The devil is in the details

ry have equivalents in every state in the form of the governorship, state legislature and courts of law.

The challenge is to find a perfect balance in the relations between the central government and the states. The equilibrium is usually determined by agree America. But in many cases, this can only come about after much debate and power- play. In the US, the Supreme Court has often the issues of taxing powers, race segregation, abortion etc.

In some federal entities, the central government is reluctant to cede too much power to the states as in Germany, where the federal government sometimes acts like a unitary state in such matters as land use, education, policing - responsibilities assigned to the autonomous states, because of party politics.

The dynamics of federalism, when one takes into consideration such topics as the division of responsibilities and powers across levels of government, the interaction with the economic and political contexts, particularly against the background of a growing integration of the international economy, indeed pose a lot of challenges as in the case of a diverse array of countries: Argentina, Australia, Canada, China, Brazil, India, Mexico, and Nigeria.

One of these is the division of expenditure and redistribution of responsibilities, as well as taxation power. In the above countries, this has led toward de facto (thought of control over expenditures. In many cases, when central and state government functions were interdependent, state autonomy was limited. Taxation tended to be fairly centralized with governments of regional states varying in the extent to which they exploited the tax bases assigned to them. In the allocation of tax revenues, whether all taxes were shared or - tween national and regional governments, the central government governments’ choice of taxes.

In the countries studied above, the goal of reallocation of funds and resources – the rationale of federalism - was grossly uneven because of political maneuverings despite policies of decentralization and devolution of power which should have left little room for discretion.

Political dynamics shaped federalism in the above countries. Nearly every country above moved toward a system in which the central government controlled most of the revenue base in return for various promises of grants to the autonomous regions.

Globalization affected the disparity of incomes across the autonomous regions. As an example, foreign direct investments and exporting industries tended to be regionally concentrated within India, China, Mexico, and Brazil. This reduced the government’s capacity to redistribute because global competitive pressures limited the extent of taxation possible.

Overall, the countries’ experiences point to the conclusion that government redistribution offset the inequalities emerging because some parts of the country are initially better placed to take advantage of opportunities opened up by globalization. Moreover, politics failed to address underly- ing infrastructure and governance differences that handicap some autonomous regions’ efforts to attract investment or build up exporting industries

Autonomous governments were found to be experts at circumventing most central governments imposed rules to restrict borrowing. Federalism’s need for negotiations between central and lower level governments were found to be as an impediment to fiscal reforms. This was characterized by a lot of political deal– making with the states trying to increase their share in national revenues by attempts to manipulate existing criteria and campaigning to alter the rules themselves.

Central government’s influence in federalist set-up

Centralized tax administration is a case allowing inefficient federal arrangements to become entrenched. Central government’s collection and guaranteed distribution removes state governments’ incentives to improve their tax administrations. It is arguable that the lack of incentives for raising local taxes or assisting the national government in tax compliance is an important factor in Argentina’s compliance at both provincial and national levels is low by international standards.

Globalization and federalism

The increased pool of resources allows local governments to build up nationally destabilizing debts where subsidized credit,