RIETI Symposium

Fiscal Reform of Japan: Redesigning the Frame of the State


Session 6: How to Reform Fiscal Relations between the Central and Local Governments
"The Central and Local Governments: Redesigning Intergovernmental Fiscal Relations"
DOI Takero (RIETI Consulting Fellow / Associate Professor, Faculty of Economics, Keio University)
"Redesigning the Fiscal Structure of Local Governments: From the Point of View of Local Governance Reform"
KITAMI Tomitaro (RIETI Consulting Fellow / Deputy Director, Industrial Organization Division, Economic and Industrial Policy Bureau, METI)
KONISHI Sachio (Professor, Graduate School of Economics, Kwansei Gakuin University)

In the sixth session, Consulting Fellow Takero Doi presented his report titled "The Central and Local Governments: Redesigning Intergovernmental Fiscal Relations." He pointed out the flaws in the government's so-called trinity reforms and said that in pushing forward with decentralization, the transfer of tax sources to local governments was insufficient and it was necessary to actually transfer taxation authority. Furthermore, he illustrated the direction that reform of the local bond system should take and referred to the need for legislation for local government bankruptcies.

Consulting Fellow Tomitaro Kitami gave a report on "Redesigning the Fiscal Structure of Local Governments: From the Point of View of Local Governance Reform." His paper analyzed the fiscal problems on a local government level using the framework of corporate governance, presenting a direction for reform. He proposed the implementation of reforms so that state-dependent governance, comprising governance in times of emergency and governance in normalcy, would function effectively. Specifically, he proposed strengthening governance to monitor the government in the short term, and said that in the long term local governments should strive to establish stakeholder-type governance, for which he suggested the scrapping of "tacit government guarantees" and the enactment of a local government revival law.

Sachio Konishi, professor at Kwansei Gakuin University's Graduate School of Economics, commented on these reports. He said that from his experience studying the problems of the Fiscal Investment and Loan Program, no one had written about the core issue which lay with the asset-liability management of the Ministry of Finance's Trust Fund Bureau. He presented his view that, generally speaking, the same problem might exist in the fiscal problems of local governments. As to the Doi report, he said it was quite different from his own understanding of the local finance system. While he could agree to some points in the Doi report concerning certain phenomena, local finance plans form the backbone of local government finances, and there was a need to look at what sort of reasoning was shared between the Ministry of Finance and the Ministry of Home Affairs, Public Management, Posts and Telecommunications when drawing up these plans. Furthermore, Konishi said it was crucial to clarify the salient points that are not discussed by the two ministries during their negotiations. As for the Kitami report, Konishi said it was interesting to use the approach of corporate governance, but as a member of the study group that took part in drawing up the paper, he mentioned some points on which conclusions were not reached. He noted that while the Ministry of Home Affairs was split and local governments were established as part of postwar reforms, it was unclear whether the realization of such reforms had really been realizable. He also touched upon the question of whether Japan's prefectures could be fully independent from the central government. Consulting Fellow Doi responded that his report aimed to break with the outlook on the world formerly held by the Ministry of Home Affairs that focused on local finance plans. Consulting Fellow Kitami said that he was skeptical of local government reforms that do nothing about the clerical duties assigned to the prefectures.

In the discussions that followed, Assistant Professor Kunieda commented that it might be better to think of local governments as special interest groups. Meanwhile, President Aoki commented that in the Kitami report, the distinction between insiders and outsiders in state-dependent governance was difficult to understand, owing to the fact that residents played both roles, and that it would be better if such points were clarified.

(Text compiled and edited by KIMURA Yuji, RIETI Research Staff)