Fiscal federalism catalyzing equitable development
Fekadu W.
History is witnessing that fiscal decentralization is becoming an important concern of the world. Many developing countries are experimenting with it as a means of improving their governance and economic growth. For instance, Canada’s fiscal decentralization was tied up with the Quebec issue of secession; Eastern Europe countries used fiscal federalism as one of the means to resolve their political and economic mess; Germany reviewed its earlier fiscal centralization as instrumental in dealing with the issue of unification. Likewise, fiscal decentralization is acquiring greater prominence in public governance system of EU, US and other countries.
The concept of fiscal federalism is new to Ethiopia, according to the House of Federations (HoF). Though it is new, it said, the application of fiscal federalism is taking root with time and the subsidy being granted to various regions has enabled the country to register sizable development and realize equitable development across the country.
The system has helped regions to undertake various projects that benefit the grass root, according to HoF. Particularly, application of fiscal federalism has enabled the country to allocate a tremendous amount of money to assist backward regions that were neglected during the defunct regimes. This has, in turn, enabled to construct infrastructure that benefit pastoralists and semi-pastoralists living in remotest areas.
Regions like Benishangul Gumuz, Somali, Gambella, Afar and Southern Peoples States have benefited a lot from the ingenious application of fiscal federalism; it has been building their capacity to register lots of development. The huge amount of money that comes from the federal government in the form of subsidy has helped them to undertake projects that add a lot the overall development of the country.
The implementation of fiscal federalism and its ensuing assistance has enabled to undertake water, health, education and agriculture-related projects, among others. It has been improving the lives of millions of individuals in border areas that experienced discrimination and inequitable development during the previous regimes. It also enabled those regions to carry out projects that enhance the productivity of animals and alleviate their suffering during drought seasons.
The federal government is applying a budget subsidy formula approved by the HoF. The House is allocating financial resources to regions that are in dire need of assistance of the federal government to undertake various development projects. These assistances are being granted based on workable formula that are being amended with time.
Similarly, statistics of the Ministry of Finance and Economic Development (MoFED) corroborate the fact that financial assistance being earmarked for regional states is growing with time. For instance, this fiscal year has seen enhanced allocation eying at strengthening equitable development envisioned by the country. To this end, the budget subsidy for regional governments has reached 117 billion Birr, witnessing 17 percent increment, big leap compared to the previous year.
The budget approved for this budget year will sustain the current double-digit economic growth and help realize the poverty alleviation effort of the country; economic transformation and ensuring continuity of the economic growth. Accordingly, the budget allocated to regional governments is 39 percent of the over 320 billion Birr approved by the government. Additional, seven billion Birr has also been apportioned to implement sustainable development; the allocation of the budget shows that due emphasis has been given (to remote woredas) to scale up infrastructure and human development, which are vital to speed up economic transformation and expedite poverty alleviation.
As usual, the budget has been allocated in an inclusive, transparent and customary system as being applied by the federation world. Practically, the allocation is expected to reduce poverty in a meaningful manner and effect stable macroeconomic and fiscal system in under-developed areas.
A huge amount of money is being transferred to regions in the form of development assistance. And, the assistance has enabled regions to undertake lots of development projects in pastoralist areas like Afar, Gambella, Benishangul-Gumuz and Somali region. The real change being expedited by the subsidy is visible. Now, every region is enjoying health, education and water projects that are easing the lives of pastoralists and semi-pastoralists.
Presently, many things have been changed with the flow of financial grant from the federal government. The grant has helped to improve the living condition of the people in remote areas. Thanks to the assistance. Mothers are enjoying maternity services in their vicinity. The health service in various regions has helped to reduce infant and maternal mortality. Let alone mothers, animals that were suffering from lack of medicine and preliminary health care are currently enjoying better veterinary services and this has burgeoned productivity.
The theory of fiscal federalism assumes that the federal system of administration can be instrumental to solve problems being encountered by governments these days, such as justifiable distribution of income, effective allocation of resources and economic stability (these things could be accomplished by the federal government because of its relative strength and flexibility in dealing with problems as compared to regions).
Financial decentralization indicates the division of governmental functions and financial relations among the various levels of government. It operates through various federal taxes, grants, and transfers. Through this system, it is typical for the government to transfer financial resources, regulate, subsidize tax, provide goods and services and redistribute income.
A case in point, the FDRE Constitution in Article 94 to 100 has declared the decentralization of financial issues between the federal and regional states. Particularly, Article 52(2) of the Constitution has enumerated powers and functions of states, including the establishment of state police power, the maintenance of public peace and order, levying and collecting taxes and duties on revenue sources reserved to them.
Similarly, the Constitution is calling for regional governments promote participation of people in the formulation of national development policies and programs and support development endeavors (Article 89/6). The overall approach of the Constitution is to provide a meaningful devolution of power and finance to the lower levels of administration. This devolution of power has conferred autonomy upon states to decide on budgetary allocation based on their need of expenditure.
Viewed from fiscal federalism, budgeting process has had two dimensions: the identification of priorities and goals and managing funds in order to fulfill these goals. In the process of identifying priorities and goals, the major activity is gathering the budget needs of each administrative office. All the information about their needs is organized at the regional level and is approved by the state council. The final step lands on regional planning and economic development bureau to aggregate the entire budget submitted by all zonal offices and other government agencies. Its duty is to evaluate the information in light of the zonal and regional economic development goals.
Each administrative unit, either at the federal or regional level, is responsible for the management and execution of its own budget approved by the respective governments; this principle grants autonomy to each federal, regional and sub-regional administrative unit over the execution of its capital and recurrent budget.
The most noticeable purpose of fiscal federalism is its recognition of the need of regions and essence of governmental grants to close their revenue gap. As a result, it is addressing financial constraints of regions; Ethiopia has been applying intergovernmental revenue transfer system due to the possible occurrence of greater fiscal imbalances that requires such system of transfer as in the case of many federations.
It necessitates an equitable revenue transfer system and collaboration between the constituent units. Ethiopia has been developing workable mechanism and logical formula to transfer subsidy (revised in 1997, 1998, 2000, 2003, 2007, 2009, and 2012). It has also revised and applied the new formula for 2017/18 and the aggregated amount of budget to be granted is being determined by up-to-date rationals.
The financial allocation formula needs the endorsement of the HoF. HoF may take into account the capital and recurrent expenditure as well as revenue potential of the regions, among others. So far, participatory and wide political consensus have brought significant contribution to Ethiopia’s fast and sustained development through the application of fiscal decentralization(however, some chided it as complex, cumbersome to audit and non-transparent; without understanding it comprehensively, though).
As transparent means, fiscal federalism in Ethiopia has derived its nature and characteristics from constitutional provisions, state of economic development, pattern of income and resource distribution and institutional capacity of the system.
The constitutional provisions have also defined the framework within which decision-making would be exercised and it has established the vertical and horizontal structures that are providing life to the prevailing socioeconomic environment of the system(the vertical structure has defined the assignment of fiscal decision-making power between the federal and lower tiers of government while the horizontal structure has outlined the nature of interaction across cross-sections of government levels).
As one scholar asserts, the application of fiscal federalism in Ethiopia is addressing main challenges related to fiscal decision-making: assignment of responsibilities and functions between the federal government and the regional governments, the assignment of the taxating power and the design of intergovernmental transfer (subsidy) of financial resources coupled with other provisions to borrow.
Until now the nation has been applying fiscal federalism wisely in a way the helps catalyze equitable development across the country. It is believed that efforts will be strengthened to further refine the system and stimulate more development in all regions; a rationale that improves efficiency of public resource utilization, builds enabling environment for development and the growth of the national economy.
Overall, the intervention of the federal government is anticipated to continue in the form of fiscal decentralization until all states and localities register equitable development. To this end, effective allocation of resources shall be made eying at development of regions that need the assistance of the federal government.