The theme of this volume is “Fiscal Decentralisation and Inclusive Growth in Asia”. Given the current economic context around the world, inclusive growth is a hugely important topic and has been made a key national policy objective in many countries. It is also promoted by international organisations – especially the OECD – as well as the ADB, the IMF, the World Bank, and the UN. The OECD has been a leading promoter of inclusive growth policies, and frameworks for analysis.

Sub-national governments are a crucial part of the public sector. In many countries, sub‑national governments are almost as large as or even larger than the central government in terms of their shares in government spending and revenue. In almost all areas of the government, such as education, infrastructure, poverty reduction and public health, sub‑national governments are a major player in improving the effectiveness of the public sector. Therefore, understanding the nature of intergovernmental fiscal relations and its optimal design is a key policy challenge in both developed and developing countries.

Many countries have made inclusive growth a major national policy objective. This volume looks at the relationship between fiscal decentralisation and inclusive growth in the Asia-Pacific region. It begins with a chapter that provides a perspective on decentralisation in a globalised world. The authors (Robin Boadway and Sean Dougherty) discuss the challenges posed by globalisation accompanied by the growing importance of information technology and its implications on fiscal decentralisation and inclusive growth. The authors then discuss that the roles of various levels of governments should change in response to increasing pressure for innovation and widening inequalities, and that the role of large urban governments is becoming particularly important in this new environment. They suggest that new thinking on the design of fiscal decentralisation (revenue decentralisation, policy harmonisation, and the structure of intergovernmental transfers) is required to help cities meet the new challenges.

Globalisation accompanied by the growing importance of information technology and knowledge-based production pose challenging problems for federations. The chapter summarises the difficulties that traditional decentralised federations face in addressing problems of competitiveness, innovation and inequality brought on by globalisation. Adapting to these challenges involves rethinking the roles of various levels of government and rebalancing them appropriately. On the one hand, responding to inequality enhances the policy role of the federal government. On the other hand, state and local governments must respond to the imperative of providing education and business services to equip citizens and firms to compete in the knowledge economy. Perhaps most important, large urban governments are best placed to provide the physical and social capital to support innovation hubs. A key challenge for fiscal federalism is to facilitate the decentralisation of responsibilities to urban governments. This entails new thinking about revenue decentralisation, policy harmonisation and the structure of intergovernmental transfers so that cities can implement their policies effectively and accountably.

This chapter provides insights into the potential impact of sub-national government’s involvement in achieving inclusive growth and sustainable development in the Asia-Pacific Region. Based on data collected by a pilot study entitled “Sub-national governments around the world: structure and finance”, it provides a comparative analysis of sub-national government organisation, responsibilities and finances across the 16 selected countries. The preliminary findings highlight the high diversity of the sample in terms of socio-economic characteristics and institutional settings as well as the complex nature of sub-national government structure with many asymmetric situations. They also stress significant fiscal imbalances in the region. While sub-national governments are involved in the provision of a wide range of public goods, services and infrastructure, in particular for social cohesion, they have in practice very limited discretionary power over their revenues, most particularly tax revenues, confirming that fiscal decentralisation is still lagging behind in many countries of the Asia-Pacific Region. This situation delays the empowerment of sub-national governments as key actors in the developing process of their countries, in particular for inclusive growth.

There is increasing interest in the question of whether decentralisation promotes inclusive and equitable development. Evidence is limited and the results are highly variable. The premise of the chapter is that a first step in addressing this question is to document how decentralisation works. Although an important public sector reform in Asia, decentralisation is organized and operates in diverse ways that reflect differences in country characteristics, histories and political economy forces. This chapter briefly examines key aspects of decentralisation in selected Asian countries—the intergovernmental system structure and decentralisation framework, the degree of fiscal empowerment and decision-making autonomy, and the level of accountability reflected in the local political system, among others. Each of these features has potential implications for inclusive development, although how they interact, the results they generate, and their dependence on other public policies may differ across countries.  Given the diversity, complexity and information gaps involved, few policy generalisations beyond relatively broad statements can be made. More work is needed to establish an evidence base on the role that fiscal decentralisation—supported by other institutional and political reforms—can potentially play in inclusive development in Asia.

One of the key inequalities in China today is the divide between urban residents with local registration (hukou) and those without. This chapter examines the historical and systemic causes of this divide between the hukou and non-hukou populations, focusing on the provision of basic education. The limited access to urban schooling for the children of rural migrants is a divisive issue in the debate on citizenship and social rights of migrants, and one with adverse implications for labour markets and intergenerational mobility. This chapter uses the provision of basic education to illustrate how fiscal decentralisation in China – under particular historical circumstances, produced a divisive, rather than inclusive growth outcome. Moreover, even though education policies have shifted over the past two decades to calling for inclusiveness, their impact has to date remained limited, leaving the government with an inequality it does not want and finding very difficult to reverse.

This chapter examines the current state and challenges related to inclusive growth and fiscal decentralisation in Japan. After reviewing the literature, it discusses the Japanese system of local public finance, with a description of recent reforms that have contributed to its fiscal decentralisation. The discussion highlights the integral role of local governments in the Japanese system of social protection, and it considers how and to what extent fiscal decentralisation could play a role in inclusive growth in the Japanese context. The rapid pace of ageing and population decrease in the country indeed poses serious challenges for inclusive growth and local public finances, which make it important to consider the roles of agglomeration and intergovernmental transfers.

One of the key connectors between inclusive growth and education seems to be fiscal decentralisation. Education equity has long been a significant policy concern, not only in developed but also in developing countries. This chapter points out how the equal distribution of educational opportunities through fiscal decentralisation affects inclusive growth. The empirical findings in this chapter pose some policy-related questions. First, the linkage between income disparities and education inequalities with the definition of student resiliency has been shown. Second, this study suggests that the mitigation of regional disparities may improve income equality. From this point of view, the regional imbalance of demographic and economic infrastructures may worsen income inequality in the highly congested capital cities in many Asian countries. Finally, this empirical study adds to the evidence concerning the relationship between two kinds of redistributive policies for many Asian countries and OECD countries.

Indonesia embarked on an ambitious course of decentralisation in 1998. Over a period of a few years, facilitated by financial transfers from the central government, responsibility for many public services and administrative tasks were devolved to local authorities. This process is continuing. Regional development is now very much in the hands of the four sub-national tiers of government. However, the speed of the devolution means that much is being done without the required accompanying skills, technical capacities, resources and oversight. As a result, while good progress has been made nationally along a number dimensions, outcomes in health, education, infrastructure, corruption and the provision of other social services have not improved as quickly as was hoped, and the variance in results across the regions has been considerable. Rather than simply devolving more and more responsibilities to sub-national authorities, the central government could take a more strategic view of regional economic development, monitoring the performance of sub-national governments, providing them with technical assistance where needed, encouraging them to emulate best performers and making use of direct grants. In the longer term the objective should be tax autonomy and transfers based primarily on block grants, although this should be conditional on adequate oversight and sufficient local capacity.

The internal revenue allotment, or IRA, is a major aspect of intergovernmental relations in the Philippine government. The IRA brings alive many local government units (LGUs) that depend on the transfer up to 98% of their budget. The importance of the IRA is highlighted by the fact that it is the largest source of funding for many LGUs. At the same time, the central government has required certain mandatory expenditures to be funded out of the IRA. On the premise that the central government knows better where the IRA must be spent, the mandatory expenditures must contribute to the collective and overall societal growth of the country. Data show that economic growth has not happened where it was intended. Among provinces, IRA dependence remains significant. Poverty incidence is similar in provinces that have high IRA dependence. Thus, while the Philippines has achieved economic growth in general, growth has not spread in areas as desired. Provincial governments continue to generally have insufficient resources due in part to their own limited administrative capacities or limited resources, and the limited resources afforded them or the over-assigned expenditure responsibilities they must undertake.

The Asian regions of the Russian federation play a disproportionately important role in the economy of the country. While only about one-quarter of Russia’s population lives in Asia, they produce almost 30% of the country’s gross domestic product (GDP). This chapter describes the intergovernmental fiscal framework in Russia and examines its effects on regional fiscal incentives, economic growth, and inequality, focusing on the Asian regions. The analysis suggests that fiscal incentives, both in the Asian regions and the rest of Russia, generated by the tax assignment policy and transfers from the federal budget are relatively weak. However, explicit fiscal rules aimed mostly at fiscally weak regions enhance fiscal incentives. Although federal transfers do not seem to impede economic growth of the Asian regions, overall transfer dependence and particularly balancing transfers are associated with lower regional growth in the European part of Russia. Transfers do reduce inter-regional inequality with respect to budgetary revenues and expenditures, but the effect is smaller for equalization transfers. The balancing transfers reduce inequality the least and sometimes even increase it. This is true both for the Asian regions and for the country as a whole. Overall inter-regional revenue inequality with and without transfers decreased in 2005-2007, stabilized in 2007-2013, and increased significantly through 2015.

This chapter studies expenditure assignment, revenue assignment and the debt of local governments in Thailand. The distribution of local expenditures and revenue among jurisdictions in 2017 are analysed by applying the Gini index and Lorenz curve. The study shows that the governmental functions that have the most unequal distribution of local expenditure per capita among local governments are agriculture, domestic peace maintenance and commerce. The least unequal distribution of local expenditure per capita is in general administration, central budget and education. Thai local governments collect a very small proportion of their budgets themselves, with around eight percent of their budgets coming from local sources of revenue. This study suggests that the shared revenue and grants are good instruments to reduce the disparity of local governments’ revenue. Moreover, government functions should be defined more clearly, identifying which functions are solely provided by the central government and which functions should be jointly provided by the central government and local governments.