Federal attractions
The good news to emerge over the past months concerning state restructuring has been that the number of proposed states has gradually shrunk, from the indefinite number of ethnic states under Maoist proposal to over a dozen conceived by Nepali Congress (NC) and, the latest, to 12- to 8-state—also called province—model currently being debated by the United Marxist-Leninist (UML) party’s Central Committee.
As proposed by UML’s Federal State Affairs Department Chairman Parshuram Meghi Gurung, the eight-state model and twelve-State model meet two broad criteria considered desirable for state formation—cultural identity and economic viability. From a neutral perspective, and looking around other Federal Republics, the two stated criteria seem reasonable and sensible but there is room for further reductions of the number of states to no more than half a dozen or less.
The paramount consideration for deciding on a fewer number of states ought to be their economic viability and promotion of production efficiency—and not the so-called esoteric criteria such as cultural identity or creation of an ethnic homeland. Economic consideration as the focal point of state restructuring will serve the national interest in the best possible manner. This is because the creation of economically-focused states would help keep the nation together, build a national image, create a merit-based society and, most importantly, reduce the likelihood of local pressure groups emerging to claim special treatment.
Looking at the economics of state formation more broadly, this should help reduce the government’s cost and equip it to provide public services more efficiently compared to what is the situation now under a centralised administrative system we inherited.
There is no firm estimate available but, looking at the budget numbers, almost the entire amount of revenue collected from tax and nontax sources gets spent on day-to-day operations of the Government with development expenditures financed almost entirely out of foreign aid and local borrowings. Also, the fact is that the so-called development spending isn’t all spent on bricks and mortars—materials used for development projects. According to some estimates, as much as half of development spending gets earmarked for administrative purposes and, on the top of it, you can add a quarter of spending ending up as bribes and kickbacks.
It is hard to conceive of a situation where the state governments would be financially more efficient and accountable than what is being practiced at the center. Therefore, we can expect another layer of bureaucracy beneath the federal bureaucracy, which, decidedly, will be more expensive and less accountable than its federal counterpart. This is because the states will replicate the federal governance model comprising of the executive, the legislature, and the courts.
The most important consideration in deciding the number of states should be keeping the overhead cost of government infrastructure as low as possible in terms of the number of people it will serve. Larger number of states means larger overhead cost on a per capita basis. And, of course, an oppressive level of costs would inevitably mean an oppressive level of tax collection.
For the current fiscal year, the government has proposed raising Rs 250 billion in revenue from tax and nontax sources, which comes to about 20 percent of GDP. This is an onerous burden in a developing country since almost half of the economy remains out of the tax net. This doubles the tax burden to those who do pay taxes.
One of the major changes in a federal system will be that state governments will have to establish their own tax sources to fund spending, administrative as well as developmental. Of course, like in most federal states, state governments will be entitled to get a slice of federal tax revenue under revenue-sharing arrangement, but federal revenue is unlikely to cover, say, more than 20 percent of state budget spending. This means that a lion’s share of state spending would need to be financed from local sources. In view of the fact that monetised part of the economy will bear most of the tax burden, federal and state taxes together can easily add up to 50 percent of taxable GDP. This would force many of the business enterprises to avoid the market and go underground, which would further shrink the tax base.
Now, if the number of states is limited to a small number—say four or five—the overhead cost of government infrastructure will be more widely distributed, reducing the cost on a per capita basis. This would mean a less onerous tax burden on the people. Also, because a larger state-size will provide larger markets for the local producers, the incentive for specialisation and low-cost production will be much greater than when the market size is limited and constrained. And there should be expectations that state governments will be inclined to zealously protect their borders, especially against “economic encroachments”.
When it comes to the state borders, if political leaders and, particularly, the newly-formed State Restructuring Commission (SRC) can be persuaded to accord a priority to economic factors, the number of states could be limited to four, with Kathmandu valley given the status of a federal jurisdiction, as is common practice under a federal system. Under this arrangement, the nation’s capital and adjacent areas are normally designated as federal territory, much like the case in India and the United States.
For simplicity and balance—of population size, resources, geographic coherence, and also ethnic distribution—delineation of state boundaries along the lines of administrative units established during the Rana period offers the best option. Under this arrangement, states line would be touching the Kathmandu Valley from all four sides that would mean four states, with southern states comprising largely of Madhesh belt and the northern region largely of mountain regions.
For a better geographic and demographic balance, considerations should be given to move the capital to Pokhara or Hetuada. Such move would yield a more neutral territory for democracy and federalism to take roots and prosper than could be expected in Kathmandu’s environs. That is because Kathmandu continues to portray a history of centrist culture, political intrigues and, most unpleasantly, ethnic prejudice of the worst kind.
Shah teaches economics at universities in the US
Posted on: 2012-01-10 09:59
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