The 21st Century Vision for Decentralization Committee's Challenge
February 28 (Tuesday) 2006
In January an advisory committee known as the “21st Century Vision for Decentralization Committee” was established, headed by Internal Affairs and Communications Minister Heizo Takenaka. Though it is an extremely important theme within Japan's structural reforms, the committee's target is very broad and considerably complex. Among the objectives of the committee is to discuss the “Problems with the Local Government System”, which has not yet been sufficiently reworked, and to draft a constructive vision of radical reforms for the future of Japan.
The six-member committee does not consist of any representatives of local governments or the central government. Instead, the committee members are: Hiroko Ohta, professor at the National Graduate Institute of Policy Studies; Atsushi Miyawaki, expert on local government issues and professor at Hokkaido University Graduate School of Law and Politics; Masaaki Honma, expert on central and local financial administration and professor at Osaka University Graduate School of Economics; Mitsuo Kobayakawa, an authority on the legal aspects of the local government system and professor at Tokyo University Institute of Law and Politics; Naoki Inose, well-known and influential writer recognized for his adept tackling of highway-related public corporation problems and difficult issues regarding Koizumi's cabinet; and myself.
The thinking behind the establishment of the committee are the slogans that are driving Koizumi's reforms, specifically the Koizumi Cabinet's goal of “small government”, where “what can be done by the private sector is taken care of by the private sector”, and where the central government's job is reduced so that “what can be done by local governments is taken care of by local governments”. The mechanism of local governments is extremely complicated, however, and difficult to understand from the outside. Thus, the committee's goal is to create a springboard to tackle the major issues of clarifying the local government system and remaking it into a transparent mechanism that is readily capable of self-reform.
Excluding the postal service's 270,000 workers, there are around 700,000 employees of the central government. Compared with this number, civil service workers in local governments number a staggering 3 million. As the slogan “what can be done by local governments is taken care of by local governments” implies, the committee is faced with the challenging task of transforming the system to meet the requirements of a new era.
The structures and rules of local governments are extremely complicated, and are particularly difficult for outsiders to grasp. Even the administrative representative to local governments from the Ministry of Internal Affairs and Communications struggles with their complexity. In response to this, our committee is designed to look away from the individual trees in the forest and look instead at the whole forest from a bird's eye view, and to focus all of our energies on illustrating an image of what local administration should look like in the future. Our report is due at the end of May, and is scheduled to be included within the framework of the government's “large-boned policy” for local government reform to be enacted in June. The project has truly just left the starting blocks.
The central aim of discussion is to clarify the location and acceptance of responsibility that is to accompany decentralization. As administrative reforms continue and decentralization or local government sovereignty strengthens-or more specifically, as local governments' degree of freedom in choosing policies increases-responsibility must naturally go hand in hand. As the degree of freedom increases, so does responsibility. As a system it is thus critical to clarify the location of this responsibility and how it should be handled.
It would be excellent if things go were to go smoothly as local governments' discretionary power grows, but the question of how responsibility will be taken if things go badly is a tough one. For private companies, this situation usually results in bankruptcy. The mechanism for such cases stipulates that, as the central player, the company must take responsibility for the bankruptcy, cede management rights to creditors, and provide compensation for damages. Fundamentally, this kind of structure should also be applicable to local governments. In reality, however, local governments have a responsibility to residents to continue providing basic services; in this way, the situation of local governments differs from the bankruptcy system of private companies.
As for what I mean by policies going badly, take for instance a case where local governments issue local bonds, cumulative debt piles up, and enacting policies becomes difficult. In reality, cases where a plethora of buildings are built with no hope of repayment, and cumulative debt piles up to enormous levels, do in fact exist, and questions of how to make the bearer of responsibility clear and how to dole out such responsibility are problematic. Examples in recent years include recommendations made by the central government that local governments should engage in large-scale investment as part of post-Bubble economic policies. As a result, local governments were steered down the path of accumulating debt. In this case, responsibility can be said to lie not only with the local governments, but with the central government as well.
Preparing a bankruptcy system is necessary on the one hand, but on the other hand, when we take into account long-term changes in the economy, it is also important to build a framework that includes cooperative debate by the central and local governments as to the appropriate scale of investment. The bankruptcy system under current conditions consists of a mechanism in which the state intervenes if the fiscal health of a local government falls below a certain designated level, and restricts the amount of bonds the local government can issue. As the degree of freedom increases, local governments are able to issue bonds freely, thereby circumventing the central government's restraint mechanism and, from the perspective of fiscal safety, rendering the braking system inoperable. As a result, if for whatever reason the local government should fail, a strict system should probably be created that will first require the local administrative chief to resign, followed by the parliamentary body that allowed it to happen, and then divide the debt appropriately amongst the local government's public and private sectors.
Another important theme is regional disparity. Though the phrase local regions is widely used, it denotes both areas like Tokyo and Yokohama, where population, economic resources and information are concentrated, as well as underpopulated areas like Shimane or Aomori, where prefectures are unable to raise enough money through taxes to pursue necessary administrative policies.
Currently, local government finance is heavily dependent on the tax allocation system. The gap between a region's standard financial needs and its standard financial revenues is covered by transferring tax revenue from the central government-in other words, via tax allocation. Incidentally, a region's standard financial needs are estimated by the total amount of necessary government expenditure based on population, length of roads, distribution of agricultural land, and other factors.
This tax allocation system is sometimes criticized as counteracting self-directed regional efforts. If a region zealously pursues administrative reform then tax allocation will decrease as a result. Or in other instances, tax allocation will shrink if a region presses for industrial development and tax revenues increase. In this way, the tax allocation system is criticized as a mechanism that does not reward effort. Due to recent reforms, 25% of cost reductions from administrative reforms are now left for tax allocation for the region as a reward. This will work as an incentive for regions with large-scale administrative fees to pursue administrative reforms.
Ironically, there is an increasing pattern of regional disparity in Japan. In areas like Tokyo, administrative reforms would generate some elbowroom and positive effects could be easily earned thanks to an abundance of human resources and information. On the other hand, local governments have had little money for administrative reforms from the start and thus reforms would have little merit. It is also difficult to bring about regionally rooted industry. Consequently, even mechanisms that reward effort invite regional disparity, making it clear that they are not genuinely effort-rewarding.
A genuine effort-rewarding mechanism is absolutely vital. What should be done, then? I believe that the answer to this question is, most likely, that major metropolitan regions and the twelve government-designated cities, major urban centers and lower-tier cities cities/towns/villages with several hundred thousand residents, and underpopulated areas must each be assessed according to their own particular conditions. Further, the discussion of their reform should proceed in such a way so that each region is treated structurally and systemically different, in accordance with their particular situations.
Lastly, I would like to mention the importance of supporting self-directed revitalization strategies for underpopulated regions. 2005 marked the beginning of population decline in Japan, and though there are some regions like Tokyo and Okinawa where the population is not shrinking, many regions throughout the country are facing dwindling populations. If this continues, depopulation will trigger increasing impoverishment in regional areas, and the country will fall into a downward spiral of economic contraction. The government is currently groping for new strategies to answer questions of how to halt this trend and how to carry economic development into the next generation. At the current rate, regions throughout Japan seem to be headed toward extremely difficult economic prospects, with decreased subsidies and tax allocation, increasing difficulty for tax breaks, and an inability to attract industrial plants.
Out of this conundrum a potent strategy is rising. Specifically, this strategy aims to draw the elderly and retired generations out from major metropolitan areas and into depopulated areas with clean air and water, fresh produce, and a quiet and stress-free environment. In other words, the goal is to attract the older generations to regional areas that boast both a healthy environment and healthy lifestyles. The strategy aims to develop “strategic tourism” by intoning the virtues of regional areas, and by gaining the understanding of people living in densely populated zones so that they will visit and enjoy all that regional areas have to offer. The hope is that, ultimately, the visitors will become taken with the areas and will move there permanently. This issue is also a topic of vigorous discussion for The 21st Century Vision for Decentralization Committee, and it is one of the tasks of the committee to assist those regions that can help support this strategy.
In any event, it is clear that Japan's present course is leading toward the hollowing out of regional areas by depopulation and global competition, and toward increasingly difficult financial conditions for local governments. In the midst of this hardship it is urgent that Japan conceive and construct a system for local governments that makes prudent and effective use of the country's limited resources.