Decentralising power to secondary cities key to growth

Titled “Unlocking the Growth Potential of Secondary Cities” focuses on the long-term benefits of a more balanced approach to urbanisation, highlighting Thailand’s secondary cities’ untapped potential and their critical role in supporting the country’s future growth and economic prosperity. 

Thailand’s urbanisation has been heavily concentrated in Bangkok, an urban agglomeration with a population 29 times larger than the next largest, Chiang Mai, and a GDP nearly 40 times greater than Chon Buri.

While fuelling economic growth, Bangkok’s dominance also creates problems such as overcrowding and weaknesses. The 2011 floods revealed Thailand’s economic fragility resulting from the concentration of vital industries in Bangkok. As climate change worsens, Bangkok’s infrastructure and the national economy will face even greater strain, necessitating economic diversification.

Meanwhile, Bangkok’s economic progress appears to be slowing, with GDP growth mirroring population growth. This suggests that the city’s economy is maturing and approaching saturation, limiting productivity gains.

In contrast, per capita GDP growth in secondary cities has recently been nearly 15 times that of Bangkok. This faster GDP growth per capita demonstrates Thailand’s secondary cities’ increased productivity, efficiency, and economic potential.

Steven Louis Rubinyi, the Bank’s senior Disaster Risk Management specialist, pointed out that Thailand’s secondary cities are rapidly growing and have significant economic potential. Unfortunately, they fall behind Bangkok in terms of infrastructure development.

“Local infrastructure is critical to enabling further growth and achieving these cities’ economic potential. The question is, how do we increase investment in these secondary cities?” he said.

Among several solutions for unlocking Thailand’s secondary cities, he emphasised the importance of decentralised investment and fiscal autonomy, and local administrative organisations (LAOs) are best positioned to make optimal local investment decisions.

Such a move enables policies to be better aligned to develop comparative advantages through more meaningful social contracts between LAOs and their residents.

“One major barrier preventing secondary cities from realising their economic potential is their overreliance on national revenues. Local governments could effectively chart their own economic growth trajectories if they had more control over urban planning, infrastructure development, and access to long-term financing mechanisms, supplemented by robust fiscal instruments such as property taxes, income tax piggybacking, and user charges,” he explained.

He listed several advantages of financing infrastructure locally, including being more efficient and appropriate to local needs; receiving scrutiny on project, finance and management; having a local design life for large infrastructure projects that can be financed over time; and relieving pressure on the national budget.

“Public-private partnerships can be used to finance infrastructure. It entails some level of risk sharing between the public and private sectors. It also helps cities secure infrastructure investment by providing modern services to citizens and businesses that pay for them,” he added.

Alternatively, he suggested that cities with strong fiscal positions may choose to borrow through capital markets. Under this option, the government must provide a fair and balanced regulatory framework, a transparent allocation of risk and responsibilities, and a clear dispute resolution mechanism.

LAOs need to show financial and revenue stability, long-term planning for capital budgets, spatial infrastructure, and finance plans, as well as transparent and accountable management.

Investors can expect stable, long-term investment from borrowers who are committed to making long-term payments.

Rubinyi emphasised that whether using PPP or municipal borrowing, these financing methods require strong and dependable local revenue instruments and the ability to pledge future revenue streams to secure capital for current infrastructure development.

According to the World Bank, an assessment of 26 projects in Chiang Mai, Rayong, Nakhon Sawan, Khon Kaen, and Phuket shows that the cities are reasonably creditworthy due to credible financial statements and a significant surplus.

He emphasised that while local revenue options exist, they are not currently being fully utilised by local governments as they have little experience in planning own fiscal policies, raising capital, engaging in PPPs and developing own infrastructure.

Furthermore, current institutional challenges prevent local governments from realising their potential. These include stringent government regulations on subnational debt and a lack of national government funding for local infrastructure.

“Traditional command and control functions revert to centralised thinking, crippling local governments. To achieve effective decentralisation, fundamental changes are required, which means advocating for strong local government with a fair bargaining system for weaker cities competing for limited national funds against stronger cities with more freedom,” he noted, citing success stories from Poland and South Africa.

To address the issue, he encourages Thailand to test two approaches to local infrastructure financing: a white paper and a sandbox initiative.
For the White Paper, LAO representatives, the central government, and other stakeholders will define the role of grants and shared taxes, local revenue instruments, municipal borrowing, and PPPs in policy support, infrastructure investment, and project development funds within a concrete framework.

In terms of the Sandbox Initiative, he explained that the model is based on learning by doing through pilot projects carried out in a few secondary cities. LAOs should be granted appropriate legal and regulatory protections on an experimental basis, as well as periodic monitoring and evaluation. 

Woothisarn Tanchai, former secretary general of King Prajadhipok’s Institute, agreed with the World Bank’s recommendation, stating that decentralisation allows locals who are most familiar with their problems to make the best decisions.

Though there are several efforts to encourage local governments to take the lead, the tone of current laws and regulations prevents them from moving forward. “What we urgently need is a regulations guillotine,” he said.

Poon Thingburanathum, deputy director of the Bank’s Corporate Planning at Thailand’s Programme Management Unit on Area-based Development, stated that empowering Thailand’s secondary cities would require a significant paradigm shift to attract their fair share of investment and talent.

“With appropriate investments in infrastructure, human capital, and institutional capacity; and with adjustments to the intergovernmental framework, a number of these cities have the potential to significantly enhance Thailand’s productivity, spur its economic growth, and bolster its global competitiveness,” he added.

 

 

Thailand’s slow momentum continues

Encouraging Thailand to unlock its secondary cities’ potential followed the World Bank’s latest Thailand Economic Monitor, which painted a cautiously optimistic outlook for the Thai economy in 2024.

Growth is expected to accelerate to 2.4%, driven by continued consumer spending, a rebound in tourism, and a pick-up in exports. This marks an improvement from 2023’s 1.9% growth, but falls slightly short of the Bank’s initial forecast due to weaker-than-anticipated exports and public investment earlier this year. 

Inflation is also expected to ease, reaching a projected 0.7% in 2024, the lowest in the region. This is attributed to lower food and energy prices, alongside a gradual economic recovery. Inflation is then expected to climb back to 1.1% in 2025.

While the outlook for 2025 is for continued growth reaching 2.8%, fuelled by stronger domestic and international demand alongside increased government spending, challenges remain. Thailand needs to address long-term issues like lagging productivity and a shrinking workforce due to an ageing population.

Fabrizio Zarcone, World Bank Country Manager for Thailand, pointed out that Thailand is at a critical juncture where it must address key challenges such as productivity and a decline in the working population as a result of an unfavourable demographic trend.

“It will be critical to rejuvenate economic growth and Thailand’s secondary cities hold significant untapped potential that is key to getting the country back on the path of sustainable development,” he said.