I. Introduction
There is a global trend towards decentralization in public administration.An important reason for decentralization is to develop more effective participation in local affairs, including activities of central government that are carried out locally.Such participation not only enhances the dignity of individual and the sense of community at all levels, but also adds vitality to governmental programs and provides a means for local control over them.Under the development of decentralization, the position of local government within all state systems in the world has changed significantly.Accordingly, local government has been realized as a vital institution efficiently and directly rendering valuable services to the local community.Local government and local politics are becoming more and more important, and local forms of political accommodation among local executive and legislative branches, and interest groups are pointing to new styles of political practice which significantly influence budgeting and financial management.
Current organization downside efforts and restructuring of government level in Taiwan reflect realized decentralization of power.County-level governments have greater power since province-level government has been shrunk since 1999.Although local governments in Taiwan have generally arisen since the outburst of local democracy, local deficit has become the new challenge to local-self governing bodies.Local finance is the nerve center of the local political universe.However, local deficit suffered by local governments in general has seemed undermining public service capability of local governments in Taiwan since 1996.
This paper tries to examine financial managerial inertia of local governments in Taiwan through a principal-agent theoretical analysis. Particularly, the paper will investigate managerial problems of budgeting system in terms of “rational” managerialism and “irrational” political practice.In Taiwan, local financial deficit fundamentally lies at failed financial institutions that suffer from a “financial triangle” involving elected officials, local councilors, and interest groups.In addition, paper will explore impotence of audit agency that fails to play an effective monitoring role in financial institution. As a matter of fact, financial deficit in Taiwan generally occurring in local-level governments reveals that financial system is mismanaged or even totally collapsed under a collusive coalition between local politicians.Deficit problem shows that some local governments have no money to pay their staff.This paper based on principal-agent theory explores a unique local deficit problem in Taiwan through examining interplays among fiscal regulatory system, the budgeting process, and financial politics.Particularly, the paper focuses on agency problem taking place in the interaction among executive, bureaucracy, local councils, and interest groups which deeply involves in local politics and determines severe local financial deficit. Finally, paper will elucidate how financial institutions fail to withstand rational and professional position in the fiscal regulatory institution.
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