A question of viability
Even as the country prepares to head into federalism, not much consideration seems to have gone into the fiscal element of the process. Debates have instead focused more around political aspects of federating the country—issues of identity, priory rights and right to self-determination—while economic viability of the federal setup has remained largely unaddressed.
Among many rationales put forth by the advocates of federalism, the economic disparity that exists between various regions in the country has been a key argument, where proponents have stated that federalism would grant the regions a greater say in mobilising resources at the local level. Overdependence on the centre for grants has been one of the most striking features of the districts and complaints have consistently abounded that these districts have not been given enough shares of the resources.
However, the 14-province model currently recommended in the report of the State Restructuring Committee under the Constituent Assembly, which is also being discussed in the State Restructuring Commission (SRC), does not seem to have taken into account the economic viability of these proposed states. Out of the total 14 proposed provinces, nine are based on ethnicity. Going by the preliminary data from the Ministry of Local Development (MoLD), even if the present districts were to be restructured as per the plan, there would still be an overdependence on grants from the centre. Districts in Far Western Nepal, for instance, have poor economic performance. For the present-day districts to survive, even within the federal set up, grants from the centre are going to be a must.
Even analysts agree that there wasn’t adequate deliberation on the economic aspects of federalism while the structure for the 14 provinces was being carved out. “Federalism has emphasised more on sentiments than economic considerations,” says Pushpa Kandel, who teaches economics at the Tribhuwan University and has been researching on the issue of fiscal federalism. Kandel argues that the present system of revenue generation is heavily skewed in favour of the Central Development Region, which
comprises of two important districts—Kathmandu and Parsa (read Birgunj). Considering that the region generates around 70-80 percent of revenue including around 50 percent of revenue from customs—Birgunj customs that is—it has made it impossible for other regions to compete. The Far West, for example, generates just one percent of the total revenue.
Despite optimistic claims by proponents of federalism, the dependence of the states on the centre is likely to persist in the new setup. Of the sources of revenue, VAT, customs, income tax and excise duty will continue to be taken care of by the centre. And although there is a general bid to empower local authorities, even in areas where they have been given responsibility—such as collecting property tax—these local authorities have not been able to perform well.
Echoing Kandel, anthropologist Sanjeev Pokharel, who has been working in the area of federalism, concurs that the present 14-province model is simply not going to work. Pokharel maintains that at least three criteria should be present for a state to be economically viable:
availability of resources, the capacity to mobilise those resources and the capacity to engage in local and international trade. Pokharel believes that most of the proposed states don’t meet these criteria.
International experiences with federalism show that most countries that have adopted federalism based on ethnicity tend to come up against problems over time. Lack of consent between various regions regarding
natural resources and issues of identity means that the number of federal states often tend to go on increasing. For instance, in Nigeria, the originally planned three states have now expanded to 36. “It’s all because of identity politics,” says Advocate Bhimarjun Acharya, who has long-been campaigning against federalism in Nepal. “Economic viability should be considered the sole base in federating a country.” Five countries—Belgium, Ethopia, Spain, Sudan and Nigeria—that adopted ethnic federalism are now witnessing internal conflict. India is yet another example of a country where federalism—central federalism, in this case—has led to internal disputes among states.
How can the issue of economic viability be addressed then? Kandel says that the country has to be federated along a North-South line, and the number of federal units have to be small, each of which would comprise of urban centres and be adjoined with international borders. But even then, the units would not be immediately viable, as it would take some time for the urban
settlements to engage in economic activities. “It’s only when people take up economic activities that we will see an increase in revenue,” says Kandel. He recommends increasing the revenue base in the federal units.
Of course, there is also the question of which provinces present-day districts will fall under in the federal setup, and how the revenue being generated at the local level today will be eventually split. For instance, the proposed Newa province will include some parts of the Kavre district, most of which will primarily be in the Tamsaling state. The proposed Narayani state will include some parts of Tanahu district, while a larger part of Tanahu will go to the Magrat province. Careful management of resources therefore becomes very important in such a situation. Although a fiscal equalisation panel to oversee the distribution of resources among the states has been proposed by the State Restructuring Commission, members of the commission differ over the issue of representation. While Commissioners Malla K Sundar and Sarbaraj Khadka are in favour of greater representation of the states in the panel, others are rooting for a more influential role of the centre.
Regardless of minor differences, many experts, including officials at the Ministry of Local Development, emphasise on the importance of deliberating the economic viability of the proposed states at this juncture, by considering the availability of natural resources, internal revenue, and infrastructural development among others, arguing that for a self-sustaining province to exist, it has to have its own resources. “Rather than relying on the centre, the states should generate their own resources,” says an official. Many also maintain that in terms of number, not more than six provinces should be carved out, if the structure is to be financially stable. “If the provinces lack physical and social infrastructures, the possibility of people in those provinces looking up to the centre for assistance will continue to be high,” he adds.
Posted on: 2012-01-07 09:44
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