Fiscal Strategies of Thai Local Governments during the Decentralization Movement: A Preliminary Exploration of Characteristics and Causes

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1 !"# $!%&''&($()*++,&--%./'%0 1 2&%-034 Fiscal Strategies of Thai Local Governments during the Decentralization Movement: A Preliminary Exploration of Characteristics and Causes Weerasak Krueathep Department of Public Administration Chulalongkorn University May 2006 Abstract Local governments in Thailand have adopted various fiscal strategies since the decentralization movement in These strategies can be classified as improving tax administration, increasing revenue sources, enhancing the efficiency of public spending, using medium-term planning and participatory budgeting. The article shows that the occurrence of such strategies can be explained by the slack-induced innovation hypothesis, rather than the fiscal stress assumption, and by the attitude of local governments political leaders. This suggests the right move of Thailand s decentralization process that allows for more fiscal and decision-making autonomy to local authorities as a means to improve service delivery and local government efficacy. Keywords: Local fiscal strategy, local government initiative, decentralization in Thailand, local fiscal health ***Note: The earlier version of this article was presented in the workshop on Improving Local Public Services in Thailand, jointly organized by the Institute for Local Government Initiatives, Chulalongkorn University and the World Bank Institute, at Royal Phuket City Hotel, Phuket, Thailand during May 17-19, The author is now a lecturer at Department of Public Administration at Chulalongkorn University, Thailand. The views expressed in this paper are those of the author(s) and do not necessarily represent those of the Institute of Local Government Initiatives or Faculty of Political Science, Chulalongkorn University. Working Papers describe research in progress or research findings by the author(s) and are published to elicit comments and to further debate.

2 Contents Introduction... 3 Data and Approach... 4 Local Government Structures in Thailand... 6 Institutional Framework... 6 Local Service Responsibilities... 7 Fiscal Decentralization: A Macro Perspective... 8 Fiscal Strategies since the Decentralization Movement... 9 I. Improving Tax Administration II. Seeking New Local Revenue Sources III. Increasing Spending Efficiency IV. Planning the Medium-term V. Adopting Participatory Budgeting Analyzing Local Fiscal Strategies Budgetary Stress Fiscal Slack Hypothesis: A Macro Perspective Fiscal Innovations and Local Political Leaders Unexplored Factors Concluding Remarks and Agendas for Future Research References:... 31

3 Introduction Thailand has implemented a comprehensive decentralization policy in 1999 under the promulgation of the Decentralization Plan and Process Act of Fundamentally, decentralization policy was a part of the country s administrative reforms after the Asian Financial Crisis in Failures in centralized management in the past led to the realization that the national government alone did not well respond to increasing local demands for public services and did not well formulate policies that facilitated the distribution of economic resources to the development of rural communities (UNDP 2003, Thanapornpan 2003, Laohatamatas 2002). Public sentiment has thus called for the decentralized public administration as a means to promote democratic governance and the quality of service delivery at a local level. Fortunately, empirical evidence shows that many local governments are well equipped to adapt to the changing environment. The nation-wide survey of Suwanmala et al (2005) indicates that the decentralization movement has, for the most part, triggered innovative administrative and local political changes. Several localities successfully applied new public management techniques as well as fiscal and political strategies to increase their capacities for handling the devolved responsibilities (Kokpon 2003, Krueathep 2004, Suwanmala 2004). Among 42 surveyed local government cases of success fiscal strategic changes during 1999 and 2003, they can be divided as: (i) improving tax administration, (ii) seeking new local revenue sources, (iii) enhancing the efficiency of spending, (iv) using a medium-term service planning, and (v) adopting participatory budgeting approach. So far the characteristics and causes of such fiscal innovations are not well explained, however. This article is, therefore, written to address two purposes. First, it Weerasak Krueathep Page 3

4 describes the characteristics of fiscal strategies of Thai local governments that have occurred since the 1999 decentralization movement. Second, as these strategies were favorably implemented in the context of Thai local governance, the article seeks to explain the determinants of such fiscal changes. Specifically, it is aimed to explore three plausible factors that have pushed forward the local governments fiscal changes. The paper focuses on the local financial management aspect since it is an essential activity if there is to be a good local government and since this subject is not widely studied in literature on Thai local government finance. This empirical exploration would add new understanding of the local fiscal initiation that benefits fiscal capacity building for other localities in a wider scale. Data and Approach This paper is based upon the data collected in the national-wide study of local government initiatives in Thailand directed by Professor Charas Suwanmala of Chulalongkorn University 1. The study reports a set of 529 local initiative cases during 1999 and 2003, covering wide local governments service functions, and containing socioeconomic characteristics and the budgets of the cities as well as management attitudes of local government s leaders. Mail survey from a list of localities in each province was used to acquire preliminary data whether local governments have initiated changes regarding service deliveries, local political development, and institutional capacity strengthening since the decentralization movement. The list was shown in an alphabetical order and made publicly available by the Department of Local Administration, Ministry of Interior. The survey Weerasak Krueathep Page 4

5 covered all 75 provinces, except Bangkok, which was carried out during June to August Then, localities were purposively picked from the survey responses to make a short list with the initial target of 10 good-practice cases for each province. Short telephone conversations were made during this selection to ensure that the short-listed cases meet our criteria: initiations must be directed to community problems and needs, successfully implemented in which intended results were met, and replicable to other localities. After that, our field researchers visited the local government sites to have in-depth interviews with local politicians, local administrators, and city residents, in order to acquire detailed information about origins, rationales, implementations, and results of each initiated case. The researchers also examined relevant local documents such as budgets, memoranda of management and community meetings, case evaluations, annual reports, newsletters, or photographs. Data were collected by using a uniformed data collection sheet and field researchers were required to participate in a 2-day workshop before starting the data collection processes. This whole phase took place during September 2003 and April The compiled data from the fields were then reported to and re-examined by our central investigator teams. After checking for their completeness, the potential cases were sent back to respective local administrators to have them rechecked. The investigators screened out deficient cases and eventually reported that 529 documented cases passed the criteria. This step took place concurrently from January 2004 to August The successfully developed cases were disseminated to local authorities and the general public accordingly to promote horizontal learning from other localities experiences. Among the total 529 cases, there are 42 initiative cases falling in the local government finance category (see Appendix 1). These fiscal-related cases are the starting point of our academic journey for the rest of the paper. Weerasak Krueathep Page 5

6 The approach in this paper is first to describe the origin and the essence of innovations and second to explain the cause of these innovations by a set of factors which often are conceptualized as having a causal relationship to innovation. These plausible factors are (1) local budgetary stress (2) fiscal resource slackness, and (3) local leader s attitudes. The following section begins with an overview of local government structures in Thailand and changing local fiscal resources since the decentralization movement in Then, it describes the successful adoptions of innovative fiscal strategies. Illustrative cases are also presented. Last, the causes of such fiscal changes are discussed. Some lessons learned are also identified for our further insight and to guide local fiscal policy. Admittedly, the surveyed data are not complete in all essential aspects for detailed analyses. This limitation will be mentioned later in the text when it appears to affect the validity of our analyses. Still, several variables and indicators do provide insights of each contributing factor to the rise of local fiscal innovations in Thailand. Local Government Structures in Thailand Institutional Framework Thai local governments are classified into two main categories; general and specific. In the general form, there are three types of local authorities located throughout all seventy-five provinces except Bangkok. They are (i) Provincial Administrative Organization (PAO, 75 units), (ii) Municipality (1,157 units), and (iii) Sub-district or Tambon Administrative Organization (TAO, 6,621 units) 2. These three types of local governments are uniformly applied in every province. In the specific form, there are two!"#$%$%$ &&' Weerasak Krueathep Page 6

7 special units of local governments governing specific areas; namely, Bangkok Metropolitan Administration (BMA) and Pattaya City. The three general forms of local governments are divided into two tiers. The lower-tier governments, municipality and TAO, function as a single operating unit, which is very close to local residents, providing local public services within their defined territory. While municipalities are located in urbanized areas, TAOs are mostly established in less-developed rural communities. By contrast, PAO is the upper-tier local government which covers an entire province and is responsible for administeringlocal public services at the provincial level as well as for working in development projects that need collaboration among several municipalities or TAOs within the provincial territory. In other words, the service functions that cross the boundaries of any single municipality or TAO are held by PAO. Political structures of Thai local government are similar to those of other nations. Each local government consists of the executive body and the local council, each of which is headed by locally elected persons from local residents and serves a fouryear term. Local Service Responsibilities The Decentralization Plan and Process Act of 1999 decreed that some public services that were originally the responsibility of the national government should be devolved into the hands of local governments. For municipality, TAO, and Pattaya City, these services are local and community planning and development; promotion of local economic development, investment, employment, trade, and tourism; local public services provision, including local roads, local public transportation system, public markets, ports and docks; waste treatment, water drainage system, garbage collection, local public utilities; parks and recreation, community arts and cultures, preservation of community Weerasak Krueathep Page 7

8 natural resource and environmental protection pet controls, slaughtering; community public safety, communal disaster control, sanitation and cremation services; and social services provision, including primary and secondary education, social welfare for children, the elderly, and the disabilities in community, primary health care and medical services, and housing and restoration. On the other hand, PAO shall perform services that are at the provincial level, which cannot be executed by any other smaller localities within a provincial territory, or are beneficial to communities in a province-wide area. These services are provincial development planning, province-scaled infrastructures, waste water treatment, solid waste disposal, and large public transportation; provision of public education, public health, social securities, and social welfare at the provincial level; natural resource and environment protection in inter-local government activities; promotion of trade and investment in a province, tourism, culture and art; and provision of technical and financial supports to lower-tier local authorities. BMA is a special case, however. It performs both lower-tier and upper-tier local government responsibilities. In short, its functions include municipality s urban services and TAO s rural services as well as the Bangkok provincial services like those of PAO. Fiscal Decentralization: A Macro Perspective Under the decentralization law which became effective in 2001, central government devolved a greater degree of fiscal resources to local governments. Table 1 shows a drastic change in the ratio of total local governments share of public revenues to those of the national government during 1997 to (insert Table 1 here) Weerasak Krueathep Page 8

9 In general, local governments total revenue leaped up about 54.9% from 2000 to 2001 or about 206.6% six years after However, each locality may gain additional resources at different rates regarding its tax bases and tax elasticity and fiscal conditions in which the calculation of intergovernmental transfers was based upon. Note that this huge resources transfer does not come without strings attached. Indeed, the increase in local government s fiscal resources was followed by the mandatory devolutions of six core functions and 245 tasks into the hands of local governments by the year as discussed in the earlier subsection. Local expenditures have been established through the democratic process. Executive bodies determine annual budget documents based on local administrative codes on local budgeting and finance. Fiscal year begins on 1 st of October and ends on 30 th of September of the subsequent year. The executive prepares the budget documents from May to July and then submits them to the local assembly in early August. Finally, budget documents are endorsed by either a provincial governor or a district head. The documents normally present revenues by sources and categories, and expenditures by programs and items, debt financing, and a summary of a previous year s fiscal status. Fiscal Strategies since the Decentralization Movement Generally, local governments are required by laws to manage their financial matters carefully, ensuring that they pertain to fiscal discipline and that their expenditure is in line with legal mandates (Andrews and Shah 2003). Thailand is of no exception. Localities are challenged with limited access to raise local tax rates and to levy new tax bases and are legally required to balance their budget appropriation. To ease these (!)**#! &&&+, -.( /00.12 && Weerasak Krueathep Page 9

10 constraints, they have adopted several fiscal strategies in order to lift up their organizational capacities, and ultimately the delivery of local public services. This section will describe the characteristics of the innovative strategies in details. By innovative fiscal strategy, the paper refers to a distinct set of fiscal policies, either revenue or expenditure orientation or both, that localities adopt to tackle a particular concern. The term innovation seems arbitrary, however. Yet, it can be labeled by a set of criteria: creative to an individual local authority for a given problem at a given time; evidently improving service quality, productivity, program effectiveness, or citizens satisfaction; and potential for replication in other local jurisdictions. Revenue maximization by improving tax collection system and by increasing new revenue sources is a primary means that many Thai localities implemented in recent years, with a few difficulties. As suggested in literature, dependable own-source revenues are essential for maintaining local government s fiscal health (Bird 1993, Oates 1993). Alternatively, some local authorities improve spending efficiency by contracting out their service responsibilities either to local business contractors or to community-based organizations. A further scheme in which financial difficulties are minimized is to develop the medium-term plan for public service delivery and resource acquisition. This strategy facilitates a forward-looking perspective for local administrators that helps stabilize their financial position beyond a single year. By contrast, some of localities try to manage local demands for public services through participatory budgeting approaches. This mechanism is close to the fundamental principle of local self-governance which would enhance more responsive and accountable local governments as often suggested in the decentralization literature (Cerniglia 2003, Chambas and Duret 2000, Lin and Liu 2000, Oates 1993, Oates 1972). Table 2 summarizes fiscal strategies adopted by local governments in recent years. Weerasak Krueathep Page 10

11 (insert Table 2 here) The following subsections will illustrate the cases of these success fiscal strategic changes by this order: (i) improving tax administration, (ii) seeking new revenue sources, (iii) enhancing spending efficiency, (iv) using a medium-term service planning, and (v) adopting participatory budget plans. Note that not all of these cases are discussed here. When similar local fiscal innovations have been adopted, only one case is selected for elaboration from the pool of cases. I. Improving Tax Administration The first illustrative case is of Huai-Kapi TAO, Chonburi Province. During the rapid economic growth of the city between 1997 and 1999, Huai-Kapi TAO adversely faced with gradual declines in own-source revenues, which were not supposed to happen during the city growth. The TAO, thus, began a tax collection improvement program to stimulate revenue growth in The program included three major measures: (i) civic tax committee (CTC), (ii) civic tax education (CTE), and (iii) improvement of tax collection process. CTC was an immediate measure to address tax collection problems and to generate guidelines for improving tax collection procedures for TAO. The committee was composed of TAO staff, village heads, and local business representatives. It conducted a field survey, met with delinquent taxpayers, and recommended new measures to improve tax-collection efficacy. CTE, on the other hand, was a longer-term and continuous effort to educate local residents in realizing the costs of local democracy to be borne by citizens. Several tax messages were sent out periodically to the public in numerous ways to inform local dwellers what tax revenues, and how many, were locally collected and how they Weerasak Krueathep Page 11

12 were matched with public spending. One-hour tax learning package and the direct notification of tax dues distributed to local taxpayers offered a preventive solution to tax delinquency problems. Finally, a tax collection process was fostered to bring new taxpayers into the local tax registration system and was expedited to make the system become more efficient. After adopting these changes, Huai-Kapi TAO s own-source revenues increased drastically from 10.8 million baht in fiscal year 2001 to 22.6 million baht in fiscal year 2003 or about percent in a nominal term. Some rural localities, for instance, Nhong-Talae TAO, Krabi Province, Bor-Noak TAO, Prachuab-Khirikan Province, and Khok-Si TAO, Khon-Kaen Province, established a tax-collection mobile unit to curtail residents transaction costs (e.g. commuting time and expenses) of paying local taxes. This strategy was commonly found with the locality where agriculture was a major economic activity, and with the city of population sizes about seven to ten thousand. This simple strategy yielded one-time increase in tax revenues about 9 to 40 percent and proved to be a cost-efficient measure. In some urbanized areas, with diverse economic activities, local authorities developed a more complex, computerized tax database to enhance their tax collection capacity. For example, Nonthaburi Municipality, an adjacent populous city to Bangkok, conducted comprehensive surveys of land uses and economic activities in the jurisdiction in The surveyed data were installed in a designated tax database, with a link to developing tax maps, and were updated annually. This tax database benefited the municipality in numerous ways. It provided complete and up-to-dated tax information needed for an effective and efficient tax billing system, enhanced the follow-up of delinquent taxpayers, and promoted tax equity by preventing some taxpayers to escape from local tax liabilities. As it turned out, municipal own-source tax revenues increased at once by 51.3% with the increase of the number of taxpayer registrations about 37.2%. Weerasak Krueathep Page 12

13 Another intriguing tax collection strategy is that of Nan Municipality, Nan Province, where tax farming to community-based groups was formed. In 2002, the city authorized local village heads to collect garbage collection fees from residents in their respective villages, upon the rate and procedures specified by the municipality. A certain percentage of the collected fees would be allocated to the village heads, when the fees were delivered to the municipal revenue division, as an incentive along with predetermined criteria (currently about 10 percent of the total amount of the fees collected in each month and another 70 percent of the monthly incremental amount of the collected fees). After adopting this strategy, net fees collected to the city were increased about 35% and the number of delinquent fee payers was dropped from 38.7% to 10.3% in Note that this strategy was not new in Thai history of tax collection system 4. Nevertheless, it proved to be the successful fee collection strategy in a rural society where a primary relationship between village leaders and communal dwellers is still dominant. II. Seeking New Local Revenue Sources In developing countries, local tax structures tend to resort to a regressive financing pattern where the non-elite bear a large proportion of tax burdens of providing services (Bardhan 2002). Likewise, limitations of Thai local governments to levy new taxes and to set local tax rates often result in inequitable local taxation across communal groups in the jurisdiction, particularly when the property tax is not imposed. To this extent, user-charge financing for local services is a more efficient and equitable alternative that better matches the cost of service provision to service consumption and helps avoid overly heavy tax burden on the poor (Mikesell 2003, Bardhan 2002, Neels and Caggiano 1996, Clark 1994).. $34,5% 6*7/ * Weerasak Krueathep Page 13

14 Thai local governments are given an access to user-charge instrument as identified by local government acts and by Article 23 of the Decentralization Plan and Process Act of So far user-charge financing to sufficiently cover the cost of services is very rare, however. Phisanulok Municipality, Phisanulok Province, is a good example in adopting user-charge instrument and debt financing for a water supply project through loans from the Government Saving Bank under the Regional Urban Development Fund (RUDF) of the World Bank in By setting the charge structures that truly reflected the costs of service provision and the ability to pay of local dwellers (progressive structure by the amount of water consumption), the municipal user-charge scheme has helped expand the municipality s ability to provide quality of water supply and has provided the financial ability to pay debt services along with the payment schedule. Ang-Khiri TAO, Chantaburi Province, is another case that collected local-road usage fees from transportation trucks when they passed through locally constructed roads. All trucks that needed to drive through the roads had to apply for a permit from the TAO and had to deposit some monies at predetermined rates, regarding truck weights and the frequency of road usages. The purpose of this charge was to internalize external impacts on road damages often caused by the irresponsible drivers. If the roads were unreasonably damaged by identifiable truck drivers, fees would be deducted from the deposits in commensurate with the estimated damages caused by those drivers. This strategy helped lengthen the local roads and reduced the cost of road maintenance for the city significantly. The last case is the establishment of a fiduciary fund for financing a particular service of Huai Yai Jiw TAO, Chaiyapoom Province. Back in 2002, administrators of the TAO wanted to provide social welfare to the aged, the poor, and the victims of natural disasters in the jurisdiction. Nevertheless, limitations of available TAO s fiscal resources and the concern for long-term financial burden had pushed the city to seek an innovative Weerasak Krueathep Page 14

15 fiscal strategy to meet this objective. Eventually, TAO established a social welfare fiduciary fund with strong supports from communal residents. Financing to this fund was from two major sources, contributions from the residents and from the TAO s budget allocation for social welfare. Benefits paid to those in need were collectively determined by community dwellers on a case-by-case basis. Locally formed groups managed this fund, with high concern for fund safety and liquidity, and with a close supervision from the TAO. III. Increasing Spending Efficiency Decentralization literature often contends the efficiency gains from decentralized administration (Oates 1998, Oates 1972, Tiebout 1956). In case of Thailand, the efficiency gain is neither derived from competition among local governments nor between localities and private firms providing similar services. Indeed, it is often secured from contracting out service responsibilities into the hands of private or communal sectors. As our study found, service devolutions usually occurred after inefficient or unsuccessful service provisions by respective local governments were realized. Prae PAO, for example, is responsible for administering a provincial sports center. Originally, the PAO administered the sports center by traditional administrative practices: setting regulations, hiring staff, charging fees, and providing sport facilities. Residents who wanted to use the facilities must pay a usage fee of 20 baht each (approximately about.50 USD), which was comparatively lower than those charged by private sports clubs. Notwithstanding, after years of bureaucratic administration, the PAO faced huge financial losses and lots of complaints about service quality. In response, PAO s chairman decided to contract-out the management of sports facilities to a private company in 2001 in order to encourage the services to be operated in a business-like approach. The PAO Weerasak Krueathep Page 15

16 stipulated, however, that user fees must remain unchanged and that the company must improve service quality. These requirements were in exchange for granting autonomy to the company to manage the center, including the right to earn a profit if the business was successful. Two years later, the privately managed sports center was offering better quality service. Customer complaints were significantly reduced and the number of users drastically expanded from 156,415 in 2001 to 559,784 in Moreover, the company gained attractive returns on investment (from % in 2001 to 22.24% in 2003) and the PAO has reduced costs. The devolution of service delivery to community-based groups is an alternative to improve service performance at reduced costs. Local street cleaning, for example, in Rajadheva TAO, Samutprakarn Province, was a community-contractual type of service arrangement. In 2001, the TAO devolved the street cleaning activity, covering an approximate area of 31 square kilometer, to 50 communal dwellers and assigned village associations to monitor the street cleanliness in their neighborhoods. This collective arrangement helped reduce TAO s employment of permanent staff and enhanced the service quality (street cleanliness) through the sentiment of community ownership. IV. Planning the Medium-term Numbers of local governments in Thailand recognize that their short-sightedness of service planning and the instability of revenue sources possibly affect the continuity of public service delivery (Suwanmala 1998). Therefore, they have sought alternative strategies to overcome these hardships. Huai-Kapi TAO was again an example of small local government that pushed forward meaningful local development planning. Back in 2000, the city s attempt to escalate the level of public acceptance of TAO s roles through the civic tax education program was successful. Then, it launched a household survey Weerasak Krueathep Page 16

17 program in 2001 as a means to acquire more comprehensive data about needs for local public services in a medium-term (four-year). The first surveys covered 411 households (about 18 percent of total households), scattered through out the territory. This strategy helped the city s administrators ensure that the identification and prioritization of mediumterm development schemes met the services demanded. Rayong Municipality, Rayong Province, is another case that adopted a mediumterm fiscal planning to sustain its service provision and development programs. Rayong city had grown rapidly since the development of the Eastern Seaboard Project in the early 1980s. Because of its rapid growth, local public services had been in high demand. Nevertheless, prior to the year 2000, the city managed its core responsibilities on a single year basis. All decisions were bounded by this short timeframe. This practice imposed fiscal constraints and management rigidity in making future development to meet unevenly increasing service demands and available resources. In the year 2000, the Rayong city, with technical assistance from the City of Portland, Oregon, and the International City/County Manager Association (ICMA) of the United States, initiated the Medium-Term Financial Planning Program (MTFP). MTFP is a financial buffer against the risk of shortages of revenue and unduly service expansions. Fundamentally, it involved outlining a five-year fiscal plan that covered overall municipal expenditure and revenue. On the expenditure side, analysts forecasted the levels of services demanded for the next five years. This also accounted for potential changes in administrative ecologies that might affect expenditure needs, e.g. demographic trends, local economic growth, social and technological development, and other environmental factors. Municipal investment projects were simultaneously considered in order to prioritize future investment with the availability of financial resources. Weerasak Krueathep Page 17

18 On the revenue side, on the other hand, the program performed a baseline forecast of all sources of local revenues, using previous tax collection data, existing tax rates, and possible changes in tax bases in accordance with the changes in socioeconomic factors. Later, policy and mandatory changes were taken into account for the budget feasibility. After putting the revenue and expenditure plans altogether, the operating position was clear for the five-year time horizon. Thus, appropriate fiscal measures can be articulated in advance; for example, tax collection improvement, debt-financing, requests for intergovernmental development grants, shrinking expenditures, and so forth. The city, hence, could avoid future budget shortfalls and ensure the continuity of municipal service provision to meet uneven public demands. V. Adopting Participatory Budgeting Literature also argues that decentralization bring about more responsive local governance (Andrews and Shah 2003, Roe 1995, Oates 1993). From our survey, two major strategies were adopted as a means to promote local accountability and responsiveness: (i) public forums for budgeting and developmental plan and (ii) public audits of local governments procurement and service performances. Khon-Kaen Municipality, Khon-Kaen Province, is an example of facilitating civic participation in city development planning. As a large and highly urbanized community, in 1998 Khon-Khan city initiated a participatory approach in capital investment projects, so-called a focus group meeting, to be a venue for policy discussion, on an issue-based basis, between municipal administrators and local dwellers who observed potential impacts (economic, cultural, and environmental) from municipal development projects. At the beginning, more than thirty local communities formed groups and had wide policy debates among group members. Then, each group s representatives joined a policy dialogue with the city Weerasak Krueathep Page 18

19 administrators to find appropriate collective solutions. The focus group meeting was proved a very successful interactive consultation approach. A year later, it was extended to the town hall meeting, which was held on a regular basis normally every three to four months. Town hall meeting was a forum for broader policy-related issues. The prime objective of town hall meetings was to discuss and agree upon any municipal project that might have significant impacts on the general public. Those who may be adversely affected by the municipal projects should be informed and should have voices in the meeting. The mayor chaired the meeting and asked the persons in charge of the projects or experts to elaborate the details. Then, the dialogue started until reaching an appropriate collective solution. More than 140 representatives of civic communities have participated regularly in these meetings since Suan-Mon TAO, Khon-Kaen Province, adopted a more progressive approach to civic participation. Suan-Mon is a small community, consisting largely of poor farmers. In the past, the TAO faced with communal conflicts exacerbated by pork-barrel budget allocations. Public monies were dispersed to each local public interest group. Inevitably, an even allocation of the TAO budget was made and, therefore, the prioritization of development programs could not be realized. With the guidance of the Ministry of Interior in 1998 to encourage the use of a participatory approach in budget preparation, Suan-Mon TAO adopted the civic forum approach in enhancing local planning and budget allocation in late The civic forum consisted of two-level budget dialogues. The first was a village forum which was a subunit of the tambon (sub-district) and the second was a tambon forum which covered the tambon-wide territory. There are 14 village forums scheduled annually from March to April. In this forum, community dwellers gather around and discuss the village s problems Weerasak Krueathep Page 19

20 and needs. They also prioritize their village s proposals to submit to the upper forum at the tambon level. In tandem with the village forum, the tambon forum, normally held in May and scheduled till the consensus is reached (usually 1 to 3 times), consists of seven to ten representatives from each village to have intense dialogues on tambon-wide needs and priorities. Each village s proposals are discussed based on collectively assessed needs. The tambon development proposals then are submitted to the TAO council meeting. The council meeting on the TAO budget appropriation is held around June-July. This meeting is, in fact, an artificial one in which the development proposals from the tambon forum are officially approved within the financial feasibility. In other words, TAO s council members respect the civic forum s ideas and decisions. Budget contents, as a result, are normally similar to those proposed by the forum. Furthermore, after the budget document is legalized, it will be sent back to the civic forum committee so that local residents can use them to monitor budget execution of the TAO. Besides the participatory budgeting, some local government encourages civic monitoring and assessing of local governments operations. Nhong-Yasai TAO, Supanburi Province, is a good example in this extent. Basically, the TAO encouraged its dwellers to involve in monitoring TAO s service delivery and procurement schemes. In 2001, it organized a series of training programs to 70 city residents for enhancing an understanding of public procurement processes and for developing basic skills of inspection of construction projects. Then, the trained residents served on procurement committees to investigate all TAO purchases in order that malpractices would be defeated. In addition, when the simple inspection of construction project is needed, about five of them would be appointed from nearby neighborhoods to inspect the construction of the TAO. Before closing this section, note that the above fiscal strategies were implemented selectively, piecemeal, rather than a whole, comprehensive scheme. From our survey, no Weerasak Krueathep Page 20

21 local government implemented all these strategies concurrently. This is so probably because local governments saw the limitation of implementing overall changes or because they had restricted interest in particular local fiscal tools. Analyzing Local Fiscal Strategies The discussion thus far presents some specifics about major fiscal strategic changes that Thai localities have devised recently. Now what can we learn from the above stories? To understand the cause of the emergence of these fiscal changes at the local level, the paper examines three major factors that are often argued in literature as the determinants of local fiscal innovations. These plausible factors are budgetary stress, fiscal resource slack, and local political leader s attitudes. Budgetary Stress A body of literature argues that fiscal austerity induces innovations (Clark, Lipset, and Rempel 1993, Mouritzen 1992, Clark and Walter 1991, Bahl, Duncombe, and Schulman 1990, Clark 1985). Whether this contention is valid in the Thai context is not clear. Essentially, fiscal stress is conceived of as an imbalance between expenditures and available resources (Mouritzen 1992). It often distorts policy choices of service provision and financing schemes. The quantity and quality of city services usually decline during city s financial strain and, to a certain extent, some localities are forced to increase taxes with the risk of political popularity loss. This circumstance, therefore, plausibly induces local governments to seek innovative fiscal strategies to cope with these pressures. Can the fiscal stress assumption explain the occurrence of fiscal strategic changes of Thai local governments? To examine this hypothesis, the paper constructs a proxy Weerasak Krueathep Page 21

22 indication of fiscal stress. Table 3 shows the index of budgetary stress of average local governments in each of the fiscal strategy categories. The index is defined as the difference between local governments total revenues and budgetary expenditures, expressed as a percentage of total revenues 5. Algebraically, the budgetary stress index is specified as BS = (R - E)/R x 100, whereas BS represents the degree of budgetary stress, R represents total local government revenues, including intergovernmental grants, and E represents total local expenditures. The index of, for example, 23.6 percent indicates that, on average, local governments that adopted tax collection improvement strategy can provide the normal level of services and still have about 23.6 percent of its revenue left over for more service provisions (or for tax cuts). Figures used in calculating the budgetary stress index are of the same year as the fiscal strategic changes were implemented. (insert Table 3 here) As Table 3 clearly shows, the localities that have implemented fiscal policy changes did not have a severe fiscal stress, on average, as measured by the budgetary stress index. In fact, they seem to have resource slackness such that they could provide more services by about 19.3 percent of the current levels. Therefore, the link between budgetary stress and fiscal innovations is not apparent and the hypothesis of stress-induced innovation is not likely to be true for the case of Thai local governments, specifically during the 1999 through Observe that three localities that adopted the strategy of improving spending efficiency had a relatively lower magnitude of budgetary slackness, on average, than had local governments in the other categories. These three localities are relatively larger than - "67/78/ +$%)9:);)$0 ; Weerasak Krueathep Page 22

23 the rest (a median population of about 90,386: see Appendix 1). The figure of 5.9 implies that the spending of these governments was somewhat limited to serve adequately the diverse needs of local residents. The choice of this strategy for a large city is sensible. Technically, the successful implementation of fiscal strategies (1, 2, 4, or 5) requires a strong support from the public. However, in a large community, local government usually faces with the difficulty in achieving effective political communication and public participation when many people involved. Thus, local governments in the large jurisdictions may risk the loss of political popularity if they choose to increase taxes or adopt the participatory budgeting. Therefore, they ended up with the improvement of their internal management, while the involvement of the general public is minimal. The above conclusion should be viewed with restriction, however. Some other factors should be stated here. First, Thai local governments are restricted to balancing their budget by laws. In fact, they are required to have budget surplus annually. This legal condition inevitably brings about the positive budgetary stress index as shown above. Second, voice and exit mechanism does not well operate in Thai local governance. Fundamentally, decentralization assumes that citizens can voice their disapproval with costly service provisions and can migrate from high tax burden jurisdictions (Andrews and Shah 2003). However, this is not the case for Thailand where local governments have assumed service responsibilities in recent years. City dwellers might have limited understanding about roles and service availabilities of their local governments. Therefore, explicit expenditure pressures do rarely prevail. Indeed, expenditure pressures are often muted by a set of legal and local political development constraints. In addition, a systematic examination of Thai local government s fiscal health has not yet been carried out, particularly the analyses of revenue-raising capacity and Weerasak Krueathep Page 23

24 expenditure needs 6. In the past, there had been a number of evaluations whether local authorities collected local revenues as forecasted (revenue collection ability) and whether they spent the allocated resources along with the budget plans as approved by local legislative bodies (spending efficacy) 7. Still, they do not resemble the formal analysis of local fiscal health. The study of revenue collection ability or spending efficacy does not provide a full picture of local financial conditions, either ex ante or ex post. The revenue forecast might be haphazardly done such that even the full collection rate may not indicate the true capacity of local residents in paying local taxes. Similarly, it might be the case that actual service demands are suppressed either by a budget surplus mandate or by irresponsive local politics despite the budget surplus. To this extent, the spending efficacy does not reflex how adequately the local entities delivered local services to their constituents. For this reason, simply the budget surpluses do not necessarily imply the healthy fiscal position of local government. Put it another way, the absence of fiscal stress of Thai local governments is valid only by legal standards. Nonetheless, it does not necessarily be the case if all factors affecting local government s fiscal health are systematically analyzed. Fiscal Slack Hypothesis: A Macro Perspective If the fiscal stress hypothesis cannot explain satisfactorily the occurrence of financial practice changes, can we alternatively explain innovative fiscal changes by the resource slackness assumption? Literary, fiscal slackness refers to the abundant of financial resources to meet expenditure needs (Mouritzen 1992). Contrary to the fiscal stress assumption, literature suggests that fiscal strategic changes require organizational ' +$"67/78/ 3 1 0$3$,077/ +558 *0 Weerasak Krueathep Page 24

25 health and resource slackness (Levine, Rubin, and Wolohojian 1981, Walzer, Jones, and Magnusson 1992). Whether or not this explanation is valid, it is our task to examine this factor in detail. (insert Table 4 here) Consider the growth of total local governments actual revenues in Table 4. Local own-source revenues were about 16 to 18 percent of total local government revenues from 2001 to 2003, whereas intergovernmental transfers were largely about 44 to 53 percent during the same period. The crucial message here is that, on average, Thai local governments have enjoyed their drastically increases in financial resources since the 1999 decentralization movement. Their total revenues have grown roughly about 17.2 percent annually since In addition, income elasticity of local governments total revenue 8, on average, was relatively larger than that of the central government. From 2001 to 2003, the income elasticity of local government s revenue from transfers was about Overall, income elasticity of total local government revenues was about 3.71, which was relatively high when compared with the income elasticity of 1.81 of the national government s total revenues during the same period. The relatively high elasticity of localities indicates that local governments total revenues grew faster than the economy and than that of the national level. When combined the tax elasticity figures with the plausibility of ineffective and irresponsive local politics and budgeting of local governments, they jointly indicate that fiscal slackness hypothesis is affirmative in explaining the existence of fiscal innovations in Thai local governments during the decentralization movement. / <!* Weerasak Krueathep Page 25

26 Fiscal Innovations and Local Political Leaders Beyond the fiscal stress and the fiscal slackness assumptions, local leaderships may directly influence fiscal policy changes (YlÖnen 1989, Clarke 1989, Clark 1985). Upon the decentralization progress in Thailand, it has provided greater opportunities for local political leaders to exercise their decision-making power, to influence local policy agendas, and to set new fiscal strategies. Our survey reported that at least four constructive attitudes of local leaders of localities in the 42 cases do prevail, with a reasonable causal link to facilitating fiscal strategic changes. First, for instance, Huai-Kapi TAO, Chonburi Province, and Bueng- Yeetho TAO, Patumtani Province, mayors, who both were successful businessmen, of both cities explicitly stated the importance of tax collection efficacy, even though local own-source tax bases are relatively small. Thus, they tried to improve their local tax collection system. This first attitude is closely linked to the second awareness of local leaders regarding equitable local tax systems, as was the case of Rayong Municipality, Rayong Province, Bangraknoi TAO, Nonthaburi Province, and Nonthaburi Municipality. They asserted that local tax collection should be equitable to all residents such that no local elite group and non-resident citizen shall escape from the local tax liabilities. The third attitude comes from some mayors, e.g. Rayong City, who had a farsighted concern for local autonomy, pointing out the fact that the current local revenue structures induce local governments to be very much dependent on central government s financial aid. This provides a substantial room for national government interventions in local agendas, which may distort the local policy-making processes and deteriorate the capacity building of local governments in the long run. This incident, therefore, has stimulated local governments effort to rely more on their own revenue sources and on Weerasak Krueathep Page 26

27 self-reliance financial practices, which later on has led to the changes in local financial practices. Last, local inefficiency in service provision also distressed some local leaders, as indicated from the case of, for instance, Phisanulok Municipality, and Prae PAO. This was so because, in Thailand, local governments are commonly regarded as inefficient, corrupt, and irresponsive (Trirat et al 2003, Sobchokechai et al 2000). This group of politicians, thus, has strived hard to prove evidently to the national agencies and to the general public that they are capable enough to perform their tasks efficiently and effectively. For this reason, this reasonably drives the fiscal strategy changes to prevail. Unexplored Factors The above discussions of fiscal strategic changes of local governments are beneficial to guiding local developmental policies that further facilitate organizational financial strength. Notwithstanding, there might be some unexamined factors that plausibly explain the natures and the emergence of local fiscal strategic changes. As some of the above illustrative cases showed, these factors are, for instance, the policy guideline from the central government, technical assistance from other organizations, organizational cultures, influences from local interest groups, and learning from local government networks. In addition, some local factors, such as local political cultures and influence of local interest groups, as suggested in literature that they are key determinants of fiscal innovation (e.g. Clark 1994, Clark and Martinot 1998) are left unexamined. Unfortunately, our study does not have such data in substantial details at present because it did not attempt at the first place to measure the impacts of those factors on the changes of local fiscal policies. Readers should be well aware of these likely unexplored determinants. Weerasak Krueathep Page 27