Fiscal federalism now

Fiscal Federalism

The experience with decentralization all over the globe is a mixed bag. While we can produce successful federal states like Switzerland and the US, it is good to note that there were already states before there was a federal government. This is to say that the states created their federal government and not the other way around as we are trying to do in this country. On the other hand we have examples of failed and balkanized former federal jurisdictions like Russia and Yugoslavia.

Federalism has its supporters as it has critics. Those apprehensive about decentralized states fear the complex and cumbersome governance in lieu of the involvement of several overlapping jurisdictions. Proponents however counter argue that it allows minorities greater participation in governance. It is recommended when regional and ethnic divisions become too complicated for central governments to handle efficiently as in the case of Mindanao. It really all depends on the precise balance of power between the local and central authorities.

The success of decentralization over centralization depends on the efficiency of the local governance and its ability to distribute power among the constituents. Jurisdictions controllers by warlords and dynasties will find it difficult to adjust to the new arrangement. Unless local jurisdictions keep their house in order and prove administrative capabilities and political accountability these states are doomed to produce weak states.

For the central government important challenges exist. Firstly, the self interest of local jurisdictions on many fronts e.g the attraction of investments and manpower which can exacerbate the already maldistributed factors of production in the archipelago. For example rich states through excessive protectionism and incentives, in the interest of its narrower development agenda, might draw precisely the factors of production in less rich jurisdictions going counter to the desire of central government to promote a more balanced development. Secondly, local governments may foil central government’s attempts to pass legislation that will promote the common good. A case in point s the possible conflict between the macro-economic policies of the government and the micro-economic agenda of the states. For example the attempt of the central government to restrain borrowing by states through monetary or fiscal policy in aid of economic stability might not be heeded by a freespending local jurisdiction as experienced in some economies in the globe in the past who even defy the international funding institutions by overborrowing from regional banks under their control.

In the case of fiscal policy if central government are more objective about the disbursement of funds given their broad national constitution. Recorded cases point to states becoming more populist since they are closer to the voters. Moreover ruling parties tend to favor captive areas in the grant of development funds. This does not necessarily lead to the optimum distribution of state funds.

Now that the concept of federalism is getting traction reinforced by the need to assuage the secessionist mood of our brother Muslims and the desire of local governments to remove the heavy yoke of imperial Manila, let me throw in my 2 cents worth. Federalism is not a novel concept. In fact the constitution provided for decentralization and devolution without explicitly promoting federalism. Had we crafted a better local government code that promoted fiscal decentralization, political devolution would have followed automatically. What is the point in devolving line agencies like agriculture when the central government impounds the share of local government in internal revenue? Did it believe that local government can only live on real estate and business taxes? For goodness sakes give them a share of the VAT and the take from excise taxes like customs collection etc. In brief whatever happens to the proposed political federalism, fiscal decentralization is a must!

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