Multi-level governance and subnational finance in Asia and the Pacific

In a comprehensive report titled “Multi-level Governance and Subnational Finance in Asia and the Pacific,” the OECD Centre for Entrepreneurship, SMEs, Regions and Cities (CFE) delves into a detailed regional analysis. This study is based on the 3rd edition of the World Observatory on Subnational Government Finance and Investment, offering a detailed perspective on the fiscal dynamics shaping subnational governance across the Asia-Pacific region. Collaboratively prepared by the Regional Development and Multi-level Governance Division (RDG) of the CFE at the OECD and the Sustainable Development and Climate Change Department of the Asian Development Bank (ADB).

Over the past four decades, subnational governments (SNGs) in Asia and the Pacific have become key economic actors due to various decentralization processes and territorial reforms. These adjustments to institutional, territorial, and multi-level governance frameworks have provided subnational governments with new responsibilities.

This study examines the territorial structure, multi-level governance mechanisms and subnational government finances across 26 countries in Asia and the Pacific and is a crucial resource for policymakers, highlighting the diverse landscapes of regions and municipalities in Asia and the Pacific.

Key Findings

  1. Subnational Government structures: Among the 26 countries in this study, 21 are unitary and 5 are federal. The study highlighted that the Asia and the Pacific has the most subnational governments of any world region. The size of regions and municipalities varied significantly across countries, with some having a highly fragmented municipal structure.
  2. Decentralization reforms: The study shows the strengthening of regional governance and of regional level of administrations by the decentralization processes in the region.  But there is a mismatch between the fiscal, political and administrative dimensions of decentralization at regional and lower levels of governments. Many countries in the region have a dual system of territorial administration, with a mix of decentralized and deconcentrated entities at the subnational level.
  3. Territorial reforms: The average municipal size in countries in Asia and the Pacific is found to be slightly larger than the OECD average. The study shows that changes in territorial organization have occurred through two entirely different types of reforms: municipal amalgamation and municipal partition. Inter-municipal co-operation is an alternate to amalgamation that is less frequent in Asia and the Pacific than in the OECD.
  4. Vertical co-ordination mechanisms: The findings reveal that vertical co-ordination mechanisms across levels of government are often in place but the participation of subnational governments in decision-making processes are relatively low in some countries.
  5. Fiscal decentralization: The countries in Asia and the Pacific have, on average, higher subnational expenditure as a share of total public expenditure than other world regions. While subnational government revenue accounts for 35.0% of total public revenue in Asia and the Pacific in 2020, the subnational expenditure in the region represents 8.8% of GDP whereas subnational revenue amounts to 8.5% of GDP, although there is huge variance both across and within the region. However, the paper highlights specifically that the expenditure and revenue ratios cannot be automatically interpreted as indicating the level of spending or revenue autonomy of subnational governments.
  6. Public financial management: Several countries in the region are undertaking reforms to improve the quality of public finance management as a crucial tool to extract greater benefits from decentralization. Priority-based and participatory budgetary practices by subnational governments are emerging across Asia and the Pacific. Subnational governments in Asia and the Pacific often own and manage substantial asset portfolios, but limited comparable data is available on these assets.

Policy Opportunities

The report highlights several policy opportunities for effective multi-level governance and strengthened subnational government finances in Asia and the Pacific. These opportunities include clarifying responsibilities across government levels, enhancing coordination mechanisms, optimizing inter-governmental transfer systems, ensuring stable revenue sources for subnational governments, bolstering expenditure autonomy, facilitating responsible debt use, building institutional capacity, improving public financial and investment management, promoting priority-based and participatory budgeting practices, and enhancing data collection and transparency on subnational government finances.

These policy recommendations aim to address disparities, enhance accountability, and foster sustainable development across diverse regions and municipalities in the Asia-Pacific region.

You can read the full report by following this link: Multi-level governance and subnational finance in Asia and the Pacific