Fiscal Decentralization and Shared Growth?

Amusingly, the 30th Sustainable Shared Growth (KKK30) seminar, which was intended to be a validation of our desk research findings on fiscal decentralization from the point of view of those on the ground, was beginning to feel like a town hall meeting. This, I guess, should not come as a surprise given that the panel discussants and majority of the participants came from the academe and government, and a few from the civil society. Certainly, we are for a civil dialogue between these two important sectors of our society, and we look forward to having more of it in future seminars.
The topic for KKK30 was “Linking Fiscal Decentralization to Vertical and Horizontal Gaps.” It was held virtually on Sept. 28. My colleague at the UPLB College of Public Affairs and Development (CPAf), Atty. Damcelle T. Cortes, presented the horizontal gap, and I delivered the presentation on the vertical gap. Fiscal decentralization here refers mainly to the transfer of funds from the central government to the local government units (LGUs). Using a systematic literature review methodology, we attempted to ascertain what the literature was saying about the relationship of fiscal decentralization with the vertical gap (the imbalance between the costs of devolved services and the available financial resources) and the horizontal gap (the developmental disparities among different LGUs). The vertical and horizontal gaps refer to the two fundamental goals of “shared growth,” which are efficiency and equity, respectively.
We found that there is generally a tradeoff between the goals of closing the vertical gap and the horizontal gap. Our recommendation is not to fall into the policy paralysis of not aggressively closing the vertical gap for fear that it would widen the horizontal gap. Pursuit of efficiency is very much encouraged with the added recommendation of using a separate policy instrument that would specifically address inequity. An equalization grant is one such instrument. If properly designed, such a grant could also be efficiency-enhancing. Our review also identified other “two-birds-with-one-stone” policies like neighborhood effects (competition among LGUs) and innovation networks.
In the discussion following our presentations, three LGU representatives joined us. They were Roberto Canuto, board member of Benguet Province, Atty. Dulce Rebanal, provincial administrator of Laguna Province, and Minnie Boongaling, municipal treasurer of Pagsanjan. All three were requesting a stay on the full devolution of public services as well as the use of the additional funds for coping with the pandemic, following the implementation of the Mandanas-Garcia Supreme Court ruling next fiscal year. This ruling expands the basis of the computation of the fiscal transfers to LGUs from the national government but, at the same time, fully devolving the functions to the LGUs. I would say that this is a reasonable request given that the Philippines suffered a dip in its Gross Domestic Product (GDP) growth twice that of the global average but was able to keep its COVID-related death rate to half of the global average.
There were other interesting points from the discussion and the ensuing Q&A Let me just share a couple.
One is on the role of good governance in LGUs, a core concern of CPAf. The views of the participants and the literature reviewed showed a mixed confidence on the importance of good governance. I cautioned, however, against underestimating governance.
Certainly, there are other factors that ultimately affect an LGU’s performance. However, the literature is also rife with effective mechanisms of good governance such as exit or voting with feet (migrating out of a poorly performing LGU to a better performing LGU), voice (expressed in local elections or town hall meetings), neighborhood effects (policies of one LGU is affected by the policies of neighboring LGUs, promoting competition among LGUs), close to the ground (LGU policy makers listen carefully to their local constituents), watching the watchers (accountability of LGU authorities), and civil society (helping in the administration and operation of LGU programs, projects, and activities).
Moreover, a central observation of our study suggests the tendency to get mixed results seems to be more evident as researchers use less rigorous methods of assessment, where the highest level of rigor is obtained from methods that systematically establish causal relationships between the interventions and observed effects. Pressed for additional factors that could explain the emergence of a handful of successful cities, I offered my observation of the crucial role of local elites. Although this deserves a more systematic study, I have observed that LGUs that prosper have local elites who are earnestly contributing to the progressive transformation of their hometown. Unfortunately, in most cases, local elites appear to be the first to maintain the status quo.
Another interesting point from the Q&A was on the medical services provided by the LGUs. This is where we had most of our ‘town hall’ vibes when residents began sharing their experiences on this issue, which is certainly a very important one in these times. Another relevant point raised by a participant is that LGUs should also consider agriculture — a sector that should be very close to the hearts of the participating LGUs (Benguet and Laguna are agriculturally-inclined provinces) as well as to us in UPLB, to which the stewardship of this sector has been essentially entrusted.
The KKK30 seminar was organized by the Sekiguchi Global Research Association (SGRA) of the Atsumi International Foundation and CPAf. In her opening remarks, SGRA Chief Representative Junko Imanishi noted that Japan and the Philippines are both archipelagoes that were forced to centralize given the colonial ambitions of Western powers in East Asia, albeit with different goals: to deflect colonization in the case of Japan, and to facilitate colonization in the case of the Philippines. Decentralization could be viewed as a journey back to our archipelagic roots.
SGRA and CPAf will have another virtual event in the first week of December on land value taxation and its sustainable shared growth implications. We hope to see you there.
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Ferdinand Maquito
Assistant Professor at CPAf