The Politics of Intergovernmental Transfers in Northeast Thailand

Abstract

Public finance theory dictates that intergovernmental transfers should help alleviate horizontal fiscal imbalances among local jurisdictions. The amount of intergovernmental fiscal transfers should be inversely related to each local jurisdiction’s revenue-generating capacity. However, intense politicking in many countries turns an intergovernmental fiscal transfer system into a battle of local and particularistic interests. This article illustrates a disjuncture between the theory and practice of intergovernmental equalization transfers with the quantitative and qualitative evidence from 226 local administrative organizations in Khon Kaen province in northeastern Thailand. Findings indicate that Thailand’s current intergovernmental fiscal transfer system is not oriented toward achieving local horizontal equity. In Khon Kaen, local administrative organizations with high fiscal capacity tend to receive more equalization grants than financially disadvantaged jurisdictions. In-depth interviews with selected local government officials in Khon Kaen reveal inconsistency and heavy politicization of the country’s intergovernmental fiscal transfer system.

Keywords

intergovernmental fiscal system decentralization horizontal fiscal imbalance equalization transfers local government finances

Introduction

If rolling back the state’s frontiers was the 1980s policy mantra, the 1990s credo was to roll them downwards (Flanders, 1995). Today the statement still encapsulates the public zeitgeist in both developed and developing countries. Growing public dissatisfaction with the inadequacy and inefficiency of centralized public management has in recent years induced a series of administrative reforms, including market liberalization, bureaucratic reorganization, greater citizen participation, and territorial decentralization (Haque, 1998; Kpessa, 2011; Peters, 2001). In Thailand, since the dramatic financial meltdown in 1997, structural reform measures have been adopted to rectify problems caused by a century of heavily centralized administration. Among these reform initiatives, decentralization aims at empowering local citizens and communities to manage their own social problems. However, Thailand has undergone a decade of decentralization reform with unsatisfactory progress (World Bank, 2005, 2012). A large number of public service functions still fall within the realm of national government responsibility, whereas local decision-making authority and fiscal autonomy remain limited (World Bank, 2005). Importantly, despite significant reforms in the country’s political and administrative system, 72 percent of national resources continue to be concentrated in the Bangkok metropolitan areas (World Bank, 2012).

The aim of this article is to examine Thailand’s intergovernmental grant allocation criteria that have been in place since decentralization began. Based on quantitative and qualitative evidence from 224 local administrative organizations in a northeastern province, this study seeks to provide an understanding of Thailand’s local public finance by demonstrating the extent local fiscal capacity (i.e., revenue-generating capacity) is used to determine the amount of the equalization grants given to local jurisdictions.

The twentieth century concluded with much optimism for local self-governance in Thailand. Decentralization—defined as a change in the allocation of authority and responsibility to smaller territorial units of government—has been touted as an experiment in self-governance at the grassroots level (Cohen & Peterson, 1999; Musgrave, 1958; Rondinelli, 1981). In a decentralized governance system, citizens learn how to meaningfully participate in the democratic process by engaging in policy formulation and by monitoring local officials’ behavior and use of authority. Heightened citizen awareness in turn propels local officials to improve local public service delivery. In the political and administrative contexts, territorial decentralization also contributes to governmental transparency and effectiveness (Kettl, 2000).

Apart from the political and administrative contexts, decentralization is a policy instrument widely believed to increase allocative and technical efficiency by matching public services with local citizen preferences (Oates, 1972). Ultimately, decentralization advocates emphasize optimal social welfare and equity result from the tailoring of resource allocation priorities to meet local needs and circumstances. Mouritzen and Svara (2002, p. 6) observe that contemporary local governments in a large number of countries have become responsible for a wider array of public services than in years past: “some of these are developed locally and others are formed and funded at higher levels of government but delivered locally.”

Nonetheless, similar to other areas of governance, decentralization reform efforts are crippled by a disjuncture between theory and practice. For instance, while the principles of designing intergovernmental fiscal transfer system are universal, less developed and transitional economies often encounter additional social and political challenges in crafting their intergovernmental fiscal system (Boex & Martinez-Vazquez, 2007). Complex social conditions – such as ethnic antagonism, regionalism, and a long history of administrative centralization – are quintessential factors influencing revenue-sharing arrangement and intergovernmental fiscal system in a large number of less developed countries. Thailand, for example, has a long history of centralized administrative tradition. Even after the decentralization reform unfolded, central bureaucratic agencies dominated by Bangkok elites continue to exercise tight control over important policy decisions favorable to Bangkok and its vicinity (World Bank, 2012).

Political variables also impinge on local fiscal structure and particularly the allocation of government resources (Deolalikar, Brillantes, Gaiha, Pernia & Racelis, 2002). Even though less developed countries and transitional economies have a wide variety of political systems, a common thread linking these diverse political systems together is an inherent discrepancy between administrative norms and actual practices (Riggs, 1964). Over the past several decades, national governments in these countries have announced bold and imaginative reform plans, but have in practice achieved much less than anticipated (Peters, 2001). Administrative reforms adopted by modern-day Thailand are illustrative of Peters’ point. After the 1997 financial crisis, everything in Thailand was conducive to dramatic changes in territorial structure: constitutional guarantee of local autonomy, legal framework for decentralization, and financial support from international donor agencies. Yet, as Thailand proceeds with decentralization, political and bureaucratic obstacles abound, hindering the development of local self-governance (Sudhipongpracha, 2013a, 2013b).

Had the letter and spirit of decentralization laws been fulfilled, more central government resources would have been diverted to local jurisdictions. However, in 2007, the military-led government changed the legally mandated amount of national budgetary allocations for local authorities from 35 to 25 percent (Patamasiriwat, 2012). Also, past research by World Bank (2005, 2012) reveals limitations of Thai local jurisdictions’ revenue-generating authority and the negative consequences for public service quality in both rural and urban communities (Patamasiriwat, 2011). In addition to this setback, not all Thai local administrative organizations are created equal; some localities have capacity to generate more revenues than others. Public finance theory dictates that the national government designs and uses an intergovernmental fiscal transfer system to alleviate both horizontal and vertical fiscal imbalances among local jurisdictions. Yet, since the official beginning of decentralization, Thailand’s intergovernmental transfer system has been in shambles, riddled with corruption and inefficiency (Patamasiriwat, 2012).

Nonetheless, extant literature on decentralization and local public finance in Thailand remains inadequate. A majority of research works on fiscal imbalances rely on data aggregated at the provincial level (Patamasiriwat, 2011, 2012). However, each province in Thailand has an average of 102 local administrative organizations (Sudhipongpracha, 2013a, 2013b). The use of provincial-level dataset precludes an understanding of the political dynamics and fiscal complexity confronting Thai local administrative organizations. Also, current empirical evidence inadequately demonstrates how Thai local governments struggle to manage the negative effects of limited taxing authority and politicized equalization grant system on their fiscal health. This article offers both statistical and qualitative findings to bridge these knowledge gaps.

Context: Local Governance Reform in the Twentieth-century Thailand

Throughout the twentieth century, Thailand’s administrative structures had pronounced centralization features. Policy formulation, planning, budget allocation, and personnel management were determined at the national level. In other words, every aspect of government decision making that has bindings effects on people from all walks of life occurred at the ministerial headquarters in Bangkok. Each ministry’s provincial and district agencies in which officials were appointed by Bangkok were responsible for executing the central government policies, programs, and directives. With the centripetal administrative forces, provincial residents were merely subjects who were perceived by the Bangkok officials to be uneducated and unfit to govern themselves.

In the early twentieth century, the Bangkok elites embraced the Western European administrative principles to tighten their control over the vast territory of Thailand – known then as Siam. The traditional administrative structure modeled after the Khmer–Brahmin theology was replaced with a Weberian bureaucracy, resulting in the formation of Western-style ministries and departments to carry out the modern state’s functions (Phongpaichit & Baker, 2005; Unger, 2003). The structural reform was considered radical, considering that the traditional structure had been in use for almost half a millennium. However, fear of the British and French imperialist invasion convinced the Siamese aristocrats to relentlessly pursue the drastic reform with two ultimate goals of ensuring macroeconomic stability and consolidating territorial control. Consolidation of territorial control was a novelty for the Siamese rulers and their subjects who were more familiar with the fluidity of feudalism and vassalage. It, however, did not take them long to get acclimatized to the novel territorial centralization. In fact, centralism was considered the most effective mechanism to strengthen the Siamese race’s political and administrative influence over a large number of ethnic groups. Consequently, all Thai vassal states – such as Lanna (the northern kingdom), city states in the northeastern region, and the Malay sultanates – were abolished and replaced by the French-style provincial structure.

The prominent output of the early twentieth-century reform was the Ministry of Interior (MOI) that had long been the pivotal thrust of Thai politics and administration. Prior to 2002, the ministry’s most powerful administrative apparatus was the Department of Provincial Administration (DOPA) that dominated all provincial gubernatorial appointments. Not only were these centrally appointed governors the most senior MOI official in each province, but other ministries and departments also devolved power to the provincial governors to supervise and control their provincial and district offices.

Paralleling the institutionalization of centralized administrative control, the municipal government system emerged. During their European tour, the late-nineteenth-century Siamese aristocratic leaders became fascinated by the glamor of European cities and, upon their return in Southeast Asia, decided to experiment with local self-government (Langford & Brownsey, 1988). The first form of a local self-governing body that ever surfaced in Thai modern history was a sanitary district (Sukhaphiban). In the first few years of the twentieth century, the number of sanitary districts grew exponentially in the semi-urbanized areas, but was confined to Bangkok and Greater Bangkok. Despite the attempt to develop local self-governing capacity, the Siamese reformers restricted the scope of sanitary districts’ responsibilities to trash collection, sewage management, and slaughterhouse inspection and licensing. Further strengthening administrative centralization, the sanitary districts were placed under the DOPA’s centralized bureaucratic supervision. The chief district officers (Nai amphoe) were ex officio heads of the Sukhaphiban council, enabling them to exert significant influence over these local authorities.

After the fall of absolutism, the Thai parliament passed the Municipality Act in 1933. Municipalities (Tessaban) were local government units in the large urban areas. In each municipality, the legislative body was the municipal council elected by district, while the mayor served as chief executive officer and was chosen from the municipal councilors. However, a Thai municipality’s scope of activity was limited to providing basic services, such as garbage collection and disposal, water supply slaughterhouses, and markets. Even for this narrow range of functions, the Thai municipalities faced perennially inadequate financial resources. Reflecting the Siamese state’s centralizing mentality, the interior ministry’s provincial governors had legal authority to inspect and approve the municipal annual plans and budgets. Importantly, the provincial governors could dismiss the municipal councils and mayors whenever they deemed necessary.

Throughout the twentieth century, Thailand or Siam was clearly a centralized bureaucratic state in which the central bureaucratic apparatuses led by the interior ministry’s provincial administration were deployed to keep people and the local communities on a short leash. Central officials and aristocrats in Bangkok vehemently promoted centralization as a necessary capacity-building step for the local communities, arguing that societal forces at the local level in Thailand were too feeble to ensure effective local self-governance.

With increasing levels of urbanism and political awareness among citizens in the 1990s, the pendulum of societal forces swung toward community empowerment and citizen participation in Thailand’s politics and administration. The 1997 Constitution – widely touted as the “People Constitution” – marked the start of the devolution of decision-making authority away from the central government to the local levels. It contained clauses on local autonomy and citizen participation that aimed to promote the highest degree of democratization and devolution ever witnessed in Thailand’s modern history.

The parliament was obliged to legislate on the plan and procedure of decentralization within two years after the ratification of the 1997 Constitution. The Plan and Procedure of Decentralization to Local Administrative Organizations Act of 1999 gave birth to the Decentralization Commission that is responsible for drafting the National Decentralization Plan. The plan specifies functions for each type of local government and identifies local revenue sources. For instance, in the case of municipalities, the 1999 legislation spells out 31 functions, a majority of which are basic public services, such as water treatment, garbage collection and disposal, cultural promotion, road maintenance, local economic development, social welfare services, slaughterhouse inspection, zoning, public park maintenance, and emergency management. In addition, each type of local administrative organizations – provincial administrative organizations (PAO), municipalities, and sub-district administrative organizations (SAO) – is regulated by its respective law.

One of the major obstacles to decentralization in Thailand is the national government’s half-hearted commitment. Transfer of public service functions and budgetary resources from the ministries to local administrative organizations is not executed according to the National Decentralization Plan (Tae-Arak, 2010). As a result, a large number of administrative functions – even those specified in the Plan and Procedure of Decentralization Act – still remain within the realm of national government responsibility, while local policy initiatives are limited. For example, in the public health domain, only 10 out of 34 health promotion functions have been devolved to the local level (Tae-Arak, 2010).

Another impediment to Thailand’s decentralization reform is a restricted range of local revenue sources. A typical local administrative organization in Thailand has four revenue sources: (i) locally collected revenues, (ii) revenues that were centrally collected and returned to localities, (iii) shared taxes, and (iv) intergovernmental fiscal transfers. The first three types are rarely sufficient for local administrative operations (Patamasiriwat, 2011). Thai local authorities succumb to perennial revenue shortfalls and must rely on intergovernmental fiscal transfers to finance their operations. Thailand’s intergovernmental transfer system is divided into general grant and specific grant. General grants allow local authorities to determine what and how to spend the allocated funds. Specific grants, on the other hand, are truly specific; the MOI – not local authorities – decides what and how to spend specific intergovernmental grants. Constrained by the interior ministry’s stringent spending rubrics, Thailand’s local governments are reduced to mere implementers of centralized policy decisions. This would not have sabotaged the decentralization reform, had specific grants not constituted the large part of local government budgets around Thailand. In reality, specific grants are local administrative organizations’ fiscal arteries (Patamasiriwat, 2012). For the majority of sub-district administrative organizations, more than half of their annual revenues come from specific grants alone. Thus, whereas local autonomy is constitutionally enshrined, the MOI’s specific grant system curtails much of local fiscal and decision-making autonomy.

Table 1.

Three Dimensions of Decentralization

Dimension	Type of Authority Transferred	Governance Concept	Sample Policy
Political	Planning/electoral	Representation	1. Popular elections of top local officials 2. Creation of local legislative councils
Administrative	Functional/organizational management	Public service responsibility	1. Transferring certain public services to local governments, such as education and health 2. Separation between national and sub-national civil service systems
Fiscal	Revenue management	Allocative efficiency	1. Introduction of local taxes and fees 2. Some degree of sub-national autonomy to borrow funds from lending institutions

Theory of Fiscal Decentralization and Intergovernmental Transfers

Territorial decentralization consists of three essential dimensions: political, administrative, and fiscal. Each dimension reflects the transfer of authority and responsibility from national bureaucratic agencies to local jurisdictions (Falleti, 2005; Schneider, 2003; Table 1). Whether decentralization will yield satisfactory outcomes hinges upon a confluence of social and political prerequisites, including citizen awareness, community engagement in local policy making and planning, and administrative accountability mechanisms for holding local officials accountable (World Bank, 2001).

Sewing the political, administrative, and fiscal dimensions of decentralization together is a daunting task for policymakers. Parker (1995) likens this policy design issue to making a soufflé that requires the right amount of essential ingredients and the right way to cook. Other scholars emphasize the sequence in which political, administrative, and fiscal decentralization reforms take place. Wildasin (1989) and Martinez-Vasquez and Boex (2001) argue that political decentralization should precede fiscal decentralization because local governments need to have a certain degree of discretionary authority, legitimacy, and accountability to their constituents before they can be responsible for fiscal decision making and local public service delivery. O’Neill (2003) and Falleti (2005) offer a similar argument that if political decentralization takes place first, it is likely to empower local communities and citizens to resist any recentralization attempt.

However, it is often difficult to differentiate among the three dimensions of decentralization. When public finance scholars discuss the merits of devolving administrative responsibility to local jurisdictions, they also allude to political and administrative concepts, such as accountability and public services. Two prominent public economists – Tiebout (1956) and Oates (1972) – argue that sub-national governments are more accountable to citizens than national government due to local control of the allocation of resources to provision of public goods. In this context, accountability is the “sensitivity of varying preferences among the residents of the different communities” (Oates, 1972, p. 11). Oates further articulates this argument in his decentralization theorem: “if the citizen tastes for a particular public good are heterogeneous and the cost of producing the good is the same for all governmental levels, local governments will produce such good more efficiently than the central government” (Oates, 1972, p. 35). In addition, certain public goods and services extend their benefits beyond a community’s boundary (Mikesell, 2003). An intergovernmental fiscal transfer system (that is, a matching grant system) can be designed to align service delivery patterns with their spillover range. In fiscal federalism literature, matching grants help to avert resource misallocation and overproduction of certain goods and services by forcing local communities to internalize the interjurisdictional spillover effects.

Recent development in fiscal decentralization literature focuses on three main issues of local fiscal disparity: (i) inter-jurisdictional cost and benefit spillovers, (ii) vertical fiscal imbalances between national and local governments, and (iii) horizontal fiscal imbalances among local jurisdictions (Rao & Singh, 2003). First, interjurisdictional spillover effects arise when the costs and benefits of goods and services extend beyond jurisdictional boundaries (Mikesell, 2003). These spillover effects are known as externalities in economics. For instance, health promotion, ill-health prevention, compulsory education, and environmental preservation are government services with positive externalities because they yield benefits for local communities and society at large. An intergovernmental fiscal transfer system can be designed to accommodate the alignment of local public services and their spillover effects, thereby correcting possible resource misallocation, inappropriate spending for some services, and free-ridership that would otherwise emerge from uncontrolled negative externalities. In terms of positive externalities, intergovernmental fiscal transfers in the matching grant form can be used to force local communities to internalize the benefits of certain public goods and services with appropriate expenditure patterns.

Second, vertical fiscal imbalances occur when administrative responsibilities and expenditures assigned to a given government level do not match revenues from own sources (Bahl, 2000). To alleviate local vertical imbalances, the national government typically transfers a share of its revenues to assist local jurisdictions in fulfilling their administrative responsibility (Bird, 1992; Bird & Smart, 2002). Theoretically, a local community’s capacity to collect own revenues is used to determine the appropriate amount of shared revenues (Boex & Martinez-Vazquez, 2007). Third, horizontal fiscal imbalances refer to a situation where local budget outlays are not equal across jurisdictions (Bird & Smart, 2002). Some local jurisdictions have more revenue-generating capacity than others. Rectifying horizontal fiscal imbalance necessitates, “equalizing the actual outlays of local governments in per capita terms, [raising all to the level of the richest local government]” (Bird & Smart, 2002, p. 3).

Designing an effective intergovernmental fiscal transfer system is as challenging as implementing the decentralization reform measures. Every step toward fully developed local governance is replete with unintended consequences. Taking advantage of the principal-agent model from organizational economics, Garzarelli (2004) and Oates (2005) point out that information asymmetry between national and subnational government agencies could jeopardize even a well-designed grant allocation system. Based on the principal-agent framework, national government agencies are principals who delegate their administrative functions to sub-national agents through an intergovernmental fiscal transfer system (Oates, 2005). However, information about actual spending behavior at the local level may not always be available to national government agencies. Local politicians’ opportunistic behavior entails serious consequences for a country’s macroeconomic stability, as witnessed in Argentina and Brazil in the 1970s–1980s.

Problems could also occur the other way around. National government mandates that accompany matching grants or other types of intergovernmental transfers may alter sub-national government budgets and priorities. After the matching funds are depleted, local jurisdictions will automatically have to bear the full brunt of maintaining assets, infrastructures, or public services previously financed by the intergovernmental grants. These mandated grants represent the national government’s intrusion on local autonomy (Oates, 2005).

As Thailand is experimenting with territorial decentralization, its intergovernmental fiscal transfer system has been designed to assist the reform process. In theory, Thailand’s intergovernmental fiscal transfer system is expected to address the three fiscal disparity issues, especially the horizontal imbalances between rich and poor local jurisdictions. In this article, we hypothesize based on the above literature review that there should be a negative relationship between the fiscal capacity of local administrative organizations, measured by their own-source revenues, and their amount of intergovernmental fiscal transfers. In other words, poor communities are expected to receive more intergovernmental grants than rich jurisdictions.

Research Methods

A fixed-effects model is commonly used to analyze panel data in contemporary studies of fiscal decentralization and intergovernmental fiscal transfers (Lu, 2010). A log-linear equation for the fixed effects model is used to interpret the results in percentage terms.

LnY_i,tLnT_i,tγLnX’_i,tβμ_iδ_tε_i,t

Y_i,t is a total amount of intergovernmental fiscal grants for local administrative organization i at year t. T_i,t is a local administrative organization’s own-source revenue – the main independent variable that measures local fiscal capacity. X’_i,t is a vector of control variables, including shared taxes, population density, and land area. Two dummy variables are also included in the model. Type of local administrative organization (µ_i) captures the time-invariant fixed effects, while year (δ_t) is used to capture the macroeconomic and political shocks.

In order to test our hypothesis, we developed a fixed-effects model for panel data of Khon Kaen local government finances over three consecutive fiscal years (2009–2011). Local financial data were obtained from the DOPA and the National Economic and Social Economic Development Board (NESDB). Situated in Thailand’s upper northeast, Khon Kaen is the region’s largest province in terms of population size and total local government revenues from 2009 to 2011, but with the highest poverty rate (Deolalikar et al., 2002) and highest local government debt level in the country. Based on the Provincial Administration Department’s statistics, Khon Kaen has a total number of 224 local administrative organizations, including 53 municipalities in the urban areas and 171 sub-district administrative organizations. To further enrich the quantitative findings, we conducted face-to-face interviews with 15 local government officials from eight local administrative organizations in Khon Kaen (Table 2). Interview questions were divided into two sections: (i) fiscal challenges faced by local administrative organizations, particularly revenue-generating capacity and revenue collection and (ii) impact of intergovernmental fiscal transfers on local government operations.

Table 2.

List of Interviewees

Type	Local Administrative Organization	Number of Interviewees	List of Interviewees
Municipality	Nakorn Khon Kaen	2	Mayor and municipal administrator
	Muang Ban Tum	2	Municipal administrator and finance director
	Muang Muang Phol	1	Mayor
	Tambon Ban Ped	2	Mayor and municipal council president
	Tambon Ban Khor	2	Municipal administrator and finance director
Sub-district Administrative Organization	Nong Khra	2	Mayor and finance director
	Nong Gung	2	SAO chief administrator and finance director
	Don Han	2	Mayor and SAO chief administrator

Results and Discussion

Statistical results in Table 3 demonstrate a statistically significant relationship between intergovernmental transfers and own-source revenues in Khon Kaen local administrative organizations between 2009 and 2011. However, this statistically significant relationship does not concur with our hypothesis. Based on the quantitative findings, a one-percent increase in a Khon Kaen local government’s own-source revenues is associated with a 0.24-percent increase in the amount of intergovernmental fiscal transfers it actually received between 2009 and 2011. For Khon Kaen province, Thailand’s intergovernmental fiscal transfer system tends to reward local administrative organizations with high fiscal capacity, instead of reducing horizontal fiscal imbalances among local jurisdictions.

Table 3.

Intergovernmental Fiscal Transfers and Local Own-Source Revenues (Fixed Effects Model)

Variable	Coefficient	Standard Error	t-statistic
Constant	10.90808***	2.5240390	4.32
log_own_rev	0.2416431***	0.0520088	4.65
log_s_tax	−0.5097421***	0.0735662	−6.93
log_area	1.095224***	0.2703227	4.05
log_popden	−1.162706***	0.2846988	−4.08
R-squared within	0.1392	sigma_u	0.36063971
R-squared between	0.6184	sigma_e	0.30323507
R-squared overall	0.5281	rho	0.58582735
F-statistic	F(5,443) = 14.33	Prob(F-statistic)	0.0000
Hausman test statistic	χ² (5) = 86.54	Prob(χ²)	0.0000

Notes:

***p < 0.01; **p < 0.05; *p < 0.10.

Dependent Variable: log_int_grant.

Method: Panel data model with fixed effects estimator.

Sample: 2009–2011.

Total panel (balanced) observations: 672.

Effect Specification: Cross-section fixed (dummy variable); Year fixed (dummy variable).

On the surface, Thailand’s current intergovernmental fiscal transfer system appears to provide incentives for local administrative organizations to put more efforts into revenue collection. This observation reflects a statement made by a public economics scholar who currently serves in the National Decentralization Commission: “the central government should not provide any equalization grants for local administrative organizations with inadequate own-source revenues because equalization transfers would not encourage them to improve their revenue-generating capacity.” On the other hand, Mutebi (2005) advances an argument that Thailand’s intergovernmental fiscal transfer system actually does not follow any standard allocation criteria at all. Since decentralization started in 1997, the intergovernmental fiscal transfer system has always been inconsistent and heavily politicized. All local government officials interviewed for this study reported irregularities in the intergovernmental grant allocation system. As one of the municipal administrators stated:

[The] intergovernmental fiscal transfers are a complete joke. The allocation criteria and procedure are not transparent at all. Without the help of a national politician, the Ministry of Interior would be laughing at your grant proposal and give you nothing. With all due respect, I understand you are an excellent writer, but literary skills do not mean anything for the interior ministry.

Even though Thailand’s constitution prohibits national politicians from interfering with central bureaucratic operations and decision making, politicking, and political interference persist. All local government officials in this study expressed their concerns with the heavily politicized intergovernmental grant system and how heavy politicization of the intergovernmental fiscal transfer system has affected the livelihood of Khon Kaen residents.

For instance, in the Ban Khor municipality, in every monsoon season, half of the municipality is inundated by storm water run-off. As there are no irrigation canals to help prevent the community from getting affected by perennial floods, the majority of Ban Khor residents have to bear with crop damage and, in some years, encountered total crop losses. Yet, in every dry season, Ban Khor residents have to cope with drought that lasts for four months on average. The municipality’s water tower does not provide an adequate supply of water for community members. When asked why they do not submit grant proposals to the central government, the Ban Khor mayor and municipal administrator replied:

The previous mayor had to ask a Khon Kaen MP for money to build a running water system. In all these years, we were well aware of the running water problem and submitted multiple grant proposals to Bangkok, but received absolutely nothing. When my predecessor went to see that MP was in 2009 when his party was in a coalition government. He promised to bring our case before the minister of interior, but never kept the promise. We waited for one budget cycle until the 2011 General Election where the MP’s party suffered from considerable losses.

As previously noted, Thailand’s intergovernmental fiscal transfer system is notorious for its opaque allocation criteria. In the public finance theory, intergovernmental fiscal transfers are intended to remedy the horizontal fiscal inequity among local jurisdictions. In other words, financially worse-off communities ought to receive more intergovernmental transfers than the better-off communities. However, during the interviews, all local government officials were not reluctant to point out the irregularity and injustice of the Ministry of Interior’s decision-making process. As one of the local finance directors opined:

How could our municipality, larger in population size and land mass, have received a smaller amount of intergovernmental transfers than that municipality? Has the world gone mad? What kind of intergovernmental grant system is this? This is the most absurd political system.

“The Thailand kind” was the terminology proposed by one of the municipal administrators who expressed serious concern for the future of local governance in Thailand. The amount of intergovernmental fiscal transfers that local jurisdictions receive in each fiscal year depends more on the quality of political connections with national politicians and central government bureaucrats than on actual expenditure needs.

Currently, the intergovernmental fiscal transfers are funneled through the Department of Local Administration (DOLA) – a department-level agency in the MOI established in 2003 to supervise local government operations, local government budgets, and intergovernmental fiscal transfers. Whereas the Provincial Administration Department (DOPA) was the citadel of central government control over local communities in the twentieth century, it was replaced by DOLA in the twenty-first century. Prior to decentralization, the interior ministry’s senior bureaucrats competed among one another to secure the DOPA directorate-general position at all costs. After decentralization, competition remains as dynamic, but attention has turned toward DOLA. One of the Khon Kaen mayors explained that:

If I really want to pursue the specific grant for the construction of a wide-ranging piping system, I would have to get in contact with our district’s current MP. Thank God if I strike the right connection, it’s easy money. But even with the easy money, I will have to set aside at least 30 percent of the grant as kick-backs for the interior minister, the MP, the DOLA directorate-general, and probably all their secretaries. In the end, it would be nice if our municipality ends up with something. But, from what I have heard in other municipalities, life is tough….

All finance directors that we interviewed also reported that even if their grant proposals are approved, the central government is always late in its reimbursement payment. In some fiscal years, their municipalities did not receive the actual grant money until the third quarter. A large number of Khon Kaen municipalities have to scavenge for other financial sources to avoid disruption of key public services. A municipal administrator provided us with a menu of alternative financial sources for his municipal government:

A municipality can borrow from three sources: (1) the Local Government Pawnshop Fund, (2) private banking institutions, and (3) the Municipal Development Fund. But, even with these additional sources of funding, we still have to go to the provincial administration and, in some cases, the Ministry of Interior in Bangkok for their approval.

Unfortunately, the sub-district administrative organizations are not legally permitted to borrow from the three sources. Few years ago, a sub-district administrative organization in a different northeastern province obtained a 10-year loan from a private bank to finance its road construction project. In 2011, the administrative court ruled that the sub-district administrative organization did not have legal authority to borrow from private banking institutions. Thus, loan payments will have to be the mayor’s sole responsibility. This incident has unleashed seismic effects throughout Thailand’s local government landscape and has also driven central government agencies to pay close attention to financial problems faced by local administrative organizations. In 2012, more central government regulations have been placed on the borrowing options for Thailand’s local governments. As one of the mayors in Khon Kaen lamented:

DOLA and the Auditor-General have recently changed the regulations regarding local government borrowing and guarantees. With the new regulations, our municipality can no longer borrow from the private banks because the local government debt ceiling set by the interior ministry is now 20 million baht. And our municipal government already exceeded it.

Even if a local administrative organization decides to apply for a private loan, it must undergo a rigorous process and must satisfy all the criteria that have been modified by the interior ministry and the auditor-general office. The process starts with the preparation of a report on five-year financial data, as well as a cost–benefit analysis report of a development project that requires the use of loan proceeds. The two reports have to be reviewed by a committee consisting of the provincial governor, DOLA’s provincial representative, and other regional administrative agents. Local administrative organizations have to obtain an approval from this committee before they can submit their loan applications to private banking institutions. One of the mayors was deeply concerned that the loan application process would succumb to the same cycle of politicking and corruption as the intergovernmental fiscal transfer system.

Conclusion

Throughout the twentieth century, Thailand’s administrative structures had pronounced centralization features. Policy formulation, planning, budget allocation, and personnel management were determined at the national level. Every aspect of government decision making that has bindings effects on people from all walks of life occurred at the ministerial headquarters in Bangkok. Each ministry’s provincial and district agencies in which officials were appointed by Bangkok were responsible for executing the central government policies, programs, and directives.

After 1997, everything in Thailand appeared to move toward decentralization of authority and responsibility to local communities and citizens. An intergovernmental fiscal transfer system has been designed to address the fiscal disparity among local administrative organizations. In the public finance literature, intergovernmental transfers are an important public policy instrument to help alleviate horizontal fiscal imbalances among local jurisdictions. These so-called equalization grants enable financially strapped local authorities to provide essential services to their constituents. This underlying logic of intergovernmental equalization transfers requires the amount of intergovernmental transfers to be inversely related to each local jurisdiction’s revenue-generating capacity.

However, analysis of panel data from Khon Kaen local administrative organizations reveals that between 2009 and 2011 intergovernmental fiscal transfers were rewarded to local jurisdictions with high revenuegenerating capacity. For Khon Kaen’s local residents, Thailand’s equalization grant system ends up magnifying horizontal fiscal imbalances. Further, in-depth interviews with several local officials provide insight into intense politicking in Thailand’s intergovernmental transfer system. A case of Ban Khor municipality showcases complex relationships among national politicians, central government bureaucrats, and local officials that influence the amount of intergovernmental fiscal transfers received by local administrative organizations in each annual budget cycle.

Granted, no perfect intergovernmental transfer system exists in the world, not even in the economically advanced federal countries. However, despite the constitutionally mandated decentralization reform, Thailand remains heavily centralized with one of the least transparent and most inequitable intergovernmental transfer systems in Asia. Whereas the scope of Thai local governments’ discretion and function is narrow, their local revenue sources are even narrower, depending largely on tax receipts from commercial activities and intergovernmental fiscal transfers. At present, the centrally imposed local tax structure leaves the vast majority of Thai localities in the rural agricultural areas with virtually nothing to tax.

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