Amaresh Bagchi: Globalisation and federalism

Can federalism survive in a globalising world.

The last two decades have witnessed a resurgence of decentralisation and federalism never seen before. Whereas before the Second World War there were only four examples of federally governed nations""the US, Canada, Australia, and Switzerland (Soviet Russia was federation only in name), there are quite a few now.

Countries which were traditional enemies for centuries are coming together to form a formidable federation""the European Union. After spells of authoritarian regimes, Argentina, Brazil, and Mexico have veered towards more democratic federal systems of government.

In the established large federations like the US, there have been moves to shift power away from federal government, reversing the centralisation that had taken place since the Great Depression.

After three decades of strongly centralised federalism, India too is striving to be more federal. There is, it would appear, a "federalist ferment" across the world, as John Kincaid, the noted political scientist, describes it.

The ferment notwithstanding, federalism is facing challenges from several directions. One, the intellectual case for federalism and its concomitant, decentralisation, has come under some critical reappraisal.

Decentralisation, it is said, has its risks and entails costs of information, coordination, and political participation.

Two, the ordering of fiscal affairs in spatially demarcated jurisdictional settings, to borrow Musgrave's terminology, involves issues (assignment of powers and functions to different levels, formulating rules of inter-governmental fiscal relations, etc.) for which there are no readymade answers.

What is more, the very forces that brought about the fall of oppressive "statism" in Eastern Europe and elsewhere and provided the impetus for decentralisation, viz. globalisation, are now posing a threat to the sovereignty of nation-states, their life-blood, and along with them of their constituent units with implications that are yet to unfold.

In a thought-provoking paper presented at a seminar organised by NIPFP in 2003, Albert Breton, the renowned votary of federalism, analysed how globalisation was working to weaken and reduce the public sector and limiting the freedom of action on the part of governments at all levels.

Economic globalisation, he argues, has required elimination of restrictions on the free movement of capital in the first place, and along with it harmonisation and standardisation of the rules that govern trade, investment, employment, property rights and environmental policies.

This has meant that the rules prevalent in the dominant economies of the world, are tending to prevail everywhere, requiring the elimination of impediments to private ownership of physical assets.

The driving factor in these developments, Breton contends, is the mobility of corporate capital facilitated by modern technology and this is having a profound impact on the functioning of governments and the public sector in all countries.

Large business corporates in their quest for maximum return on their capital prefer to operate in economies that provide the best environment for their operation such as decisiveness in implementing contracts, flexible labour laws, lower job security of workers and congenial tax regime.

Governments are played against one another in this quest. One thus finds a downward drift in corporate tax rates across the world. How these tendencies are changing the behaviour of governments remains to be modelled.

However, one visible outcome has been that governments are obliged to provide goods and services to corporate capital at tax prices that do not meet the cost of their production and delivery.

The citizenry at large are left to be content with fewer (and lower-quality) governmentally provided goods and services than before. Not surprisingly, globalisation is accompanied by the transfer of the task of supplying goods and services which hitherto were the responsibility of the public sector to the private sector.

Breton's portrayal of the phenomenon of shrinking governments as an outcome of globalisation may seem overly simplistic. After all, the disenchantment with large governments has much to do with the pervasive inefficiencies of the public sector and the opportunities of self-aggrandisement it provides to politicians and bureaucrats.

Also, globalisation enhances welfare, as Jagdish Bhagwati points out so elegantly in its defence. However, the fact remains that the propagation of decentralisation and privatisation as the way to make governments more efficient has received a big push from globalisation. Thus, devolution of powers to junior governments may not mean as a large a role for them as might be supposed. A similar apprehension was expressed by Musgrave," ... devolution not only aims at revising the weights carried by higher level governments but also carries an expectation that lower level government means less government".

The ability of governments to design their public sector in accordance with the wishes of their people is being constrained also by the imperatives of harmonisation in many matters particularly taxation.

The current proposal to have a uniform rate of VAT in all states in India provides a case in point (though, in fairness, harmonisation does not enjoin uniformity).

Another constraint has been the imperatives of fiscal discipline considered essential at all levels of government for macroeconomic stability and stressed by the IMF and World Bank""the Washington Consensus ""along with privatisation and liberalisation as a key element of the economic framework that attracts investment.

Assistance extended by multilateral agencies to help countries in financial crisis is invariably accompanied by insistence on fiscal reforms anchored on downsizing government through retrenchment and privatisation along with tax reforms.

Since subnational debt and deficits have been a contributory factor in macro imbalance in the developing countries, attention has turned increasingly to reforms at the state level with prescriptions that reduce the policy space of junior governments.

According to some observers, there has been a net accretion to states' autonomy in several federal countries because of globalisation, as their subnational governments can now approach international aid agencies directly and negotiate for loans and grants""a window for accessing funds that was not open to them earlier.

Attention is drawn to the attempts by states in Brazil to obtain assistance from the IMF and World Bank. The states in India too found it possible to negotiate with international agencies, a benefit they did not enjoy before signifying the emergence of what Kincaid calls "constituent diplomacy" , a mark of "co-sovereignty".

In a well-documented article published recently in the Publius, the Journal of Federalism, Rob Jenkins of the London University strongly contests these claims.

Citing instances from India, he points out that the lending instruments of aid agencies like the World Bank specifies the government of India as the borrower and not just the guarantor of the loan, thereby giving the central government a leverage.

In the end, the Centre sees that its will prevails even when it does not have to fund a reform programme from its own resources. Often "these are very intrusive reforms representing a charge on their sovereignty irrespective of whether the reforms are a good idea in theory or effective in practice", says Jenkins.

In dealing with the WTO, Jenkins points out, the states are not taken into confidence even when there is room for accommodating their interests.

Apart from the compulsions of harmonisation and macro stability, providing "global public goods" like fighting terrorism or AIDS, environmental protection and facing natural disasters like the recent Tsunami call for global initiative and organisation.

Coordination in many matters entails surrendering part of the sovereignty of nations and their constituent states. Can federalism with its commitment to diversity survive all this? One wonders.

In the end, Musgrave warns, "Globalization, decentralization and diversity may prove to be uneasy partners". Indeed, to quote Kincaid again, "The accommodation of human diversity remains the leading challenge for federalism. It is also the leading challenge for the world".

(The author is Emeritus Professor, National Institute of Public Finance and Policy)