Federalism Creates Both Advantages and Disadvantages for Business.

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Question: Federalism creates both advantages and disadvantages for business. Discuss providing examples to illustrate your answer.

Since over 100 years, Australian federation has made outstanding changes for the interaction between inter-government relations and business community. It contributes to make Australia a truly national economy with significant mobility of capital, labour, goods and services (Wiltshire and Kenneth 2008, pp. 613). Nevertheless, it is argued that federalism creates both advantages and disadvantages for business. In this article, discussion of how federalism makes more advantages for business other than disadvantages is proposed, especially for the situation of Australian federation. The argument firstly presents the general advantages of federalism with discussing from flexibility and competition which assist and boost the development of business. Although federalism still confronts disadvantages for business like decentralisation and complexity of financial policies to globalisation, corrections and solutions are continuously promoted to prove federalism’s positive aspects for the business development.

In a federal system, according to Palencia (1974, pp. 16), “Federalism brings about political decentralisation through the distribution of responsibilities between central and local authorities.” It is also written (Eccleston et al 2009) that, multiple layers are composing in modern federation with relating to the size and activity scope. The multi-layers are formed by different governments at each level that defined with different roles and responsibilities. Therefore, by dividing power into different local governments, each level of governments has its own independent power and responsibility sphere. This distributing structure of federal system introduces several benefits for businesses.

Firstly, flexibility that accommodated different economic and cultural is endowed with the decentralisation of power which is under a federal constitution. “These characteristics correlate significantly with geography, and state laws in a federation can be adapted to local conditions in a way that is difficult to achieve through a national government. By these means overall satisfaction can be maximised and the winner-take-all problem inherent in raw democracy alleviated” (Walker 1999). Backwards to 1991, it was proposed that a better correspondence between provided package of goods and services can be obtained by federal government of decentralisation comparing to the unitary government (Hamlin 1991, pp. 193). Also, a report by Business Council of Australia (2006) proposed that the federal system is particularly applicable for the nations with mixed interests and cultures together with existing of regionalism. Meanwhile, argument of establishing regional government and supporting regional autonomy says that it will make a system more democratic because of its more close to people. In European Union and United States, decentralisation has been regarded at the centre stage of policy experiments in the last two decades. It is believed as a way to make government more responsive and efficient by fragmenting central authority and introducing more intergovernmental competitions and checks and balances (Bardhan 2002, 185). In a consequence, decentralisation of federalism takes a good advantage and flexibility to serve the variable requirements in one system.

Secondly, due to the decentralisation of governments, competition is involved that brings potential efficiency advantages of federalism which benefits businesses. It is argued by Hamlin (1991, pp. 194) that, with respect to tax-payers, voter-citizens, investors and many other resources, competition is generated among a multiplicity of governments and thus will improve their efficiency. Generally speaking, as population of tax-payers or consumers has their own mobility, if governments want to retain these people, they will have to compete with each...
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