Competition is good for states, too!

– This article was originally published by Ankshita Chaudhary in the Himalayan Times on the February 03, 2019.

Competition is indispensable in a well-functioning market economy. Economists, since the days of Adam Smith, have understood that the invisible hand operates through mutual interdependence and works only if the producers of goods and services vie with one another. It is through this competition that prices are kept low and firms are incentivized to improve and innovate. Correspondingly, competition between states is perhaps the most important element for improving both the quality and cost-effectiveness of government services. It can be argued that a country is said to be administered efficiently when its subnational governments are engaged in a healthy competition with one another.

Competitive federalism is one such approach whereby which the states compete with each other in a joint pursuit of national development. The freedom to compete allows each state to design, experiment, innovate and reform to fit its unique demographic challenges as well as to cater to its particular constituents’ wishes. In a one-size-fits-all system, the heterogeneity of different states and their local requirements is not taken into account and citizens are not allowed to ‘vote with their feet.’ Competitive federalism allows a country to make use of the most efficient system of operation, as each state takes actions and continually seeks to reform by putting an end to failing efforts whilst adopting successful approaches from other states. Not only does this iterative process lift all boats, as the states that fail to reform might risk losing citizens and businesses to more competitive states, but also provides a credible barometer that puts pressure on each state to improve its record.

The Constitution of Nepal has envisaged a cooperative and not a competitive federalism in terms of functional jurisdictions where all levels of the government are involved in discharging the same function with different roles and capacities. But even four years after established federalism, the country is challenged with how to operationalize the federal structure. While the constitutional mandates are clear, the constant bickering among the center and the subnational governments over devolved power has caused uncertainties and has led to unwanted disputes. The dispute is basically seen in three areas – formulation of laws, human resources and resource sharing.

This over-centralization of federalism in Nepal has stifled the creativity of the federating units. In particular, the central government has taken upon itself too many functions which it poorly and ineffectively delivers upon while stifling the creativity and capacity of the constituent states to handle these functions better. Since restructuring Nepal is in the process albeit discreetly at the moment, the government can draw lessons from its neighboring India who is also seeking for a balance between competition and cooperation.

India has had a long history of cooperative federalism. However, it welcomed competitiveness among states so as to pave the way towards more investment destinations within the country. In the pursuit to promote competitive federalism in India, the union government mandated that the states work with central government on a shared vision of national objectives. Nonetheless, the state governments will not look towards the central government for policy guidelines and fiscal resources. Likewise, the share of states in central tax revenue has been increased from 32% to 42%. The states are bestowed with greater financial strength and autonomy as they now have the freedom to plan their expenditure based on their own priorities. Moreover, the growing competition between states has led to reforms in legislation and implementation of plans and policies. This change has successfully reduced red tape and simplified compliance procedures thereby attracting substantial investments in the respective subnational governments.

Similarly, countries such as Australia and USA also provide good examples of competitive federalism. Australia’s competition between state and territory governments has driven improvements in the service delivery sector and has helped achieve the digital strategy’s goal of creating a ‘data-informed and agile public service’. Likewise, Delaware in the USA, has become an eminent destination for business incorporation. Many businesses including AT&T and Google have incorporated their business there because it has the most advanced and business-friendly corporate legislature. A few states including Nevada and Pennsylvania are replicating Delaware’s success. These states are refraining from over-taxing capital; hoping to attract business owners.

Cooperative and competitive federalism are not mutually exclusive and thus, have the same underlying principle — progress of the nation as a whole. For Nepal to prosper, neither competition nor cooperation alone can bring in the best results. It is competition with cooperation that will drive the real change. To ensure competitiveness, the federal government should cooperate with the states and provide necessary autonomy in their policy making as well as allocate them the required funds to spend based on their own priorities. The cooperation will form the ground base on which competition can begin that will ensure a cooperative and a competitive federal Nepal!