Administr ation Right

Once countries decide to decentralize—whether gradually, as in Thailand and Vietnam, or with an initial dramatic change, as in the Philippines and Indonesia—they must get the fiscal design right. Critical to effective fiscal design is the ability of local governments to adjust budgets and thus respond to community preferences regarding the quantity and quality of public services. Ideally, and according to theory, subnational governments provide services to their constituents up to the point at which the cost—in terms of taxes—equals the benefit, in terms of the value of the services. To satisfy this con-dition, local governments must have the authority to exercise own-source taxation, and be in a finan-cial position to do so. This is the essence of account-ability and efficiency under decentralization, and that is why decentralized revenue policy matters. The design of a local revenue system includes three central dimensions: the assignment of rev-enue sources among types of government, the degree of autonomy with which subnational gov-ernments can exercise their assigned authority, and the efficiency of the revenue administration system. For a decentralized system to meet expectations, policymakers must ensure coordination between these dimensions