Going federal: Getting it right

The members of the Liberty Discussion group sat down at Gaia Restaurant and Coffee Shop on June 30, 2017 to discuss on article titled ‘Federalism as a commitment to Preserve Market Incentives’ by Stanford Professors Yingyi Qian and Barry R. Weingast.  In the article the authors talk about the features that federalism should have so that it would preserve markets. The article goes on with talking about  the model prescribed by economists like Charles Tiebout and F.A. Hayek. The model suggested by Hayek and Tiebout focuses on providing autonomy to the provincial government in terms of policy making, making provision of public goods and services and taxation, without any intervention from the state government. This would create competition between the states and ensure efficient allocation of public spending.

In addition to this, the authors of the article have added ‘Hard-budget constraint’ as a feature of federalism such that it would preserve markets. If the state governments receive limited funding from the federal government, they would be prudent in making financial decision and also, they will not be in a position to bail out the failing firms on their respective provinces. This would make both the provincial government and market efficient.

The discussants stated by discussing on ‘competition between the states’. The central question was, does federalism creates competition between the states? And if does, is the competition beneficial? Some of the participants opined that federalism does induce competition between sub-national governments, which would produce better outcomes in terms of growth and development of the country. They viewed that provincial governments will compete with each other for more businesses and people by making the policies that would be favourable to them. This would increase the business activities, create more employment and increase growth. However, some counter argued that the competition might not be beneficial for all the places. Place like Karnali might not be benefitted by federalism.

With the issue regarding, the roles and rights of the different tiers of government, all the participants agreed that the roles must be clearly defined. They claimed that the constitution has not clearly divided the roles among the 3 tiers of government, which might create confusion while exercising powers.

The participants were divided pertaining the issue of hard vs soft budget constraint. Some viewed that federalism must be characterized by hard-budget constraint as it would limit the power of the state government to spend haphazardly. However, others were in support of soft-budget constraint.