Introduction to
Economics
Lesson 7 / 07
FEDERALISM
Federalism is a
concept more usually considered in the context of Political Philosophy
or Political Science. However,
as with most if not all, human activity, it has a significant connection
with Economics. It is
pertinent, given the fact that Australia is one of approximately 25
nations around the world with a federal system of government, with the
number seemingly likely to grow in the near future.
Also, by the reference, by a number of Australian politicians in
recent times, to the concept of a new Federalism.
What is
Federalism?
Federalism is a
political system in which sovereignty [or the ultimate power] is divided
between a central governing authority and the governing authorities of
its 2 or more constituent parts, in English generally referred to as
states.
Federalism is inextricably intertwined with Constitutionalism,
which is the concept that power within a political entity is limited by
an ultimate or overriding set of laws, which must be obeyed by the
governing authority or authorities.
Whilst Constitutionalism is not a necessary part of a non-
federalist [or unitary] system of government, it follows that in
Federalism, such ultimate or overriding set of laws is necessarily
contained within the covenant that binds the constituent states together
and defines their relationship with each other and with the central
governing body. Thus the
source of the word Federalism is said to be ‘foedus’, the Latin for
covenant.
A Federalist nation
is referred to as a Federation or Union.
It can arise in 1 of 2 ways; a partial but not total breaking
apart of a previous unitary entity, or a coming together of previously
separate states or political entities.
Belgium is an example of the former, Australia of the latter.
Aspects of
Federalism
Federalism is often
depicted as one of the checks and balances forming part of
Constitutionalism. As such
it has traditionally been seen as a major constraint on the power of
government generally vis a vi the citizenry.
This arises from the fact that power divided is power diminished.
A government
wishing to impinge upon its citizens may not have the power to do so, or
be able to do so only in cooperation with one or more of the governments
with whom power is shared. Such
cooperation takes time and compromise.
Those who believe in the ultimate power of government as a source
of good see this as a problem. Conversely
those who believe that the least government is the best government
regard it as a virtue.
Apart from its
role, within the ambit of Constitutionalism, of constraining the power
of government generally, and hence acting to preserve and enhance the
freedom of the citizenry, federalism can be a major factor in the
economic development of a nation, typically by effecting, free trade
within its territory.
The Council of
Australian Federation was created in 2006 by the Premiers and Chief
Ministers of all the States and Territories as a means of coordinating
and improving the scope and quality of their activities.
A report was prepared for it by Law professors Anne Twomey and
Glenn Withers on Australian federalism.
Perhaps unsurprisingly, given the body for which they had
reported, the report was very positive in its support for federalism as
a system of government.
Some of the
benefits of federalism, as listed by the report’s authors include the
following;
·
Competition—The element
of competition inherent in federalism tends to result in an overall
superior performance of federal compared to unitary nations. The states compete with each other to achieve superior
practice and results. Since
citizens in a federation are prima facie free to move their person or
economic activity from one state to another [voting with their feet] the
states are driven to achieve the best result or else risk losing their
population and wealth to a better performing state.
·
Efficiency---Studies
suggest that federations are more efficient and have proportionately
fewer public servants and lower public spending than unitary states.
Such finding tends to contradict the views of the typical critic
of federalism such as Professor George Williams, who regards present day
Australian federalism as a bloated and inefficient system.
Of the 8 major advanced industrial nations forming the
G8—Germany, France, Italy, UK, Canada, Russia, Japan and the USA---
commanding 65% of the world’s economic activity, 4 are federations.
·
Customisation---Basic
differences, particularly in a large country such as Australia,
including climate, geography, demography, culture, industries and
resources makes for better government being provided, in most respects,
by governments attuned and connected to such differences, rather than to
the ‘one size fits all’ approach of a centralized government.
·
Innovation---With a number
of governments rather than just one, federalism provides greater
opportunity for new and potentially superior ideas to be introduced and
tested
·
Freedom of Choice--- In
those regards that are important to them, people are enabled to pick and
choose the government that best suits or provides for them, and if
necessary to relocate.
The authors point
out that in the last 50 years federations economically have outperformed
unitary nations. Greater
decentralization leads to better performance.
They purport to put a figure on this and to suggest that each
Australian in 2006 was on average $4507 better off as a consequence of
federalism.
Federalism in
Australia
Federalism in
Australia has not fared well, particularly since 1920 when the High
Court decided the famous Engineers’ Case.
This did away with the implied constitutional concepts of
immunity of state instrumentalities and reserved state powers.
In many respects
Australia today is a formal rather than an actual federation, with the
states retaining little actual authority.
This has come about largely by the practice by the federal or
central government of what has been described as ‘opportunistic
federalism’; the selective and gradual appropriation of what had
previously been state areas of authority, and the consistent willingness
of the High Court to endorse such action
Critics of the High
Court’s consistent support for centralization have suggested that it
has come about as a consequence of two considerations, neither of which
today is as significant as it once was; first Australian nationalism and
the belief that to achieve this fully federalism should be seen as only
a transitional system of government leading to a fully centralized
nation. Secondly, since the late 1930s, the influence of Keynesian
economic theory, which was seen as requiring an all-powerful central
government effectively to implement.
Perhaps the single
most debilitating factor for Australian federalism, brought about by the
above considerations, is the current fiscal imbalance between the
revenue raising capacity of the states and that of the federal
government. The revenue
raising capacity of the states has largely been stripped away to the
extent that, amongst federations, Australia has the greatest such fiscal
imbalance.
The Future
In recent times
federalism worldwide has been taken up or supported as a superior system
of government. Of the 2
emerging major powers of India and China, India is a federation and
China is inclining that way. Countries
with problems of regional autonomy such as Spain and Iraq are potential
candidates therefor as is the European Union.
In Australia
politicians of the major parties have expressed interest in reforming
federalism, particularly in the direction towards a more cooperative
rather than competitive federalism.
By this they mean a more appropriate and clear-cut division of
power between the federal and state governments.
It may be however that they are missing the point.
In carving up power between them, the capacity of such division
to protect the citizenry from arbitrary government power will be
diminished or lost. In
economic considerations, moreover, it is the element of competition, not
cooperation, which is responsible for the main benefits of federalism.
David Sharp
8 May 2007