Making sense of the discourse on federalism

-This article was originally published by Suresh Sapkota in The Himalayan Times on July 17, 2016.

A discourse on Federal Nepal started in Nepal’s mainstream politics about a decade ago. After a 10 year transition phase post the culmination of the civil war, we are now the Federal Democratic Republic of Nepal. Now we will be applying federal principles for dividing powers between member units — the sub-national entities — and common institutions.

Federalism is about power-sharing

Unlike the unitary state, in a federal system, at least two tiers of government exist; these different tier governments further have powers to make laws that govern their respective jurisdictions. Especially, the power to formulate laws related to local development, revenue collections and making expenses are ensured to the sub-national entities by the constitution itself.

Citizens thus have political obligations to, or have their rights secured by, two authorities. This division of power between the sub-national entities (provinces, for example) and the federal government (the centre) may vary; typically, the centre has powers regarding defense and foreign policy (but sub-national entities may also have international roles).

Many arguments for federalism have traditionally been put in terms of promoting various forms of liberty; for example famous political scientist of Jerusalem and writer of the book ‘Exploring Federalism’ Daniel Elazar argues for federalism because federalism, in principle, gives sub-national entities freedom from the intervention of the federal government, empowers them by allowing them to be in charge of their own resources and enables them to deal with their (provincial) matters of concern (which further lends a self-balancing mechanism to federalism, in effect, effective utilisation of local resources), and gives enhanced opportunities to these sub-national entities and their people. When considering reasons of fered in the literature for federal political orders, many appear to be in favour of decentralisation.

Guiding principle for federalism

From an economic standpoint, federalism should decide on which functions and instruments are best centralised and which are best placed in the sphere of subnational tiers of government; in other words, who gets to decide on the income and expenditure methods/instruments of the sub-national governments.

In Nepal, federalism is still not an economic phenomenon. The concept of federalism finds its roots in the identity of Madheshis, ethnic and other marginalised people. Thus, Nepali federalism has inherent features of identity and culture, and shares less economic concern. Unclear and confused political agendas have also made federalism less of an economic concern. Federalism has been advertised as the only solution for all identity, culture and local development related problems; and the basic fiscal element has been ignored.

While we are emphasising on ethnicities, castes and cultures on the demarcation process, the economic aspects have been held hostage. For example, the current discourse on federalism has completely missed out on discussions like what kind of federalism would be most beneficial to Birgunj given it is the main entry/exit point for all cross-border trades. Will a federalism that has been designed to solve the ethnic tensions within the country do justice to Birgunj as an economic hub?

Understandably then, observations of the mindset of current political leaders, bureaucrats, and even the new constitution, reveals a lot of reluctance in terms of practicing fiscal federalism. As per the Constitution, major sources of revenue — custom duty, value added tax, corporate income tax, excise duty and personal income tax — which comprise around 80 per cent of total tax revenues are assigned to the federal government.

Service charges, punishment and fines, and tourism charges are to be collected concurrently by all three levels of governments. Under this model, around 90 per cent of total tax revenue will go to the federal government. Provinces, on the other hand, should coordinate with the local bodies to collect their part of revenues such as entertainment tax, advertisement tax and other nontax revenues. This means that provinces do not have the power to collect revenues by themselves which automatically limits their power of expenses.

One gets a sense that the provinces are not being viewed as anything different from the VDCs and municipalities under the previous model of governance where they got their budget from the Honorable Finance Minister. This issue is directly related to sustainability of federalism — at least with the proposed delivery of development from federalism.

Federalism should be self-enforcing

American political scientist William H. Riker emphasises, a central design problem of federalism is how to create institutions that at once grant the central gover nment enough authority to provide central goods and police the sub-units, but not so much that it usurps all public authority. The principle argues that to survive, federal structures must be self-enforcing. The centre and the provinces must have incentives to fulfill their obligations within the limits of federal bargains. Economic meaning of self-enforcement is the situation where provinces are free to collect income and make expenses by themselves, and are not dependent on the centre. Political and bureaucratic community, on the other hand, argues against giving powers to provinces so that we can have ‘the system that fits Nepal’ or ‘because of geo-political situation’ which are vague and illogical arguments themselves.

With one and a half years to go before the constitution is to be implemented, we have at least some time to change the direction of the discourse from an identitydriven federalism to economic pragmatism-driven federalism. Only then will it be able to capture the frustrations of Nepal’s citizens which have been growing in the absence of economic opportunities here in Nepal itself. At the end of the day, it is economic opportunities, jobs and incomes that will lead to growth, and give identity to the people, and not the other way round.