Federalism and Regional Equity: Building Partnerships or Transfer Dependencies

Macrofederalism and Local Finances, Forthcoming

21 Pages Posted: 19 Apr 2006

Abstract

Constituent units of a nation state encompassing a large geographic area usually differ considerably in population size, resource base, economic and demographic composition of population and topography. These differences contribute to divergent levels and growth rates of incomes across sub-national units. Most nations, federal and unitary alike undertake policies to reduce regional disparities to ensure political and economic stability for the political union. In unitary countries, national government is relatively unconstrained to pursue policies to induce convergence in regional incomes. In federal countries, on the other hand, constituent units can undertake actions to mitigate the effects of federal policies. However, the task of reducing regional disparities is a daunting one and there is no assurance of success even in the long run. Despite active policies, these disparities persist in the long run both in federal and unitary countries alike. In the extreme case of China, Shanghai province has a per capita GDP that is 17 times that of Guizhou province. This paper shows the fact that the very policies adopted to overcome these disparities under some conditions ensure the long run deprivation of the disadvantaged regions.

Globalization introduces further complexities in meeting this challenge. Under globalization, skill mix and knowledge capital rather than the resource base of country determines its international competitiveness. Thus regions with less education and training and with a higher relative concentration of unskilled workers loose at the expense of regions with skilled workers. Thus globalization compounds the problems of regional convergence within nations. This paper discusses the responses to this challenge in federal systems. In section 2, the paper outlines types of actions that may be helpful to the process. Section 3 discusses the downside risks of certain policies intended to deal with this issue. Finally, policy implications of earlier discussions are drawn.

Keywords: intergovernmental fiscal relations, governance, fiscal federalism

JEL Classification: E62, H61

Suggested Citation

Shah, Anwar, Federalism and Regional Equity: Building Partnerships or Transfer Dependencies. Available at SSRN: https://ssrn.com/abstract=896154

Anwar Shah (Contact Author)

World Bank ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

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