Implementation of public works and intergovernmental relationships in Japan

A large proportion of public work projects in Japan are implemented on the initiative of local governments. Although local governments are independent decision makers, involvement of the central government can be justified if the behavior of the local governments generates technical externalities or fiscal externalities through strategic interactions. Precisely because local governments are independent decision makers, however, it is possible for them not to follow the plan constructed by the central government. In this paper I overview the literature on the reasons why the Japanese central government expects rather easily the effectiveness of its public works plans, particularly focusing on guidance provided by the central government for local government. The instruments of this guidance include direct or indirect regulations, fiscal or non-fiscal incentives and persuasion. While some development plans stipulate the rights of planners to make recommendations to or promote coordination among implementing bodies, explicit exercise of these powers is not common. The fiscal incentives include matching and purpose-specific grants and apparently general grants through the local allocation tax grants system to cover the responsibilities of implementing bodies. "Project cost adjustment" equalizes the part of Basic Fiscal Needs, which is a base of calculation of the amount of the local allocation tax grants, to the corresponding product of the unit cost, unit of service and adjustment coefficient. This adjustment was introduced for a practical reason in the 1960s to calculate appropriately the Basic Fiscal Needs of local governments implementing public works projects. In addition, some portions of debt service payments for particular local government bonds are covered through the local allocation tax grants system. Such "refinements" of the system to cope with local "realities" seem to make it possible for the central government to induce local governments effectively to follow its plans. The Japanese central government makes local governments involved in drawing up its development plans or preparing its budgets to obtain their voluntary cooperation and to coordinate multiple objects and instruments. Behind the background of such planning and budget preparation are frequent and institutional contacts, interchange of personnel and high integration between the central and local governments. Engineering officials in particular, who have specialized knowledge and skills necessary for implementation of public work projects, have created a community encompassing the central and local governments. During the processes of planning for the five Comprehensive National Development Plans, the central government set up official and public opportunities to communicate with concerned bodies, especially after the Third Plan, investing much time and resources to ensure coordination. As Japanese development plans in general do not guarantee mobilization of resources necessary for their own realization by themselves, coordination during planning can make guidance afterwards easier. The involvement of local governments, which are the subsequent targets of guidance, in the planning and budget preparation of the central government, which is provides this guidance, can not only transmit the information that local governments hold to the central government, but also create room for their lobbying. Such lobbying itself may waste policy resources and distort resource allocations as well.