Should fiscal control be centralised or decentralised? There are arguments on both sides. For instance, as Brendan O’ Duffy writes in one of the essays included in ‘ Comparative Politics ,’ edited by Judith Bara and Mark Pennington (www.sagepublications.com), rationalist institutionalists say that the chances of politicians and bureaucrats abusing their power are greater where fiscal centralisation is higher. “By decentralising fiscal control, higher levels of economic growth are likely because leaving fiscal decision-making closer to individual citizens or communities leads to more efficient factor utilisation and lower levels of inflation.”
In contrast, there are those who aver that central government control of the fisc maximises the government’s ability to use Keynesian policies to regulate the supply and demand of key factors of production, including money supply. “In this view, both efficacy (effective government) and equality (through the distribution of tax receipts, expenditure) require a high degree of fiscal centralisation and a strong centre able to intervene to correct the imperfections of markets.”
Citing studies by Francis Castles about how federal and unitary states compare in terms of their impact on economic prosperity and governance, the author notes that decentralised political and fiscal arrangements are associated with superior long-term economic growth rates, and lower levels of inflation, though decentralisation had no discernable impact on levels of employment.
Another study that O’ Duffy mentions is of Hans Kerman, who compared 18 countries. The performance of the larger states, such as German and France, was better than the less modernised states of Spain, Portugal and Ireland, but these differences are less to do with federal versus unitary status and more to do with levels of industrialisation and post-Second World War subsidies for rebuilding war-torn economies, the author observes.
Recommended read.
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Errors in targeting subsidies
Public distribution system (PDS), as a scheme, has failed miserably, rues R. Gopinath in one of the essays that P. Nayak has included in ‘ Growth and Human Development in North-East India’ (www.oup.com).
He speaks of both Type I and II errors, that is, excluding the genuinely poor or deserving households, and inclusion of non-eligible persons due to mistakes of excessive coverage. Targeting errors arise in welfare programmes due to imperfect information, measure of household characteristics, corruption, and inefficiency, the author explains.
Generally, the states where poverty ratios were relatively higher also had higher levels of exclusion; for example, Orissa with 47 per cent poverty ratio and 26.56 per cent error of exclusion, and Uttar Pradesh with 31 per cent and 26.75 per cent, respectively. “Gujarat, with only 14.7 per cent poverty level also recorded a high error of exclusion at 45.84 per cent due to inefficient management.” Quite worryingly, an evaluation by the Planning Commission in 2005 indicated that 57 per cent of BPL (below poverty line) households were not included in the targeted PDS.
Insights of value.
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