Federalism, also referred to as federal government, a national or international political system in which two levels of

government control the same territory and citizens. The word federal comes from the Latin term fidere, meaning “to
trust.” Countries with federal political systems have both a central government and governments based in smaller
political units, usually called states, provinces, or territories. These smaller political units surrender some of their
political power to the central government, relying on it to act for the common good.
In a federal system, laws are made both by state, provincial, or territorial governments and by a central government.
In the United States, for example, people who live in the state of Ohio must obey the laws made by the Ohio
legislature and the Congress of the United States. In Canada, residents of the province of Québec follow the laws
made by Québec’s legislature and those made by the Canadian parliament. In addition to the United States and
Canada, countries that are considered federalist include Australia, Brazil, Germany, India, Malaysia, Mexico, Nigeria,
and Switzerland.
Federal political systems divide power and resources between central and regional governments. The balance of
power between the two levels of government varies from country to country, but most federal systems grant
substantial autonomy to state or provincial governments. Central governments decide issues that concern the whole
country, such as organizing an army, building major roads, and making treaties with other countries. Federalism
varies in practice, however, and in some countries with federal systems the central government plays a large role in
community planning, schools, and other local issues.
Federal political systems are relatively uncommon around the world. Instead, most countries are unitary systems,
with laws giving virtually all authority to the central government. The central government may delegate duties to
cities or other administrative units, but it retains final authority and can retract any tasks it has delegated. The central
government in a unitary system is much more powerful than the central government in a federal system. Cameroon,
France, Italy, Japan, Kenya, Morocco, South Korea, Sweden, and Uruguay are examples of unitary systems.

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A confederation is similar to a federal system but gives less power to the central government. The loose alliances of
countries or other political entities that make up a confederation seek to cooperate with one another while retaining
ultimate control of their own internal policies. Unlike federal systems, confederations usually give each member
nation absolute control over its citizens and territory. The central government decides only issues that affect all
members of the confederation. In the 18th century the United States was founded as such a system under the Articles
of Confederation. More recently, the Soviet Union dissolved in 1991, and many of the former republics formed a
confederation called the Commonwealth of Independent States (CIS) to coordinate domestic and foreign policy.
Confederations tend to be weak and unstable because member nations often resist relinquishing final authority on any
matters and insist on their right to withdraw from the confederation at any time. Confederations are uncommon; most
are international bodies with limited and specific responsibilities, such as the European Community (EC) and the
British Commonwealth.
THE BEGINNINGS OF MODERN
FEDERALISM
II
The United States began as a confederation. A weak central government ruled the country from 1783 to 1789 under
the Articles of Confederation. Each state had an equal voice in Congress, but Congress could not collect taxes to
operate the government. The confederation of states had no chief executive and no central body with enough power to
make the states abide by the Articles of Confederation. Some states refused to follow the terms of the 1783 Treaty of
Paris that ended the American Revolution, even though the Articles of Confederation gave Congress the right to make
treaties for all the states. Trade disputes with Great Britain and other countries paralyzed the economy, but the
Articles of Confederation left Congress powerless to take charge of international trade. Some states imposed heavy
taxes on goods from neighboring states, further stifling commerce.
The ensuing economic crisis threatened to destroy the young country, but no political authority had power to assume
leadership. “The wheels of government are clogged,” future president George Washington remarked in 1785.
Washington and other statesmen realized that the country could only survive if the central government had more
power, but they also wanted to avoid trampling the rights of the states. In 1787 political leaders held the
Constitutional Convention to confront the crisis, and this historic meeting produced the principles of modern
federalism.
FEDERALISM IN THE CONSTITUTION
II
I
Delegates to the Constitutional Convention at first sought merely to improve the Articles of Confederation, but this
proved impossible. They wrote the Constitution of the United States, an almost entirely new document. The
Constitution’s advocates, called Federalists, envisioned an energetic national government (see Federalist Party). The
U.S. Constitution gave Congress broad powers, some of which are exclusive—that is, not shared with the states. For
example, only Congress can make war, deal with foreign nations, issue money, and regulate interstate and foreign
commerce. The laws of the national government prevail if they conflict with state laws. The Supremacy Clause in
Article VI of the U.S. Constitution holds that the federal constitution, and all laws and treaties based on it, are “the
supreme law of the land.”
The Constitution preserves some powers for the states, however, making the United States what Federalists such as
James Madison called a “compound republic.” The states share some powers with the national government, but they
also retain some independence. The concurrent powers—those shared by both the national and the state governments
—include taxing, spending for the public welfare, borrowing money, and eminent domain (taking private property for
public use at a fair price).
The Tenth Amendment to the U.S. Constitution specifies that powers not granted to the national government are
reserved, or held, only by the states. The states regulate businesses and professions, conduct elections, provide for
public schools, and protect the health and safety of their people. The states also retain sole power to establish local
governments, including counties, cities, towns, school districts, and many kinds of special districts. These local
governments provide a wide range of services, such as schools, streets and roads, elections, and police and fire
protection. Most of these government bodies can impose taxes.
CONFLICTS OVER FEDERALISM
IV
From the time the Constitution was adopted in 1789, questions about the exact boundary between state and national
power have sparked frequent disputes. Using “states’ rights” as support for their cause, Southern states defended the
practice of slavery as an issue for states to decide, while Northern states pushed to abolish slavery. Combined with
economic and political tensions between the states, slavery led 11 Southern states to secede (withdraw) from the
Union during 1860 and 1861. The American Civil War, which began in 1861, was partly a conflict over the proper
role of national and state governments.
The power of Congress to make laws affecting state and local issues grew steadily after the Civil War ended in 1865.
The Supreme Court of the United States gave Congress more and more control over the states, often basing its
decisions on the Commerce Clause in Article I, Section 8 of the Constitution. This clause empowers the federal
government to regulate interstate commerce. By the late 19th century the Supreme Court interpreted this authority
broadly, allowing Congress to take action on food quality, child labor, and other problems not specifically related to
interstate trade. The Supreme Court further expanded the scope of congressional power under the Commerce Clause
during the New Deal in the 1930s. The New Deal, which President Franklin Roosevelt created to confront the
country’s economic depression, included laws affecting nearly every home and workplace. The Supreme Court
upheld most of Roosevelt’s New Deal initiatives, including laws setting minimum standards for pay and working
conditions, protecting labor unions, and regulating farm production. After World War II (1939-1945), national
authority under the Commerce Clause continued to grow.
The action of Congress against racial segregation stands as the most important expansion of national power in the
postwar period. Some Southern states argued that the Tenth Amendment gave them the right to maintain segregation
and that Congress had no authority to interfere in purely local matters. In 1964 the Supreme Court ruled in Heart of
Atlanta Hotel v. United States that despite the rights reserved to the states by the Tenth Amendment, Congress had the
authority to bar segregation because it could harm interstate commerce.
The authority of the federal government has also grown as a result of a more gradual increase in power at all levels of
government in the United States. Since the Constitution was adopted in 1789, national, state, and local governments
all have assumed more powers and duties. They have been forced to do so by the increase in population, the growth
of cities and towns, the rise of huge industries, and the ever-growing need for better roads, railways, and
communication systems. Once strictly local, problems such as crime and transportation have become national issues.
Many experts defend the growth in power of the federal government in the United States. They insist that the public
interest demands federal control in cases involving more than one state. Other experts fear that the continued
expansion of federal authority over state and local matters will create an inefficient and possibly dangerous
concentration of power in federal hands.
When conflicts arise, the courts must decide how to balance states’ rights with the needs of the nation. Although
federal courts tend to take a broad view of national powers, in the early and mid-1990s the Supreme Court issued
several rulings that curtailed congressional power over the states. In 1992, for example, the court ruled that Congress
could not require states to make laws controlling radioactive waste. The Court issued another important decision in
1997, ruling that Congress could not compel local law enforcement officers to conduct background checks on gun
buyers.
In 1999 the Court issued a series of rulings that further shifted power from the federal government to the states. In
three 5-to-4 decisions that reflected the justices’ deep divisions over how to balance state and federal powers, the
Court strengthened the principle of sovereign immunity, which gives states immunity from lawsuits arising from
violations of federal law. In one case, the Court ruled that state employees cannot sue states for overtime wages due
to them under federal labor laws. In the two other cases, the Court ruled that businesses cannot sue states in federal
court for patent infringement or false advertising claims that violate federal law. In a similar decision in 2000, the
Court ruled that states cannot be sued for violating a federal age-discrimination law. In 2001 the Court ruled that state
employees cannot sue states for money damages based on employment-discrimination violations of the federal
Americans with Disabilities Act. Combined with earlier rulings, the decisions reduced the ability of individuals to sue
states for violating federal law.
Fiscal Policy and Growth in Africa:
Fiscal Federalism, Decentralization
and the Incidence of Taxation
Economic Commission for Africa
Theories of
Federalism
By
Ademola Ariyo
By
Stephen Njuguna Karingi, KIPPRA

Page 2
Draft, not for citation
Table of Contents
1.
Introduction
1
2.
Rationales for Decentralisation: Political
and Economic Arguments 1
3.
Forms of Decentralisation 2
4.
Intergovernmental Relations and Financial Autonomy 5
5.
Fiscal Federalism
7
5.1
The Principles of Fiscal Federalism
7
5.2
The Kenyan Lesson
12 6.
Lessons for Kenya from International Best Practice
in Fiscal Decentralisation 17
7.
Conclusion 20
8.

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1
Introduction
Decentralisation is supported by political as well as economic arguments,
combining objectives as separate as enhancing economic efficiency and
strengthening ‘democracy’. Devolution is one of the types of decentralisation.
For that reason, any discussion on fiscal devolution would best be placed in
context if there was consensus understanding of what decentralisation is and all
about. In this paper therefore, we begin by seeking an understanding of the
concept of decentralisation. We touch also briefly on the theoretical
underpinnings of decentralisation and provide some motivation why
decentralisation is popular. Attractive claims are made in support of
decentralisation ranging from its capacity to enhance economic efficiency to
strengthening democracy and promoting good governance. There are many
forms of decentralisation, and it is important that it be appreciated that in
practice, decentralisation processes need not be of any one neat type, but should
draw elements from different forms. In fact, one would want to caution against
easy generalisations of decentralisation that are made regarding its potential
benefits. After the theoretical presentations we then give the Kenyan story of
attempts to decentralise and draw lessons which should inform the current
attempt to devolution in the on-going Constitutional reform.
Rationales for Decentralisation: Political and
Economic Arguments
In a lay-man’s language, decentralisation is understood to mean the distribution
and re-distribution of power and authority within the various levels of the
modern government. But we also note that, decentralisation has also been
recently associated with the transfer of certain types of power and authority to
non-government and market based bodies (see Rondinelli 1986).
Smith (1985) presents a discussion the political arguments for decentralisation are
hinged on the liberal democratic tradition. Democrats see decentralisation as a
way of increasing responsiveness of the government to the demands of individual
citizens to the extent that one of the most compelling motivations for
decentralisation is the strong correlation thought to exist between
decentralisation and democracy. Decentralisation is therefore seen to promote
such values as equality, responsiveness and accountability and in the liberal
democratic tradition, it is believed that more responsive and accountable local
governments would contribute to a more stable form of national democracy.
Economic arguments for decentralisation on the other hand stem from the
public choice theory and the new political economy school. The public choice
theory advanced by authors such as Buchanan (1980) on its part is based in the
school of rational individualism which believes that individuals are rational and
are the best ‘maximisers’ of their own welfare making the markets very important

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2
as it is through them that individual preferences are translated into choices that
would in turn allow the satisfaction of individual wants. However, as a result of
the existence of public goods, the Government is still recognised by the public
choice theorists. The government to some should not restrict itself to the
provision of public goods but should be in a position to control and regulate
private economic activity as well. Nonetheless, due to the rational individualism
operating in the case of those manning Government, rent-seeking behaviour is
seen to prevail which not only impinges on individual freedom, but also causes
the waste of social resources.
The negative outcomes from the rent seeking behaviour provide the theoretical
basis to the New Political Economy, which regards the state as predatory, and
concludes that due to the government individual preferences are not maximised.
Since governments are rent seeking, decentralisation is seen as a means to
controlling them because it facilitates opportunities for the articulation of
individual preferences. In other words, according to Mackintosh and Roy (1999)
the heart of the economic argument for the decentralisation is that lower levels of
government are more sensitive to individual preferences than are higher levels.
Forms of Decentralisation
In discussing types of decentralisation, there are two important issues that come
to mind. Firstly, one must distinguish between the nature of power that is being
transferred and therefore classify the functions that the ‘decentralised unit’ can
effectively perform. Secondly, it is important to consider the institutional nature
of the decentralised unit, in order to differentiate between the extent of control
that the central Government, continues to exercise over the decentralised unit,
post the transfer of powers.
There are four popular typologies of decentralisation: deconcentration,
delegation, devolution and privatization as identified in Rondinelli and Nellis
(1986).
Administrative Decentralisation: Deconcentration and
Delegation
Administrative decentralisation seeks to redistribute authority, responsibility and
financial resources for providing public services among different levels of the
government. It forms an important aspect of ‘territorial decentralisation’, which
specifically refers to the transfer of powers and resources, from higher levels of
the government to local governments situated in different territories or regions
within the country. Depending on the nature of the ‘decentralised unit’,
administrative decentralisation is of two types, deconcentration and delegation.
Deconcentration is the weakest form of (administrative) decentralisation, as it

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3
distributes decision-making authority and financial and management
responsibilities among the different levels of the central government.
A more ‘extensive’ type of administrative decentralisation is ‘delegation’. Through
delegation, central governments transfer decision-making and the administration
of public functions to semi-autonomous organisations not wholly controlled by
the central government, but ultimately accountable to it. Examples are public
corporations, regional development agencies, special function authorities, semi-
autonomous project implementation units and a variety of parastatal
organisations.
None of the units to which powers are either ‘deconcentrated’ or ‘delegated’ are
elected institutions. They also do not have powers to reformulate policies that
affect their status or position within the broader decision-making structure, and
can only take decisions on subjects transferred to them.
Decentralisation on Fiscal and Economic Grounds
The second type of decentralisation is that on fiscal and economic grounds.
Today, there are various types of economic decentralisation that are recognised.
Mackintosh and Roy (1999) distinguishes the various categories of what can be
considered as economic decentralisation. One type of economic decentralisation
is fiscal decentralisation, which concerns the transfer of fiscal and expenditure
powers from the central government to lower levels of government. It includes
intergovernmental transfers that shift general revenues from taxes collected by
the central government to local governments for general or specific uses, the
authorisation of municipal borrowing and the mobilisation of either national or
local government resources through loan guarantees. Fiscal decentralisation can
take many forms, and lower levels of government may be empowered to raise revenue through a range of methods
including self-financing or cost recovery
through user charges, co-financing or co-production arrangements through
which users participate in providing services and infrastructure through monetary
or labour contributions, and the levying of property or sales tax or indirect
charges.
While fiscal decentralisation primarily concerns transfers of powers from higher
to lower levels of the government, at the other end of the spectrum of economic
‘decentralisations’ is a more controversial issue, i.e., privatisation. Privatisation of
public sector economic activity, together with the liberalisation of sectors
monopolised by government, is understood to be a form of decentralisation
which is seen as the creation of ‘new decentralised economic activity within
markets, replacing public sector institutions with private firms as decision-
makers’.
Another form of economic decentralisation is the decentralisation of public
management decision-making, which basically involves decentralisation of the

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4
management of public funds for the delivery of publicly funded services. This
forms the core logic of the New Public Management. The second form,
contracting is naturally one of the predominant forms that NPM assumes. This
involves the contracting out of publicly funded service provision to private
commercial or non-profit firms.
It may be added that these different forms of economic decentralisation are
extremely complex, as they involve institutions with varying institutional natures.
These may be elected or non-elected institutions of the state, or non-state
institutions from the market and civil society that work in ‘partnership’ with the
state, in one guise or another. Embodying functional changes of a variety of
sorts, different forms of fiscal decentralisation can be complementary either to
‘administrative’ decentralisation as explained above, or ‘political or democratic’
decentralisation, which we will describe next.
Democratic Decentralisation
The last major type of decentralisation is what is variously called political or
democratic decentralisation. Some authors also use the term ‘devolution’ to
loosely understand the same phenomenon. A key feature of this form of
decentralisation is that it entails the transfer of power from higher levels of the
government, both from elected institutions such as the national parliament or
central bureaucracies, to local elected representatives of the people. Relying on
electoral forms of representation, these types of decentralisation are theoretically
derived from the basic proposition of democracy, which is simply that individuals
by selecting representatives to their government from among themselves would
be able to convey their preferences better to the latter. The argument for
decentralisation is subsequently adapted from this core logic. Local governments
comprised of representatives from individuals resident within their jurisdictions
would be better informed of the preferences of their ‘constituencies’ and would
be able to respond more effectively in order to meet their interests.
Decentralisation in the Context of Public Sector
Reforms: New Public Management
‘Reforming’ the public sector has been on the agenda in governments across the
world for over two decades now, and different kinds of experiments in
management and public-private partnerships have followed. These are important
to regard because they form a part of the ‘good governance’ agenda of
governments across the world. These decentralisation reforms of the public
sector bear important implications for the continuing role of the state, and the
position of citizens in their interrelationship with the state, given the importance
of private ownership and provision within public sector reform.
Public sector reform primarily involves different kinds of public-private
partnerships. The common objective in these partnerships is to increase the

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5
efficiency and effectiveness of ‘governance’. The public sector has long been
criticised for being overstaffed, inefficient and corrupt. Reform initiatives mainly
involve the adoption of market-based principles of functioning, with the
underlying presumption that market based principles would allow for greater
efficiency in the public sector. Other positive aspects such as an increase in
responsiveness and accountability in ‘governance’ are also attributed to these
processes of public sector reform. However, each form of public-private
partnership involves a different kind of role for the state, which cannot simply be
described as ‘minimal’.
The NPM historical origin is in the UK in the 1980s (see Ferlie et al. 1996 for
discussions on the New Public Management). There is a very conscious and
deliberate attempt to separate economic decision-making and the control over
resources from the actual provision of services. The predominant form that the
NPM assumes is one of contracting. Driven by objectives of efficiency and
economy, the underlying belief is that contracting out of services by the central
government to executive agencies, local government departments or private
providers would embody the replacement of traditional hierarchical controls of
government with the market as the central means of coordinating economic
activity. Thus, contracting is driven by motives of ‘controlling social sector
spending and reducing the leverage over the public services of both the trade
unions and the local government’.
Contracting encourages the ‘economic decentralisation of the management of
public funds’. The underlying logic is that autonomous delivery agencies whether
private providers, or even PSCs or Public Service Contractors, which are ‘those
NGOs that function as market oriented non profit businesses’, would necessarily
be more cost effective and efficient. This would result from their ‘relative
isolation’ from the strong authoritarian and hierarchical social forms, which
characterise and impede traditional government. Independent of these
constraints, it is believed that private agencies, PSCs and NGOs would be able to
deliver goods and services in ways that are regarded typical of market exchanges,
i.e., neutral of considerations other than economic efficiency.
Having considered the political and economic rationales for decentralisation and
also having discussed albeit briefly the different types of decentralisation, this
paper now shifts attention to fiscal devolution. But before that its important to
note that it is always premised that decentralisation can be designed. In other
words, each country can design its own form of decentralisation. So, what are the
key issues in designing decentralisation? These are: territorial demarcation in
design; nature and functions of institutions; the issue of ownership;
intergovernmental relations; and financial autonomy.
Fiscal devolution is related more to the question of intergovernmental fiscal
relations and financial autonomy.

Page 8
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Intergovernmental Relations and Financial
Autonomy
Smith (1985) provides an exhaustive discussion on intergovernmental relations
emphasising how critical they are in the framing of decentralisation policies.
Intergovernmental relations basically refer to relations between different tiers or
levels of government. Intergovernmental relations concern the links between
different levels of government in a decentralised system, i.e., the centre, province
and district. Decentralisation necessarily redefines relations between levels of a
government to a greater or lesser degree. How effectively it does may have
profound implications for the success of decentralisation, because despite the
initiation of formal decentralisation policies, ‘unsuitable’ intergovernmental
relations can engender tense relationships between central and local
governments.
Intergovernmental relations can affect the nature and extent of decentralisation,
in its various forms, critically. For instance, at one extreme, central authorities
might simply unload functions onto local government and abdicate any
responsibility. At the other end, central government agencies act as facilitators
and supporters of the local government. Strong proponents of decentralisation,
sometimes view the centre’s role as overbearing particularly in the processes of
devolution that entail the transfer of powers to elected local representatives.
Others more suspicious of local politics and capacities suggest that accountability
and service standards are best maintained by strong supervision, or at least
monitoring, of the local government by the centre. The key issue then is
regarding the attitude of the central government regarding the extent of control
that it wishes to relinquish, as well as the relative position of bargaining that
different local governments may have vis-à-vis the centre. This last aspect can
also depend on a range of factors like the respective political parties that are in
power at the centre and the state, differing ideological rhetoric adopted by these
parties and the significance of regional politics at the national level. The
important thing to bear in mind is that within the same country, different sub-
national governments can have very different relations with the central
government, which can potentially affect the uniform adoption of
decentralisation policies.
On the issue of financial autonomy, the nature of financial arrangements for local
government functioning is a key index of the degree of decentralisation.
Territories can be delineated, their functions allocated and institutions created,
but if authority over revenue and expenditure is retained by the central
government then decentralisation is partial at best. Fiscal decentralisation that
concerns the transfer of fiscal and expenditure powers from the central
government to lower levels of the government is a critical component of
decentralisation policies.

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7
We discuss the fiscal arrangements in detail in the following section. The point of
raising this issue here is to emphasise their significance while devising new
institutional arrangements that are to be viable financially.
Fiscal Federalism
The Principles of Fiscal Federalism
The problems of a decentralised fiscal system have received much attention in
the public finance literature. The fiscal structure in some countries like the US
was designed to maximise the autonomy of the States and to ensure that the
federal government only managed core fiscal functions (like foreign affairs and
defence).
In recent times, the World Bank, and aid agencies have begun to assert that
decentralisation of economic powers - especially spending powers - from central
government to provinces and cities is an essential part of an economic reform
package. The shift in the thinking of multilateral organisations is cemented on
arguments that are presented in World Bank (1997) and also in OECD (1997).
These assertions are significantly influenced by theoretical developments in the
discussion on fiscal federalism. Hence, it becomes important to discuss the basic
theory of economic decentralisation. These theoretical issues begin with
considering the basic fiscal functions of government and inquire whether each
function, theoretically, belongs to central government, to the State government
or to both. The functions of government require a theory of the State. So, what
are these functions? The question to answer in thinking about fiscal devolution
and economic development is the one which studies on fiscal decentralisation
always begins with: Should the allocation, distribution and stabilisation functions
be centralised or could they be decentralised? We consider each of these
functions of the State below and try to answer this question which should help us
in our discussions on the way forward for Kenya.
The allocation function refers to the provisioning of public goods by the
government, which are defined as goods that are produced by the public sector
for the benefit of the community as a whole. Examples of such goods include
justice, police, foreign affairs and defence. However, the allocation function may
be broader in its remit depending on what is demanded by the community. Thus
health education, water supply etc. may also be public goods.
When discussing the allocation function it is important to distinguish between the
provision of public goods and the production of public goods. For example a
government may provide education either by running schools in its jurisdiction
or by paying the fees of students who study in privately run schools. The
allocation function is most directly related to the question of economic
decentralisation: Should social goods and services be provided on a centralised or
 Page 10
8
a decentralised basis? Some public goods are such that the incidence of their
benefits is nation-wide (Like defence, foreign affairs etc) while others (rubbish
collection, street lighting etc) are geographically limited in scope. The general
conclusion that emerges from theories of economic decentralisation is that public
goods and services should be provided by local government when their benefits
accrue to a local population and by central government when the benefits accrue
to the nation as a whole.
This sounds fairly simple. However, in practice several problems may arise: in
some cases, in the provision of public goods, the cost of providing a good may
fall, the larger the number of consumers who benefit from it. There is the
problem of congestion. Then problems may arise because of differences in
preferences and income. In making the general proposition that allocation should
be decided by the geographical remit of a public good we often forget that
peoples preferences and incomes may differ across communities. Moreover,
when we speak of “local” and “Central” units we also have to deal with the
problem of optimum group size. And finally, there are two other complicating
issues. The first one is that of mixed national-local goods. Some goods are both
national and local in character. And the second one relates to the protection of
minority preferences. It is assumed that the preferences of members of a
community are those of its majority. But, what about minorities?
The distribution function is defined as those activities undertaken by a government
to bring about greater equality in income and wealth. The extent to which this
function is a part of a government’s public policy remit differs according to
country and historical context. However, in principle, it is accepted that if there is a
concern with equalising distribution then that concern is addressed by the
government and not by private agents. It would appear, in the first instance that
policies to adjust the distribution of income amongst individuals should be
conducted on a nation-wide basis because attempts to adjust within a local area
can be frustrated by the “voting with the feet effect”. Hence it is a principle of
economic decentralisation theory that fiscal redistribution should largely be a
centralised function.
However, this does not mean that the distribution question is not relevant to the
theory of economic decentralisation. This is because even if one accepts that
decentralised units cannot address the question of the National distribution of
income, there still remains the question of equity between rich and poor regions.
This brings in the key issue of fiscal equalisation.
The stabilisation function refers to the use of economic policy to maintain a stable
and smoothly running economy. This refers to the responsibility government has
for ensuring an appropriate money supply, keeping the balance of payments
under control, and ensuring that inflation is not excessive. Stabilisation too is
viewed largely as a centralised function.

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The major reason why stabilisation policies are considered to be best
administered at the central level is this: regions and provinces in a country have
no means of “insulating” themselves from policies adopted in other regions or
provinces. Thus any policies applied to control inflation; unemployment or
growth within a province will “leak” outside the province. For example suppose a
region decides to control unemployment by increasing spending on public works
and raising taxes. This may result in a situation where taxpayers emigrate to other
provinces and the unemployed from other provinces come and find work in this
province. This would frustrate the original aim of the policy. At the national
level, controls on emigration make this phenomenon unlikely.
Similarly when it comes to monetary policy it is impossible to imagine a situation
where local authorities all have the right to print and distribute money, as this
would frustrate national control over the money supply. In summary the degree
of fiscal and monetary co-ordination required to run stabilisation politicos is
unlikely to happen in a decentralised setting.
However, if such important parts of government policy - stabilisation and
distribution - are centralised then that still raises the question of how these
policies are executed at local levels. In the case of distribution, it is clear that
solving or alleviating the problem of regional inequality involves multi-party
negotiations between the Central government and local units. In the case of
stabilisation, too, keeping inflation low, and ensuring solvency in the balance of
payments involves ensuring that central and local policies are harmonised. Thus
the problem of fiscal decentralisation does not end once we have decided on the
appropriate assignment of functions between central and local governments.
There still remains the question of how central and local governments interact
with each other - their economic relationships are an integral part of the study of
economic decentralisation. This is the issue of intergovernmental fiscal relations.
Firstly, intervention by a higher level of government may be needed to correct spillover of benefits.
In the model discussed above it was assumed that expenditures incurred on
providing public goods in one area would only benefit the residents of that area.
In practice, of course, this is not true.
Economic theory cannot come up with any solution for this problem, except an
extreme one: to centralise provision of all goods where spillovers occur! In
practice however, this issue is often resolved through negotiation. In such a
situation it becomes essential to work out some form of contractual arrangement
between local areas that allow benefit spillovers to be recognised. Hence, we need
inter-governmental contractual arrangements to deal with such spillovers. Such
contracts may involve pooling resources, payments by provinces that benefit
from spillovers to provinces that lose from them, or sharing of facilities to make
spillovers redundant.

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Secondly, the central government may consider certain local services to be of vital strategic
importance and hence may wish to subsidise them. There are two kinds of strategic issues
that arise in this context, where intergovernmental negotiation becomes
necessary. The first has to do with cases where the use of a resource by one local
area inhibits the use of a resource by another local area. A classic example of this
is water supply. Suppose two provinces obtain water from the same river. This
can become a major source of political contention, and some inter-jurisdictional
negotiation is vital here. Clearly in such a situation some co-ordination becomes
imperative. Provinces would need to come to an agreement regarding the
appropriate property rights that each has to the common resource- the river. This
is the most familiar example of a strategic issue, which may require central
government negotiation or tripartite discussion between provinces and the
central government. Another case could be that of pollution where, for instance,
a city's pollutants are dumped in the countryside.
The second type of strategic issue that arises in this context is that which occurs
when it becomes impossible for local jurisdictions to come to agreements with
each other because the number of “stakeholders” if an issue is too large. Here
strategic intervention becomes essential.
Thirdly, the process of allocation of public goods may itself raise issues of distribution equity
across local jurisdictions. We have already recognised the principle that distributional
issues are best dealt with at a central level. But is allocation independent of
distribution? Can issues of equity be separated from issues of allocation? In
economic theory, it is argued that governments may desire to ensure the
availability of some essential goods and services in a quantity that is affordable to
all for policy reasons. Hence, the “merit goods" argument may often warrant
central intervention even in the allocation function.
The other argument has to do with the assumption that all provinces have the
same capacity to provide goods and services. This is patently untenable. Poorer
provinces have smaller tax bases and hence a lower capacity to provide goods
and services compared to richer provinces. Hence, there may be a case of the
central government intervening to ensure that poorer provinces do not seriously
suffer in performing the allocation function on account of their relative poverty.
For example, leaving the allocation function entirely to provincial governments
may mean that children in richer provinces have a better education than children
in poorer provinces. This may not be ethically acceptable to the population as a
whole and hence there is here a case for central intervention to ensure common
minimum standards.
Second, it may be the case that in some provinces the cost of providing a service
may be greater than in other provinces due to geographical or other
considerations. Thus a province in a remote or hilly area may not be able to
supply transport services at the same level of cheaper cost as a province in the
plains. Provinces adjoining international borders may have to incur higher

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expenditure on policing. Provinces prone to natural disaster may need extra
assistance. Again, in such cases there may be a case for the central government
to intervene in the allocation function.
Lastly, intervention by the centre might be necessary because it may be, more advantageous to
tax at central government rather than local government. Provinces may provide services.
But should they also raise taxes (the question of tax efficiency)? As we have
already seen this may give richer provinces an unequal advantage over poorer
provinces. Benefit spillovers too complicate issues. Moreover by drawing on the
entire economy as a tax base it may be possible to make the taxation system more
efficient and cost effective. For these reasons it is often the case that central
governments collect taxes and then distribute the proceeds to State governments
according to some formula like population, per capita income etc. Thus, even if
provinces provide public services, it may not be the case that provinces will
finance them.
Strategic, distributional and tax efficiency issues often involve pooling and
devolution of resources by the Centre to the local government units. What
happens is that a national tax base is created? This tax base is then devolved to
local units taking account of distributional, strategic and efficiency
considerations. The resources devolved to local units are called Grants. The term
“Grants” should not be construed, as it often is, to mean hand-outs from the
centre to local units, as finally all the resources of the State are equally the
property of the centre and the local authorities.
The theory of grants is concerned with how grants may best be devolved to
address the problems of inter-governmental fiscal relations discussed above. One
of the key issues is that of distribution which is a major plank when it comes to
consideration of equitable development. In addition, the objective of fiscal
equalisation is seen to be an important issue in a fiscally devolved system.
The type of grant structures that best suits a country like Kenya thus depends
largely on concrete circumstances. Economic theory of decentralisation does,
however, provide some discussion of the relative merits of the different types of
grants: matching versus non-matching grants; and general versus selective grants.
We will only present here the conclusions that economic theory of grants arrive
at and distil the recommendations that would be applicable to a country like
Kenya.
The most important policy implication on the choice between matching and non-
matching grants is that if a government wants to increase the consumption of
specific public goods then matching grants are better than non-matching grants.
This is because the scope for “leakage” of the grant into consumption of non-
public goods is limited. However, an equally important policy implication is that,
irrespective of whether a grant is matching or non-matching, there will always be
some “leakage” from a grant! The general implication of this is that the scope for
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12
central government to “fine tune” public expenditure in local areas through the
use of grants is limited. To this extent, since local governments are more in tune
with local preferences, it can be argued using this theory that the bulk of grants
should be non-matching grants, and matching grants should be used selectively.
The other important issue in the case of a non-matching grant that is provided by
government is whether it should be given as a general grant or as a selective
grant. The policy implications of the ensuing analysis are interesting. Whether or
not selective grants achieve their intended purpose depends on two things: the
intensity of demand for public goods other than the good for which the selective
grant is offered, and the magnitude of the selective grant. For example suppose a
government wishes to use grants to increase the availability of primary education
in a province. The analysis tells us that the extent to which this aim can be
achieved though selective grants depends on (a) the extent to which the
community values primary education, as opposed to other public goods like
health, water supply etc. (b) the amount of money the centre is able to allocate as
a selective grant. Small selective grants will not succeed in their aim.
In general both these examples show us that community preferences are vital in
determining the success of strategic central interventions using grants.
Governments cannot assume that just because they “throw some money” at a
project or a policy goal, that goal will be achieved.
The Kenyan Lesson
Decentralisation has been of central concern in Kenya. The attempts to
undertake decentralisation in the form of devolution can be traced as far back as
pre-independence time when the first Constitution was being prepared. The
independence constitution contained a decentralisation system based on units
identified as “Jimbo
1
”. However, this system collapsed as soon as it was put in
place and the country reverted to a Unitary State. The unitary state system (see
Figure 1) consists of the Central Government, Local Authorities, State owned
enterprises and extra-budgetary institutions. The Government structure can be
split into two namely, administrative and economic structures. The administrative
structure is exemplified by a provincial administration. Here the Government
links to the grassroots or village level through the Provincial Commissioners,
District Commissioners and the District Officers. The District Officers complete
the chain through their link to the Chiefs and Assistant Chiefs.
The economic structure on the other hand is more complex than the
administrative one. This comprises Ministry headquarters at the top with
Provincial Departmental heads and District Departmental Heads at the Province
and District levels respectively. These link to the lowest levels through field
1
“Jimbo” is a Swahili word for region. The country was divided into regions by the colonial
government as it left and each region had a significant level of political autonomy.

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officers like extension workers, Hospital workers, and teachers. The Provincial
Departmental Heads mainly provide an operational link to the Districts. Not
many projects and programmes are implemented at the provincial level.
Implementation mainly takes place at the District level.
The Ministry Headquarters have a second line of service provision to the people
through the state owned enterprises (Parastatals). Funds for service provision and
budget implementation can therefore be channeled to the targeted areas through
the Ministry Headquarters, through the District offices, or through Parastatals as
grants.
Figure 1 shows that what exists in Kenya today is an indication that the country
never actually managed to design a decentralisation framework that would pass
the criteria for a sound decentralisation. However, decentralisation has remained
an important issue as exemplified by the attention this is receiving in the new
Constitution currently being drafted.

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14
Figure 1: The Structure of Government in Kenya
The current system of Government notwithstanding, there has been policy
initiatives that have been undertaken over the years which have the semblance of
an attempt to decentralise. The first example as noted includes the establishment
of local authorities (even though all the powers are centred on the Minister for
Local Government). The country’s decentralisation history can therefore be said
to have began with local authorities. Even though the current local government
system was laid in 1963, the local authorities have been in existence for much
longer. A number of reforms have been made to strengthen local authorities. The
reforms include the Sessional Paper No. 12 of 1967; the Transfer of Functions
Central Government
(Ministries/Departments)
Province
(Provincial Commissioner, Heads of Departments,
Provincial Monitoring and Evaluation Committee)
District
(District Commissioner, Departmental Heads, District Development
Committee, District Evaluation Committee)
Division
(District Officer, Divisional Heads, Sub-DDC)
)
Location
(Chief, Location Development Committee,
Extension staff)
Sub-Location
(Assistant Chief, Extension staff, Sub-location
Development Committee)
Local
Authorities

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15
Act of 1969 and the Local Government Act of 1977. The local authorities at
independence had various functions assigned to them. But the Transfer of
Functions Act undermined the revenue base of local authorities by transferring
major functions such as primary education, health, road maintenance as well as
the Graduated Personal Tax to the Central Government. The result has been that
apart from a few local authorities such as Nairobi and Mombasa which still have
some schools and health facilities, almost all of the other authorities do not
perform any of the functions that the Transfer of Functions Act touched on.
The country has also enacted various White Papers to promote participatory
development planning and management such as the highly acclaimed Sessional
Paper No. 10 of 1965 on African Socialism, Sessional Paper No. 1 of 1986 on
Economic Management, creation of Regional Development Authorities, and the
formulation of the District Focus for Rural Development Strategy in the 1980s.
The Sessional Paper No. 10 emphasised the importance of decentralised planning
in Kenya in the hope of extending planning functions to provinces, districts, and
municipalities. The objectives of the District Focus for Rural Development
which became operational in July 1983 were to: shift decision making closer to
the beneficiaries and the point of implementation; encourage and strengthen local
participation; speed up development by prompting equity in resource allocation;
and arrest rural-urban imbalance and increase employment opportunities.
However, in spite of all these initiatives little seems to have been achieved in
Kenya in terms of devolution in particular. There has not since independence
been significant restructuring of the existing Central Government and local
government structures to facilitate communities participation in their own local
development affairs. In this respect, the following are some of the weaknesses
that can be drawn from the past decentralisation efforts:
(a) There has been existence of different institutional arrangements which apply
different approaches in service delivery;
(b) Existence of local authorities with weak revenue bases and ineffective
service delivery systems. This weakness has for the last few years been
addressed through the scrapping of the local authority service charge which
was being paid by the workers living in a given local authority with the Local
Authority Transfer Fund (LATF) which is 5 per cent of the income taxes
collected by the central government. The formula used in distributing this
money recognises the variations in the demand for the quantity of service in
different local authorities.
(c) Poor governance characterised by corruption and political interference in
the District Focus for Rural Development which led to improper
prioritisation in the resource allocation process at the District level.

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(d) Lack of a formal legal mandate and weak institutional framework rendering
the District Development Committees decisions under the DFRD
unenforceable.
On the basis of the foregoing discussion, it is evident that Kenya has not
achieved much in decentralisation and with respect to fiscal incidence and
growth; the centre through the central government has had all the control. In this
respect, the main conclusion that one can make is that attempts to
decentralisation so far in Kenya have failed to achieve the types of
decentralisations that have been witnessed elsewhere in Africa. But having said
that, it is evident that the country has been keen for a decentralisation system that
works and the current Constitution Review process has in the draft constitution
proposed the principles of devolution; the organisation of these devolution
principles; the powers of devolved governments and the intergovernmental
relations. While the review process is not complete, the last leg of the discussion
will start in November 2003 and consensus is starting to emerge on the
devolution process that the country should adopt.
The principles and objectives of devolution in the draft constitution are as
follows among others:
(a) To give powers of self-governance to the people at all levels and enhance
participation of people and communities in the exercise of the power of the
state;
(b) Ensure democratic and accountable exercise of power;
(c) Increase checks and balances and the separation of powers;
(d) Ensure equitable sharing of national and local resources throughout Kenya,
with special provisions for marginalised areas;
(e) Facilitate the decentralisation of central government powers.
There are four tiers of Governments below the national that have been envisaged
based on the current existing administrative boundaries. The four levels of
Government will be: village; location; district and province. The district will be
the principal level of devolution powers. All the devolved authorities will be
entitled to equitable share of revenue raised nationally to enable them to provide
basic services. The devolved governments are also entitled to benefit from local
resources to ensure that the benefit incidence to the local community is
maximised.
On the financial autonomy (fiscal decentralisation question), while the principle
functions of the different tiers are yet to be fully determined, the National
Government will be responsible for the collection of the major sources of
revenue. The Districts may also impose taxes or levies. The principal of fiscal
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equalisation is inbuilt in the constitution such that the national revenue shall be
shared equitably. More specifically, through a commission for local government
finance, there will be unconditional grants; conditional grants; and equalisation
grants that will be shared from the centre to the lower levels of Government. The
intergovernmental relations are also defined in the draft and do not deviate
significantly from the theoretical propositions discussed in earlier parts of this
paper.
Lessons for Kenya from International Best Practice in
Fiscal Decentralisation
Our discussion so far has argued that while there are both political and economic
arguments for decentralisation, Kenya has been a failure in implementing
decentralisation. However, the country is today determined to get it right as it
undergoes a transition and as it redefines its institutions of government through a
new Constitution. There are lessons that the country can draw from, which have
been summarised in the literature by Roy Bahl as implementation rules for fiscal
decentralisation. In this section we highlight what each of the implementation
rules in decentralisation mean for Kenya.
Fiscal decentralisation is a comprehensive system: What this implies for the country is
that to implement, there is need to begin with the design of the system. The
current exercise being in the right direction. But for it to work, it will be
important to put in place the appropriate laws and being a system, piece-meal
applications are likely to fail as has happened in the past. However, given the
nature of the shocks that fiscal decentralisation are likely to have in the
country, a ‘phased-in’ strategy is the best approach. Therefore, the gains from
decentralisation may not necessarily be immediate.
Finance follows functions: Essentially, the country will have to decide what are
the functions to be carried out by the lower levels of government even before
determining what taxes or grant formula to use. The function assignment
must come first, followed by the revenue assignment, then the grant formula
and finally whether the lower levels of government should be given powers
to borrow. So far, the draft constitution has dealt with the expenditure and
revenue assignment and also with the types of grants. The details of these
require that the legislation to put it into effect follow the same order in
dealing with the arising issues in fiscal decentralisation.
There should be a strong central ability to monitor and evaluate decentralisation: It is
anticipated that for fiscal decentralisation to work that the central
government show leadership in financial accounting; auditing rules; disclosure
requirements for borrowing; adjustment of grant formula; and technical
assistance for lower levels of government. Moreover, the centre should have
a strong fiscal analysis unit and an extensive data system. The reality of Kenya
indicate that this is likely to be one of the greatest challenges to the success of

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18
fiscal decentralisation in the country. The financial management systems in
the country today are weak and the central capacity as it exists today is not
sufficient both to carry out the required fiscal analysis and also monitor.
There is therefore a significant risk that given the existing financial systems in
the public sector and capacity for technical analysis of the issues in
decentralisation the country’s decentralisation programme might turn out to
be sub-optimal.
Intergovernmental systems for urban and rural sectors are different: Due to differences
in sub-national governments capabilities, the intergovernmental systems are
different for different types. Experience even here in Kenya has been that
higher levels of Government if one may call the City of Nairobi that are given
more powers to tax and borrow while the lower or smaller levels of
government rely more on grants. The country will thus need to appreciate
that intergovernmental relations can be different not only because of the
likelihood of political differences in future between the centre and lower
levels of government but also because capacities differ.
Significant taxing powers should be given to local governments: It does not make much
sense to assign expenditure functions without significant taxing powers.
Decentralisation may not be complete if the taxing powers are limited.
However, the country will have to develop capacity for property taxation,
being the leading candidate of a tax that cannot easily be exported in terms of
financing the activities at the lower levels of government. As the situation is
today, most local governments in Kenya have very limited capacity in
property taxation and the centre might have to be involved here initially in
determining the valuation of properties in the different local governments.
Central governments must make decentralisation rules that they make: The economic
and political history of the country is that even where constitution and
legislative provisions exist, the Government has tended to flout some of the
rules. The rule of law has not always been seen to be sacrosanct and what this
means is that there is a high risk that if there is no rule of law,
decentralisation might not achieve its intended objectives. This is going to be
a challenging area for the country but a risk that will need to be appreciated
from the outset.
Keep it simple: Given the diverse interests in the country and the fact that it is a
young democracy, there has been a temptation to accommodate more and
more concerns as they arise in the process of the constitution making. A case
in point has been the number of districts that have been accepted as the
recognised number in the draft constitution. The many demands mean that
the country is likely to come up with a very complex decentralisation system.
However, simple intergovernmental systems are easier to administer and they
also minimise the political tensions that tend to be engendered by
decentralisation processes. As a starting point, there is a strong case to keep

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fiscal decentralisation simple since the current experience indicates that there
is likely to be limited capacity at the local levels and it is only by keeping it
simple that the costs of monitoring and evaluation can be minimised.
Intergovernmental fiscal design should match decentralisation reforms objectives: Different
designs have different objectives. In Kenya, it is clear that the political
argument for decentralisation seem to far outweigh the economic argument.
Indeed, there have been arguments that the territorial demarcation and the
tiers of governments being proposed might result in unviable local
government entities. This being the case, it will be important that the fiscal
design match the political objectives. Financial autonomy both in the
expenditure and revenue side will need to be designed in such a way that the
political tensions that have led to the clamour for devolution are not
engendered in the new government system.
Fiscal decentralisation should consider all levels of Government: This rule has got more
to do with a decentralisation situation where the territorial demarcation may
result in some regions/provinces that are so large such that the provincial
autonomy may compromise central control. This is unlikely to be a key issue
in Kenya unlike the outcomes that have been witnessed in countries like
India and China where decentralisation objectives with respect to the central
control have been interfered with by the autonomy claims of larger
provinces/regions.
Impose a hard budget constraint: For decentralisation to work, it is important to
have discipline at the lower level strongly enforced. A hard budget constraint
which can take various forms such as – no deficit grants measures, no bailout
of debt, or no direct coverage by central government of year-end shortfalls –
should be put in place. Once again, this is likely to be a risk area for fiscal
decentralisation in Kenya given that the central government has always failed
to operate under a hard budget constraint. Failure to do so at the local
government levels would impose hard macroeconomic adjustment
requirements for the country and may in the end lead to intergenerational
inequality even for regions that are disciplined when the debts of
undisciplined regions are taken up by the central government.
Intergovernmental systems are always in transition: A realisation of this in the design
process of decentralisation is likely to result in institutions that would
facilitate the capturing of the transitional issues. For instance, the fiscal
architecture or revenue capacity for different regions may change at different
rates and in different directions. This would call for the adjustment of the
grant formula in operation. Unless there is an institutional framework to
address the challenges posed by fiscal architecture changes in different
regions, tensions may emerge between different regions which might cause
instabilities in the whole decentralisation system. Fortunately, the draft
constitution for Kenya recognises this challenge and proposes to entrench a

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local government fiscal commission which would deal with challenges such as
changing fiscal architecture.
There must be a champion for fiscal decentralisation: Theory and practice of
decentralisation has shown that it is as much a political process as it is an
economic process. Consequently, if there is no champion for fiscal
decentralisation, there is a risk that the objectives may not be achieved. The
failure of decentralisation attempts in the country can be attributed to lack a
champion. Even today, there is a perception that the momentum that was
there in the last few years have been lost, at least in the case of one of the
wings of the ruling coalition. Unless the whole ruling coalition or the leading
lights of the coalition from the highest level believe in fiscal decentralisation,
there is a high likelihood that the process might fail. Lessons from other
African countries will be useful here whereby the country can evaluate where
decentralisation has succeeded and where it has failed, the level of
involvement of political leadership.
Conclusion
This paper has looked at the theoretical arguments for decentralisation and some
of the important theoretical issues that have to be dealt with in designing
decentralisation. The paper then briefly looked at the history of decentralisation
in Kenya and drew some of the weaknesses in this history. The conclusion that
was reached in this brief discussion is that Kenya never really had any significant
decentralisation and the various attempts made failed in their objectives.
However, it was pointed out that currently the on-going Constitutional reform
process is convinced about the need for decentralisation to succeed in the
country. The paper noted that the political argument for decentralisation appears
to be the main motivation for decentralisation as opposed to economic
arguments. However, through a discussion of the rules of implementation for
fiscal decentralisation based on international experience, it emerged that there are
several risks that exist in particular related to capacity both at the national level
and subsequent local governments which might significantly affect the non-
attainance of an optimal outcome for decentralisation in the country. But having
said that, there is no one neat type of decentralisation and it is possible that as the
country continues to design its decentralisation, experience from the successes
and failures in the African continent will inform greatly the final system that the
country adopts.

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 © Metaphysics Research Lab, CSLI, Stanford University

Federalism
First published Sun Jan 5, 2003; substantive revision Thu Oct 12, 2006

Federalism is the theory or advocacy of federal political orders, where final authority is divided between sub-units
and a center. Unlike a unitary state, sovereignty is constitutionally split between at least two territorial levels so that
units at each level have final authority and can act independently of the others in some area. Citizens thus have
political obligations to two authorities. The allocation of authority between the sub-unit and center may vary,
typically the center has powers regarding defense and foreign policy, but sub-units may also have international roles.
The sub-units may also participate in central decision-making bodies. Much recent philosophical attention is spurred
by renewed political interest in federalism, coupled with empirical findings concerning the requisite and legitimate
basis for stability and trust among citizens in federations. Philosophical contributions have addressed the dilemmas
and opportunities facing Canada, Australia and Europe, to mention just a few areas where federal arrangements are
seen as interesting solutions to accommodating differences among populations divided by ethnic or cultural cleavages
yet seeking a common political order.
• 1. Taxonomy
• 2. History of Federalism in Western Thought until 1900
• 3. Reasons for Federalism
○ 3.1 Reasons for a federal order rather than separate states or secession
○ 3.2 Reasons for preferring federal orders over a unitary state
• 4. Further Philosophical Issues
○ 4.1 Sources of Stability
○ 4.2 Allocation of Authority
○ 4.3 Distributive Justice
○ 4.4 Democratic Theory
• Bibliography
○ Historical
○ Contemporary
• Other Internet Resources
• Related Entries

1. Taxonomy
Several species of federal orders may be distinguished, and much valuable work contributes to distinguishing and
explicating the central terms (cf. Wheare 1964, King 1982, Elazar 1987a, Riker 1993, Watts 1998).
Federations are here taken to involve territorial divisions of authority, typically entrenched in the constitution which
neither a sub-unit nor the center can alter unilaterally. In comparison, decentralized authority in unitary states can be
revoked by the central legislative authority at will. Such entrenchments notwithstanding, some centralization often
occurs owing to the constitutional interpretations by a federal level court in charge of settling conflicts regarding the
scopes of final legislative and/or judicial authority.
In contrast, confederations have weaker centers than federations do. Typically, in a confederation a) sub-units may
legally exit, b) the center only exercises authority delegated by sub-units, c) the center is subject to sub-unit veto on
many issues, d) center decisions only bind sub-units but not citizens directly, e) the center lacks an independent fiscal
or electoral base, and/or f) the sub-units do not cede authority permanently to the center. Confederations are often
based on agreements for specific tasks, and the common government may be completely exercised by delegates of the
sub-unit governments. Thus many would count as confederations the North American states during 1776-1787,
Switzerland 1291-1847, and the present European Union.
In asymmetric (con)federations the sub-units have different bundles of authority; some may for instance have special
rights regarding language or culture.
If the decisions made centrally do not involve sub-units at all, we may speak of Separate (Split or Compact)
federalism. The USA is often given as example, since the two Senators from each state are not representing or
selected by sub-unit (State) authorities but by electors voted directly by citizens — though this is by sub-unit decision
(U.S. Constitution Art. II Section 1; cf. Dahl 2001). Federations can involve sub-units in central decision-making in at
least two different ways in various forms of interlocking (or cooperative) federalism. Sub-unit representatives can
participate within central bodies — in cabinets or legislatures - (collective agency/compositional arrangement); in
addition they often constitute one central body that interacts with other such bodies, for instance where sub-unit
government representatives form an Upper House with power to veto or postpone decisions by majority or qualified
majority vote (divided agency/relational arrangements).
Two processes of federalism may be identified (Stepan 1999). Independent states may come together by ceding or
pooling sovereign powers in certain domains for the sake of goods otherwise unattainable, such as security or
economic prosperity. Such ’coming together’ federations are typically arranged to constrain the center and prevent
majorities from overriding a sub-unit. Examples include the present USA, Switzerland, and Australia. ’Holding
together’ federations develop from unitary states, as governments’ response to alleviate threats of secession by
territorially clustered minorities. Such federations often grant some sub-units particular domains of sovereignty e.g.
over language and cultural rights in an asymmetric federation, while maintaining broad scope of action for the central
government and majorities. Examples include India, Belgium, Canada and Spain.
In addition to federations, other interesting alternatives to unitary states occur when non-territorial sub-units are
constituted by groups sharing ethnic, religious or other characteristics. Karl Renner and Otto Bauer explored such
arrangements for geographically dispersed cultural minorities, allowing them some cultural and ”personal” autonomy
without territorial self rule (Bauer 1903; Renner 1907; Bottomore and Goode 1978; cf. Tamir 1993). Consociations
consist of somewhat insulated groups in sub-units who in addition are represented in central institutions often
governing by unanimity rather than by majority (Lijphart 1977).
2. History of Federalism in Western Thought until 1900
Johannes Althusius (1557-1630) is often regarded as the father of modern federalist thought. He argued in Politica
Methodice Digesta (Althusius 1603) for autonomy of his city Emden, both against its Lutheran provincial Lord and
against the Catholic Emperor. Althusius was strongly influenced by French Huguenots and Calvinism. As a
permanent minority in several states, Calvinists developed a doctrine of resistance as the right and duty of "natural
leaders" to resist tyranny. Orthodox Calvinists insisted on sovereignty in the social circles subordinate only to God's
laws. The French Protestant Huguenots developed a theory of legitimacy further, presented 1579 by an author with
the telling pseudonym "Junius Brutus" in Vindiciae Contra Tyrannos. The people, regarded as a corporate body in
territorial hierarchical communities, has a God-granted right to resist rulers without rightful claim. Rejecting
theocracy, Althusius developed a non-sectarian, non-religious contractualist political theory of federations that
prohibited state intervention even for purposes of promoting the right faith. Accommodation of dissent and diversity
prevailed over any interest in subordinating political powers to religion or vice versa.
Fundamentally dependent on others for the reliable provision of requirements of a comfortable and holy life, humans
require communities and associations that are both instrumentally and intrinsically important for supporting
[subsidia] their needs. Families, guilds, cities, provinces, states and other associations owe their legitimacy and
claims to political power to their various roles in enabling a holy life, rather than to individuals' interest in autonomy.
Each association claims autonomy within its own sphere against intervention by other associations. Borrowing a term
originally used for the alliance between God and men, Althusius holds that associations enter into secular agreements
— pactum foederis — to live together in mutual benevolence.
Ludolph Hugo ((ca.) 1630–1704) was the first to distinguish confederations based on alliances, decentralized unitary
states such as the Roman Empire, and federations, characterized by ‘double governments’ with territorial division of
powers, in De Statu Regionum Germanie (1661) (cf. Elazar 1998; Riley 1976).
In The Spirit of Laws (1748) Charles de Secondat, Baron de Montesquieu (1689-1755) argued for confederal
arrangements to ensure the ideal scale of government required for political liberty understood as non-domination —
that is, security against abuse of power. A ‘confederate republic’ with separation of powers secures the requisite
homogeneity, identification and self-sacrifice within sufficiently small sub-units where the common good subdues
private interests thus preventing tyranny and ‘internal imperfection’. The sub-units pool powers sufficient to secure
external security, reserving the right to secede (Book 9, 1). Sub-units also serve as checks on each other, since other
sub-units may intervene to quell insurrection and power abuse in one sub-unit.
David Hume (1711-1776) disagreed with Montesquieu that smaller size is better. Instead, "in a large democracy ...
there is compass and room enough to refine the democracy." In "Idea of a Perfect Commonwealth" (Hume 1752)
Hume recommended a federal arrangement for deliberation of laws involving both sub-unit and central legislatures.
Sub-units enjoy several powers and partake in central decisions, but their laws and court judgments can always be
overruled by the central bodies, hence it seems that Hume’s model is not federal as the term is used here. He held that
such a numerous and geographically large system would do better than small cities in preventing decisions based on
“intrigue, prejudice or passion” against the public interest.
Several 18th century peace plans for Europe recommended confederal arrangements. The 1713 Peace Plan of Abbé
Charles de Saint-Pierre (1658-1743) would allow intervention in sub-units to quell rebellion and wars on non-
members to force them to join an established confederation, and required unanimity for changes to the agreement.
Jean-Jacques Rousseau (1712-1778) presented and critiqued Saint-Pierre’s proposal, listing several conditions
including that all major power must be member, that the joint legislation must be binding, that the joint forces must
be stronger than any single state, and that secession must be illegal. Again, unanimity was required for changes to the
agreement.
Immanuel Kant (1724-1804) defended a confederation for peace in On Perpetual Peace (1796). His Second Definite
Article of a Perpetual Peace holds that the right of Nations shall be based on a pacific federation among free states
rather than a peace treaty or an international state: "This federation does not aim to acquire any power like that of a
state, but merely to preserve and secure the freedom of each state in itself, along with that of the other confederated
states, although this does not mean that they need to submit to public laws and to a coercive power which enforces
them, as do men in a state of nature."
The Articles of Confederation of 1781 among the 13 American states fighting British rule had established a center too
weak for law enforcement, defense and for securing interstate commerce. What has become known as the U.S.
Constitutional Convention met May 25 — September 17 1787. It was explicitly restricted to revise the Articles, but
ended up recommending more fundamental changes. The proposed constitution prompted widespread debate
arguments addressing the benefits and risks of federalism versus confederal arrangements, leading eventually to the
Constitution taking effect in 1789.
The "Anti-federalists" were fearful of undue centralization. They worried that the powers of central authorities were
not sufficiently constrained e.g. by a bill of rights (John DeWitt 1787, Richard Henry Lee) — which was eventually
ratified in 1791. They also feared that the center might gradually usurp the sub-units’ powers. Citing Montesquieu,
another pseudonymous ‘Brutus' doubted whether a republic of such geographical size with so many inhabitants with
conflicting interests could avoid tyranny and would allow common deliberation and decision based on local
knowledge (Brutus (Robert Yates?) 1787).
In what has become known as The Federalist Papers, James Madison (1751-1836), Alexander Hamilton (1755-1804)
and John Jay (1745-1829) argued vigorously for the suggested model of interlocking federal arrangements (Federalist
10, 45, 51, 62). Madison and Hamilton agreed with Hume that the risk of tyranny by passionate majorities was
reduced in larger republics where sub-units of shared interest could and would check each other: "A rage for paper
money, for an abolition of debts, for an equal division of property, or for any improper or wicked project, will be less
likely to pervade the whole body of the Union than a particular member of it." (Federalist 10). Splitting sovereignty
between sub-unit and center would also protect individuals’ rights against abuse by authorities at either level, or so
believed Hamilton, quoting Montesquieu at length to this effect (Federalist 9).
Noting the problems of allocating powers correctly, Madison supported placing some authority with sub-units since
they would be best fit to address “local circumstances and lesser interests” otherwise neglected by the center
(Federalist 37).
Madison and Hamilton urged centralized powers of defense and interstate commerce (Federalist 11, 23), and argued
for the need to solve coordination and assurance problems of partial compliance, through two new means: Centralized
enforcement and direct applicability of central decisions to individuals(Federalist 16, also noted by Tocqueville
1945). They were wary of granting sub-units veto power typical of confederal arrangements, since that would render
the center weak and cause “tedious delays; continual negotiation and intrigue; contemptible compromises of the
public good.” (Madison and Hamilton, Federalist 22; and cf. 20).
They were particularly concerned to address worries of undue centralization, arguing that such worries should be
addressed not by constraining the extent of power in the relevant fields, such as defense, but instead by the
composition of the central authority (Federalist 31). They also claimed that the people would maintain stronger
"affection, esteem, and reverence" towards the sub-unit government owing to its public visibility in the day-to-day
administration of criminal and civil justice (Federalist 17).
John Stuart Mill (1806-1873), in chapter 17 of Considerations on Representative Government (1861), recommended
federations among "portions of mankind" not disposed to live under a common government, to prevent wars among
themselves and protect against aggression. He would also allow the center sufficient powers so as to ensure all
benefits of union — including powers to prevent frontier duties to facilitate commerce. He listed three necessary
conditions for a federation: sufficient mutual sympathy "of race, language, religion, and, above all, of political
institutions, as conducing most to a feeling of identity of political interest"; no sub-unit so powerful as to not require
union for defense nor tempt unduly to secession; and rough equality of strength among sub-units to prevent internal
domination by one or two. Mill also claimed among the benefits of federations that they reduce the number of weak
states hence reduce temptation to aggression, ending wars and restrictions on commence among sub-units; and that
federations are less aggressive, only using their power defensively.
Pierre-Joseph Proudhon (1809-1865), in Du Principe fédératif (1863) defended federalism as the best way to retain
individual liberty within ‘natural’ communities such as families and guilds who enter pacts among themselves for
necessary and specific purposes. The state is only one of several non-sovereign agents in charge of coordinating,
without final authority.
Philosophical reflections on federalism during the 20th century has addressed several issues, including reasons for
federalism to concerns for stability, the legitimate allocation of authority between sub-unit and center, distributive
justice and challenges to received democratic theory.
3. Reasons for Federalism
Many arguments for federalism have traditionally been put in terms of promoting various forms of liberty in the form
of non-domination, immunity or enhanced opportunity sets (Elazar 1987a). When considering reasons offered in the
literature for federal political orders, many appear to be in favor of decentralization without requiring constitutional
entrenchment of split authority. Two sets of arguments can be distinguished: Arguments favoring federal orders
compared with secession and completely independent sovereign states; and arguments supporting federal
arrangements rather than a (further) centralized unitary state. They occur in different forms and from different starting
points, in defense of ’coming together’ federalism, and in favor of ’holding together’ federalism.

3.1 Reasons for a federal order rather than separate states or secession
- Federations may foster peace, in the senses of preventing wars and preventing fears of war, in several ways. States
can join a (con)federation to become jointly powerful enough to dissuade external aggressors, and/or to prevent
aggressive and preemptive wars among themselves. The confederate American states moved to a federation largely
for the first of these reasons, since the center powers of the Confederacy were too weak for protection from external
threats. The European federalists Altieri Spinelli, Ernesto Rossi and Eugenio Colorni argued the latter in the 1941
Ventotene Manifesto: Only a European federation could prevent war between totalitarian, aggressive states. Such
arguments assume, of course, that the (con)federation will not become more aggressive than each state separately, a
point Mill argued.
- Federations can promote economic prosperity by removing internal barriers to trade, through economies of scale, by
establishing and maintaining inter-sub-unit trade agreements, or by becoming a sufficiently large global player to
affect international trade regimes (for the latter regarding the EU, cf. Keohane and Nye 2001, 260).
- Federal arrangements may protect individuals against political authorities by constraining state sovereignty, placing
some powers with the center. By entrusting the center with authority to intervene in sub-units, the federal
arrangements can protect minorities’ human rights against sub-unit authorities (Federalist, Watts 1999). Such
arguments assume, of course, that abuse by the center is less likely.
- Federations can facilitate other ends where credible commitments, coordination or control over ‘spill-over’ effects
and externalities by sovereign states is desired but difficult to ensure without transferring some powers to a common
body. Since cooperation in some areas can create a need for further coordination in other sectors, federations often
exhibit creeping centralization.
- Federal arrangements may enhance the political influence of formerly sovereign governments, both by facilitating
coordination, and - particularly for small states — by giving these sub-units influence or even veto over policy
making, rather than remaining mere policy takers.
- Federal political orders can be preferred as the appropriate form of nested organizations, for instance in ’organic’
conceptions of the political and social order. The federation may promote cooperation, justice or other values among
and within sub-units as well as among and within their constituent units, for instance by monitoring, legislating,
enforcing or funding agreements, human rights, immunity from interference, or development. Starting with the
family, each larger unit responsible for facilitating the flourishing of sub-units and securing common goods beyond
the reach of sub-units without a common authority. Such arguments have been offered by such otherwise divergent
authors as Althusius, the Catholic traditions of subsidiarity as expressed by pope Leo XIII (1891) and Pius XI (1931),
and Proudhon.

3.2 Reasons for preferring federal orders over a unitary state

- Federal arrangements may protect against central authorities by securing immunity and non-domination.
Constitutional allocation of powers to a sub-unit protects individuals from the center, while interlocking arrangements
provide influence on central decisions via sub-unit bodies (Madison, Hume, Goodin 1996). Sub-units may thus check
central authorities and prevent undue action contrary to the will of minorities: "A great democracy must either
sacrifice self-government to unity or preserve it by federalism. The coexistence of several nations under the same
State is a test, as well as the best security of its freedom . . . The combination of different nations in one State is as
necessary a condition of civilized life as the combination of men in society" (Acton 1907, 277).
- Federal orders may increase the opportunities for citizen participation in public decision-making; through
deliberation and offices in both sub-unit and central bodies that ensures character formation through political
participation among more citizens (Mill 1861, ch. 15).
- Federations may facilitate efficient preference maximization more generally, as formalized in the literature on
economic and fiscal federalism - though many such arguments support decentralization rather than federalism proper.
Research on ’fiscal federalism’ addresses the optimal allocation of authority, typically recommending central
redistribution while local provision of public goods. Federations may thus allow optimal matching of the authority to
create public goods to specific affected subsets of the populations. If individuals' preferences vary systematically by
territory according to external or internal parameters such as geography or shared tastes and values, federal — or
decentralized — arrangements that allow local variation are favored, for several reasons. Local decisions prevent
decision-making from becoming overloaded, and local decision-makers may also have a better grasp of affected
preferences and alternatives, making for better service than would be provided by a central government that tends to
ignore local preference variations (Smith 1776, 680). Granting powers to population subsets that share preferences
regarding public services may also increase efficiency by allowing these subsets to create such ‘internalities’ at costs
borne only by them (Musgrave 1959, 179-80, Olson 1969, Oates’ 1972 ’Decentralization Theorem’). Federal
arrangements also shelter territorially based groups with preferences that diverge from the majority population, such
as ethnic or cultural minorities, so that they are not subject to majority decisions severely or systematically contrary
to their preferences. Non-unitary arrangements may thus minimize coercion and be responsive to as many citizens as
possible (Mill 1861 ch. 15, Elazar 1968; Lijphart 1999). Such considerations of economic efficiency and majority
decisions may favor federal solutions, with "only indivisibilities, economies of scale, externalities, and strategic
requirements ... acceptable as efficiency arguments in favor of allocating powers to higher levels of government"
(Padou-Schioppa 1995, 155).
- Federal arrangements may promote mobility and hence territorial clustering of individuals with similar preferences,
and allow sub-unit autonomy to experiment and compete for individuals who are free to move where their
preferences are best met. Such mobility towards sub-units with like-minded individuals adds to the benefits of local
autonomy over the provision of public services — absent economies of scale and externalities (Tiebout 1956,
Buchanan 2001).
4. Further Philosophical Issues
Much recent attention has focused on philosophical issues arising from empirical findings concerning federalism, and
has been spurred by dilemmas facing Canada, Australia and Europe.

4.1 Sources of Stability

As political orders go, (con)federal political arrangements pose peculiar problems concerning stability and trust.
Federations tend toward disintegration in the form of secession, or toward centralization in the direction of a unitary
state. Such instability should come as no surprise given the tensions typically giving rise to federations in the first
place. Federations are often marked by a high level of ’constitutional politics’: Political parties often disagree on
constitutional issues regarding the appropriate areas of sub-unit autonomy, the forms of cooperation and how to
prevent fragmentation. Such sampling bias among states that federalize to hold together makes it difficult to assess
claims that federal responses perpetuate cleavages and fuel rather than quell secessionist movements. Some
nevertheless argue that democratic, interlocking federations alleviate such tendencies (Simeon 1998, Simeon and
Conway 2001, Linz 1997; cf. McKay 2001, Filippov, Ordeshook and Shvetsova 2004).
Many authors note that the challenges of stability must be addressed not only by institutional design, but also by
ensuring that citizens have an ‘overarching loyalty’ to the federation as whole in addition to loyalty toward their own
sub-unit (Franck 1968, Linz 1997). The legitimate bases, content and division of such a public dual allegiance are
central topics of political philosophies of federalism (Norman 1995a, Choudhry 2001). Some accept (limited) appeals
to considerations such as shared history, practices, culture, or ethnicity for delineating sub-units and placing certain
powers with them, even if such ‘communitarian’ features are regarded as more problematic bases for (unitary)
political orders (Kymlicka 1995, Habermas 1996, 500). The appropriate consideration that voters and their sub-unit
politicians should give to the interests of others in the federation in interlocking arrangements must be clarified if the
notion of citizen of two commonwealths is to be coherent and durable.

4.2 Allocation of Authority

Another central topic is the critical assessment of alleged grounds for federal arrangements in general, and the
allocation of authority between sub-units and central bodies in particular, indicated in the preceding sections. A
related important issue is who shall have the authority to make such allocations and changes (Recent contributions
include Knop et al. 1995, Kymlicka 2001, Kymlicka and Norman 2000, Nicolaidis and Howse 2001).
The “Principle of Subsidiarity” has recently received attention owing to its inclusion in European Union treaties. It
holds that authority should rest with the sub-units unless allocating them to a central unit would ensure higher
comparative efficiency or effectiveness in achieving certain goals. This principle can be specified in several ways, for
instance concerning which units are included, which goals are to be achieved, and who has the authority to apply it.
The principle has multiple pedigrees, and came to recent political prominence largely through its role in quelling fears
of centralization in Europe - a contested role which the principle has not quite filled (Fleiner and Schmitt 1996,
Burgess and Gagnon 1993, Follesdal 1998).

4.3 Distributive Justice

Regarding distributive justice, federal political orders must manage tensions between ensuring sub-unit autonomy and
securing the requisite redistribution within and among the sub-units. Indeed, the Federalists regarded federal
arrangements as an important safeguard against “the equal division of property” (Federalist 10). The political
scientists Linz and Stephan may be seen as finding support for the Federalists’ hypothesis: Compared to unitary states
in the OECD, the ‘coming together’ federations tend to have higher child poverty rate in solo mother households and
a higher percentage of population over-sixty living in poverty. Linz and Stepan explain this inequality as stemming
from the ‘demos constraining’ arrangements of these federations, seeking to protect individuals and sub-units from
central authorities, combined with a weak party system. By comparison, the Constitution of Germany (not a ’coming
together’ federation) explicitly requires equalization of living conditions among the sub-units (Art. 72.2) Normative
arguments may also support some distributive significance of federal arrangements, for instance owing to legitimate
trade-offs between sub-unit autonomy and redistributive claims among sub-units (Follesdal 2001). A central
normative issue is to what extent a shared culture and bonds among citizens within a historically sovereign state
reduce the claims on inter-sub-unit redistribution.

4.4 Democratic Theory

Federalism raises several challenges to democratic theory, especially as developed for unitary states. Federal
arrangements are often more complex, thereby challenging standards of transparency and accountability. The
restricted political agendas of each center of authority also require defense (Dahl 1983; Braybrooke 1983).
The power that sub-units wield in federations often restricts or violates majority rule, in ways that merit careful
scrutiny. Federal political orders typically influence individuals’ political influence by skewing their voting weight in
favor of citizens of small sub-units, or by granting sub-unit representatives veto rights on central decisions. Minorities
thus exercise control in apparent violation of principles of political equality and one-person-one-vote — more so
when sub-units are of different size. These features raises fundamental normative questions concerning why sub-units
should matter for the allocation of political power among individuals who live in different sub-units.
Federations are often thought to be ’sui generis’ , one-of-a-kind deviations from the ideal-type unitary sovereign state
familiar from the Westphalian world order. Indeed, every federation may well be federal in its very own way, and not
easy to summarize and assess as an ideal-type political order. Yet the phenomenon of non-unitary sovereignty is not
new, and federal accommodation of differences may well be better than the alternatives. When and why this is so has
long been the subject of philosophical, theoretical and normative analysis and reflection. Such arguments may also
contribute to the overarching loyalty required among citizens of stable, legitimate federations, who must understand
themselves as members of two commonwealths.