Federalism and Multilevel Governance

Federalism and Multilevel Governance
How is power distributed between levels of government? Why are some countries federations, while others are unitary states? Which level of government should be responsible for which functions? These questions lie at the intersection of political science and economics.

Forms of Territorial Organization of Power
Unitary State — power is concentrated at the national level. Local bodies operate by delegation from the center and can be reorganized or abolished. Examples: France, Japan, United Kingdom.
Federation — power is constitutionally divided between the federal center and the subjects of the federation. Subjects possess their own powers, which the center cannot unilaterally repeal. Examples: USA, Germany, Russia, Switzerland.
Confederation — a union of sovereign states with minimal central power. A rare and usually unstable form. Historical examples: Holy Roman Empire, USA before 1787.
Multilevel Governance — a modern concept that recognizes the multiplicity of levels and actors of governance: supranational (EU), national, regional, local, non-governmental organizations.

Economic Theory of Federalism
Economists analyze the optimal distribution of functions among the levels of government:

• Decentralization Theorem (Oates). In the absence of externalities and economies of scale, decentralized provision of public goods is more efficient than centralized provision. Logic: local authorities know local preferences better.
• Foot Voting (Tiebout). If citizens can move between jurisdictions, competition among local authorities leads to efficient provision of services. People choose the jurisdiction with their preferred set of services and taxes.

Arguments for Centralization:

• Externalities. If the actions of one jurisdiction affect others (for example, pollution in a river crossing boundaries), coordination at a higher level is needed.
• Economies of Scale. Some goods are more efficiently provided centrally: defense, monetary system.
• Redistribution. If the wealthy can move away from high taxes, redistribution must be centralized.
• Uniform Standards. Basic rights and minimum standards require the national level.

Arguments for Decentralization:

• Information. Local authorities know local conditions and preferences better.
• Accountability. It's easier to control local authorities than a distant central power.
• Innovation. Multiple jurisdictions are a “laboratory of democracy” where experiments can take place.
• Competition. Rivalry among jurisdictions disciplines authorities.

Fiscal Federalism
The distribution of taxing and spending powers is a key question:

• Distribution of Expenditures. General principle: a function should be performed at the lowest level capable of effectively carrying it out (subsidiarity). Defense — center, local beautification — municipality, education — disputed.
• Distribution of Taxes. Mobile tax bases (capital, skilled labor) should be taxed at the national level, otherwise there will be a “race to the bottom”. Non-mobile (real estate) — at the local level.
• Vertical Imbalance. Often, the spending powers of regions exceed their taxing capabilities. This requires transfers from the center — interbudgetary relations.
• Horizontal Imbalance. Regions differ in wealth. Equalizing transfers smooth out differences but can undermine incentives.

Political Economy of Federalism
Behind economic arguments lie political interests:

• Federalism as protection against tyranny. Vertical division of power complements horizontal division. Federalism is a guarantee against concentration of power.
• Federalism as accommodation. In multiethnic societies, federalism can keep the state together by giving minorities autonomy. Belgium, Switzerland, India — examples.
• Secession. But federalism can also contribute to breakup — giving regions tools for mobilizing against the center. The USSR, Yugoslavia, Czechoslovakia broke up along federal seams.
• Soft budget constraints. If regions expect help from the center in case of trouble, they lack incentives for financial discipline. Debt crises of subnational entities are a widespread problem.

Modern Trends

• New Regionalism. Decentralization is occurring in many unitary states: Spain, United Kingdom, Italy, France. Regions are gaining more powers.
• Supranational Integration. The EU is a unique experiment in multilevel governance. Part of sovereignty has been transferred to the supranational level.
• Glocalization. Simultaneous strengthening of global and local levels at the expense of the national. Cities and regions enter the international arena directly.
• Networks and Governance. Formal levels of power are supplemented by networks of non-governmental actors, public-private partnerships, and transnational regimes.

Practical Conclusions
The optimal distribution of power depends on context:

• There is no universal recipe. The right degree of centralization/decentralization depends on the size of the country, diversity, historical legacy, and political culture.
• Compatibility is important. Spending and taxing powers must be coordinated. Responsibility without resources is ineffective.
• Coordination mechanisms are needed. Multilevel governance requires institutions to resolve conflicts and coordinate between levels.