Ahmad, E., Hofman, B., Ma, J., Rye, D. Searle, B. and Steveson, J. (1999), “Indonesia: Decentralization—Managing the Risks,” Fiscal Affairs Department, International Monetary Fund, Washington, D.C.
Bird, R. M. (1999), “Rethinking Subnational Taxes: A New Look at Tax Assignment,” International Monetary Fund, WP/99/165, Washington, D.C.
Drummond, P. and Mansoor, A. (2002), “Macroeconomic Management and the Devolution of Fiscal Powers,” International Monetary Fund, WP/02/76, Washington, D.C.
Norregaard, J. (1997), “Tax Assignment” in Teresa Ter-Minassian (ed.), Fiscal Federalism in Theory and Practice, International Monetary Fund, Washington, D.C.
Pisauro, G. (2001), “Intergovernmental Relations and Fiscal Discipline: Between Commons and Soft Budget Constraints,” Working Paper, 65, International Monetary Fund, Washington, D.C.
Tanzi, V. (1995), “Fiscal Federalism and Decentralization: A Review of some Efficiency and macroeconomic Aspects” in Annual World Bank Conference on Development Economics, edited by Michael Bruno and Boris Pleskovic (Washington, D.C: World Bank).
Webster, D. (2002), “Implementing Decentralization in Thailand: the Road Forward”, Capacity Building Projects, Office of the Decentralization to Local Organizations Committee and World Bank, draft memo.
Wegelin, E. A. (2002), “Thailand: Decentralization Capacity Assessment. Finding and Recommendations,” Capacity Building Projects, Office of the Decentralization to Local Organizations Committee and World Bank, draft memo.
Prepared by Teresa Dabán.
Drummond and Mansoor (2002), Oates (1999), Fomasari, Webb and Heng-fu Zou (2000) Pisauro (2001), Tanzi (1995) and Ter-Minassian (1997) present excellent surveys on the advantages and drawbacks of fiscal decentralization.
The consolidation examined here refers only to central and local governments. Social security and extrabudgetary funds are not included. In Indonesia and the Philippines, which also implemented a decentralization process during the 1990s, local governments spend about 17–18 percent of the general government expenditure, representing 3.9 percent of GDP in Indonesia and 3.4 percent of GDP in Philippines. See Ahmad and others (1999) for Indonesia.
A more detailed description of the structure of governance in Thailand can be found in Suwanmala (2002).
Municipalities in Thailand are of four types: the Bangkok Metropolitan Administration and Pattaya city, that have special status; the 20 Tesaban Nakorn, which have population of over 50,000 and have metropolitan status; the 86 Tesaban Muang, which have population of over 10,000, and generally are provincial capitals; and the Tesaban Tambons, which are small towns or peri-urban areas on the periphery of larger municipalities.
Deconcentration refers to the delegation of central government responsibilities to its own branch offices located in provinces or districts, with the functions remaining the responsibility of the central government. Decentralization refers to the transfer of a significant degree of administrative and legal autonomy for public expenditure and revenue from the center to lower levels of government.
Act Determining Planning and Staging of Decentralization B.E. 2542 (1999).
This ratio was 14 percent in 1999/00.
The NDC, chaired by the Deputy Prime Minister, is composed of officials from the local and central governments. The Office of the National Decentralization Committee (ONDC) serves as the Secretariat of the NDC. The ONDC currently is understaffed (it has 35 professionals), given the magnitude of the task assigned to the NDC. In addition, the staff skills and experience levels are not fully consonant with the responsibilities of the office. In particular, the ONDC is ill equipped to disseminate and explain the decentralization action plans to the almost 8,000 local governments (and the central government line departments). See Wegelin (2002).
Plan to Decentralize Administrative Power of Local Administrative Organizations (1999).
Operations Plan Staging of Decentralization to Local Government Organization, (2002).
Revenue and expenditure assignment among different levels of government give rise to vertical imbalances (that is pre-transfer fiscal balances) when the own revenues and expenditures of various levels of government are unequal.
The Building and Land Tax and the Land Development Tax accounts for half of locally collected revenues. The central government determines the rate and base of these local taxes.
Shared taxes included the VAT, liquor, excise, gambling, mineral and petroleum, motor vehicle and specific business taxes. Their structure is determined and revenues are collected centrally.
Currently three types of subsidies are used: (1) general-purpose subsidies, which are distributed according to local expenditures needs and revenue capacity (30 percent of total subsidies); (2) specific project subsidies (40 percent of total), and (3) subsidies with transfers of responsibility, allocated only to TAOs, and used as a transitional tool to meet the 20 percent target for local revenues as prescribed by the NDA (30 percent of total).
Given that local governments have under spent significantly in the last few years, they have built up large reserve funds. Local governments must submit 10 percent of their funds to the Local Development Fund at the Ministry of Interior.
Transfer of education will comprise primary and secondary education. Transfers of health care services will comprise promotional/preventive and curative health care provided through three layers of support: primary health care centers (at the Tambon level), secondary health care center (at district hospitals), and tertiary health care centers (at provincial hospitals).
This follows practice on other countries. For example, the United States and Canada have formed boards to deliver services ranging from education to fire fighting and wastewater management.
The NDC is preparing an action plan for transferring personnel from central to local governments to adjust the manpower balance between central and local administrations.
Webster (2002) points out to some deeper norms, such as the passive culture of local governance in Thailand. That is the opposite of other East Asian countries, such as the Philippines, in which local governments are very aggressive in taking on new functions under conditions of decentralization.
In 2002/03 and beyond direct and unconditional grants for local authorities will replace most of the indirect specific grants, granting local governments more autonomy than previously. However, it is envisaged that local governments will only be able to receive their grants directly from the central government from 2005 onwards as this requires a change in the Budget Act, which at present does not recognize local governments as being eligible to be budgeting heads.
See Webster (2002) and Wegelin (2002). The current building blocks of Thailand’s decentralization effort are TAOs. Webster points out that the problems with basing decentralization on so many small and rural units of government are: (1) TAOs are too small to be efficient, viable as autonomous cost-effective local government units in their own right (for instance, TAOs can afford to pay only lower-level, less experienced, and more junior staff, ensuring that the most needy rural groups are governed by the least experienced people); (2) TAOs are too fragmented as to be accountable units of local government in terms of meeting their responsibilities; (3) municipalities are not taking advantage of the decentralization process although urban areas are expected to grow considerably in the near term.
In Indonesia, for instance, with a population of more than 200 million, decentralization focuses on the Kabupaten (District), in the Philippines the Municipal level is the key building block, and in Japan the Prefecture level.
Consolidation could also be achieved through formal mergers into larger local government units, although it may be politically difficult. This has been done in other countries such as Japan, China and Canada. The Tambon Act states that TAOs that share the same boundary within the District can be merged into one TAO with the consent of the citizens. The Ministry of Interior also has a right to merge small TAOs with population of less than 2,000 into one bigger TAO. However, mergers have to be based on the consent of the residents in the local governments concerned.
However, in spite of the attractiveness of this idea, some risks exist. The existence of local government units with very different fiscal power can make the decentralization process very complex. In addition, the asymmetric approach can introduce notorious differences in the political influence of the local governments in national policy. In any case, the public services affected by this asymmetric process of decentralization should be valued in order to guarantee that the quality of the public services does not depend on the level of government in charge of the provision.
For instance, the planned Property Tax that will replace the Land and Building Tax is welcome, but there is typically more potential for such tax in urban than in rural areas. The characteristics of the new Property Tax are as follows: (1) the base will be defined as the capital value and not as the rental value, as it is now. That will increase tax collection since rental values reflects mainly the current use of the property, while capital value, generally based upon market values, is said to reflect the value of the property in the best alternative use and, (2) some exemptions will be phased out, such the exemption of residential property.
It is generally acknowledged in the literature that the most obvious candidates as “good” local taxes are land or property taxes and, to some extent personal income taxes. Unless the local jurisdictions are large such as in Canada, Brazil, United States, or India, consumption taxes, as well taxes on capital income, in particular corporate income taxes, are generally considered less appropriate at the local level because of the mobility of the corresponding bases. See Norregaard (1997) and Bird (1999) for a discussion.
The preconditions for purely financial market discipline to work are very demanding (Ter-Minassian, 1997). First, adequate information on the local government’s outstanding debt and repayment capacity should be available to potential lenders. Second, bank provisions for local debts should not treat governments as privileged borrowers and bankruptcy procedures should be clearly established. Finally, and perhaps the most important, there should be no perceived chance of a bailout. On this last point, it should be noted that in the recent international history of intergovernmental fiscal relations, there are no examples of local governments allowed to go bankrupt (which would involve default on their debt) in the more advanced federal states. On the contrary, there have been many cases, both in developed and developing countries, where local government financial crises have been resolved through the intervention of the central government. Examples are the bailout of New York City in 1975, and of the bailout of Bremen and Saarland in Germany in 1992. See Pisauro (2001).