ABSTRACT
Under what conditions are territorial legislative designs decisive in shaping intergovernmental fiscal relations? As decentralization became more widespread in the developing world in the 1980s and 1990s, it ignited a great deal of scholarly attention on the economic viability of federalism. One of the most salient, mostly unchallenged, theses about this question traces the superiority of decentralization to normative economic thinking on federalism. Drawing on Charles Tiebout’s (1956) work, it is argued that decentralization limits the ability of government officials to supply local goods on political grounds. In this light, Barry Weingast (1995) developed the concept of market- preserving federalism to connote systems in which decentralized control over the economy by subnational governments within a common market precludes the central government from encroaching on the political and economic rights of its citizens. This arrangement, the argument goes, underpins fiscal responsibility, providing no incentives for the constituent parts to overuse the common pool of federal economic resources. In recent years, however, as the “desirability” of federalism has burst upon the scene as a subject of interest to scholars and policy-makers, Weingast’s assumptions have come under criticism (Rodden and Ackerman 1997). Perhaps the most important common thread running through these works is that normative public choice theories largely ignore the role of bureaucracy and the political framework in which intergovernmental decisions are taken. Put differently, Weingast’s theoretical roadmap fails to account for the poor fiscal performance of many federal states such as India and the large Latin American federal states of Argentina, Brazil and Mexico, let alone the Russian experience which kindled a cacophony of epithets such as market-distorting federalism (Slider 1997) and market-hampering federalism (Zhuravskaya 2000).
