An important characteristic of many countries is that they exhibit, to greater or lesser degrees, some “asymmetry” in the way in which different regions are treated by their intergovernmental fiscal systems. This paper explores some of the varied extents and manners in which such asymmetrical treatment may help or hinder the maintenance of an effective nation-state, where “effectiveness” encompasses both how effectively, efficiently, and (perhaps) equitably public services are provided throughout the national territory and also the effects asymmetry may have on the very existence of “fragmented” nation-states.
Key words: federalism, decentralization, asymmetry, subsidiarity JEL codes: H70, D74
Fiscal Federalism and National Unity Richard M. Bird and Robert D. Ebel
Belgium, Bosnia-Herzegovina, Canada, People’s Republic of China, Germany, India, Indonesia, Iraq, Philippines, Russia, Spain, Sudan, Switzerland—what can this diverse set of countries possibly have in common? One important answer is that each contains within its boundaries a significant territorially based group of people who are, or who consider themselves to be, distinct and different in ethnicity, in language, in religion, or just in history (ancient or recent) from the majority of the population. Indeed, contrary to the common view—one might say mythology—that the most “natural” nation-state is a unified and homogeneous entity, such “fragmented” countries (Bird and Stauffer, 2001)1 are found throughout the world. Homogeneous nations are more the exception than the rule. Indeed, heterogeneity, whether ethnic or economic, is a more common feature of most countries than homogeneity. 2 A second important characteristic of many countries is that they exhibit, to greater or lesser degrees, some “asymmetry” in the way in which different regions are treated by their intergovernmental fiscal systems. While such asymmetry is often most obvious in formally federal countries, it comes up, sometimes in surprising ways, in almost every instance. This paper explores the varied extents and manners in which asymmetrical treatment helps (or hinders) the maintenance of an effective nation-state. “Effectiveness” in this context may be understood in two ways. The first relates to the normal focus of economic analysis of public sector activities: How effectively, efficiently, and (perhaps) equitably are public services provided throughout the national territory? The second meaning, however, lies well outside the normal field of expertise of economists: What are the connections between how a country’s public finances are structured and how a nation-state that is fragmented holds together in the first place? This question has risen to the forefront of public policy analysis in an especially important way when it comes to creating “new” countries out of regions torn by civil conflicts, such as those in Bosnia-Herzegovina and Sudan. But it is also much on the minds of those concerned with public policy in such long-established countries as Belgium, Canada, and Spain. In many fragmented countries, it is not surprising that the majority group dominates politically. Sometimes, a particular minority exerts more influence, perhaps because of its wealth and power, perhaps owing to historical factors. Occasionally, as may be argued to University of Toronto and Urban Institute, respectively. In Ahmad, Ehtisham and Giorgio Brosio, eds. Handbook on Federalism,(Washington, DC, USA: International Monetary Fund, forthcoming) 1 Bird and Stauffer (2001) contains the proceedings of a conference held in February 2000 in Murten, Switzerland on this topic, organized by the World Bank Institute in collaboration with the Institute du Federalisme of the University of Fribourg. . 2 Alesina et al. (2002) develop a parallel concept of “fractionalization”. Fractionalization is an index that measures a country’s...