Transitions in governance

Improving city government performance in the era of decentralization: the experiences of Indonesia and the Philippines


Increasing awareness of urbanization and the important role that cities play in a nation’s economy (Dobbs et al., 2011; Glaeser, 2011) has shifted the spotlight onto city governments and city leaders (Barber, 2013). Issues related to “managing fast growing cities” have been well-documented (see, e.g., Devas and Rakodi, 1993). Central to tackling these challenges is the capacity of city governments to plan for, finance, and manage change. In the developed and developing worlds alike, city governments and leaders are expected to deliver not just performance but also innovations to deal with new problems and/or old problems of unprecedented scale.

Decentralization leads to more efficient allocation of resources, more responsive public service, and improved economic development at the local level, proponents claim (Oates, 1972; Tiebout, 1956). Local governments are considered to be better at identifying and serving local needs and more easily' held accountable to the public. Different configurations of offers by the local government will keep existing firms and residents while attracting new ones, thus creating a situation where city governments compete with each other by offering the most desirable social and business environments.

The Philippines and Indonesia are notable tor their adoption of direct democracy' and extensive decentralization within a short period of time. This transformation started with the Philippines’ “people power revolution” in 1986 and Indonesia’s Reformasi in 1998. Along with this phenomenon came a drastic change in the way governance takes place at the local level. Mayors arc increasingly taking center stage, and local democracy’ is gradually’ institutionalized, albeit to various extents and at different speeds. Despite claims of association between decentralization and improvement in local public services, the link between the two is not a direct one. After more than 25 years of decentralization in the Philippines and 15 y'ears in Indonesia, improvement in local government performance has been debatable (Lewis 2010) and economic growth at the local level remains disputable (McCulloch and Malesky 2011). But as Indonesia and the Philippines slowly tinker with their incentive systems and implement more measures to encourage or incentivize local governments to deliver quality public services, we are seeing some positive changes in the way such incentive systems are utilized.

This chapter highlights the presence of two types of incentives to improve city government performance in the context of decentralization. The first is top-down incentives in the form of administrative measurements and rankings conducted by the central government; the second is bottom-up incentives in the form of citizens’ political support (votes) for local leaders who perform well and deliver quality public services. The remainder of the chapter will be presented as a case study comparing the Philippines and Indonesia, exploring decentralization, top-down incentives, and bottom-up incentives for local performance first in the Philippines and then in Indonesia. The final section provides a conclusion and agenda for future research.

Decentralization and local public performance incentives in the Philippines


The Philippines’ “people power revolution” toppled Ferdinand Marcos’ authoritarian regime in 1986 and brought forth a new era of democracy at both the national and the local level. The country’s new 1987 Constitution institutionalized reforms that limit the power of the executive and mandated Congress to enact a code that gave more autonomy to local government units (LGUs). This code was later enacted as Republic Act No. 7160, also known as the Local Government Code (LGC) of 1991.

Decentralization in the Philippines has been taking place since 1992 according to the provisions of LGC 1991. It has taken the form of devolution, whereby LGUs (provinces, cities, and municipalities) are given considerable autonomy to decide their development priorities and implement relevant programs. The sectors that are now within the purview of the LGUs are wide-ranging: agriculture, industrial development, environmental protection, health services, social welfare, local infrastructure, land use, and tourism. For cities, specifically, communications, transportation, education, and civil defense are also included in the LGU remit.

The transfer of authority from the national government to LGUs is supported by transfer of personnel and fiscal resources. In 1992, at the onset of decentralization, about 60% of staff from the Department of Agriculture, Department of Health, and Department of Social Welfare and Development were transferred from the national government to various local governments (Wallich et al., 2007). In the period 1992-2003, the average yearly expenditure of the Philippines’ LGUs was about 23% of the country’s total public expenditure. This is a substantial increase compared to the yearly average of 11% before decentralization (1985-1991). By 2009, the proportion had risen even further to 25% (Martinez-Vazquez and Vaillancourt, 2011).

Despite having more resources to spend, LGUs’ authority to generate revenue remains limited. Most of the substantial taxes (i.e., personal and corporate

Improving city government performance 19 income tax, consumption tax) are collected by the national government as part of the Philippines’ internal revenue. LGUs, on the other hand, collect real property tax, property transfer tax, and amusement tax. LGUs are also able to impose fees for services (e.g., yearly renewal of business permits), as well as charge for the public utilities that they provide.

Of the internal revenue collected by the national government, 40% is redistributed to LGUs according to a simple formula based on each LGU’s land area and population. This is called the Internal Revenue Allotment (IRA). For the most part, LGUs have the autonomy to plan and decide what to do with their IRA. The IRA is large enough to enable LGUs to pay staff salary costs and provide very basic services but not enough to carry out substantial development schemes or programs. As a result, LGUs that lack motivation or pressure may just be able to survive, providing a minimal level of service, while those that are more motivated would be encouraged to generate additional revenue to complement the IRA.

Devolution as assigned by LGC 1991 follows a hierarchy in which provinces are identified as first-tier LGUs, municipalities and component cities are second-tier, and barangays- the smallest administrative unit in the Philippines -are third-tier. Cities fall into one of three possible legal classes: “component”, “independent component”, or “highly urbanized”.1 Component cities, together with municipalities, occupy the second-tier hierarchy under the provincial government. However, highly urbanized and independent component cities occupy the first-tier hierarchy, on a par with provinces. These higher-tiered cities do not report or share any of their tax revenues with the provincial government (neither do their citizens vote for provincial government officials). Instead, independent component and highly urbanized cities report directly to the national government and coordinate with their respective provinces.

Based on the 2015 census, there are 17 regions, 81 provinces, 145 cities, and 1,488 municipalities in the Philippines.2 Of the 145 cities, 35 are “highly urbanized” and five are “independent component” cities. In terms of population, four cities had more than 1 million inhabitants in 2015 (three of which are in the National Capital Region, NCR), 16 cities had between 500,000 and 1 million, 94 cities had between 100,000 and 500,000, and 31 cities had a population under 100,000. The average population of Philippine cities was 282,240 and the median 168,110.

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