Federalism and Economic Reform

Federalism is considered as a strategically important structure by economists. It constitutes the assignment of economic functions to different levels of the government in a country. Many developed as well as developing economies follow a federal structure. Federalism is considered to deal effectively with public-private conflicts, corruption and other economic obstacles.
The process of decentralization is integral to federalism. Economic federalism has its own advantages. With the responsibility of taxation and government spending being distributed, the economic process speeds up, leading to faster growth. Also specific authorities can have better functional knowledge over specialized domains.

Economic reforms bear considerable significance in Federalism. In the current global scenario, liberalization and privatization are at the core of economic reforms adopted by several developing economies.

Major economic policy reforms aspects that have considerable impact on federalism are –
Privatization of state owned enterprises
Tax reforms
Price controls and rationing systems
Regulatory reforms.
Some argue that a federal structure may not be conductive to economic reforms. In countries that have political federalism, a state or constituent has its own autonomy for decision making. The state mechanism has to ensure that the policy reforms are implemented throughout the economy. In order to ensure this, in a federal structure certain policy reform decisions should exclusively be handled by the central government.

The process of decentralization in federalism provides advantages in terms of lower costs of acquiring information as also lower monitoring costs. These are conductive to economic reforms. Measures introduced by economic reforms that attract investment, foreign trade and also reduced state intervention in economic activities. While constituent sub units of the government also need to bring down their intervention in economic activities, these reforms brings about economic competition among sub units to attract investment and foreign capital. As such it contributes to the successful outcomes of economic reforms.

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Last Updated on : 26th June 2013

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