Fiscal Decentralization in Indonesia and Thailand.pdf

Journal of Comparative Policy Analysis: Research and Practice

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Fiscal Decentralization in Comparative Perspective: Analysis of the Intergovernmental Grant Systems in Indonesia and Thailand Tatchalerm Sudhipongpracha & Achakorn Wongpredee To cite this article: Tatchalerm Sudhipongpracha & Achakorn Wongpredee (2016): Fiscal Decentralization in Comparative Perspective: Analysis of the Intergovernmental Grant Systems in Indonesia and Thailand, Journal of Comparative Policy Analysis: Research and Practice, DOI: 10.1080/13876988.2016.1138659 To link to this article: http://dx.doi.org/10.1080/13876988.2016.1138659

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Fiscal Decentralization in Comparative Perspective: Analysis of the Intergovernmental Grant Systems in Indonesia and Thailand TATCHALERM SUDHIPONGPRACHA* & ACHAKORN WONGPREDEE** *College of Local Administration, Khon Kaen University, Khon Kaen, Thailand, **Graduate School of Public Administration, National Institute of Development Administration, Bangkok, Thailand

(Received 9 November 2014; accepted 2 December 2015) ABSTRACT Decentralization can inadvertently lead to local fiscal disparity. One type of intergovernmental fiscal transfers, the general-purpose grant, can help equalize local fiscal imbalances. This article examines the extent to which the general-purpose grant systems in Indonesia and Thailand help mitigate local fiscal disparity. The findings show that the general-purpose grant system in Thailand does not effectively address disparities in local fiscal conditions. Localities with more own-source revenues and higher per capita income receive more general-purpose grants than those with weak fiscal capacity. In contrast, Indonesia’s general-purpose grant allocation system provides more resources for economically disadvantaged and conflict-ridden provinces. Keywords: comparative decentralization policy; intergovernmental fiscal transfer; Gini coefficient and percentile analysis; Indonesia; Thailand

Introduction As many developing countries began to decentralize over the past few decades, local governments have become important actors in basic public service provision. However, the localities’ own revenues alone cannot finance their entire expenditures. Intergovernmental fiscal transfers play a critical role in ensuring the efficiency and equity of decentralized public services. Within each country, there are different types of intergovernmental fiscal instruments, each of which theoretically serves a specific goal (Ahmad and Searle 2006). While revenue sharing is used to ensure an appropriate balance between revenues and expenditures assigned to different levels of government, Tatchalerm Sudhipongpracha is an assistant professor in the College of Local Administration at Khon Kaen University, Thailand. His research focuses on local government, administrative reform, local public health management, and fiscal decentralization. Achakorn Wongpredee is an associate professor in the Graduate School of Public Administration at the National Institute of Development Administration, Thailand. His research interests include politics of decentralization reform and local public finance. Correspondence Address: Tatchalerm Sudhipongpracha, College of Local Administration, Khon Kaen University, Khon Kaen, Thailand. Email: [email protected]

© 2016 The Editor, Journal of Comparative Policy Analysis: Research and Practice


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T. Sudhipongpracha and A. Wongpredee

general-purpose or unconditional grants are designed to alleviate fiscal disparities among rich and poor localities. Specific grants are transferred to local governments for specific programs that foster national priorities, such as health and education. In this article, we investigate the extent to which the intergovernmental fiscal policies help address local fiscal disparity. We do so by focusing on the general-purpose grant systems in Indonesia and Thailand, the two Southeast Asian countries that faced similar domestic and international pressures to embrace decentralization in the late 1990s. Nonetheless, while Indonesia’s decentralization efforts have been touted as a “big-bang” approach, decentralization in Thailand has been noted for its slow progress (ShairRosenfield et al. 2014). Government reform experts are also concerned with local revenue sources and how they are spent. Intergovernmental fiscal transfers, when properly designed, offer incentives for local government units to provide economically efficient and socially responsible public services. The cash-strapped localities can take advantage of the general-purpose grants that are designed to equalize fiscal conditions among local governments (Boex and Martinez-Vazquez 2004). To achieve this objective, general-purpose grants must be inversely related to each jurisdiction’s fiscal capacity (Bird and Smart 2002). The present article is an attempt to contribute to the existing fiscal decentralization literature with regard to how general-purpose grants are allocated to local governments in Indonesia and Thailand. We begin with a critical review of existing theoretical and empirical works on fiscal decentralization and intergovernmental grants. The main argument in this section is that general-purpose grants, when allocated based on local fiscal capacity, can assist the jurisdictions with insufficient resources in fulfilling their public service responsibilities. By compensating local governments with low fiscal capacity, general-purpose grants have an equalizing effect and reduce horizontal fiscal imbalances. The second section of this article provides a contextual overview of the decentralization reform process and intergovernmental fiscal transfer system in each of the two Southeast Asian nations. Then, after clarifying the methodological tools and data used in this research, the article reports the findings of a comparative analysis of the general-purpose grants in Indonesia and Thailand in relation to their local governments’ fiscal capacity. The final section discusses the research findings and concludes with new ideas for future research on fiscal decentralization in the two Southeast Asian countries and beyond.

Literature Review Theoretical and Empirical Reviews of Fiscal Decentralization Fiscal decentralization theory is founded on an important debate in public finance and economics concerning the appropriate size and economic role of government (Kwon 2013). There are two major perspectives in this debate. The first perspective emphasizes the autonomy of the economic sphere and calls for limitations on government intervention (Siddiquee 2006). For those in favor of limited government, the decentralized public services and citizen mobility are assumed to improve the efficiency and quality of public services (Tiebout 1956). Such a view is predicated on the assumption that local governments, in a fully decentralized governance system, are likely to compete with one another to offer taxes and public services. The bundles of taxes and services that emerge from this


Fiscal Decentralization in Comparative Perspective

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interlocal competition are expected to satisfy the “footloose citizens” whose residential choice is purely based on their preferences about taxation and public goods. In this school of thought, an efficient mix of taxes and public services can be achieved without a strong, centralized national government (Brennan and Buchanan 1980). The second perspective stresses the importance of government involvement in the private sector. In this view, government institutions serve three crucial functions: macroeconomic stabilization, income distribution, and resource allocation. However, this view does not argue for complete centralization of the three functions. Macroeconomic stabilization and income distribution should rest within the realm of national government responsibilities. Concerned with allocative efficiency, Oates (1999) argues that resource allocation is suitable for local governments. Due to their proximity to citizens and communities, local governments have informational advantages over their national counterparts (Shah 2007). Thus, when given adequate revenue-raising power, local governments can efficiently allocate resources to produce local public goods that reflect the local preferences (Boadway and Shah 2007). The fiscal decentralization literature has a common normative message: “finance should follow function” (Shah 2007, p. 9). In other words, assignment of administrative responsibility to each level of government should correspond with assignment of revenue-generating authority. Correspondence between expenditures and revenue capacity is important for ensuring democratic accountability, local fiscal self-reliance, and public service quality. In reality, decentralization has resulted in unequal net fiscal benefits (NFBs) (benefits from public services minus tax burden borne by local citizens) among local jurisdictions in many countries (Shah 2007). The NFBs depend largely on local fiscal capacity, which varies across jurisdictions. Even within the decentralized fiscal structure, there are few tax bases that are efficient and easy to administer by local governments. Even non-tax revenues, such as user charges and fees, are limited in scope. Also, largely due to economies of scale, the provision and management of certain public services is more cost-effective for large local jurisdictions. Rich localities are likely to provide a higher level of public services at a lower tax rate than are poor localities. This fiscal inefficiency induced by the unequal NFBs among diverse localities calls for the role of intergovernmental grants. Intergovernmental Grants and Fiscal Imbalances Given the administrative costs and implementation difficulties, local governments are likely to fall short of the tax revenues needed to fulfill their functions. Intergovernmental transfers are needed to compensate for the limited local tax revenues. Even in today’s fiscally decentralized countries, transfers make up “two-thirds to threequarters” of the local governments’ annual income (Schroeder 2007, p. 63). However, even if the transfers finance all local expenditures, an appropriate combination of transfers can make local governments fully accountable to both their citizens and higher levels of government (Bird and Smart 2002). Poorly designed transfers will not suffice, even if they finance only 10 per cent of local expenditures (Köthenbürger 2002). Generally, countries that have adopted fiscal decentralization rely on a combination of shared revenues, general-purpose or unconditional grants, and specific or conditional grants (Ahmad and Searle 2006). One important reason for providing local governments with these forms of financial assistance stems from fiscal imbalances among different government units. Such imbalances can be either vertical or horizontal.


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Vertical fiscal imbalance is one of the common features of all multilevel governance systems (Rao and Chelliah 1991). This type of imbalance occurs when there is a mismatch between revenue means and expenditure needs at each government level. In most decentralized countries, central governments still raise much of the local revenues, while local governments become increasingly responsible for a diversity of public service responsibilities (Sorens 2014). In certain developing countries, local governments have been given considerable authority to levy local taxes after decentralization (Frumence et al. 2013). In reality, however, local jurisdictions cannot raise sufficient revenues to finance their expenditures due to limited administrative capacity and local economic conditions. Central governments typically use revenue sharing to close this vertical fiscal gap. The vertical fiscal balance can be achieved when expenditures and total revenues, including shared revenues, are approximately equal in rich local jurisdictions (Sudhipongpracha 2013). However, this solution leads to another problem. Even though the vertical fiscal transfers, such as revenue sharing, can be used to rein in fiscal imbalances among different levels of government, horizontal fiscal disparity continues to exist among rich and poor localities (Sorens 2014). Horizontal fiscal imbalance refers to the differences between revenues and expenditures among governmental units within one level of government. This type of fiscal gap can be closed by adopting the fiscal dentistry technique, which gives each local jurisdiction sufficient intergovernmental grants to equalize its revenues and expenditures. The public finance literature calls for general-purpose or unconditional grants from the central governments to local jurisdictions on a progressive scale (Rao and Chelliah 1991). However, existing research reveals several shortcomings of the general-purpose grant system. For instance, Germany’s revenue-pooling system, which is an equivalent of the general-purpose grant system, was found to create poor incentives for state governments to raise their own tax revenues (Baretti et al. 2002). Such a disincentive effect was also common in other transitional economies, including Latin American (Stein and Grisanti 1997) and Eastern European countries (Haldeda et al. 2013). To avoid local governments’ revenue underperformance, the general-purpose grant allocation system must be based on each jurisdiction’s fiscal capacity. Developing countries use a variety of allocation methods. For example, general-purpose grants in Pakistan are allocated entirely based on each province’s population size (Kim and Smoke 2003). Cambodia has developed and incorporated its “Poverty Severity Index” in the intergovernmental transfer formula (Meng and Pfau 2012). The Philippines, Indonesia, and India rely on multiple variables, including land area and income per capita, in their transfer formulas (Kim et al. 2003).

The Politics of Fiscal Decentralization in Indonesia and Thailand Apart from economic considerations, political and institutional factors also affect how the fiscal decentralization policies are designed and implemented (Smoke 2015). As decentralization involves the power and authority transfers from the center to regional and local governments, a vast number of empirical studies related to the politics of decentralization focus on the bargaining relationship between national and local elites (Garman et al. 2001; Gibson 2005). Yet the definitions of elites in these research works vary considerably from who they are to their scope of influence (Guinjoan and Rodon 2014; Weingast 2014).



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However, despite the lack of a single accepted definition for elites, the politics of decentralization literature provides two crucial points for the present analysis. First, the national and local elites’ strategic behavior and the victorious coalition’s prevailing territorial interests are key determinants of the type and content of the decentralization policy (Falleti 2010). As empirical works on Latin American politics demonstrate, the first type of decentralization that has been adopted defines the country’s central‒local relations context in which future decentralization measures occur (Falleti 2005). The devolution of political power to local elites early in the sequence is likely to lead to further decentralization (O’Neill 2003). On the contrary, if the national elites’ interest prevails, the transfer of unfunded administrative functions will happen at the onset of decentralization and consequently make local elites more dependent on the center for resources (Samuels 2004). Second, the historical legacies and long-term evolution of institutions also set constraints on a country’s decentralization efforts (Sudhipongpracha 2013). For instance, different patterns of institutional evolution of the national bureaucratic systems in the Philippines and Thailand shaped each country’s decentralization reform (Hutchcroft 2001). The two countries share weakly institutionalized political party systems that are organized along national lines (Sidel 1996). Yet while Thailand has had a tradition of centralized provincial administration since the late nineteenth century, the Philippines has had no such tradition since the American colonial era and its national bureaucracy has limited capacity to supervise provincial and local officials (Hutchcroft 2000). As the historical institutionalism school puts it, strategic choices made in historically defined contexts have “a continuing or constraining influence over the policy into the future” (Marriott 2010, p. 37). Thus, unlike the Philippines, Thailand has adopted an unbalanced approach to decentralization. While local government executives and councilors in Thailand are now popularly elected, the scope of local administrative responsibility and autonomy remains limited. On the contrary, Indonesia and Thailand had similarly centralized provincial administrative structures prior to the 1997 financial crisis. The crisis reduced the national budgets and eroded traditional clientelistic arrangements through which government officials maintained their ties to citizens (Sudhipongpracha 2014). At the same time, domestic and international movements around democracy and human rights energized challenges to the centralized administrative systems in Indonesia and Thailand. To present themselves as democratically minded and reform-oriented, national political leaders and parliamentarians in the two countries agreed the decentralization-related legislation. Yet, although Indonesia and Thailand began their decentralization reforms under similar conditions, the two countries ended up pursuing different paths toward decentralized governance. One of the key distinctions between the two countries’ decentralization reforms is the status of provincial administration after decentralization. While the centrally appointed provincial governments in Indonesia were abolished after decentralization, their counterparts in Thailand remain intact until today. In Indonesia, the two key decentralization laws strengthened local governments at the expense of provincial governments. Local government leaders were no longer subordinate to provincial governors (Alfonso and Hauter 2006). As a result, no government agencies were fully in charge of coordinating efforts to maintain the quality of local public services (Bertrand 2007). This administrative structure generated much concern about the decentralization process. Ultimately, the decentralization laws were amended in 2004 to give the central and provincial governments the tools to intervene in local government affairs and hold the local officials accountable for their actions. However, the gap between formal


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laws and actual practices remains serious in Indonesia. Regardless of the 2004 law, cities and regencies continue to have more administrative authority than the provincial governments (Buehler 2010). In contrast, Thailand follows a more highly sequenced decentralization process than Indonesia. Unlike Indonesia’s decentralization laws, the Thai decentralization plans are limited by the scope of local government functions, authority, and resources. Local governments continue to operate under the interior ministry’s auspices. Although the provincial and municipal government executives are now chosen through popular elections, their authorities are shared with the centrally appointed governors and chief district officers. This dual administrative structure has become more pronounced since Thaksin Shinnawatra’s administration (2001–2006) introduced the CEO governor policy in 2003, which gave the centrally appointed provincial governors complete authority over local governments and regional offices from all ministries (Mutebi 2004). Another difference between Indonesia and Thailand’s reforms is the transfer of public service responsibilities to local governments. In Indonesia, the city and regency governments are charged with all the public services for which the central and provincial agencies are not responsible (Lewis 2003). In sharp contrast, local governments in Thailand must fulfill only the functions stipulated in the decentralization laws. The interior ministry holds the legal authority to interpret and adjudicate on all the ambiguous terms. For the fiscal dimension, although local governments in Indonesia can create new taxes under the 1999 decentralization laws, they still depend heavily on Jakarta’s financial assistance. Based on the fiscal decentralization literature, an intergovernmental fiscal transfer policy should be formulated after clarifying local government functions. However, the opposite occurs in Indonesia: “While devolved functions were only vaguely defined, relatively clear revenue instruments were assigned to the local governments” (Usui 2004, p. 1). Revenue sharing now consists of property-related taxes, personal income tax, and natural resource revenues. Local governments in Indonesia also receive general-purpose grants (Dana Alokasi Umum: DAU) and specific grants (Dana Alokasi Khusus: DAK). The DAU in particular has become more important to local budgets than it was prior to decentralization, currently making up nearly 75 per cent of total revenues for city and regency governments (Lewis 2003). After the decentralization reform began, this type of grant was designed to equalize local fiscal capacity and enable local governments to finance their expenditure needs (Ferrazi 2005). To achieve the equalization objective, the fiscal gap allocation formula was established, taking into account population, area, poverty level, and geographic condition. However, the DAU has not been allocated entirely according to the formula (Usui 2004). Indonesia’s intergovernmental grant allocation process is strongly influenced by the political dynamics within the Parliament (Hofman and Kaiser 2004). Thus, in spite of the equalization formula, the actual DAU allocation is influenced by the “hold harmless” principle, which has been manipulated to ensure that each locality’s DAU grant does not fall below what they received before decentralization and the cost of delivering devolved functions (Brodjonegoro 2002). Because the pre-decentralization grant system favored the resource-rich regions, the “hold harmless” allocation ends up widening local fiscal disparity. Since 2002, several reforms have been undertaken to make the DAU more equalizing, but have not succeeded due to strong opposition from the regional representatives in the Parliament (Brodjonegoro and Susastro 2002).



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Nonetheless, empirical studies yield mixed results regarding the DAU. While Hofman and Kaiser (2004) point out that the DAU is less equalizing than one would expect due to the “hold harmless” allocation, Hofman and colleagues (2006) find that the it actually helps equalize fiscal imbalances among local jurisdictions in Indonesia. This is because resource-rich localities receive less DAU per capita than regions with low fiscal capacity. In Thailand, local governments are entitled to shared revenues and three types of intergovernmental grants. First, the general-purpose grant is allocated based on the formula developed by the National Decentralization Committee to mitigate fiscal imbalances among local governments. Second, the purposive grant is dedicated to public service programs that have been transferred to local authorities according to the national decentralization plans, such as the school lunch program and primary healthcare services. Third, the specific or conditional grant, which is designed to serve the national government priorities, contains explicit details about program objectives and operations. In contrast to Indonesian local governments, local governments in Thailand rely more on purposive and project-specific grants than the general-purpose grant (Sudhipongpracha and Wongpredee 2015). This phenomenon reflects the manner in which public service responsibilities have been transferred to local governments since Thailand adopted its first national decentralization plan. Rather than a broad spectrum of functions, the central government only devolves specific programs to the local level. Some of these programs were successfully transferred to local jurisdictions across the country, such as the school lunch and milk programs. For other programs, local governments are required to meet the central government’s capacity assessment criteria before they can assume the responsibility. The purposive grant used to finance these devolved programs has become more important to local budgets than the other two grants. Similar to the DAU, the general-purpose grant in Thailand is designed to equalize fiscal capacity among local jurisdictions by providing them with additional revenues to fulfill their legal obligations and other devolved functions (Suwanmala and Weist 2009). However, there are two problems with the grant allocation process. First, the allocation formula changes every year. Second, the amount of national budget allocations for the general-purpose grant policy also fluctuates, depending on parliamentary politics. With decentralization currently underway in Indonesia and Thailand, the local authorities find themselves in vastly different situations concerning their revenue-generating abilities. The fiscal equalization mechanisms constitute an integral part of local government finances. However, the general grant allocation processes are subject to each country’s political dynamics. Against this background, we seek to determine the extent to which the DAU in Indonesia and the general grant in Thailand are allocated based on local governments’ fiscal capacity.

Research Methods Operationalization of Local Fiscal Capacity Decentralization unavoidably results in differences between revenue instruments and expenditure assignments among local governments. As previously discussed, the public finance literature emphasizes the role of a general or unconditional grant in equalizing

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local fiscal disparity. In this article, the amount of the general-purpose grant for local governments in each province is measured on a per capita basis and can be calculated as follows: P


Amount of general purpose or unconditional grant per capita ¼

ðGLGi Þ Ni

where GLGi is the amount of the general-purpose grant received by local governments in the ith province in 2011. Ni represents the ith province’s population size in the same year. Moreover, two proxy indicators are used to measure the local governments’ fiscal capacity. The first indicator is local own-source revenue determined by the sum of local own revenues generated by all local government units in each province. This indicator is also calculated on a per capita basis: P Local own source revenue per capita ¼

ðRLGi Þ Ni

where RLGi is the amount of local own-source revenues collected by local governments in the ith province in 2011. Ni symbolizes each province’s population size. However, critics argue that basing local fiscal capacity on actual revenue collection does not take into account variations in local fiscal effort. This criticism assumes that local governments have broad authority to increase or decrease tax effort by changing their tax collection effort, tax rates, and tax bases. This assumption may not hold true in the developing world where local governments have limited taxing and administrative authority. Thus, in many developing countries, local fiscal capacity can be safely measured by the actual own-source revenue collections (Boex and Martinez-Vazquez 2004). Other indicators are used to determine local fiscal capacity, such as the representative revenue system (RRS). The RRS calculates the amount of tax and non-tax revenues that each locality can generate from a standard tax system consisting of multiple local revenue sources (Yilmaz et al. 2006). The usefulness of this indicator depends on data quality (Bird and Slack 1990). However, due to poor data quality in developing countries, the RRS may not clearly reflect local fiscal capacity (Devas 2008). To quantify local governments’ fiscal capacity in the context of developing countries, Boex and Martinez-Vazquez (2004) suggest that proxies for the local ability to tax or ability to pay can also be used. Therefore, per capita income in each province is included as the second indicator of local fiscal capacity. As Patamasiriwat (2012) observes, using both local own-source revenue and per capita income can offer a comprehensive picture of local governments’ fiscal conditions, especially in the context of decentralization reform in Thailand. In this study, the formula for each province’s per capita income is as follows: P Per capita Income in each province ¼

ðPLGi Þ Ni

where PLGi is gross provincial product generated by the ith province in 2009 and Ni represents each province’s population size.


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Data and Case Selection In this study, provincial-level data are used to assess the role of intergovernmental fiscal transfers in addressing local disparity in Thailand and Indonesia. The 2011 fiscal figures from each locality, including own-source revenue and general-purpose grant allocation, are aggregated to produce the provincial-level data. For the per capita income indicator, there is often a delay between when economic activities occur and when their consequences are recognized by economists and the government. Bearing in mind this time lag effect, the 2009 data on gross provincial product (GPP) for the Thai provinces and gross regional product (GRP) for the Indonesian provinces are used to measure the value of economic activities in each Thai and Indonesian province in 2011. The primary reason for using the province as a unit of analysis is because it is difficult to disaggregate the GPP and GRP data to lower governmental levels. However, a major weakness of this approach is that the research results may not capture variations in fiscal capacity among subprovincial government units in each province. For the Thai case, the Bangkok Metropolitan Authority (BMA), Pattaya City, and Beung Kan province are excluded from this analysis. The BMA and Pattaya are special jurisdictions, while Beung Kan recently received the royal charter and became the country’s new province. Thus, only data from 75 provincial units are used in this study. Similarly, autonomous regions in Indonesia (Aceh, Yogyakarta, Papua, and West Papua) and Jakarta are omitted, leaving 29 Indonesian provinces in this analysis. The Thai provincial data comes from the Department of Local Administration and the National Economic and Social Development Board (NESDB), while the Indonesian provincial data are secured from the Ministry of Finance in Indonesia. Data Analysis Based on Patamasiriwat and Kamnuansilpa (2012), two inequality measures – the Gini coefficient and the ratio of the 90th and 10th percentiles of a distribution (P90/P10 ratio) – are used to analyze the fiscal and economic disparity among Thai and Indonesian provinces. Since each of these two measures has its own shortcomings, public economic experts suggest that the two ratios should be provided whenever they are available (Hellier 2013). The Gini coefficient ranges from 0 to 1, with 0 indicating perfect economic equality and 1 indicating perfect inequality. With respect to the P90/P10 ratio, the larger the ratio, the greater the disparity. Findings In Thailand, three types of intergovernmental grants made up 40 per cent of total local government revenues in 2011 (Figure 1). Shared value added tax (VAT) constituted 34 per cent. Certain revenues, such as automobile tax and traffic violation fines, are collected by central agencies and returned to local jurisdictions. These revenues accounted for 16 per cent of local revenues. In 2011, local governments in Thailand could collect only 9 per cent of the entire revenues from their own sources, including land development tax, property rental tax, slaughterhouse tax, and signboard tax. Similar to their counterparts in Thailand, local governments in Indonesia relied heavily on revenue sources other than their own. In 2011, own-source revenues represented only 17 per

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Figure 1. Composition of Thailand’s local government revenues in 2011

Figure 2. Composition of Indonesia’s local government revenues in 2011

cent of total local revenues in Indonesia, although the local governments are allowed to levy a variety of taxes, such as entertainment tax, hotel and restaurant tax, mineral extraction tax, and advertisement tax (Figure 2). On the other hand, intergovernmental grants, including the DAU and DAK, made up 73 per cent of Indonesia’s local government revenues.

General-Purpose Grants and Local Fiscal Capacity In Thailand, local governments differ considerably in terms of their per capita local ownsource revenues and per capita incomes. The P90/P10 ratio of per capita local own-source revenues of 5.55 indicates a large gap in revenue-generating capacity between poor and rich provinces (Table 1). On average, the provinces at the 10th percentile could collect only US$5.3 per capita in 2011. In contrast, the provinces at the 90th percentile on average collected US$29.2 per capita in the same year. Apart from variations in revenue collections, the P90/P10 ratio also shows pronounced income disparity among Thailand’s local governments. As shown in Table 1, the provinces at the 90th percentile averaged US$8,493.4 GPP per capita, 6.55 times higher than those in the 10th percentile whose average GPP per capita was US$1,296.2 in 2011. However, the local jurisdictions in Thailand did not show much disparity in the amount of general-purpose grant per capita that they received from the national government in 2011.


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Table 1. P90/P10 ratios of fiscal capacity and the general-purpose grant per capita in Thailand, in US$ (N = 75)


Mean Percentile 10th 25th 50th 75th 90th P90/P10 ratio

Fiscal capacity I Local own-source revenue per capita

Fiscal capacity II Per capita income

General-purpose grant per capita

14.9

4,143.0

45.4

5.3 6.7 10.0 17.0 29.2 5.55

1,296.2 1,705.1 2,545.8 3,960.3 8,493.4 6.55

26.7 29.5 34.2 51.5 55.8 1.64

Note: All values have been converted to 2011 US$.

Table 2. P90/P10 ratios of fiscal capacity and the DAU per capita in Indonesia, in US$ (N = 29)

Mean Percentile 10th 25th 50th 75th 90th P90/P10 ratio


Fiscal capacity II per capita income

DAU per capita

42.67

2,255.40

18.54

19.97 24.85 39.07 59.37 108.92 5.45

719.29 1,187.19 1,514.43 1,891.47 5,471.77 7.61

3.75 8.42 14.40 28.87 39.81 10.62


From the P90/P10 ratio of general-purpose grants per capita, the 90th percentile received only 1.64 times more general transfers per capita than the 10th percentile. In the same vein, Indonesia had significant income disparity among its local governments. As indicated by the P90/P10 ratio of per capita income, the archipelagic nation had provinces with an average of US$5,471.77 per capita – 7.61 times more per capita income than those at the 10th percentile that produced only US$719.29 per person (Table 2). Local governments in Indonesia and Thailand also share similar own-source revenue disparity. In Indonesia, the provinces at the 90th percentile generated 5.45 times more revenues from their own sources than those at the 10th percentile. The 90th percentile could on average collect US$108.92 per capita from their own revenue sources in 2011, while the 10th percentile brought in only US$19.97 per capita in revenues to their local government coffers (Table 2). However, with a P90/P10 ratio of 10.62, the Indonesian local governments show greater disparity in the amount of general-purpose grant (DAU) per capita than their counterparts in Thailand. On average, while the provinces at the 90th percentile received US$39.81 in the DAU per capita from Jakarta, those at the 10th percentile were given an average of US$3.75 in the DAU per capita.

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Table 3. Disparity measures of local governments in Indonesia and Thailand Gini coefficient Indicator


Fiscal capacity I: local own-source revenue per capita Fiscal capacity II: per capita income General-purpose grant per capita

Indonesia

Thailand

0.69 0.53 0.63

0.41 0.65 0.11

The Gini coefficients for each variable are also calculated to assess the disparity patterns among local governments in Indonesia and Thailand. The two fiscal capacity indicators appear to be consistent with each other (Table 3). Local governments in the two countries show inequality in their own revenues per capita and per capita incomes. In Thailand, inequality is most pronounced when per capita income is taken into consideration (Gini coefficient = 0.65). The Indonesian local governments demonstrate the greatest disparity in their per capita own-source revenues (Gini coefficient = 0.69). The most obvious distinction between Thailand and Indonesia lies in the disparity of general grant allocations (Table 3). An argument can be made that the general-purpose grant allocation system in Thailand is more equitable. However, we must exercise caution in equating the low general-purpose grant disparity with the effectiveness of an intergovernmental grant system in mitigating local fiscal disparity. The low general-purpose grant disparity can also be construed as suggesting that all local governments receive equally meager amounts of general-purpose grants and that the grant allocation process may not take into account each local jurisdiction’s fiscal needs. Because the P90/P10 ratio and the Gini coefficient for each variable do not permit more analysis of the two countries’ intergovernmental transfer systems, additional evidence is necessary for a better understanding of the dynamics of local fiscal disparity in Thailand and Indonesia. To better understand the local fiscal disparity patterns in Thailand, we investigate the fiscal capacities and general grants per capita among local governments in the three richest and three poorest provinces in Thailand. As Table 4 shows, although the three richest provinces in terms of per capita income could collect more own-source revenues per capita than the poorest provinces, these six provinces received approximately equal amounts of general-purpose grants per capita. For instance, local governments in Rayong province generated approximately 13 times more own revenues per capita and 33 times more income per capita than local governments in Nongbua Lumphu. However, on average, the Rayong localities received only $11 more in general-purpose grants per capita than the Nongbua Lumphu localities. By the same token, the high general grant disparity among local governments in Indonesia may not be entirely problematic. In fact, the DAU appeared to have an equalization effect on the resource-strapped jurisdictions. In other words, the three poorest provinces, as measured by per capita own-source revenue and income, received more DAU per capita than the richest provinces (Table 5). North Maluku in particular received 15 times as much DAU per capita as East Java, the country’s richest province. It must be noted that apart from the low economic development level, North Maluku, Maluku, and Gorontolo also experienced a series of communal violent acts between 1998 and 2004. The violence resulted in a large number of internally displaced persons, as well as the


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Table 4. Three richest and three poorest provinces in Thailand measured by per capita income in 2011, in US$

Province



General-purpose grant per capita

49 45 96 5 5 4

32,892 13,783 8,204 1,299 1,208 1,147

72 69 70 62 62 61

Rayong Chonburi Phuket Sakon Nakorn Surin Nongbua Lumphu



Table 5. Three resource-rich and three resource-strapped provinces in Indonesia in 2011, in US$ Province



DAU per capita

60 55 43 15 15 16

1,852 1,627 1,236 671 525 444

3 3 4 35 42 46

East Java West Java Central Java Gorontolo Maluku North Maluku


large-scale destruction of infrastructure, residential areas, and businesses. Therefore, it can be argued that the DAU is more equalizing than the general-purpose grant in Thailand in the sense that the resource-strapped and conflict-ridden localities in Indonesia receive more DAU per capita than those with high economic potential. In the context of decentralization reform, an intergovernmental fiscal transfer system is theoretically designed to enable local governments to perform their devolved functions. Indonesia and Thailand are among many countries that have been experimenting with decentralization. Each country has developed a general-purpose grant system to provide local governments with adequate resources. However, as this section has demonstrated, the general grant allocation system in Thailand is less equalizing than in Indonesia. In Indonesia, local jurisdictions with limited revenue-collection capacity and low per capita income are given more general-purpose grant dollars than those in prosperous provinces. The opposite occurs in Thailand, where rich and poor localities receive approximately the same amounts of general grant allocations per capita. Discussion and Conclusion Despite their different decentralization approaches, local governments in both countries rely heavily on intergovernmental fiscal transfers (Brodjonegoro and Asanuma 2000;


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Wongpredee and Sudhipongpracha 2014). Various types of grants have been established to enable local governments to perform their devolved functions. The general-purpose grant, when appropriately designed, offers an important impetus for equalizing local fiscal capacities (Shah and Thompson 2004). Yet, even though both countries have established explicit grant allocation criteria, empirical evidence indicates that actual grant allocations do not strictly conform to the formula. As demonstrated by the findings in this study, local governments in Indonesia and Thailand continue to show pronounced disparities in own revenue collection and per capita income levels. The general-purpose grant allocation system in Thailand does not effectively address the local fiscal disparity issue. Local jurisdictions in Thailand with fiscal constraint and low economic potential receive almost the same amounts of general grant allocations as those with adequate own-source revenues. These findings are consistent with two recent works (Patamasiriwat 2012; Sudhipongpracha and Wongpredee 2015), which argue that the general-purpose grant system in Thailand is actually “disequalizing” in the sense that local governments with high fiscal capacity are likely to receive more general grant allocations than those with low fiscal capacity. However, the DAU in Indonesia equalizes local fiscal disparities more effectively. Based on this study, the DAU allocation process favors resource-poor and conflict-ridden local governments in the provinces outside Java. In order to ensure Indonesia’s national unity after the fall of Suharto’s authoritarian regime, all decentralization-related policies were designed to prevent the secession of the outer islands (Rasyid 2003; Turner et al. 2003; Alfonso and Hauter 2006). The DAU allocation process helps achieve this national priority. This finding falls along the same lines as an earlier study by Hofman et al. (2006) that quantitatively demonstrated the equalization effect of the DAU. Further, Thailand’s local governments are currently responsible for a small number of devolved public services (Shair-Rosenfield et al. 2014). Meanwhile, the amounts of intergovernmental fiscal transfers are unpredictable and highly politicized. Thus, decentralization has left the Thai localities with limited functions and resources. The context within which the Thai local governments operate stands in sharp contrast to what the Indonesian local governments encounter. The main revenue source for the Indonesian local authorities comes from the DAU, which provides consistent and predictable streams of financial resources. While an objective grant formula is necessary for mitigating local fiscal disparity, minimum public service standards must also be in place to ensure that local governments make use of their resources in a responsible manner. However, such public service standards are incompletely implemented in Indonesia and Thailand for a variety of reasons: weak oversight by the national government agencies, poor communication to local government authorities, and inadequate local administrative capacity (Brillantes and Flores 2012; Patamasiriwat and Kamnuansilpa 2012). In Indonesia, the national government’s weak regulatory capacity and limited professional workforce at the local level are the two major obstacles to effective implementation of the minimum public service standards (Brodjonegoro and Susastro 2002; Khaleghian 2004; Eckardt and Shah 2006; Firdaus and Wiwiek 2012). On the other hand, local governments in Thailand have less administrative responsibility and authority than their Indonesian counterparts (Suwanmala and Kruethep 2011; Shair-Rosenfield et al. 2014; Wongpredee and Sudhipongpracha 2014). The interior ministry continues to wield considerable influence over local governments. Thus, more research is needed to assess the performance of local governments in Indonesia and Thailand and to develop key indicators for local administrative


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performance. It is also vital that local governments in the two countries begin to explore other revenue sources and alternative public service delivery methods that can help reduce their expenditures. Collaborative partnerships with the business sector and participatory mechanisms, such as coproduction, are among many alternative public service delivery approaches that need further examination.

Acknowledgement The authors gratefully acknowledge use of the services and facilities of Khon Kaen University in Thailand.


Funding This research was funded by the Thailand Research Fund (TRF) [grant number TRG5880020].

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