Does fiscal decentralization improve healthcare outcomes empirical evidence from china

In this study, we use the infant mortality rate IMR as an indicator of healthcare outcomes and provide a quantitative measurement of the impact of fiscal decentralization on infant morta

Public Finance and Management

ABSTRACT

Since the late 1970s, China has adopted a variety of economic reforms that have led to its overall economic success The Tax Sharing System (TSS) reform, as part of the gradual fiscal decentralization policy, was initiated in 1994 The conventional theory claims that fiscal de- centralization could result in various potential benefits including increased responsiveness of local governments to deliver public goods However, very little empirical work has examined the impact of fiscal decentralization on health outcomes in China In this study, we use the infant mortality rate (IMR) as an indicator of healthcare outcomes and provide a quantitative measurement of the impact of fiscal decentralization on infant mortality at the provincial government level We measure fiscal decentralization as both a dummy and a ratio and esti- mate the infant mortality rate production function using both Ordinary Least Squares (OLS) and Panel Feasible Generalized Least Squares (FGLS) approaches We find that, contradicto-

ry to the predictions made by the conventional theories, fiscal decentralization has generated

an overall adverse impact on the IMR in China

1 INTRODUCTION

Living a longer and healthier life has become the foremost choice and pose 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

pur-of life depends heavily on healthcare, medical knowledge, and medical ance 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

insur-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 lization (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 re-sources and expenditure responsibilities for healthcare from central govern-ment to sub-national governments (Mills, Vaughan, Smith, & Tabibzadeh, 1990) This area of decentralization becomes an important component of poli-

decentra-cy reforms in many countries including China, Ghana, Indonesia, the pines, 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

Philip-The purpose of this study is to provide a quantitative measurement of the impact of fiscal decentralization on the IMR in China using provincial gov-ernment 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 en-compasses 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 de-centralization 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) regres-sions

There are two main reasons to focus on the relationship between infant mortality and fiscal decentralization in China First, China has achieved re-markable progress in reducing the IMR from 1949 to1978, which was the planned economy period with a low level of personal income With the re-forms 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, in-fant 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 pre-dict 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 devel-opment during the 1990s and early 21st century, as well as the fiscal decentra-lization 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 ca-pita central budgetary expenditures and provincial budgetary expenditures

The remainder of the paper is organized as follows Section 2 briefly scribes China’s healthcare delivery system Section 3 surveys IMR production functions and possible channels through which infant mortality could be de-termined Section 4 develops empirical models and introduces data sources

1

See http://www.chinability.com/GDP.htm

Section 5 reports the results and section 6 concludes with policy implications and suggestions for future research

2 HEALTHCARE SYSTEM IN CHINA

China has a unitary form of government with five levels hierarchically ranged in a pyramid-like fashion with the central government at the apex, sit-ting 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

ar-Figure 1 Infant mortality rate in China, 1950-2006

Data Source: Population Division of the Department of Economic and Social Affairs of the

United Nations Secretariat, World Population Prospects

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 med-ical 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 vive the economic reforms of 1978, which promoted profit-seeking, privatiza-tion, commercialization, and marketization in the healthcare sector All medi-cal 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 gov-ernment subsidies Healthcare services including infant healthcare and immu-nization 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

sur-of Chinese population, the majority sur-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 personal ex-penditure Among them, the share of government budgetary expenditure has decreased from about 39% in 1982 to about 18% in 2006, and government extra-budget expenditure has also reduced from more than 47% at the end of 1970s to 32% in 2006.2 In contrast, personal expenditure on healthcare has more than doubled over the past three decades from about 20% in 1978 to nearly 50% in 2006

After the 1994 TSS reform, healthcare expenditures were shifted from the central government to sub-national governments The officials of sub-national

2

The account for public finance in China has dual tracks: budget account and extra-budget account Both include revenue and expenditure accounts Budgetary expenditure refers to the distribution and use of the funds that the government has raised based on Budget Law, so as to meet the needs of economic construction and various causes Extra-budgetary expenditure refers to the expenditure that is arranged in line with the extra-budget plans and appropriated from the special accounts at the same administrative level See World Bank (2000, 2001) for the role of extra-budget funds in China

governments have been pursuing GDP-centered economic growth for the pose of being promoted, at the cost of public healthcare investment Based on the relevant government regulations, the healthcare expenditure responsibility

pur-is jointly assumed by central, provincial, prefectural, and county levels of ernments.3 In fact, the expenditures of central government on healthcare have been minimized It is provincial and sub-provincial level governments that shoulder the task Specifically, sub-national governments have assumed 97%

gov-of healthcare expenditures in recent years while the central government shares only 3% However, the major part of sub-national government revenues has been used to initiate large-scale infrastructure construction and investment projects in addition to funding administrative expenses The remaining public funds available for healthcare are minimal In contrast with the average 9% growth rate of nominal GDP annually, total healthcare expenditures as a per-centage of nominal GDP decreases— from about more than 1% in 1981 to less than 1% in 2006.4 Furthermore, the share of healthcare expenditures in total government expenditures also decreased from more than 5% in 1981 to less than 5% in 2006 (see Figure 3)

Figure 2 Compositions of total healthcare expenditures, 1978-2006

Due to the reduction in government expenditures for healthcare and the creasing marketization of medical services, the overall performance of health-

3 For example, The State Council Document No 3, ―The Decision on Public Health Reform and Development‖, issued in January 1997, requires that public spending on health care at both the central government and sub-national governments increase at a higher rate of growth than general budgetary expenditures

4

See http://www.china.com.cn/chinese/2006/Jan/1087140.htm

care is unsurprisingly deteriorating Reduced government healthcare tures directly restrain the healthcare capital accumulation, which could result

expendi-in deterioratexpendi-ing healthcare outcomes such as stagnatexpendi-ing IMR reduction expendi-in the 1990s and 2000s In a health fairness assessment conducted by the WHO in

2002, China was ranked 144th among the 191 countries in the world Besides overall poor performance, the disparities in healthcare expenditures are also widening Government healthcare expenditures have shifted from rural areas

to urban areas in order to train professional medical staff, purchase intensive medical facilities, and finance advanced medical research The gap between urban and rural areas on healthcare expenditures is ever increasing in terms of healthcare expenditures per capita (see Figure 4) Hillier and Shen (1996) estimate that the gap of healthcare expenditures per capita between

capital-urban and rural areas increased four folds in 1981 and six folds in the 1990s Figure 3 Shares of total health expenditures in total government

expenditures and nominal GDP, 1981-2006

Through many years’ trials, China has now endeavored to realize a prehensive healthcare system In urban areas, it is combined from socially accumulated funds and personal accounts with minimum compulsory medical insurance, employer’s compensatory medical insurance, and individual com-mercial medical insurance In rural areas, a new rural cooperative medical sys-tem has been carried out with joint funding from rural residents, sub-national governments, and the central government

com-Although the 1978 economic reforms have brought remarkable economic growth in China, the healthcare delivery has not seen much improvement The IMR reduction has stagnated after 1980, as shown in Figure 1 Meanwhile, the

life expectancy has remained roughly the same from 68 in 1982 to 69 in 1993 (Hsiao & Liu, 1996) Furthermore, as Bloom and Gu (1997) and Liu et al (1999) reported, almost every single healthcare indicator is better for urban residents than for rural residents after the economic reforms For example, infant mortality in urban areas has been consistently dropping albeit at a slow-

er rate compared to the speed before 1978 while the IMR in rural areas has been constantly increasing since the 1990s

Figure 4 Total health expenditures per capita in urban and rural areas

Notes: (1) The total health expenditures include government budgetary expenditures on health, extra-budgetary expenditures on health and personal health expenditures; (2) the measurement unit is yuan per person

3 LITERATURE REVIEW

Infant mortality and life expectancy are frequently chosen as ments of the level of overall health in current literatures In contrast with life expectancy’s being influenced more by personal health investment, accumula-tion of positive or negative factors during one’s life and individual living ha-bits, infant mortality is impacted more by income level, public spending, and local medical facilities Accordingly, to quantify the impact of income and public healthcare expenditures, this study focuses on infant mortality only Infant mortality can be a result of both direct and indirect causes The for-mer is mainly medical including immediate causes (such as immaturity, birth injury, genetic disease, and congenital anomaly) and chronic causes (such as malnutrition, prenatal care, availability of all vaccines, and infection) The indirect causes of infant mortality consist of social, economic and environ-mental factors that cause infants to be more exposable and sensitive to direct causes These factors include, but are not limited to, income level, income

measure-distribution, public healthcare expenditures, healthcare human capital, care physical capital, women’s labor force participation, urbanization, ethno-linguistic fractionalization, quality of governance, public sanitation and other issues dealing with infrastructure such as access to safe water and electricity, and so forth Among them, public healthcare expenditures are direct input, whereas healthcare human capital (such as the number of doctors or nurses per one thousand persons) and physical capital (such as the number of hospital beds per one thousand persons) are healthcare direct output The overall ef-fects of fiscal decentralization on the healthcare outcome include direct effects such as cost saving in production and delivery of healthcare services as well as indirect effects such as increased healthcare expenditures or improved health-care capital

health-Although historically IMRs fluctuate with wars, famines, epidemics and social turmoil, as the general welfare of a society improves its IMR declines Therefore, rich countries tend to have a lower IMR than poor ones

Flegg (1982) conducts a cross-underdeveloped-country study over the riod of 1968-1972 and uses OLS estimations controlling for income inequality, female fertility rate, female illiteracy rate, and healthcare human capital (measured by the number of doctors per 1,000 persons and the number of nurses per 1,000 persons) The result shows that the impact of per capita real GDP on IMR is not statistically significant, which suggests that income level (measured by per capita real GDP) is not a direct determinant of infant mortal-ity and may affect infant mortality only indirectly through such factors as healthcare human capital In fact, using the WHO’s cross-country data in 2004, Anand and Barnighausen (2004) have confirmed the significantly positive relationship between healthcare human capital and infant mortality reduction

pe-Previous studies also find that public healthcare expenditures have a tive impact on infant mortality For example, Corman, Grossman, and Joyce (1987) use the 1977 cross-county neonatal mortality rates in the U.S and find that poverty-related public health expenditure programs play an important role

posi-in reducposi-ing neonatal mortality The World Bank (1995) also documents the significant effect of public health expenditure on infant mortality reduction in backward areas of the Philippines Using demographic and health survey data from over 60 low-income countries between 1990 and 1999, Wang (2003) finds that infant mortality in rural areas is substantially higher than in urban areas A recent study by Bokhari, Gai, and Gottret (2007) estimates the elastic-ity of under-five-year-old child mortality with respect to both income and government health expenditures using instrumental variable techniques and finds that mortality is affected by government health expenditure but not by economic growth

On the other hand, some studies have produced opposing results For ample, Filmer and Pritchett (1999) use the United Nations Children's Fund (UNICEF) and World Bank cross-country data with IV estimation and find that the effects of public health expenditures on infant mortality are both sta-tistically and economically insignificant Musgrove (1996) summarizes that among the determinants of infant mortality, the income variable is always sig-nificant while healthcare expenditure share in GDP, healthcare expenditures in total government expenditures, and the government expenditure share in GDP are all insignificant Using a cross-sectional sample containing 117 countries

ex-in 1993 and a model correctex-ing for heteroscedasticity, Zakir and Wunnava (1999) find that government healthcare expenditure and its share of GNP do not play a role in determining infant mortality Berger and Messer (2002) also argue that the reverse relationship between healthcare expenditures and IMR reduction by previous studies does not hold based on their analysis of 1960-

1992 data across 20 Organization for Economic Co-operation and ment (OECD) countries using OLS estimation On the contrary, they find that

Develop-an increase in public healthcare expenditures is associated with Develop-an increase in IMRs In addition, their research suggests that increases in income inequality are related to lower mortality rates

In regard to the impact of fiscal decentralization on IMR reduction, several studies argue that fiscal decentralization could lead to increased local govern-ments’ responsiveness and accountability by providing preference-matching local public goods such as particular vaccination initiatives (Alesina & Spolaore, 1997; Faguet, 2004; Lockwood, 2002; Oates, 1972; Silverman, 1992) This effect is known as ―allocative efficiency.‖ Seabright (1996), Pers-son and Tabellini (2000), and Hindriks and Lockwood (2005) contend that fiscal decentralization could also reduce the incumbents’ rent diversion out of tax revenues Hayek (1945) argues that the provision by local governments regarding residents’ preferences saves information transmission costs from sub-national governments to the central government This effect is related to the ―productive efficiency.‖ For example, targeting a low-income population and nutritionally at-risk infants, local special welfare programs such as sup-plemental foods, health care referrals, and nutrition education for low-income pregnant women can be initiated immediately rather than waiting for approval from the central government Besides allocative efficiency and productive efficiency, the third possible gain of fiscal decentralization in a large country such as China is that various sub-national governments can experiment with alternative ways of reducing the IMR This type of effect could be called lab

or ―experimental efficiency‖ (Garzarelli, 2006; Oates, 1999) All of the above are direct effects of fiscal decentralization on IMR reduction There exist other mechanisms through which fiscal decentralization could have indirect impact

on the IMR For example, fiscal devolution could alter the local healthcare expenditure structure, thus affecting local healthcare human capital and subse-quently the IMR

Nonetheless, Prud’homme (1995) and Tanzi (1996) remind us that these potential benefits of fiscal decentralization may not become fully realized First, the significant gap of rich-poor and urban-rural area’s IMR in China could be widened under the circumstance that horizontal fiscal equalization cannot be achieved completely by central transfers Second, due to the lack of skilled personnel, information, management capacity, and advanced equip-ment, the benefits of local provision of healthcare could be discounted sub-stantially Third, poor local governance could also occur due to moral hazards accompanied with fiscal decentralization such as corruption and bureaucracy This could be the case, particularly for China as it does not have a democratic election system Local officials could be more corrupt and bureaucratic with-out supervision either from the central government due to decentralization or from the residents due to the absence of a voting mechanism In addition, even with the presence of productive and allocative efficiency from the demand side, this kind of efficiency could be counteracted by the local supply’s ineffi-ciency due to lack of economies of scale and scope (Prud'homme, 1995; Tanzi, 1996)

Besides these theoretical discussions, empirical evidence about the impact

of fiscal decentralization on healthcare is also mixed Using panel data of both low-income and high-income countries for the period 1970-1995 with OLS and fixed-effect estimations, Robalino, Picazo, and Voetberg (2001) find a significant impact of fiscal decentralization on infant mortality reduction They add that this effect is also present even in the environment of high cor-ruption A study of China by Uchimura and Jutting (2007), using a panel county-level data, also finds that more fiscally decentralized counties have lower IMRs if they have a well-functioning transfer system among sub-national governments and a strengthened local fiscal capacity However, this study does not control for factors such as health expenditures, healthcare hu-man capital, or healthcare physical capital that have been included in most previous IMR production function research In addition, Asfaw et al (2007) use rural IMRs in 14 states in India between 1990 and 1997 and document that fiscal decentralization does play a statistically significant role in reducing rural IMR

Opposing the above findings, Tang and Bloom (2000) present a case study

of a poor rural county in China and find little evidence that radical fiscal centralization leads to increased healthcare outcomes Their research cautions against attempts to implement radical decentralization without addressing lo-cal financial constraints or weakness in local management capacity Guldner (1995) also states that decentralization in healthcare without direction may compromise the effectiveness of the healthcare system and undermine the rea-lization of national priorities based on the case analysis of Vietnam In fact, Green and Collins (1994) emphasize that for primary healthcare, there must be

de-some degree of centralization in resource allocation and planning and the posed form of decentralization should not hinder policies of equity

cross-2003

Specifically, the empirical model is specified as follows:

where i =1, 2, 3…., 31 provinces in the sample, and t = years 1980, 1981,

1989, 1990, 2000 and 2003 The 1981, 1990 and 2000 provincial IMR data are census data that are collected about every ten years whereas the data for 1980,

1989 and 2003 are estimated by the National Bureau of Statistics

The dependent variable, IMRit, is chosen as the healthcare indicator for

each year and each province in order to evaluate the effects of fiscal lization and public healthcare spending by sub-national governments

decentra-The independent variable of primary interest, FDit, is fiscal

decentraliza-tion measured in two ways: (1) a dummy that takes 0 before the 1994 TSS reform and 1 after the reform; and (2) the ratio of per capita provincial budge-tary expenditures to the sum of per capita central budgetary expenditures and per capita provincial budgetary expenditures, as used in Qiao, Martinez-Vazquez & Xu (2008) If fiscal decentralization improves local governments’ responsiveness, β1 is conceivably negative We compare the results from mod-els using two different fiscal decentralization measures

It should be noted that the measurement of fiscal decentralization is much more controversial and challenging than the policy itself, particularly in the

case of China As pointed out by Ebel & Yilmaz (2002), in the sense of tralization, local governments must have the authority to tax ―own sources‖ Based on this definition, the most appropriate measure would be the share of total provincial revenues (including the grants and other transfer revenues from the central government) from provincial own-source revenues Akai & Sakata (2002) adopt this measure in their cross-state study of fiscal decentrali-zation in the U.S Unfortunately, in China, none of the sub-national govern-ments have such authority to impose a new tax, nor do they have discretion to alter existing tax rates In addition, a complex flow of provincial revenues such as shared revenues, rebated tax revenues, transfer revenues and extra-budgetary revenues further complicate the revenue sources at the sub-national government level (Qiao, et al., 2008) Therefore, most fiscal decentralization research about China focuses on the measures from the expenditure side Fol-lowing the logic from cross-country studies that use the ratio of sub-national government expenditures to central government expenditures, fiscal decentra-lization at the provincial level should be measured as the ratio of direct pro-vincial expenditures to central expenditures at the province However, the data for the central government expenditures at each province in China is not avail-able (Lin & Liu, 2000) Zhang & Zou (1998) use the ratio of provincial ex-penditures to central expenditures as a measure of fiscal decentralization at the provincial level, which has received criticism due to the common denominator

decen-With these considerations, we follow Qiao, et al (2008) and use the ratio

of per capita provincial budgetary expenditures to the sum of per capita central budgetary expenditures and per capita provincial budgetary expenditures as a measure of fiscal decentralization Although far from perfect, this measure has the following merits: (1) the measure from the expenditure side better captures the degree of local fiscal autonomy; (2) the sum of central expenditures and provincial expenditures as the denominator of the ratio allows for variation of decentralization to some degree; and (3) it controls for the population The higher the ratio, the more fiscally decentralized the province-level govern-ment.5 According to this measure, we rank 31 provincial governments from

1980 to 2003 by the average value and find that the top six decentralized vincial level governments are Tibet, Shanghai, Beijing, Tianjin, Qinghai, Ningxia and Xinjiang while the bottom six are Guizhou, Jiangxi, Sichuan, Hunan, Anhui and Henan The ethnically minority populated regions and the three old municipalities enjoy most local fiscal autonomy while the inland regions have the least fiscal discretion

pro-lnGRPPC it is the natural log form of real GRP per capita We use this

vari-able to capture the dwindling effect of income on the IMR The coefficient β2

5

See Halder (2007) for comprehensive survey about the measurement of fiscal tion

decentraliza-is assumed to be negative indicating that an increase in income reduces the

IMR at a decreasing rate

lnHEPC it, , HESE it, and HESG it are health expenditure per capita, health

expenditure share in total expenditure, and health expenditure share in

nomin-al GRP, respectively These variables are expected to negatively correlate with

the IMRs They represent direct inputs through which FD it may have indirect

effects on IMR it The indirect effects of FD it may include increased healthcare physical facilities and human capital stock, while the direct effects could in-clude, but are not limited to, more diversified healthcare programs responding

to diversified local preferences, more education programs available to nant women in responding to the accountability to local people and cost saving

preg-in transmittpreg-ing local healthcare preference preg-information from sub-national ernments to the central government

gov-BEDP it and DOCP it are the numbers of medical beds and doctors per

10,000 persons measuring healthcare physical capital and human capital, spectively Both coefficients β6 and β7 are expected to be negative These va-riables are outputs of healthcare expenditures that may constitute indirect

re-causes of IMRit and could be closely related to chronic re-causes of IMRit such as

baby delivery care and prenatal medical care

GEO it is a geographical location dummy The four ―super‖ municipalities

that are directly administered by the State Council – Beijing, Tianjin, hai, and Chongqing – are assigned 1; eight coastal provinces including Liaon-ing, Hebei, Shandong, Jiangsu, Zhejiang, Fujian, Guangdong, and Hainan are assigned 2; the 13 inland provinces including Jilin, Heilongjiang, Anhui, Jiangxi, Henan, Hubei, Hunan, Shanxi, Sichuan, Guizhou, Yunnan, Shaanxi, and Gansu are assigned 3; and the five ethnically minority populated auto-nomous regions – Inner Mongolia, Guangxi, Tibet, Ningxia, and Xinjiang –are assigned 4 As shown in Figure 5, on average, the IMRs for inland and auto-nomous regions are about two folds higher than those of coastal regions and the four super municipalities Weng and Wang (1993) also find that the IMR is about 50% higher among ethnic minorities than among the Han, the largest ethnic group in China Thus, β8 is hypothesized to be positive

Shang-FD t *GEO it is the interactive product of the decentralization dummy and

the region dummy Together with GEO it , public spending is decomposed into

two aspects: time-specific changes and region-specific effects, GEOit,,

imply-ing the generally region-fixed aspects; and a fiscal decentralization interacted

region effect, FD t *GEO it, representing the responsiveness from sub-national governments in inland and ethnically autonomous regions after fiscal decen-tralization