Federalism and growth

The Asian Development Bank’s latest Nepal Macroeconomic Update is reflective of the fears surrounding the implementation of fed­eralism and operationalization of the three tiers of government. It projects the national economy to grow by 5.5 percent in 2018/19, well below the gov­ernment target of 8 percent, but still respectable con­sidering an average of 4.3 percent growth over the past one decade.

Boosting growth this year will be expectation of political stability, as well as normal monsoon and implementation of mega-infrastructure projects, says the report. But it then points out limited capacity of sub-national government units and complications in implementation of federalism as the biggest obstacles to growth. “Slow progress in requisite legislation and deployment of staff, the need for further clarification of mandates and responsibilities of the three tiers of government, and inconsistencies in revenue mobiliza­tion regarding fees and taxes at local levels” could all hinder smooth operationalization of fiscal federalism.

Clearly, for Nepal to prosper there should be a high level of coordination between the three tiers of gov­ernment, and a level of agreement on resource mobi­lization and spending. Yet what we see is the opposite. Local units complain that even though they have been saddled with many responsibilities, the center has been miserly about giving them the needed money and manpower. Likewise, the seven provincial gov­ernments are unhappy that between them ‘the center and the local units have appropriated all vital powers’ and the province-level governments as such have been made redundant. The federal government for its part says these are birth pangs of federalism and things will be sorted out in due course.

In other words, there is currently little trust between the different tiers, which in turn is crimping their growth prospects. If the ruling coalition under Prime Minister KP Sharma Oli is serious about honoring its promise of all-round prosperity, it will have to start trusting the lower tiers more, and not hesitate to del­egate vital powers and resources. In a federal system, the center acts not so much as guardians of lower tiers but more as facilitators of their aspirations for devel­opment. Yes, there is room for abuse of such delegat­ed powers. But then the old unitary dispensation was hardly a model of economic rectitude. The onus is on the all-powerful federal government to honor the let­ter and spirit of federalism.