Federalism – The Best Solution for Developing Societies.

Evolution of Federalism

The history and evolution of federalism is rich and complex.  From the ancient Greek city-states coming together to stop the Persian invention, to the modern European Union, federations come in many shapes, sizes and purposes.  Federalism provides a system of political organization that allows for action by a shared government for certain common purposes, while tolerating autonomous action by regional units of government for purposes that relate to maintaining regional distinctiveness and administration.

Federalism as it has been implemented in Australia (1901), Canada (1867), Switzerland (1848), and primarily the United States (1789), is identified as classical federalism, primarily due to the longevity of these constitutions.  Overall, there are five major characteristics of classical federalism:

1) Sovereign power is split between a national government and a local political unit – the State – each to constitute an autonomous government;

2) Within the ambit of its authority, the national government is supreme over state governments;

3) The national government, through any of its constituent branches, but especially through its courts, is solely competent to decide the scope of the powers ceded to the national government;

4) The ceding of power to the national government creates a direct relationship between the national government and the people of the several states with which the states cannot interfere;

5) States cannot secede from the union; only dissolution as an act of the people of the entire federation is permitted.  This is because power is assumed to reside in the people of the various states united through the general government.

Prior to 1945, the general attitude towards federalism was one of benign contempt.  During the 19th century, most countries that emerged from colonialism in the Americans adopted a federal system of government, which unfortunately did not survive the pressures of geopolitical developments and the demands of independence.  Furthermore, it was argued that federalism was based on an outmoded economic philosophy, and it was a handicap in an era when positive government action was required.  According to these critics, centralized unitary government was much more appropriate to address the conditions of the twentieth century.

After 1945, the popularity of the federal idea proliferated, due to the break-up of the colonial empires around the world.  The African and Middle Eastern post-colonial governments were often the product of historical accidents of the ‘scramble for empire,’ or of administrative convenience.  Consequently, the post-colonial political boundaries rarely coincided with the distribution of the racial, linguistic, ethnic, and religious communities or with the locus of economic, geographic, and historic interests.  However, the application of federalism by developing nations around the world has been more cosmetic, than legitimate.  It wasn’t until South Africa adopted its current (federal) constitution in 1996 that we saw true federalism in a developing nation.

In many developing countries, leaders of independence movements and colonial administrators were confronted with the reality of having to reconcile the forces of integration and separation.  On the one hand, there was a need for relatively centralized economic and political government units to facilitate rapid economic development and national control.  On the other hand, there was a desire for independence and self-determination of people within a nation that represented ethnic, religious, racial, and linguistic divergent communities.

However, the application of federalism in developing nations has not yielded the results promised by classical federalism.  Many argue that federalism helps prevent conflicts in societies that are polarized geographically, while providing for the protection of minorities in divided societies.  According to this theory, decentralization of power under federalism helps to prevent different ethnic or religious groups from fighting over the policies implemented.  Unfortunately, in most post-colonial nations in Africa and the Middle East, irrespective of the form of government adopted (parliamentary or federal), more often than not, the dominant ethnic group consolidated power on a centralized government that ruled with little regard for the rights and privileges of minorities, or the economic benefits of limited government.

Federalism and Development

Overall, federalism can have both political and economic benefits, if applied consistently with the principles outlined below.  As a system of governance, federalism can be instrumental in promoting sustainable economic development.  It dispenses political power from the center level to the lower levels in a beneficial way to a society, because it brings the government closer to the people, enhances participation, fosters a more egalitarian society, promotes more effective community involvement, and increases solidarity by empowering ordinary people to make decisions for their communities.

When power and authority are within the prerogatives of local government, the people become motivated to share governing concerns and responsibilities.  Due to an enhanced sense of community and cooperation to offer services that higher levels of government do not currently provide – because they won’t or they can’t – relationships between citizens and government representatives proliferate.  Furthermore, critics have argued that ‘democracy’ and ‘decentralization’ are mutually exclusive terms.  The more a state becomes centralized, the more controlling and even authoritarian it becomes since power aggregates into the hands of a few.

Nowhere is this more obvious than in Africa and the Middle East.  There, not only centralization in the name of efficiency or expediency has become an excuse for abuse, but also there is a proliferation of favoritism of certain ethnic/religious groups over others.  In African and Arab countries, people in power within the central government are known to grant special rights or privileges to those individuals’ local communities.  One of the main reasons why more developing countries should opt for a federalist system is to prevent or curb this type of abuse.

However, most developing nations fall in the trap of believing that the accumulation of power at the center is required to stabilize the system, provide greater security in their territory, integrate markets for more rapid growth, or to merge the political system to become more unified.  Although undoubtedly there is need for a hierarchy and a bureaucracy to provide order to a society and fortify national interests, the difficulty for most developing nations has been that of balancing ‘order and efficiency’ with enhanced participation and autonomy in lower levels of government.

When describing decentralization, the key elements of a federal system, one must distinguish between the three types of decentralization.  First, political decentralization refers to granting political power to lower levels of government.  The more political power that resides in lower levels of government, the more those people are empowered and the society will take more responsibility for the affairs of their communities.  Second, administrative decentralization refers to the transfer of management, planning and administration to lower levels of government intended to relieve inefficiencies generally endemic in a central government bureaucracy.  After all, certain governing functions are best handled by the central government, while others should be managed by lower levels of government.  Third, market decentralization refers to the process of privatization, under which the government (central or local) is removed from the market and government agencies are prevented from managing or controlling sectors of the economy.  Regulating the market to guarantee the best deal for consumers and citizens, yes – but not managing entire sectors of the economy.

Market Preserving Federalism

However, in the context of developing countries, decentralization in and of itself is not enough unless it yields some economic benefits.  This is where ‘market preserving federalism’ (MPF) comes into play.  There are three classic arguments about the economic benefits of federalism.

First, Friedrich Hayek argues that the central government can never have enough information to formulate policies to specific circumstances.  Except for truly national public goods like defense and foreign policy, lower governments will make better decisions about policies with a local impact, because they have better information about local needs.  Second, under Charles Tiebout’s theories, there are two related benefits to federalism; first, induced competition among jurisdictions forces political officials to be sensitive to the economic and political consequences of their actions, and second, competition among jurisdictions leads to an optimal mix of policies when citizen preferences differ.

Third, according to professors Parikh and Weingast, under ‘fiscal federalism’ there is an ideal assignment of policies and taxes across levels of government.  Ultimately, the prospect of political interference with markets deters investment and other economic activity.  Therefore, to promote markets and economic growth, political institutions should commit the state to preserve markets.  Thus, the state must be powerful, but limited.

According to Barry Weingast and his collaborators, only ‘market-preserving federalism’ allows politicians to credibly commit to preserving the market.  According to them, decentralized control over the economy by sub-national governments within the common market prevent the central government from interfering with markets.  Furthermore, intergovernmental competition over mobile sources of revenue constrains individual sub-national governments, because government officials face incentives to abide by the limits imposed on them.  Decentralization under MPF allows for diversity of policy choices and experimentation by local governments, thus creating a feedback to the central government and other local governments.

According to Weingast, the five axioms of market-preserving federalism are the following: 1) There is a hierarchy of governments and division of authority exists; 2) Sub- governments have primary political authority over the regulatory and police powers concerning the economy; 3) The national government has authority to police the lower government (in particular to assure the common market); 4) Governments face a hard budget constraint; 5) There is some form of an institution that provides a credible commitment to the entire structure (federalism must allow for self-enforcing government).

The central feature of market-preserving federalism is that it imposes limits on the exercise of authority by all levels of government.  Contrary to a system with a centralized unitary government, market-preserving federalism limits the central government directly by placing particular areas of public policy beyond that government’s reach.  Furthermore, the lower governments are also limited, not only by the central governments supervision of the common market, but also by the competition they face from each other.

Furthermore, no government has a monopoly of regulatory authority over the entire economy.  Competition among jurisdictions extends to factors of production, like capital and labor.  Hard budgets constraint implies that local governments can go bankrupt, which is a powerful incentive for proper fiscal management.  Finally, market-preserving federalism provides a secure political foundation for markets.  Therefore, MPF holds considerable promises for developing countries, because the type of limits enforced by this kind of federalism will prevent the often harmful and crippling intervention by the government in the economy.

Coming up next…

A closer look at the U.S. federal government structure and how it achieves both horizontal and vertical separation of powers… the key to the success of the American MPF!

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About Nasos Mihalakas

I am an Assistant Professor of International Business and Government policy, and a former U.S. Government policy analyst. I have over nine years of experience with the U.S. government as a trade policy analyst, and U.S.-China trade relations. I have worked for both a Congressional Commission advising Congress on the impact of trade with China and for the U.S. Department of Commerce investigating unfair trade practices. However, my education has been on constitutional and comparative law, with an LLM from University College London, and a JD from the University of Pittsburgh. Currently I am writing a book on the evolution of Federalism in the U.S., and the application of Federalism as a form of governance around the world. You can contact me at: nasos.mihalakas@gmail.com
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One Response to Federalism – The Best Solution for Developing Societies.

  1. antefaith says:

    I get so many important points from this essay thank you.

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