IRSPM 2010: Public Governance in Transitional and Developing Economies

Presented by RFI Smith

Governance Transitions in Federations

Agendas for change in India and Australia

 Department of Management

Overview• Key federal arrangements in India and Australia

• Economic liberalisation and impacts on intergovernmental relations

• Change agendas

• Lessons?

3

Background

• Shared strategic issues– Despite large differences in history, context and scale India and Australia

share overlapping agendas for change in federal arrangements

• Indian agendas – Contradictory influences and trends

– Foreshadow major challenges to principles, structures and processes but change is gradual and opportunistic

• Australian agendas – More effective use of available institutional frameworks through

intergovernmental negotiation

– Continued pressure from unilateral federal change initiatives

4

Shared experience—India and Australia

• Systems of responsible cabinet government

• Shared reference points in federal compacts

• Explicit role of intergovernmental bargaining and preoccupation with fiscal relationships

• Muted impacts of global financial crisis

• Federal compacts ‘incomplete contracts’

• Federal systems always in transition

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Agenda drivers

• Economic liberalisation in 1980s and 1990s

• Managing intergovernmental relations– substantial, fluid and contested proposals

– federal financial arrangements heavily favour national governments

– negotiation with multiple institutions and interests

– impacts of economic globalisation

• Enhance policy and management scope at centre • Put pressure on scope of state governments

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India—federal arrangements

• Strong contradictory forces– began as ‘holding together’ federation

> pronounced unitary tendencies

– forces for decentralisation> internal social and economic diversity > coalition governments> rise of parties representing regional interests/underprivileged groups many of

which hold office at state level > participation of such parties in central coalitions> decentralisation of powers to local government. > following cuts to federal economic restrictions in 1991 state governments

imposed own restrictions

But increase in political power of state governments matched by increase in fiscal dependence on centre

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India—paths to economic liberalization

• History of smothered initiatives• Transition in 1991 began at centre

– central investment restrictions relaxed– growth of bipartisan support

• Drivers– example of south east Asia, especially Malaysia– need to seek IMF assistance in 1991– political support for civil service proposals for liberalization– industry support—Confederation of Indian Industry– home grown

• Contradictory patterns– pragmatic, gradual, incremental, interactive– political support did not extend to systematic implementation– sector gaps– centre could negotiate more easily with IMF than states

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India—intergovernmental impacts

• Competition of states with centre and each other more clear– existing state controls on investment more visible

– state reregulation enhanced state roles

– states adopted different strategies

– international agencies began dealing direct with states

• Obstacles to negotiating regulatory reform– easier where constitutional power lay with centre, eg telecommunications

– risk that even low key negotiations undermine institutions needed to manage change

• Contradictory patterns– implemented reforms rarely undone

– emerging coalition of urban and richer rural interests

– close ties between government and capital

– high profile ‘reforming’ state governments defeated

– rent seeking by regionally based parties

– successful states resent revenue redistribution to less advanced states

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India—agendas for change

• Wide range of issues– changed role of government– collisions between international and domestic economic interests– need for market supporting institutions– asymmetry in capabilities of centre and states (and between states)

• Wide range of relationships– burgeoning networks of consultation and negotiation– incremental development of arrangements to manage relationships – use of ‘empowered committees’ to negotiate outcomes

• Fiscal federalism– shrinking fiscal space for states– intermixing of central and state roles– multiple channels for fiscal transfers to states– budget bailouts and fudging– proposed dual GST

• Claims of minorities– new states

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India—assessment

• ‘The most difficult reforms are yet to be achieved’ (Sharma)

• Strategies of gradualism grapple with crosscutting trends towards centralization and decentralization

• Most significant trend is extension of range of forums in which central and state governments can negotiate roles

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Australia—federal arrangements• ‘Coming together federation’

– states retained own constitutions and infrastructure– high proportion of shared and contested functions

• Centralizing forces– federal financial power

> revenue sharing arrangements

> special purpose payments

– negotiated transfers of power– judicial interpretation of federal constitution

• Mitigating forces– negotiating use of shared powers through Council of Australian Governments

(COAG)– federal public service stronger in policy than operations– states increasingly frame demands in terms of national interest– states’ own forum—Council for the Australian Federation (CAF)

• Federal influence substantial but not complete

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Australia—paths to economic liberalization

• By 1980s external economic trends forced rethinking of long running policies

– tentative changes in 1960s and 1970s reversed

• Drivers– agreement by economists on macro and micro economic reform– strong federal political and public service leadership– imaginative state initiatives– negotiated agreements

> states

> trade unions

– bipartisan support for critical changes

• Contradictions– Tension between strategies of negotiation and deployment of federal power

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Australia—impacts on intergovernmental relations

• Paths to federal dominance– federal government as principal and states as agents– competitive tendering between states and other providers– bypass states by funding end users

• Howard government (Liberal-National 1996-2007)– lukewarm on COAG– late preference for direct federal intervention

• Rudd government (Labor 2007-)– funds in return for performance– consolidated special purpose payments– national takeovers in cases of poor performance

> hospital management

– vigorous negotiation of intergovernmental agreements through COAG

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Australia—agendas for change

• Close links between:– multiple demands for national approach to policy

and

– proposals to improve intergovernmental relations

• Off limits

– fiscal reform in interests of states

• Continuing influence of states

– political if not financial influence

– as federal government takes interest in local matters, states take interest in national and international spheres

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Australia—assessment

• Continuing tensions

• Federal king hits and takeovers• referendum proposals, judicial interpretation, financial power, referrals of

power

• Negotiated agreements• mutual adjustment by teams of ministers and public servants• sophisticated systems for managing intergovernmental relations

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India and Australia—common points

• Economic liberalization prompted by external events

• Change processes driven by domestic forces

• Negotiation of changes critical

• Programs of change pragmatic

India and Australia—divergence • India

– proliferation of intergovernmental forums yet to crystallize

– economic liberalization allowed state governments to capture valuable regulatory space

– large scale privatization not feasible

– proposal for dual GST may help redress vertical fiscal imbalance

• Australia– effectiveness of

intergovernmental forums and agreements

– negotiations bound states to national regulatory regimes

– extensive privatization at both levels of government

– GST left problems of vertical fiscal imbalance unresolved

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Conclusion

• India could examine Australian arrangements for intergovernmental relations

• Australia could reflect on adverse impacts in India of period of dominance by central government

Both illustrate:

• Federations as incomplete contracts

• Challenge for parties to federal compacts to negotiate imaginative transitions

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RFI SmithAdjunct Senior Research Fellow

Department of ManagementMonash University

MelbourneAustralia

Contact:

rfismith@ozemail.com.au