Does fiscal decentralization improve healthcare outcomes? Empirical evidence from China.

Author:Jin, Yinghua


Living a longer and healthier life has become the foremost choice and purpose of human development (United Nations Development Programme, 1990-2008). Among different measures of human health, the lifespan of babies is considered "the most delicate test of health conditions" (Liu, Hsiao, & Eggleston, 1999). As the starting stage of life, an infant is the most vulnerable. Thus, improved health conditions may have far-reaching positive effects in reducing infant mortality. Blaxter (1981) and Sen (1998) argue that the quality of life depends heavily on healthcare, medical knowledge, and medical insurance. They also find that the statistics on infant mortality reflect all of these policy issues. According to the United Nations Development Programme (UNDP), infant mortality rate (IMR) is defined as the number of infant deaths per 1,000 live births under a year of age in the same year (UNDP, 1990-2008). This indicator has been widely used for cross-country comparisons and trend analysis of healthcare outcomes.

A number of studies have tried to associate healthcare with fiscal decentralization (Asfaw, Frohberg, James, & Jutting, 2007; Cantarero & Pascual, 2008; Duret, 1999; Uchimura & Jutting, 2007). Within the healthcare sector, fiscal decentralization specifically refers to the decentralization of financial resources and expenditure responsibilities for healthcare from central government to sub-national governments (Mills, Vaughan, Smith, & Tabibzadeh, 1990). This area of decentralization becomes an important component of policy reforms in many countries including China, Ghana, Indonesia, the Philippines, Uganda, and Zambia. Using different measures of decentralization, scholars generally find that higher fiscal decentralization leads to a lower IMR (Asfaw, Frohberg, James, & Jutting, 2007; Cantarero & Pascual, 2008; Duret, 1999; Uchimura & Jutting, 2007). However, there are few studies that have explored the impact of fiscal decentralization on the IMR in China.

The purpose of this study is to provide a quantitative measurement of the impact of fiscal decentralization on the IMR in China using provincial government data. Since 1978 China has moved away from a centralized fiscal system to a decentralized one. The systematic change to a decentralized fiscal system occurred upon the passage of the 1994 Tax Sharing System (TSS) reform. To capture the impact of the TSS reform, we developed a generalized model using a panel provincial dataset for the period of 1980 to 2003 that encompasses both the pre-TSS and post-TSS eras. Using a framework of IMR production function, we analyze both the direct and indirect channels such as income and medical facilities. For the purpose of comparison, we employ two measures of fiscal decentralization: first, we treat the 1994 TSS reform as a natural experiment and use an interactive term of a fiscal decentralization dummy and a geographical location dummy to gauge the effect of fiscal decentralization on the IMR in different regions; second, we measure the degree of fiscal decentralization using the ratio of per capita provincial budgetary expenditures to the sum of per capita central budgetary expenditures and per capita provincial budgetary expenditures, as developed by Qiao, Martinez-Vazquez & Xu (2008). Both measures are analyzed through Ordinary Least Squares (OLS) and Panel Feasible Generalized Least Squares (FGLS) regressions.

There are two main reasons to focus on the relationship between infant mortality and fiscal decentralization in China. First, China has achieved remarkable progress in reducing the IMR from 1949 to 1978, which was the planned economy period with a low level of personal income. With the reforms of 1978, China's economy started to boom in the 1980s and maintained a high growth rate--an average of about 9% growth in real Gross Domestic Product (GDP) throughout the 1990s and into the 21st century. (1) According to conventional views, higher economic development should be associated with the reduction of infant mortality (World Bank, 1993). In China, however, infant mortality stayed around 29 infant deaths per 1,000 live births from the late 1980s until present, and did not see further large-scale reductions despite high economic growth during that period of time (United Nations, 2005).

Second, the 1994 TSS reform in China recentralized government revenues while keeping major healthcare expenditure responsibilities on the shoulders of sub-national governments without providing adequate funding support from the central government. Conventional theories of fiscal decentralization predict that sub-national governments would be more responsive to local needs including healthcare delivery (Oates, 1993). Unlike other health indicators such as life expectancy and maternal mortality, infant mortality could be more sensitive to public health investments in the form of health expenditures by governments. According to Barker (1997), Wagstaff (2001), and Case, le Roux, and Menendez (2004), prenatal healthcare, baby delivery facilities and personnel, infant nutrition, and public sanitation are all possible channels through which infant health could be affected. These factors are also direct outcomes of government healthcare expenditures. The increased responsibility coupled with inadequate funding at the sub-national level could contribute to the stagnation of infant mortality abatement since the late 1980s in China. Thus, this study attempts to quantify whether the high-speed economic development during the 1990s and early 21st century, as well as the fiscal decentralization represented by the TSS reform of 1994 have affected infant mortality in China.

This study intends to improve existing studies in several ways. First, we use a panel province-wide dataset that allows for the effects of time-varying unobservables. Second, we measure health expenditures in total amount of expenditures, as a percentage of total government expenditures, and as a ratio to nominal Gross Regional Product (GRP). Third, we include several control variables such as a regional dummy, healthcare human capital, healthcare physical capital, urbanization, and fertility. Finally, in addition to a traditional dummy measure, we also measure the degree of fiscal decentralization using the ratio of per capita provincial budgetary expenditures to the sum of per capita central budgetary expenditures and provincial budgetary expenditures.

The remainder of the paper is organized as follows. Section 2 briefly describes China's healthcare delivery system. Section 3 surveys IMR production functions and possible channels through which infant mortality could be determined. Section 4 develops empirical models and introduces data sources. Section 5 reports the results and section 6 concludes with policy implications and suggestions for future research.


China has a unitary form of government with five levels hierarchically arranged in a pyramid-like fashion with the central government at the apex, sitting atop sub-national levels that consist of provincial, prefectural (including prefectural-level cities), county (including county-level cities), and township governments. Provincial-level governments include 22 provinces, five ethnic minority autonomous regions, and four municipalities directly administered by the State Council.


As a part of public welfare during the planned economy period from 1949 through 1978, healthcare delivery was innovatively designed by the central government and successfully carried out by the sub-national governments. The lower levels provided a public medical system in the urban areas and relied primarily on part-time peasant doctors (or "barefoot doctors") in the rural areas. The training and services of barefoot doctors were subsidized by the sub-national governments. Sidel and Sidel (1975) summarize this type of medical system as a combination of traditional Chinese medicine and modern Western medicine: preventive, labor-intensive, cooperative-oriented, mass based collectivism, and egalitarianism. This system was proven effective in that it quickly reduced infant mortality from over 200 per 1,000 live births in 1950 to around 50 in 1978, about a three-quarter reduction in magnitude (see Figure 1). The average life expectancy in China has increased from about 35 in 1949 to about 70 in the early 1980s. The overall health conditions in China improved significantly and many contagious diseases were eradicated in less than 30 years. Due to its remarkable achievements, this system was recognized as a grassroots healthcare model by the World Health Organization (WHO) at the Alma Ata Conference in 1978 (WHO, 2008).

However, this relatively successful centralized medical system did not survive the economic reforms of 1978, which promoted profit-seeking, privatization, commercialization, and marketization in the healthcare sector. All medical institutions such as the Centers for Disease Control and Prevention (CDC) now have to be responsible for their own profits and losses in accordance with economic reforms without public financial support or any other sort of government subsidies. Healthcare services including infant healthcare and immunization are charged at market prices. As a result, the previous preventive and cooperative-oriented low cost medical system has been dissolved and replaced with a market-oriented medical system at soaring prices. Less than one tenth of Chinese population, the majority of which are public servants or employees in state-owned enterprises (SOEs), has medical insurance (Bertelsmann Stiftung, 2010).

Along with the marketization of healthcare goods, services and institutions, government healthcare expenditures have shrunk by nearly half. As shown in Figure 2, total national expenditure on healthcare is composed of government budget expenditure, government extra-budget expenditure, and...

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