the Failure Of Japan's Financial Decentralization.

So far with my last two posts, I have explained how Decentralization merits carrying out for our economy and factors needed for its success. Finally this time, I’m going to tell you how Japan’s financial decentralization taken by the Koizumi government went for the goal of the reform.

The primary goal of the reform was to reduce the budget deficit of central government, which I showed in my first post, by cutting the massive transfers and subsidies to local governments and transfer the sufficient amount of the reduced financial resources to local taxes so that the locals gain more self-determinable financial revenue to engage themselves to provide profit-concerned efficient activities for their citizens’ needs. However, the reform did fail to achieve the goal in many senses due to two reasons .

The first factor made the reform unsuccessful was that the central government did not offer (transfer) adequate financial resources to its local government  (the lack of the 1^st condition I mentioned in the last-week post.) From 2003 to 2006, Japan’s central government reduced the transfers and subsidies to the local governments by 5 trillion dollars and transferred 3 trillion dollars (only about 7% of the annual revenue for the local governments) into the local taxes in order that local governments exercises more independent public activities for their citizens’ wants without the central helps or interferences. However, because the increase in local tax revenues was far short of the reduction in transfers and subsidies from the central government, the reform did not succeed in empowering or establishing the financial autonomy of the local governments. Therefore, The reform didn't help the local government to improve their own tax revenue to be financially independent but ended in forcing them to cut their expenditures by firing the local public employees and reducing public services.  

The second reason was simply the lack of capacity at local level, which is the 2^nd condition for successful decentralization in my last post. The local public employees used to just provide services and goods the central government asked them to. Therefore, there were not enough professional personnel who could manage public activities and act independently from the central to govern their regions efficiently.  

The central government had to have trained local personnel and dispatched some professionals from the central government before starting to conduct the reform to support the financial decentralization of the local governments to be done rightly and effectively.

On the bottom line, the Koizumi reform ended up in reducing the budget deficit only temporarily (after 2008, the deficit has been increasing again). And making the local governments financially independent by strengthening their tax bases completely failed, and the effective decentralized governance couldn't be accomplished during the koizume reform. Although Japan has still been trying to succeed in making an efficient decentralized governance system by strengthening the local tax bases and shifting more governmental authorities and responsibilities to the local, there still have many problems needed to be solved to decentralize efficiently and properly.