The Performance and Driving Force of Government Health Expenditure in China: Evidence from Provincial Panel Data, 1991-2007

Thursday, May 5, 2011
12:00 PM - 1:30 PM
Philippines Conference Room

The new health reform started in 2009 has shown the determination of the Chinese government, especially the central government, to increase its responsibility in the health sector. The most obvious manifestation of this commitment would be to increase government health expenditure (GHE). But there is still a hot debate about whether the government should allocate more public finds to health or just deepen the marketization of the health sector. Moreover, commitments at the central and local levels are not the same: local government responsibility for GHE is high, and commitments by the central government to increase GHE have not translated into increases in local government GHE as much as proposed in the national health reform.

Our research seeks to answer two questions: What was the actual pattern of GHE? And why did China’s local governments respond as they did? We first discuss the necessity of public financing for health care, and then analyze how intergovernmental economic competition affects local governments’ behavior under “Chinese-style decentralization” (known as fiscal decentralization with political centralization). Empirically, we apply a dynamic panel data model to provincial panel data from 1991 to 2007 to identify the effect of GHE on health performance in each province over time, using infant mortality and some morbidity metrics as health performance variables. We also examine differences across regions, as well as before and after the Severe Acute Respiratory Syndrome (SARS) epidemic of 2003.

Our analysis provides evidence that Chinese-style decentralization negatively impacted GHE. The main findings are as follows:

  1. Increasing GHE did improve health performance, and this improvement was mainly driven by the GHE through the health department directly, not through spending by other governmental departments that also impact health. However, pursuit of economic performance lowered local governments’ GHE, mainly by decreasing GHE through local health departments.
  2. Compared with in the eastern and western regions, this health improvement was not significant in China’s middle regions, where the intergovernmental economic competition leads to much less GHE through health departments.
  3. The outburst of SARS in 2003 further increased the positive effect from GHE through local health departments, while the effect from GHE through other departments was not equally significant.

All these results suggest that adjusting the structure of public health financing, reforming the fiscal system, and improving the performance evaluation system for local governments are critical for the success of China’s on-going health reform.