The Two Logics of Perverse Fiscal Federalism in the Developing World
37 Pages Posted: 21 Aug 2014
Date Written: 2014
Federalism can be a conflict-prevention mechanism, but some political scientists and economists have also endorsed certain features of the system as being likely to establish proper market incentives for economic growth. Most developing countries have ignored economists' recommendations for proper design of federal and decentralized institutions, particularly with respect to hardening of the budget constraint and the enforcement of an open, common market. The first logic of perverse fiscal federalism is secession deterrence: for many governments, preventing ethnic conflict seems to require fiscally deleterious institutions. In ethnoregionally diverse federations such as India, South Africa, and Indonesia, the common market is often not enforced, and tax decentralization falls far short of the recommendations of orthodox economists and international lending institutions. The second logic of perverse fiscal federalism is found in developing federations without ethnonational minorities: in many of these states, personalist electoral institutions preserve excessive expenditure decentralization with a soft budget constraint. Examples in this category have included Brazil and Argentina. While ethnic diversity has helped to preserve or to create relatively robust forms of fiscal federalism in Western democracies such as Switzerland, Canada, and Spain, it has had the contrary effect in developing countries. The political logics of federalism in the developing world will likely continue to stymie efforts to reform federal institutions along orthodox lines.
Keywords: federalism, ethnic conflict, secession, political economy
JEL Classification: H10, H70, P16, R50
Suggested Citation: Suggested Citation