Executive summary

Subnational governments’ capacity to effectively fund and deliver public services are crucial for the realisation of the benefits of decentralisation. However, subnational government capacities often suffer from significant weaknesses, ranging from inadequate assignments of own-revenues, through to flaws in tax administration, the design of intergovernmental transfers, spending assignments and various aspects of public financial management. The first chapter, by Teresa Ter-Minassian, gives an overview of these challenges, and discusses how central governments can contribute to easing the resource constraints on subnational capacity building as well as create appropriate incentives for these governments to improve their performance.

The second chapter, by Paul Smoke (New York University), gives a political economy perspective on intergovernmental fiscal system design and implementation. Although fiscal decentralisation has been a popular reform for decades, including in Asia, success with operationalising reform frameworks and the realisation of expected results have often been elusive, particularly in middle and lower-income countries. This chapter argues that a nuanced diagnosis of context, particularly of the political economy realities, is essential for improved system performance. While there is no universal remedy for increasing the effectiveness of fiscal decentralisation, better diagnostics and more strategic and flexible approaches to implementation have the potential to improve on the status quo.

The third chapter, by Junghun Kim (Network on Fiscal Relations), discusses how to find the right balance in the use of intergovernmental grants. Discussions on the design of intergovernmental fiscal relations often revolve around the premise that intergovernmental grants – especially earmarked grants – should be minimised, as they imply a vertical fiscal imbalance between central and subnational governments. However, almost all local governments provide certain essential public services, where earmarked grants play an important role in the provision of such services. Several country cases show the importance of intergovernmental relations in the role of co-ordinating across levels of government for the efficient and equitable provision of essential public services.

The fourth chapter, by Dorothée Allain-Dupré, Isabelle Chatry and Louise Phung (OECD) provides an overview of decentralisation trends and challenges in the Asia-Pacific region, based on a new database. The subnational landscape in the region is highly diverse when looking at territorial organisation, decentralisation patterns, subnational finances and capacities. Since the 1990s, decentralisation reforms have been carried out in many Asian countries, transferring responsibilities and fiscal resources to subnational governments. These reforms translated into high fiscal decentralisation indicators – above world averages – but several bottlenecks to effective multi-level governance and subnational capacity building remain. Unclear assignments of responsibility across levels of government and weak fiscal decentralisation are the most prominent challenges.

The fifth chapter, by Roger Shotton and Uyanga Gankhuyag (UNDP), examines how fiscal transfers in Asia can provide opportunities for attaining the Sustainable Development Goals (SDGs). Increased and better quality public spending is needed, with responsibility for a significant share of this spending mandated to subnational governments across Asia, which are primarily dependent on fiscal transfers to fulfil their mandates. Moreover, the allocation of these transfers may unintentionally shape progress towards reducing geographic inequality and also carry perverse incentives affecting the quality of spending. The chapter argues that there is also an increasing body of experience in explicitly attaching positive incentives to transfers, which hold promise for promoting better local service delivery performance and accountability, and hence for attaining the SDGs.

The sixth chapter, by Andrew Bauer and Uyanga Gankhuyag, looks at natural resource taxation and revenue sharing in Asia. More than 30 countries have put in place natural resource revenue-sharing systems – systems that allocate revenues from natural resources to subnational governments separately from other fiscal revenues. The main aim of such systems is to enable natural resource-producing regions of a country to benefit more from natural resource extraction, as well as to mitigate conflicts between national and subnational governments. To work smoothly and enhance trust, natural resource revenue-sharing systems need to be well designed and implemented, as well as overseen by an adequate and transparent governance mechanism.

The seventh chapter, by Zhi Liu (Lincoln Institute of Land Policy), looks at municipal finance and property taxation in China. Chinese cities have relied heavily on the revenues from public land leasing to finance urban development. Recently, following China’s recent amendment of its Land Administration Law, villages can supply rural land for urban development without going through land expropriation by local governments. This amendment will have a significant impact on the future of municipal finance. In the context of China’s inter-governmental fiscal framework, this chapter discusses the current issues facing its municipal finance system, the new issues that would emerge as a result of the amendment and options to address them, notably through greater use of property taxation.

The eighth chapter, by N.K. Singh (Fifteenth Finance Commission), examines fiscal federalism in India over recent decades, and draws attention to the need to improve its principles and practices. The chapter argues that today’s India, notably through its governance “matrix”, economic development, institution-building and multilateral relations, is vastly different from the India that drafted its constitution in 1950. The country is going through a transition in its intergovernmental relations, with boundaries based on linguistic factors and administration blurring, given changes brought on by innovation and migration. Rapid socio-economic trends such as technological change, rising mobility and market integration will affect the future of fiscal federalism in India.

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