The devil is in the details
implicit bailout guarantees, and captive state- owned banks shield them from the costs of their borrowing.
The main policy challenge for federalism in a global economy is to channel the competition into pressures for reform rather than races to the bottom.
Globalization creates new unevenly distributed windfalls that turn the spotlight on the country’s redistributive abilities.
no match for market allocation of resources. The policy implication we can extract is that countries should focus less on explicit redistribution and more on creating conditions for all citizens to have equal access to market opportunities.
Most experts of federalism express doubt on countries’ ability to use transfer to affect the inequalities across states or offset changes - discipline. For example, Chinese provinces’ preferential tax treatments for investors be the early 1990s, leading the central government to restrict these tax powers and close many of the hundreds of “special economic zones” that provinces had created.
There is clearly the need of rules- based approaches involving central government oversight of borrowing and a credible threat to punish state governments if they fail to maintain fiscal discipline as well as constant vigilance and policy adjustment to close loopholes.
Argentina provides a more typical example where rules limiting borrowing by states are ineffective. The rules are incomplete: Despite the restrictions the currency board placed on central bank creation of money, provinces circumvented this restriction on the currency supply by issuing their own bonds, effectively substituting for currency.
The Indian government’s formal authority to control state borrowing has also not pre
Federalism and economic reform
Reforms in federal policy are impeded when states interested in the distributional consequences of trade liberalization, privatization, tax reform, and so on, behave like organized lobby or interest groups in national- level politics. Autonomous governments also frequently control policies that can either enhance or frustrate the intended effects of national- level reform
interests tend to play out as negotiations between executive branches (or ruling coalition) and legislatures in both federal and unitary democracies, but federalism appears to increase the intensity of these struggles by strengthening federal politicians hoping to join regional politics in the future, scramble to represent the interests of autonomous regions.
damaging in Argentina. State governments and elections in Argentina create a need for local party bosses, who in turn control nomination for national legislators. As a as an overhaul of the national social security - inces were guaranteed concessions.
The central government’s ability to control state spending depends on its ability to enforce restrictions on grants or alter their approval (especially by supermajorities in the legislature) is needed.
In sum, while devolution and decentralization as contemplated by the move to federalism has decidedly many advantages, studies have shown that in representative liberal democratic systems, particularly in parliamentary governments which is the centerpiece of federal states, this can be easier said than done. This is because parliamentary systems are run by political parties which are rooted in local governments, bottom of the political pyramid.
A case in point is the US where the states are divided into “Red” and “Blue’ states sig the party bosses have a big say in vetting local candidates who in turn become subservient to Washington DC party leaders who are mostly members of the Federal legislature funds to the States through such gimmicks as log-rolling or pork barrel and locating such big ticket items as developing military bases and defense spending. Depending on which to the periphery will be dictated by the loyalty, central government.
There may be cases however when states are so powerful politically and/or economically within the union, as in the case of Bavaria in Germany or California in the US, that state legislatures can check and balance central government.
In sum, as we move into the path of federalism, the points raised above are worthy of consideration.