Fiscal Decentralization in Southeast Asia

Article excerpt

ABSTRACT. Fiscal decentralization is currently very popular and is being undertaken in many developing and transitional economies. This paper reviews the primary rationale for such policies and provides a short checklist of features useful in assessing a country's decentralization progress. The checklist is used to review the current status of decentralization efforts in the Philippines, Indonesia, Thailand, and Malaysia. The cases illustrate that the Philippines has progressed far towards a fiscally decentralized system, that both Indonesia and Thailand are now in midst of the process, and that Malaysia appears to have no intent of joining other countries in this policy effort.

INTRODUCTION

Relations between central and subnational governments in many Southeast Asian countries are in a state of flux. Although there are multiple dimensions to the changes in intergovernmental relations in these countries, the focus here is on the fiscal dimension, specifically fiscal decentralization.

As Oates (1999, p. 1120) states in his recent essay on the subject, "Fiscal decentralization is in vogue. Both in the industrialized and in the developing world, nations are turning to devolution to improve the performance of their public sectors." As reviewed in the following section, there are several arguments that support such changes. At the same time, there are certain factors that can limit the efficacy of such policies and that may impede the process in Southeast Asia; these too are noted below.

The main purpose of this paper is to review and compare the changes in intergovernmental fiscal arrangements that have been made or are being contemplated in several Southeast Asian countries.1 In order to provide some structure to that review, a checklist of policies generally associated with successful fiscal decentralization is proposed. The experiences of the Philippines, Indonesia, Thailand and Malaysia with regard to decentralization are then reviewed.2 From that review we make some direct comparisons between the several countries and close the paper with several broad generalizations based on the events in the region.

FISCAL DECENTRALIZATION

As noted above, countries throughout the world have recently been engaged in altering central-local fiscal relations through decentralization of decision-making powers. For example, the World Bank reported "Out of the 75 developing and transitional countries with populations greater than 5 million, all but 12 claim to be embarked on some form of transfer of political power to local units of government" (Dillinger, 1994, p. 1). These policy initiatives are undertaken for a variety of purposes and take various forms. There is, for example, still considerable discussion of the relative merits of the exact form that such decentralization can and should take (e.g., administrative deconcentration, governmental devolution, delegation, or even privatization).3 Of particular interest here is the second of these alternatives-devolution of powers to fiscally autonomous local government units.4

Implications of Decentralization

Probably the most often quoted theoretical argument underlying the advantage of fiscal decentralization is Oates' (1972) "decentralization theorem."

For a public good-the consumption of which is defined over geographical subsets of the total population, and for which the costs of providing each level of output of the good in each jurisdiction are the same for the central or the respective local government-it will always be more efficient (or at least as efficient) for local governments to provide the Pareto-efficient levels of output for their respective jurisdictions than for the central government to provide any specified and uniform level of output across all jurisdictions.

The idea behind the theorem is that if preferences, i.e., demand, for public goods differ by location (and are reasonably homogeneous within a locality), efficiency gains are obtained by allowing each locality to provide the level of public goods that most closely reflects local demands. …