Federalism's Values and the Value of Federalism

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Finance Papers
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Finance and Financial Management
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Inman, Robert P

What is it about federal governance that makes it so attractive to economists, political philosophers and legal scholars and is there any evidence that would suggest all this attention is warranted? Proponents see federalism as a means to more efficient public and private economies, as the foundation for increased political participation and democratic stability and as an important check on governmental abuses of personal rights and liberties. This study provides a working definition of federal governance and classifies a sample of 73 countries as either a constitutionally based federal democracy, an administratively based federal democracy, a unitary democracy, a federal dictatorship or a unitary dictatorship. Governance is then related to 11 measures of economic, democratic, and rights performance. Three conclusions follow. First, decentralized policy-making does have a unique contribution to make to a society's ability to enforce property rights, to protect political and civil rights, and then because of such rights protections, to enhance private sector economic performance. Second, while policy decentralization is the key to federalism's strong rights and economic performance and can be achieved within a unitary government by fiat, constitutionally established provincial (or state) governments provide an extra and important protective barrier for policy decentralization. Federal institutions protect policy decentralization, and policy decentralization provides federalism's valued outcomes. Third, federalism needs democracy; there is no evidence that adding policy decentralization or provinces to a dictatorship significantly improves a dictatorship's economic or rights performance.

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CESifo Economic Studies
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