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Lost in the noise

Publication Date : 24-07-2012


It turns out that identity-based federalism was the single most decisive factor in the failure of Nepal's Constituent Assembly (CA) to bring out a constitution. Federalism itself is new to Nepal, and the idea of identity-based federalism was so powerful that the country expended an enormous amount of investment in terms of time, money, energy and political capital in the effort to write a constitution which eventually came to naught. There is no denying that life, liberty and happiness are the ends for which we as individuals, families or societies strive with other things serving as the means to get them. Nepal has experimented with family dictatorships, partyless regime and multiparty democracy, and all of these with or without the monarchy. History shows that the wait for a solid path to prosperity has already spanned multiple generations.

Transitioning into a federal structure in and of itself is a paramount undertaking where power sharing between the federal and state governments has to be adopted theoretically (that is, legally) and in practice. An array of structural issues must be configured. For example, what would be the structure of the government and at what levels? What would be their relationships in political and administrative terms? How are the governments formed and how extensive are they at different levels? How are the responsibilities shared between different levels of government? What will be the status of the current districts and village development committees? What will be the structures of the bureaucracy and the courts? How will the fiscal system be managed? Who will have the authority to impose and collect different kinds of taxes? What will be the nature of the fiscal relationships between the federal government and the states and other sub-national governments?

The framers of the constitution have to sort out these issues and they may even have been sorted out from the time we have been hearing that the CA was ready to promulgate the constitution sans the identity issue. But I don’t observe them drawing much public interest. No doubt, identity politics has energised citizens a great deal. But one can only wonder if the structuring of political, administrative, legal and financial matters is unimportant when it comes to making a successful transition into a federal democracy. Let’s use one of the issues, fiscal federalism, to exemplify how important they are for a successful transition. Federalism is about sharing power and responsibilities for public management and action, and in fiscal terms it means how resources are collected and spent. Money for the public treasury comes from taxes, fees, customs duties and other incomes from government services. The government also counts on bonds, loans and grants to fund its activities.

In the existing centralised system, all kinds of taxes including income, sales, property and estate are within the responsibility and authority of the central government. Other fees, customs duties and government proceeds are also under the purview of the central government. Because revenue collection is centralised, allocations of funds for all public activities also come from the central government and are disbursed to regional, district and local governments. There is also a highly integrated bureaucratic system in which different ministries or agencies have a presence at the central and local levels.

In a federal system, however, there is greater sharing of responsibilities to provide services. Some departments or agencies operate only at the central, state or local level so that the way resources are used would be different. More importantly, who has the authority to collect what kind of taxes would be explicitly spelled out. While it is the people or the beneficiaries of the services who pay the taxes or fees, what level of the government has the designated authority over taxation depends on fiscal coordination. Theoretically, what kind of tax and service structure is appropriate depends on efficiency and equity considerations with the former focusing on the cost and the latter on maintaining fairness across individuals.

If the state government has exclusive authority over certain kinds of taxes and services, then there can be enormous differences across states in the resource base and, therefore, their ability to provide services. Certain states, for example, may be more

prosperous by virtue of having a larger tax base or supply of natural resources, and they will be able to provide better quality and a wider array of services like education or healthcare. It’s not that there is no role of intergovernmental grants since they will be necessary to look after states that lack resources to provide services to their residents. But states on their own may choose to tax less and provide less services in which case the federal government cannot require states to increase their services. The capacity of the federal government will be limited by the constitution so that, despite greater need and willingness, it lacks the authority to force states to act against their will.

This leads to disputes between the federal and state governments as is happening in the US right now over expanded coverage of healthcare. While the federal government has intervened on equity grounds to provide healthcare coverage to low income citizens, many states are resisting this move. Under this initiative, the federal government will pay for almost all of the expanded care. But states fear they will be unable to handle the expanded cost after the extra money from the federal government dries up. Even though a major portion of the cost is absorbed by the federal government for a few years, how much the states will have to cover afterward will depend on their fiscal capacity with more prosperous states having to cover larger portions.

No system is static, and issues like these are settled incrementally. Opportunities will arise to revisit the constitutional provisions. But making constitutional amendments in a democracy typically requires a super majority (two-thirds of the votes) and may not happen easily. A question then arises if politicians, civil society leaders, the media and the public care enough to find out whether and how they are appropriately addressed.

Wagle teaches public policy at Western Michigan University, US


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