Government Decentralization Reforms in Developing Countries March 2001 Institute for International Cooperation I I C Japan International Cooperation Agency J R 00 - 77 Government Decentralization Reforms in Developing Countries March 2001 Institute for International Cooperation Japan International Cooperation Agency Preface The wave of decentralization of governments throughout the world since the end of the Cold War has fostered decentralization as a theme of political importance in many developing countries. This movement has the power to dramatically change the relationships between the central and local institutions in such countries. These relationships are a fundamental aspect of a state’s institutional framework, along with an independent legislature, executive branch and judiciary. For those who are in charge of development assistance, decentralization itself is a new area for assistance; moreover, it requires us to re-examine existing assistance policies. In this era of decentralization, the Study Team for Government Decentralization Reforms in Developing Countries was established as a primary step in guiding Japan’s future technical assistance aimed at responding to the needs of recipient countries in this area. Specifically, this team was established for the purpose of investigating the status of decentralization reforms in developing countries, analyzing country-specific problems related to such reforms and ultimately, drafting proposals for effective assistance. Several developing countries have been selected as case studies in an effort to examine problems related to decentralization in such countries from the administrative and fiscal perspectives. Three Southeast Asian countries have been selected for these case studies: Indonesia, Thailand and the Philippines. In these countries, systematic reforms toward decentralization have been launched and are now in progress. The reforms have been aimed at transferring administrative functions through the redeployment of personnel and redistribution of materials and funds; however, capacity building within local governments has come to the fore as a pressing issue that must be addressed. Under these circumstances, JICA organized an internal assistance committee led by the members of this study team, and started the Program for Local Administrative Capacity Building in Thailand. The Program includes joint research with counterparts in Thailand, as well as a series of field investigations and seminars. Close dialogue on an equal basis between Thai and Japanese experts is intended to establish a new form of international cooperation to support policy that has a high level of feasibility. This was established in the belief that a spirit of collaboration will be the critical factor in providing assistance in areas such as decentralization, which affect the fundamental direction of the recipient country. The six members of the study team, chaired by Mr. Michio Muramatsu, Professor of the Graduate School of Law, Kyoto University, have held a total of ten meetings. Papers written by each member on the basis of the team discussions have been compiled into this report. The Japan International Cooperation Agency intends to make the most of the valuable analyses and proposals presented in this report for its future assistance, and to distribute copies of this report to the various organizations concerned, including the governments of the subject countries, so that it can be considered by all interested parties. We would like to take this opportunity to express our thanks to Professor Muramatsu and the members of the Study Team, who contributed excellent reports. We would also like to express our gratitude to the various persons concerned who have functioned as resources and shared their valuable insight and opinions with us. March 2001 Keiichi Kato Managing Director, Institute for International Cooperation Japan International Cooperation Agency Introductory Remarks from the Chairperson This report is the product of the Study Team for Government Decentralization Reforms in Developing Countries. This team has examined the trends of decentralization in three Southeast Asian countries, namely Indonesia, Thailand and the Philippines, and has analyzed their ongoing reforms in comparison with the experience of Japan. In its pursuit of the most appropriate means of providing policy support with the greatest potential in this area, the team chose the decentralization process in Thailand as the primary subject of analysis, while conducting supplementary analyses of the same process in Indonesia and the Philippines. The Study Team was primarily concerned with understanding the current conditions of the process of decentralization in developing countries. Each member endeavored to compile and analyze a substantial amount of data for the study. Prof. Katayama, as a member of the Third Country Study Team for Japan’s Official Development Assistance to the Republic of the Philippines, Prof. Nagai and Mr. Okamoto, as JICA experts in Thailand and Indonesia, and other members, individually studied the trends in each country as well as in the international aid agencies. This report contains the results of their efforts. Meanwhile, experts in Japanese local government and finance examined how the Japanese experience could be useful for policy support in this area by comparing it with the information from the administrative and fiscal studies on Thailand and other developing countries. Secondly, the Study Team analyzed international trends in the systematic reform of local government. Decentralization is a reform that reinforces local government. In reviewing the Japanese experience in decentralization, it became necessary to trace the history of the process of government decentralization reforms in developing countries in other countries. For this purpose the report has adopted the concept of a basic dichotomy of local governmental systems in the world: the ‘integrationist’ model vs. the ‘separationist’ model. The latter refers to local governments operated relatively independently from the central government, while the former means that the central government is concerned with local government and responsive to the demands of local governments. In the early modern period in Japan, a definite ‘integrating’ form of local government system was constructed on purpose and was maintained throughout the reforms under the US occupation that were enforced right after the war. In the postwar reform of the local governmental system, Japan had a choice between the ‘integrationist’ model prevalent in European countries and the ‘separationist’ model of Britain and the US. On the whole, Japan chose the former in most of its policies and system designs, and consequently the present system in Japan has the character of an ‘integrationist’ model as a variation of the European model. These concepts of models and strategies were used in this report for the purpose of examining local government systems in developing countries and Japan and discussing local government in general. This report has shared many pages with the analysis of central-local fiscal relations. Although many previous fiscal analyses have focused on the econometrics of this government function, this report provides the analysis of finance in relation to politics and administration. Our earnest wish is that this document will be utilized as an important resource material for understanding of the central-local government relations and decentralizing reforms in developing countries. Michio Muramatsu Chairperson Study Team for Government Decentralization Reforms in Developing Countries Government Decentralization Reforms in Developing Countries Table of Contents Preface Introductory Remarks from the Chairperson Chapter 1 Background and Purpose of the Study and the Participants ....................................... 1 Chapter 2 Trend towards Decentralization in Developing Countries 2-1 Decentralization in Indonesia: a Project for National Integration ..................................... 4 Masaaki Okamoto Former visiting researcher at the Center for Southeast Asian Studies, Kyoto University, and presently a JICA Expert in Indonesia 2-2 Decentralization in Thailand .............................................................................................. 41 Fumio Nagai Associate Professor of the Faculty of Law, Osaka City University 2-3 Decentralization in the Philippines .................................................................................... 77 Yutaka Katayama Professor of the Graduate School of International Cooperation Studies, Kobe University Chapter 3 Characteristics of Decentralization in Developing Countries from Case Studies 3-1 Decentralization in Developing Countries from the Administrative Perspective .............. 96 Kengo Akizuki Professor of the Graduate School of Law, Kyoto University 3-2 Fiscal Decentralization in Developing Countries: Thailand, Indonesia and the Philippines .... 112 Nobuki Mochida Professor of the Graduate School of Economics, University of Tokyo 3-3 Fiscal Decentralization in Developing Countries: Case Study of the Present State of Thailand and Issues of Decentralization..................... 137 Masahisa Hayashi Professor of the School of Social Sciences, Waseda University Chapter 4 Lessons for Future Assistance Concerning Local Capacity Building in Developing Countries .................................................................................................. 162 Fumio Nagai Associate Professor