Federalism in a Changing World: Learning from Each Other 9780773571402

Table of contents :
Contents
Preface
PART A: INTRODUCTION
Welcome Note
Federalism in a Changing World - A Conceptual Framework for the Conference
Federalism and Foreign Relations
Federalism, Decentralisation and Conflict Management in Multicultural Societies
Assignment of Responsibilities and Fiscal Federalism
PART B: THEME I
SCIENTIFIC BACKGROUND: THEME PAPER: Federalism and Foreign Relations
SCIENTIFIC BACKGROUND: SUBTHEME PAPERS: Foreign Relations of Sub-national Units
Participation of Sub-national Units in the Foreign Policy of the Federation
Implementation of International and Supra-national Law by Sub-national Units
Federal Structures and Foreign Policy of International and Supra-national Organisations
WORK SESSION PROCEEDINGS: REPORTS: Foreign Relations of Sub-national Units (Work Sessions 1 and 13)
Participation of Sub-national Units in the Foreign Policy of the Federation (Work Sessions 2 and 14)
Implementation of International and Supra-national Law by Sub-national Units (Work Sessions 3 and 15)
Federal Structures and Foreign Policy of International and Supra-national Organisations (Work Sessions 4 and 16)
DIALOGUE TABLE PROCEEDINGS: SUMMARY ADDRESS: Federalism and Foreign Relations (Dialogue Tables 1 and 4)
PART C: THEME II
SCIENTIFIC BACKGROUND: THEME PAPER: Federalism, Decentralisation and Conflict Management in Multicultural Societies
SCIENTIFIC BACKGROUND: SUBTHEME PAPERS: Constitution Making and Nation Building
Decentralisation and Good Governance
Communities – Civil Society and Conflict Management
International and Regional Action with regard to Conflicts in Multicultural Societies
WORK SESSION PROCEEDINGS: REPORTS: Constitution Making and Nation Building (Work Sessions 5 and 17)
Decentralisation and Good Governance (Work Sessions 6 and 18)
Communities – Civil Society and Conflict Management (Work Sessions 7 and 19)
International and Regional Action with regard to Conflicts in Multicultural Societies (Work Sessions 8 and 20)
DIALOGUE TABLE PROCEEDINGS: SUMMARY ADDRESS: Federalism, Decentralisation and Conflict Management in Multicultural Societies (Dialogue Tables 2 and 5)
PART D: THEME III
SCIENTIFIC BACKGROUND: THEME PAPER: Assignment of Responsibilities and Fiscal Federalism
SCIENTIFIC BACKGROUND: SUBTHEME PAPERS: Fiscal Federalism and Political Decision Structures
Problems of Equalisation in Federal Systems
Fiscal Competition
Fiscal Decentralisation in Transition Economies and Developing Countries
WORK SESSION PROCEEDINGS: REPORTS: Fiscal Federalism and Political Decision Structures (Work Sessions 9 and 21)
Problems of Equalisation in Federal Systems – The Concept of Equalisation (Work Session 10)
Problems of Equalisation in Federal Systems – Revenue Equalisation versus Cost Equalisation (Work Session 22)
Fiscal Competition (Work Sessions 11 and 23)
Fiscal Decentralisation in Transition Economies and Developing Countries (Work Sessions 12 and 24)
DIALOGUE TABLE PROCEEDINGS: SUMMARY ADDRESS: Assignment of Responsibilities and Fiscal Federalism (Dialogue Tables 3 and 6)
PART E: PLENARY SPEECHES
President of the Swiss Confederation, Head of the Federal Department of Finance, Switzerland
President of the Federal Republic of Germany
Federal Councillor, Head of the Federal Department of Foreign Affairs, Switzerland
Associate Justice, Supreme Court of the United States of America
Head of the Presidential Office for Indigenous People, United Mexican States
President of the Republic of Mali
President of the Federal Republic of Yugoslavia
Federal Chancellor of the Republic of Austria
Prime Minister of the Kingdom of Belgium
Vice-President of the European Convention, Italy
Minister of Defence of the Republic of India
Federal Councillor, Head of the Federal Department of Justice and Police, Switzerland
Prime Minister of Canada
Authors

Citation preview

Federalism in a Changing World Learning from Each Other

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Federalism in a Changing World Learning from Each Other Scientific Background, Proceedings and Plenary Speeches of the International Conference on Federalism 2002 EDITED BY RAOUL BLINDENBACHER AND ARNOLD ROLLER

Published for the International Conference on Federalism 2002 St. Gallen, Switzerland by McGill-Queen's University Press Montreal & Kingston • London • Ithaca

© McGill-Queen's University Press 2003 ISBN 0-7735-2602-1 (cloth) ISBN o-7735-26o3-x (paper) Legal deposit second quarter 2003 Bibliothèque nationale du Québec Printed in Canada on acid-free paper that is 100% ancient forest free (100% post-consumer recycled), processed chlorine free. McGill-Queen's University Press acknowledges the support of the Canada Council for the Arts for our publishing program. We also acknowledge the financial support of the Government of Canada through the Book Publishing Industry Development Program (BPIDP) for our publishing activities.

National Library of Canada Cataloguing in Publication International Conference on Federalism 2002 Federalism in a changing world, learning from each other: scientific background, proceedings and plenaries of the International Conference on Federalism 2002 / edited by Raoul Blindenbacher. Conference held Aug. 27-30, 2002 at the University of St. Gallen, Switzerland. Includes bibliographical references. ISBN 0-7735-2602-1 (bnd) ISBN o-7735-26o3-x (pbk) 1. Federal government - Congresses. I. Blindenbacher, Raoul and Koller, Arnold. II. Title. JC355.I58 2OO2

321.O2

02003-900563-!

This book was typeset by Dynagram Inc. in 10/12 Baskerville.

Overview

Contents vii Preface xiii PART A

INTRODUCTION

PART B

THEME I

1

51

Federalism and Foreign Relations PART C

T H E M E II

195

Federalism, Decentralisation and Conflict Management in Multicultural Societies PART D THEME III 349

Assignment of Responsibilities and Fiscal Federalism PART E

PLENARY SPEECHES

Authors 597

517

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Contents

Preface PART A

xiii INTRODUCTION

Arnold Koller Welcome Note

1

3

Raoul Blindenbacher / Ronald L. Watts Federalism in a Changing World - A Conceptual Framework for the Conference 7 Daniel Thurer

Federalism and Foreign Relations

26

Cheryl Saunders Federalism, Decentralisation and Conflict Management in Multicultural Societies 33 Wallace E. Oates Assignment of Responsibilities and Fiscal Federalism 39 PART B

THEME I

51

SCIENTIFIC B A C K G R O U N D : THEME PAPER Bernhard Ehrenzeller / Rudolf Hrbek / Giorgio Malinverni / Daniel Thürer Federalism and Foreign Relations 53 SCIENTIFIC BACKGROUND: SUBTHEME PAPERS John Kincaid Foreign Relations of Sub-national Units 74 Yves Lejeune Participation of Sub-national Units in the Foreign Policy of the Federation 97

viii Contents Rahmatullah Khan Implementation of International and Supra-national Law by Sub-national Units 115 Udo Diedrichs / Wolfgang Wessels Federal Structures and Foreign Policy of International and Supra-national Organisations 130 WORK SESSION P R O C E E D I N G S : REPORTS

William John Hopkins Foreign Relations of Sub-national Units (Work Sessions 1 and 13) 149 Beat Habegger Participation of Sub-national Units in the Foreign Policy of the Federation (Work Sessions 2 and 14) 159 Martin F. Polaschek Implementation of International and Supra-national Law by Sub-national Units (Work Sessions 3 and 15) 169 Benjamin Schindler Federal Structures and Foreign Policy of International and Supra-national Organisations (Work Sessions 4 and 16) 179 DIALOGUE TABLE P R O C E E D I N G S : SUMMARY ADDRESS

Jakob Kellenberger Federalism and Foreign Relations (Dialogue Tables 1 and 4) 189 PART C

T H E M E II

195

SCIENTIFIC B A C K G R O U N D : THEME PAPER Thomas Fleiner / Walter Kälin / Wolf Linder / Cheryl Saunders Federalism, Decentralisation and Conflict Management in Multicultural Societies 197 SCIENTIFIC BACKGROUND: SUBTHEME PAPERS Nicholas R.L. Haysom Constitution Making and Nation Building 216 Richard Charles Crook Governance 240

Decentralisation and Good

Radmila Nakarada Communities - Civil Society and Conflict Management 260 MichaelJ. Kelly / Timothy L.H. McCormack International and Regional Action with regard to Conflicts in Multicultural Societies 278

ix Contents WORK S E S S I O N P R O C E E D I N G S : REPORTS

Lidija R Basta Fleiner Constitution Making and Nation Building (Work Sessions 5 and 17) 308 Thomas O. Hueglin Decentralisation and Good Governance (Work Sessions 6 and 18) 315 Ash Narain Roy Communities - Civil Society and Conflict Management (Work Sessions 7 and 19) 325 Dauda Abubakar International and Regional Action with regard to Conflicts in Multicultural Societies (Work Sessions 8 and 20) ' 337 D I A L O G U E TABLE P R O C E E D I N G S : SUMMARY ADDRESS

Nafis Sadik Federalism, Decentralisation and Conflict Management in Multicultural Societies (Dialogue Tables 2 and 5) 342

PART D

T H E M E III

349

SCIENTIFIC B A C K G R O U N D : THEME PAPER Richard Bird / Bernard Dafflon / Claude Jeanrenaud / Gebhard Kirchgdssner Assignment of Responsibilities and Fiscal Federalism 351 SCIENTIFIC BACKGROUND: SUBTHEME PAPERS Jiirgen von Hagen Fiscal Federalism and Political Decision Structures 373 Bernard Dafflon / François Vaillancourt Problems of Equalisation in Federal Systems 395 Jose Roberto Afonso / Sergio Guimarães Ferreira / Ricardo Varsano Fiscal Competition 412 Anwar Shah Fiscal Decentralisation in Transition Economies and Developing Countries 432 WORK S E S S I O N P R O C E E D I N G S : REPORTS

Lars P. Feld Fiscal Federalism and Political Decision Structures (Work Sessions 9 and 21) 461 Isabelle Joumard Problems of Equalisation in Federal Systems The Concept of Equalisation (Work Session 10) 471

x Contents

Nicolas Schmitt Problems of Equalisation in Federal Systems Revenue Equalisation versus Cost Equalisation (Work Session 22) 481 Nicholas Aroney Fiscal Competition (Work Sessions 11 and 23) 492 Flora Musonda Fiscal Decentralisation in Transition Economies and Developing Countries (Work Sessions 12 and 24) 502 D I A L O G U E TABLE P R O C E E D I N G S : SUMMARY

ADDRESS

Bob Rae Assignment of Responsibilities and Fiscal Federalism (Dialogue Tables 3 and 6) 513 PART E

PLENARY

SPEECHES

517

Kaspar Villiger President of the Swiss Confederation, Head of the Federal Department of Finance, Switzerland 519 Johannes Ran President of the Federal Republic of Germany 524 Joseph Deiss Federal Councillor, Head of the Federal Department of Foreign Affairs, Switzerland 534 Antonin Scalia Associate Justice, Supreme Court of the United States of America 539 Xóchitl Gálvez Head of the Presidential Office for Indigenous People, United Mexican States 549 Amadou Toumani Touré President of the Republic of Mali

555

Vojislav Kostunica President of the Federal Republic of Yugoslavia 559 Wolfgang Schüssel Federal Chancellor of the Republic of Austria 567 Guy Verhofstadt Prime Minister of the Kingdom of Belgium 572 Giuliano Amato Vice-President of the European Convention, Italy 577 George Fernandes Minister of Defence of the Republic of India 582

xi Contents Ruth Metzler-Arnold Federal Councillor, Head of the Federal Department of Justice and Police, Switzerland 587 Jean Chretien Prime Minister of Canada Authors

597

592

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Preface

Federalism today enjoys an ever-increasing acceptance throughout the world. In long-established federations it is experiencing a real renaissance. A number of other countries whose government systems used to be highly centralised have become federations, incorporated federal elements into their constitution, or at least favour devolution. A major talking point in Europe is the extent to which the European Union should adopt federal structures and practices following eastward enlargement. There are many reasons for this development, such as the desire to bring politics closer to the people and encourage more active participation; the wish to live their cultural diversity in unity, respecting one another; the prevention of ethnic conflicts etc. Last but not least, federalism is a possible political response to the current trend towards globalisation of the economy. As we know, federalism is a highly flexible instrument for state organisation that can be continually adapted to new needs and very different historical, ethnic, political and economic circumstances. This much-lauded flexibility, which permits solutions that are often ideally suited to the country in question, has the disadvantage that federalism has been accused of being a chameleon-like concept that can be "all things to all men". This has rendered difficult a rewarding exchange of ideas and experiences between the different federations. Thus the Swiss government and the Cantonal Governments Conference decided to organise the International Conference on Federalism 2002 in St Gallen under the motto: "Federalism in a Changing World - Learning from Each Other". Three important contemporary issues were designated as the themes of the conference: first, Federalism and Foreign Relations;

xiv

Preface

second, Federalism, Decentralisation and Conflict Management in Multicultural Societies; and third, Assignment of Responsibilities and Fiscal Federalism. To familiarise participants with the subject matter, to lay a solid theoretical foundation, and to provide some possible solutions, we asked wellknown experts in federalism to contribute general introductions to each theme, and more in-depth studies of the related subthemes. According to the aim of "Learning from Each Other", the conference itself focused on a large number of work sessions and dialogue tables where participants examined the situation in specific countries and tried to find more general solutions through intensive dialogue. In the plenary sessions presidents, premiers, ministers and a Supreme Court judge gave their visions of federalism in their respective countries. More than 600 politicians, high-ranking civil servants, academics and youth participants from over 60 countries took an active part in the conference. We are pleased that this book containing the scientific background papers, the proceedings of the work sessions and dialogue tables, and the speeches of the plenary sessions gives full coverage of the conference. The book is organised into five parts. Part A forms an introduction containing the welcome address to conference participants, a description of the conceptual framework of the conference, and the opening speeches given on the conference themes. Parts B to D are devoted to the three conference themes. Each part begins with the scientific background to the conference: a theme paper providing an informed overview of the topic, and four papers examining the subthemes. During the conference, each subtheme was examined at two work sessions. The reports summarising these, which form the next sections of Parts B to D, constitute a first analysis of the dialogue that took place. The concluding sections of Parts B to D provide a preliminary evaluation of the dialogue tables, which brought together all the participants from the work sessions surrounding a given theme. The summary addresses printed here were given by the moderators of the dialogue tables, and sum up their views on the discussion. The final part of the book, Part E, presents the speeches given at plenary sessions throughout the conference. The speeches are arranged in the same order as they were given at the conference itself. We would like to thank the contributors to this book, both the authors of the many papers and reports, and the speakers who have allowed the texts of their speeches to be reproduced here. Our thanks are also due to all the conference participants whose contributions to the dialogues at the conference are an important basis for this volume. Finally we would like to thank the British Council Switzerland for their assistance with language editing and

xv

Preface

preparation of the manuscript, and the staff at McGill-Queen's University Press for their help and cooperation on this project. We hope that this volume will not only bring together the relevant theoretical and practical aspects of federalism, but will also initiate an ongoing dialogue that will continue to promote the confirmed aim of the International Conference on Federalism 2002: to learn from each other. Arnold Roller, Former President of the Swiss Confederation Raoul Blindenbacher, Executive Director, International Conference on Federalism 2002

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PART A

INTRODUCTION

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ARNOLD KOLLER

Welcome Note

On behalf of the Steering Committee, I would like to welcome all of you to the International Conference on Federalism 2002. Some of you have travelled great distances to meet here in St Gallen for four days to discuss current issues of federalism and to learn from each other. We would like to thank you most cordially for your interest and willingness to participate actively in the conference. I hope you will understand that with so many prominent people present from both Switzerland and abroad I will not be able to welcome each of them individually. However, I do wish to express my special thanks to Dr Schönenberger, the Landamman of the Canton of St Gallen, Dr Christen, the Mayor of the City of St Gallen, Professor Gomez, the Rector of the University of St Gallen and to the International Student Committee, for their untiring support in preparing and organising the conference. A special note of thanks goes to the more than 150 students who volunteered their time during their holidays and - which is even more important - during preparations for their examinations in order to ensure the success of the conference. As you know, Switzerland is one of the world's oldest federal states. The federal and cantonal governments have been living successfully in peace with each other for more than 150 years. No less a figure than Napoleon Bonaparte declared, following the obvious failure of the "Republique Helvétique, une et indivisible", which had been set up on the French model: "The more I have reflected on the nature of your country, the more I have been convinced by the variety of its constituent parts that it is impossible to subject it to uniformity. Everything leads you to federalism." And it is Napoleon who is supposed to have said: "La Suisse est fédérative ou elle n'est pas" (Switzerland is either federalist or is not at all). We hold

4 Arnold Koller

ourselves fortunate that the Federal Council and the Conference of Cantonal Governments welcomed the Canadian initiative of 1999 (taken at the Mont-Tremblant conference) and declared their willingness to jointly organise and finance the International Conference on Federalism 2002 in Switzerland. This has made it possible for us to welcome more than 600 politicians, judges, senior officials, scholars and youth representatives from more than 60 countries and all continents to St Gallen. May this conference give federalism new impetus both in Switzerland and the world over. We have a big program for you. That is clear from the conference's motto: Federalism in a Changing World - Learning from Each Other. On the one hand, at the plenary sessions we will have the privilege of hearing the views of several heads of state and prime ministers on how they, as the highest bearers of political responsibility, view federalism both in general terms and in their own federal states. At the 24 work sessions and the subsequent six dialogue tables we would like to see you immerse yourselves in an intensive dialogue, which we hope will give rise to a productive learning process. We see this as a promising way to achieve valuable and concrete results. Since federalism is not a concept fixed for all time, ready-made solutions cannot simply be plucked out of a textbook. Moreover, the International Conference on Federalism 2002 is not a government conference designed to produce resolutions on the topics discussed. Rather, given the problems confronted by federalism all over the world, we would like to learn from each other in an intensive exchange of ideas, thoughts and experiences, and to develop possible solutions together. The Federal Council has defined three themes of topical interest for the conference: first, Federalism and Foreign Relations; second, Federalism, Decentralisation and Conflict Management in Multicultural Societies; and third, Assignment of Responsibilities and Fiscal Federalism. The conference's Steering Committee, in close conjunction with Swiss and foreign experts on federalism, have divided the themes into four subthemes, which are to be addressed at the work sessions through cases relating to specific countries. These will form the basis for a practice-oriented exchange of ideas and experiences. To help you familiarise yourselves with the conference themes, we have invited internationally renowned experts to present papers on each of the themes - for this I would refer you to the Conference Reader distributed prior to the conference. In addition, we have asked eminent practitioners of federalism from various federal states to assist the work sessions by presenting introductory cases on individual countries. A mutual exchange of ideas and experience should then lead to solutions which, we hope, will be of general validity. Although we believe that we have created the best possible basis for a fruitful conference on federalism, we realise that this approach relies on a meeting of minds - on dialogue rather than monologue.

5 Part A Introduction

Today, federalism is a great success throughout the world. In long-established federations like the United States, Switzerland and Canada, it is experiencing a real renaissance. Witness the various reform projects currently underway, such as the new federal constitution and the new financial equalisation project in Switzerland, the pro-state stance of the Supreme Court in the United States and, after 30 years of contentious constitutional deliberations, an evolutionary process of improving relations between Quebec and the federation in Canada. A number of countries whose government systems used to be highly centralised, like Belgium, Spain and South Africa, have become federations, or have at least incorporated federal elements into their constitutions. And former colonies like India or Nigeria are now among the world's most populous federal states. A major talking point in Europe is the extent to which the European Union should adopt federal structures and practices following its eastward enlargement. Unfortunately, the debate is complicated by a problem of terminology: whereas in English the word "federal" is associated with the Federalist Papers and hence with greater centralisation, in other languages it.is associated with the diametrically opposed concept of giving greater autonomy to constituent states. There are many reasons for the keen global interest in federalism. These include the quest for political structures that are closer to the individual citizen, the wish for citizens to be more involved in political processes, the need for people to be able to identify with their state at a time of increasing globalisation, or the creation of scope for cultural diversity within a country. This all goes to show that federalism is much more than just a particular type of political structure enshrined in a constitution. The new-found appeal of federalism stems primarily from the values it brings out. In today's multicultural nations or associations of states, federalism makes it possible, in the words of the Swiss federal constitution, to "live our diversity in unity respecting one another". Consequently, it also allows ethnic, linguistic or religious minorities to develop their own identity. Today that is probably the most prominent advantage of federalism by comparison with centralised states. Other long-recognised advantages include the limitation of state power and hence the preservation of civil liberties, regional equality, and better opportunities for grass-roots involvement in political processes. With the quest to bring politics nearer to the citizens, federalism comes very close to the widely supported principle of subsidiarity, which calls for the state's tasks to be devolved to the lowest possible level. As we know, federalism is a highly flexible instrument for state organisation that can be continually adapted to new needs and circumstances. Although the world's 25 federal states have certain similarities, they are often very different with regard to the distribution of powers, financial federalism and federal institutions. This much-lauded flexibility would appear to

6 Arnold Roller

be both a strength and a weakness. It is a strength in that it permits constantly changing solutions that are often ideally suited to the country in question. This has recently given rise to asymmetric forms in which constituent states are treated in different ways - as in Belgium, Canada, Spain or Russia. But it is also a weakness in that federalism has been accused of being "all things to all men" - a concept that can be used or abused to suit all manner of political needs. Little seems to be defined, other than that member states are granted a certain degree of autonomy and are given a say in central government policy. So we would be well advised at this conference not only to praise federalism but to look at it critically in each individual case, as there are inevitably certain contradictions between federalism and democratic equality. And although federalism can often be a very efficient approach to performing the duties of the state, federal decision-making processes can be slow and expensive. Consequendy, the success or failure of federalism does not ultimately depend on federal institutions or decision-making processes, but on the particular country's federal political culture. In its new federal constitution, Switzerland has tried to enshrine this essential federal culture in a set of general principles governing the cooperation between the confederation and the cantons. According to these principles, the federal structure calls for mutual assistance in the fulfilment of tasks, consideration and support, the settlement of disputes by negotiation rather than by jurisdiction, the preservation of the cantons' autonomy - which means leaving sufficient sources of funding - and ensuring equitable financial equalisation. In the final analysis, it is not possible to codify the sort of political culture that is required for a federal system. Such a system calls for mutual trust, a readiness for dialogue between diverse but equal partners, loyalty towards the federal government, and a consensus that diversity is an enrichment of the federal state rather than a threat to the state's integrity. May this federal culture enliven the intensive discussions that will be going on between representatives from all over the world in the next few days. Such a spirit will ensure that the International Conference on Federalism 2002 proves a resounding success.

RAOUL BLINDENBACHER AND RONALD L. WATTS

Federalism in a Changing World A Conceptual Framework for the Conference

1.

THE RELEVANCE OF THE FEDERAL IDEA IN THE CONTEMPORARY

WORLD

In the contemporary world, federalism as a political idea has become increasingly important as a way of peacefully reconciling unity and diversity within a political system. The reasons for this can be found in the changing nature of the world leading to simultaneous pressures for both larger states and also for smaller ones. Modern developments in transportation, social communications, technology, industrial organisation, globalisation and knowledgebased, and hence learning societies, have all contributed to this trend. Thus, there have developed two powerful, thoroughly interdependent, yet distinct and often actually opposed motives: the desire to build dynamic and efficient national or even supra-national modern states, and the search for distinctive identities. The former is generated by the goals and values shared by most Western and non-Western societies today: a desire for progress, a rising standard of living, social justice, influence in the world arena, participation in the global economic network, and a growing awareness of worldwide interdependence in an era which makes both mass destruction and mass construction possible. The latter arises from the desire for smaller, directly accountable, self-governing political units, more responsive to the individual citizen, and from the desire to give expression to primary group attachments - linguistic and cultural ties, religious connections, historical traditions, and social practices - which provide the distinctive basis for a community's sense of identity and yearning for selfdetermination.

8 Raoul Blindenbacher / Ronald L. Watts Given these dual pressures throughout the world, for larger political units capable of fostering economic development and improved security on the one hand, and for smaller political units more sensitive to their electorates and capable of expressing local distinctiveness on the other, federal solutions have had an increasing appeal throughout the world. The reason for this is that federalism provides a technique of constitutional organisation that permits action by a shared government for certain common purposes in a larger political unit, combined together with autonomous action by smaller constituent units of government, direcdy and democratically responsible to their own electorates. As such, federal political systems provide the closest institutional approximation to the complex multicultural and multidimensional economic, social and political reality of the contemporary world. To what can this increased interest in federalism be attributed? One major factor has been the recognition that an increasingly global economy has unleashed centrifugal economic and political forces weakening the traditional nation state and strengthening both supra-national and local pressures. As a result governments are faced increasingly with the desire of their populaces to be both global consumers and local self-governing citizens at the same time. The transition from an industrial to a knowledge-based and learning society has also contributed to this trend. Consequently the development of knowledge and its application have become fundamental to society. This trend has two important political implications. First, a primary task of political systems has become that of facilitating the processes of knowledge development within society. Second, given the elements of independence and interdependence involved in the creation and dissemination of various specialised forms of knowledge, there is an increasing need for forms of political organisation that facilitate both the purpose-specific development of knowledge and its overall integration within the broader network of society. Moreover, since knowledge is constantly changing, renewing itself, expanding, and becoming ever more complex, the political framework must be flexible and capable of evolving by learning from its own experience. This requirement for a flexible and evolving balance of independence and interdependence has been a major factor contributing to die need for constantly evolving federal forms of political organisation, and is a trend that appears certain to increase rather than decrease (see, for instance, Courchene, 2001; Willke, 1995). These developments have contributed to the current interest in federalism, not as an ideology, but in terms of practical questions about how to organise the sharing and distribution of political powers in a way that will enable the common needs of people to be achieved while accommodating the diversity of their circumstances and preferences. Furthermore, in the context of a world in which societies are becoming increasingly knowledge

g Part A Introduction

based, much can be learned from the experience of the various ways in which other federal systems have attempted to combine independence and interdependence in wrestling with similar problems and in adapting to ever changing world conditions. As a consequence, there are in the world today some 25 countries that are federal in their character, claim to be federal, or exhibit the characteristics typical of federations. Indeed some 40% of the world's population today lives in countries that can be considered, or claim to be federations, many of which are multicultural or even multinational in their composition. During the past decade especially there has been an international burgeoning of interest in federalism. Political leaders, leading intellectuals and even some journalists are now increasingly speaking of federalism as a healthy, liberating and positive form of political organisation. Furthermore, Belgium, Spain, South Africa, Ethiopia, Italy and the United Kingdom appear to be emerging towards new and innovative federal forms. In a number of other countries some consideration is being given to the efficacy of incorporating at least some federal features, although not necessarily all the features of a full-fledged federation. Furthermore, the European Union (EU), with the addition of new member states, is in the process of evolving its own unique hybrid of confederal and federal institutions. Thus, everywhere, with changing world conditions, federalism continues to evolve. 2.

THE FEDERAL IDEA: ITS ESSENTIAL FEATURES

Over the years there has been much scholarly debate about the definition of federalism. Definitions have varied from broad inclusive ones to narrow restrictive ones. The basic essence of federalism is the notion of two or more orders of government combining elements of "shared rule" for some purposes and regional "self-rule" for others. It is based on the objective of combining unity and diversity: i.e. of accommodating, preserving and promoting distinct identities within a larger political union. This basic idea has been expressed through a variety of federal institutional forms in which, by contrast to the single source of constitutional authority in unitary systems, there are two (or more) levels of government, combining elements of shared rule through common institutions with regional self-rule for the governments of the constituent units. The broad category of federal forms encompasses a wide range of institutional forms from constitutionally decentralised unions to confederacies and beyond. Within this broad genus of federal political systems, federations represent a distinct species in which neither the federal nor the constituent units of government are constitutionally subordinate to the other, i.e. each has sovereign powers derived from the constitution rather than from another

10 Raoul Blindenbacher / Ronald L. Watts

level of government, each is empowered to deal directly with the citizens in the exercise of its legislative, executive and taxing powers, and each is directly elected by its citizens (Watts, 1999, 6-14). The structural characteristics generally common to federations as a specific form of political system are the following: • Two (or more) orders of government each acting directly on their citizens (rather than indirectly through the other order); • A formal constitutional distribution of legislative and executive authority, and allocation of revenue resources between the orders of government ensuring some areas of genuine autonomy for each order; • Provision for the designated representation of distinct regional views within the federal policy-making institutions, usually provided by a federal second chamber composed of representatives of the regional electorates, legislatures or governments; • A supreme written constitution, not unilaterally amendable by one order of government, and therefore requiring the consent not only of the federal legislature but also of a significant proportion of the constituent units through assent by their legislatures or by referendum majorities; • An umpire (in the form of courts, or as in Switzerland provision for referendums) to rule on interpretation or valid application of the constitution; • Processes and institutions to facilitate inter-governmental collaboration in those areas where governmental responsibilities are shared or inevitably overlap. What basically distinguishes federations from decentralised unitary systems and from confederations is that in unitary systems the governments of the constituent units ultimately derive their authority from the central government, and in confederations the central institutions ultimately derive their authority from the constituent units and consist of delegates of the constituent units. In a federation, however, each order of government derives its authority, not from another order of government, but from the constitution. Nevertheless, it should be noted that some political systems are hybrids combining characteristics of different kinds of political systems. Those which are predominantly federations in their constitution and operation, but which include some federal government powers to override governments of constituent units, an arrangement more typical of a unitary system, have sometimes been described as "quasi-federations". At different stages in their development Canada, India, Pakistan, Malaysia and South Africa have been so described. On the other hand Germany, while predominantly a federation, has a confederal element in the Bundesrat, its federal second chamber, which is composed of instructed delegates of the

11 Part A Introduction

Land governments. A hybrid, predominantly a confederation but with some features of a federation, is the EU since Maastricht. Hybrids occur because statesmen are often more interested in pragmatic political solutions than in theoretical purity. In setting out the distinctive characteristics of a federation there are some important points to note. First, there is the distinction between constitutional form and operational reality. In many political systems political practice has transformed the way the constitution operates. Therefore, to understand how a given federation operates, it is necessary to examine not only its constitutional law but also its political practices and processes. Significant characteristics of federal processes include: • A strong disposition to democratic procedures since they presume the voluntary consent of citizens in the constituent units; • Non-centralisation as a principle expressed through multiple centres of political decision making; • Open political bargaining as a major feature of the way in which decisions are arrived at; • The operation of checks and balances to avoid the concentration of political power; • A respect for constitutionalism and the rule of law since each order of government derives its authority from the constitution. While certain structural features and political processes may be common to federations, it must be emphasised that federations have exhibited many variations in the application of the federal idea. There is no single ideal form of federation. Among the variations that can be identified among federations are those in: • The degree of cultural or national diversity which they attempt to reconcile; • The number, relative size and symmetry or asymmetry of the constituent units; • The distribution of legislative and administrative responsibilities among governments; • The allocation of taxing powers and financial resources; • The degree of centralisation or decentralisation and the degree of e nomic integration; • The character and composition of their central institutions; • The processes and institutions for resolving conflicts and facilitating collaboration between interdependent governments; • The procedures for formal and informal adaptation and change; • The roles of federal and constituent-unit governments in the conduct of international relations.

12 Raoul Blindenbacher / Ro

d L. Watts

Ultimately federalism is a pragmatic and prudential technique whose applicability in different situations has depended upon the different forms in which it has been adopted or adapted, and even upon the development of new innovations in its application. Consequently, the exchange of information among practitio s from different federations, including those active in governments and academics, can contribute to a more realistic understanding of the potential effectiveness or ineffectiveness of different kinds of federal arrangements and processes in different circumstances. Furdiermore, given the pace of changing conditions in the contemporary world and the need for federal systems to adapt to these, much can be learned from exchanging information on the experience of different federations in responding to them. 3.

FEDERAL CONSTITUTION, GOVERNMENTS AND SOCIETIES

Federal systems are a function not only of constitutions, but also of governments, and fundamentally of societies. In learning from the experience of different federations, it is important, therefore, to distinguish between federal societies, governments and constitutions in order to understand the dynamic interaction of these elements with each other. The motivations and interests within a society leading to pressures both for political diversity and autonomy on the one hand and for common action on the other, the legal constitutional structure, the actual operation processes and practice of governments are all important aspects in the operation of federations. It is through considering the interaction of these that we may come to understand more fully the nature of federal systems and how they are able to respond to changing conditions and circumstances. At one time, the study of federations tended to concentrate primarily on their legal frameworks. Scholars have come to realise, however, that a merely legalistic study of constitutions cannot adequately explain political patterns within federations. Indeed, the actual operation and practices of governments within federations have, in response to the play of social and political pressures, frequently diverged significantly from the formal relationships specified in the written legal documents. Scholars writing about federal systems have, therefore, become conscious of the importance of the social forces underlying federal systems. As one author put it: The essential nature of federalism is to be sought for, not in the shadings of legal and constitutional terminology but in the forces - economic, social, political, cultural - that have made the outward forms of federalism necessary ... The essence of federalism lies not in the constitutional or institutional structure but in the society itself. Federal government is a device by which the federal qualities of the society are articulated and protected. (Livingston, 1956, 1-2)

13 Part A Introduction

But the view that federal institutions are merely the instrumentalities or expressions of federal societies, while an important corrective to purely legal and institutional analyses, is also too one-sided and oversimplifies the causal relationships. Constitutions and institutions, once created, themselves channel and shape societies (Cairns, 1977). For example, in both the United States in 1789 and Switzerland in 1848, the replacement of confederal structures by federal constitutions marked turning points enabling the more effective political reconciliation of pressures for diversity and unity within their societies. The causal relationships between a federal society, its political institutions, and political behaviour and processes are complex and dynamic. The causal impact is not simply a unidirectional one, but rather involves a two-way interaction with each influencing the other two. The pressures within a society may force a particular expression in its political institutions, processes and behaviour; but these institutions and processes, once established, usually in turn shape the society. They do this both by determining the channels in which the social pressures and political activities flow, and by establishing policies that modify the shape of society. Thus, the relationships between a society, its constitution and its political institutions and processes are not static but involve continual mutual interaction. In considering the experience of different federations, we therefore need to consider not only the influence of social forces upon the adoption, design, modification and subsequent operation of federal constitutional structures, but also the influence that particular federal political structures and the related processes and political practices have had upon social loyalties, feelings and diversities. It is in the interplay of the social foundations, the written constitution, and the actual practices and activities of governments at different levels that an understanding of the nature and effectiveness of a particular federation is to be found. In assessing the experience of different federations, account therefore, needs to be taken not only of how well the institutions in each federation reflect the particular social and political balance of forces within that society, but also to what extent and in what manner these institutions, once established, have effectively channelled and influenced the articulation of unity and diversity within that polity. Figure i The interaction of federal societies, constitutions and governments

14 Raoul Blindenbacher / Ronald L. Watts Figure 2 Federal evolution through time

The analysis of the interaction between social integration, economic integration and political integration and the relation of these to the counterbalancing catalysts for regionalism, requires an examination of a number of factors. First there is the character of the background conditions, including: " The relative strength or weakness of national, economic and social links among the constituent units; • The proximity of the constituent units to each other; • The degree to which particular constituent units are themselves internally homogeneous in language, religion, race and culture; • The degree to which particular constituent units differ from neighbouring units in language, religion, race, culture, level of modernisation, economic development and political ideology or outlook; • The degree of disparity in relative wealth and political influence; • The relative size and bargaining power of the constituent units; • The complementarity or competitiveness of the elites in the different constituent units. Second, there is the strength of the motives for integration and for regionalism, including: • The desire for security from external or internal threats; • The desire for the economic benefits of integration; • The balance between the desire for a wider common identity and the desire for a sense of regional identity or even nationhood; • The desire to secure the distinctive features of the society within a constituent unit against threats of assimilation; • The desire to enhance the economic benefits for a particular regional group.

15 Part A Introduction

In addition to analysis of background conditions and the strength of various motives, important to understanding the interaction of social, economic and political integration is the character of the integration or devolutionary process in each case, including: • The character of the negotiating process itself (e.g. use of referendum and election campaigns); " The role of the leading elites; • The impact of direct and indirect external influences; • The timing and sequence of steps in the process of negotiation and of unification or devolution. All these elements - the role of underlying conditions, motives, and the character of processes - are important to understanding the origin, operation, and evolution of federal systems. 4.

THREE

PARTICULARLY

CONTEMPORARY

SIGNIFICANT

ISSUES

Three particularly significant contemporary issues provide a focus for identifying the impact of the changing nature of the world upon the evolution of federations. The first arises from the impact of globalisation which has tended everywhere to the increased merging of domestic and international policy issues. This has radically changed the handling of foreign relations in federations. The traditional approach to foreign relations was that of "recognising internal diversity but emphasising external unity". Foreign relations were regarded, therefore, as solely the domain of federal governments. But that approach has now been called into question in many federations by the increased activity of the constituent units in foreign relations, and by their active participation and involvement in the formulation of federal foreign policies. Constituent units of federations are now frequently involved directly both in trans-border arrangements with the constituent units in neighbouring countries, as well as in establishing missions abroad, especially to attract investment. In such federations as Germany, Belgium and Switzerland, the governments of the constituent units have also been recognised formally as important participants in the development and formulation of the foreign policy of the federation. This has derived from the recognition that foreign relations now frequently relate to other areas of jurisdiction previously constitutionally assigned to the constituent units. In addition the implementation of some aspects of international and supra-national law has increasingly fallen, within federations, upon the governments of the constituent units. Further , a number of supra-national and international organisations,

i6 Raoul Blindenbacher / Ronald L. Watts

such as the EU or Francophonie, have provided a role for the constituent units of federations to play. A second major issue arises from the prominence of multicultural diversity and the frequency of multicultural conflicts in the contemporary world. Federalism and decentralisation can make a substantial contribution to the peaceful resolution of multicultural conflicts in a world marked by many such conflicts. This raises for comparative consideration, the role that federalism and decentralisation can play in constitution making and nation building in societies marked by diversity, and in reinforcing democracy, transparency and accountability in such countries. Important aspects here are also the roles of communities and civil society in conflict management, and of efforts to resolve such conflicts through international mediation. A third issue very much to the fore in contemporary federations is that of the appropriate assignment of responsibilities and of fiscal resources to the different orders of government, because of the worldwide trend to more decentralisation and autonomy directed at greater efficiency and equity. Related subthemes which need to be examined are the consequent political decision-making structures that are required, the problems of equalisation to correct financial disparities among the constituent units in federations, enabling fiscal competition but without excesses, and the appropriate forms of decentralisation in federations marked by transitional or developing economies. These three sets of particularly significant issues in contemporary federations are, of course, interrelated. Each of them relates to efforts to reconcile unity and diversity: the first to reconciling internal and external diversity, the second to reconciling internal diversity through processes of democratic self-government, and the third to reconciling internal diversit with the requirements of divided responsibilities, efficiency, equity and accountability. Because of their importance and relevance in the world today, these issues were chosen as the three main themes of the International Conference on Federalism 2002. 5.

FEDERATIONS LEARNING FROM EACH OTHER

Federal systems reflect the society that produces them. In a world that today is undergoing social change at an unprecedented rate, all federal systems are currently undergoing continuous transformation. They are all faced with the need to develop an ability to learn and adapt in order to cope with the challenges they face. In such a context there is a very real value in exchanging experience about different ways of tackling common problems. At the same time we need to recognise that, as already noted above, no single ideal federal model is applicable everywhere. There have been many

17 Part A Introduction

variations in the application of the federal idea to fit different circumstances. One therefore cannot simply transfer an institutional model from one country to another without taking account of the different conditions and circumstances. Nevertheless, as long as this caution is borne in mind, there is a genuine value in learning from the experience of federations elsewhere. Many of the problems faced are common to most federations. The experiences of other federations may therefore help us in several ways. They enable us to foresee more clearly the likely consequences of the various arrangements being advocated. Through identifying similarities and differences, attention may be drawn to certain features of our own arrangements whose significance might otherwise be underestimated. Options that might otherwise be overlooked may be identified. Furthermore, experience elsewhere may provide both positive and negative lessons: we can learn not only from the successes but also from the difficulties of other federations. 5. j. Types of learning

When considering how federations can learn from each other, we should recognise that learning theory distinguishes three types of learning (Probst and Buchel, 1994). The first type, known as "adaptive learning", is purely confined to conveying information from the "initiated" to the "uninitiated". However, federal systems have two characteristics that make this model unlikely to succeed. The first is their heterogeneity: when considering the different experiences of federal systems, with their different background con ditions, it is clear that each country is to a considerable extent unique. These differences should be borne in mind when attempting to transfer a model from one situation to another. Their second characteristic is an underlying dynamism. Beyond being simply different from one another, federal systems are in a constant state of flux, of ongoing development, and there is no guarantee that a given solution will work in the same way at different points in time and under different conditions. The combination of these two characteristics seriously limits the usefulness of the adaptive learning model. The second type of learning, known as "learning for change", analyses the way in which federal systems function, together with their objectives and how these can be realised. In view of the inconsistency and variability of different federations, the relevance and value of the data used as a tool for learning for change must be constantly checked. Depending on how political objectives have changed, the outcomes of the learning process will have to be constantly adjusted and redefined. The third type of learning concentrates on learning to learn, and is known as "process learning". This method focuses on the learning process itself underlying the actual content of what is being learnt. When using this method, it is necessary to check whether long-established behaviour patterns and

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Blindenbacher / Ronald L. Watts

forms of dialogue, such as the tendency to ignore errors or prevent them from being raised, are impeding or bypassing certain conclusions and learning processes. In order to uncover such unconscious defensive routines, the way in which participants learn for change must be analysed. If federations are to learn successfully from each other, they must use both the technique of learning for change and that of process learning. Integrated with these must be a continuous communication process not only between different federations, but also within a federal system itself. Once set in motion, this process should be an ongoing one, allowing constant interaction between the parties involved. This communication relates to the structure of and changes in a collectively shared and publicly usable knowledge base. In exchanging statements, justifications, explanations, interpretations and so on of day-to-day events, those participating in the learning process generally refer to concrete episodes and patterns of explanation in what they say. This so-called routinised reference both challenges the prevailing situation and at the same time reproduces it. According to this line of reasoning, dialogue can produce new realities within the federal systems. 5.2. Rules of dialogue

A major pre-requisite for federations to learn from each other successfully is the creation of optimum conditions within which interpersonal communication can take place. The great challenge for those engaged in a learning process involving individuals from different federations is that they are not learning only for themselves, but are part of an environment which facilitates their learning capacity. It is therefore necessary to create suitable forums in which individual learning interests and collective learning requirements can come together. According to the theory of group dynamics (Isaacs, 1999; Schein, 2000), "dialogue" is considered the most suitable form of regular communication between individuals. In this context, dialogue is a form of conversation that enables participants to go beyond the limits of their individual understanding. Unlike "discussion", in which those taking part are generally intent on asserting their own opinion, dialogue is about going beyond the bounds of one's own understanding. As Plato emphasised long ago, in a dialogue, a group explores a specific subject area from many different angles. Individuals do not tie themselves down to their own opinion, but freely share their assumptions. The result is that participants can explore and bring to the surface the full wealth of their thoughts and experience in an unfettered way, going far beyond their individual opinions. Those participating in dialogue can be said to be observers of their own thinking. The success of dialogue depends to a great extent on the selection of participants. In particular, the following considerations should be taken, into account.

ig Part A Introduction

• Participants in a dialogue should not be chosen vertically, according to positions held, but horizontally, according to themes and interests. In other words, depending on the breadth of the topic to be covered, all possible points of view and all known positions should be represented by the most committed and knowledgeable people available. This process, known as "triangulation" (Campell and Fiske, 1959), allows participants to work all around the issues to be examined. • Participants must have an adequate knowledge of the issues being considered, and of the current opinions and ideas surrounding them. The distribution of background materials prior to the dialogue provides a useful resource, making the necessary knowledge available. Dialogue thrives mainly on the quality of the communication between the participants. It is therefore essential to apply some basic rules of discourse, including the right to form opinions freely. Provided that participants adhere to the requirement of mutual respect for integrity, and no specially justified and accepted confidentiality or secrecy requirements are breached, all themes and contributions can be openly analysed. Their relevance is decided in the discourse itself. Disagreements over problem definitions and proposed solutions are settled by arguments that require collective acceptance. Objections or criticisms can be raised, and criticisms invalidated at any time. A basic pre-requisite for this is that it is possible to reach a common understanding of the relative contributions (Habermas, ig88a/b). 5.5.

Learning arenas: the knowledge spiral

One way of facilitating this learning process is through so-called institutionalised learning arenas or as part of process-oriented conferences. The International Conference on Federalism 2002 was designed as just such a learning arena. The approach that was chosen involved the selective enrichment of individual experience by integrating it with more generally available knowledge, and developing it further in conversation. In a learning arena, individuals expand their own knowledge through a "knowledge spiral" (Osterloh and Wtibker, 1999). It is developed by integration with new practical and theoretical knowledge, and finally transformed into procedures producing political action. This process has the specific intention of fostering a collective vision among those attending process-oriented conferences. This vision can assist the development of new solutions for problems in specific subject areas - in this case, the ways in which federal systems deal with the challenges they face, and their ability to adjust to new goals and objectives. During the first stage of this process, referred to as the "combination stage", participants are apprised of the state of the art regarding a given

2O

Raoul Blindenbacher / Ronald L. Watts

subject. Full information on the subject is made available to participants, who add it to their own knowledge and experience, and alter this in the light of the new information. During the second stage, the "internalisation stage", participants are required to make a critical analysis of their own practical experiences in the light of the new theoretical knowledge they have acquired. This broadens their understanding of their own experiences. The aim of this stage is to make individuals receptive to new patterns of thought and action, and so enable them to see and interpret their own social and political reality in new ways. During this process they become receptive to hitherto unfamiliar or misunderstood points of view, and reach a fresh understanding that enables them to solve problems in a new way. The third stage of the knowledge spiral, known as the "externalisation stage", involves a verbal explanation of participants' new understanding of individual experience. Intense personal communication is essential for this inductive process, and following demanding group interactions concrete results are eventually produced, which can be used and adapted in other situations. 6.

CONFERENCE CONCEPT

6. i. Combination stage: scientific preparation

The considerations for effective learning through dialogue, outlined in the preceding section, were taken into account in the organisation of the International Conference on Federalism 2002. Since a carefully planned preparation of the content of the conference themes is a vital component of the learning arena, papers were prepared in advance on the three conference themes described above: Federalism and Foreign Relations; Federalism, Decentralisation and Conflict Management in Multicultural Societies; Assignment of Responsibilities and Fiscal Federalism. Each of the three theme papers was prepared under the coordinated direction of a "Leading House" consisting of three Swiss academics and an international expert on federalism. The content of the papers included the development of the main points pertaining to the theme and an explanation of the choice of the four subthemes for each. The subtheme papers were written by eminent international scholars. They outlined the state of the art in research in these fields, and identified key questions to assist the in-depth consideration of particular cases in the work sessions at the conference. The theme papers and the subtheme papers, assembled in a "Conference Reader", were sent to participants prior to the conference. This enabled participants to give some preliminary thought to the conference issues and to prepare themselves.

21

Part A

Introduction

Thus, in this first step of the learning process, existing knowledge was organised into themes and subthemes, and made available to everyone involved in the process. Participants had access to the academic background material related to the various issues before they attended the conference. 6.2. Internalisation stage: work sessions

Work sessions were selected as the ideal forum for implementing this stage during the International Conference on Federalism 2002. The work sessions were central to the conference, and were intended to develop innovative, pioneering, problem-solving approaches based on both general themes and specific cases. Experience has shown that work sessions that produce successful dialogue take a considerable period of time; in this case, three and a half hours were allocated to each one. Each work session was introduced through one or two cases illustrating the subtheme concerned, which served as a starting point for a learningoriented dialogue. While it was important to realise that these specific experiences could not be translated directly into other circumstances, the use of cases underlined the emphasis on generating practical rather than theoretical dialogue. According to the triangulation procedure, in order to present the fullest possible picture of a given case, the content needed to be explored from a number of different reference points. Therefore, during the work sessions each case was presented by three to five "case statement makers" in short summaries detailing their responses to the questions formulated in the subtheme papers. Their statements provided the vital link between theory and practice, and ensured that the ensuing dialogue had its foundations in existing situations and problems. Using the presentations of the case statement makers as the starting point, the next objective was to draw on the experience of the other participants, thus expanding the dialogue to include diverse situations. This dialogue was moderated according to the guidelines laid down above. During the discussion, the following issues were given particular consideration: • What can be learnt from the cases presented? • What generalisations can be drawn from the learning process? • What can be applied to other cases and how can it be done? To ensure that the work sessions ran smoothly the following tasks and functions were performed by the participants.

22

Raoul Blindenbacher / Ronald L. Watts

Work Session Chair: this role involved introducing the various participants who delivered presentations during the work session; their presence provided the sessions with a necessary element of formality. At the International Conference on Federalism 2002, this position was allocated to members of the Swiss governments from different levels (cantons, cities etc.). It was important that their function in government stood in a relation to the theme of the work session. Dialogue Leader: the work sessions were moderated by the dialogue leaders, whose profile included skills in group dynamics, assertiveness and conflict management, an ability to instil enthusiasm, and experience of different cultures. They also possessed a keen interest in political matters and were prepared to explore the theme of the work session in depth. In addition, they were experienced in moderating political dialogues at an international level. To ensure that moderation was impartial, the dialogue leaders were not actively associated with special interest groups in the narrower sense of the term. Case Statement Makers: the case statement makers set out their points of view in a short presentation, based on the questions formulated in the subtheme papers. To ensure that the presentation of the case was broad, practical and in keeping with the triangulation procedure, the case statement makers were experts from diverse spheres, such as politics, the civil service, the sciences, and civil society. As well as playing key roles in their fields, the individuals selected were willing and able to take part in a learningoriented dialogue. Analysis Statement Makers: the work session proceedings were assisted by two "analysis statement makers". They were experts in the field, and their academic knowledge of the subtheme enabled them to place contributions by the practitioners in a theoretical or generalised framework, putting the dialogue in a new perspective and opening up new areas. At the conference in St Gallen these positions were occupied by the author of the subtheme paper and a representative of the Leading House responsible for the theme. Scientific Summary Writers: this role involved summing up the work sessions, paraphrasing the dialogue and undertaking an initial analysis of its content. The scientific summary writers were academics with special editing or journalistic skills. Their reports are published in this volume. 6.3. Externalisation stage: dialogue tables and plenary sessions

During the third stage of the knowledge spiral, knowledge accumulated by individuals has to be internalised and then further developed or externalised, for which the most suitable method is the use of what are known as dialogue tables. This forum creates an interactive space devoted to small groups in which the dividing line between the speakers and those listening

23 Part A Introduction

is deliberately removed. To this end, those investigating a theme, i.e. the participants from the four work sessions associated with a given theme, were brought together in a large room, divided into small groups of seven to twelve and seated at appropriately sized tables. The dialogue tables were organised by a facilitator, referred to as a "dialogue table moderator". His task was to briefly explain the dialogue table method, lay down the time frame and formulate the deliberately open questions to be examined by participants at the tables. These included: • What concerns me about what I have heard in the work sessions when I think of my own political realities? • What is new to me and where do these different experiences fit in? • Have I acquired new basic knowledge from what I have heard? To begin with, the case statement makers from the work sessions were present on the podium, and from here they summarised in a succinct statement the knowledge they personally had gained from the work sessions. Once collected, these statements gave the dialogue table an impression of the direction in which new problem-solving models, and where appropriate a new understanding of federal systems, could develop. Following these statements, the other participants were given the opportunity to ask questions, and the podium speakers were each asked to join one of the group tables. It was important to ensure that at least one podium speaker was allocated to each table. A rotation system was used to stimulate dialogue, whereby the case statement makers left their table and joined a new one at regular intervals. At the end of each dialogue table, participants also had the opportunity to address the plenary and inform it of the most important information they had acquired from the group dialogues. The dialogue table moderators presented their general conclusions in a final plenary session. They outlined the visions developed over the course of the interactive sessions, and brought together the overriding themes and issues that arose. 7. W H A T N E X T : CONTINUING THE KNOWLEDGE SPIRAL To ensure that the knowledge spiral continues into future, the findings of the conference had to be subjected to thorough evaluation and reflection. The knowledge gained has been set down in writing and is published in a suitable form in this book, so that it is available in its entirety to interested parties at any time. This guarantees that future learning arenas can immediately proceed from the previous combination stage, building on the progress already made, and facilitating the process of learning for change in the future.

24 Raoul Blindenbacher / Ronald L. Watts

Events such as the International Conference on Federalism 2002 are of great value for those involved in the operation of federations, since they provide an opportunity to exchange information on their various experiences. The title of the conference was appropriately "Federalism in a Changing World - Learning from Each Other". In making this emphasis, the conference represented a major advance forward, in that it built upon the first such event held in Mont-Tremblant, Canada, in October 1999, and the subsequent establishment of the Forum of Federations as a network for exchanging information among federations. All too often, learning efforts made in conferences previous to that had the disadvantage of being dissipated in small-scale activities, and hardly noticed outside the groups of participants immediately involved. Thanks to the knowledge generated at the conference, it will be possible to create a new treasury of experience that must be systematically extended and expanded. In particular, it must be enriched with further learning experiences. It is hoped that the institutionalisation of learning arenas with the aim of generating and spreading knowledge will be achieved by developing a network of knowledge exchange regarding issues related to federalism. This will extend the possibilities for productive dialogue through suitable forums in the future. According to the concept of process learning, no effort should be spared in continually seeking new forums that encourage the productive exchange of knowledge between people from different cultures and sectors of society. These endeavours are justified by the fact that such future learning arenas will continue to promote the confirmed aim of the International Conference on Federalism 2002: "to safeguard peace in the world". REFERENCES

Cairns, A., 1977. The Governments and Societies of Canadian Federalism. Canadian Journal of Political Science, 10(4), December 1977, 695-725. Campell, D. and Fiske, D., 1959. Convergent and Discriminant Validation by the Multitrait-Multimethod Matrix. Psychological Bulletin, 1959, 81-105. Courchene, T.H., 2001. A State of Minds: Toward a Human Capital Future for Canadians. Montreal: Institute for Research on Public Policy. Habermas,J., igSSa/b. Theorie des kommunikativen Handelns. Handlungsrationalitdt und gesellschaftliche Rationalisierung. Vols i and 2. Frankfurt: Suhrkamp. Isaacs, B., 1999. The Dialogue and Art of Thinking Together. New York and Koln. Livingston, W.S., 1956. Federalism and Constitutional Change. Oxford: Clarendon Press. Osterloh, M. and Wiibker, S., 2000. Wettbewerbsfdhiger durch Prozess- und Wissenmanagement. Wiesbaden: Gaebler. Probst, GJ.B. and Biichel, B.S.T., 1994. Organisationales Lernen. Wettbewerbsvorteil der Zukunft. Wiesbaden.

25

Part A Introduction

Schein, E., 2000. Prozessberatungfur dir Organisation der Zukunft. Koln. Watts, R.L., 1999. Comparing Federal Systems. 2nd ed. Montreal and Kingston: McGill-Queen's University Press. Willke, H., 1998. Systemisches Wissensmanagement. Stuttgart: Lucius und Lucius Verlagsgesellschaft.

DANIEL THURER

Federalism and Foreign Relations

"International relations are like a game of billiards". This is how one observer described the old world of sovereign states. According to the commentator in question, national lawyers were concerned with the internal structure of the billiard balls while international lawyers dealt with their interactions. But when the matter is examined in terms of the interplay between federalism and foreign policy, it is clear that this image does not reflect the modern reality. The purpose of my presentation is to show that we need new philosophies, new theories and new concepts if we are to come to terms with the workings of today's federalism and shape the federalism of tomorrow. My presentation consists of three parts. The first part, entitled "A Qualitative Leap", considers the traditional view of federalism and the challenges now facing it. The second part, entitled "Shortcomings of Escher's Maxim", highlights four aspects of modern federalism that do not fit neatly into the old way of thinking. The third part, entitled "Beyond Montesquieu", considers the question of how, viewed through a foreign policy lens, federalism can and should be understood as an ordering principle and philosophy for contemporary circumstances. 1.

A QUALITATIVE LEAP

According to the conventional view of the international order, states lay beside each other like billiard balls, with nothing moving within. They were defined by three elements: a territory marked off from the outside world, a national people, and sovereignty in the sense of supreme state power. This view has become ingrained in our minds and is still to be found in many

27 Part A Introduction

textbooks. There was probably never a time when it was a true reflection of reality, and the evidence of our everyday experience is that it does not apply to our contemporary world at the beginning of the twenty-first century. Two historical developments are causing the international system to change and are seriously eroding the classical model of statehood. The first comprises the "top-down", so to speak, processes of globalisation. These are trends extending far beyond the economic field and encompassing areas such as culture and communications and ultimately, indeed, our very values and sense of identity. Globalisation is leading to new forms of internationalisation, unification and institutionalisation of traditional social orders: universal markets and human rights belong to the goals and ethos of the global systems which are increasingly overriding, permeating and combining with national legal systems. In a sort of counter-movement, regional forces have been emerging throughout the world at the sub-national level with efforts being made to establish, develop and maintain small and in certain cases trans-national spaces. An example is the Regio Basilensis, whose institutions cover German, French and Swiss territory. The ethos of inter-state regions is the preservation or recovery of the shared identity of historical communities, many of them divided by national boundaries, the establishment and realisation of democracy and citizenship for the local region, and the promotion of efficiency and transparency of political and administrative processes across national borders. Are "pararegional structures" also emerging across national frontiers: connections and networks between cities, for example between London, New York, Frankfurt etc.? How does all this relate to federalism? The historical development of the federalist principle began with the federal constitution. The aim of such a constitution is to combine unity and diversity harmoniously in a political system. The characteristic features of the constitution of a federal state are: • The presence of two or more legal orders which apply directly to citizens of the state; • A constitutional distribution of power among the different levels in the political structure, with the subsidiarity principle applying where possible and with the constituent states enjoying a substantial sphere of autonomy; • Involvement of the constituent states in the formulation of federal policy; • A constitutional basis that cannot be amended without the participation of the constituent states; • Processes and institutions to facilitate cooperation in matters that fall under the shared responsibility of different players in the federalist system. The "federal state" was "invented" by the founding fathers of the United States, adopted by Switzerland in 1848 and subsequently by over 20 further

28 Daniel Thiirer

countries, most of whom are represented here today in St Gallen. Federal constitutions generally assigned questions of foreign policy to the federation, particularly to the federal government. The central state was thus given a virtual monopoly over foreign affairs, even in matters over which the cantons had jurisdiction for internal purposes. It was fundamentally a matter for the federation to represent the state as a whole in its international relations and to defend it against any threats to the body politic. Alfred Escher, a powerful Zurich statesman of the nineteenth century, coined a maxim to describe this arrangement: "internal diversity and external unity". 2.

SHORTCOMINGS

OF ESCHER's MAXIM

The representatives of Leading House I - my colleagues Bernhard Ehrenzeller, Giorgio Malinverni, Rudolf Hrbek and I - examined the issues pertaining to "Federalism and Foreign Relations" and, proceeding from the microcosm to the macrocosm, as it were, identified four dimensions: • The foreign policy of constituent states; • Participation by constituent states in the foreign policy of the federation; • Transposition and application of international and supra-national law in the federal state; • "Federation building" in Europe. Let us begin with foreign relations of sub-national territorial authorities. One of the characteristic features of the modern federal state is that constituent states and, to some extent, local government authorities, are increasingly becoming active in foreign policy as independent players. Of course this phenomenon is nothing new. It was provided for in die Swiss federal constitution of 1848, for example. Even back then, our old federal state spoke to the outside world not just with the one voice of the confederation, but with the 26 voices of the confederation and the 25 cantons. Of course, the pursuit of independent external contacts by the constituent states has come to the fore as a defining feature only in more recent times. Border "lines" have become blurred and been subsumed into border "spaces". Old, historic contiguous regions are once more emerging as cultural and economic spaces. Consider the Lake Constance area, to take a particularly obvious example. The architecture of ecclesiastical buildings, for example, or the history of families and firms show how close-knit the area was before the establishment of nation states with their precisely defined boundaries. Lake Constance is the only region in the world where three federal states come together. Here, the existing constitutional possibility for regional diversification of the state's external representation facilitated

2g Part A Introduction

the emergence of cross-border arrangements between constituent states and local authorities. It goes without saying, of course, that loyalties of this kind cannot be pushed so far as to jeopardise the integrity of the states concerned. Worldwide, we are also witnessing, for example, constituent states and cities increasingly extending their spheres of activity beyond national borders, whether on a unilateral or multilateral basis and whether through formal or through non-binding agreements. The story that during the Second World War the state of Vermont declared war on Germany before Washington did so, as I heard from one of the Senators for that state when I was in the United States, offers a particularly striking - and also questionable - case in point. But the idea of constituent states and cities undertaking initiatives in the area of human rights, launching or supporting ecological programs, establishing cultural links with foreign counterparts, competing abroad on an autonomous basis for investment in their economies, lodging protests or imposing sanctions - all this is now commonplace. Indeed, many sub-national territorial units have set up their own representative offices in foreign capitals and economic centres. What are the circumstances in which constituent states can engage in external activity? Where they have a direct interest as the owners of banks, insurance companies or other commercial companies? Or where they are directly concerned in their role as guarantors of fundamental rights? Are they entitled, as a general rule, to conduct activities across national boundaries in matters falling within the scope of their intra-state jurisdiction? Where are the limits, dictated, for example, by the need for unified action by the state as a whole? As a general proposition, it may be concluded that the divergence between the inner and outer structure of the federal state is increasingly receding into the background and the "internal diversity" lauded by Escher is being reflected more and more towards the outside as well. Behind the gradual shift to autonomy in foreign policy and the emergence of subnational territorial units from the grip of the old nation state, are we seeing the birth of a new, flexible, variable federative model, characterised by overlapping spheres of competence in the shaping of national, transnational, international and supra-national relations? Let us turn, secondly, to the internal relationship between constituent states. These states are increasingly involved in the formulation of the foreign policy of the federal state. Various forms of cooperation may be observed. In the Bundesrat (Upper House of Parliament) model of Germany and Austria, for instance, the governments of the Lander participate in the formulation of federal policy through their own chamber (the upper house) in the federal parliament. In Belgium, the regions and linguistic communities have their own external powers in matters lying within the scope of their internal powers, although they are required to consult the

go Daniel Thurer

central government before entering into treaties with foreign authorities. In Switzerland, the cantons have joined together in the Conference of Cantonal Governments with a view to bringing their combined influence to bear on the federal government in particular and general policy areas, including foreign policy matters. We are thus witnessing a process in which, while powers are increasingly migrating from constituent states to the federal government and to international forums and institutions as a result of globalisation, the cantons are responding to this by using both formal and informal procedures to exert their own influence on the shaping and formulation of federal policy. In the slipstream of globalisation, the long-running internal trend is continuing whereby the right of self-determination of internal actors has been developing into a process of codetermination at the higher level of the federation. In this process, the constituent states are, of course, not involved in foreign policy as players in their own right, but as hidden partners in foreign policy, as it were, concealed from view to the outside world. The counterpart to this bottom-up participation in federal affairs - and this is the third dimension I referred to above - is the top-down transposition and application of international and supra-national law. This involves classical issues of the relationship between international law and municipal law. A number of approaches are possible. Complex questions of legislative technique arise. In these processes, the state may be likened to the customhouse in Hawthorne's novel The House of the Seven Gables, through which, figuratively speaking, passes the merchandise landed at the state's borders off the high seas. Are the goods reweighed and repackaged upon "import" (dualism) or are they left as they are (monism) ? Do they remain at federa level (the "custom-house") or do they continue on to the constituent states (the "subsidiaries"), where the latter have jurisdiction, internally, over the matters in question? How can the federal state ensure that the constituent states comply with their obligation to respect and in any event to implement international or supra-national law? We are therefore asking: in what manner and in what form do internal territorial units form, as it were, the "base" for the transposition and enforcement of international and supranational law at internal level within the federal state? The implementation of such law within a federal state concerns not only the law of the federation but also the superior legal order which takes precedence over the federal state as such. We come now, on our journey through the world of federal institutions, to the fourth and perhaps most interesting and innovative stage: the federalist processes unfolding at supra-national, particularly at European level. This takes us back out of the internal domain of the sovereign state and confronts us with the unprecedented phenomenon of the pooling of sovereignty, the transformation of national sovereignty through the institutions

31 Part A Introduction

that have emerged in the supra-national union of states and nations. The principle of federalism has taken on new and original forms in the area of European integration. A particularly topical aspect is, of course, the ambitious plan adopted at the Laeken European Council to draft a European constitution. I can hardly imagine, however, that there will emerge from this a substantive new legal order for the European Union (EU). Rather, it will become clear, that the European pouvoir constituant continues ultimately to consist not of a single European people but of several different nations. The EU will remain a union of states (or nation states) and is not going to mutate into a European nation state. This is probably axiomatic and a specific feature of the realisation of the federalist principle in the European region. But is that not also a significant federalist finding? Is it not a frequently overlooked, but essential and by no means inevitable effect of European integration that, in their respective fields of activity, government agencies (e.g. immigration authorities, employment offices etc.) as well a commercial enterprises and individuals must treat the "Other" - i.e. the nationals of another EU member state - as fundamentally equal, and that the legislative, executive and judicial branches at all levels of government are bound to keep constantly in mind the legal orders and traditions of which European integration is composed? In this sense, institutions shape our behaviour, and practices are internalised. The saying "form follows substance", however, does not always apply; reality shows that institutions too shape the conduct and even the thought processes of individuals. This everyday aspect of "federalism in action" is often overlooked. 3.

BEYOND

MONTESQUIEU

Federalism - this much is clear - is an idea, a principle of legitimacy that extends far beyond the federal state, which constitutes just one of its manifestations. Bodin and Hobbes developed the theory of sovereignty, Locke championed the fundamental and human rights of the individual, Montesquieu conceived the doctrine of the separation of powers, and the Philadelphia founding fathers created the federal state. Our discussion of the relationship between foreign policy and federalism has shown that we are in need of a new philosophy of federalism. This will not be the billiard ball theory but a theory of networks or mediators between political communities. The nodes in the networks are the nation states. The nation states remain the central players in international relations, their constitutional systems remain the most effective safeguards of human rights, the central forums of democracy, the indispensable promoters of social justice. But statehood must be interpreted afresh in the light of new federalist processes: it must open itself up both inwardly and outwardly, but conversely it must also curb centrifugal, polyarchic processes.

32

Daniel Thxirer

Let me conclude with a little story. I found the story in a booklet entitled How To Be Successful in Business Life that I bought many years ago at a kiosk somewhere in the United States. The story goes as follows: There was once a battleship in heavy seas. It was night. The officer in charge informed the captain that the ship was on a collision course with another ship whose light had been observed in the distance. The captain gave an order to tell the boat: "We are on a collision course, change direction by twenty degrees". The answer came: "I advise you to change course by twenty degrees". The captain replied; "We are a battleship, the captain is speaking. Who are you?" The answer came back: "I am a seaman, second class". The captain: "So, I order you to change course immediately". The answer: "You had better change course, sir; I am a lighthouse".

The story suggests that even if we who believe in the federal system are weak compared to apologists of centralist power, we are strong under two conditions: if the practical basis on which we stand is solid and if our message is clear and illuminating. What would be our mission, our philosophy? Let me name four elements. First, the state no longer finds meaning in itself. It has become a "middle man" or a "mediator" between the inside and outside. Second, modern constitutional states are not only the true "junctions" in the network of international and sub-national affairs, but also the most effective trustees of the international community's values. They still are, in the final analysis, the single entity that is best capable of actually guaranteeing human and fundamental rights as well as equality and rule of law, of achieving democracy and of- at least partially - imparting social justice. Third, a special basic attitude is required for handling a federal system, which Denis de Rougemont referred to as the "love of complexity". In this sense, the philosophy of federalism corresponds optimally to the spirit of the complex modern information and knowledge society. Fourth, the legitimation of the federal form lies ultimately in the affirmation of variety as wealth, and in the respect and tolerance of others, who we do not seek to standardise but accept as they are. We need a new federal philosophy. Pellegrino Rossi once noted that Geneva had produced innovative practitioners and had had the good fortune to have philosophers on hand to explain to the world what was being done there: Calvin as regards the Reformation, Rousseau as regards democracy. We have joined together here in St Gallen for a unique assembly of practitioners and philosophers. Work sessions on three fascinating themes will take place. The ones on Federalism and Foreign Relations promise to be a good catalyst for a new, richer understanding of an old principle that is in danger of ossifying. I hereby invite you to take part, in order to, as the title of the conference puts it, "learn from each other".

CHERYL SAUNDERS

Federalism, Decentralisation and Conflict Management in Multicultural Societies

It is trite that multicultural societies are a feature of the late twentieth century and the early twenty-first century. This is not because multicultural societies are new, although the phenomenon of multiculturalism may also be growing and changing through population movements of various kinds. Rather, it is because of the greater prominence of the multicultural character of societies. This in turn is a response to a variety of factors. One is the end of the Cold War, and the relaxation of the somewhat macabre discipline that it imposed upon the world. Another is the greater consciousness of racism, associated with the rights revolution. A third is a reaction against globalism. In this connection, Raoul Blindenbacher and Ronald L. Watts (see Blindenbacher and Watts, Part A) suggest in their paper that the desire for identity is leading to renewed emphasis on "primary group attachments - linguistic and cultural ties, religious connections, historical traditions, and social practices". A final factor explaining the new prominence of multicultural issues is the terrible evidence of what happens when a multicultural society cannot live in peace, which we have witnessed in so many parts of the world over the past decade: Africa, the Middle East, Eastern Europe, South and South East Asia. The issue for this theme is the extent to which, and in which circumstances, federalism is an answer for the governance of multicultural societies. In the theme paper we define federalism broadly for this purpose as "a constitutionally established balance between self-rule and shared rule"; a balance that may be struck in a wide variety of ways. We note, however, that in some cases federalism is not the only possible answer, and that in any event it is never the exclusive answer. There are other ways of protecting minorities from majorities: most obviously, through effective recognition of

34 Cheryl Saunders

rights. There are other ways of including minorities in governance. Examples include power sharing, proportionate electoral systems and other institutional arrangements. These mechanisms are part of the constitutional tool kit from which solutions must be constructed. But the detail of an appropriate and workable solution for a multicultural society will depend in part on its specific circumstances. It may be worth drawing attention at this point to the very wide range of societies that meet the description of multicultural and to their very diverse circumstances. In some cases, the different cultural groups are of long standing. In others, cultural differences are the result of waves of relatively recent immigration. In some cases, cultural groups are territorially located: in others they are not. In some cases, other values compete strongly with the value of cultural diversity: the value of legitimacy derived from majority rule in South Africa after decades of apartheid is an example. In some cases, multicultural societies are peaceful and harmonious or relatively so. In others they are, or have been (or could be), in violent conflict. An impression of the range of multicultural societies can be gleaned more directly from the cases that will be used as examples for this theme. Our host, Switzerland, is an established multicultural society. So, in a very different form, is the United Kingdom. So, but more recently or tentatively or both are South Africa, Italy, India, Mexico, Brazil and Nigeria. In three of our cases, however, there has been violent conflict in the recent past, from which lessons might be drawn. The three to which I refer are Yugoslavia, Bosnia and East Timor. In another three there is existing conflict awaiting resolution: Somalia, Cyprus and Sri Lanka. Generalisations about the governance of multicultural societies must encompass all of these. Nevertheless, let us generalise and say that in all such cases, federalism is or can be an attractive option, for a range of reasons. The combination of unity and diversity that federalism offers potentially enables a multicultural society to have its cake and eat it too. It enables minorities to become majorities in sub-national units thus assisting to answer the question "who should govern whom?" It provides a means for the recognition and acceptance of different languages, religions and cultures. Most importantly of all, perhaps, it embraces diversity, it positively values diversity, it can promote diversity, and thus can capture the benefits of diversity. In this way it increases the legitimacy of the state in the eyes and hearts of its entire people and not merely of a dominant group. In societies in conflict or potential conflict, this has the further advantage of increasing the likelihood that a real peace will be made and will hold. A federal approach also compensates for the deficiencies of traditional constitutional principles in the face of cultural diversity. We suggest in our theme paper that the assumptions on which paradigm nation states are based tend to deny, to ignore or to exclude culture, at least in relation to questions of governance. This is reflected in the uneasy compatibility of

35 Part A Introduction

cultural difference with some key constitutional principles: equality, citizenship, majoritarian decision making, and the separation of the public and private spheres. This is not to say, of course, that modern constitutionalism does not offer mechanisms to protect aspects of culture through mandated tolerance and rights of various kinds. These are valuable and important concessions but they do not and cannot impart a sense of ownership of the state to different cultural communities, in theory or in practice. Ours is a huge topic. Consistently with the format for this conference, we have identified four aspects of it for thorough examination. The four subthemes focus respectively on: • • • •

Making and building a multicultural state; The governance of the constituent units; The role of civil society in multicultural states; The circumstances and manner of international intervention in ethnic conflict.

Each approaches the question of the governance of a multicultural society from a different but key perspective; that of the state itself, its constituent units, society and the international community. Each is discrete in its conception, although inevitably there is overlap between subthemes on such key questions as ethnic federalism; how to deal with a threat of secession; where to strike the balance between unity and diversity; and the extent and significance of the conflict between federal arrangements that recognise and value cultural diversity and other constitutional values. In what follows, I briefly outline each of the sessions by way of an introduction to them. i.

CONSTITUTION MAKING

AND NATION BULDING

Federalism interacts with this subtheme in several ways. First, there is a question of the extent to which a federal solution can contribute to establishing and maintaining peace in a multicultural society by making a state and by building a nation. As I suggested earlier, the answer to that question is complex and may require consideration of other ways of ensuring the inclusion of different cultural groups while preserving the democratic legitimacy and effectiveness of the state. Secondly, there is a question about how peace making and the constitutional processes that follow it should be conducted so as to maximise the likelihood that the chosen solutions, including federal solutions, will work and will last. There is thus an opportunity, under the auspices of this subtheme, to examine a range of highly pertinent and practical questions. How can the various groups with a stake in the outcome be given confidence in the

36 Cheryl Saunders

constitutional process and in federalism as a solution? Is federalism necessarily an obstacle to nation building, as is so often feared? How, when, and where should the necessary compromises be struck between centralisation and non-centralisation in a federation? What are the real pros and cons of ethnic federalism? How can the bogey of secession be avoided or handled in the precarious federal state? 2. D E C E N T R A L I S A T I O N AND GOOD

GOVERNANCE

By definition, an advantage of federalism is its capacity to deliver government that is more local, more accessible and more responsive, and thus to enhance democracy. These are valuable outcomes for any society offering particular benefits for multicultural societies. But local government is not much use unless it is good government which is genuinely accessible and responsive and which serves the community's needs. Even without the complication of multiculturalism, as a generalisation the smaller the polity the greater the potential for its capture by small political elites, detracting from the purpose of decentralisation and leading to corruption and other forms of abuse. Even without the complication of multiculturalism, self governing sub-national units almost inevitably will be unequal in economic development and prospects, presenting the familiar federal dilemma of the extent to which equalisation is appropriate or necessary. These and other issues are raised by this subtheme. The latter, of course, is also raised by Theme III. In addition, however, in multicultural societies, the link between the operation of the federal principle and the presence of culturally diverse communities adds further dimensions to the issue of sub-national governance. Should the sub-national units coincide with ethnic groupings? Should such coincidence be regarded as beneficial, enhancing cultural autonomy and promoting their legitimacy of the governing arrangements? Or is such a coincidence problematic, reinforcing ethnicity as a basis for political actions? How can the potential benefits of decentralisation in multicultural communities be maximised, while minimising the disadvantages? And an associated question: what to do about the position of minorities in culturally defined sub-national units? 3.

COMMUNITIES AND CONFLICT

CIVIL SOCIETY MANAGEMENT

We know that civil society is critical for effective democracy. In a multicultural community, however, civil society takes on an additional or new significance. Part, perhaps all, of society may itself comprise culturally divided groups. The underlying issue for this subtheme therefore is: what implica-

37 Part A Introduction

tions does this have for the manner in which the state is built, for its prospects of success, and for the governance techniques to be used? Several questions arise. The first raises, once again, the link between federalism and ethnic grouping. The now familiar question is whether and in what circumstances geographic boundaries should coincide with ethnic boundaries, thus reinforcing the divisions within civil society, but preserving an identity to which people can readily relate. In this context, the question can be presented even in the absence of territorially based cultural groupings, by the possibility of non-territorial or personal federalism, as demonstrated by the case of Belgium. The second group of questions deals with the balances, compromises and accommodations that federalism requires. In the circumstances of a multicultural federal society, how can a national civil society be built? How can strongly delineated cultural groupings be reconciled with the principles of democracy and human rights? These questions are raised in a particularly acute form in relation to linguistic, religious and other cultural rights. Should there be group rights (and should the groups coincide with federal units)? Can these be equated with individual rights? How can group rights, including rights to self-determination, be reconciled with individual rights and the rights of citizenship? 4.

INTERNATIONAL AND REGIONAL

ACTION

WITH REGARD TO CONFLICTS IN MULTICULTURAL SOCIETIES

International intervention in intra-state ethnic conflict is another phenomenon of the late twentieth century involving a departure from traditional principles of state sovereignty. The phenomenon interacts with federalism in a number of ways. First, the emergence of the international community, in various different manifestations, as a significant player in multicultural conflict in fact represents the involvement of another level of government and in that sense might loosely be described as having a federalist dimension. This perception in turn raises questions about the rule of law, transparency, and accountability as it applies to the international sphere. There is a further question as well, about whether new procedures or institutions are needed through which the international community may act. Secondly, intervention by the international community has implications for the questions of legitimacy, inclusion, constitution making and peace building raised in the first sub theme (Constitution Making and Nation Building). The extent of these implications depends on the nature of the international intervention, which can, of course, take a wide variety of forms. But where international action involves military intervention and a physical international presence, there is a question about how to maximise

38 Cheryl Saunders

its positive effects and to minimise the problems that it presents for the future of the society. When, how, and on what basis should intervention occur? What are the pitfalls? How can the international community inform itself about local circumstances and avoid capture by particular groups? What are the legitimate and sensible limits of international action? How far can and should the international community go, beyond peace making and keeping, when involving itself in the maintenance of law and order and in the construction of a state? In the circumstances of international intervention how can all parts of the multicultural community be given ownership of the process and of its outcome? Finally, international action also is relevant to the theme in the following way. Where the international community has some influence on the outcome there is a question of when it should favour federalism and when it should act so as to facilitate secession. In other words, when should it strain to hold a state together? These questions raise once again the issue of whether and when federalism can resolve ethnic tension. In this way, the subtheme takes us back to and neatly ties together the rest of the theme.

WALLACE E. OATES

Assignment of Responsibilities and Fiscal Federalism Federalism and Public Sector Performance: An Economist's View1

1.

INTRODUCTION

Both in the industrialised and developing world, moves are afoot for the decentralisation of government in the hope of improving the performance of the public sector. Such moves toward "devolution" are justified both in political terms as a means to bring policy making closer to the people to enhance democratic processes, and in economic terms as a way to adapt public outputs to local tastes and circumstances. But the real issue here cannot be one simply of centralisation versus decentralisation. The public sector by necessity involves different levels of decision making, and the question here involves the proper alignment of functions and policy instruments among the different levels of government. This, incidentally, encompasses not only fiscal structure, but regulatory prerogatives as well. Our objective is to determine the vertical structure of the public sector that can enable it to function most effectively. There are no absolute rules - or inviolable principles - in such an assignment of functions. But the literature on fiscal federalism has provided some general guidelines that provide a point of departure for thinking about this issue in the context of particular countries, or groups of countries like the European Union (EU). In the first section of this paper, I provide a brief review of these guidelines along with some observations. In addition, the organisers of this conference have asked me to address certain subthemes. In the subsequent sections, the paper takes up these issues: fiscal competition, fiscal equalisation, and fiscal decentralisation in the transition economies and developing countries. This is an imposing agenda, which I cannot hope to cover in a comprehensive way, but I will at least offer some thoughts on each of these issues.

4O

Wallace E. Gates

2.

ON THE A S S I G N M E N T OF F U N C T I O N S

In the context of multilevel government, public finance economists have posed the issue of the assignment of functions (e.g. Gates, 1999). What specific jobs or responsibilities are the different levels of government best equipped to handle? Their answer to this question is not a rigid blueprint for governmental structure, but rather some rough guidelines that we should consider in assigning functions to the different levels of government. Let me be more specific. It seems clear, for example, that the primary responsibility for macroeconomic stabilisation policies must be lodged at the central government level. The central government, for good reasons, exercises control of the monetary system and hence the power to regulate the supply of money and credit, and through this important channel to influence the aggregate level of economic activity. Likewise, countercyclical fiscal measures are most effectively exercised at the central level. A local government, for example, could not expect to revive a depressed local economy with a local tax cut; the new income generated by the reduction in taxes would be spent largely on goods and services produced elsewhere resulting in very little stimulus to local economic activity. In short, decentralised governments are very limited in what they can hope to accomplish in the way of macroeconomic stabilisation. Similarly, economists have pointed out some important constraints on decentralised re-distributive policies that suggest a basic role for central government in providing assistance to low-income households. A local government, for instance, that initiates an aggressive program to redistribute income from the wealthy to the poor runs the risk of attracting an inflow of low-income residents, while inducing an out-migration of the well to-do. And the threat of such mobility tends to discourage decentralised programs of assistance to the poor (Brown and Gates, 1987). There is, in fact, some evidence, in the United States at least, that poor households exhibit some mobility in response to local differentials in welfare payments. In a recent and careful econometric study, Jonah Gelbach (2002), for example, finds both that levels of welfare payments in us states have influenced migration decisions of recipients, and that this has led to reduced levels of payments to the poor. This suggests an important role for central government in poor relief. The case for decentralised finance is found in the provision of public goods and services whose consumption is limited to specific jurisdictions. For such "local public goods", a system of decentralised finance allows each jurisdiction to provide a suitable level and range of public services that is responsive to the demands of the local citizenry and the costs of provision. Such an outcome of differentiated outputs can significantly increase economic welfare as compared to an outcome characterised by a relatively uniform level of provision across the nation.2 The basic prescription then is that

41 Part A Introduction

the central government should provide "national public goods" that are consumed collectively by everyone in the country, while provincial (or state) and local governments should provide outputs of those public services whose consumption is specific to their own constituencies. We could, of course, conceive of a world in which the central government, with full information and wide-ranging powers, differentiated outputs jurisdiction by jurisdiction to account for geographical differences in costs and demands. But such an outcome is unlikely. Firstly, there are serious informational problems in practice. It is hard for a central agency to know what people want in each locality, what the efficient levels of public outputs are in each place. Decentralisation takes advantage of the more complete information available in each jurisdiction. Secondly, even if central government possessed such information, it would be difficult politically to translate it into differentiated public outputs. There are pervasive political pressures for equality of treatment that make it hard to provide a wider scope of services in some areas than in others (even though it is economically efficient). Thus, centralised provision of many public services is likely to compromise the performance of the public sector.3 Let me offer two brief observations on these prescriptions. Firstly, as I mentioned above, these are not firm "principles" but rather some general guidelines. There is some limited scope for decentralised stabilisation and re-distributive activity, but a major central role seems clearly to be needed. Secondly, the general principle for decentralised finance does not translate directly and easily into a precise delineation of specific goods and services to be provided at each level of government. What is deemed to be "local" in some countries may well be regarded as a provincial or even national good in other settings.4 Nevertheless, there remains a strong economic case for encouraging the provision of public services at the lowest level of government that encompasses spatially the benefits and costs of the outputs. It is interesting that this basic perspective of fiscal federalism has been developed in the context of the modern nation state. Things become more complicated when it is applied to emerging "federations" like the EU. But it provides some useful insights. In particular, it suggests certain problems confronting the EU. The member states in the EU become, in certain ways, like the states in, say, the United States. Many have now given up their individual monetary and exchange rate prerogatives with monetary union and have taken on certain fiscal constraints that limit their capacity to engage in traditional counter-cyclical policies. In this sense, their position is similar to a state or province in a nation state. The problem is that the new top layer of government in the EU is not in a position to provide the kind of fiscal stabilisation (both automatic and discretionary) that a sizeable central government brings to the typical nation state. The central budget is simply too small to offer much in the way of stabilising forces. The member

42

Wallace E. Gates

countries may thus find themselves vulnerable to location-specific shocks that neither they nor the EU can address effectively. It may also be the case that over time, with rising mobility across national borders in Europe, member states will find themselves increasingly constrained in their capacity to carry out necessary re-distributive programs. Again, the size and scope of the EU budget (at least as currently envisioned) is simply insufficient to carry out this function. These are issues that the EU, in its evolution, will have to address (Sinn, 1994, 1997; Gates, 2001). 3.

FISCAL

COMPETITION

AND ITS IMPLICATIONS

A direct challenge to the fiscal federalism "prescription" has emerged in some of the literature on fiscal competition. One segment of this literature contends that competition among governments leads to the underprovision of public services. The argument is that public officials, in their eagerness to create jobs and encourage economic growth, will tend to hold down tax rates and offer subsidies and other inducements to attract new business investment. This results in a so-called "race to the bottom" with inadequate provision of public services. This line of argument, however, is far from self-evident. I want to stress that there is an enormous literature, mainly theoretical in character, that explores this issue. Dozens and dozens of papers and conferences have explored various facets of economic competition among governments.5 This body of work is in many ways rather unsatisfying: in particular, it does not, in my view, produce much in the way of firm policy conclusions. Let me explain briefly. There is clearly plenty of competition among governments for new private sector investment. This competition, incidentally, is not limited to fiscal measures: it includes regulatory activities as well. Governments can attract business not only with low tax rates, but also with lax environmental measures (as one example) that do not burden new business enterprise with heavy costs. But the existence of such competition does not necessarily imply under-provision of public services. It is perfectly straightforward, for example, to construct a standard neoclassical model of economic competition among governments in which such competition provides precisely the right incentives for providing efficient levels of public services (e.g. Gates and Schwab, 1988). Competition among governments in such models is a good thing: it encourages efficient decision making. Economists have long praised the virtues of competition in the private sector, and, at least in certain models, this view extends to competition in the public sector as well. However, it is not hard to introduce various realistic elements into these models (e.g. strategic behaviour of various sorts, or the absence of certain fiscal instruments) such that distortions arise. And these may take the form

43 Part A Introduction

of the under-provision of public services including not just too little spending on local public goods, but also such things as excessively lax environmental standards. The problem is that it is hard to assess the implications in practice of these competing views. The theoretical models tell us little about the magnitude of potential distortions even if there is a race to the bottom. And things become even more complex when we allow for differing perspectives on the performance of government. Some observers see a tendency in government toward excessive budgetary size (e.g. Brennan and Buchanan, 1980). From this point of view, economic competition is a good thing: it constrains the overly expansive tendencies of the public sector. Thus, it is difficult to come away from this literature with any hard conclusions on the important question of whether we need harmonisation of policies to restrain interjurisdictional competition (Gates, 2001). As I mentioned, this literature is predominately theoretical in character. We do not have much empirical work to complement the theoretical papers and to see what in fact happens. There is plenty of evidence that vigorous competition among decentralised governments exists, at least in the United States (e.g. Bartik, 1991). But this really does not address the issue. The question is whether or not such competition has beneficent effects or whether it leads to under-provision of public goods. There is one body of empirical work in the United States that has examined an episode of devolution in environmental decision making. During the Reagan Administration in the 19805, there took place a devolution to the states of certain responsibilities for environmental management. There have been a handful of studies of this period to see if this resulted in any kind of a race to the bottom. All of these studies without exception can find no such evidence. They find no reduction in spending on pollution abatement or deterioration in environmental quality. If anything, there is some evidence of a "race to the top".6 More generally, there is only one study I know of that explores the likely magnitude of the distortions resulting from interjurisdictional competition. Ian Parry (2001) has constructed a computable general equilibrium model in which regional governments have a single tax: a tax on mobile capital. Using representative values of the key parameters from the literature, Parry conducts a series of simulations in which he calculates the welfare losses from competition. He finds, in most cases, that these losses are quite modest with typical estimates of the excess burden per dollar of revenues on the order of 3%. Moreover, he finds that when he allows for some budget-maximising tendencies among public officials, the welfare losses quickly diminish and soon become welfare gains. This seems to me an important line of work in that it gives us some feel for the likely importance of distortions from any race to the bottom. It suggests that they are small and perhaps even negative. One comes away from the fiscal competition literature feeling unsatisfied in the sense that it does not really give us a solid answer to the

44 Wallace E. Gates

question of whether there is, in fact, a race to the bottom (a very sinister sounding outcome!), and, if so, whether it amounts to anything very significant. My own feeling is that the general economic case for fiscal decentralisation has not been seriously compromised. There remains, in my view, a strong case for the decentralised provision of local public goods.7 There are surely specific instances where some kind of harmonisation can probably improve matters, but I think these must be examined on their own merits, and not adopted simply on the basis of a general presumption of a destructive race to the bottom. 4.

ON FISCAL EQUALISATION

Fiscal equalisation is a prominent feature of many (but not all) systems of federal finance. Equalisation measures take a number of different forms, but their basic purpose is the same: to transfer funds to fiscally weak jurisdictions. In certain cases, fiscal equalisation may be embedded in a system of revenue sharing in which the central government provides disproportionately large transfers to provincial, state, and/or local governments that have small tax bases relative to some measure of fiscal needs. In other cases, equalisation objectives may manifest themselves in programs of matching grants, where the matching share of the grantor is larger for fiscally weak jurisdictions. The use and role of fiscal equalisation varies significantly from one country to another. In many systems of federal finance, Canada, Australia, and Germany to mention only three, equalisation measures have been a major feature of inter-governmental finance. In Canada, one can argue that they have played an important political role in holding the federation together. In other cases such as Italy, they have been a source of considerable political tension resulting in resentment of the continuing transfers from the north to the south. In contrast, in the United States, there has been little interest in fiscal equalisation at the central government level. There is no basic, major program of fiscal equalisation to transfer funds from the central government to the states. There are, however, lots of such programs (especially for school finance) under which individual states provide funds to their local governments. Let me offer a few brief observations on systems of fiscal equalisation. First, although its use is widespread, fiscal equalisation is certainly not a necessary feature of fiscal federalism. Economists typically think of redistributive measures from the rich to the poor as those that transfer income from relatively high-income individuals to those with low incomes. From this perspective, equalising inter-governmental grants are not a very effective device: they must inherently involve some perverse transfers since some monies are going from low-income households in wealthy jurisdictions to relatively rich individuals in poorer jurisdictions. The transfers may

45 Part A Introduction

be equalising on average, but they are not so effective as a program that transfers funds direcdy from rich to poor households. Inter-governmental equalising transfers thus require a somewhat different justification in terms of social values. They must be based on some social sense that it is desirable to provide additional support for the provision of public services in fiscally weak (typically, but not always, poor) jurisdictions. Second, systems of fiscal equalisation are controversial in terms of their implications for economic efficiency. Some observers contend that such equalisation allows poorer jurisdictions to compete more effectively with fiscally stronger ones. In the absence of such grants, this view holds that fiscally favoured jurisdictions have the capacity to promote continued economic growth at the expense of fiscally deprived areas. Fiscal equalisation, from this perspective, provides some levelling of the playing field. But others see the issue differently. Ronald McKinnon (1997), for example, contends that fiscal equalisation can impede needed regional adjustments that promote growth in poorer regions. McKinnon argues that equalisation can hold back development in poorer regions by impeding a desirable inflow and outflow of resources in response to cost differentials. At any rate, many countries find, on equity and political grounds, that fiscal equalisation programs are important facets of their systems of federal finance. This typically requires the development of indexes of "fiscal need" and "fiscal capacity" that serve as the key inputs into a formula for the disbursement of funds. There are some inherent ambiguities in the definition of such indices, but they have not proved so formidable as to prevent the establishment of workable systems of fiscal equalisation. 5.

FISCAL DECENTRALISATION IN TRANSITION ECONOMIES AND DEVELOPING COUNTRIES

Fiscal decentralisation is currently a major dieme of fiscal reform both in the transition economies and the developing world. The failure of central planning has led to moves toward privatisation on the one hand, and decentralisation of the public sector on the other. The prevailing sense is one of the need, where possible, to get various activities out of the public sector, and, where this is not feasible, to move them to lower levels of government. As regards decentralisation of the public sector, the problem here is that effective performance in the public sector requires at least two elements. We have already discussed the issue of the appropriate alignment or assignment of functions to the different levels of government. But the assignment of functions is not enough. A high level of public sector performance also requires the design and working of a coherent set of fiscal and regulatory institutions that embody incentives for effective policy making

46 Wallace E. Gates

(Picciotto and Weisner, 1998). In short, we simply cannot dump monies on newly formed provincial and local governments and expect them to function well. This is a broad and complex issue.8 But let me simply point to what I see as the most critical elements. The literature has stressed, quite properly I think, the importance of "hard budget constraints" for decentralised levels of government (e.g. McKinnon, 1997). The basic idea here is that effective decision making requires the electorate and their officials to weigh the benefits of proposed public programs against their costs. And this implies that regional and local jurisdictions must bear the costs of proposed extensions of public programs. This means regional or local financing, either through user fees or jurisdictional taxes. Let me stress that this surely does not rule out systems of intergovernmental grants, perhaps with equalising features. But it does mean that these grants must not be too large and must not be expansible in response to local budgetary decisions. If such grants dominate provincial and local revenue systems, then officials are likely to turn to political channels to get additional funding from above, instead of relying on increases in own revenues.9 Inter-governmental grants (aside from special programs with spill-over effects) should be lump-sum in character so that decentralised governments must finance at the margin extensions of public programs. There must not be a prospect that decisions to increase the public budget will be ratified by "bailouts" from higher levels of government. This also suggests the need for limitations on debt finance. The issuance of bonds to finance state-local expenditures makes economic sense for investment in public infrastructure; it provides a sensible way to spread out the payments for the projects over their useful life. But debt issues must not be available to finance deficits on current account. The concept of a hard budget constraint for decentralised levels of government thus implies some basic limitations on the forms and scale of both inter-governmental grants and the use of debt finance.10 This presents a major challenge in many developing countries, where systems of decentralised taxation are often woefully inadequate. The development of provincial and local revenue systems is, in my view, one of the most pressing fiscal issues in federal finance in the developing world. The data reveal that most developing countries have public sectors that are not only highly centralised (relative to the industrialised nations), but that place a disproportionate reliance on central revenues. Inter-governmental transfers are typically the major source of revenues for provincial and local governments - and this renders very difficult the emergence of effective and accountable public decision making. It is interesting, in this regard, that the evolution of many of the industrialised countries over the past century or two involved long periods of fiscal centralisation (Gates, 1993). And the point of departure for this evolution

47 Part A Introduction in many instances (like the United States) was a setting with a relatively well-developed system of state and local taxation. In the United States, for example, at the beginning of the twentieth century, the central government share in public expenditure and revenues was only about one third. My point here is that in much of the industrialised world, there has existed a well-established system of decentralised taxation. In the current context, in contrast, the developing nations have, as a starting point, a highly centralised system of finance with very limited and weak institutions for local taxation. Much important work needs to be done in the creation and development of institutions of public finance, especially systems of taxation, in the developing world (Bird, 1992; Bahl and Linn, 1992; Bird and Vaillancourt, iggS). 11 Finally, let me mention briefly the difficult and troubling issue of corruption. Some observers have claimed that fiscal decentralisation in the developing and transition economies is undesirable because of widespread corruption at decentralised levels of government. The case for this argument is, however, far from clear either in theoretical or empirical terms. In fact, some recent empirical work has explored the association of measures of corruption with the extent of fiscal decentralisation and has found an inverse relation. Raymond Fisman and Roberta Gatti (2002), for example, have regressed various measures of corruption on an number of explanatory variables - one of them being a measure of fiscal decentralisation and they find that the level of corruption varies inversely with the degree of fiscal decentralisation. Although this is a complicated issue, the view that fiscal decentralisation tends to increase the level of corruption in the public sector thus does not seem to have compelling support. In sum, the case for the development of decentralised fiscal and regulatory institutions in developing and transitional economies is, in my view, a compelling one. But it is not a simple matter. It will require the design and introduction of a set of decision-making practices and revenue systems that embody the right kinds of incentives for good governance. This will take time. 6.

ON LEARNING FROM OTHERS

The motto of this conference is "learning from others". The structure of inter-governmental finance varies widely from one country to another, often for distinctive historical reasons. But there is an ongoing process of evolution of public sectors in which there are opportunities for the realignment of responsibilities and of fiscal and regulatory instruments. This is nowhere more evident than in Europe where there are simultaneously reforms taking place for devolution within member countries, while at the same time a new central level of government is taking shape in the EU: centralisation and decentralisation at the same time! The experience of

48 Wallace E. Gates

individual nations can provide useful guidance. For example, Gebhard Kirchgassner and Werner Pommerehne (1996) having examined the effects of tax competition in Switzerland, concluded that it has not seriously undermined the operation of a relatively decentralised fiscal system, an experience with wider implications for Europe. More generally, fiscal decentralisation itself provides potential "laboratories" for policy experimentation. As pointed out long ago by James Bryce (1888) in his insightful study of the United States, "Federalism enables a people to try experiments which could not safely be tried in a large centralised country" (Vol. I, 353). In fact, the United States' experience involves a number of important and intriguing cases where policies were initiated at local or state levels, and after their successful operation there, were later instituted at the central level (Gates, 1999). These socalled "laboratories of democracy" can produce valuable experience with a variety of different policy options, experience that can be usefully drawn upon elsewhere. NOTES 1 This paper was the basis for the author's speech at the International Conference on Federalism 2002. 2 This idea has been formalised as the "Decentralization Theorem" (Dates, 1972, ch. 2). The magnitude of the welfare gains from such decentralisation depends on several factors including the variability of demand across jurisdictions, interjurisdictional cost differentials, and the price elasticity of demand (Oates, !997)3 Asymmetric information and various principle-agent problems make this a rich and complex issue. See, for example, Levaggi's treatment (2002) of decentralised budgeting procedures. 4 Shah (1994, ch. i) and McKinnon and Nechyba (1997) provide a useful listing of public services associated with different levels of government. 5 Wilson (1996, 1999) has provided two excellent surveys of the competition literature. For a comprehensive treatment of the theory of fiscal and regulatory competition, see Wellisch (2000). 6 For a more detailed description of these studies and their findings, see Oates (2002). 7 Frey and Eichenberger (1996, 1999) offer an intriguing proposal for a restructuring of the public sector in the EU consisting of "functional, overlapping, and competing jurisdictions". Their contention is that competition among jurisdictions in the provision of individual public services would enhance the performance of the government sector. 8 For an excellent treatment, see Bird and Vaillancourt (1998). 9 There is extensive evidence for the United States that inter-governmental grants have provided a strong stimulus to spending by state and local governments;

49

Part A Introduction

this is known as the "flypaper effect" (Gates, 1999). Winer (1983) has found similar evidence for Canada; he finds that the separation of public spending and taxation decisions through grants raised provincial expenditures. 10 In the absence of such limitations, excessive spending by provincial and local governments resulting in bailouts by the central government can create a serious moral-hazard problem and even destabilise the entire public sector. There are numerous instances of this phenomenon including, for example, recent experience in Argentina and Mexico (Trillo et al., 2002). 11 There is, incidentally, an extensive literature on taxation in a federal system. This literature addresses the so-called "tax-assignment problem", the issue of which taxes are best assigned to the different levels of government (McLure, 1983; Gates, 1999). REFERENCES

Bahl, R. and Linn,J., 1992. Urban Public Finance in Developing Countries. Oxford: Oxford University Press. Bartik, T., 1991. Who Benefits from State and Local Development Policies ? Kalamazoo, Michigan: W.E. Upjohn Institute. Bird, R., 1992. Tax Policy and Economic Development. Baltimore: Johns Hopkins Press. Bird, R. and Vaillancourt, R, eds, 1998. Fiscal Decentralization in Developing Countries. Cambridge: Cambridge University Press. Brennan, G. and Buchanan, J., 1980. The Power to Tax: Analytical Foundations of a Fiscal Constitution. Cambridge: Cambridge University Press. Brown, C. and Gates, W., 1987. Assistance to the Poor in a Federal System. Journal of Public Economics, 32, 307—330. Bryce,J., 1901. The American Commonwealth. London: Macmillan [first published 1888]. Fisman, R. and Gatti, R., 2002. Decentralization and Corruption: Evidence Across Countries. Journal of Public Economics, 83, 325-345. Frey, B. and Eichenberger, R., 1996. To Harmonize or to Compete? That's Not the Question. Journal of Public Economics, 60, 335-349. Frey, B., 1999. The New Democratic Federalism for Europe: Functional, Overlapping, and Competing Jurisdictions. Aldershot: Edward Elgar. Gelbach,J., 2002. Migration, the Lifecycle, and State Benefits: How Low is the Bottom? Working Draft. Kirchgassner, G. and Pommerehne, W., 1996. Tax Harmonization and Tax Competition in the European Union: Lessons from Switzerland. Journal of Public Economics, 60, 351-371. Levaggi, R., 2002. Decentralized Budgeting Procedures for Public Expenditure. Public Finance Review, 30, 273-295. McKinnon, R., 1997. Market-Preserving Fiscal Federalism in the American Monetary Union. In: M. Blejer and T. Ter-Minassian, eds. Macroeconomic Dimensions of Public Finance: Essays in Honour of Vito Tanzi. London: Routledge, 73-93.

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McKinnon, R. and Nechyba, T., 1997. Competition in Federal Systems: The Role of Political and Financial Constraints. In: J. Ferejohn and B. Weingast, eds. The New Federalism: Can the States be Trusted?Stanford: Hoover Institute Press, 3-61. McLure, C, ed., 1983. Tax Assignment in Federal Countries. Canberra: Australian National University. Gates, W., 1972. Fiscal Federalism. New York: Harcourt Brace Jovanovich. Gates, W., 1993. Fiscal Decentralization and Economic Development. National Tax Journal, 46, 231-237. Gates, W., 1997. On the Welfare Gains from Fiscal Decentralization. Journal of Public Finance and Public Choice, 2-3, 83-92. Gates, W., 1999. An Essay on Fiscal Federalism. Journal of Economic Literature, 37, 1120-1149. Gates, W., 2001. Fiscal Competition and European Union: Contrasting Perspectives. Regional Science and Urban Economics, 31, 133-145. Gates, W., 2002. A Reconsideration of Environmental Federalism. In: J. List and A. de Zeeuw, eds. Recent Advances in Environmental Economics. Aldershot: Edward Elgar. Gates, W. and Schwab, R., 1988. Economic Competition among Jurisdictions: Efficiency-Enhancing or Distortion-Inducing? Journal of Public Economics, 35, 333-

354Parry, I., 2001. How Large Are the Welfare Costs of Tax Competition? Resources for the Future Discussion Paper, No. 01-28. Picciotto, R. and Wiesner, E., eds. 1998. Evaluation and Development: The Institutional Dimension. Washington, D.C.: World Bank. Shah, A., 1994. The Reform of Intergovernmental Fiscal relations in Developing and Emerging Market Economies. Washington, D.C.: World Bank. Sinn, H.W., 1994. How Much Europe? Subsidiarity, Centralization and Fiscal Competition. Scottish Journal of Political Economy, 41, 85-107. Sinn, H.W., 1997. The Selection Principle and Market Failure in Systems Competition. Journal of Public Economics, 66, 247-274. Trillo, F., Cayeros, A. and Gonzalez, R., 2002. Determinants and Consequences of Bailing Out States in Mexico. Eastern Economic Journal, 28, 365-380. Wellisch, D., 2000. Theory of Public Finance in a Federal State. Cambridge: Cambridge University Press. Wilson, J., 1996. Capital Mobility and Environmental Standards: Is There a Theoretical Basis for a Race to the Bottom? In: J. Bhagwati and R. Hudec, eds. Harmonization and Free Trade. Vol. I. Cambridge, Mass.: MIT Press, 395-427. Wilson, J., 1999. Theories of Tax Competition. National Tax Journal, 52, 269-304. Winer, S., 1983. Some Evidence on the Effect of the Separation of Spending and Taxing Decisions. Journal of Political Economy, 91, 126-140.

PART B

THEME I

Federalism and Foreign Relations

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SCIENTIFIC B A C K G R O U N D : THEME PAPER BERNHARD EHRENZELLER, RUDOLF HRBEK, GIORGIO MALINVERNI AND DANIEL THURER

Federalism and Foreign Relations

1.

BASIC THEMES AND GUIDING IDEAS

i.i. The traditional notion of foreign policy

For a long time, international relations were synonymous with relations between sovereign states with clearly defined national borders, where the nation state was the principal actor in foreign affairs. The basic principles of this world of states were national sovereignty, and deriving from it, the equality of states, dieir immunity, and the prohibition of intervention (Thiirer, 2001). For the state, the fact that sovereignty constituted its claim to power meant that it could take decisions independently of other states, both towards foreign states in matters pertaining to international law, and in relation to itself in matters concerning the shape given to domestic government and the treatment of the various problems and tasks of politics and jurisdiction. The notion of the state was closely tied to a particular, exactingly defined territory. The limits of national territory were coterminous with the limits of national sovereignty, within which the hierarchically structured body politic could develop without restrictions (Brock and Albert, 1995). Hence, the first objective of foreign policy was to safeguard the independence of the nation state in its territorial integrity. Alfred Escher, the nineteenth-century Zurich statesman, reduced the federalist conception of the Swiss Confederation to the succinct formula "external unity, internal diversity". This makes the basic idea of the federalist state in the traditional world of states clearly: to stand together against the world outside in a potentially threatening international environment while safeguarding diversity within the confederation, a diversity that refers

54 Ehrenzeller / Hrbek / Malinverni / Thiirer

to a certain measure of the constituent parts' (member states) independence, and their specific diverse cultural and regional identities. The need for a state to take unified action against the world outside was undisputed, and thus, in states with a federal organisation, called for a concentration of foreign policy making by the central state. Moreover in all states, the conduct of foreign policy was considered the real and proper domain of the executive power, even in states with a parliamentary system of government, or where parliament was an independent power alongside the executive (as in the presidential system in the United States, for instance). After all, traditional international law held that only the executive power had the right to represent the state as a whole. As such, this comprehensive scope of jurisdiction far exceeded the formal power of representation (in terms of Article 7 of the Vienna Convention of the International Law of Treaties), and ultimately included the fundamental power to shape the foreign policy of the state as a whole on all levels of state organisation in a binding manner. Increasingly, this traditional conception of the nation state's foreign policy is being called into question by far-reaching changes in the international system and in international relations, by the changing nature of what constitutes statehood, and by the growing influence of non-governmental actors on international relations. The following sections will explore the developments bringing about this change, and the effects of reconfigurations of the international system. 1.2.

The basic notion of federalism

In essence, federalism is a principle that structures and orders complex national entities by spreading state power among several levels of government. Traditionally, it is considered as being closely connected to the idea of the federal state. The principal features of a federal system of government are the vertical separation of powers, the substantial autonomy of the constituent states, and their right to participate in the administration, decision shaping and making of the federation. In the first instance, the constitution of the federal state shares out powers between the federal level of the confederation and its constituent states through a vertical separation of powers, allocating a considerable degree of freedom to member states to shape politics and policies. In a federal state, constituent states thus have autonomy that derives directly from its federal constitution. While different levels are related hierarchically with constituent states as subordinates, they exercise their respective powers independently, as allocated to them by the constitution. The constituent states generate their own purposes and aims, and engage in the decisions of the state as a whole through various participatory rights. However, the federalist idea is no longer confined to the constitution of federal states. It is increasingly coming into play in other forms of state or-

55 Part B Theme I - Scientific Background

ganisation, in the first instance in the form of decentralisation of state power (e.g. devolution in Great Britain). The principle of federalism is also gaining influence within international organisations, and even - in the social sphere - within trans-national organisations. In this respect, the guiding tenet has been the principle of subsidiarity. That is, higher levels of the state become active only in those fields required by the interest of the state as a whole (in particular to create equal standards of living, and to safeguard the state's legal and economic unity, for example Article 72 of the Basic Law in Germany), or if subordinate levels are overtaxed by political problems bound up with the performance of their duties. This principle defends the autonomy of sub-national levels against encroachments from above, by requiring the higher level to justify the use of its powers, or even its inclination to exercise them. This paper maintains that a federalist order is always a constituted order. Federalist systems of political order thus neither mean simply that a multitude of de facto levels of jurisdiction exists, nor that the various bearers of power within a state are taken into account. Rather, federalist systems presuppose that an adequate foundation has been laid in a constitutional text, or in some other form of social consensus that has been accorded a similarly fundamental status. Different combinations of these forms are also conceivable, as is their supplementation with informal structures and procedures. The constitutional federal state meets this requirement in particular. Besides the allocation of power to different levels, what federalism really means and where its significance lies, is in the pursuit of a particular system of values, in particular the preservation of numerous regional and local identities, and the integration of heterogeneous societies. What matters in this respect is the cooperation and coordination between different government levels, a linkage that presupposes respect for, and observation of, federated jurisdiction. Moreover, federalist systems aim to ensure a closer relationship with their citizens by promoting decision-making processes that are equitable and transparent, involve less bureaucracy, and grant citizens more political responsibility and participation, thus lending greater guarantees to the legitimacy of political decisions. Federalism often stimulates creative competition amongst a federation's constituent states. However, on balance federalist entities appear to be more complex than centralist ones. The long-term view among both political scientists and politicians is that in principle a federal political system has a greater capacity for solving problems than its centralist counterpart. 7.3.

The guiding idea of this paper

Federalism is not only an internal structural and organisational principle of the nation state; more and more it is also a notion with a growing

56 Ehrenzeller / Hrbek / Malinverni / Thiirer

formative influence in both international relations and international organisations. In the changing international system, as in any national framework, federalism embodies not only an ordering principle, but also a system of values, notably a demonstration of due and mutual respect for the "Other". Traditional foreign policy, which is to say the foreign relations between sovereign states, is being superseded by a structured system of international and trans-national relations. In this system all levels of action undergo integration, from the communal to the supra-national, and a multitude of different actors participate, exercising influence and cooperating beyond national borders. This leads to a twofold process of change. Firstly, while nation states continue to play a central role in international relations, the previously frequently invoked unity of the nation state, in particular that of federal states, towards the world outside is yielding to state power that is becoming more highly differentiated in its foreign relations. Today, we would actually have to adapt Escher's formula to speak of diversity within the state, as well as towards the world outside. In this way, the nation state is losing in part its monopolistic claim to representation in foreign policy making, being pushed - on the international level too - into acting as a mediator and an equaliser between the various levels of the state. Secondly, international organisations, and supra-national communities in particular, are themselves subject to increasing pressures of internal decentralisation and federalisation. They must learn to deal with the growing number of players within a state (and on a sub-national level) with all their different interests, to grant them space to fashion themselves, and to integrate them in their decision-making processes. It is even more important in terms of achieving balance, that endeavours to advance federalism on an international level should pursue the same objectives as those sought thus far on the national level. That is to say, supra-national federalising tendencies ought to safeguard the cultural diversity of national, regional and local identities, and promote political pluralism and all due regard for the "Other". In addition, they should ensure a closer relationship with citizens through transparency in arriving at political decisions. The dynamic process of federalising state power in foreign relations depends to a large extent on a state's historical, cultural, economic and political conditions, takes different forms, and occurs on a different scale in different countries and regions. That is, it will not inevitably follow only one particular direction. While federalising foreign relations means more autonomy for the sub-national entities in observing their own interests, it does not mean the dissolution of the nation state's power and recognition of the right of secession of particular ethnic groups. In this respect, the European Union (EU) is without doubt an exemplary case with regards to the integration of federal states and the creation of federal structures on a supra-national level.

57 Part B Theme I - Scientific Background 2.

CHANGES IN THE INTERNATIONAL SYSTEM

The past few years have seen strikingly large-scale changes in the international system. Certain changes have occurred on a scale that has caused historians, political scientists, experts on international law, and economists to speak of a qualitative leap in the course of world history (Delbruck, 2001). In the first place comes globalisation, that complex and controversial concept which succinctly sums up these radical changes. Further, the new penetration of state boundaries and the institutionalising of international politics account for the shift of structures and processes in both the global and regional frameworks. On the supra-national level, international organisations are advancing into ever-new fields of regulation, and are bringing more and more legal ruling into international relations. The development of the EU is both characteristic of and decisive for Europe, in that it furthers a process of integration that makes for denser, more enmeshed systems of associations in which different levels of system (national, regional and local, but also supra-national) become interrelated. 2.1.

Globalisation

The processes encompassed under the concept of globalisation, which serves now as their universal umbrella term, have fundamentally changed the framework of conditions for international activity. Globalisation originated in the economic sphere, but has since expanded rapidly into other areas, such as advances in telecommunications or in the new technologies. It also encompasses a growing awareness of global issues such as environmental protection or international security in the face of crime, terrorism and war. Further, globalisation means a certain tendency towards an approximation of societal and community ways of life, identity and culture beyond national borders. In this respect the change in everyday life all over the world is probably the most revolutionary and most sustained effect of globalisation (Giddens, 2001). In general, we can assume that cross-border interactions are both increasing and intensifying, a factor which links national societies more strongly, and demands new measures for controlling and guiding politics beyond nation-state regulations and settlements. Globalisation changes the very perception of political processes. The growing sense that meeting opportunities and solving problems are now global issues, leads to the realisation that a state-centred view is no longer adequate for coping with the tasks that present themselves. The increase in the number of actors shaping international relations is characteristic of the changes brought about by globalisation. Within the scope of the nation state, for instance, constituent member states or parliaments are demanding more opportunities to participate. In addition to

58 Ehrenzeller / Hrbek / Malinverni / Thiirer

nation states represented by their respective governments, a number of other players have made their appearance on the international stage: international or even supra-national organisations, less institutionalised forms of cooperation, such as international regimes, multinational corporations, or interest groups and newer social movements in the shape of so-called non-governmental organisations (NGOS). It is precisely such "trans-national politics" (Kaiser, 1969), or cross-border politics of social and non-governmental organisations, that are taking on an increasingly important role in international relations. The conventional diplomacy of the nation state is made relative and changes against the background of these developments. As an element of the "technological revolution", the new modes of communication in particular (Internet, mobile telephones etc.), make it easier to establish contacts across national boundaries. "Global Networking" has thus become possible for many players and is no longer reserved for the nation state and its diplomatic apparatus. Many sub-national entities establish direct contacts in the most diverse areas with foreign partner organisations. This turn away from a state-centred perspective opens up possibilities for the expansion of the levels of action. Kohler-Koch's thesis of "Regieren in entgrenzten Raumen" (Kohler-Koch, 1998) calls into question the territorial state as a universal yardstick, and also refers to how necessary and beneficial it is to consider the emergence of radically new political areas ("neue politische Raume"), their structures, and how decision-making processes take place within them. These areas include supra-national levels (both global and different regional ones, depending on the particular part of the world), as well as sub-national levels (regional and communal). 2.2.

The process of the penetration of boundaries (Entgrenzung) and interdependence

To date, the international system has constituted itself in terms of states whose territories are clearly demarcated. Changes in the characteristic association between the nation state and its territory point to a fundamental change in international relations. This change can be analysed as a process of boundary penetration (Brock and Albert, 1995). National borders are becoming more permeable, and states are less and less able to defend themselves against this development by taking measures to insulate themselves. In addition, a growing interdependence enhances the process of boundary penetration, and ultimately leads to states taking measures to isolate themselves that appear to be dysfunctional and hence fail to be meaningful any longer. While the unified and clearly defined nation state comprising a fixed territory is not about to dissolve, it is nonetheless losing its function as the unique or uncontested frame of reference in both its regulation of the do-

59 Part B Theme I - Scientific Background mestic sphere and its participation in the international arena. The hierarchy of legal systems that has been ensured by the territorial structuring of national units (from die municipality to the supra-national level) is called into question by the overlapping of borders. The principle of clearly defined borders (Bussjager, 2000: "Prinzip des Nicht-Schneidens von Grenzen") is violated by flexible borders, such as those that the EU has drawn with reference to regional subsidies, which eclipse traditional national borders. The process of boundary penetration thus means that new domains emerge which do not coincide with the traditional borders that have developed over the course of history. This incongruence of political, economic, cultural and social habitats is a central factor in the radical change in the conventional form of the international system as a world of states. Moreover, these new conditions make it necessary for states to adapt themselves to an ever-increasing interdependence, which confers a particular dynamic on international relations. 2.3. Institutionalising international politics 2.3.1. International institutions. Institutionalised forms of international cooperation had already begun to develop towards the end of the nineteenth century. Only since the end of the Second World War has it been commonly accepted that global problem scenarios require a systematic coordination of policies and appropriately adjusted institutions on a global level. Today, hardly any areas of politics and policy making remain un-discussed in some shape or form on an international level. Many problems are treated in an institutionalised and very systematic form within institutional forums set up specifically to that end. Thus, Keohane observes: "To analyse world politics in the 19905 is to discuss international institutions" (Keohane, 1998). The need for regulation and monitoring that is bound up with the process of globalisation has only reinforced the impression of the "complex interdependence", observed in the 19705 by Keohane and Nye (1977). International institutions have become the most important players in international politics alongside the nation states. However, they do not necessarily compete with nation states. Rather, they provide the states (which establish such institutions as a rule) with new and different possibilities for reaching dieir objectives and interests in a cooperative manner, if and when they are unable to do so on their own as is increasingly die case. 2.3.2. Regional integration. The attempts of states to meet global challenges by institutionalising supra-national forms of regulation and monitoring are not confined to the global level, but have led to many regional communities and organisations with corresponding institutions. This development is particularly apparent in Europe. The process of European integration has strongly determined the order of Europe, beginning with Western Europe in

60 Ehrenzeller / Hrbek / Malinverni / Thurer

the second half of the twentieth century. Today, the preliminary outcome of this integrative process, the EU, presents itself as an entity tfiat has extended its jurisdiction and sphere of co-responsibility to virtually all areas of politics and policy making. In the meantime, the EU also embraces all areas of foreign and security policy, including its military components and, most recendy, defence policy. As a result of increasing global interdependence, it is also becoming apparent that many other policy fields that have been "Europeanised" have an international dimension, such as agricultural policy, environmental policy, or policies for regulating competition, so that diird-party countries perceive the EU as an independent player in international politics. The expansion of the EU'S jurisdiction and sphere of co-responsibility have gone hand in hand with an increasing differentiation of the EU decisionmaking process (involving a multitude of institutions, procedures and players), which underlines the organisation's ongoing dynamics of integration. 3.

T H E C H A N G I N G N A T U R E OF T H E S T A T E AND

OF STATEHOOD

Like the international environment, the state (understood as that which has hitherto defined statehood) is about to undergo radical change. As discussed above, today's nation states are "integrated in an ever-increasingly ramified and denser network of trans-national and inner-societal dependencies and relations of negotiation" (Scharpf, 1991). Traditionally, the state has been defined by three elements: its people, its territory and its state power. However, each of these points of reference has become questionable. The criterion of state power for instance, has become doubtful by virtue of the externalised dimensions of areas diat were traditionally part of domestic policy. But this is so more particularly because states are dividing and asserting their power (i.e. their sovereignty) with others within the scope of international organisations, although more so within the scope of regional communities. This is known as "pooling of sovereignties". The notion of a fixed state territory is called into question by changes in the territorial structures of the nation state, especially as a result of the process of boundary penetration. The international integration of the state, and the Europeanisation of the EU member states in particular, are additional factors that call into question the traditional notion of die state. Governments are hardly able to offset the resulting loss of their powers of regulation and monitoring precisely because, together with die demand for more democracy in (foreign) policy matters, more players are staking claims to participation and co-determination. Even though the developments outlined in the following certainly apply in their tendency, they should not be considered inevitable. In political and economic emergencies for instance, counter-movements that guide development towards strengthening the power of the nation state still remain conceivable.

6i

Part B Theme I - Scientific Background

5. i. Changes in the territorial structures of the nation state

In Europe as well as in other parts of the world, tendencies towards decentralisation and regionalisation can be discerned very clearly as responses to state centralism. There are various reasons for the critique of centralisation, and for the demands that sub-national units be re-valued. First of all, the inefficiency of centralist solutions is lamented, since problems are often identified too late, and the solutions chosen are unable to do justice to the particularities of individual regions. Further, a perceived lack of legitimacy follows from a lack of consideration for historical, ethnic and cultural circumstances. Within the scope of the EU, it is also argued that an internal market leads to competition between locations, demonstrating that subnational units require more powers and spheres of autonomous action. The increasing integration of nation states on an international level has led within nation states, through a parallel process as it were, to a kind of disintegration of political structures and forces, and thus to a relativising of the centralised state's monopoly of foreign policy (Malinverni, 1998). The trend towards strengthening sub-national units (regions and municipalities) is not limited to former centralised states, but is also discernible in federal states. Federalism, sub-national regionalism, or decentralisation bring about even more boundary penetration, since constituent states or regions are entering more and more frequently into relations with neighbouring foreign member states or regions (Bussjager, 2000). Decentralisation, regionalisation, and similar processes reaching all the way to federalisation, thus enhance the value of sub-national levels and turn these territorial units, which differ considerably in their legal status and political quality, into "participants in state power also in the sphere of foreign policy" (Aldecoa and Keating, 1999) and into players in the political process on national, international and supra-national levels. j. 2. External dimensions of domestic policy

Today, it is nearly impossible to find a policy field that can be analysed and regulated exclusively in terms of the nation state. Virtually all political problems have a foreign policy dimension, whether with regard to their content or to the decision-making process. Obviously, international influence on the shape of national politics does not have the same weight everywhere. Whereas it is simply no longer possible to take economic or transport policy decisions without taking international framework conditions into account, states continue to have considerable independent authority to take decisions in education or public health, for instance. However, at the same time, these rather more domestic areas of politics and policy making are being influenced more strongly by international developments. This means that the domestic and external spheres of the state

62 Ehrenzeller / Hrbek / Malinverni / Thiirer

are growing together more and more, making it increasingly difficult for nation states to be able to undertake an autonomous shaping of all policy areas. International events increasingly determine the scope for action in domestic policy, and there is a corresponding internationalisation of politics within the scope of the nation state. For the state, integrated in a network of international relations (Tomuschat, 1978: "Geflecht internationaler Beziehungen") this means a clear-cut loss of influence on the shaping of politics. The decisions of the individual state are subject to numerous constraining framework conditions, which lie beyond its immediate influence. The situation is just as demanding for sub-national levels, in particular for the constituent states of a federation. While they continue to be responsible for an area of jurisdiction in accordance with the allocation of powers within the domestic sphere, certain international standards strongly curtail their freedom of action. As a rule, constituent states have only very limited possibilities to intervene in the fashioning of aims on an international level. Yet because they are strongly affected by corresponding developments, they attempt to find possibilities for intervention and for exercising a right of codetermination. 3.3. International integration of the nation state

States are integrated into an enormous number of regulatory and monitoring systems. In this way, the state becomes part of a multilevel system extending to the global level, through both regions and the international plane. For the state, global interdependence does in fact mean a certain restriction of its freedom to act, but in turn it also offers opportunities to participate in this complex new environment. To begin with, nation states establish international institutions that compensate for their loss of autonomy by effectively bringing their respective objectives and interests onto international levels of action, for instance through the membership of global institutions (UN-System, World Trade Organization (WTO), various international regimes etc.), as well as by attempts to seek integration on a regional scale (EU, North American Free Trade Agreement (NAFTA), Mercosur etc.). In Europe, it is membership of the EU that opens up new possibilities of co-participation and influence for nation states. The erosion of traditional statehood is being accelerated and even reinforced by the European process of integration, which various commentators characterise either as a division of sovereignties, or a so-called pooling of sovereignties. European integration, the objective of which is the increasingly closer union of the peoples of Europe (Art. 4 Para. 2 EUT), also has far-reaching consequences for the shaping of politics and for the institutional structures of member states in the EU. The keyword, "Europeanisation", refers to the adjustment of all aspects of politics within EU member states to the EU and its own particular features, from institutions (polity) to the creation of po-

63 Part B Theme I - Scientific Background

litical intent (politics) to areas of policy making (policies) (Sturm and Pehle, 2001). This does not mean that national political systems are relieved of all functions or replaced by a European political system. Rather, Europeanisation links nation states and the EU as levels, by means of increasingly stronger bracketing and integration. Hence, Europeanisation means very close links between the national and the community level. Some speak of (political) entanglement and the emergence of a large new system of interconnections and associations. 3.4. Demands for participation by additional governmental and non-governmental players

The process of globalisation in the international system typically increases the number of players. On the national scale too, more and more players are entering the political process. In general, the demands for more democracy and enhanced participation apply to all areas of politics, including foreign policy. In the traditional conception of national foreign policy, such policy was the undisputed province of the executive power. With the demands of various players for more opportunities for co-participation in foreign policy, this view has become increasingly weaker. Today, more societal or non-governmental players, such as interest groups, parties, NGOS, multinational corporations etc., are engaging in foreign policy and international politics as national and trans-national players, thereby changing the structure of decision-making systems and the course of decisionmaking processes. International associations of parties with similar basic agendas, international labour unions or international NGO networks are all cases in point. The demands for co-participation by these non-governmental players, who are organising themselves on a trans-national scale in order to have greater impact, have made an essential contribution to the changing nature of foreign policy and international politics. Today, national parliaments are also trying to exert more influence on foreign policy decision-making processes in order to lend them greater democratic legitimacy. The constituent states are also countering their loss of influence through the internationalisation of politics, by laying claim to more co-participation in the federal state, as well as by establishing and shaping independent foreign relations of their own accord. 4. NEW S T R U C T U R E S AND OF G O V E R N A N C E

FORMS

What are the conclusions one should draw from these developments, and what consequences can we expect for the federal state, the regionalconstituent state level, and the emerging federal structures of the international system?

64 Ehrenzeller / Hrbek / Malinverni / Thurer 4. i. A multilevel system

Most fundamentally, we observe the emergence of a multilevel system in which the different levels of political action (global, regional, national, and sub-national) are in close cooperation. We believe that under these changed circumstances, the use of the principle of federalism is a very effective way to contain the proliferating trends of globalisation and regional differentiation, while maintaining effective forms for the exercise of government. The changing nature of the state and its international environment shows that the nation state has become at once too small and too large for many political problems (Bell, 1973; Watts, 1999). It is too small in so far as the effects of globalisation can no longer be controlled and guided by nation-state regulations, which explains why international institutions are trying to regulate what lies beyond the capacity of individual nation states (Linder, 1999). Yet the nation state is also too large to comply with the wish of many citizens to develop an independent identity within their community. The (federal) state is effectively sandwiched between the pressure of international institutions from above, and the pressure of its constituent states from below. Hence, new forms of governance are required, as the means of guiding and regulating political processes. Cooperation between all levels of the emerging multilevel system is central, including the inclusion of the various governmental and the many non-governmental players in politics, business and society. The development of a large variety of networks in many different areas of politics, but also the networking of similar institutions from different states (constituent states, parliaments, courts), point to the enormous importance of trans-national cooperation for achieving political objectives, and for the effective guidance of political processes in the age of globalisation. Many of the tried and tested structures and procedures for guiding political processes are no longer able to meet the new demands, or have become inadequate. Today, politics takes place on various levels, in a "five-storey house" (Cottier and Germann, 2001) so to speak, which comprises the various constitutional tiers: the communal, inner-state-regional, nation-state, international-regional and global levels. In its vertical configuration, this multi-tiered structure bears a certain resemblance to the federalist principle of organisation. But here superiority and subordination are not meant to be seen in the typically hierarchical way, but rather as an interconnection of politics on different levels, which forms a new polyarchic structure with dynamic centres of action. This differentiation of many levels of the exercise of power leads to the application of the principle of subsidiarity. With this principle, federalism proposes to contain the proliferating developments of globalisation and regional differentiation, while maintaining effective forms for the exercise

65 Part B Theme I - Scientific Background

of government (Sidjanski, 2000). This differentiation of levels of action through subsidiarity leads to distributions of power that are very closely in line with the idea of federalism, and thus to the safeguarding of basic values such as democracy, cultural pluralism and human rights. However, a word of caution against exaggerated expectations from the principle of subsidiarity is very much in order. It is legally almost intangible and virtually unmanageable (i.e. no corresponding decisions of the European Court of Justice are yet to hand). Rather, it is to be understood as a guiding political idea or principle of planning. These findings have consequences for the federally organised state. Changes on the international level bring into sway the delicate balance between the federal level of the state and its constituent members. The institutionalising of international politics shifts the de facto centres of decision making from the carefully attuned (federal) state framework, to organisations acting in much wider spheres that are hardly able to take regional particularities into account, and which actually tend towards centralist solutions. Constituent states therefore attempt to influence foreign policy in order to influence international decisions that concern them directly. The basic principle mentioned at the beginning, unity towards the outside world, diversity within, only approximately captures the reality of the foreign relations of federal states. In reality diversity exists not only within, but also moves out towards the rest of the world. On all levels mentioned, altered systems of order, together with new integrative systems, are needed to cope with changed requirements. The objective is to establish capabilities for movement and monitoring among the numerous players intent on bringing their interests and values to the shaping of foreign policy. In essence, it is a matter of integrating state power, the boundaries of which have been dissolved, into new structures and forms of governance that are still capable of taking action. Ultimately, an order conceived in this way can function effectively on an international level and be recognised as legitimately democratic, only if it is constituted in a certain way or has a quasi-constitutional character at least in its basic outline, one that lends itself more and more strongly to an intensifying process of constitutionalisation. 4.2. Consequences of change for the federal state

Changes and developments on the international as well as the state level have important consequences for the federal state. Firstly, the institutionalising of international politics shifts the centres of decision making from the federal state framework into organisations acting in much wider spheres. The nation state thus cedes parts of its legislative and executive powers especially to the supra-national level. Secondly, constituent states attempt to influence national foreign policy in order to influence international

66 Ehrenzeller / Hrbek / Malinverni / Thiirer

decision making. At the same time, they demand that the nation state takes their interests into close consideration. Nevertheless, it is crucial to recognise that the nation state at present remains the principal foreign policy player, the most important guarantor of human rights, and the sustainer of the constitutional state and a basic democratic order. The basic legitimation for political action still emerges from the nation state. However, in view of diverse foreign and domestic developments, the state has become an "intermediary community" (Thiirer, 1998). This overarching process casts it in a double role: the state is obliged to live according to, represent, and promote the same basic values both in the domestic sphere and towards the outside world. On the strength of its constitution, the state is thus obliged to safeguard and enhance the law, democracy, prosperity and basic life resources of its citizens, and support a peaceful, democratic, equitable and environmentally friendly order on the international level. Today, the nation state is able to enjoy self-determination only by safeguarding both national interests and acknowledging its responsibility towards the international community of states. It is evident, however, that a state's foreign policy depends essentially on how it is constituted within itself. States with a federal organisation are also required to consider their constituent states' interests and sensibilities in conducting their foreign relations. This close tie is strengthened even further by sub-national entities participating in a country's foreign policy. The allocation of legislative powers to supra-national levels, in particular to supra-national institutions, presupposes that sub-national units within nation states are put increasingly in charge of the application and enforcement of supreme law. This function, very often linked with considerable scope for discretion, is becoming increasingly political with regard to the recognition and legitimation of the international law that must be brought to bear. Whereas this phenomenon has so far had meaning only in inner-state relations, such as between constituent states and the federation, the political potential of this mandate to effect the application and enforcement of law is now also becoming apparent on supra-national levels. The necessity for a "cooperative federalism", in which the different levels recognise each other as equivalent and take each other into account, becomes evident. In traditional relations between the different levels, the subordinate level enjoyed certain powers of regulation granted by the constitution (self-determinate federalism). It was fitting, however, that the superior level enjoyed the privilege of legal precedence, at least insofar as it made use of its powers (in terms of a system of competing powers and the power of the central level). The lower levels were thus fully integrated with the higher ones. Today, important changes in this interaction, that is in the change from a dual to a cooperative federalism (Malinverni, 1998), result from the fact that the new habitats and domains of activity no longer coin-

67 Part B Theme I - Scientific Background

cide with traditional state structures. The higher level still takes precedence, but is obliged to take the actual interests of the lower state levels into greater consideration, and to pay heed to other emergent situations. A case in point rises from Articles 54 and 55 of the Swiss federal constitution, in accordance with which "the Rights of the Cantons shall be safeguarded and their interests taken into account" in determining the federal state's foreign policy (similarly for Germany, Article 23 Basic Law; Austria, Article 23d Basic Law; and Belgium, Article 143/167 of the Federal Constitution). In this way, the nation state cedes part of its legislative powers to the supra-national level, while at the same time it is more obliged to take the interests of its member states into consideration. It thus appears that the nation state has certainly lost influence. However, it would be incorrect to assume that the nation state is really being crushed between the advancing supra- and sub-national levels. Without doubt, nation states will remain the centres of (as well as the sources which legitimate) political power in the future (Cottier and Germann, 2001). Essentially, the role of nation states will depend on the form taken by lower and higher levels, and on which powers will be allocated to them. The nation state's task will increasingly be that of an intermediary, coordinating, equalising and mediating between the different levels (Saladin, 1995). It will participate in negotiations between these levels, take on the moderator's role, and enhance its exoneration from certain duties by NCOS and other players. ^.j.

Consequences of change for the regional-constituent state level

The changes we have noticed are also exerting a strong influence on subnational levels of the constituent states and municipalities. As discussed above, the various processes that are bound up with globalisation are also triggering countertrends. Many people are orienting themselves towards smaller frames of reference (Norris, 2001) in order to meet their need for security and identity in a rapidly changing environment. Processes of decentralisation, regionalisation and federalisation are taking this concern into account. Territorial division need not be conceived as static. New habitats are emerging all the time with the growth of large cities and conurbations, or through growing cross-border relations between constituent states. The new habitats are laying claims to political recognition and acceptance, and are thus becoming another decision-making centre. The sub-national levels of this system are seeking to respond to their loss of ability to shape events, and the shift of decision making away from the nation state onto the international level. In essence, three developments are shaping the regional-constituent state level. First, the constituent states are trying to make use of their own proper sphere, in which they are autonomous, both beyond their borders and on an

68 Ehrenzeller / Hrbek / Malinverni / Thiirer

international level. Hence, they are fostering a variety of contacts with constituent states and regions abroad, usually their neighbouring countries. Without doubt, these foreign relations offer an attractive instrument to subnational levels for safeguarding their interests in several different areas of politics (Duchacek, 1990). This also applies, in a similar form, to larger cities in particular establishing relations with other cities and regions abroad. Second, constituent states are increasingly asserting their rights to participate in the foreign policy decision-making process of the federal state. Since the nation state continues to be the most important player in foreign policy, for constituent states autonomous foreign relations can be seen more as a complement to, rather than a substitute for, active participation in the decision-making processes of the federal state. It is only by making use of their inner-state rights of participation that constituent states can bring their interests to bear effectively. Third, constituent states are anxious to obtain and preserve as much freedom to shape their affairs as possible with regard to the implementation and enforcement of international law, a function that is becoming increasingly political in its significance. Only in this way can they avoid being degraded to mere executive authorities within the mandate to implement and carry out international law. In order to counteract this danger, and to offset losing their powers on a national level, constituent states are most interested in the federalisation of international organisations, so that they can participate independently in the international decision-making process, and become directly involved in the development of international law (which would comprise the federalisation of participation on an international level as well). 4.4. Federal structure of an international system

As shown above, in a world of permeable state boundaries, nation states and member states are currently adjusting their structures and character of governance to the altering overriding conditions. Likewise, a look at the supra-national levels reveals the need for more effective forms of governance. It should be borne in mind that on an international level too, a system can only be effective and recognised as democratically legitimate if its main features bear at the very least a quasi-constitutional character. The protection of common interests among different nations, and the safeguarding of human rights, democracy and the maintenance of the rule of law on an international level, demand fundamental agreement on the most essential questions among the parties involved. Moreover, societies' need for integration while safeguarding their respective cultural identities, and their desire for an international division of power, show how relevant the federalist idea is to the task of constituting an international system that is at once efficient and able to safeguard basic values.

69 Part B Theme I - Scientific Background

Given the depth of integration possible among all comparable endeavours on a regional level, discussion of federalisation on supra-national levels centres first of all on the future design of the EU. In this respect, the structure of the EU embodies the tensions and integrations among the different territorial levels mentioned. Thus, the EU is the only international (supra-national) organisation that has, or even shows the first signs of having, its own federal structures. At any rate, it has strengthened its federal character more and more in the past few years, and there is a strong tendency towards recognising that a democratic Europe can be achieved only as a federal association of states. It stands to reason that this issue lies at the heart of the debate on the possible creation of a European constitution. However, there is considerable disagreement with regard to the specific design of such a constitution. Without a doubt, several factors favour an interpretation of the EU as an entity organised along federal lines. " The EU has a jurisdictional system. Although many consider this to be insufficiently clear and to need greater precision, it does make distinctions between the powers of the Union and those of the member states; it also recognises competing forms of jurisdiction. • The allocation of legislative powers on the community level corresponds with the obligation to enforce and implement these decisions on the level of the constituent states (the regions and constituent states within the federation). • The decision-making system and the rules of procedure are shaped by the cooperation of the institutions of the Union and its member states. Further evidence for the existence of federalist structures includes among other things the common budget, with its redistribution effects recalling the mechanisms of fiscal adjustment in a federal system. It also includes the debate on the principle of subsidiarity in the EU, which the 1992 Maastricht Treaty embodied explicitly in the Community Law (Article 5 EEC), and which was supplemented by the protocols of the 1997 Amsterdam Treaty. The principle of subsidiarity is a further strong indication of the significance of federalism for the Union. Necessarily, this also includes the member states' corresponding rights of participation, in particular of the constituent states, regions and municipalities. As well as this anchoring of the principle of subsidiarity, the establishment of a Committee of the Regions took another step in this direction within the scope of the EU, which found its way into the Community System with the Maastricht Treaty (Article 263-265 EEC). During the past few years, the Committee of the Regions has endeavoured to consolidate and extend its position within the institutional system of the EU, as well as to increase its muscle with the Council and Commission. However, there is still

70 Ehrenzeller / Hrbek / Malinverni / Thiirer

a large gulf between the objective envisaged and the Committee's actual political weight (Hrbek, 2000). There are clear indications that regions and constituent states both in Europe and in North America are expanding their foreign policy activities not only within the scope of international organisations such as NAFTA, but also in other forms of cooperation (Brock and Albert, 1995). The establishment of cross-border institutions and the resulting new patterns of communication indicate that it is extremely viable for sub-national levels to build up their own foreign relations, and that this usefully complements their inner-state participation in the decision-making processes of the federation. Without a doubt, the federalist principle can be said to have a promising future on a national as well as an international level. It remains suitable as a concept for organising and shaping nation states, as well as for creating new systems of organisation and the resulting governance on an international level. However, one cannot overlook the fact that the basic values inherent in the principle of federalism - precisely as regards the shaping of international relations - may clash with other basic values to which the international community is equally committed, such as the universal protection of human rights. Conflicts can also arise between the overriding demands on the power of international institutions to act, and the precept to safeguard the identity of regions and constituent member states. Hence, it must be the role of a constituted international system shaped by federalism to create genuine possibilities for representative bodies (acting in the interests of constituent states and regions), while making provisions for effective decision-making mechanisms that integrate these bodies in the overall objectives of the respective international or supra-national organisations. 5.

S U B T H E M E S OF THE L E A D I N G H O U S E I

Within the scope of the main topic of the Leading House I, the following four important aspects have been selected as subthemes for the conference: • Foreign Relations of Sub-national Units; • Participation of Sub-national Units in the Foreign Policy of the Federation; • Implementation of International and Supra-national Law by Subnational Units; • Federal Structures and the Foreign Policy of International and Supranational Organisations. The first subtheme, Foreign Relations of Sub-national Units, deals with the foreign policy activities of the sub-national level of the federation. The main emphasis is on the possibilities and limits of arranging and diversify-

71 Part B Theme I - Scientific Background

ing the power of the state towards the world outside. In essence, this covers two manifestations of this so-called constituent diplomacy (kleine Aussenpolitik). On the one hand, there is cross-border regional cooperation on a communal, regional and member-state level, which takes place primarily on the contractual level between sub-national units of different states. On the other hand, there are the many other more political possibilities, usually non-contractual in kind, such as unilateral sanctions or foreign policy acts of legislation, that these sub-national units have in order to conduct foreign relations beyond regional cooperation in a well-directed manner. The second subtheme, Participation of Sub-national Units in the Foreign Policy of the Federation, enquires into the different possibilities for participation as regards determining foreign policy through the federalist organisation of the state. There are various models, ranging from that of federal participation within the scope of the constitutional organs of the federal government (Model of the Bundesrat in Germany), through the cooperation of regional and federal organs (Belgium), to the member states creating their own institutions on a contractual basis in order to safeguard common interests, for example the Conference of Cantonal Governments model in Switzerland (Konferenz der Kantonsregierungen or KdK). The third subtheme, Implementation of International and Supra-national Law by Sub-national Units, concerns the various systems, forms and means through which member states can implement community norms, in particular those pertaining to international law (and the consequences of non- or delayed enforcement). While the first three subthemes enquire into the consequences of a state's organisation as a federation for its foreign policy, the fourth subtheme, Federal Structures and the Foreign Policy of International and Supra-national Organisations, considers the federalisation of international systems of regulation, essentially of the EU, and possibly of NAFTA. By analogy, it enquires into the consequences of federal structure for interand supra-national organisations' foreign policy. On the one hand, the possibilities of giving a federal shape to the structures of supra-national organisations are raised for discussion (with specific reference to the current debate on a "European constitution"). On the other, attention is given to the significance of, relationship with, and area of conflict between the foreign policy of supra-national communities and the still-existing foreign policy of member states. These four subthemes, which are ultimately intrinsically connected, can be considered from two different points of view. First, the aspect of sovereignty among nation states being made relative, i.e. how they conduct foreign policy in relation to the outside world (the first and fourth subthemes), and with regard to the domestic sphere how they shape foreign political will and enforce international law (the second and third subthemes).

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Ehrenzeller / Hrbek / Malinverni / Thurer

Secondly, the perspective of continuous and dynamic growth (from the small to the large) and change in the federalist system within the scope of foreign policy, which reaches as far as the emergence of an altered international system with new federalist "macrostructures" on international and supra-national levels. REFERENCES

Aldecoa, F. and Keating, M., eds, 1999. Paradiplomacy in Action. The Foreign Relations of Subnational Governments. Special issue of Regional and Federal Studies, 9. i. Bell, D., 1973. The Coming of Post-Industrial Society. A Venture in Social Forecasting. New York: Basic Books. Brock, L. and Albert, M., 1995. Entgrenzung der Staatenwelt Zur Analyse weltgesellschaftlicher Entwicklungstendenzen. Zeitschrift fur Internationale Beziehungen, 2, 259-285. Bussjager, P., 2000. Entgrenzung und Staatserosion als Problem der modernen Staatstheorie. Zeitschrift fur offentliches Recht, 55, 347-365. Cottier, T. and Germann, C., 2001. Die Partizipation bei der Aushandlung neuer volkerrechtlicher Bindungen: verfassungsrechtliche Grundlagen und Perspektiven. In: D. Thurer, J-F. Aubert andJ-P. Miiller, eds. Verfassungsrecht der Schweiz. Zurich: Schulthess, 77-96. Delbriick, J., 2001. Structural Changes in the International System and its Legal Order: International Law in the Era of Globalization. Swiss Review of International and European Law, i, 1-36. Dicke, K., 2000. Erscheinungsformen und Wirkungen der Globalisierung in Struktur und Recht des internationalen Systems auf universaler und regionaler Ebene sowie gegenlaufige Renationalisierungstendenzen. In: K. Dicke et al., eds. Volkerrecht und Internationales Privatrecht in einem sich globalisierenden internationalen System. Deutsche Geselhchaft fur Volkerrecht, 26. Heidelberg: Miiller, 13-41. Duchacek, I.D., 1990. Perforated Sovereignties: Towards a Typology of New Actors in International Relations. In: HJ. Michelmann and P. Soldatos, eds. Federalism and International Relations: The Role of Subnational Units. Oxford: Clarendon Press, 1-33. Ehrenzeller, B., 2002. Aussenpolitische Handlungsfahigkeit und Verfassung: eine Betrachtung aus der Sicht der neuen schweizerischen Bundesverfassung. In: H-J. Cremer, T. Giegerich and D. Richter, eds. Tradition und Weltoffenheit des Rechts, Feschtschrift fur Helmut Steinberger. Heidelberg: Springer, 703-731. Ehrenzeller, B., 1993. Legislative Gewalt und Aussenpolitik. Eine rechtsvergleichende Studie zu den parlamentarischen Entscheidungskompetenzen des deutschen Bundesstages, des amerikanischen Kongresses und der schweizerischen Bundesversammlung. Basel and Frankfurt am Main: Helbing & Lichtenhahn. Giddens, A., 2001. Entfesselte Welt: wie die Globalisierung unser Leben verdndert. Frankfurt am Main: Suhrkamp. Hrbek, R., 2000. Der Ausschuss der Regionen - Eine Zwischenbilanz zur Entwicklung derjiingsten EU-Institution und ihrer Arbeit. In: Europaisches Zentrum fur

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Foderalismus-Forschung Tubingen, ed.Jahrbuch desFoderalismus 2000 -Foderalismus, Subsidiaritdt und Regionen inEuropa. Baden-Baden: Nomos, 461—478. Keohane, R.O., 1998. International Institutions: Can Interdependence Work? Foreign Policy, no, 82-96. Keohane, R.O. and Nye.J.S., 1977. Power and Interdependence: World Politics in Transition. Boston: Little Brown. Kohler-Koch, B., 1998. Regieren in entgrenzten Raumen. Pvs-Sonderheft, 29. Linder, W., 1999. SchweizerischeDemokratie: Institutionen -Prozesse-Perspektiven. Bern: Haupt. Malinverni, G., 1998. LTndependance de la Suisse dans un monde interdependant. Revue de droit suisse, 117 (2, Halbband), 1-137. Norris, P., 2001. Global Governance and Cosmopolitan Citizens. In: J.S. Nye (Jr) and J.D. Donahue, eds. Governance in a Globalizing World. Washington D.C.: Brookings Institution Press, 155-177. Saladin, P., 1995. Wozu noch Staaten?Zu denFunktionen eines modernen demokratischen Rechtsstaats in einer zunehmend uberstaatlichen Welt. Bern: Stampfli. Scharpf, F.W., 1991. Die Handlungsfahigkeit des Staates am Ende des zwanzigsten Jahrhunderts. Politische Vierteljahresschrift, 4, 621-634. Sidjanski, D., 2000. The Federal Future of Europe. Michigan: The University of Michigan Press, Ann Arbor. Sturm, R., 2001. Die Entgrenzung des politischen Raumes - Politik und Burger auf der Suche nach Heimat. Politische Studien, 378, 23-43. Sturm, R. and Pehle, H., 2001. Das neue deutsche Regierungssystem. Die Europdisierung von Institutionen, Entscheidungsprozessen und Politikfeldern in der Bundesrepublik Deutschland. Stuttgart: UTB. Thurer, D., 1998. Der Verfassungsstaat von aussen gesehen - eine Skizze. In: D. Thurer, Perspektive Schweiz. Zurich: Schulthess, 35-57. Thurer, D., 2001. Recht der internationalen Gemeinschaft und Wandel der Staatlichkeit. In: D. Thurer, J-F. Aubert and J-P. Miiller, eds. Verfassungsrecht der Schweiz. Zurich: Schulthess, 37-61. Tomuschat, C., 1978. Der Verfassungsstaat im Geflecht der internationalen Beziehungen. Veroffentlichungen der Vereinigung deutscher Staatsrechtslehrer. Berlin: De Gruyter, 7-63-

Watts, R.L., 1999. Comparing Federal Systems. Montreal and Kingston: McGillQueen's University Press.

SCIENTIFIC B A C K G R O U N D : SUBTHEME PAPER JOHN KING AID

Foreign Relations of Sub-national Units Constituent Diplomacy in Federal Systems

1.

THE RISE OF CONSTITUENT DIPLOMACY

Constituent diplomacy, that is the participation of regional and local governments in foreign policy making and international affairs, is now an institutionalised characteristic of democratic federal polities. It also occurs in a growing number of quasi-federal countries such as Spain, in non-federal countries such as Japan, and even in some non-democratic countries such as the People's Republic of China. It is likely that constituent diplomacy will become a characteristic of nearly all nation states during the twentyfirst century. Key factors that have given rise to constituent diplomacy are democratisation, human rights, market liberalisation, inter-governmentalisation, decentralisation, United States policies, technological innovation, and behaviour diffusion. The rise of constituent diplomacy is commonly attributed to growing economic interdependence (Keohane and Nye, 1977; Duchacek et al., 1988) associated with globalisation and regional integration, such as the European Union (EU) and the North American Free Trade Agreemen (NAFTA). Although this explanation is correct, it is only partly so. It cannot account for the virtual absence of constituent diplomacy during the first era of modern globalisation in the late nineteenth century, or for the uneven development of constituent diplomacy across countries in recent decades. The first era of globalisation, which occurred in the late nineteenth century but then collapsed under the disruptions of the First World War and the post-war tariff wars, did not produce a flowering of constituent diplomacy. Instead, it produced nationalisation or centralisation, largely as a

75 Part B Theme I - Scientific Background

result of labour pressure to establish welfare states and international pressure to engage in balance-of-power foreign relations. National governments sought to remain firmly in the driver's seat so that the foreign affairs powers shared by the constituent governments of federal polities tended to be deemed irrelevant if not a danger to the ability of the nation state to speak with one voice in foreign affairs. 1.1. Democratization During post-Second World War globalisation, constituent diplomacy emerged in a few federations during the 19505, but did not become widespread until the late 19805. One explanation for the staggered rise of constituent diplomacy in the late twentieth century is the staggered path of democratisation since the Second World War. Federal democracies generally tolerated and sometimes encouraged constituent diplomacy; nondemocratic regimes did not tolerate such activity. Following 1945, more federal democracies such as Germany and India came into existence, decolonisation created new democracies, and by the igSos many dictatorial or highly centralised regimes were collapsing, as in Mexico, Portugal, Spain, and the Union of Soviet Socialist Republics (USSR). As democracy spread to more countries, so did constituent diplomacy. More generally, the protest movements of the 19605 and 19705 associated with civil rights in the United States, the Vietnam War, the militaryindustrial complex, de-colonisation in Africa and Asia, women's liberation, environmental protection and the like, considerably democratised foreign policy making in Western democracies. These movements penetrated and sometimes toppled elite foreign policy establishments in order to express their voices in foreign affairs. They also placed new issues such as environmental protection on the international agenda, forged their own international relations, spawned new political parties such as the Greens and numerous non-governmental organisations (NGOS) and, in federal democracies, used all centres of power - federal, regional, and local - to achieve their objectives. Regional and local governments became forums for foreign policy debates, expressions of regional and local opinion, and stages for making policy choices, such as enactments of local nuclear-free zones. By the 19805, national elites could no longer make foreign policy in isolation from public opinion, and Western democratic governance had become an "intermestic" (Manning, 1977) blend of domestic and foreign affairs. 1.2. Inter-governmentalisation Foreign policy can also be regarded as the last policy domain to be intergovernmentalised in the world's major federal democracies during the

76 John Kincaid twentieth century. The Great Depression of the 19305, the Second World War, post-war reconstruction, and the maintenance needs of welfare states all stimulated federal government involvement in domestic policies previously managed exclusively or predominantly by their constituent governments. As international developments impinged on the economic and political affairs of constituent governments, those governments sought to inter-governmentalise foreign policy making as well. 7.3. Human rights movements In addition, human rights movements encouraged not only individuals to assert rights, but also encouraged nationality, ethnic, religious, and linguistic communities, especially stateless nations, to assert communal rights as distinct societies deserving recognition, self-government, and distinctive voices in national and international affairs. For many such communities, constituent diplomacy became an integral component of identity recovery and legitimisation of their perceived sovereignty and "national" status, within both their federation and the international arena. Quebec nationalism, for example, emerged during the Quiet Revolution of the igGos, projecting a distinct identity within and outside of Canada. Quebec's constituent diplomacy served as a tool of its nationalism and an instrument of its modernisation. Consequently, there has been a flowering in recent decades of linguistic nationality, ethnic, racial, and religious communal identities, many of which have territorial bases within nation states, and thus either actual or potential governmental basis for domestic and foreign expression. 1.4. Decentralisation A fourth factor has been pressure for decentralisation of governance or federalisation following the collapse of so many highly centralised and dictatorial communist, fascist, and military regimes since the mid-19705, and especially since the fall of the Berlin Wall in 1989. Decentralisation has been promoted not only to accommodate cultural diversity but also to enhance democracy, foster economic development, improve government efficiency, and facilitate modernisation. By the 19905, even the International Monetary Fund and especially the World Bank had become advocates of decentralisation. In the context of contemporary globalisation, therefore, certain forms of constituent diplomacy are becoming important and generally accepted components of decentralised or federal governance. 7.5. Market liberalisation A fifth key factor has been market liberalisation, which creates a competitive environment not only for businesses but also for constituent gov-

77 Part B Theme I - Scientific Background

ernments and NCOS. An excessively planned economy cannot tolerate constituent diplomacy that might contradict the national government's plans. Market liberalisation reduces traditional government roles in regulating and subsidising the economy, and exposes the nation state and its constituents to international economic competition. This in turn compels constituent governments to engage the global economy to promote exports and attract foreign investment and tourists. Consequently, market liberalisation has given rise to constituent diplomacy even in some nondemocratic countries, such as the People's Republic of China where provincial and local governments have acquired significant economic development responsibilities under what has been called "market federalism" (Montinola et al., 1995). i. 6. United States policies

A sixth important factor has been the economy, culture, and policies of the United States which after the Second World War, unlike at the end of the First World War, chose not to retreat within its borders, but rather to build international institutions, drive globalisation, support democratisation, and provide security for the construction of the EU. This is the most significant international political difference between late nineteenth-century globalisation and late twentieth-century globalisation. The United States emerged as a hegemonic power in 1945; it helped to reconstruct Western Europe and Japan, and to maintain a bi-polar balance of power worldwide for some 45 years. Whatever the world's opinions about how the United States has exercised its power, United States policies allowed economic interdependence and, along with it, constituent diplomacy to develop among free Western nations. Indeed, the post-Cold War spread of globalisation and democratisation very likely depends greatly not only on widening economic prosperity, but also on United States military dominance. The United States government also fostered constituent diplomacy by nudging its own states and localities into the international arena. During the 19505, state and local governments were encouraged to engage in people-to-people programs, such as the Leader Exchange Program (Mettger, 1955). Municipalities were encouraged to establish sister-city relationships around the world. President Eisenhower (1953—1961) created the Pearson Fellowship Program, which enables United States foreign service officers to work for a year with a state or local government. Under John F. Kennedy's administration (1961-1963), the United States Department of Commerce encouraged states to become involved in international economic affairs. Commerce was then headed by Luther Hodges, former Governor of North Carolina. Presidents Lyndon B. Johnson, Richard M. Nixon, and Jimmy Carter (former Governor of Georgia) also encouraged states to promote exports and seek foreign investment. At President Carter's request, the

78 John Kincaid

National Governors' Association (NGA) formed a standing committee in 1978 on International Trade and Foreign Relations. i. 7. Technological innovation

Technological developments that have spurred globalisation have also spurred constituent diplomacy. For example, the cost (in 1990 us$) of a three-minute telephone call from New York City to London dropped from nearly $250 in 1930 to about $5 by 1980, thus putting international telephony within the budgetary reach of regional and local officials who previously would have been hard-pressed to justify to their voters $250 international telephone calls. Since the early 19905, e-mail and the Internet have virtually eliminated the physical costs of international communications. Air travel and declining airfares since the 19605 have also allowed regional and local officials to travel abroad in ways that were prohibitively expensive and time-consuming prior to the 19608. 1.8. Behaviour diffusion

Finally, constituent diplomacy reflects the diffusion of innovation within and between federal democracies. As certain constituent governments, such as southern us states and Quebec, pioneered constituent diplomacy, other constituent governments copied that behaviour. As the pioneering leaders of constituent governments sought to develop relations with constituent governments abroad, they elicited responses from those governments. Over time, constituent diplomacy became legitimised as normal behaviour, increasingly leading officials of constituent governments to conclude that constituent diplomacy is a part of their official responsibilities. The broadening and deepening of constituent diplomacy also reflects the diffusion of innovation, with some constituent governments being models for others. Quebec, for example, is often viewed as a model by constituent political communities seeking to assert a "national" identity, such as the Basque Country, Catalonia, Flanders, Scotland, Tatarstan, and Wallonia. Globalisation, therefore, is as much a context for constituent diplomacy as it is a cause of constituent diplomacy. Democratisation, inter-governmentalisation, human rights, decentralisation, market liberalisation, United States policies, and technological innovation in travel and communications have all occurred during the current era of globalisation. In turn globalisation, and its communications tools especially, have helped to drive democratisation, inter-governmentalisation, human rights, decentralisation, and market liberalisation. All of these factors became highly interdependent by the 19805, thus producing an era of globalisation which includes constituent diplomacy, and which differs from the late nineteenth-century globalisation.

79 Part B Theme I - Scientific Background 2.

REGIONALISATION AND CONSTITUENT

DIPLOMACY

It is also important to distinguish between the impacts of globalisation and of regional integration, such as the development of the EU and of NAFTA, on constituent diplomacy. The rise of the EU has spurred intense constituent diplomacy within most member states, and made constituent diplomacy particularly salient in the federal member states such as Belgium and Germany, devolving member states such as Italy, Spain and the United Kingdom, and potential federal member states such as Switzerland. Regional integration has a broader and deeper impact on constituent regional and local governments than does globalisation, because the EU also entails monetary and political union. Indeed, EU integration has become so broad and deep that the term "constituent diplomacy" may no longer apply. This point was made by the German Lander when they obtained changes in the Basic Law as the price of Germany's approval of the 1993 Maastricht Treaty. The federal government's exercise of its constitutional foreign affairs powers with respect to the EU under Articles 24(1) and 32(1) of the Basic Law, had created an open flank through which the federal government could allow the EU to invade constitutionally protected Lander powers. Germany's relations with the EU, argued the Lander, were no longer international or foreign relations, but rather domestic inter-governmental relations. Hence, the Lander obtained significant changes in the Basic Law, particularly Article 23, which gave them a direct voice in Germany's participation in EU policy making on matters affecting the Lander. In Belgium's federal arrangement, regions and language communities have external competence in matters under their control, and Belgium is largely dependent on its regions and communities for representation in the EU and other institutions, such as the Organisation for Economic Cooperation and Development (OECD) and United Nations Educational, Scientific and Cultural Organization (UNESCO). Changes in the Swiss constitution in 1999 also gave the cantons a larger, more direct voice in foreign affairs. Article 55 provides for the cantons to participate in foreign policy decision-making processes and international negotiations that involve their powers or essential interests. Not all EU member states have undertaken such constitutional change, partly because not all member states are federal. However, the spreading of constituent diplomacy and of regional assertions of self-government in the face of rising EU power are likely to push more member states in the same direction. Constitutional change is less pressing for federations engaged in primarily economic integration, such as NAFTA, where Americans, and probably Canadians and Mexicans as well, do not contemplate ever-deeper political

80 John Kincaid

union. President Vicente Fox proposed a deepening of NAFTA into an EU-style common market with open borders, expansion of NAFTA's North American Development Bank along the lines of the EU'S structural funds, and hemispheric economic union, but his proposals received a cool reception in Washington, D.C., and probably died with the terrorist attacks of 11 September 2001. The need for adequate representation in national agreement making and treaty making might, however, be more acute for Canadian provinces and Mexican states than it is for us states, in part because of Canada's and Mexico's economic dependence on the United States, where Gross National Product (GNP) per capita (PPP$) reached $28,020 (United States) in 1999 (compared to $21,380 for Canada and $7,660 for Mexico). The United States accounts for about 85% of Canada's foreign trade and 42% of its Gross Domestic Product (GDP). Regional economic and population disparities are also less acute in the United States than in Canada and Mexico. Ontario, for example, comprises nearly 40% of Canada's population and produces about 55% of Canada's manufacturing output. The six neighbouring United States Great Lakes states account for 18 % of the United States population and about 25% of United States manufacturing. In turn, the United States has no state like Quebec positioned to be a political or cultural barrier between sections of the nation, and no rebellious indigenous state like Chiapas. However, Canada's provinces and Mexico's states are likely to be able to negotiate statutory judicial and administrative arrangements to accommodate their international concerns. Most Canadian provinces have treated constituent diplomacy as a more or less natural extension of domestic inter-governmental relations as reflected, for example, in Alberta's Ministry of International and Intergovernmental Relations, which has three overall objectives: • To secure benefits for Alberta from strengthened international relations; • To secure benefits for Alberta as an equal partner in a revitalised, united Canada; • To support Aboriginal people and governments in achieving selfreliance and enhanced well-being (Government of Alberta 200117). There has been no pressure to amend the United States constitution to strengthen or dilute the us states' constituent diplomacy. The lack of such pressure is due partly to the ease with which the inter-governmental system has accommodated the international concerns of state and local governments, and to the generally cooperative inter-governmental relations that have prevailed in this field. Moreover, most governors and big-city mayors have supported globalisation. Additionally, most us states and many big cities occupy extraordinary economic positions that make them less vulnerable to global economic turbulence than the constituent governments of

81 Part B Theme I - Scientific Background

most countries. For example, in terms of 1998 GDP, California is the world's seventh largest economic power (with Canada ranking twelfth, Mexico fourteenth, India seventeenth, Australia twentieth, and Russia twenty-fourth). New York and Texas rank tenth and eleventh, and New York City alone ranks nineteenth. Even the economy of the nation's poorest state, Mississippi, is larger than that of about 120 nations. Although international trade's share of the country's total GDP increased from 11 % in 1970 to nearly 30% in 2000, the United States economy is less internationally dependent than most economies. United States exports as a share of worldwide exports increased only from 15.7% in 1993 to 17.7% in 1999, compared to 34.7% to 38.0% for the EU, although the rest of the world's share of exports declined from 49.6% to 44.3%. The United States incurred continual trade deficits during the 19905, but most economists attributed the deficits to a robust United States economy that grew faster than the economies of its trading partners. During the 19705 and 19808, United States corporations appeared to be stagnant and lagging behind Japan and Germany, but by the 19905 United States corporations had responded to global competition by restructuring and improving productivity. 3.

MOTIVATIONS FOR CONSTITUENT DIPLOMACY

Constituent governments engage in international activities essentially for four reasons. One major reason is economic, mainly connected with trade. It concerns especially the export of goods and services; inward investment for economic development, employment expansion and tax-base growth; and tourism - all of which are highly competitive globally. They are also location specific. That is, regions in federal systems produce different goods and services, have different economic-development and tax-base needs, and offer different tourist attractions. In these respects, most constituent governments recognise that they must compete in the global marketplace against their counterparts at home and abroad. A second major reason is cultural, whether such activities be merely friendly goodwill cultural exchanges popular with many citizens, or more concerted efforts to achieve global recognition of a region's distinct cultural or "national" identity, or desires to connect with compatriots abroad. The Basque Country, for example, has sought to forge relations with Basques who have migrated elsewhere, and Scotland has sought to generate interest in Scotland among the 5.4 million Americans of Scottish decent. A third motivation is political - to protect a constituent community's position or status in international arrangements; to assert a nationalist

82 John Kincaid

identity and legitimacy and thereby achieve self-esteem through regional and global recognition; to seek independence as a nation state; to obtain security against aggression; to satisfy domestic political interests such as citizens concerned about nuclear proliferation, environmental protection, labour rights, or human rights; and/or to satisfy the political ambitions of constituent government leaders. A fourth reason is cross-border housekeeping, namely, the need to resolve numerous cross-border issues, such as wandering cows, automobile traffic, and water pollution, between contiguous regions divided by an international border. There are, for example, thousands of housekeeping agreements between Canadian provinces and us states. Likewise, numerous cross-border arrangements exist between neighbouring constituent governments in Europe, as well as various larger associations such as the Euro-region, the Four Motors of Europe, the Working Group of the Pyrenees, the Conference of Peripheral and Maritime Regions, and the European Association of Border Regions. For the most part, cross-border housekeeping and international economic activity are likely to produce the least domestic inter-governmental conflict, although the pursuit of exports, investments, and tourists may induce competition among regions within a federation. However, there are opportunities for constituent governments, especially neighbours, to cooperate as well in promoting exports and in attracting investment and tourists. External housekeeping and economic activities also have spill over benefits for the whole federation, and are thus best conducted in cooperation with the federal government, which can assist its constituent governments through its embassies and other international services. Such cooperation can increase efficiency and decrease costs by reducing bureaucratic duplication. Cultural activities, and especially political activities, are the most likely to create domestic inter-governmental conflict as certain culturally distinct constituent communities engage in international activities that may embarrass the federation or contradict federal foreign policy objectives. In July 1999, for example, the Basque parliament invited the Kurdish assembly-inexile to meet in the Basque parliament, much to the consternation of the Spanish government, which was seeking good relations with Turkey. Indeed, for some communities, cultural and political constituent diplomacy are more important than economic and housekeeping activities because they do not wish to be perceived as a mere economic entity like Ohio or Ontario, but as a distinct "national" personality like Quebec, and they fear that global economic interests will overwhelm their culture and politics. However, constituent diplomacy itself is rarely the cause of domestic inter-governmental conflict. Instead, it is usually a reflection of existing inter-governmental conflict created by the constituent community's domestic assertions of cultural distinctiveness and self-governing autonomy.

83 Part B Theme I - Scientific Background

Constituent diplomacy is another tool or weapon for asserting the political community's autonomy within its federation by projecting its identity internationally, gaining international political leverage over its federal government, and acquiring a patina of "national" status - a matter of considerable political importance to some constituent communities (Kincaid, iggoa). Constituent diplomacy may also exacerbate inter-governmental conflict when a constituent community is governed by a political party that opposes the party in power in the federal government, or by a premier or governor who has national political aspirations. 4.

TEN CONSTITUENT DIPLOMATIC

ROLES

Constituent governments can and do perform at least ten roles with respect to international affairs (Kincaid, iQQob and 1999). However, the delineation of these roles assumes that the constituent governments wish to remain a part of their federation. Independence-minded political communities seeking secession are likely to assert different roles. 4. i. Partners in foreign policy development

Constituent diplomacy begins at home with efforts by constituent governments to influence the formulation of their federation's foreign policies within the country's federal system. Contemporary globalisation has made foreign policy a matter of shared rule, and external constituent diplomacy a matter of constituent political community self-rule. The term "partner" seems appropriate insofar as the long-term success of the federation and its constituent governments in the global arena depends on domestic intergovernmental cooperation on foreign policy. The constituent governments also need to cooperate with each other and to recognise their common interest and common fate as members of a federal nation state that is the legally recognised state in international law, even while they also have divergent interests and compete with each other in certain fields. In a world in which the nation state is the legal foundation of international relations, there is an advantage in recognising the supportive and protective role of one's nation state. The extent of partnership depends largely on the constitutional arrangements that incorporate constituent governments in the make-up of the federal government, and on the traditions of inter-governmental cooperation and consultation that already prevail in domestic policy making. However, partnership with respect to foreign policy may require extraordinary efforts at inter-governmental cooperation, because national elites often regard foreign policy as a national prerogative. In a few federations, constituent governments have obtained formal representation in international forums. This, however, appears to be the

84 John Kincaid

exception rather than the rule, and is most prevalent in the EU where constituent governments have sought to be directly represented, at least on certain matters, in negotiations in the European Commission and the Council of Ministers. Arguably, however, such EU negotiations are more like domestic inter-governmental relations than international relations today; hence, the case for inclusion in EU institutions is stronger than cases for inclusion in genuinely international forums such as NATO and the United Nations General Assembly. Short of official representation, most federal democracies have provided for informal, unofficial, or semi-official representation of constituent governments in relevant international forums. Likewise, the establishment of formal inter-governmental institutions to manage foreign affairs may be necessary or appropriate in some federations, but not all federations. Such institutions may be especially necessary in: • Federations participating in regional integration, such as the EU federations; • Federations experiencing pressures from culturally distinct communities asserting autonomy; • Federations with a tradition of institutionalising most facets of intergovernmental relations; • Federations with constituent government officials who are as competent or more competent than national officials. In the United States, an Intergovernmental Policy Advisory Committee to the Office of the United States Trade Representative was established in 1988 to advise the president on state and local government concerns in international trade and trade agreements. However, formation of this committee reflected a need to inter-governmentalise the United States Trade Representative in the same way that virtually all domestic, and then many foreign policy issues were inter-governmentalised across all relevant federal agencies during the late twentieth century. 4.2. Pressure points in foreign policy making

Regardless of formal constitutional and institutional arrangements, constituent governments serve as pressure points in national foreign policy making by lobbying federal officials to protect and promote their interests in the global arena, and to include their interests in foreign policy making. Such lobbying is often done by regional and local officials acting individually on behalf of their constituent communities, and also acting together across the federation on certain matters. Constituent governments can also mobilise business executives and interest groups within their jurisdictions to lobby federal officials. Regional and local officials can generate grass-

85 Part B Theme I - Scientific Background

roots pressure as well, by making public pronouncements on foreign policy and mobilising citizens to pressurise the federal government. 4.3. Self-governing political communities

Constituent governments are self-governing political communities whose laws and policies have implications for the domestic impact of foreign developments as well as international relations. As globalisation increases interdependence worldwide, previously domestic dimensions of selfgovernment have international consequences that can advance or retard a constituent community's position in the global arena. This role, however, is also one most likely to engender domestic inter-governmental conflict as assertive constituent communities seeking to enhance their autonomy and status within their federation impede or contradict policies pursued by the federation and by other constituent governments, and in addition export their autonomy-seeking behaviour into the international arena. This role is also most likely to trigger conflict with other nation states and with the constituent governments of other federations. This possibility is especially true of wealthy constituent governments, such as us states, which can wield enormous financial clout in global markets and project their regulatory power into the international arena. This power was demonstrated, for example, in us state and local government financial sanctions on South Africa during the apartheid era, and financial threats to Swiss banks holding assets belonging to victims of the Nazi Holocaust. Sanctions against Burma enacted by the Commonwealth of Massachusetts in June 1996 triggered protests from the EU as a violation of World Trade Organization (WTO) rules. The United States Trade Representative tried, unsuccessfully, to persuade the Governor of Massachusetts to veto the legislation. In 2000 however, the United States Supreme Court struck down Massachusetts' law, though not because of EU complaints or any violation of WTO rules, but because the Court concluded that Massachusetts' law had been pre-empted by a federal statute sanctioning Burma, and that the state law constituted an "obstacle to the accomplishment and execution of the full purposes and objectives" of the federal statute (Crosby, 2000; Stumberg and Porterfield, 2001). The principal challenges facing the self-governing autonomy of constituent political communities will be the long-term implementation of freetrade rules under the WTO and regional arrangements such as NAFTA. These agreements potentially threaten to override a wide range of regional and local powers of self-government (Kincaid, 1994; Weiler, 1994), because the inherent logic of free trade requires the obliteration of tariff and non-tariff trade barriers. In many federations, such as the United States, it is regional and local policies that can most often be attacked as non-tariff trade barriers because of those governments' extensive domestic governance

86 John Kincaid

responsibilities. The EU has a sizable list of us state laws it wishes to challenge under the WTO, and many foreign enterprises wish to compete in the nearly $300 billion us state and local government procurement market. Globalisation, therefore, is also changing the ways in which constituent governments procure goods and services, reducing historic emphases on regional and local suppliers, and weakening the political connections between constituent governments and their resident suppliers. 4.4.

Promoters of area interests

In the role for which they are perhaps best known, constituent governments promote their interests in the global arena, whether those interests be economic, cultural, and/or political. Constituent governments advertise their jurisdictions to investors and tourists, market their products and cultures to external consumers, dispatch their highest officials on missions abroad to foreign countries and international organisations, open offices in other countries, hire public relations and lobbying firms abroad, issue pronouncements on international affairs, and engage in other activities to protect and promote their interests. Insofar as these activities can benefit the federation as well, there are opportunities for inter-governmental and inter-jurisdictional cooperation. In the United States, for example, the Trade Information Centre of the United States Department of Commerce's International Trade Administration provides export assistance for most regions of the world as well as NAFTA. Advice is available on many countries about government procurement, intellectual-property protection, standards, and other commercial laws, regulations and practices. The International Trade Administration's Commercial Centres, which are usually located in primary business districts abroad, house state export-development agencies, industry associations, government agencies, and other partners. The United States and Foreign Commercial Service branch of the United States Department of Commerce identifies investment and export opportunities through United States embassies, consulates, and trade centres in about 81 important markets. The Foreign Agricultural Service has more than 60 foreign offices that assist states and their agribusiness interests. The United States Department of State also provides commercial and economic services through some 96 embassies and 36 consulates. United States foreign service officers offer economic and political advice on country-specific business cultures and practices. The federal government also engages in many other cooperative activities on behalf of state and local governments and their residents. Domestic conflict is more likely to arise, however, when leaders of constituent governments promote their jurisdictions' cultural and political interests by seeking to be treated as heads of state abroad and to have their overseas offices treated as embassies. The willingness of some nation states

87 Part B Theme I - Scientific Background

to do so, such as some Muslim states in the Middle East, which have greeted certain leaders of Islamic republics in Russia as heads of state, encourages more assertive constituent diplomacy, exacerbates intergovernmental conflict, and complicates the federation's foreign relations. 4.5. Parties to agreements with foreign governments Many federal democracies permit their constituent governments to enter into treaties, compacts, contracts, or agreements of various types with foreign governments under certain conditions. The growth of constituent diplomacy has brought with it an increase in such agreement making. Frequently, however, these agreements are not with foreign nation states, but with constituent regional or local governments of other nation states. Some constituent communities seeking greater autonomy or "national" status enter agreements with counterpart political communities so that each reinforces the other's legitimacy. Overall, however, many agreements entail cooperation on trade, economic issues, technology, science, education, and culture. In some cases, formal agreements are necessary to address certain matters such as cross-border issues. The construction of bridges and other infrastructure in border regions and the formulation of traffic rules, for example, require long-term governance and financing arrangements. In some cases, constituent governments seeking to elevate their "national" status within their federation and in the international arena eagerly seek agreements, especially if they can be called "treaties". Many agreements, however, pertain to matters of minor importance, such as cultural exchanges, but which have symbolic value to constituent communities. 4.6. Proxies for the nation state Where regional and local officials cannot officially represent their country abroad, they nevertheless, in effect, often represent what is best or worst about their country to others. Well-conducted constituent diplomacy will reflect favourably on the federation as a whole; poorly conducted constituent diplomacy may reflect negatively on the federation as a whole. Although foreign governments and diplomats can distinguish between national and constituent diplomacy, foreign media and citizens do not always distinguish one from the other. Furthermore, when a constituent government engages in domestic or foreign activities that trigger international protests, international pressure is likely to be brought against the federal government to crush the behaviour of its errant constituent government, whether or not it has the constitutional authority to do so. At times, constituent regional or local government officials can open foreign or international doors in semi-official ways that would be awkward or impossible for the federal government to do officially. Just as NGOS

88 John Kincaid perform many useful bridge-building cross-border functions (Keck and Sikkink, 1998), even between hostile nation states, so too constituent governments can perform useful functions of a similar nature. In addition, regional and local officials can initiate discussions with their external counterparts on issues of mutual concern, and then carry constructive proposals back to their national governments - a common practice along the Mexico-United States border, for example, where Mexican states usually have less autonomy and fiscal capacity than us states to act unilaterally. Regional and local governments can also provide aid, such as disaster relief, to equivalent governments in another country, where it might be diplomatically awkward for the federal government to do so, or when the other national government might not wish to receive aid from the federation itself. 4.7. Public education and opinion forums Regional and local officials can also bring foreign affairs issues home to their citizens, helping them to understand how the increasingly interdependent world affects their daily lives. A major key to a successful economy is a well-educated workforce attuned to world events. Cultural and educational exchanges, along with twinning arrangements, constitute a significant portion of constituent diplomacy, and represent important extensions of constituent governments' historic responsibilities for general as well as civic education in most federal democracies. Regional and local governments also serve as public-opinion forums on foreign policy. Local councils and regional legislatures occasionally pass resolutions on foreign policy, regional and local officials speak out on foreign affairs, and foreign policy propositions sometimes appear on regional and local referendum ballots. Citizens may also employ regional and local government mechanisms to enact internationally relevant policies, such as nuclear-free zones. Some such enactments may have an uncertain legal status, but they are symbolically important to their advocates. The phrase "think globally, act locally" captures the spirit of this role. Indeed, insofar as constituent governments are laboratories for experimentation, they can serve as sources of ideas for national responses to globalisation, whether those responses are embodied in federal law or in regional laws across a federation. 4.8. Problem solvers on the world scene Constituent governments are often problem solvers as well: • They can help ease cross-border tensions and resolve cross-border problems; • They can develop innovations and disseminate them worldwide through the many mechanisms that now exist to diffuse regional and local innovations globally;

89 Part B Theme I - Scientific Background • They can often provide the kinds of practical technical assistance to regional and local governments abroad that are outside the competence of federal officials; • Some constituent governments also provide financial assistance to governments, NCOS, or compatriots abroad. 4.9. Patrons of democracy Since the fall of the Berlin Wall especially, the constituent governments of the Western federal democracies have engaged in democracy building by providing ideas, model legislation, technical assistance, training and the like for national, regional, and local governments in many countries. At times, constituent governments undertake such activities on their own, but frequently their actions are funded by their federal government. Given that democratisation and economic development require competent local and regional governments, the constituent governments of more developed federal democracies can be valuable assistants. Regional and local officials also participate in international and regional organisations that promote regional and local democratic self-government worldwide, not only against domestic intra-national obstacles but also against international threats to autonomy posed by free trade, globalisation, and supra-national rule making. Many local officials around the world support the proposed international Charter of Local Self-Government. They also support the International Union of Local Authorities, World Association of Cities and Local Authorities Coordination, and so on. 4.10. Practitioners of goodwill Constituent governments can play useful roles in promoting goodwill abroad and improving cultural understanding between peoples. Regional and local governments are well suited for this role. Such activities are often best carried out on a small-scale, one-to-one basis so that participants can see how other people really live and think. Regional and local governments can work with their resident business firms and NGOS to build different kinds of bridges between peoples, and to assemble rich cultural and educational programs. In addition, regional and local programs are often less freighted with the ideological baggage and policy antagonisms that separate national governments, thus enabling regional and local goodwill initiatives to overcome barriers that divide peoples. 5.

CONSTITUENT DIPLOMACY AND INTER-GOVERNMENTAL

RELATIONS

Whether constituent diplomacy occurs under conditions of intergovernmental cooperation or conflict varies greatly across federations,

go John Kincaid

and within a federation across time. If overall inter-governmental relations in a federal system are cooperative, then constituent diplomacy is likely to develop in an inter-governmentally cooperative manner, with disagreements and conflicts being resolved much as they are resolved in other policy fields. Constituent diplomacy does not so much alter the nature of inter-governmental relations as widen their scope by adding new issues to the inter-governmental agenda, and by bringing new players into foreign affairs as the line between domestic policy and foreign policy becomes thinner. Hence, constituent diplomacy increases possibilities for inter-governmental and inter-jurisdictional cooperation, just as it increases possibilities for conflict, especially where domestic intergovernmental relations are already conflictual. However, conflict often attributed to constituent diplomacy is not necessarily caused by constituent diplomacy. Instead, the conflictual international activity is another manifestation of conflict already present in the federation domestically. Antagonistic constituent diplomacy simply aggravates existing conflict and subjects the federal government to greater international embarrassment. At the extreme, conflict caused by the constituent diplomacy of a secession-minded region is not caused by that diplomacy per se. Instead, that diplomacy is a manifestation of the conflict caused by the region's secessionist desires. Therefore conflict over the region's diplomacy cannot be resolved without resolving the underlying secession conflict. Likewise, conflict might be rooted in the party system and election outcomes. When one party controls the federal government and a different party controls one or more constituent governments, there may be conflict over constituent diplomacy just as there is over many other matters. Often, such conflict cannot be resolved administratively or judicially: it must be resolved politically if at all. The same principle applies to federations where the federal government is controlled by one ethnic, linguistic or religious group, while one or more constituent governments are controlled by different groups. This is a core issue because most federations are multinational, multi-linguistic, multi-religious, and so on. Their constituent communities often view themselves as "nations", and foreign policy making is seen as an attribute of sovereign statehood. As such, constituent diplomacy can become another weapon in the competition for power against the federation and in domestic battles that long predate the current era of globalisation. There is therefore no magic formula for resolving conflict, and what works in one federation may not work in another. In the absence of secessionist or other oppositional political motives however, constituent governments ordinarily have strong incentives to resolve conflict so that they can better promote their interests. If the federal system is basically cooperative and consultative, then habits that prevail in domestic policy making can be applied to foreign policy making with, perhaps, two attitude adjustments. Firstly, where national foreign policy offi-

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Part B Theme I - Scientific Background

cials have not customarily cooperated with their constituent governments, they need to change their attitudes and behaviour - something not always easy to accomplish. Secondly, constituent government officials need to recognise that they are not fully independent foreign policy makers, nor are they nation-state foreign policy makers. They are policy makers for their region or locality and ought therefore to remain focused on the real needs of their region and locality. 6.

NORMATIVE CONSIDERATIONS

One basic question is the extent to which the international concerns of constituent governments should be privileged over the international concerns of businesses, NGOS, and other elements of civil society. A federal government has direct responsibilities for all of its citizens, and most federal systems operate under some type of dual majoritarianism involving shared rule by citizens of the federation and self-rule by citizens of the constituent communities. Insofar as a federation's foreign policy is, in principle, intended to benefit the federation, then it is legitimate to limit the reach of constituent diplomacy, and to constrain constituent diplomacy to matters that benefit constituent communities in ways that supplement and enhance, rather than detract from, the federation's policies. Moreover in making foreign policy for the federation, the federal government is obligated to listen to non-governmental voices as well. These voices crosscut the federation's constituent communities and sometimes oppose their policy interests. Article 147 of the Swiss constitution seems to recognise this fact. While the constitution privileges the cantons in Articles 45 and 55, Article 147 incorporates political parties and non-governmental interests, in addition to cantons, in hearings and consultation. There also are dissident voices within constituent communities. Although the elected officials of constituent governments in federal democracies formally represent their citizens, there are opposition parties, NGOS, and other elements of civil society in a constituent community that may oppose certain aspects of their government's constituent diplomacy. They may appeal to the federal government and even the international community to override their constituent government. Therefore it is not self-evident that a federal democracy should privilege the foreign policy voices of constituent government officials over other voices. Indeed, given the decline of public trust in governments in most Western democracies, citizens may at times regard business firms or NGOS as better representatives of their international interests than their elected constituent government officials. The very process of democratisation that contributed to the rise of constituent diplomacy has also brought non-governmental voices into the foreign policy arena. Local governments can encounter the same problems with their regional government that regional governments encounter with their federal

92 John Kincaid

government, namely, a desire by regional officials to monopolise foreign policy and claim constituent diplomacy as the sole prerogative of the regional "state". A 1999 declaration by the Government of Quebec, for example, states: above and beyond its jurisdictions in matters of education, language, culture and identity, the Gouvernement du Quebec is the sole interlocutor competent to directly and appropriately represent the reality and interests of the Quebec people. (Declaration 1999)

Nothing is said about local or aboriginal governments. Thus, regional officials may be no more sensitive to the international interests of their local governments than federal officials are to the international interests of their constituent governments. Yet in many constituent regions, the lion's share of the jurisdiction's economy and culture is accounted for by one or two cities or metropolitan areas. Furthermore, in many constituent regions, there are sharp differences in economy and culture between urban and rural areas. Balancing these interests in a monopolistic structure of regional constituent diplomacy may not be possible, and suppressing local constituent diplomacy may be detrimental to the entire region. The emergence of constituent communities seeking to advance cultural and political objectives domestically and internationally as "national" states is the most conflictual dimension of constituent diplomacy. This dimension will increase during the foreseeable future because many such assertions are occurring worldwide. There has been growing intellectual legitimisation of such assertions in the names of human rights and cultural diversity, and the constituent communities of some federal democracies, especially Quebec in Canada, have considerably advanced cultural and political constituent diplomacy. Such constituent communities, moreover, are likely to elevate and institutionalise foreign affairs in a ministry or department of international relations, and to develop a cadre of foreign policy bureaucrats. On the other hand, constituent governments more focused on economic and housekeeping diplomacy are likely to embed those responsibilities in relevant domestic ministries or departments. The establishment of a ministry or department of international relations, and appropriations of tax revenues to maintain that establishment are crucial symbolic institutionalisations of the constituent community's "national" status. Elevating the autonomy of particular constituent governments, however, introduces asymmetry into a federation, and privileges the constituent diplomacy of particular constituent governments over that of others. Elevating the self-rule dimension of federalism, especially asymmetrically, at the expense of the shared-rule dimension of federalism could unbalance and fragment a federation unless there are compelling reasons of political expedience to hold the structure together.

93 Part B Theme I - Scientific Background

There is also the problem of reductio ad absurdam. If a constituent political community, such as Quebec, asserts rights to "freedom of speech" in international affairs, to protect and "promote cultural diversity", to be recognised as a distinct culture rather than as a simple "regional component" of a single "Canadian culture", and to be "the sole interlocutor" for Quebec (Declaration 1999), then it must accord the same rights to the aboriginal nations within its boundaries and to other resident communities that regard themselves as culturally distinct. The aboriginal nations in Canada experienced far more repression, including genocide, than did Frenchspeaking Canadians, who themselves were co-conquerors of the aboriginal nations. The aboriginal cultures and languages are in any case older than those of Quebec and France, and so in these respects they have a higher moral claim to national status than does Francophone Quebec. To the extent then that culturally distinct constituent political communities do not accord the same rights to their resident minority communities, they are replicating the reactionary character of the nation-state era, in which the state was the coercive, paternalistic instrument for imposing, enforcing, and subsidising a national culture. These are precisely the repressive policies of the past that have given rise to so many assertions of cultural nationalism today. The federation, therefore, may be obliged to intervene in the affairs of such constituent governments to protect minority communities as well as dissident interests that regard the federal government as more supportive of their concerns than their constituent government. Thus, there are federalism and democracy grounds for constraining the authoritative reach of constituent diplomacy. To date, the major federal democracies have managed such nationalistic assertions fairly well. There has been little or none of the bloodshed occasioned by many such assertions around the world, despite the impractical, reactionary, and illiberal propensities of constituent governments seeking to use regional state power to enforce a "national" culture. The peaceful management of such cultural conflict has been due partly to the liberal democratic character and non-centralisation of Western federations. In turn, cultural and political constituent diplomacy are likely to be constrained by several forces. Firstly, they may be constrained by the jurisdiction's voters if the policies fail to produce benefits, especially economic benefits. If voters believe that cultural and political activities are being pursued at the expense of necessary economic development, they may insist that the constituent government should turn its attention to promoting exports and attracting investment and tourists. However, the constituent government could counteract this force by blaming the region's economic problems on globalisation and federal policies, thus intensifying protectionist cultural nationalism. Constituent communities strongly motivated by cultural and political concerns may be especially vulnerable to such self-fulfilling prophecies. This is so because

94 J°hn Kincaid

educated voters and workers in the private tertiary (service) sector of the economy tend to understand the relationship between globalisation and government capacities to manage the domestic economy, and are thus less likely to punish government officials simply for economic performance. However, public sector workers in government bureaucracies, academic and cultural institutions, as well as workers in the primary (agricultural) and secondary (manufacturing) sectors are more likely to punish elected officials if they do not respond protectively to globalisation (Hellwig, 2001). Government workers and intellectuals in protected jobs, as well as farmers and assembly-line workers seeking protection, are often the most ardent cultural nationalists. Secondly, to the extent that a constituent government's cultural and political diplomacy produces negative externalities for other constituent governments of the federation, they too will oppose those policies. Thirdly, aside from the federal government itself, non-governmental interests that crosscut the boundaries of constituent governments are likely to seek to maintain the shared-rule dimension of federal democracy as a countervailing power to constituent governmental power, and to oppose certain constituent governments on specific foreign policy issues. Fourthly, cultural and political constituent diplomacy is likely to be constrained by the nation-state system itself, because nation states have a powerful self-interest in maintaining the international system as an international system. Even in the EU, there is little enthusiasm for a Europe of the Regions. 7.

CONCLUSION

Constituent diplomacy is now an institutionalised and mostly legitimised facet of federal democracy, and a phenomenon that is spreading to other political systems as well. This development is due not so much to globalisation per se as to democratisation, inter-governmentalisation, human rights, decentralisation, market liberalisation, United States policies, and technological innovation in travel and communications, which have made the current era of globalisation different from that which took place in the nineteenth century. Consequently, even if globalisation experiences some reversals, constituent diplomacy is likely to endure, at least in federal democracies. REFERENCES

Crosby v. National Foreign Trade Council, 2001. 120 S. Ct. 2288. Declaration, 1999. Declaration of the Gouvernement du Quebec Respecting Quebec's Participation in International Forums Dealing with Education, Language, Culture and Identity. Pamphlet, 24 March 1999.

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Duchacek, I.D., 1984. The International Dimension of Subnational SelfGovernment. Publius: The Journal of Federalism, 14 (Fall), 5-31. Duchacek, I.D., Latouche, D. and Stevenson G., 1988. Perforated Sovereignties and International Relations: Trans-Sovereign Contacts of Sub-national Governments. Westport, CT: Greenwood Press. Elazar, D.J., 1987. Exploring Federalism. Tuscaloosa: University of Alabama Press. Fry, E., Radebaugh, L.H. and Soldatos, P., eds, 1989. The New International Cities Era: The Global Activities of North American Municipal Governments. Provo, UT: David M. Kennedy Center for International Affairs, Brigham Young University. Government of Alberta, Ministry of International and Intergovernmental Relations, 2001. 28th Annual Report, 2000-2001. Edmonton: Author. Hellwig, T.T., 2001. Interdependence, Government Constraints, and Economic Voting. The Journal of'Politics, 63 (November), 1141-1162. Keck, M.E. and Sikkink, K., 1998. Activists Beyond Borders: Advocacy Networks in International Politics. Ithaca, NY: Cornell University Press. Keohane, R. and Nye, J., 1977. Power and Interdependence. Boston: Little Brown. Kincaid, J., 1984. The American Governors in International Affairs. Publius: The Journal of Federalism, 14 (Fall), 95-114. Kincaid, J., iggoa. Constituent Diplomacy in Federal Polities and the Nation State: Conflict and Co-operation. In: HJ. Michelmann and P. Soldatos, eds. Federalism and International Relations: The Role of Subnational Units. Oxford: Clarendon Press, 54-75Kincaid, J., iggob. State and Local Governments Go International. Intergovernmental Perspective, 16 (Spring), 6-9. Kincaid, J., 1994. Economic Union and Federal Diversity: Should a Coca-Cola Bottle Carry 51 Health Warnings and, If So, in What Language? In: A. Mullins and C. Saunders, eds. Economic Union in Federal Systems. Leichhardt, NSW: The Federation Press, 37-68. Kincaid, J., 1999. The International Competence of us States and Their Local Governments. Regional & Federal Studies, 9 (Spring), 111-130. Manning, B., 1977. The Congress, the Executive and Intermestic Affairs: Three Proposals. Foreign Affairs, 55 (January), 306-324. Mettger, H.P., 1955. Foreign Relations at the State Capital. State Government, 28 (October), 237-240. Montinola, G., Qian, Y. and Weingast, B.R., 1995. Federalism, Chinese Style: The Political Basis for Economic Success in China. World Politics, 48 (October), 50-81. Shuman, M.H., 2000. Going Local: Creating Self-Reliant Communities in a Global Age. New York: Routledge. Siekman, P., 2000. The Big Myth about us Manufacturing. Fortune, 142 (2, October), 244g[BB]-244[pp].

96 John Kincaid Stumberg, R. and Porterfield, M.C., 2001. Who Pre-empted the Massachusetts Burma Law? Federalism and Political Accountability Under Global Trade Rules. Publius: The Journal of Federalism, 31 (Summer), 17 3-2 04. Testa, W.A., Oppedahl, D.A. and Merkel, L.S., 2000. The Bi-national Great Lakes Economy. Chicago Fed Letter, 153 (May), 2. Weiler, C., 1994. Foreign-Trade Agreements: A New Federal Partner? Publius: The Journal of Federalism, 24 (Summer), 113-133.

S C I E N T I F I C B A C K G R O U N D : SUBTHEME PAPER YVES

LEJEUNE

Participation of Sub-national Units in the Foreign Policy of the Federation

1.

INTRODUCTION

Federalism consists of a delicate balance between the unity and the diversity of its components. This is especially true with regard to foreign policy. Although the principle of the unity of the federal state under international law does not go against the development of external relations specific to the sub-national units - whether or not they are governed by international law - it does, however, imply fulfilling the state's international obligations and safeguarding the coherence of its foreign policy (Lejeune, 1988, 13) There are, it is true, few sub-national units that have been granted powers at international level under the constitution of the federal state to which they belong. Rather than claiming for themselves the use of equivalent legal instruments, sub-national units have often preferred to be effectively associated with the way their state conducts its international relations. With this in mind, various techniques for participating in the federation's foreign policy attempt to reconcile the formal monopolisation of the management of this policy by central government with due consideration of the specific interests of the constituent units. This paper is concerned with the legal aspects of this participation. It confines itself to presenting various national rules or practices which have been set out under the following headings: conclusion of treaties; representation at international level; activities of the European Community (EC); sovereignty or exclusive jurisdiction over adjacent sea areas; jurisdictional settlement of international disputes involving the federation. But before undertaking this review, it may be useful to set the matter within a wider context, that is the obligation on the partners in a composite state to cooperate loyally.

98 Yves Lejeune i.i. Scope of the topic i.i.i. Cooperative federalism and foreign policy. What is known as "federal loyalty" entails an obligation to adopt federalist behaviour within the federation (Lejeune, 1994). Nowadays, federalism does actually require cooperation both among the sub-national units and between the sub-national units and central government. In this regard, Article 44 of the Swiss constitution of 18 April 1999 provides that: 1 The Confederation and the Cantons shall collaborate, and shall support each other in the fulfilment of their tasks. 2 They owe each other mutual consideration and support. They shall grant each other administrative and judicial assistance. The federation is not the only kind of composite state in which the issue of the collaboration between central government and the sub-national units is raised or, more particularly, the issue of the participation of these entities in decisions on foreign policy. For die purposes of this paper, we shall designate as "composite" any state in which there are groups of people authorised by the central government to establish their own legal system and modify it themselves in future. This kind of state grants these groups legal personality under public law and establishes them in legal communities on which it bestows certain legislative, administrative and even jurisdictional powers. In each composite state, no matter which category it belongs to, its constitutional law or political practice may establish mechanisms to ensure information, dialogue and cooperation between the state and (some of1) its constituent entities to facilitate the conduct of external relations. These are techniques the use of which bears witness to a type of political behaviour similar to that found in cooperative federalism. As an example, Article 55 of the Swiss constitution sets out the principle that the cantons should participate in decisions coming under the jurisdiction of the confederation in the foreign relations area: 1 The Cantons shall participate in the preparation of decisions of foreign policy which concern their powers or their essential interests. 2 The Confederation shall inform the Cantons timely and fully, and consult them. 3 The position of the Cantons shall have particular weight when their powers are concerned. In these cases, the Cantons shall participate in international negotiations as appropriate. The Federal Law of 22 December 1999 on the Participation of the Cantons in the Foreign Policy of the Confederation (LFPC) details and clarifies the methods by which the cantons can participate in the decisions of the confederation on the subject of foreign policy. As stated in the first article of this act:

gg Part B Theme I - Scientific Background 1 The Cantons shall participate in the preparation of decisions on foreign policy which concern their powers or their essential interests. 2 The essential interests of the Cantons are particularly concerned when the foreign policy of the Confederation affects important tasks to be performed by the Cantons. 3 The participation of the Cantons must not hinder the Confederation's ability to act in the sphere of foreign policy. In Belgium, the international autonomy of the regions and the communities must be combined with a concern for coordinating their initiatives and those of the federal government. To achieve this coherence, Article 3ibis of the Ordinary Act on Institutional Reforms of 8 August 1980 lays down the creation of an Interministerial Conference on Foreign Policy (CIPE) where the Belgian foreign minister and the regional and community ministers responsible for international relations meet on an equal footing. The federal government is obliged to provide the regional and community governments with regular information on its foreign policy. This conference is the preferred venue where the foreign policies of the Belgian state and its constituent parts can be coordinated by consensus and without primacy of the federal authority. Should the occasion arise, the Consultation Committee, composed "in order to respect linguistic parity", of six members of the federal government (including the Belgian Premier who chairs the committee) and six ministers representing the regional and community governments, is called on, solving by way of consensus the difficulties that the CIPE itself has not smoothed away. 1.1.2. Foreign policy and European integration. The relations between the composite states or their constituent parts and the EC should be discussed separately on account of their closeness and their specific characteristics. As a matter of fact, the interaction between the policies of the EC institutions and the policies of the member states has taken on a "domestic" dimension that has replaced the traditional modes of international cooperation. It is characterised by a growing interdependence between the two levels of power and a complete interweaving of their respective areas of competence. This "domestic" dimension presupposes a European "milieu" different from the community of states. The most appropriate way of characterising the current EC structure in legal terms would seem to be as a confederation initially given the "legal trappings" of international organisations, in which the states remain sovereign but have created an integrated legal space. The relations between the member states and the EC are therefore no longer really "foreign" affairs. This being the case, European integration raises the same problems for sub-national units and public groupings granted a similar status as the conduct of external relations by composite states: a guarantee must be given

ioo Yves Lejeune

that the interests of regions will be taken into account in the European decision-making process because, formally, only member states of the European Union (EU) are party to this process. 2. THE PARTICIPATION OF SUB-NATIONAL UNITS IN THE CONCLUSION OF THE F E D E R A T I O N ' S TREATIES The mechanisms listed range from the preliminary information procedure and the preparation of negotiating positions to the ratification of treaties, via active and direct participation in preliminary discussions, signature, and parliamentary approval of these treaties. 2.1. The preliminary information and consultation procedure, preparation for negotiations and possible participation in these negotiations

Current Swiss constitutional law is probably the most detailed regarding the mechanisms for involving sub-national units in the negotiation of treaties. It is enough to quote here Articles 3-5 of the Swiss LFPC : Article 3 Informing the Cantons 1 The participation of the Cantons in the foreign policy of the Confederation shall be based on the mutual exchange of information. 2 The Confederation shall inform the Cantons timely and fully of foreign policy plans which concern their powers or their essential interests. 3 The information on the foreign policy of the Confederation must be drawn up so as to assist the Cantons to give the foreign policy of the Confederation a better foundation in their domestic policy. Article 4 Consulting the Cantons 1 During the preparation of foreign policy decisions which concern their powers or their essential interests, the Confederation shall consult any Cantons that request this. It may also consult them on its own initiative. 2 As a general rule, it will consult the Cantons before commencing negotiations. This consultation will complete the consultation procedure with regard to international treaties. 3 The Federal Council shall take account of the views of the Cantons. These views shall be given particular weight in areas concerning the powers of the Cantons; where the Federal Council deviates from the views of the Cantons, it shall communicate to them the main reasons for so doing. Article 5 Participation of the Cantons in the preparation of negotiating positions and in the negotiations i If the powers of the Cantons are affected, the Confederation shall involve representatives of the Cantons in the preparation of the negotiating positions as well as, as a general rule, in the negotiations.

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Part B Theme I - Scientific Background

2 It may do so if the powers of the Cantons are not affected. 3 The Cantons shall propose their representatives who shall be appointed by the Confederation. 2.2.

Participation in the negotiation, signature and ratification of treaties

Leaving aside ancient cases where certain treaties were signed concurrently by the plenipotentiaries of the Swiss Federal Council and the canton concerned (Lejeune, 1984, 143), it is Belgium's current constitutional law that provides the most striking example of such participation. A cooperation agreement signed on 8 March 1994 between the federal, regional and community authorities laid down the procedure for concluding treaties dealing simultaneously with matters concerning federal, regional or community powers. These kinds of treaties are called "mixed" because the exclusive international jurisdiction of the regions and the communities prohibits the federal government from concluding them alone, which would constitute an encroachment on the area reserved for these sub-national units. The CIPE, referred to above, is first called upon to decide by consensus whether the treaty being drafted is mixed. The federal government has to inform the conference that it wishes to open bilateral or multilateral negotiations with a view to concluding such a treaty. A regional or community government may also take the opportunity to ask the federal government to undertake an initiative in this regard. The conference may decide to enter into international negotiations even if one of the sub-national units does not envisage taking part. It will decide, again by consensus, on the composition of the Belgian delegation, which will consist of representatives of the regional or community governments on an equal footing with the federal representatives, but under the "coordinating leadership" of the federal foreign ministry or the relevant Belgian ambassador. Full powers are granted by the foreign minister, subject to the formal agreement of the regional or community ministers responsible for external relations. Following the signature of the treaty by the representatives of the federal government and the sub-national units,2 the consent of all the competent parliamentary assemblies is required; the task of ratifying the treaty is ultimately reserved for the King. In this way, the participation of Belgium in international legal relationships will no longer be allowed to encroach upon the exclusive jurisdiction of the sub-national entities without their explicit consent. The Belgian system of mixed treaties is a good and highly effective way of organising the participation of the sub-national units in the conclusion of federal treaties. In law, as the King alone is empowered to ratify, with the assent of the parliamentary assemblies of the regions and communities involved, any treaty that partially concerns non-federal matters, the kingdom must be

1O2

Yves Lejeune

considered Belgium's sole contracting party. The normal practice of the EU in international treaties confirms this: Belgium declared officially about the treaties it concludes as a member state of the EU that the kingdom as such is bound in all cases, in respect of its whole territory, by the provisions of the treaties it has concluded, and that it will therefore bear full responsibility for compliance with the obligations entered into in these treaties.3 2.3.

Participation in the parliamentary approval and implementation of treaties

In general, federations have the treaties that impinge upon their sub-national units' area of competence approved by the second chamber, which represents them. However, mixed treaties in Belgium require not only the assent of the federal chambers, but also the assent of the parliaments of the communities or regions involved. As far as the implementation is concerned, international law is not concerned with the way in which countries organise this implementation, but it does not allow them to invoke provisions of their internal legal systems to shirk their international obligations. It is therefore for the constitutional law of each federation to determine which of its organs are competent to implement treaties, but a federal state may not plead provisions, practices or circumstances existing in its internal legal system in order to justify a failure to comply with its obligations under international law. 3.

PARTICIPATION OF SUB-NATIONAL

UNITS

IN THE INTERNATIONAL REPRESENTATION OF THE F E D E R A T I O N

The international relations that concern sub-national units may also include the right to maintain diplomatic or consular relations and the right to take part in international conferences or join international organisations. 3.7.

Participation in diplomatic representation

It is constitutional law which must decide whether the state will or will not allow its constituent entities to maintain diplomatic or consular relations with members of the international community. In times past, such an authorisation enabled the soviet republics of Ukraine and Byelorussia to maintain permanent missions to the United Nations (UN) (1945-1990), and before that the member states of the German Empire to establish legations alongside the Empire's legation or to maintain special legations to countries where there was no German embassy (1871-1918). In contemporary constitutional practice, sub-national units no longer have a genuine autonomous right of representation. It is true that many re-

103 Part B Theme I - Scientific Background gions maintain delegations, agencies or liaison offices either to international organisations like the European Communities (Heichlinger, 1999), or in a few major cities in Europe, the United States or Asia. However, these relations are not reciprocal, as the exchange of "representatives" between a region and an independent country are unknown in practice; they therefore take on a specific form which does not allow them to be classed as diplomatic or consular relations. Consequently, some composite states are involving these regions more and more closely in their own diplomatic representation to foreign states or to international organisations. This is the policy pursued by Belgium. Under a cooperation agreement which they concluded on 18 May 1995 with the federal government, Belgium's regions and communities appoint representatives, called "community or regional attaches", in Belgian diplomatic and consular posts to foreign states or to international organisations. The federal foreign minister arranges for these representatives to be included on the list of Belgian diplomatic.and consular agents abroad or Belgium's representatives to international bodies. These representatives are subject to the same rights and duties as their federal colleagues and perform their duties under the diplomatic authority of the head of post, whom they must inform of their activities, but they receive their instructions from their own authorities. The formula had been used regularly since 1986, at least as far as the French-speaking community and Flanders were concerned. Similarly, Belgium's communities and regions have appointed "attaches" or "delegates" within Belgium's permanent representation to the EU. Both Austria's Lander and Spain's autonomous communities also enjoy an institutionalised presence in their respective permanent representations to the EU. Unlike the individual representation of each Belgian community or region, they are represented collectively. 3.2. Participation in international conferences and organisations 3.2.1. Pursuing activities that come under both federal and sub-national jurisdiction. The international institutions very often engage in their activities in an area that goes beyond matters considered exclusively federal in terms of the domestic legal system. It is also appropriate to involve subnational units in representing their country within the organs of these inter-governmental organisations. In Austria, Belgium, Canada, Germany, Switzerland and, to a lesser extent, Australia and the United States, the sub-national units are involved not only in preliminary policy making, but also in representing the federal government within technical conferences and organisations (United Nations Educational, Scientific and Cultural Organization (UNESCO), Organisation for Economic Cooperation and Development (OECD), International Labour

104 Yves Lejeune

Organization (ILO), World Health Organization (WHO), Food and Agriculture Organization (FAO) etc.) whose activities cover some of the areas that come under their jurisdiction (Couvreur, 1983; Lejeune, 1984, 60). The same is true within a large number of border commissions. In Belgium, under a framework cooperation agreement of 30 June 1994, the federal foreign ministry is responsible for organising a general and systematic dialogue with the sub-national units. Where the agenda requires it, the Belgian delegations will include representatives from each community involved, both at ministerial level and at technical level. They are headed by the permanent federal representative or any person designated by virtue of the principally competent community or communities. Only the positions resulting from the dialogue may be presented in the context of the international organisation concerned. Contacts are required if Belgium's attitude has to be modified urgently while in session. If no agreement can be reached on a new Belgian point of view the president of the delegation takes a position ad referendum. Persistent disagreement between the federal and sub-national authorities may justify the abstention of the Belgian representative during a vote. 3.2.2. Pursuing activities that come under sub-national jurisdiction only. Still on the subject of Belgium, the regions and the communities occupy the seat reserved for the kingdom in international conferences and organisations whose range of activities covers solely regional or community areas of competence. In a forum where issues are debated which generally come under the exclusive jurisdiction of only one of Belgium's communities, that community will represent Belgium. According to another formula, the arrangement is - more rarely - that the government is represented simultaneously by a federal delegation and a delegation from a community. This path, opened up by Canada and Quebec in the Inter-governmental Agency of the Francophonie, was borrowed by Belgium and the French-speaking community, starting in 1986, during the summits held periodically by the Heads of State and Government of Countries Using French as a Common Language. When issues that are the exclusive domain of all three communities are debated in an international forum, Belgium is exclusively represented by one of the three communities, which have organised a rota system that allows their respective governments to represent Belgium in turn (Lagasse, 1997; Sran, 2001). 4.

P A R T I C I P A T I O N OF S U B - N A T I O N A L U N I T S IN THE A C T I V I T I E S OF THE EU

In the early 19905, all the member states of the EU that are federal (Germany, Austria, Belgium) or have a strong regional structure (Spain, Italy, United

105 Part B Theme I - Scientific Background Kingdom) adopted highly formalised procedures in order to enable their sub-national units to participate in EU policy making (Engel, 2001). In this respect, the approach in Austria and Germany corresponds to a centralised cooperative federalism. The Belgian system shows another philosophy: coop eration between federal and regional or community authorities in the municipal sphere must work out Belgium's point of view by way of consensus. 4.1. Participation in the Community decision-making process 4.1.1. Preparing the federation's position. In Belgium, the cooperation agreement "concerning the representation of the Kingdom of Belgium on the Council of Ministers of the European Union", concluded on 8 March 1994, governs the overall participation of the regions and communities in coordinating Belgium's policy on Europe. At the heart of die mechanism is the interaction between the need to achieve a consensus within the state and the autonomous action of the federal government, the regions and the communities at European level. Representatives of the federal government, the regions and the communities participate on equal terms in the preliminary administrative coordinating meetings which are organised on a regular basis by the federal foreign ministry's Department of European Affairs (Pn) "to determine the Belgian position, both from the general point of view and for each item on the agenda of the Council of the European Union", whatever the composition of those meeting. If it is found to be impossible to reach agreement, the issue in dispute is submitted to the CIPE, which settles it in accordance with the consensus procedure. Otherwise, the matter is brought before the Consultation Committee. However, internal coordination generally works well and the necessary consensus is most often achieved. The operation of the system is strengthened by the prior establishment of positions in numerous sectoral ministerial conferences, as well as by trilateral coordination meetings between the sub-national units.4 These positions are then "formalised" at a coordination meeting at P11. Within the Council, the minister representing Belgium can only take up a position on matters that have been discussed at a preliminary meeting. In the absence of any consensus, the minister must abstain. The same rule already applies upstream of the Council meetings, for Belgium's permanent representative or his deputy at the Permanent Representatives Committee (COREPER). In Germany, the procedure followed today dates back to the legislative assent to the Single European Act of 1986 but did not take on its present form until the new Article 23 of the Basic Law ("European Article") of December 1992, and the Act of 12 March 1993 on Collaboration between the Federation and the Lander in the Business of the EU (EUZBLG). Before that, Germany had a "participation procedure for the Lander" based on the principle of unanimity, which proved to be inappropriate.

io6 Yves Lejeune

The current German system is characterised by the use of the Bundesrat (Senate) and the principle of majority decisions to adopt a position on the proposed rules of EC law, including any projects that come under the exclusive internal jurisdiction of the Lander (Klatt, 1999; Morawitz and Kaiser, 1994; Miiller-Terpitz, 1999). According to Article 23 of the Basic Law: (2) The ... Lander, by their representation in the Bundesrat, participate in matters of the European Union. The Government has to thoroughly inform ... the Bundesrat at the earliest possible time ... (5) Insofar as, in the area of exclusive legislative competence of the Federation, interests of the Lander are affected or insofar as, for any other reason, the Federation has legislative competence, the Government takes into consideration the statement of the Bundesrat...

At the heart of this complex consultation process we find both a search for a point of view shared by the federation and the Lander and, quite often, the problem of the correct classification for a Community project in accordance with the categories specified in Article 23. In fact, this provision draws a distinction among the types of "consideration" given to the statement of the Bundesrat, between types which are "simple" and types deemed "as decisive, where the legislative powers of the Lander, the structure of their administrative authorities, or their non-contentious administrative procedures are centrally affected" (§ 5). If the consideration given is deemed to be "decisive" this means that the federal government is supposed to base its negotiating position on the opinion of the Bundesrat. The numerous divergences as to the classification of cases on the basis of this distinction have never given rise to serious political conflicts or a jurisdictional verification, and the consultation procedure has become practically routine for the Bundesrat. However, the essential positions taken are the result of consensus obtained at various sectoral ministerial conferences and, on the more important matters, as part of the Conference of the Minister-Presidents of the Lander, before being formally decided on in the Bundesrat (Engel, 2001). The participation of the Lander in the meetings that determine the instructions to be given to the German representative at COREPER, or the German negotiating position for certain formations of the Council is also provided by representatives of the Lander appointed by the Bundesrat. In Austria, the procedure for ensuring participation of the Lander was introduced by means of a revision of the constitution in 1992, and included in the new article of the Federal Constitutional Act on Europe (Article 23d) in 1994. It was supplemented by an agreement between the federation and the Lander, concluded on 12 March 1992, under the terms of which the "administrative" treatment of Community files is entrusted to

107 PartB Theme I - Scientific Background a liaison office for the Lander (Verbindungsstelle der Lander). Also worthy of note is a treaty between the Lander, which came into force on 4 April 1993 and gave rise to the Integrationskonferenz der Lander, in which each Land is represented by its head of government (with voting rights) and by the president of its parliament (with no voting rights), but which has been practically inactive to date (Unterlechner, 1997; Fischer, 2000, 117-141). According to Article 23d, § i, of the Federal Constitutional Act: The Federation must inform the Lander without delay regarding all projects within the framework of the European Union which affect the Lander's autonomous sphere of competence or could otherwise be of interest to them and it must allow them opportunity to present their views within a reasonable interval to be fixed by the Federation ... Under Article 23d, § 2, which was inspired by German practice, the federation is bound by a "uniform opinion of the Lander on a project established within the framework of the European Union and affecting matters in which legislation is in the hands of the Lander". It can only depart from this opinion "for imperative reasons of foreign and European policy". The content of these "uniform opinions" is drawn up at the Heads of Government Conference or during sectoral conferences held by the Lander. To date, the federal government has always formally adopted these opinions, with one exception. In the Austrian system, the liaison office for the Lander is the key institution. Formally, it has no power of coordination on the ground: it has to confine itself to providing the flow of information. However, as the office is responsible for conveying the "uniform opinion" to the Federal Chancellery, it acts as a filter. In addition, it participates, at the request of the Lander, in meetings called to set out the instructions to be given to the Austrian representative at COREPER; it makes available to the Lander some of their joint representatives (Gemeinsame Landervertreter) on the committees of the EU and coordinates both their appointment and their activities. 4.1.2. Participating in federal representation at the Council of Ministers. In Belgium, obtaining prior internal consensus on the Belgian position is the sine qua non for a division of labour between the federal government, the regions and the communities at European level. Article 203 of the Treaty Establishing the European Community, the current terms of which were set out in the Maastricht Treaty, allows a minister delegated by all the sub-national units in a country to represent this country in the Council of Ministers of the European Union. It is, in effect, a kind of "lex Belgica" which has enabled Belgium to transpose its internal legal system to European level. In fact, Article 81, § 6, of the Special Act on Institutional Reforms provides that "the (regional and community) governments shall be

io8 Yves Lejeune

authorised to bind the (federal) State within the Council of the European Communities, where one of their members represents Belgium, as laid down in a cooperation agreement". The cooperation agreement of 8 March 1994, as referred to above, governs the systematic sharing of Belgian ministerial representation on the Council between the federal and sub-national authorities, taking into account the different configurations of the Council. In Annex I of the agreement, the configurations of the Council are arranged into several categories from the point of view of the internal power-sharing arrangement. In the Category I Councils (exclusive jurisdiction of the federal authorities, e.g. the "General Affairs" Council and the Council of Economic and Finance Ministers (ECOFIN)), Belgium is represented solely by the federal government; in Category II (mainly within federal jurisdiction, such as energy and social affairs), it is represented by a federal minister accompanied by a "ministerassessor" representing all the sub-national units; in Category III (matters mainly covered by the communities or regions), by a minister from one of the sub-national units assisted by a federal minister-assessor; in Category IV (exclusively regional or community matters, such as culture and youth), solely by a minister from one of the sub-national units. The modification of the municipal power sharing in July 2001 led to the conclusion of a cooperation agreement in May 2002 creating two new categories: fishery, reserved for the Flemish region (Category V), and agriculture, where Belgium is henceforth represented by a federal minister accompanied by two "ministersassessors": one Flemish, the other Walloon (Category VI). It should be noted that the Council, which meets at head of state and government level, normally comes under Category I, which is also the case for the European Councils. The "sitting" minister represents Belgium for a complete session of the Council, which rules out any change in the conduct of the negotiation (Bribosia, 1999, 85-144). The regions and the communities have agreed to represent Belgium in the Council on a six-monthly rota system, on the basis of strict equality among all the sub-national units, including the small German-speaking community. This system applies both when the regional or community minister is the "sitting" minister (Categories III and IV) and when he is attending as an assessor (Category II). The system reconciles the principle of equality among all the sub-national units with the specific interests of each one, with Wallonia more often sitting on the "Industry" Council, Flanders on the "Culture" Council and the German-speaking community on the "Tourism" Council, which satisfies each community's interests. It should be pointed out that neither the sharing of representation among the federal and sub-national authorities according to subject, nor the rota system among regions or communities apply to working groups, whose membership is arranged informally. In the subjects entirely under its jurisdiction, each community or region may in fact send its expert to sit

log Part B Theme I - Scientific Background alongside those from the other sub-national units. In the event of disagreement among them, these experts will express a reservation without giving reasons, so as not to disclose problems of a purely internal nature to the other delegations. In Germany, Article 23, § 6, of the Basic Law provides that: the Federation shall delegate the exercise of rights of the Federal Republic of Germany as a member of the European Union to a representative of the Lander nominated by the Bundesrat if exclusive legislative competencies of the Lander are centrally affected. Section 6, paragraph 2, of the Act on Cooperation between the Federation and Lander in European Union Matters (EUZBLG) states that only one representative of ministerial rank can be nominated by the Bundesrat. However, the rule only concerns the transfer of the conduct of negotiations during sessions of the Council, not the presidency of the German delegation. In practice, the federal government has mostly refused to transfer the conduct of negotiations to the Lander, even in the case of projects that incontestably fell within their exclusive jurisdiction. Section 6 of EUZBLG also applies very widely to working groups. The federation and the Lander have shared lists of EC committees and projects to which representatives of the Lander are nominated. The distinguishing feature of German practice is the fact that these representatives are nominated not by the sub-national units themselves, but by the Bundesrat (Engel, 2001). In Austria, Article 23d, § 3, of the Federal Constitutional Act allows "a representative nominated by the Lander to take part in the decision-making process in the Council". It should be noted that this is not a real transfer of the "conduct of negotiations", like the possibility offered in Germany by the Basic Law. To date, this possibility has not yet been exploited, partly because the federal government has (almost) always followed the "uniform opinion" of the Lander. By contrast, regular recourse is made to Article 8 of the agreement of March 1992, which provides that representatives of the Lander can be included in the Austrian delegation during meetings of working groups. 4.2. Partnership in European regional policy 4.2.1. Participating in the work of the Committee of the Regions. The Committee of the Regions, currently governed by Article 263 of the Treaty of Rome as amended by the Treaty of Nice, is made up of representatives of regional and local bodies who either hold a regional or local authority electoral mandate, or are politically accountable to an elected assembly. Its members are appointed by the Council for four years at the suggestion of the member states. The committee is consultative in nature and is currently made up of 2 2 2 members. Belgium and Austria each have 12 seats, while Germany has 24.

no

Yves Lejeune

Belgium has opted for representation by its communities and regions alone, unlike Germany, whose delegation is made up of 21 representatives of the Lander and 3 representatives of the municipalities (EUZBLG, § 14), and Austria, whose representation calls for one candidate per Land and three candidates proposed jointly by the Austrian Association of Towns and Cities and the Austrian Association of Municipalities (Federal Constitutional Act, Article 2%c, § 4). 4.2.2. Participating in structural interventions of the EU. EU policy to reduce the disparities between die levels of development of the various regions of the EC is now set out in Articles 158 to 162 of the Treaty of Rome. Under these provisions, the four structural funds (European Regional Development Fund (ERDF), European Agriculture Guidance and Guarantee Fund (EAGGF) guidance section, European Science Foundation (ESF), Financial Instrument for Fisheries Guidance (FIFG)), the European Investment Bank and the other existing financial instruments are placed at the service of regional policy, each according to the specific provisions that govern it. Operating on the principle of partnership, EC action will henceforth be based on: close consultation between the Commission and the Member State, together with the authorities and bodies designated by the Member State within the framework of its national rules and current practices, namely: the regional and local authorities and other competent public authorities; the economic and social partners; any other relevant competent bodies within this framework. (Article 8 of Regulation i26o/gg/EC of 21 June 1999 laying down general provisions on the structural funds) The partnership concerns all the stages of the action, for example determining zones eligible to benefit from Community aid, working out development or re-conversion plans to identify the needs of these zones, establishing Community Support Frameworks, setting up operational programs, monitoring and evaluation of operations by committees, reports and inspections. In Germany, Austria and Belgium, most of the priority objectives set for the actions co-financed by the structural funds fall within the powers assigned in whole or in part to the sub-national units. It is they who not only prepare, design and implement the programs, but also follow them up in partnership with the European Commission. 5.

PARTICIPATION OF SUB-NATIONAL UNITS IN EXERCISING

THE "INHERENT" RIGHTS

OF THE FEDERATION OVER ADJACENT SEA AREAS

Coastal states exercise full and complete sovereignty over the adjoining sea area, known as "territorial sea", subject to the right of innocent passage of

in

Part B Theme I - Scientific Background

foreign ships or aircraft and to certain restrictions imposed on their jurisdiction in this regard. On the other hand, they exercise some sovereign powers and exclusive or preferential rights beyond their territorial sea (exclusive economic zone, fishery conservation zone or continental shelf). The present era has been witness to claims of this kind, emanating not only from independent states, but also from some sub-national units (Lejeune, 1984, 62-69). This may be surprising but, all things considered, the question of extending the jurisdiction of these authorities to adjacent sea areas is naturally within the scope of the powers of coastal states over the parts of the sea subject to their sovereignty or their exclusive jurisdiction. As international law does not regulate the distribution of state powers in the countries concerned, it would not be able by itself to grant to the central government either the monopoly of state sovereignty over coastal waters or the monopoly of sovereign rights over its exclusive economic zone or its continental shelf. No international law objection could therefore be made against granting specific powers on the territorial sea to the sub-national units under federal law, nor against any incorporation of the territorial sea into the territory of the sub-national units on whose shores it laps. Both solutions can be found in comparative law. It is the task of federal constitutional law to determine the maritime borders of the sub-national units and the powers they would be authorised to exercise on the territorial sea. Neither do the powers exercised by some sub-national units beyond the external boundary of the territorial sea, for example by setting condition for exploiting natural resources, constitute autonomous manifestations with regard to the federations of which they form part. The sub-national units that act in this way are of necessity passing themselves off to the international community as organs of their respective federations. In reality, it is the federations that are exercising, with the aid of the subnational units, their exclusive jurisdiction or their sovereign rights over the spaces in question (Lejeune, 1984, 401). And it is their constitution tha grants these powers. 6.

PARTICIPATION OF SUB-NATIONAL IN THE JURISDICTIONAL

UNITS

SETTLEMENT

OF INTERNATIONAL DISPUTES INVOLVING THE FEDERATION

As they are not sovereign states, sub-national units do not have the right to lodge a complaint with an international court concerning the conduct of a foreign state or an international organisation which in their opinion constituted an internationally wrongful act causing them loss or damage, whether directly or indirectly. In particular, EU law refuses the sub-national units of Germany, Austria and Belgium direct access to the Court of Justice of the European Communities to cancel decisions made by the Parliament,

112 Yves Lejeune

the Council and the Commission to which they object.5 If it wishes to remedy this lack of "active legitimation", the country's internal legal system has to endeavour to arrange indirect access to the European Court for its constituent parts. In Germany, the EUZBLG of 12 March 1993 provides that, on request of the Bundesrat, the federal government should make use of the possible remedies that law provided for in the Treaty on European Union "in so far as the legislative powers of the Lander are affected by an action or deficiency of the Union's organs and in so far as the federation does not have the right to legislate" (§ 7). In Belgium, the Special Act on Institutional Reforms allows any region or community to obtain federal authority for its claim, whereby the state endorses it and takes it to "international or supra-national" justice (Art. Si, § 7), i.e. in practice essentially to the Court of Justice. When the dispute concerns the exercise of exclusive community or regional powers, the sub-national unit concerned has the right to compel the federation to use its right to go to court at their request and on their behalf: even if there has been no consensus within the CIPE, the federal government must "summons the juridical person under international law wit out delay" (Art. 81, § 7). When the dispute concerns matters that come only in part under the domestic jurisdiction of the regions or the communities, the federation and the sub-national unit concerned must take the decision jointly to summons the person under international law in the name of the Belgian government. The methods by which actions are brought were determined by a cooperation agreement signed on 1 1 Jul The Special Act on Institutional Reforms does not address the hypothesis of actions brought by a European institution or another member state against Belgium, confining itself to providing that the community or region concerned must have been "involved" by the Belgian government in all of the procedure (Art. 16, § 3, 2). This involvement could only mean the right granted to the community whose conduct is in dispute to decide alone on the line of argument to be adopted before the Court. 7. C O N C L U S I O N The federal systems for allowing the sub-national units to participate in the federation's foreign and/ or European policy are quite different from one another in nature. In certain cases the participation of sub-national units can be seen as compensation for the powers they have lost. In other cases, allowing the sub-national units to participate in the drafting of the international or European rules to be implemented may be seen as the solution to the problem of the failure of these units to implement international or European law.

113 Part B Theme I - Scientific Background

The imagination of politicians and lawyers is inexhaustible when it conies to devising methods likely to give the sub-national units mediated access to the international or European scene! NOTES 1 Here we are thinking of regions with special status. 2 Any region or community party to a mixed treaty can also mandate a federal minister or a Belgian ambassador to sign the treaty on its behalf. In this way, the Belgian foreign minister's signature on the Treaty of Amsterdam of 2 October 1997 and the Treaty of Nice of 26 February 2001 also binds the Belgian regions and communities. 3 See the statement by Belgium at the Council meeting on 9 November 1998 in the Official Journal of the European Communities C 351, 18.11.1998. 4 The coordination meetings between regions or communities are held on request, informally and not regularly. They are conducted by the region or community in charge of the case on the basis of the rota system established under the cooperation agreement of 8 March 1994. There is, for example, an Interregional Cell for the Environment (CELINE), which plays a major part in this regard. 5 According to the case law of the Court of Justice, however, the regions can, like "any legal entity or individual person", appeal against any decisions directed towards them and against any decisions that concern them directly and individually. REFERENCES

Bribosia, H., 1999. La Participation des autorites executives aux travaux du Conseil de I'Union et des Conferences intergouvernementales. In: Y. Lejeune, ed. La participation de la Belgique a I'elaboration et a la mise en oeuvre du droit europeen, Aspects arganisationnels et proceduraux. Brussels: Bruylant, 85—144. Couvreur, P., 1983. Organisations et conferences internationales. Belgian Review of International Law, 189-2 25. Engel, C., 2001. Vers un 'Federalisme a plusieurs niveaux'? Une analyse des procedures et pratiques de la participation des Regions au processus decisionnel communautaire. EipaScope 2001/1. This can be viewed at http://www.eipa.nl Fischer, K.H., 2000. Die Positionierung der osterreichischen Bundeslander im institutionellen Gefuge der Europaischen Union. In: R. Hrbek, ed. Europapolitik und Bundesstaatsprinzip. Die "Europafdhigkeit" Deutschlands und seiner Lander im Vergleich mil anderen Foderalstaaten. Baden-Baden: Nomos, 117-141. Heichlinger, A., 1999. Regional Representation in Brussels: The Right Idea for Influencing EU Policy Making? Maastricht: European Institute of Public Administration. Klatt, H., 1999. Die innerstaatliche Beteiligung der Bundeslander an der deutschen Europapolitik. In: P. Nitschke, ed. Die Europdische Union derRegionen, subpolity undPolitiken der dritten Ebene. Opladen: Leske & Budrich, 133-166.

i i 4 Yves Lejeune Lagasse, C-E., 1997. Le Systeme des relations Internationales dans la Belgique federale. Courrier hebdomadaire du CRISP (Brussels), No. 1549-1550. Lejeune, Y, 1984. Le Statut international des collectives federees a la lumiere de I'experience Suisse. Paris: Librairie de droit et de jurisprudence. Lejeune, Y, 1988. Les grands Themes. In: F. Delperee, and Y. Lejeune, eds. La collaboration de I'Etat, des Communautes et des Regions dans k domaine de lapolitique exterieure. Louvain-la-Neuve: Academia; Brussels: Bruylant, 9-31. Lejeune, Y, 1994. Le Principe de la loyaute federale: une regie de comportement au contenu mal defini. Administration Publique (trimestriel), 2-3, 233-238. Morawitz, R. and Kaiser, W., 1994. Die Zusammenarbeit von Bund und Ldndern bet Vorhaben der Europaischen Union. Bonn: Europa Union. Muller-Terpitz, R., 1999. Die Beteiligung des Bundesrates am Wittensbildungsprozess der Europaischen Union: das Bundesratsverfahren nach Art. 23 Abs. 2,4 bis 7 GG unter besonderer Berucksichtigung seiner verfahrensrechtlichen Ausgestaltung. Stuttgart, Munich, Hanover, Berlin, Weimar, Dresden: Boorberg. Sran, V.V.K., 2001. La Representation des entiles federees au sein des organisations internationales. Chroniques de droit public. Gand: Mys & Breesch, 157-170. Unterlechner, J., 1997. Die Mitwirkung der Lander am EU- Willensbildungs-Prozess: Normen, Praxis, Wertung. Vienna: Braumuller.

SCIENTIFIC BACKGROUND: SUBTHEME PAPER RAHMATULLAH KHAN

Implementation of International and Supra-national Law by Sub-national Units

1.

INTRODUCTION

In recent years, some standard assumptions of federal systems have come to be questioned. One, asserting the pre-eminence of the national government and dismissing the relevance of the sub-national units in the conduct of foreign relations, has been particularly contested. This has compelled a reassessment of the role of sub-national units in the implementation of international and supra-national law. The subject has attracted serious attention in the United States and Europe, facilitating novel solutions from practitioners and the judiciary. Given the intensity of the scrutiny already received and the variety and complexity of the solutions evolved to meet the challenges in numerous political contexts, what follows is only a synoptic presentation of the salient features of the problem posed. Discussion on the implementation of international and supra-national law by sub-national units must obviously commence with the position in that regard of the national governments that compose the sub-national units. Courts in different federal jurisdictions have consistently used international law principles as one of the sources of their decisions. However, the sense of obligation to invoke and apply that law complementarily, or in substitution of national law, has varied depending on the legal system of the country. i.i. The primacy of international law In the United States, courts have routinely applied customary international law. Consolidating earlier decisions, the United States Supreme Court famously held in the Paquete Habana case that:

116 Rahmatullah Khan [international law is part of our law, and must be ascertained and administered by the courts of justice of appropriate jurisdiction as often as questions of right depending upon it are duly presented for their determination.

For ascertaining and administering that law, the Court offered this guidance: where there is no treaty and no controlling executive or legislative act or judicial decision, resort must be had to the customs and usages of civilised nations, and, as evidence of these, to the works of jurists and commentators who by years of labor, research, and experience have made themselves peculiarly well acquainted with the subjects of which they treat.1

The Paquete Habana ruling, more than a century old, is considered good law even today.2 The respect shown by the United States judiciary for international law is conditioned, inter alia, by the position accorded to treaties in its constitution. The United States constitution provides that the president "shall have Power, by and with the Advice and consent of the Senate, to make Treaties, provided two-thirds of the Senators present concur" (Article II). The presidents of the United States have exercised this power to commit the nation to hundreds of international obligations. Thousands more additional obligations have been assumed by United States presidents, without going through the Article II process, by means of the so-called "executive agreements".3 By virtue of Article VI, "all Treaties made, or which shall be made, under the Authority of the United States, shall be the supreme Law of the Land". The Supreme Court has held that this supremacy applies only to treaties that are self-executing. The supremacy clause (tempered by the requirement of Senate approval by two-thirds majority) has had interesting consequences for the federal system of the United States. Before going into that, a word on the position of international law in general and treaties in particular in other jurisdictions will be appropriate at this stage. Almost without exception, federal constitutions assign the conduct of foreign policy to the central government. A well-defined residual authority in this field is sometimes vested in the sub-units, as in the case of the Swiss cantons and the German Lander. In the case of Canada, the power to conclude treaties lies with the federal government. However, the implementing power has to conform to the general division of powers in the constitution. When implementation entails encroachment upon the powers assigned to the provinces, the central government has found it necessary to solicit the provincial governments' cooperation. The authority of the central government in Australia (Commonwealth) is comparatively unfettered. Nevertheless it has in practice found it prudent to expand the scope of the central initiatives by the process of treaty consultation. Al-

iiy

Part B Theme I - Scientific Background

though the federal government in Germany similarly enjoys predominant power in the field of foreign affairs, it has developed the practice of consulting the Lander in the adoption of treaties in which the interest and responsibilities of Lander are involved (Henkin, 1996, 49-51). Article 32 of the Federal Republic of 23 May 1949 regulates the powers of the federal government and the Lander in the field of foreign relations. Under this scheme: • The federal government conducts relations with foreign states; • Before the conclusion of the treaty affecting the special circumstances of a Land that Land shall be consulted in sufficient time; • In the areas in which the Lander have the power to legislate, they may, with the consent of the federal government, conclude treaties with foreign states. The constitutional limits of the federal government and the Lander were tested in an early case before the Federal Constitutional Court in what is known as the Reichskonkordat case. The case concerned the constitutionality of a statute passed by the Land of Niedersachsen in 1954, providing for common non-denominational education for all school children. The federal government found the Land legislation inconsistent with its treaty obligation under the concordat concluded between Germany and the Vatican in 1933, prescribing separate Catholic schools for children of Catholic parents within Germany. The Constitutional Court held that under the Bonn constitution of 1949, the subject matter of education fell within the jurisdiction of the Lander. The Court noted that the treaty commitments of the federal government did not override the powers vested exclusively with the Lander on specific subjects. However, conscious of the fact that its ruling might pose difficult problems for the federal government in the conduct of foreign policy, the Court stated that the remedy lay in the inner harmony of the constitution which upheld the principle of federal comity (Bundestreue) between the federal government and the La=nder.4 The above three rather overlapping jurisdictions have generated significant controversy. But a practice seems to have developed in which both sides (the federal and state governments) seem to exercise their powers with moderation. The federal authorities exercise their apparently exclusive power in consultation with the Lander where the latter's competence comes into play. And the Lander do not establish diplomatic missions of their own, although their right to communicate with their counterparts in other federations was confirmed in one of the first decisions of the Federal Constitutional Court (Leonardy, 1993, 236). The Lander's right to communicate with their counterparts in other countries is respected by involving them in negotiations conducted with other states and the European

118 Rahmatullah Khan

Union (EU) by the federal governments, if the issues at stake concern legislative competence of the Lander (Leonardy, 1993, 247). 1.2. The supremacy clause in the United States

The supremacy clause in the United States has led to expansive claims. For Lori Damrosch, for instance: our constitutional law is clear: the treaty-makers may make supreme law binding on the states as to any subject, and notions of states' rights should not be asserted as impediments to the full implementation of treaty obligations. (Damrosch, 1991, 5*5.53°)

The interpretation is primarily based on the celebrated decision of the Supreme Court in Missouri v. Holland. In this case, the Court upheld a migratory bird protection statute as a valid implementation of a treaty with Great Britain, dismissing the argument that the statute unconstitutionally interfered with Missouri's rights in violation of the Tenth Amendment. In a statement that would gladden the hearts of today's environmentalists, Justice Holmes observed in 1920 that the treaty in question concerned "a national interest of very nearly the first magnitude" that could be protected "only by national action in concert with that of another power".5 States must adhere to the treaties not because international law so requires, but because by adopting a treaty, the federal government is engaging in the exercise of its foreign relations power. As Lea Brilmayer notes, international law hardly puts in an appearance in the state courts (Brilmayer, 1995, 295 31313,314). The preoccupation with local issues translates into sovereignty-related claims in the supra-national context. In the classical federal structure, it could generate tricky posers over the power of federal authorities to force state governments to implement the international commitments assumed by federal authorities. In a supra-national context it could lead to judicial smear and political bickering, for example when a member state fails to implement a non-binding "directive" of the supra-national agency. The issue has created considerable controversy even in an advanced supranational structure like the EU. The vexing problem of enforcing/implementing federal directives/ rules has played out differently in the European Community from the experience in the United States. Following the seminal decision in Francovich v. Italy, the European Court of Justice has held member states liable for breaching Community law in a variety of circumstances - most notably for their failure to implement directives when that failure allows one private party to commit wrongs against another. The supremacy of the Community

119 Part B Theme I - Scientific Background

law, conspicuously absent in its constituent instruments, is asserted by reference to the principles of individual rights, direct applicability and direct effect.6 The doctrinal confluence has given rise to such normative homogeneity in national remedies that Lord Denning warned in 1974 that Community law was creeping "into the estuaries and up the rivers" of England. Extending the metaphor, Professors Curtin and Motelmans observed that it has since "partially burst its banks and is now rushing in great gulps into surrounding country-side, with all the inherent risks not only for the unprepared country-folk, unfamiliar with its vigour and its thrust, but also for their long familiar national landscape and monuments".7 Resistance to imposed homogeneity is reflected in the member states' proclivity to exaggerate compliance and hide non-compliance. The failure to implement Community legislation is reportedly widespread. The more than 90% compliance reported by member states disguises the proportion of directives that have yet to be fully implemented. They also "fail to show the variance by sector, variability among member states, and the quality of implementation and enforcement", says Swaine, and adds: "The degree to which non-implementation has taxed, and continues to tax the energies, credibility, and success of the Community is hard to overstate".8 Failure to implement Community directives has attracted adverse judgments in cases running into hundreds, notes Swaine.9 The failure of the Court to secure compliance has resulted in greater reliance on the Commission and resort to national courts that have distinct advantages in this field. j. 3. Foreign policy and states' rights

How does the foreign policy- and treaty-making power correspond with the rights of the sub-units in a federation? Is international law a paramount body of principles controlling and limiting municipal law? Or do international law and municipal law each have their own separate and distinct spheres of operation, so that a country might be fully bound by international law by virtue of a treaty obligation, yet be incapable (because of its own internal municipal law, owing for example to the federal form of government) of giving effect to or implementing the treaty in its municipal law? How far, for instance, does the federal treaty-making power, or foreign affairs power generally, impinge on its internal scheme of power distribution? Put differently, should the mere fact of concluding a treaty on a given subject confer on the national government legislative power over that subject in so far as is necessary to implement the treaty; and does that amount to an interdiction of the power of the member states over the same subject matter? Solutions to these and other equally challenging issues have been attempted differently in different jurisdictions (McWhinney, 1962).

12O Rahmatullah Khan

India has resolved the dilemma by vesting plenary power of treaty making and implementation with the national government. Article 253 of the constitution stipulates: Notwithstanding anything in the foregoing provisions of this chapter Parliament has power to make any law for the whole or any part of the territory of India for implementing any treaty, agreement or convention with any other country or countries or any decision made at any international conference, association or other body.10

The law of the United States on the effect of state legislation on the foreign affairs power of the national government is quite complex. However, there is consensus among scholars that state and local laws are unconstitutional if they "impair the effective exercise of the Nation's foreign policy".11 That view is based on the supremacy clause of the constitution (Article VI). According to Article VI, state laws that are in conflict with federal laws or treaties are unsustainable. The consensus ends there. There is controversy as to what state action constitutes "impairment", and what action facilitates the nation's foreign policy. Is state action, for example, penalising companies doing business in Burma (as Massachusetts did in 1996) as a response to the human rights record of the Burmese military regime, consistent with the nation's foreign affairs power. Two federal courts have invalidated that statute as inconsistent with federal foreign policy.12 That and other local trade sanctions became a subject of heated debate in the American academic community.13 i. 4. Judiciary's endorsement

The foreign policy pre-emption of state action has received judicial endorsement in a series of cases. Even in 1875, the Supreme Court had struck down a California law which, to counter unwanted Chinese immigration, had created an Office of Immigration with discretionary powers restricting supposedly undesirable immigrants. In Chy Lungv. Freeman,1^ the Supreme Court held the state action invalid, on the grounds that "a silly, an obstinate, or a wicked [state] commissioner may bring disgrace upon the whole country, the enmity of a powerful nation, or the loss of an equally powerful friend". Fifteen years later, in Chae Chan Pingv. United States,15 the Court further explained: The control of local matters being left to local authorities, and national matters being entrusted to the government of the Union, the problem of free institutions existing over a widely extended country ... has been happily solved. For local interests the several States of the Union exist, but for national purposes, embracing our relations with foreign nations, we are but one people, one nation, one power.16

121 Part B Theme I - Scientific Background

In the 19305, the Court rendered a series of judgments making the foreign affairs power of the national government plenary and exclusive. The best known of the decisions of that period was United States v. Curtiss-Wright Export Corp. which involved a federal statute delegating to the president the authority to impose arms embargoes upon certain foreign nations. The Court traced the power of the Union to the Articles of Confederation and upheld the "irrefutable postulate that though the states were several their people in respect of foreign affairs were one".17 A year later in the United States v. Belmont, the Court interpreted Curtiss-Wright to mean that: the external powers of the United States are to be exercised without regard to state laws or policies ... Within the field of its powers, whatever the United States rightfully undertakes, it necessarily has warrant to consummate. And when judicial authority is invoked in aid of such consummation, state constitutions, state laws, and state policies are irrelevant to the inquiry and decision. It is inconceivable that any of them can be interposed as an obstacle to the effective operation of a federal constitutional power.18

In Zschernigv. Miller, the Supreme Court was called upon to test the validity of an Oregon law denying statutory inheritance of Oregon property to nationals of countries where the inherited property would be subject to confiscation. The Court found that the statute was "an intrusion by the State into the field of foreign affairs which the constitution entrusts to the President and the Congress." The intrusion was held unconstitutional: It seems inescapable that the type of probate law that Oregon enforces affects international relations in a persistent and subtle way ... The several States, of course, have traditionally regulated the descent and distribution of estates. But those regulations must give way if they impair the effective exercise of the Nation's foreign policy.19

Some commentators have critiqued the Court's consistent rulings in favour of the national government in the field of foreign policy as constitutionally untenable. According to these critics, invoking merely the "logic of the federal system" and the necessity to "speak with one voice" as grounds of such a bias in favour of the national government, was an insufficient argument against state action which was imperative in the integrated world economy.20 The basic realities of the integrated global economy are all too obvious. Peter Spiro describes the situation as one in which states have acquired the status of "demi-sovereigns under international law" (Spiro, 1999, 1223 at 1225). Marshalled in support of the thesis, inter alia, is the fact of the growing economic strength of the sub-units in the modern federations such as the United States. If they stood as independent nations, seven

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states of the Union would be counted among the top 25 countries in terms of Gross Domestic Product (GDP). Spiro argues that even Vermont, with the smallest economy among the states, would outrank almost i oo nations. It is common practice now for sub-units of modern federations to court and get courted by foreign investors (Spiro, 1999, 1223 at 1249). In fact, sub-federal jurisdictions now see international trade and foreign investment as critical to their economic well-being. As Spiro notes, they compete ferociously for foreign investment in the United States, with tax breaks and other incentives (Spiro, 1999, 1223 at 1248). 7.5. Doctrine

Doctrine has lent legitimacy to this accretion of power to the states in the United States. Writing in the University of Colorado Law Review, Martin S. Flaherty, reiterates that federalism, at least in terms of state sovereignty, has been a "backward-looking" doctrine since its inception, and that a forwardlooking interpretation of the jurisprudence suggests that "states' rights at the end of the day would be reduced to irrelevance." Citing Barry Friedman in support, Flaherty concludes: "The march of globalisation cannot help but have an overall nationalising effect on our polity. In the end, the sovereignty of New Jersey simply makes less sense in the new world order" (Flaherty, 1998). There is evidence to the contrary. The study of state constitutions even in countries with advanced federal structures has been of only recent origin. It is now widely recognised that sub-national constitutions play an important role, and that a system of constitutional federalism cannot be fully understood without analysing the constitutional arrangements within the constituent units. The benign neglect is seen as incompatible with the realities of national lives of people living in advanced federal structures in which daily lives are governed much more directly by state than by federal laws. The complementarities of the state constitutions render to the federal nation a finite status. This realisation has led to greater emphasis in the law school curricula in the United States, Europe and Australia. In the United States federal system, states are not required to have a constitution of their own, and are relatively free to devise and change governmental institutions and arrangements as their citizens wish. They are free, in the words of Justice Louis Brandeis, to "serve as a laboratory" for social experiments (Williams, 1997, 339)- The state constitutions occupy a unique place in the political structure of the United States federation: unique in their origin and function as well as in their hierarchical place in the pecking order of its legal system. State constitutions have a chameleon-like quality. They are at once supreme, constitutional documents, taking precedence over all other forms of state law, and at the same time subservient, lesser forms of law, giving

123 Part B Theme I - Scientific Background way to any kind of valid federal law, authorized by the federal constitution, including federal common law and administrative regulations. (Williams, 1997, 339)

The Swiss federation in which its cantons have hammered out almost every conceivable experiment in political mechanics has served as "the democratic workshop of Europe" (Williams, 1997). Many other federal systems have their own constitutions, incorporating important government powers, not necessarily similar or identical in ambit and scope. In Germany, for instance, the Lander constitutions contain differing provisions, reflecting in some cases the influence of the post-War occupation forces, but mostly conforming to the "homogeneity principle" contained in the German Basic Law. On the other hand, the Belgian constitution does not permit regions to have their own constitution. In Australia, state constitutions predate the federal, and even though they can be changed by mere legislative acts of the state parliaments and do not contain bills of rights, they nevertheless lend great authority to the sub-units. And although Brazil received the gift of devolution from the erstwhile unitary national government, its sub-units have adopted constitutions that are repetitions of the national constitution. Contacts between federal units are not necessarily limited to units across borders, but extend to distant centres of industrial and investment power.21 Given the fact that most of the federal constitutions assign a monopolistic power over the conduct of foreign affairs to the federal government, such contacts have led to interesting compromises, yielding to the imperatives of the contemporary interdependence of a globalised world. In the United States, the constitutional provision barring states from entering into any agreement or compact with a foreign power has not prevented states from energetically pursuing their investment and trade interests beyond the national borders, generally with the consent and encouragement of the Federal Department of Commerce. The Canadian provinces have, for a long time, asserted their right to act internationally in their areas of constitutional jurisdiction, which include control over natural resources. The cantons of Switzerland and the Lander of Germany have engaged in direct contact with foreign governments. Even centrist France, which entertained contact between foreign powers and local authorities only through the Ministry of External Affairs, had to establish a special office to coordinate the "external activities of local collectivities" (Michelmann and Soldatos, 1990). The Swiss constitution specifically provides for such mediation in Article 56: 3. T Cantons may deal directly with lower ranking foreign authorities; in other cases, the relations of the Cantons with foreign countries shall be conducted by the Confederation acting on their behalf.

Federal intervention, however, takes place only when the cantons' contact engages the national capital of the foreign state, but not when the

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canton enters into direct contact with the representatives of local communities, comparable to the Swiss cantons. The post-industrial integrated international economy witnesses a curious phenomenon in which foreign policy formulation and implementation has engendered both centralisation of the federal structures, and decentralisation or localisation of foreign policy. One finds federal units acting as agencies of the federal government in the global market place, negotiating trade and investment arrangements with similar sub-units of government in other countries. Japan and China, with completely different political economies, find virtue in internationalising their regions and provinces to secure better economic results (Hocking, i993a, 15). The tilt in favour of states' rights in matters of economy has found resonance in a completely different field, i.e. the power of the sub-units in the administration of criminal justice. 2.

STATES AND A D M I N I S T R A T I O N OF J U S T I C E

The United States has of late found itself in the unenviable position, when faced with the power of its states in the administration of justice, of failing to perform its international obligation, inviting charges of violating its consular notification duties under the Vienna convention.22 In April 1998, for example, Angel Francisco Breard, a Paraguayan national, was executed in Virginia. In March 1999, two German nationals, Karl and Walter LaGrand, were executed in Arizona. Joseph Stanley Faulder, a Canadian national, was executed in Texas on 17 June 1999. In each of these cases, the states involved admitted that they had not advised the foreign nationals of their right to speak with their nations' consular officers. In every case, the executions were carried out despite pleas from the United States Department of State, the International Court of Justice (icj), and each of the nations to which the accused belonged. In each of these cases there was a clear violation of the Vienna Convention. One hundred sixty three states are parties to the Vienna Convention on Consular Relations. Its provisions are widely thought to embody customary international law. Article 36 of the Convention confers three rights upon consuls and foreign nationals. The first is the right of the consul to assist fellow nationals who have been arrested or detained. The second is the right of the nationals to determine whether they desire such consular assistance. The third is the right of the national to be notified of the right to seek consular assistance. Article 36 instructs state parties to ensure that their laws and regulations give "full effect ... to the purpose for which ... Article [is] intended". The original draft of the Convention provided for mandatory consular notification when a foreign national was detained in a foreign country. The provision was found unacceptable to several countries which argued that such an automatic notification would infringe an individuals' right of privacy (Thornberry, 2000, 117).

125 Part B Theme I - Scientific Background

The Supreme Court's affirmation of the treaty power of the national government does not square up with the powers of states in the administration of criminal justice. In recent years, the Court has tilted in favour of the rights of states. In New York v. United States, for example, the Court struck down a federal statute that in effect compelled state disposal of radioactive waste. In United States \. Lopez, the Court invalidated a federal statute that made the possession of firearms near school zones a federal crime. And in Printz v. United States it invalidated a federal statute requiring state law enforcement officials to conduct background checks on prospective handgun purchasers. As is well known, criminal punishment, especially the death penalty, is a state subject in the United States. "Under our federal system", stated the Supreme Court in the Lopez case, "the States possess primary authority for defining and enforcing the criminal law".23 This federal feature of the constitution has put the United States into adversarial relations with other states, including its allies. In a recent case, Breard v. Virginia,24 the obligation of the federal government to respect the provisional measures indicated by the icj was resisted by both the federal government and the state authorities invoking the federal character of the United States. The governor of the state took the position that law enforcement being a matter of state concern he could not cede such responsibility to the icj. It was argued that complying with its provisional measure to delay the execution of Breard would have the practical effect of transferring responsibility from the state to the International Court. The federal government communicated the view that the measures indicated by the icj were non-binding, and urged the stay of the execution if the state governor wished to do so. And the Supreme Court found "nothing in our existing case law [that] allows us to make that choice for him".25 While indicating the interim measures, the icj went out of the way to enter the disclaimer: [T]he issues before the Court in this case do not concern the entitlement of the federal states within the United States to resort to the death penalty for the most heinous crimes; and ... further, the function of this Court is to resolve international legal disputes between States, inter alia, when they arise out of the interpretation or application of international conventions, and not to act as a court of criminal appeal.26

A number of commentators have contested the state and federal authorities' position in the Breard case, and find that such federalism concerns were in violation of Holland.2^ It is pointed out that federalist concerns have yielded in favour of the federal government in commerce and trade, and in environmental protection. Diplomatic and consular relations play an important role in providing a cultural bridge between states and their nationals abroad. The United States record in this field has been one of consistent concern, epitomised

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by its traumatic 1979 experience in Tehran when Iranian students and the revolutionary guards held hostage its diplomatic staff for 444 days. It has also demonstrated extra sensitivity to its citizens travelling or resident abroad. Manifesting the latter, the State Department has stressed the importance of consular access as codified in Article 36 of the Vienna Convention on Consular Relations of 1963.28 This Article recognises that communication is essential for facilitating the exercise of consular functions relating to nationals of the sending states. Article 36(1) (a) provides that consular officials shall be free to communicate with and have access to nationals of the sending state. And nationals of such states are provided reciprocal rights. In cases of detention, the receiving state is obliged to provide such access, and inform the detainee of his right of access to the consular authorities of his state. The United States has viewed the above provision of the Vienna Convention as containing an obligation of the highest order not to be taken lightly. It has affirmed its right of consular access in numerous cases.29 The United States sedulously pressed for an affirmation of its rights in this regard before the icj, and obtained a clear ruling from the Court.30 The zealous protection by the United States of the rights of its citizens resident abroad does not seem to be reflected by a matching concern for the rights of foreign residents living on its territory. 3.

CONCLUSIONS AND ISSUES

The above presentation offers the hypothesis that the supremacy of the federal government in matters relating to the conduct of foreign policy can no longer be taken as a given. A century of United States practice and the jurisprudence of its courts seem to have yielded to the economic and other realities of an integrated world. The participatory role of the states in the conduct of foreign policy has been grudgingly conceded. Similar developments have taken place in other federal systems in Europe, Australia, Canada, India and elsewhere. Recognition of this reality, in theory and practice, raises the corresponding assumption about the responsibility of the sub-units of a federation to implement international and supranational law. The recent United States practice of yielding to states' rights in the field of administration of criminal justice, even at the cost of commitments made under international conventions is apparently inconsistent with its constitutional scheme of division of powers. NOTES

1 17505677,700-21(1900)^1700. 2 See, Restatement (Third) of the Foreign Relations Law of the United States (1987), which defines customary international law as "resulting] from gen-

127 Part B Theme I - Scientific Background eral and consistent practice of states followed by them from a sense of legal obligation" and proceeds to state that: "[international law and international agreements of the United States are law of the United States and supreme law over the law of the several states"; and finds it in conformity with the supremacy clause of the United States Constitution (Art. VI, cl 2) which posits: "This Constitution, and the Laws of the United States which shall be made in Pursuance thereof; and all Treaties made, or which shall be made, under the Authority of the United States, shall be the supreme Law of the Land; and the Judges in every State shall be bound thereby, any Thing in the Constitution or Laws of any State to the Contrary notwithstanding" (Art. 102 (2), at 30, and Art. 111 ( i ) , at 42). 3 The us State Department publishes a list of treaties and other international agreements of the United States in force. Assessment and analyses of the treatymaking practice and power are abundant. For an authentic account, one turns first to Henkin (1996). 4 For an analysis of the Reichskonkordatca.se, see McWhinney, 1962, 36-38 and 46-49. 5 2520831435. 6 For a comprehensive account of the Court's jurisprudence on the subject, see Swaine, 2000, 1-128. 7 Curtin and Motelmans, 1994, 732-733. 8 Swaine, see above note 6, 89. 9 Swaine, see above note 6, 97. 10 For an exhaustive comparative analysis of the Indian federal structure, see Basu, 1987. 11 Zschernigv. Miller, 389 us 429, 440 (1968). For a discussion of the consensus on the subject, see Henkin, 1996, n.3 supra, 151-65; Maier, 1989; Ramsey, 1999. 12 1996 Mass. Adv. Legis. Serv (Law Co-op.); National Foreign Trade Council v. Baker, 26 F. Supp. 2d 287, 291-92 (D. Mass. 1998), affd, Natsios, 181 F. 3d at 45. 13 Schmahmann and Finch, 1997; Price and Hannah, 1998; Denning and McCall (J r )> 199914 92 us 275 (1875). 15 130 us 581 (1889). 16 130 us 581 (1889), at 605-06. !? 299 us 304 (1936), at 317. 18 301 us 324 (1937), at 331-32. 19 389 us 429 (1968), at 440. 20 For an analysis of the debate, see Ramsey, 1999, n. 12. 21 For an extensive list of such contacts between the United States and European federal units, see Michelmann and Soldatos, 1990. 22 For an assessment see Thornberry, 2000, 107. 23 United States v. Lopez, 514 us 549, 561 n.3. 24 445 S.E.2nd 670 (1994). The case concerned a Paraguayan national who was charged and convicted of rape and murder of a woman in Arlington County, Virginia. The case was unsuccessfully litigated in the domestic courts and found

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its way to the icj on the grounds that the petitioner was denied the benefit of consular assistance guaranteed under Article 36 ( i ) (b) of the Vienna Convention on Consular Relations of 1963. 25 445 S.E.2nd 670 (1994), at 1356. 26 Case concerning the Vienna Convention on Consular Relations (Para. v. us), 3 April 1998, para. 38. 27 See for example Henkin, 1998, 679; Vazquez, 1998, 683. 28 596 UNTS 261. 29 For an enumeration and analysis of such cases, see Aceves, 1998, 257. 30 Case Concerning United States Diplomatic and Consular Staff in Tehran (us v. Iran), icj Reports (1980). REFERENCES

Aceves, W.J., 1998. The Vienna Convention on Consular Relations: A Study of Rights, Wrongs, and Remedies. VanderbiltJournal of'Transnational Law, 31, 257. Basu, D.D., 1987. Comparative Federalism. New Delhi: Prentice-Hall. Brilmayer, L., 1995. Federalism, State Authority, and the Preemptive Power of International Law. In: DJ. Hutchinson, D.A. Strauss and G.R. Stone, eds. 1994 The Supreme Court Review. Chicago: Chicago University Press, 295-343. Curtin, D. and Motelmans, K., 1994. Application and Enforcement of Community Law by Member States: Actors in Search of a Third Generation Script. In: D. Curtin and T. Heukels, eds. Institutional Dynamics of European Integration: Essays in Honour of Henry G. S'chermers, 732. Damrosch, L.F., 1991. The Role of the United States Senate Concerning "SelfExecuting" and "Non-Self-Executing" Treaties. Chicago-Kent Law Review, 67, 5!5-530Denning, B.P. and McCall,J.H. (Jr), 1999. The Constitutionality of State and Local "Sanctions" against Foreign Countries: Affairs of State, States' Affairs, or a Sorry State of Affairs? Hastings Constitutional Law Quarterly, 26, 307. Flaherty, M.S., 1999. Are We to Be a Nation? Federal Power vs. "States' Rights". Foreign Affairs, 70, University of Colorado Law Review, 4, 1278-1316. Henkin, L., 1996. Foreign Affairs and the United States Constitution. 2nd ed. Oxford: Clarendon Press. Henkin, L., 1998. Provisional Measures, United States Treaty Obligations, and the States. American Journal of International Law, 92, 679. Hocking, B., ig93a. Localizing Foreign Policy: Non-Central Governments and Multilayered Diplomacy. New York: St Martin's Press. Hocking, B., ed., 1993^ Foreign Relations and Federal States. London: Leicester University Press. Maier, H.G., 1989. Preemption of State Law: A Recommended Analysis. American Journal of International Law, 83, 832-833. McWhinney, E., 1962. Comparative Federalism-States'Rights and National Power. Toronto: University of Toronto Press.

12Q

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Michelmann, HJ. and Soldatos, P., eds, 1990. Federalism and International Relations The Role of Subnational Units. Oxford: Clarendon Press. Price, D.M. and Hannah, J.P., 1998. The Constitutionality of United States State and Local Sanctions. Harvard International Law Journal, 39, 443. Ramsey, M.D., 1999. The Power of the States in Foreign Affairs: The Original Understanding of Foreign Policy Federalism. Notre Dame Law Review, 75, 341. Schmahmann, D. and Finch, J., 1997. The Unconstitutionality of State and Local Enactments in the United States Restricting Business Ties with Burma (Myanmar). Vanderbilt Journal of Transnational Law, 30, 175. Spiro, P., 1999. Foreign Relations Federalism. University of Colorado Law Review, 70, 1223. Swaine, E.T., 2000. Subsidiarity and Self-interest: Federalism at the European Court of Justice. Harvard International Law Journal, 41, i. Thornberry, C., 2000. Federalism v. Foreign Affairs: How the United States Can Administer Article 36 of the Vienna Convention on Consular Relations Within the States. McGeorge Law Review, 31, 107. Vazquez, C.M., 2000. Breard and the Federal Power to Require Compliance with icj Orders of Provisional Measures. McGeorge Law Review, 31, 683. Williams, R., 1997. Comparative State Constitutional Law: A Research Agenda on Subnational Constitutions in Federal Systems. In: R. Blanpain, ed. International Encyclopaedia of Laws — Law in Motion. The Hague: Kluwer Law International, 339-346.

SCIENTIFIC BACKGROUND: SUBTHEME PAPER UDO DIEDRICHS

AND WOLFGANG

WESSELS

Federal Structures and Foreign Policy of International and Supra-national Organisations The Case of the Common Foreign and Security Policy: The European Union as a Model for a New Federal Actor 1.

COMMON FOREIGN AND SECURITY THE EUROPEAN

POLICY: UNION AS

A FEDERAL ACTOR

IN THE

MAKING?

The evolution of the Common Foreign and Security Policy (CFSP) over the last four decades is of considerable political relevance. The second pillar of the European Union (EU) constitutes a key element of the European construction as well as a cornerstone of the national foreign policies of its member states. It is increasingly perceived as an important though strange actor within the international system. However the end result of this endeavour is less clear. Will it become a real actor - a "superpower" - or a "global player", or might it even wither away under external shocks? Or as we argue, we may be observing a pluralistic federal actor in the making - with clear weakness but also considerable strength. In any case the CFSP, even after the signing of the Treaty of Nice, does not automatically reflect a clearly designed and commonly accepted master plan. On the contrary, in order to avoid doctrinal de bates, the "founding fathers" of the European Political Co-operation (EPC), and later the creators of the second pillar of the EU system opted for a pragmatic and ambiguous institutional construction open to different interpretations (Nuttall, 1992; Rummel and Wessels, 1978 Consequently, various concepts of the aims and methods of a joint international presence of the EU and its member states continue to coexist.

131 Part B Theme I - Scientific Background

2. CONSTRUCTING THE LEGAL CONSTITUTION: FROM THE FIFTIES TO NICE 2OOO In the immediate aftermath of the Second World War, proposals for the integration of key sectors closely related to national sovereignty - such as the former war industries of coal and steel production or defence policy - into a new European framework found considerable support among the political elites. Federal plans for a European Defence Community (EDC) in 1950/1954, but also inter-governmental concepts embodied in the (Gaullist inspired) Fouchet plans in 1961/62, were not crowned by success. The summit of The Hague in 1969 launched a new but modest start in the development of EPC. The Luxembourg (1970), Copenhagen (1973) and London (1981) reports defined the first principles and procedures for activities in this field (de Schoutheete, 1986; Nuttall, 1992; Rummel and Wessels, 1978). As part of the overall debate on reforming the institutional set-up, EPC was given a first legal foundation in the inter-governmental conference leading to the Single European Act (SEA) in 1986. Title III, Article 30, SEA, of 17/28 February 1986 stated that: [t]he High Contracting Parties being members of the European Community [an explicit hint at the exclusion of third countries from the "club"] shall endeavour jointly to formulate and implement a European foreign policy. (Art. 30, point i SEA)

Compared to the earlier reports, the SEA reinforced the member states' obligations to consult each other before fixing their own positions and to refrain from national decisions, "which impair their effectiveness as a cohesive force in international relations or within international organisations" (Art. 30, point 2 SEA). The SEA widely confirmed the institutions and procedures of regular EPC business (Art. 30, points 3-4, 10 SEA). The cooperation remained inter-governmental and required decisions based on consensus. The new provisions of the Maastricht Treaty in 1992 set out the general objectives and rules of the European construction and created the three pillars under a common roof. The EPC was transformed into the CFSP, representing the second pillar of the EU. It was incorporated into "one single institutional framework" (Art. C Treaty of the European Union (TEU) Maastricht Version (M.V.)). The closeness of European Community (EC) and CFSP structures was underlined by the fact that an EC organ, the European Council, also became the central decision-making body in CFSP (Art. J.2, J.8,2 TEU M.V.); the limited role of the European Commission and the European Parliament was confirmed. Article C TEU also called for

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consistency in foreign policy activities, for which the European Council and the European Commission were made responsible. Furthermore, in a considerable change in view of the inter-governmental doctrine, for the first time rules for majority voting were introduced to the CFSP. Compared to EC provisions they included, however, certain specific modalities: majority decisions not only required 62 weighted votes, they also had to comprise two thirds of the member states (Art. J-3,2 TEU M.V.). These rules were applicable only in specific cases, i.e. the implementation of joint actions, while the objectives, means and duration of the concrete measures were to be defined by prior consensus. Also as a step towards communitarisation the administrative set-up of the CFSP was to be covered by the EC budget. Questions of security and defence were no longer taboos on the CFSP agenda; the Western European Union (WEU) especially - so far the comparatively independent, but also marginal defence component of Europe was to be understood as an integral part of the development of the EU (Jopp, 1997). Another inter-governmental conference (IGC) culminating in the European Council of Amsterdam in 1997 produced procedural amendments to improve the CFSP'S internal efficiency as well as its external visibility and effectiveness (Regelsberger and Schmalz, 2001, 254-255). Among the novelties were: a provision to move from the consensus requirement towards the possibility of constructive abstention (Title V, Art. 23 TEU Amsterdam Version (A.V.)); new ways to achieve an extension of majority votes through the introduction of the instrument of "common strategies" (Arts 13 and 23 TEU A.V.), though national safeguard and fall-back clauses were also inserted, i.e. in case of "important and stated reasons of national policy" (Art. 23, 2 TEU A.V.), a procedurally refined version of the infamous Luxembourg veto was envisaged. The office of a High Representative for the CFSP (Art. 18, 3 and 26 TEU A.V.) was created to assist the presidency in both management and external representation. Modifications of the old troika system towards more continuity (Art. 18 TEU A.V.) were introduced, as was the installation of a Policy Planning and Early Warning Unit (PPEWU) at the Council Secretariat under the authority of the High Representative. It is, however, relevant that this function was not - as some had argued - located inside the Euro pean Commission, but in the European Council under the guidance of the rotating presidency. The Amsterdam Treaty also specifies the security and defence aspects of CFSP. It introduces the "Petersberg tasks" (Art. 17 TEU A.V.), i.e. the EU'S competence for humanitarian and rescue operations, peacekeeping, and crisis management including peace making and combat forces. The institutional and procedural amendments and revisions illustrate the clear preference of the member states for improving the efficiency of

133 Part B Theme I - Scientific Background

procedures without giving up their ultimate say. The coordination became more legalised, but the heads of government did not introduce any "hard" sanctions against non-compliant members. They rationalised their intergovernmental set-up without a qualitative move towards communitarisation. In contrast, such a step was taken in justice and home affairs by moving asylum and immigration issues from the third to the first pillar (Monar, 2001). Shortly after the provisions of the Amsterdam Treaty had entered into force in May 1999, another debate started on revising and amending the recently signed treaties. It was driven mainly by the "leftovers" of Amsterdam, i.e. fundamental questions on EU institutional provisions, which had remained unsolved in the earlier IGC but which were pressing in view of the forthcoming Eastern enlargement. The need to consider another reform of the CFSP provisions was widely considered as being premature, and only slight legal adaptations seemed necessary. These would reflect recent dynamism in certain areas of CFSP without, however, provoking a debate on sensitive issues, particularly in the area of security and defence policy. Nevertheless, matters of European security and defence were not completely out of sight. The EU 's experience with the Kosovo crisis and the altered course in British policy towards an autonomous European capacity produced unexpected dynamics in CFSP practice (Jopp, 2000, 243; Regelsberger, 2000, 233). The Fifteen entered into intensive deliberations on an EU Rapid Reaction Force and on institutional and organisational adaptations (Military Committee, Military Staff). As in the early days of EPC these new steps started informally and were then gradually lifted to the European Council level. The outcome (Regelsberger, 2001; Algieri, 2001; Wessels, 2001) of the third IGC, which ended with the Nice European Council in December 2000 and the signature of the new treaty of 26 February 2001, offers an extension of majority voting for CFSP in the case of the appointment of the High Representative for the CFSP - and Secretary General of the Council (Art. 207 EC Treaty Nice Version (N.V.)) and of nominating special representatives (Art. 23, 2 TEU N.V.). In institutional terms the treaty revision formulates incremental adaptations: the Political Committee, traditionally the central CFSP body to prepare and implement ministerial decisions, plays a growing role particularly in cases of crisis management operations (Art. 25 TEU N.V.). Its new function is also reflected in a change of name to Political and Security Committee (PSC or Comite Politique et de Securite, COPS), while other details, such as its composition, location or the chairmanship, are by intention not fixed in the treaty itself but through a European Council decision (Decision oi/yS/crsp of 22 January 2001). Furthermore, the Nice Treaty foresees adaptations in Article 17 TE which correspond to an earlier decision of the WEU Council to transfer major functions of this organisation to the EU (except for the mutual military

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assistance clause of the contracting WEU parties according to Article 5 of the modified Brussels Treaty) - an almost revolutionary development, if one recalls that even the gradual integration of the WEU bodies into the EU before 1998 led to massive disputes among the Fifteen. Finally, it is worth mentioning that the heads of state and government agreed to introduce "enhanced co-operation" to the second pillar as well (Art. 27a-e TEU N.V.; Regelsberger, 2001, 159; Wessels, 2001, 205). Based on the conviction that in an enlarged EU situations might occur in which a group of the "willing" could go ahead with a "specific policy serving the common interests and objectives of the CFSP", the articles mentioned suggest an enhanced cooperation of at least eight member states in those cases where the implementation of a joint action (Art. 14 TEU) or a common position (Art. 15 TEU) cannot be carried out by all. However, enhanced cooperation "shall not relate to matters having military or defence implications" (Art. 27 b TEU N.V.). This limitation to specific cases counters initial ideas of some governments to make the provisions applicable also for the sensitive area of security and defence where unanimity might be difficult to achieve. However, the modest compromise reached in Nice after long controversies also had to pay tribute to the concerns of several small member states, which feared being marginalized and excluded from core groups - an experience they had witnessed already in the course of the Bosnia Contact Group and the Kosovo crisis (Algieri, 2001, 162; Regelsberger, 2001, 160). Also, larger member countries like the United Kingdom were opposed to such a clause. Nice by no means signals the end of CFSP reforms. Though the post-Nice process as defined by the Nice Council in 2001 (Declaration No. 23: Declaration on the future of the Union, Treaty of Nice) does not directly mendon CFSP, it is not excluded either. The further instinationalisation of the (Common) European Security and Defence Policy ((C)ESDP) infrastructure in Brussels might create the need for new rules in the not too distant future. The events of 11 September 2001 might turn out to be another factor in accelerating the EU'S ambitions to establish military capacities and to base CFSP on firmer institutional and procedural grounds. In their latest drive for designing a European "constitution" (Laeken European Council, 2001) the heads of government put certain issues on the CFSP agenda: the European Council has decided to convene a Convention composed of the main parties involved in the debate on the future of the Union. In the light of the foregoing, it will be the task of the Convention to consider the key issues arising for the Union's future development and try to identify the various possible responses. (Laeken Declaration - The Future of the European Union, 15.12.2001)

The Nice Version and even more the agenda for the next steps "towards a constitution" (Laeken Declaration) illustrate the still unfinished nature

135 PartB Theme I - Scientific Background

of the CFSP: elements of communitarisation were inserted into a refined system of inter-governmental mechanisms. The ambiguity in terms of the final result remains. The masters of the treaties have not constructed a constitution, which would follow conventional federal patterns, but it is also necessary to have a look beyond "the legal constitution" at the real patterns of the "living constitution" (Olsen 2000, 6). 3.

REAL PATTERNS TOWARDS A DE F A C T O FE D E R A L I S AT I ON

After several steps of constructing an institutional and procedural set-up, the EU and its member states today dispose of a unique "legal regime" (Smith, 2001) or "CFSP legal order" (Wessel, 1999) to jointly formulate and implement CFSP including matters of European security and defence. However, the real modes of governance still have to be analysed. This "living constitution" is reflected in the patterns of engagement of actors, as well as the use of the procedures, especially for producing policy outcomes. 3. i. Brusselisation: mobilisation without communitarisation As the constitutional developments above illustrate, both the number and variety of actors in the CFSP and ESDP of today have little in common with the early days of the EPC and are beyond the already more sophisticated system of the early nineties (Bretherton and Vogler, 1999). More and more national and community actors use an ever-growing institutional set-up. In 2002, the second pillar of the EU has at its hierarchical top the European Council, which meets at least twice a year according to the TEU (Art. 4 TEU N.V.). In reality at least the same number of informal sessions has to be added. Its task is to provide overall guidance and to define the principles of the CFSP including those on defence. In times of crisis the European Council will meet at short notice. This Council in its composition of foreign ministers and, if needed, including the ministers of defence - a clear novelty since 2000 - prepares the discussions of the European Council and is politically responsible for all main decisions in CFSP. What had seemed unthinkable in the first two decades of the EPC has now become normal, i.e. foreign ministers meet in the Council at monthly intervals to discuss all foreign and security issues. At the administrative level we witness a "Brusselisation" of the diplomatic apparatus and thus the creation of a "core network" (Dyson and Featherstone, 1999; Wessels and Linsenmann, 2002). The constant broadening of the CFSP agenda has given rise to intensive use of a great number of working parties for regional subjects like the Middle East or Latin America, as well as for functional topics like human rights issues (Wessels, 2000,

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181). Other expert groups, like the one on civil crisis management, were established recently to improve the Fifteen's performance in ESDP. Another category of groups deals with the proper functioning of the CFSP itself, such as the European correspondents of the national foreign ministries and their close association with the EC business, especially the group of political councillors in the permanent representations of the EC member states. The working parties meet at regular intervals, twice per presidency or more frequently, and report regularly to the Political and Security Committee, the key institution at diplomatic level in CFSP. Since its inception under the Swedish presidency in the first half of 2001, this body works at high speed, i.e. in twice-weekly meetings. This could accelerate the CFSP decision-making process. The fact that the members of the PSC are by intention permanently placed in Brussels, and that they should be high-level officials/ambassadors from the permanent representations of EU member states to the Union (according to Council Decision 01/78 CFSP of 22 January 2001) could open the way not only for a better daily coordination between the CFSP and EC pillar for the sake of consistency, but also for a strengthening of the common European interests against concerns voiced in national capitals. However, the work of the PSC cannot successfully be done without a constant link to the foreign ministries of the Fifteen. The installation of the EU Military Committee and the establishment of the EU Military Staff in the Secretariat General of the Council at a size of 130 officers (as of 2001 onwards) represent a considerable increase in scope and complexity of the present institutional structure of the CFSP. This "Brusselisation" could have similar socialisation results as the early EPC did before it, especially as many actors have already shared experiences within NATO bodies. However, the very different administrative cultures and working methods of the military as well as of the Council Secretariat and the foreign offices could produce some dividing lines in dayto-day work. Some experts even speculate that there is something like a "fourth pillar" in the making by the military establishment. The post of the High Representative for the CFSP, to which the former NATO Secretary General Javier Solana was appointed in 1999, represents another major feature of the institutional innovations of the late nineties. Meanwhile, he enjoys considerable authority both among the Fifteen and outside the EU borders (Frisch, 2000). In spite of the strengthening of the High Representative, this position has not turned into a European Foreign Minister. In times of crisis large member states develop their own profile putting the European spokesman on a lower level. The "rise" of other actors in CFSP, especially of the High Representative for the CFSP, also generated competition with the European Commission as the "spokesperson" of the EU.

137 Part B Theme I - Scientific Background 3.2.

Operating foreign policy

For a systematic overview of the patterns of real activities we will take a look at the policy results made public. The policy output of today's CFSP has largely increased compared to what the EPC had produced before. Both in terms of quantity (i.e. agenda according to regional and functional issues) and of quality (i.e. differentiation of instruments and contents) the difference is striking. Declarations have remained an adequate tool despite the harsh and often unjustified criticism of a "mere declaratory" European diplomacy. Third parties often confirmed that "words" may have a significance in foreign policy, though they may not always be sufficient to demonstrate the EU'S self-claimed capacity to act. In order to become more proactive in its performance the Maastricht Treaty introduced the new instruments of "joint actions" and "common positions". "Joint actions" are to express a particular interest of the EU and its member states towards a country or region that manifests itself in visible activities "at place" (Art. 14, i TEU A.V.). They refer to geographical zones close to the EU like the former Yugoslavia, Russia or the Middle East. The election observations in Russia, in South Africa and the Occupied Territories in the first half of the nineties can serve as examples for such very concrete decisions limited in time and staffed with operational resources. Today joint actions cover, among other things, the work of the EU 's special representatives who help to bring stability and peace to other world regions. Joint actions also include the EU'S support for the United Nations (UN) administration in Kosovo, assistance in the setting-up of police forces in Albania and the EU Monitoring Mission in the Federal Republic of Yugoslavia. The other new instrument, the common strategy, introduced with the Amsterdam Treaty in 1999, has been used three times so far. Designed to express the EU'S vital interests towards a country or a region by formulating a comprehensive approach, it is not surprising that Russia, the Ukraine and the Mediterranean have been given a priority, but strangely enough not yet the Balkans. Common strategies seem to play a helpful role in terms of coherence of EC, CFSP and national policies (Schmalz, 1998) because the formulation of the text requires a lot of consultation among the actors involved at the different levels and fosters a harmonisation of views among them. The formal instruments of the EU have thus been used extensively and proved their use (except for strategies). However, in many cases they are not (yet?) the "arms" of an effective global player. 4. P R E L I M I N A R Y C O N C L U S I O N S

The dynamics of the EU system and the differences of the present institutions and procedures will create sufficient incentives for the heads of

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government to take a decisive step towards some kind of supra-national/ federal set of rules for running an efficient and effective CFSP. Challenges and shocks from the international system will be perceived as pressure pushing national politicians towards common approaches perhaps starting with a rather incremental method. Proposals in this sense have already been presented by some politicians. Foreign and especially defence policies remain on a plateau that gives national actors sufficient opportunities for autonomously using their own paths if this is perceived to be necessary. This policy area would stay resistant to the process of federalisation. The heads of government will take further steps towards a rationalisation in die next IGC, but they will not cross the borderline towards supra-national modes of governance. A trend towards a more federal character of CFSP cannot be identified without contradiction. As regards the institutional evolution, it became clear that there is a highly fragmented process of supra-national decision making, leaving the key competencies to the member states and establishing consensus as the central procedure (federalisation as institutional development) . On the other hand, as regards the involvement of actors from different levels and their increasing socialisation in the Brussels arena, CFSP has become less hermetic, more open and transparent, and also more inclusive (federalisation as a social and communicative process). Both aspects of federalisation are closely linked, but put emphasis on a different set of factors. It could be expected that the federalisation of CFSP will continue not only - and perhaps not even primarily - on the institutional track, but rather in social and communicative channels leading to further commitments by actors (like ministers, military decision makers, diplomats, members of the European Parliament, Commission staff) and enhancing mutual learning and discursive practice, which again could serve as an incentive for further reforms in the institutional sphere. 5. T E S T I N G CFSP: THE C A S E OF THE EU AFTER 1 1 SEPTEMBER 2OO1

5. i. Reactions to the terrorist attacks within the EU

The terrorist attacks against the World Trade Center in New York City and the Pentagon in Washington, D.C. on 11 September 2001 prompted an immediate and unequivocal reaction from the EU and its member states. In several declarations and press statements representatives of the EU insti tutions and the member states voiced their condemnation of the acts, their compassion for the American people and support for the United States government.

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Three days after the shocking events, in a joint declaration of 14 September the heads of state and government, the presidents of the European Parliament and the European Commission and the High Representative for the CFSP expressed their "complete solidarity"1 with the United States. They also harshly condemned the audiors of the terrorist acts and promised to undertake all efforts necessary for bringing those responsible to justice. Among the consequences to be drawn for the EU itself, the declaration summed up four points: • A commitment to global justice and democracy and the promotion of an international framework of security and prosperity, and a contribution towards global action against terrorism; • The continuation of the development of the CFSP with a view to ensuring that the EU would be able to speak out clearly and with one voice; • The evolution of ESDP into an operational tool, including efforts to strengthen intelligence for fighting terrorism; • The swift implementation of a genuine European judicial area including a European warrant for arrest, and the mutual recognition of legal decisions and verdicts.2 At a special European Council meeting in Brussels on 21 September 2001, the heads of state and government stressed their support for the United States and defined themselves as part of the international coalition against terrorism.3 The EU policy to combat terrorism included enhancing police and judicial cooperation (e.g. by introducing a European warrant of arrest, drawing up a list of terrorist organisations, or concluding agreements between Europol and United States authorities), developing international legal instruments, putting an end to the funding of terrorism, strengthening air security and coordinating the EU'S global action.4 As to the EU'S international dimension, it was stated: [i]t is by developing the Common Foreign and Security Policy (CFSP) and by making the European Security and Defence Policy (ESDP) operational at the earliest opportunity that the Union will be most effective.5

At first glance, the political intention to give a European answer to the radically changed international situation, and to adopt common approaches was visible. Of special interest was the will to strengthen CFSP. Indeed, the post11 September phase was a crucible for European efforts to coordinate and streamline foreign policies of the EU member states. This idea could find sufficient legitimacy by the wording of the TEU. Article 11 TEU states that" [t]he Union shall define a common foreign and security policy covering all areas of foreign and security policy", whose objectives will be among others "to

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strengthen the security of the Union in all ways" (Art. 11.1 TEU). Furthermore the treaty provides that "[t]he member States shall support the Union's external and security policy actively and unreservedly in a spirit of loyalty and mutual solidarity" (Art. 11.2 TEU), and that: [t]he Member States shall work together to enhance and develop their mutual political solidarity. They shall refrain from any action which is contrary to the interests of die Union or likely to impair its effectiveness as a cohesive force in international relations. (Art. 11.2 TEU)

Article 16 of the TEU states that: Member States shall inform and consult one another within the Council on any matter of foreign and security policy of general interest in order to ensure that the Union's influence is exerted as effectively as possible by means of concerted and convergent action.

On the other hand, it must be remembered that the obligations under the TEU did not reveal the strong supra-national features as in the case of the EC. A crucial question therefore was to what extent the member states took these provisions seriously and acted according to common principles. The tension between national and European policies should become a key feature of the post-i i September development. 5.2. Growing tensions within the EU: the myth of a common foreign policy ?

When the United States started to build up an international coalition against terrorism, the major European countries lined up and offered their support. Great Britain actively took part in the preparation and implementation of military operations in Afghanistan that started on 7 October 2001. France and Germany also made their contribution, although they were not directly involved in the attacks against the Taliban regime. These three countries played a major role for the United States in the European context, while the EU as an organisation was not regarded as a central actor.6 At this initial stage, different patterns of engagement of the EU countries became visible. Apart from Britain, France and Germany, other member states like Italy or Spain offered military support, but were not considered by the United States; a third group of countries did not offer military resources for different reasons. Furthermore, domestic political conditions in the EU countries were highly divergent, especially concerning public support for United States policy (The Independent, 6.11.2001). Therefore it was extremely difficult to find a coherent approach among the EU in operational terms.

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The EU as such did not appear as a key factor that also had political consequences: The United States seeks legitimacy from Europe but picks its partners according to the task at hand. EU leaders decide a common policy in Brussels but action is devolved to European capitals. The trouble is that this approach does not match the Maastricht Treaty blueprint of a common European foreign and security policy, in which all 15 EU members are supposed to move in step. (Barber, 2001)

Britain, France and Germany tried to closely coordinate their activities, as the key European allies of the United States. On the fringe of the European Council at the Belgian city of Ghent on 19 October 2001, the heads of state and government of these three countries met separately before the official summit in order to undertake mutual consultations (The Guardian, 22.10.2001). This huis clos aroused the severe criticism of the Belgian Presidency, of the smaller member states, of the European Commission and of Spain and Italy - for not belonging to the exclusive club of the three countries. It also led to warnings against a Europe "dominated by great powers" (Financial Times, 19.11.2001), or a "directorate" (Financial Times, 16.11.2001); the "end of European common foreign and security policy" (Corriere della Sera, 19.10.2001) was even invoked. But the secrecy of the "Big Three" was not the only problem existent within the EU ; there were divergences among the member states as to how far solidarity with the United States should go. A number of countries - reportedly Ireland, Austria, Finland and Sweden - rejected unconditional support for the United States as a kind of carte blanche in the fight against terrorism (BBC Monitoring Service, 12.11.2001). At the Ghent summit, the initial wording of the final declaration was watered down, not calling for an overthrow of the Taliban regime, at the insistence of some (non-NATO) member states which regarded the original version as too "interventionist" (Irish Times, 20.10.2001; The Independent, 20.10.2001). So officially solidarity with and support for the United States was repeated in strong wording, but different standpoints loomed in the background.7 Some observers assessed these developments as a proof of the EU 's inability to be or even to become a serious international actor, and of the persistence of nation states as central actors in foreign policy. However, the protests against the Ghent mini-summit showed an impact. Some weeks later, the British prime minister Tony Blair felt urged to invite a number of additional guests to what should have been a British-FrenchGerman consultation on 5 November 2001 in London on the ongoing military operation in Afghanistan. The Italian, Spanish and Dutch heads of government, the Belgian prime minister as President of the European Council, and finally Javier Solana as the High Representative of the CFSP were also asked to attend. The fact that the invitation had been extended

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to further EU partners could be regarded as a proof of a "bad conscience" and reflected that the sensitivities of the EU partners could not be ignored. In the aftermath, Tony Blair also tried to convince the United States administration to accept help offered by the other European countries, thus honouring their efforts in mobilising resources for the fight against terrorism. But the chain reaction did not stop there: protests against the London mini-summit were raised internally by other smaller countries like Portugal, Austria and Greece, with support from the Nordic states (The Independent, 6.11.2001) that had not been considered for participation. Thus, an uneasy feeling remained leaving the impression that the EU as such was not able to coordinate and harmonise the views of the member states efficiently. The United States in general did not care too much about the internal EU quarrel; talks were held with EU representatives in a number of compositions, but without allowing them to play a substantial role in support for the United States operations in Afghanistan. On 20 September, a joint EU-US ministerial statement was issued on combating terrorism; Secretary of State Powell met with the Troika on 20 September 2001; the President of the European Council, Guy Verhofstadt, and Commission President, Romano Prodi, met with President Bush on 28 September 2001 and in ormed him about the results of the European Council from 21 September. These consultations were part of a very dense and rich list of contacts that the American administration established with third countries at different levels in order to build up and strengthen the international coalition against terrorism, but it did not acquire a special importance for Washington. On the other hand, as regards the stabilisation of the international financial system after 11 September, the EU did play a substantial role due to its increased weight in global monetary politics. This was, however, a setting distinct from the military field. 5.3. After the crisis: ups and downs in coherence ?

The situation turned more positive for the EU when the military operation in Afghanistan finally showed success and led to the overturn of the fundamentalist regime in Kabul. After the defeat of the Taliban rulers, a new political order had to be found for the country. Under the auspices of the UN, a conference was organised in late November 2001 near Bonn bringing together the major anti-Taliban groups. They should negotiate an agreement on a post-war order for Afghanistan and could count on promises by the international community (including the EU at the forefront) for substantial reconstruction assistance. One important consequence for the EU was that the discourse about retaliation that had dominated the last weeks switched into a discourse about

143 Part B Theme I - Scientific Background

reconstruction. This made it possible to reconcile public opinion which had become increasingly critical of the United States attacks in all major EU countries, but it also served to better streamline the positions of the EU member states; they agreed upon several key issues like the need for building up Afghanistan, and for providing humanitarian assistance and economic support. Further, they also found a common line in assessing a major consequence of the crisis in the re-launching the Middle East peace process. What the EU has managed to agree to in a common approach is a longterm agenda for the fight against terrorism (Howorth, 2002, 3) including emphasis on the role of the UN, fresh efforts in the Middle East peace process, and the creation of a global system for security, prosperity and development (Howorth, 2002, 3). On the other hand, solidarity with the United States became disputed in the wake of American persistence regarding the possibility of extending the focus of attention to further countries, opening common ground in the EU for foreign policy coordination. President Bush's statement about the "axis of evil"8 was sharply rejected by most EU partners and reflected a growing uneasiness about the American fight against terrorism (Le Monde, 14.03.2002). With a view to EU policy towards Iran and Iraq, there could be a fundamental disagreement with the United States administration. The EU is not willing to break up dialogue with Teheran and insists (in a majority) on diplomatic pressure on Saddam Hussein to abide by the relevant UN resolutions concerning weapons instructions. One open question will be if Britain follows the United States' track and participates in possible military action against Baghdad; Tony Blair at least gave some hints that this could happen (Financial Times, 3.03.2002). Coherence among the EU countries has shown signs of ambiguity since; the apparent United States decision to extend the targets of the fight against terrorism to Iraq or other countries, has created difficulties for the EU member states. At a time when the Bush administration seemed to prepare for military action against Baghdad, different positions were taken by the larger EU countries. While Germany rejected a military engagement in Iraq, even in the case of a UN mandate, Britain has been most loyal to the United States; finally, France signalled a preference for a clear and stated legitimation through the UN. In particular, the formula of a "German way" as coined by Chancellor Schroder during the election campaign was received with enormous mistrust and disapproval by the European partners. After the elections of 2 2 September and the victory of the ruling coalition, it will take time to reestablish a cooperative relationship with Washington; another imminent

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challenge, however, will be to find a common European approach. There is no alliance or coalition within the EU that could become the nucleus of a European position. A long-term strategy on the fight against terrorism based upon social and economic stability, a distinctive way of dealing with problem countries like Iran and a high appreciation for the role of the UN could nevertheless constitute features of an EU approach after 11 September distinctive from the United States. 5.4. Conclusions to be drawn: strengthening the EU

What are the main factors and elements in the EU performance in CFSP after 11 September, how can they be assessed, and what consequences can be drawn from these findings? In assessing the CFSP'S performance after 11 September it is therefore necessary to distinguish between the short-term and the long-term implications (Howorth, 2002). It is true that the EU was not a decisive, or a convincingly unified actor in the first months after the crisis. Signs of increased coherence had been visible for a certain time after the overturn of the Taliban regime. As in former times of EU history, such as the conflicts in former Yugoslavia, the EU has proved its capacity to draw consequences from failures and setbacks. This could lead to a strengthening of CFSP and a boost to the realisation of the ESDP. Recently, the EU countries failed to coherently define a position towards United States policy against Iraq. This led to a situation where the EU wa not able to act as an effective international actor. It has become clear that coordinating or even harmonising foreign and security policy positions among the EU member states is still a cumbersome task. In CFSP the first basic question is whether the member states actually use the TEU in a given situation or decide not to do so. The degree to which they consult each other on a matter of foreign and security policy of general interest (according to Article 16 TEU) cannot be judicially defined, but is left to the discretion and judgment of national governments. The fact that Britain, France and Germany held trilateral consultations on the military operations in Afghanistan was largely considered by the other partners as a disregard of EU solidarity and consistency. But there was, by the "Big Three", a publicly demonstrated effort to avoid the impression of being "free-riders" or creating an exclusive club. The decision to extend the guest list to the London summit in October 2001 can be regarded as an expression of these endeavours. Without the existing CFSP procedures and the rooted traditions among the EU countries this would most probably not have happened. CFSP does make a difference - even if it is by voicing protest against a lack of European solidarity and by creating a "bad conscience" among certain governments

145 Part B Theme I - Scientific Background

for having broken certain rules. As mentioned above, social and communicative processes are to be taken seriously and play a role in CFSP. After the military campaign in Afghanistan the situation first relaxed, but then the EU was not able to define a coherent position; diplomatic and political action appeared as inconsistent. This was due to divergent interests voiced at national level, as well as to the primacy of domestic politics over European and international strategies, and not least also to the change in the international situation and the approach taken by the United States. External factors and powers like the United States are still of essential importance for the definition of the EU 's foreign and security policy. 6.

WHAT R E C O M M E N D A T I O N S SHOULD BE D E R I V E D FROM THE

FINDINGS?

The EU should increase its efforts to acquire capabilities in a broad range of policies; therefore the speedy development of ESDP should be a priority putting emphasis not only on military, but also on civilian capacities for crisis management. Only with efficient capabilities will the EU be able to be regarded as a serious actor in its own right. The institutional set-up of the CFSP should be further concentrated and rationalised. The High Representative should become a true spokesman of the EU in an international crisis like that of 11 September and represent the member states' views to third partners, possibly at the expense of the presidency. The link between CFSP and the European communities should be strengthened in order to efficiently manage complex policies requiring diplomatic as well as economic and financial resources. In the long term the closer connection between the External Relations Commissioner and the High Representative of CFSP should not be regarded as a taboo, although it should not be taken as a universal remedy. Finally, the EU should further develop not only the institutional dimension of CFSP, but also try to improve the social and communicative interaction among the member states. This could be managed by practical steps like fostering interaction and exchange among diplomats, for example by creating a European Diplomatic Academy whose program could become part of the career training of national civil servants, including elaboration of and training for scenarios like that of 11 September. What the aftermath of 11 September has shown is that national and domestic considerations still overshadow European and international politics. The generation of a group of Europeanised experts and diplomats, but increasingly also political decision makers, should not replace, but provide a counterweight to the influence of national capitals.

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NOTES

1 See Joint Declaration by the Heads of State and Government of the European Union, the President of the European Parliament, the President of the European Commission, and the High Representative for the Common Foreign and Security Policy, Brussels, 14 September 2001. 2 Ibid. 3 See Conclusions and Plan of Action of the Extraordinary European Council Meeting on 21 September 2001, Brussels, SN 140/01. 4 Ibid. 5 Ibid. 6 BBC Monitoring Service from. 12 November 2001 comments: "When the towers in New York and parts of the Pentagon in Washington collapsed, George W. Bush did not ask for Europe's telephone number". 7 See Declaration by the Heads of State and Government of the European Union and the President of the European Commission, Follow-Up to the September 11 Attacks and the Fight against Terrorism, 19 October 2001, SN 4296/2/01. 8 See the President's State of the Union Address, 29 January 2002. REFERENCES

Algieri, E, 2001. Die europdische Sicherheits- und Verteidigungspolitik - erweiterter Handlungsspielmum fur die GASP. In: W. Weidenfeld, ed. Nisza in der Analyse. Giitersloh: Verlag Bertelsmann Stiftung, 161-201. Barber, L., 2001. Europe's 'Great Powers' Break Rank: As the Afghan crisis Goes on, Washington's Preference for ad hoc Co-operation is Creating Cracks in European Unity. Financial Times, 6.11.2001. Copenhagen Report, 1973. Second Report of the Foreign Ministers to the Heads of State and Government of the Member States of European Community of 2 rd u 3 J ty 1973 (Copenhagen Report), In: C. Hill and K. Smith, eds. European Foreign Policy, Key Documents. London and New York: Routledge, 2000, 83-92. Declaration No. 23: Declaration on the Future of the Union, Nice Treaty. In: Official Journal of the European Communities C8o of 10.03.2001, 85-86, ue.eu.int/en/sum.htm. Dyson, K. and Featherstone, K., 1999. The Road to Maastricht. Negotiating Economic and Monetary Union. Oxford: Oxford University Press. European Council, 2001: Laeken Declaration - The Future of the European Union, 15.12.2001, Doc. SN 273/01. Frisch, T., 2000. DerHohe Vertreterfur die GASP - Aufgaben und erste Schritte. Ebenhausen: Stiftung Wissenschaft und Politik. H.D. Genscher and E. Colombo, 1981: Draft European Act Proposal by the German and Italian Foreign Ministers (The Genscher/Colombo Plan), 12 November 1981.

147 Part B Theme I - Scientific Background In: C. Hill and K. Smith, eds. European Foreign Policy, Key Documents. London and New York: Routledge, 2000, 120-125. Howorth, J., 2002: DESDP after 11 September: From Short Term Confusion to Long Term Cohesion? EUSA Review, 15, ( i ) , 1-4. Jopp, M., 1997. The Defence Dimension of the European Union: The Role and Performance of the WEU. In: E. Regelsberger, P. de Schoutheete de Tervarent and W. Wessels, eds. Foreign Policy of the European Union -From EPC to CFSP and Beyond. Boulder and London: Lynne Rienner Publishers, 153-169. Jopp, M., 2000. Gemeinsame Europaische Sicherheits- und Verteidigungspolitik. In: W. Weidenfeld, and W. Wessels, eds.Jahrbuch der Europdischen Integration, 7999/2000. Bonn, 243-250. London Report, 1981. Report on European Political Cooperation Issued by the Foreign Ministers of the Ten on 13 October 1981 (London Report). In: C. Hill and K. Smith, eds. European Foreign Policy, Key Documents. London and New York: Routledge, 2000, 120-125. Luxembourg Report, 1970. First Report of the Foreign Ministers to the Heads of State and Government of the European Community of 27 October 1970 (Luxembourg Report). In: C. Hill and K. Smith, eds. European Foreign Policy, Key Documents. London and New York: Routledge, 2000, 75-79. Monar, J., 2001. Justice and Home Affairs after Amsterdam: The Treaty Reforms and the Challenge of their Implementation. In: J. Monar and W. Wessels, eds. The European Union after the Treaty of Amsterdam. London, 267-295. Nuttall, S., 1992. European Political Cooperation. Oxford: Oxford University Press. Olsen, J.P., 2000. Organising European Institutions of Governance. A Prelude to an Institutional Account of Political Integration. ARENA Working Papers WP 00/2. Regelsberger, E., de Schoutheete de Tervarent, P. and Wessels, W., eds, 1997. Foreign Policy of the European Union -from EPC to CFSP and Beyond. Boulder and London: Lynne Rienner Publishers. Regelsberger, E., 2000. Gemeinsame AuBen- und Sicherheitspolitik. In: W. Weidenfeld and W. Wessels, eds.Jahrbuch der Europdischen Integration icjcjcj/2ooo. Bonn, 233-242. Regelsberger, E., 2001. Die Gemeinsame AuBen- und Sicherheitspolitik nach "Nisza" - begrenzter Reformeifer und auBervertragliche Dynamik in der ESVP. Integration 2/01, 156-166. Regelsberger, E. and Schmalz, U., 2001. The Common Foreign and Security Policy of the Amsterdam Treaty: Towards an Improved EU Identity on the International Scene. In: J. Monar and W. Wessels, eds. The European Union after the Treaty of Amsterdam. London and New York: Continuum, 249-266. Reinhardt, R. and Wessels, W, eds. 1978. Die Europaische Politische Zusammenarbeit. Bonn: Europa Union Verlag. Schmalz, U., 1998. The Amsterdam Provisions on External Coherence. Bridging the Union's foreign Policy Dualism? European Foreign Affairs Review, 3, 421-442. Schoutheete, P. de, 1986. La Cooperation politique europeenne. Brussels: Labor.

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Smith, M.E., 2001. Diplomacy by Decree: The Legalisation of EU Foreign Policy. Journal of Common Market Studies, i, 79-104. Wessel, R.A., 1999. The European Union's Foreign and Security Policy. A Legal Institutional Perspective. The Hague, Boston and London: Kluwer Law International. Wessels, W., 1997. An Ever Closer Fusion? A Dynamic Macropolitical View on Integration Processes. Journal of Common Market Studies, 35 (2), 267-299. Wessels, W., 2001. Nice results. The Millenium IGC in the EU'S evolution. Journal of Common Market Studies, 39(2), 197-219. Wessels, W. and Linsenmann, I., 2002. EMU'S Impact on National Institutions: Fusion Towards a "gouvernace economique" or Fragmentation? In: K. Dyson, ed. European States and the Euro: Playing the Semi-Sovereignty Game. Oxford: Oxford University Press.

WORK SESSION P R O C E E D I N G S : REPORT

WILLIAM JOHN

HOPKINS

Foreign Relations of Sub-national Units (Work Sessions i and 13)

1.

INTRODUCTION

The past 50 years has seen two phenomena occur in global governance. The unprecedented growth in international trade and cooperation, particularly in Europe and North America, has been accompanied by a renewed interest in the federal idea to the extent that around a third of the world's population now lives in a federal state. One result of these developments is the increasingly blurred distinction between the international and the domestic, a fact that is emphasised by an increasing tendency of sub-national units to engage in activities beyond the borders of the nation state. The work sessions upon which this paper is based explored this phenomenon through examining cross-border agreements and sub-national diplomacy in Western Europe and North America. The examples discussed exposed the pragmatic focus of these developments and their limitations. They also raised questions about the future both of the traditional nation state and of federal systems in an increasingly globalised world. 2. C R O S S - B O R D E R A G R E E M E N T S

As an entirely land-locked state at the geographic centre of Europe it comes as no surprise that cross-border relations are a feature of the Swiss federal state. Perhaps the most documented of these examples is that established around the shores of Lake Constance. The regions that surround the lake have a long history of autonomy and cooperation although the Agreement itself was only established in 1972. Based upon an interregional agreement it was established with the specific aim of regulating

150 William John Hopkins

lake use in the wake of fears over its long-term future. The nature of the agreement limits the formal powers of the International Conference of Lake Constance. It cannot engage in regulation. Instead it operates on the basis of consensus and voluntary agreement. Cooperation between the lakeside regions is far more intense today than in 1972, and the subjects discussed at the International Conference of Lake Constance now include transportation, development and education. Issues such as these require regulation at a cross-border level, which cannot be achieved under the current agreement. Those involved with the conference noted that when proposals require regulation at the federal level, such as for higher education cooperation, they soon become bogged down. In turn this encourages the regional tier to adopt less formal responses such as the "virtual university" now under discussion. This would not require federal approval and is thus deliverable under the current inter-regional regime. The International Conference of Lake Constance represents only one of a myriad of organisations that operate across the Swiss border. Others include the Alpine State Commission and the Upper-Rhine Regional Conference. Unlike the Lake Constance example, this conference is based upon formal inter-governmental agreement (those involved in this organisation pointed to the involvement of unitary France as a reason for this) and has a far broader remit perhaps reflecting its more recent genesis. Although European experience with formal cross-border agreements between sub-national governments has a long pedigree they are by no means the only examples one finds in the federal world. Another well-documented example is the Great Lakes Charter of 1985, which introduced a United States-Canadian framework to aid management of these impressive geographical features. The Great Lakes Charter like the Lake Constance example is not a formal treaty. As such it operates on a voluntary basis through a procedure of consultation and collective action in relation to research and policy development. The latter led in 1995 to the signing of the Great Lakes Charter Annex, which bars significant water removal from the lakes. Lacking the institutional ability to introduce the regulations contained in the Annex and other agreements reached, the charter leaves it to each state or province to incorporate the policies agreed into regional legislation. As part of this process other actors will be consulted on the proposals in a way that is not part of the Lake Constance example. Another notable difference is that the Great Lakes Charter remains strictly focused on ensuring the ecological health of the Great Lakes, and the policies associated with it reflect only this aim. 2.1. Do cross-border institutions require formal recognition ?

A feature of most if not all cross-border regional agreements is the lack of formal legal capacity enjoyed by the institutions created. Even when estab-

151 Part B Theme I - Work Session Proceedings lished under a formal inter-governmental agreement such as in the UpperRhine example, "sovereign" rights have not been transferred. This can have significant repercussions on the effectiveness of these institutions. Those involved with the Upper-Rhine Regional Conference noted that attempts to develop a single waste-disposal facility for the region have foundered on the issue of how to charge fees. Such fees would need to be introduced in law, something that cannot be achieved without the agreement of the relevant national levels through a formal inter-governmental agreement. Although it was noted that both the Bavarian and United States courts have been willing to make reference to the decisions of the International Conference of Lake Constance and the Great Lakes Charter as a form of "soft law" (e.g. Little Traverse Bay Bands OfOdawa Indians and others v. Great Spring Waters Of America 2002, 203 F. Supp. 2d 853), the legal position of these cross-border institutions is extremely confusing. Their powers and structures are based on a combination of informal agreement, international law and private law and they are in effect a sui generis form of organisation unrecognised by international law. Some participants in both organisations felt that as long as these organisations continue to exist in a legal limbo, they will lack the necessary powers to significandy improve cross-border development. Not all viewed this lack of formal powers as crucial. Some suggested that these institutions work best as cooperative structures requiring unanimity to develop decision making. Assigning of specific powers to cross-border institutions in their own right is politically difficult and potentially dangerous for smaller regions, which could find their interests overridden. For the time being at least, these arguments remain theoretical, as cross-border regional cooperation will continue to rely upon regional solidarity and financial autonomy rather than formal powers of regulation. 2.2.

What makes cross-border agreements succeed?

The plethora of apparendy successful Swiss cross-border organisations raises an interesting question. Why do they flourish in Switzerland when Switzerland's position outside the European Union (EU) might be expected t make tiieir success problematic? One reason advanced by Swiss and German representatives was culture. Although the Swiss border remains economically significant, for much of its length it does not mark a cultural divide. Languages and regional dialects do not follow the national borders in diis part of Europe. Is tiiis what holds these informal structures together? Although cultural and linguistic similarities must clearly be an asset in such organisations, those with experience of North America did not believe they were enough to achieve success. Students from the United States and Canada pointed out that the relationship between Canadian provinces

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William John Hopkins

and us states has often been poor despite the strong cultural and linguistic ties. The Great Lakes Charter, on the other hand is an example of a successful cross-border venture, which begs the question: why has it succeeded where others have failed? The answer may lie in the realm of politics rather than culture. Several participants in such organisations recognised that when the subject matter of cross-border agreements covers areas where the interests of the participant regions are similar, these operate as effective conduits for cross-border decision making. However, when these informal institutions are asked to resolve conflicts they will soon be found wanting. A further reason for the success of these organisations may be federalism itself. It is noticeable that these cross-border institutions rarely exist outside federal states. Where unitary states are involved they are far less able to engage in cross-border activities. Participants from the UpperRhine example noted the difficulties in dealing with the centrally appointed Prefect who represents the French region. This person was far less able to negotiate than the regional ministers from Switzerland and Germany, which limits the effectiveness of the institution. This situation may improve as regional decentralisation makes a reappearance on the French political agenda. Significant regional and local autonomy is therefore a further prerequisite for effective cross-border relationships. Although doubts may remain as to the effectiveness of such agreements, they clearly perform a useful pragmatic role even at the informal level. Without the domestic autonomy of the regional unit, this advantage is impossible to deliver. 3.

SUB-NATIONAL INTERNATIONAL RELATIONS

The globalisation of governance and the accompanying penetration of state boundaries have extended the role of sub-national units beyond merely cross-border arrangements. The constituent units of many federal states are now engaged in activities far beyond their territorial boundaries. This is not a new phenomenon. Older federations such as Switzerland (Wildhaber, 1974) and Germany (Engel, 1992) have long engaged in limited international activities, while the new Belgian regions and communities have been quick to enter the international arena (van Ginderachter, 1993). The United States by contrast has, at least formally, barred any such activities by the unequivocal words of Article 10 of the United States constitution: "No state shall, without the consent of Congress ... enter into any agreement or compact with another state, or with a foreign power". The United States participants all agreed that such a simplistic analysis of the United States situation belies the constant tension between the constituent states and the federation over the states' autonomous role beyond the borders of the federation.

153 Part B Theme I - Work Session Proceedings 3. i. Sub-national legislation and international law: the United States experience us states and even local governments have a history of using domestic regulation to influence the policy of foreign governments. Swiss participants recalled that 26 states and 200 cities had introduced sanctions against Swiss companies and products to force a resolution of the "dormant account" scandal in Switzerland.1 Several United States commentators pointed out that this example was by no means alone. A number of local governments have consistently engaged in sanctions (e.g. San Francisco, Berkley and Burlington), and both California and New York State have introduced sanctions against particular states as a result of their treatment of Armenians and Jews respectively. Examples unrelated to the issue of sanctions include states introducing anti-trust legislation that discriminates against foreign firms, and California's unitary taxation scheme, which ensures that multinational corporations pay tax related to their global income not that accrued in the state. Although one could question the wisdom or the motives behind these policies, it was emphasised by the United States constitutional lawyers that such actions are decisions taken by democratically accountable institutions acting within their domestic jurisdictions. The problem only occurs when these legitimate actions interfere with international law. Should the courts intervene to restrict the activities of the states that have repercussions beyond their borders? The response of the Supreme Court to this question has not been without controversy. Although in the examples given above the Court has not struck out the actions of the states there are instances where it has intervened. In the case of Crosby (Crosby v. National Foreign Trade Council, 530 u.s. 363), discussed more fully in the paper of Justice Scalia, a number of states (in this case Massachusetts) had introduced laws restricting the granting of state contracts to businesses with links to Burma (Myanmar). The state law was struck out on the basis that it was pre-empted (Article 6, clause 2 of the United States constitution) by an act passed by Congress (no Stat 3009166) to prohibit new investment in Burma. In fact Congress did not explicitly pre-empt state laws in relation to sanctions on Burma, and the Supreme Court appears to have endorsed a type of implied pre-emption in foreign affairs similar to that developed in domestic matters. The Supreme Court had gone further in the much earlier case of Zschernigv. Miller (389 u.s. 429) where it struck out a state law purely on the grounds that it trespassed into the federal level's international responsibilities. This development of a "negative foreign commerce clause" implies that the actions of the states will be restrained when they are felt to be too great a burden upon the action of foreign trade or the federal government in its pursuit of international relations. Although these decisions clearly do represent some limitations on the autonomy of the states,

154 William John Hopkins

significant leeway appears to remain for them to introduce domestic legislation that has international impact. 3.2. Sub-national diplomacy

The fact that Article 10 of the United States constitution bars states from indulging in international agreements without the consent of Congress means that such activities must be informal. Participants from several United States jurisdictions confirmed that the extent to which states develop such a role varies considerably. Some states see their international role as purely cultural, while others have clearly developed an informal institutional capacity to engage in sub-national diplomacy. Utah, for example, retains 24 representatives around the globe. Where states do engage in activities beyond their borders the focus is economic, primarily the encouragement of trade and tourism, although even this can lead to controversy particularly in the use of incentive schemes to attract investment. The development of the global market has meant that even local governments now demand that their voices be heard on a number of international matters particularly as they become more aware that their autonomy is being restricted by the growth of international trade agreements. Until recently these efforts were hampered by the rather uncoordinated nature of such activities as a result of extensive rivalries between cities and regions. United States representatives from local government reported a noticeable reduction in these actions in the aftermath of September 2001. It was suggested that the expansion of state foreign affairs activities in the United States was a direct result of the expansion of federal policy. The analogy was drawn with the development of United States federalism in the 19305. Until the New Deal of 1934, federal affairs in the United States were seen as distinct and distant from the affairs of the state. This occurred to the extent that state governors rarely travelled to the capital. In the years since this shift, visits by state governors to Washington have become commonplace. The same is true of international affairs. United States practitioners and commentators both emphasised that foreign affairs were still a low priority for most us states. As foreign matters enter into the states' field of vision they are dealt with on a pragmatic basis. This will be achieved formally if the Supreme Court is involved, informally if it is not, and increasingly through private or semi-private institutions. This semi-formal diplomacy is not always visible. It was suggested by both academics and practitioners that this emerging sub-national diplomacy operated on a far more informal and pragmatic basis than its national cousin. A distinction was drawn between foreign affairs and foreign relations with state action falling into the former definition, focusing as it does on semi-private issues such as trade and development. Nevertheless, although regional relations may be less formal they are not

155 Part B Theme I — Work Session Proceedings

less active. Lander representatives noted the wide range of agreements entered into by the German regional tier including around 46 with their Russian counterparts. In Germany, such agreements must gain the approval of the Bund. In practice approval is the norm although the Foreign Office attempts to avoid the regions engaging in binding agreements. Such a process is entirely lacking in the United States example where the states rarely even inform the federation. States appear to indulge in such activities to the extent that they feel appropriate. If the federation feels a state is going too far, the onus is on the federal level to intervene. Extreme varieties of sub-national diplomacy were also discussed, with the micro-nationalist regions of Quebec and Belgium being raised as examples. Since the Umbrella Treaty of 1968, which allowed a formal relationship between the Quebec government and the French government, a number of offices and links have been established by the Quebecois. Quebec is not the only Canadian province to engage in these activities. Some are associate members of us state organisations (e.g. the Council of States and the Western States Association) while most also regularly lobby the United States Congress, although they have recently closed their offices in the United States capital at Ottawa's request. Quebec, as one might expect, has continued to operate an office in both Washington and New York, although its focus is on tourism. The difference in the Quebec (and New Brunswick) examples is that their activities have a cultural and political context rather being centred only on economic development and trade. The extensive competencies of the Belgian regions and communities include foreign policy in their areas of domestic autonomy. Flanders also maintains nearly 100 economic officers around the globe as well as nine "ambassadors" who are not subject to the Belgian authorities. Again these activities have a significant political and cultural element as the Flemish in particular strive to create a distinct identity at the international table. 3.3.

The regional level and international organisations

The development of supra-national organisations across the globe is a phenomenon that has had a huge impact upon the operation of federal states (Hopkins, 2002). As matters that had previously been regarded as domestic are increasingly handled at the inter-governmental level, the regional tier is increasingly finding its autonomy proscribed. Nowhere is this more evident than in the EU. The major issue that faces European regional governments at the present time is the internal relationship between sub-national, national and supra-national levels in European matters (Bursens, 2002). The recognition of this threat to regional autonomy has resulted in the Declaration of Flanders receiving the signatures of 45 regions. This demands that European legislative regions in particular be given a far greater role in

156 William John Hopkins

European decision making. For all European regions, representation in Brussels is far more important than traditional international relations. Similar developments have also been evident in the United States as a result of the North American Free Trade Agreement (NAFTA). One example raised by United States local government representatives was the threat to local living wage laws. The trend towards limiting sub-national autonomy when it interferes with the international commitments of the federation was confirmed in the relationship between the states and World Trade Organization (WTO) regulations. Under United States domestic legislation the president may strike down a state law should it be felt to impinge on the requirements of the WTO. Observers of the United States system noted that the states would much rather have seen Congress take such a decision. 4.

CONCLUSIONS

The increased interaction between domestic and international affairs has had a significant impact upon the practice of federalism in the countries examined. At one level national borders are a hindrance to the successful delivery of policies and, as a result, sub-national units have increasingly developed cross-border relationships, with or without the involvement of the federal level. The "permeability" of these borders and the internationalisation of trade have also had the effect that domestic legislation increasingly has a potential impact far beyond the borders of the particular sub-national territory. In turn the internationalisation of trade and the impact of decisions taken in other nation states upon the economy of a region has led many to indulge in informal sub-national diplomacy to promote trade and tourism. Beyond these actions of the regions on the international stage, regional autonomy is increasingly threatened by the development of supra-national institutions, which increasingly take decisions previously regarded as domestic. For all these reasons, the traditional division of domestic and international policy is no longer sustainable. This presents a number of serious challenges to the federal or regional state. One of the key challenges it raises is the question of accountability. The principle of federalism is predicated upon democratic decision making and subsidiarity, but the internationalisation of decision making undermines this crucial aspect of the federal ideal. Decisions taken at the inter-governmental, cross-border or supra-national level are by their very nature inter-executive decisions taken without the involvement of the relevant legislatures. In fact such decisions operate in a political space detached from the mechanisms of accountability. There is no parliament or council where such decisions can be scrutinised. Should such institutions be granted "sovereign rights" to make and enforce decisions in their own right, the issue of accountability will be thrust to the fore.

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Part B Theme I — Work Session Proceedings

The Upper-Rhine Regional Conference experience was raised in the work session as a rare example of such a body both recognising and attempting to address the accountability deficit created by increased internationalisation of decision making. The Upper-Rhine Regional Council comprising regional and national parliamentarians/councillors has been created to shadow the conference itself although its discussions may cover much wider subjects. In tandem with the accountability issue, the development of subnational foreign affairs and cross-border relationships raises questions about the future of the nation state itself. The discussion of the various types of sub-national involvement in international affairs presented above is clear evidence of the permeability of national borders today, and it would appear that the "hard border" of the traditional nation state is under considerable strain as it softens under practical pressures (Hopkins, 2002a). The ease with which cross-border issues can be resolved in cases where the state operates a decentralised system of government cannot be lost on local and regional politicians in unitary states involved in such bodies. One should not be too hasty in predicting the demise of the state itself however. There is still a role for the national level, and even those micronationalist regions that wish to leave their parent state see it being replaced by another state, not disappearing entirely. The importance of the nation state to the operation of the regional tier is most clearly shown in the predicament in which the Kurdish administration finds itself. Denied access to the national level by a hostile Iraqi government, the Kurdish administration is not given the privileges of statehood on the international stage. Surrounded by hostile states with Kurdish minorities of their own, which they refuse to recognise, the Kurdish administration is only given the status of a political party in their contacts with these states. This makes the development of cross-border and international relationships difficult, even though they are clearly rational for all concerned. In a world of nation states, regional autonomy can be ignored. The process of regional involvement in international affairs appears set to continue, but it is not an even or predictable path. All regions are not created equal, and those that have the power to force their way onto the in ternational stage will undoubtedly do so. Those that cannot will be left behind. This "creative destruction" as described in the work session will have a serious impact on the development of federal governance and the nation state in the global era. The evidence presented above suggests that there will be an enlargement and proliferation of sub-national international relations in various guises but the future of sub-national international relations may belong to those regions with the power, both economic and constitutional, to seize the opportunity.

158 William John Hopkins NOTE i Swiss banks and the government were accused of acting unethically in relation to accounts of holocaust victims that had lain dormant in the years following the Second World War. REFERENCES

Bursens, P., 2002. How Multi-Level are IGCS: The Belgian Federation and the 2000 Conference. Regional and Federal Studies, 12(3). Engel, C., ed., 1992. Le Role des regions dans I'exercise des competences externes des etats en Europe ocidentale. Brussels: TEPA. Hopkins, J., 2002. Fitting Round Pegs into Square Holes: Multi-Layered Governance and International Organisations. Canta LR, 9. Hopkins, J., 2OO2a. Devolution in Context. London: Cavendish Publications. van Ginderachter, J., 1993. Les Competences Internationales des communautes et des regions Belgique. Studia Diplomatica, 44(2). Wildhaber, L., 1974. External Relations of the Swiss Cantons. Canadian Yearbook of International Law, 12.

WORK SESSION PROCEEDINGS: REPORT

BEAT HABEGGER

Participation of Sub-national Units in the Foreign Policy of the Federation (Work Sessions 2 and 14)

1.

INTRODUCTION

A country's federal structure is an important factor in conditioning its foreign policy. Federalism, traditionally conceived as shaping only the internal functioning of a political system, in fact also determines the foreign policy making of a country. Contrary to the traditional notion of foreign policy, today's political realities do not correspond any longer with the conventional wisdom of a clear division between a domestic and a foreign policy sphere of governance. While the historic nation state is supposed to behave as a unitary actor, the domestic political structure provides subnational units with competencies to influence the foreign policy of the federation (Jha, 1999, i). It is evident that the federated entities are only able to keep their political significance according to their constitutionally granted rights if they participate effectively in the federation's governance of foreign affairs. In federal democratic systems, officials of sub-national governments have always tried to maintain an influence or a significant role in federal foreign policy making. Interdependence, globalisation, and the shift of decision making away from the nation state onto the international level have only intensified this need. These fundamental changes regarding the role of the nation state and the condition of the international system bring into sway the delicate balance between the different levels of authority. Although many federal constitutions preclude their constituent parts from the making of foreign policy by assigning these powers to the federal government, it is impossible to ignore the interests of the federated entities entirely. Thus, the sub-national units are trying to reinforce their role in

16o Beat Habegger

foreign policy making in order to compensate for lost autonomies and legislative powers. Their main purpose is to be involved in major decisions before the final decision is reached or an international treaty signed (Duchacek, 1990, 11). An understanding of the governance of external relations within a particular federal set-up must take constitutional dispositions as a starting point of enquiry. However, anyone interested in the true functioning of a political system has to go beyond formal structures. The political practices and the interplay of the sub-national units with each other, as well as the relationship between the federal and the sub-national level, must be examined (Jha, 1999, 13). In order to gain a better understanding of federal systems, it is thus necessary to study both their constitutional laws and their political processes and practices (Watts, 1999, 14). The topic under consideration in Work Sessions 2 and 14- the participation of sub-national units in the foreign policy of the federation - enquired into the different possibilities for participation with regard to determining foreign policy through the federal framework of the state. Three of the numerous models of participation in federal states were discussed more thoroughly in the work sessions. The report therefore begins with a brief analysis of the participatory rights of sub-national units in foreign policy in the German, Belgian and Swiss federal systems. The study of the functioning and characteristics of the respective political systems was the first purpose of the work sessions. The second purpose was to enable an exchange of experiences between practitioners and scholars of different countries. At the heart of the work sessions were several key questions. Is it possible for the federated entities to influence the federation's foreign policy effectively? How can the involvement of sub-national units be reconciled with the need for a credible, reliable, and coherent foreign policy? What are the pros and cons of the different models of participation? In view of these questions, the report summarises some of the main findings of the work sessions. 2.

THREE

MODELS OF PARTICIPATION:

GERMANY, BELGIUM AND

SWITZERLAND

The following paragraphs provide a brief overview of the participation of sub-national units in the federal systems of Germany, Belgium, and Switzerland. 2.1. Germany

The Federal Republic of Germany is composed of 16 constituent states (the Lander) and designates itself as a democratic and social federal state (Art. 20 Para, i Basic Law). The so-called "eternal guarantee clause" (Art. 79 Para. 3

161 Part B Theme I - Work Session Proceedings

Basic Law) maintains the Lander as centres of political decision making with substantial legislative powers and the right to participate in federal legislation through the Council of States (Bundesrat) (Kokott, 1999, 176-177). According to Article 30, Basic Law, the exercise of state powers and the fulfilment of state functions is a matter for the Lander, unless the Basic Law provides or admits otherwise. In reality, however, the Basic Law provides for broad areas of exclusive and concurrent powers of the federation, whereas the legislative powers of the Lander are confined to certain policy areas (Kokott, 1999, 176-177). Foreign policy is a federal competence (Art. 32 Para, i Basic Law). The Lander still have the right to be consulted before the conclusion of an international treaty, but only if one or several of them are more affected by a federal policy decision than the others. The federation even has the right to conclude international treaties within the exclusive legislative powers of the Lander, but in this case they participate in the federation's decisionmaking process according to the so-called "Lindauer Abkommen" (Sturny andThalmann, 2000, 151-154). The coordination between the Lander and the federation usually takes place in the Bundesrat, which is at the heart of the German federal system with regard to the governance of external relations. Because most international treaties have to be approved in the form of a federal law, the Bundesrat has the right either to oppose or to veto, depending on the topic of the international treaty (Art. 59 Para. 2 Basic Law and Art. 77 Basic Law) (Sturny and Thalmann, 2000, 155-156). Above all however, the Bundesrat plays a crucial role in the participation of the Lander in matters pertaining to the European Union (EU). Despite being an organ of the federation, the Bundesrat today serves as the most important device for the Lander in securing their role in the formation of the federation's EU policy. Article 23, Basic Law, provides for a complex coordination process through which the Lander participate in all matters of EU policy (for a comprehensive account see Oschatz and Risse, 1995). As to Article 23 Paragraph 2, Basic Law, the federal government keeps the Bundesrat informed, comprehensively and at the earliest possible time. Insofar as the interests of the Lander are affected in a matter within the exclusive competence of the federation, the federal government shall take into consideration the position of the Bundesrat. Whenever the legislative powers exclusive to the Lander are affected, to that extent the position of the Bundesrat shall be the decisive factor in determining the federation's position (Art. 23 Para. 5 Basic Law). Furthermore, if exclusive legislative competencies of the Lander are primarily affected, a Land delegate shall represent Germany at EU level, for example in the deliberations of the Council of Ministers (Art. 23 Para. 6 Basic Law). In practice however, the federal government has mostly refused to transfer the conduct of negotiations to the Lander (see Lejeune, PartB).

162 Beat Habegger 2.2. Belgium

In Belgium, several constitutional revisions, between 1970 and 2001, ended with the creation of a federal state. Even today, Belgium finds itself in an ongoing process of federalisation. The specific character of the Belgian system lies in the coexistence of two different federated entities: the regions and the communities. The three regions - the Wallonian, the Flemish, and the Brussels-Capital regions - are territorial entities, whereas the three communities - the French, the Flemish, and the German communities - reflect the cultural diversity of the country. Each level of authority has a certain set of competencies as stipulated in international treaties and the Belgian constitution, as well as in special and ordinary laws. Two important constitutional features should be mentioned with respect to the topic under consideration. First, apart from the cases of concurrent powers (the exception in Belgium), there is no supremacy of federal law over regional law (Alen, 1995, 35). In general, all legislative powers are exclusive - each level has its own powers that cannot be disputed. Second, this principle of exclusive powers is also valid in the governance of external relations. If the regions or communities have been made competent for certain policy domains internally, then they are also competent for these matters externally. Thus, within their respective competencies, the regions and the communities possess treaty-making power. In foreign affairs, a specific procedure was developed for the conclusion of so-called "mixed treaties" that deal with matters concerning federal, regional, and community powers simultaneously. The exclusive powers of the regions and the communities prohibit the federal government from concluding these treaties unilaterally. It is not allowed to encroach upon the exclusive jurisdiction of the sub-national entities without their explicit consent (see Lejeune, Part B). The coordination between the federal level and the federated entities takes place in the Interministerial Conference on Foreign Policy (CIPE), where the respective representatives meet on equal terms. The Consultation Committee is called on to solve the difficulties that have not been resolved by consensus in the CIPE. Institutionalised coordinating organs along with informal procedures render possible a coherent formation of the federation's policy decisions within the complex Belgian system. The federated entities have also become increasingly involved in the EU decision-making process. First, at the preparatory stage, a cooperation agreement ensures the equal participation of all federated entities as well as the federal government in coordinating meetings that aim to achieve consensus on the Belgian position in EU matters. If the parties are not able to reach a consensus, additional procedures (CIPE, Consultation Committee) come into force. The minister representing Belgium within the Council of Ministers can only take up positions previously discussed at a preliminary meeting (see Lejeune, Part B).

163 Part B Theme I - Work Session Proceedings

Second, at the table of the Council, a minister delegated by all the subnational units represents the country. Following a change to Article 203 ECT, the Council of Ministers is not exclusively formed by members of federal governments. A member of a sub-national government can therefore represent Belgium legally. The level of authority representing Belgium depends on the configuration of the Council, that is, on the matters being discussed (see Lejeune, Part B). 2.3.

Switzerland

Switzerland is divided into 26 quite autonomous cantons. The country's extensive federal structure is complemented by almost 2,900 communes, each enjoying considerable autonomy and competencies. According to Article 3 of the federal constitution (FC ), the cantons are sovereign insofar as their sovereignty is not limited by the constitution. They exercise all rights that are not expressly transferred to the federal government. Each canton has far-reaching legislative, fiscal and administrative competencies. The constitution also stipulates an obligation of the federation and the cantons to collaborate and to support each other in the fulfilment of their tasks (Art. 44 FC). Mechanisms of negotiation, mediation, information, and consultation all make reference to the change from a dual to a cooperative federalism, in which the different levels of authority recognise each other as equivalent, and take their respective interests into account. Foreign relations are a federal matter, yet the principle of cooperative federalism requires the federation to take the powers of the cantons into consideration and to protect their interests (Art. 54 Para. 3 FC). The participation of the cantons regarding decisions of foreign policy is laid down in Article 55 FC. The cantons shall participate in matters concerning their powers or their essential interests, and they shall have the right to participate in international negotiations when appropriate. In addition, the federal government has to inform them timely and fully, and to consult them. These provisions have been further elaborated in an ordinary law in 1999 (for a comprehensive account see Pfisterer, 2001, 535-542). During the negotiations on the European Economic Area at the beginning of the 19905, the cantons realised their need for a common institutional arrangement in order to coordinate their positions and maintain more sustained contact with the federal government. As a consequence, in 1993 the so-called Conference of Cantonal governments (KdK) was estab lished with its own institutional structure (board of ministers, secretariat). Ever since, most of the coordination between the cantons themselves as well as between the federation and the cantons has occurred in this quite powerful, but rather informal instrument of cantonal governments (on the KdK, see Miinger, 1994). In Switzerland, the need for sub-national units to be involved more directly in foreign policy is primarily a response to the continuing process of

164 Beat Habegger European integration. Although not a member state of the EU, Switzerlan is influenced to a large extent by the decisions and developments within the Union. Consequently in political practice, the right of the cantons to participate in foreign policy first and foremost implies the right to participate in the federal policy of European integration. 3. F I N D I N G S The following paragraphs highlight important aspects of the topic under consideration, brought up repeatedly during the work sessions. 3. i. Participation and direct activities To begin with, an important distinction must be made. The participatory rights of federated entities through the federal framework should be clearly set apart from the foreign policy activities which sub-national units undertake at their own discretion (so-called "constituent diplomacy"), for instance the cross-border regional cooperation or the offices of subnational units in foreign capitals. Although it might sometimes be difficult, it is important to draw the line unambiguously in order to tackle the different problems in an appropriate way. For instance the Swiss federal constitution expresses this important distinction in a very clear way. Article 55 FC sets the guidelines for the effective participation of the cantons within the federal framework, whereas Article 56 FC deals with the relations that the cantons may undertake with foreign countries on their own. Because Work Sessions 2 and 14 focused on the participation of sub-national units in the foreign policy of the federation, the remarks made on "constituent diplomacy" have not been included in this report. 5.2. Policy coherence

In the traditional international order of the inter-state system, the nation state had to be able to take unified action against the world outside and to "speak with one voice" in order to defend national interests effectively. This requirement was unquestionable even in a federal state. Until today, it has thus been strongly disputed whether the federated entities should have a say in foreign policy making, and how far-reaching their powers should be. Accordingly, in the work session it was stated by some participants that federalism displays its positive effects first and foremost within the federation, and is not necessarily suited for the domain of foreign policy. On the other hand, most participants argued that a federation is by definition multi-faceted in character and rarely able to speak strictly with one voice in every situation. It is often quite difficult to find a commonly accepted position among all actors involved, especially if the internal distribution of pow-

165 Part B Theme I - Work Session Proceedings ers assigns major competencies to the federated entities. Compared to "constituent diplomacy", it is less likely that the foreign policy of die federation would be undermined by actions of the federated entities, because all their activities take place within the constitutionally defined federal framework. Nevertheless, every federation needs institutions and mechanisms to coordinate the interests of the different levels of authority. 3.3. Policy coordination The tension between liberty of action for the sub-national units and the necessity of policy coherence for the federation underlines the need for effective mechanisms of conflict resolution. Through institutionalised consultative and coordinating procedures, problems are anticipated and each other's legitimate interests accommodated (Jha, 2000, 13). First, the federated entities need coordination among themselves. In Switzerland for instance, it is essential for the 26 cantons to cooperate and coordinate their actions if they intend to have a real influence on the foreign policy making of the federation. Second, the sub-national units and the federation have to coordinate their positions to die greatest extent possible in order to strengthen the national position in international negotiations, and avoid inconsistent policy declarations that are damaging to the country's international reputation and credibility, as well as to ensure that the interests of all parties engaged are taken into account. In Belgium for example, the regions, the communities and the federation must pull together in the CIPE when preparing the Belgian position for the EU Council of Ministers. In the absence of any consensus, the minister representing Belgium must abstain from the vote (see Lejeune, Part B). As well as formalised mechanisms, informal or semi-formal procedures that may be used in coordinating the respective policies need to be considered. In Germany for example, the federal chancellor meets on a regular basis with the prime ministers of the Lander to discuss common problems and to coordinate positions, which gives the Lander an additional device for influencing the federation's foreign policy. 3.4. Implementation of international law According to traditional international law, the federation has a duty to ensure the effective implementation of international law, regardless of the internal allocation of responsibility. In practice though, the implementation often occurs not at federal level, but at sub-national level. Thus, whatever the constitutional rules might be, efficient implementation of foreign policy and international treaties requires the willing cooperation of the subnational units (Jha, 1999, 12). It is therefore advisable or even imperative to include sub-national units in the federal decision making.

166 Beat Habegger

New research on the member states of the EU suggests clearly that in federal states where those responsible for implementing agreements are involved in the negotiation process, implementation records are better. Because sub-national governments under a federal system are responsible for much of the implementation of legislation, problems arise during the implementation stage unless the regional governments are integrated into international negotiations early on (Martin, 2000, 184). In Germany for instance, the Lander are not legally obliged to implement international treaties of the federation. The federation is therefore dependent upon the voluntary motivation of the Lander. Obviously this can be encouraged by the effective participation of the federated entities in the negotiation process (Sturny and Thalmann, 2000, 157-158). 5.5. Foreign policy andsu policy

The relationship between the participation of sub-national units in foreign policy in general and in the context of the federation's policy as regards to matters of the EU was also addressed in the work sessions. Principally, there was a consensus that European integration has more far-reaching consequences for a country than other forms of participation at the international level. The relation between the member states and the Union is in fact no longer foreign policy in its classical form. It is rather a new form of European domestic policy (Europaische Innenpolitik), in which the interactions between the European level and the state level have taken on "domestic dimensions", replacing traditional modes of international cooperation. On the other hand, several participants argued that the effects not only of the EU, but also of other international institutions, regimes, and regulations on the federation should be taken into account. In many countries the participation of sub-national units in the foreign policy of the federation became a pressing issue in the first place through the all-embracing process of European integration. Undermining of their competencies was beyond any doubt the main reason for sub-national units' request for more participatory rights in foreign policy. In Germany for example, the Lander demanded more involvement in government decisions regarding the EU because they realised that the continuing drift of legislative powers to the European level was undermining their own competencies. Conversely, the federation needs the expertise of the Lander and their administrations on the European level, as they are normally competent regarding policy implementation. 4.

CONCLUSION

The participation of sub-national units has become a major feature of the foreign policy of federations. Traditionally excluded from the governance

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of external relations, the federated entities are reinforcing their role within the federal framework in order to compensate for loss of powers due to globalisation and internationalisation of law making. The purpose of the participation in the federation's foreign policy is to be involved in decision making before the final decision has been reached or the international treaty signed. The federal systems of Germany, Belgium and Switzerland illustrate the different opportunities for federal states to shape an appropriate framework for the requests of the federated entities. In the work sessions it became clear that the participation of sub-national units works well in each of the three countries under consideration. They succeed in voicing their interests, and the process does not actually hinder the federal foreign policy. However, coordination procedures between the different levels of governance are indispensable, and have been put into practice in the German, Belgian and Swiss federal systems. As a rule, the participation of the subnational units is equally crucial for the federal government. The federation needs the willing cooperation of the federated entities in order to implement its foreign policy and international law. Moreover, the federation has to rely on the knowledge of the federated administrations when shaping foreign policy that primarily affects the sub-national units. This is particularly true in matters concerning the EU. Consequently, participatory rights have been developed primarily as a reaction to the ongoing process of European integration. The German system especially, for instance, is largely adjusted to the participation in the federation's EU policy. In Germany, Belgium and Switzerland the participation of sub-national units in the foreign policy of the federation has stood the test of time. In order to understand their respective roles, a thorough knowledge of the federation's political system in general is required. In the end however, each federal system has its pros and cons and the design for a specific country is not necessarily suited to or even transferable to a different political context. Instead, the historical, cultural and political realities of a federation always need to be considered in order to create an appropriate set-up. REFERENCES

Alen, A., 1995. Der Foderalstaat Belgien: Nationalisms -Foderalismus Demokratie. Baden-Baden: Nomos. Duchacek, I.D., 1990. Perforated Sovereignties: Towards a Typology of New Actors in International Relations. In: H.J. Michelmann, and P. Soldatos, eds. Federalism and International Relations: The Role of Sub-national Units. Oxford: Clarendon Press,

!-33Jha, N.K., 1999. Foreign Policy Making in Federal States: The Indian and Canadian Experiences. India Quarterly, 55(3-4), 1-16.

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Kokott, J., 1999. Federal States in Federal Europe: The German Lander and Problems of European Integration. In: A. Jyranki, ed. National Constitutions in the Era o Integration. London: Kluwer Law International, 175-204. Martin, L., 2000. Democratic Commitments: Legislatures and International Cooperation. Princeton: Princeton University Press. Miinger, B., 1994. Die Konferenz der Kantonsregierungen. In: D. Freiburghaus, ed. Die Kantone undEuropa. Bern: Haupt, 247-263. Oschatz, G-B. and Risse, H., 1995. Die Bundesregierung an der Kette der Lander? Zur europapolitischen Mitwirkung des Bundesrates. Die Offentliche Verwaltung, 48 (i 0,437-452. Pfisterer, T., 2001. Auslandbeziehungen der Kantone. In: D. Thurer,J-F. Aubert, andJ-P. Miiller, eds. Verfassungsrecht der Schweis. Zurich: Schulthess, 525-546. Sturny, T. and Thalmann, U., 2000. Rechtsvergleich: Die Rolle der Gliedstaaten in der Aussenpolitik. In: P. Hanni, ed. Schweiserischer Foderalismus und europdische Integration. Zurich: Schulthess, 151-195. Watts, R. L., 1999. Comparing Federal Systems. Montreal and Kingston: McGillQueen's University Press.

WORK SESSION PROCEEDINGS:

MARTIN

REPORT

F. POLASCHEK

Implementation of International and Supra-national Law by Sub-national Units (Work Sessions 3 and 15)

1.

INTRODUCTION

-

INTERNATIONAL LAW

IN FEDERAL SYSTEMS

The implementation of international law in a federal system is full of problems, and there are many ways of dealing with them. In both work sessions, the case acted as the starting point for a long debate involving participants from different countries giving examples from other federations. In some federations, constitutional law provides special rules, generally giving the federal government the power of (subsidiary) implementation. In some federations sub-national units have the power to conduct relations with foreign states and/or sub-national units, and to conclude international treaties in the area of their legislation. In addition, federations that are members of supra-national organisations have to make sure that supranational law is implemented at the sub-national level. Special rules, at national as well as at supra-national level, ensure that the federated entities participate in the supra-national organisation's policy making and have access to the supra-national organisation's court. 2. S U P R E M A C Y OF I N T E R N A T I O N A L LAW

-

THE CASE OF C A N A D A

Canada can be regarded as a special case because Quebec, the only Canadian province with a French-speaking majority, is the biggest Frenchspeaking community outside France. Quebec is more active internationally than any other sub-national unit in the world and wants to have a "foreign policy" equal to that of the state. So the federal government has to

170 Martin F. Polaschek

consider the special wishes of Quebec, and has to act for two linguistic communities. Although the constitution of 1867 gave the provinces a high level of autonomy, the power of making international treaties still lies with the federal government. The "Labour Conventions Judgement" (1937) confirmed the exclusive authority of the federal government to enter into international agreements, but the implementation of treaties is a joint task. Treaties in matters of provincial jurisdiction can only be implemented by the provinces; the federal government therefore has to use its treaty-making power with respect for provincial interests. Consultation and cooperation are very important, and the provinces are increasingly involved in the preparatory negotiations. That "multilevel governance", as has been highlighted by a Canadian Chief Justice, works reasonably well most of the time, although it is not very formalised. The examples given by the case statement makers demonstrated the different problems caused by this system, as well as some that occur outside bilingual federations. The framework created by the Canadian courts is much more intricate than that of other federations who follow the rule "externally we are one" (e.g. the United States). In Canada, as a Canadian lawyer mentioned, the courts play an interesting, but not the central role. However, the Baker case ruled by the Supreme Court of Canada in 1999 should be mentioned here. The Supreme Court held that a rule of international law, even though not fully incorporated into Canada's domestic law, would be relevant in determining the legality of the exercise of statutory discretion. Analysis of the cases and the statements by the participants reveals four different groups of problems. 2.1.

The "inter-governmental deficit"

If there is no consensus between the provinces, the ratification of an international treaty can be delayed. The provinces should coordinate their policies more, and avoid competition with each other on an international level. A high-ranking representative of a Canadian province presented the delay in the ratification of the Kyoto protocol to reduce greenhouse gas emissions as an example: some provinces are for the ratification, some are against, some have no opinion to date. There can also be differences between the federal government and some of the provinces, as an Austrian government official observed. Canada wanted to sign an agreement on social security with Austria. The latter was interested in homogenous provisions, but Quebec wanted a separate settlement. Finally, an arrangement was found, but the negotiations were complicated and prolonged. Another example, given by a Canadian politician, concerned economic development. Provinces trying to attract foreign businesses sometimes compete with each other. To avoid competition like

171 Part B Theme I - Work Session Proceedings this, "Team Canada" has been founded, which tries to coordinate the economic policies of the federation and the provinces. The prime minister, the minister for international trade, the provincial premiers and territorial government leaders, together with business representatives are organising missions to foreign countries to increase trade and create jobs and growth in Canada. The promotion by Canada's leading politicians helps participants to come into contact with businessmen abroad and emphasises the wish of the federal and provincial governments to increase international trade. 2.2.

The "democratic deficit"

Foreign policy is dominated by the executive powers. The legislative chambers are very often not involved in negotiations. But final parliamentary approval is insufficient. Once an international commitment is made, parliaments may have little choice but to implement the legislation. Often, secrecy and dispatch are important during negotiations, but that also means a lack of information to the parliaments (especially the opposition) and the interested public, especially non-governmental organisations (NGOS). 2.3.

The "federal deficit"

Because of its formal treaty-making power, the federal government can determine the priorities of the provinces, especially in the field of federal legislation. Local policies (for example pollution control or fishing) are discussed at an international level, but the sub-national units are not sufficiently involved by the federal government. Even when international treaties do not relate to provincial jurisdiction, they may still have consequences for the sub-national units. 2.4.

The "national deficit"

Canada is a multinational federation, but Quebec often feels underrepresented by the federal government. Because of its special "national character", it wants to act freely on the international level to preserve its French identity. Although in Canada, as in many federations, the sub-national units are prohibited from being parties to international treaties, Canadian provinces are almost sovereign in some fields; they cooperate with other federal units all over the world and increasingly engage in foreign policy. This can also be seen in other federations. For example, the Swiss cantons, and the German and Austrian Lander participate in foreign policy. Different examples show that explicit authorisation by law is less important than the political power of a state in the federation. Examples from other work session

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participants showed that there are also differences between the provinces of a federation. Some are more engaged in international affairs, some less; some are more interested in economic relations, some in cultural. In some federations, like Canada, the United States or Brazil, the federal government cannot force states to implement international law. This can lead to international conflicts, especially where human rights are concerned. In some countries, the provinces are obliged to take all measures required for the implementation of international treaties. If they fail to do so, the federal authorities can take the measure by subsidiary legislation or force the sub-national unit to oblige. 3.

IMPLEMENTATION WITHIN THE FRAMEWORK OF SUPRA-NATIONAL ORGANISATIONS -

THE CASE OF AUSTRIA

There is a difference between the implementation of international and supra-national law. Law of the European Union (EU) is not international, but domestic law; its implementation requires special rules. The European law relates to both the spheres of competences of the federation and of the states. For this, federations belonging to supra-national organisations (in the EU: Austria, Belgium and Germany) have to make sure that the "supranational law" will be implemented at the sub-national level. The problems, and how it is possible to deal with them, can be seen by examining the situation in Austria. European law concerns federal as well as provincial jurisdiction. For this, it is possible that for the adaptation to directives, ten bills (one by the fed eral parliament, nine by the provincial parliaments) have to be passed. About one third of the provincial statutes (wholly or in part) are passed in order to implement European law. The Austrian constitution provides special orders for the implementation. The states are bound to take all necessary measures within their autonomous sphere of competence to implement juridical acts within the framework of European integration. If a state fails to do so, the European Court of Justice of First Instance has to declare the dilatoriness. Then, the competence for such measures, in particular the issuance of the necessary laws, passes to the federal authorities. A measure taken by the federation pursuant to this provision becomes invalid as soon as the state has taken the requisite action. To date, there has been one judgment by the Court dealing with such a case, concerning a directive on the workers from risks related to exposure to biological agents at work (Judgement of the Court [Fourth Chamber], c-no/oo; 11 October 2001). The directive was adopted at the federal level, but some of the states did not take the required measures. Since the directive was not completely implemented into Austrian law within the time limit, the Commission of the EU brought the action to the Court,

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seeking a declaration that the Republic of Austria had failed to comply with its obligations. In its rejoinder, the Austrian government stated that the necessary measures had since been adopted at federal level, and that matters were at an advanced stage at the provincial level. The Court did not accept that argument, and declared that Austria had failed to fulfil its obligations. As a consequence of this judgment, the federal government issued an ordinance, substituting a provincial statute. There are different methods of coordination between the states and the federal government (Art. 23d of the Austrian federal constitution - B-VG). • Distribution of documentation: it is important for the states to be informed of events in Brussels. The federal government must inform the states without delay regarding all projects within the framework of the EU, which affect their autonomous sphere of competence, or could otherwise be of interest to them. • Consultation with the states: in the above-mentioned case, the Lander must be allowed to present their views to the federation (the Bund). If provincial legislation is involved, and the states present a uniform comment, the federal government is bound thereby in negotiations with and voting in the EU. It may deviate from that comment only with regard to compelling foreign and integration policy reasons. The states must be informed of these reasons without delay. • Provincial participation in delegations: when a project within the framework of the EU also affects matters of provincial legislation, a member of a provincial government can represent Austria in the Council of the EU. While representatives of Belgian and German federal entities who have the same right use it, the Austrian states have not done so until now. In addition, the states (and the local authorities) are represented in the Committee of the Regions. They maintain offices in Brussels to improve commercial and political connections at the European level and cooperate with other European sub-national units. But the committee was described by one Austrian politician as a "toothless tiger". It has no real power; the sub-national units cannot influence European policies in that way. More important would be the lobbying in the European Parliament. In Austria, as in some other countries, the candidates are nominated by the provincial sections of the political parties. Therefore many Austrian MPS feel obligations to their states. In the Council of Europe, the sub-national units and the local communities are better represented than in the EU. The Congress of Local and Regional Authorities (whose president joined the work session) is the third body of the Council beside the Committee of Ministers and the Parliamentary Assembly. Beginning with the European Outline Convention

174 Martin F. Polaschek

on Trans-frontier Co-operation between Territorial Communities or Authorities (signed in Madrid in 1980), the Council of Europe is trying to improve and secure cooperation between sub-national units. Additional protocols, signed in 1995 and 1998 in Strasbourg, have been further steps in that direction. Although only soft law, these texts are an important tool for sub-national units, especially in rather centralised countries. Following the example of the European Charter of Local Self-Government (Strasbourg, 1985), the Council is currently discussing a Convention on Regional Self-Government, which should serve as a standard for regional democracy and self-government, including external relations. In June 2002, there was a meeting in Helsinki to prepare the draft, but the decision on what form the text should take (that of a convention or a recommendation) was postponed. As well as the rules concerning the implementation of supra-national European Community (EC) law in Austria, there exist special rules for the implementation of international law, which were presented in the work session by an Austrian lawyer. The states are bound to take measures that become necessary for the implementation of international treaties within their autonomous sphere of competence. If a Land fails, competence for such measures passes to the federation. A measure taken by the federation pursuant to this provision becomes invalid as soon as the state has taken the requisite action. In contrast with the implementation of European law, no decision by a court is required. Since 1988, the Lander have had the power to conclude treaties with states bordering on Austria or with sub-national units of those states in matters falling within their own sphere of competence (Art. 16 B-VG). Before the initiation of negotiations about such a treaty, the federal government must be informed. Also, before such a treaty is concluded, the federal government's approval has to be obtained. Treaties concluded by a state shall be revoked upon request by the federal government. If the state does not duly comply with this obligation, competence in the matter passes to the federation. Because this is a rather complicated procedure, the states have not concluded such treaties to date. The federal constitutions of Germany and Switzerland and Belgium have comparable rules concerning the treaty-making power of the federated entities. Article 32 of the German Basic Law states that insofar as the states have power to legislate they may conclude treaties with foreign countries with the consent of the federal government. Article 55 of the Swiss constitution clearly stipulates how the cantons can participate in decisions of foreign policy. They shall be informed "timely and fully" and consulted; their position shall have particular weight when their powers are concerned. In such cases, they even can participate in international negotiations. Pursuant to Article 56 the cantons may also conclude treaties with foreign countries within the scope of their powers, but the confederation must be informed

175 Part B Theme I - Work Session Proceedings

before the conclusion and such treaties may not be contrary to the law of the confederation nor to the law of other cantons. They may only deal directly with sub-national units; relations with foreign states are conducted by the federal government acting on their behalf. Article 167 Section 3 of the Belgian Constitution empowers the community and regional governments to conclude treaties regarding matters that are within the scope of the responsibilities of their councils. The discussion following the presentation of the Austrian case was enriched by the question of the position of the local authorities (above all the large cities and metropolitan regions), NCOS, and civil society as a whole in international and EU affairs. For many participants, the role of the European Court as an independent authority in declaring the delay of the implementation of EC law was a good example of the protection of the states' jurisdiction in this area. 4.

CONCLUSION

International law is becoming ever more important on the national as well as the sub-national level. The evolving international economic order requires adaptation of federal as well as provincial law. Implementation can take place in different ways. In "dualistic" systems, international and national law are totally separated. International treaties and conventions even once signed do not become part of domestic law until they are legislated into force. In "monistic" systems, further legislation is only required if the international rule is not applied directly. Additionally, there is the problem of the internal division of competences. If the conclusion of an international treaty concerning sub-national matters by the federation implies its power to implement it by national legislation, it is a severe restriction of the powers of the federated entities. On the other hand, if the federation has no influence or control over the implementation by the sub-national units, the latter can prevent the performance of international obligations. Some constitutions allow the federal level to substitute the implementation. In cases of abuse, the ruling of a (supra-/international) court can be required. These questions are important especially for members of supra-national organisations, as the case of Austria has shown. This leads to the question of the responsibility in case of breaches of such obligations under international law. Before international courts, the federation is also responsible for failure by the federated entities to meet such obligations. Some constitutions (for example Switzerland) provide for the recovery the financial costs of such breaches from the federated entities concerned. In some countries, such as Canada, "indemnity agreements" exonerate the federation. Thus far, sub-national units are not directly responsible in international law, but their position may well change.

176

Martin F. Polaschek

Some rulings by international courts, such as the LaGrand case of the International Court of Justice in 1999, tend in that direction. Although mentioned by one of the analysis statement makers, the recent United States practice of yielding to state's rights in matters of criminal law was not further discussed. However, examples from other federations were added. There have been condemnations of Brazil by the Inter-American Court of Human Rights concerning violations of human rights by state officials. The federation was held responsible, although it cannot influence the state judiciary and officials. The incorporation of international human rights laws into domestic legislation, and the required constitutional reform, is one of the major tasks of the Brazilian federal government. The same problem was mentioned by a Swiss lawyer: in many cases, the "Eidgenossenschaft" was condemned by the European Court of Human Rights concerning criminal procedures, although the Swiss cantons have the competence for criminal procedural law. The implementation of human rights treaties leads to the transfer of "new values" to sub-national units. This is a very relevant topic, because it can lead to political, ethical and religious tensions. In such a case - if rules to force the implementation do not exist - the federation must inform, instruct, and convince the sub-national units that the implementation is good and important for them. Conflicts over the implementation of international treaties may undermine the legitimacy of international law itself and result in a lack of support for international law by the sub-national units. Participants from other federations pointed out that it can be very hard to implement international law, especially for smaller federated entities. More consultation and information should be made available by the federation, and more cooperation between the sub-national units themselves is important. In Switzerland, some cantons are working together by employing one expert/the same experts to prepare the implementation. Often, federal governments are not interested in consulting the states and including them in international affairs, but the influence of international law on the sub-national level is still growing. Foreign policy making is no longer the prerogative of the federation. The sub-national units are becoming more and more internationally involved and the federal government has to share its powers with them. Some federal constitutions attribute international competences to the federated entities. As one of the analysis statement makers pointed out, there is a growing "polyarchy" at the international level. REFERENCES

Brunn, G. and Schmitt-Egner, P., eds, 1998. Grenzuberschreitende Zusammenarbeit in Europa. Theorie -Empirie - Praxis. Baden-Baden: Nomos.

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Bucar, B., 1998. The Emergence of International (Legal) Obligations between Subnational Territorial Units - Illusion or Reality? In: R. Kicker, J. Marko, and M. Steiner, eds. Changing Borders: Legal and Economic Aspects of European Enlargement. Frankfurt/Main et al.: Peter Lang, 32. Cottier, M., 1999. Die Anwendbarkeit von volkerrechtlichen Normen im innerstaatlichen Bereich als Auspragung der Konstitutionalisierung des Volkerrechts. Schweizerische Zeitschrift fur Internationales und europdisches Recht, 9, 40. Cranwell, G., 2001. The Case for Parliamentary Approval of Treaties in Australia. E Law - Murdoch University Electronic Journal of Law, 8 (4, December 2001) (http://www.murdoch.edu.au/elaw/issues/v8n4/cranwell84_text.html 2 December 2002). Danilenko, G. M., 1999. Implementation of International Law in cis States: Theory and Practice. European Journal of International Law, i o, 51. Dominice, C., 1999. The International Responsibility of States for Breach of Multilateral Obligations. European Journal of International Law, 10, 353. Freiburghaus, D., 2001. Die Schweiz - Der Foderalismus nach der neuen Bundesverfassung und die Mitwirkung der Kan tone an der AuBenpolitik. Jahrbuch des Foderalismus 2001, 2, 296. Goldsmith, J., 2000. Do States Have the Power to Conduct International Affairs? CNN Interactive, 27 June 2000 (http://www.cnn.com/2OOo/LAW/o6/columns/ fl.goldsmith.burma.o6.27/ 2 December 2002). Hanni, P., ed., 2000. SchweizerischerFoderalismus und europdische Integration. Die Rolle derKantone in einem sich wandelnden internationalen Kontext. Bern: Schulthess. Kadelbach, S., 1999. International Law and the Incorporation of Treaties into Domestic Law. German Yearbook of International Law, 42, 66. Kalbfleisch-Kottsieper, U., 2001. Foderaler Kompetenzverlust durch Uberkompensation? Eine kritische Bilanz der europapolitischen Mitwirkung der deutschen Lander insbesondere mit Blick auf den Bundesrat. Jahrbuch des Foderalismus, 2, 168. Keating, M., 1999. Regions and International Affairs: Motives, Opportunities and Strategies. Regional and Federal Studies, 1/99, 1. Kerremann, B. and Beyers, J., 1996. The Belgian Subnational Entities in the European Union: Second or Third Level Players? Regional and Federal Studies, 2/96, 41. Kicker, R., 1998. The Alps Adriatic Working Community: Practice and Legal Aspects. In: R. Kicker, J. Marko and M. Steiner, eds. Changing Borders: Legal and Economic Aspects of European Enlargement. Frankfurt/Main et al.: Peter Lang, 13. Leonardy, U., 2000. Treaty-Making Powers and Foreign Relations of Federated Entities. In: B. Coppetiers, D. Darchiashvili, and N. Akaba, eds. Federal Practice. Exploring Alternatives for Georgia and Abkhazia. Brussels: VUB University Press, 151. Opeskin, B.R. and Rothwell, D., 1997. International Law and Australian Federalism. Melbourne: Melbourne University Press. Trone, J., 2001. Federal Constitutions and International Relations. St Lucia/ Queensland: University of Queensland Press.

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True, C., 1997. Die Bundesstaatlichkeit der Bundesrepublik deutschland Auswirkungen auf die Umsetzung volkerrechtlicher vertrage.Juristische Schulung, 1092. Unterholzner, K, 1998. Recent Developments Within the Council of Europe, In: R. Kicker, J. Marko and M. Steiner, eds. Changing Borders: Legal and Economic Aspects of European Enlargement. Frankfurt/Main et al.: Peter Lang, 21. Unterlechner, J., 1997. Die Mitwirkung der Lander am EU-Willensbildungsprozej}: Normen, Praxis, Wertung. Vienna: Braumiiller. Wouters, J. and de Smet, L., 2001. The Legal Position of Federal States and Their Federated Entities in International Relations - The Case of Belgium. K.U. Leuven, Institute for International Law, Working Paper N. 7 (June 2001).

WORK S E S S I O N P R O C E E D I N G S :R E P O R T

BENJAMIN SCHINDLER

Federal Structures and Foreign Policy of International and Supra-national Organisations (Work Sessions 4 and 16)

1.

INTRODUCTION

The author has attempted to structure the summary thematically. As dis cussion in the work sessions did not always follow a linear path, a chronological structure would have made the report much less comprehensible. Although the main subject of discussion was the federal structure of the European Union (EU), the author has chosen to highlight a few specifically Swiss aspects in order to associate the International Conference on Federalism 2002 more closely with its host country. 2.

FOREIGN POLICY AND

FLEXIBILITY

Foreign policy demands rapid, flexible action, as illustrated all too clearly by the events of and following 11 September 2001. Alternatively, in th pithy words of a case statement maker with great experience in foreign policy matters: "Foreign policy is basically about acts, not rules." Another case statement maker put it slightly differently: "It's products not process that count." 3.

FEDERALISM

AND

COMPLEXITY

It would appear that federalist systems demand the sort of basic attitude that was described by Denis de Rougemont as an "amour de complexite" (Thiirer, 2002). Discussions returned time and again to the complexity of decentralised federalist systems and their inherent tendency to be slow and cumbersome (see Ehrenzeller, Hrbek, Malinverni, Thiirer, Part B; Wessel

180 Benjamin Schindler

and Diedrichs, Part B). A journalist from a most respected European periodical illustrated this with an anecdote. Recently, he said, he had asked an influential Swiss person about the chief concerns of Switzerland's foreign policy. The person answered: "Switzerland doesn't have a foreign policy!" This statement may perhaps be an exaggeration, but it indicates the difficulty of operating a coherent foreign policy in a system in which consensus is taken to extremes. A Swiss scientist upheld the view that, ultimately, Swiss neutrality ensures that the country's delicate balance between different religions, linguistic groups, cultures and parties is not upset. If we were to apply the Swiss example to Europe, the logical consequence would be a passive or at least very restrained foreign policy. Yet a direct comparison with Switzerland is misleading for several reasons. There is another key factor that stands in die way of an active Swiss foreign policy: government opinion forming is shaped by direct democracy, so domestic policy absorbs most of the country's political energy and thereby limits the ability of government to act (Thurer, 1999, 150). Switzerland also differs from Europe on another point: it is small and has therefore been able to "afford" a passive foreign policy - at least in the past. By contrast, as will be demonstrated here, the need for a common foreign policy for Europe is undisputed - an "a la Suisse" approach is out of the question at the European level, as one case statement maker acknowledged: "Neutrality and non-intervention are not a option for Europe. We can't just cultivate our garden." 4.

COMMON FOREIGN POLICY: AN UNDISPUTED NECESSITY

The need for a common foreign policy was a recurring topic of debate. In the past, this need was usually seen in terms of a common military threat. According to one case statement maker, "all federal states are born for military reasons"; this also applies to a certain extent to Europe. After all, European integration was promoted after the Second World War precisely in order to avoid future intra-European conflict. To date, this objective has been achieved beyond dispute. By contrast, a further step towards integration - a common external front on issues of foreign and security policy - seems to be a great distance away (Habermas, 2001, 7). At the same time, however, participants in the discussions often expressed clear agreement that new social problems and threats such as ter rorism, drug trafficking, crime, migration, health policy etc., can only be countered effectively from a common base. "Foreign policy works best when powers that have reach and respect say the same thing, at the same time, in the same way, to the same people. Europe must learn to walk stronger and taller and speak as one", as one participant put it in the discussions. Frequently quoted in this context was Tony Blair's statement that he wants EU to be "a superpower, not a superstate". The last half of

181 Part B Theme I - Work Session Proceedings

this quotation ("not a superstate") not only addresses the aspect of common power, but also that of restraint - federalist restraint. 5.

FEDERALIST FOREIGN A GORDIAN

POLICY:

KNOT?

During the debate, a German scientist asked the question that is probably the crux of the matter: what is the relationship between the concepts of federalism and flexibility? Are they at all compatible? If we look at the Swiss example (see below), we might conclude that federalist foreign policy is an oxymoron. This led a case statement maker to talk about a "dilemma between a common EU foreign policy presence on the one hand, and the vital force of nation states on the other". Although inter-governmentalism is impractical where foreign policy is concerned, it is the only viable option at present. According to a member of the Convention of Europe, the Convention's difficult objective is thus to increase Europe's ability to act, whil maintaining the capacity of the member states to operate independently. 6.

COMMON FOREIGN POLICY AND THE W I L L I N G N E S S TO WAIVE NATIONAL SOVEREIGNTY

If an effective common foreign policy is to be put into practice, intergovernmental frameworks and instruments must be dismantled. The imminent expansion of the EU to the east will further increase pressure in this regard. Expansion will not be possible without greater depth. As the number of member states rises, inter-governmental mechanisms will become more and more ponderous, inflexible and "unjust". It would be a problem, for example, if small states such as Cyprus or Malta were able to veto crucial points of the EU'S foreign policy. The scope of foreign policy authority is becoming a litmus test ("Lackmus-Test") of the degree of member states' collectivist intentions and their willingness to give up their sovereignty. Ultimately, foreign policy is all about a "pooling of sovereignties" (see Ehrenzeller, Hrbek, Malinverni, Thiirer, Part B). However, putting this awareness into practice has proved extremely difficult. The willingness to give up national sovereignty is particularly lacking when it comes to foreign and security policy, and emotional resistance is considerable. This became especially clear in discussions of examples in which foreign policy has used its last resort - armed force. A British politician was not alone in his view that the decision to send a nation's soldiers to carry out duties that place them in danger of injury or death is not one that can be under the control of any body other than the elected government and parliament of individual nations. "I find it hard to imagine looking the parents in the eye and saying: your son has died because he was

182 Benjamin Schindler

sent under the orders of a commission in Brussels or even of an Assembly in Strasbourg", he said. However, some participants opposed his views. A German scientist warned that the deployment of soldiers should not be used as a killer argument (Totschlag-Argument) to nip every discussion about Common Foreign and Security Policy (CFSP) in the bud. A student from Slovakia also pointed out that a single European currency seemed inconceivable just 20 years ago. Security policy might follow a similar path, subject to the readiness of politicians to develop visions to push developments forward. Such a vision could be that of the German Federal Minister of Foreign Affairs, Joschka Fischer - oft-quoted in the discussion - who said "I am working on making myself surplus to requirements". 7- A Q U E S T I O N OF N A T I O N A L S O V E R E I G N T Y ! E U R O P E — A " F E D E R A T I O N OF N A T I O N S " ? The issue of waiving sovereignty on foreign policy is closely linked to the question of whether the EU is a federal state (Bundesstaat) or a federation of states (Staatenbund). The Bundesstaat designation still brings to mind the definition of Swiss statesman Alfred Escher (1819-1882): "External unity, internal diversity". So what did German Federal President Johannes Rau mean when he referred to the Europe of the future as a "federation of nations"? Debate about whether the EU should be classified as a Bundesstaat or a Staatenbund concluded that wrangling over terminology does little to aid clarity. Europe will probably have to be described using new terms such as Staatenverbund (as coined by German Federal Constitutional Court) or simply as an entity sui generis. A journalist in the discussions also added pointedly: "Semantics have always been at the heart of the federalist debate". This observation is confirmed by a look back at Swiss constitutional history. According to Article 3 of the Swiss federal constitution, the Swiss cantons are "sovereign insofar as their sovereignty is not limited by the Federal Constitution". This provision was one of the few to be adopted in the 1999 constitution virtually unchanged from the original constitution of 1848. There is no debate that this sovereignty provision runs counter to modern teaching on constitutional law. Yet Art. 3 of the Swiss federal constitution contains a seminal political message even today. The Swiss Confederation is not the result of late-stage decentralisation or administrative fragmentation, but has grown up out of a "bottom-up" federation of sovereign states (McKay, 2001, 105). Johannes Rau's choice of words should therefore be interpreted in a similar way to the use of the term "sovereignty" in the Swiss federal constitution. "When Rau speaks of a 'federation of nations', then he means that the process is a slow one" explained one participant. It will be achieved through a "federal evolutionary process", or in other words: "The structure of Europe is an evolving process; it's biology, rather than architecture."

183 Part B Theme I - Work Session Proceedings

Concerning foreign policy, a high-ranking European official offered: "Experience is a great school. Fools will learn no other." He was echoed by a scientist who stated that: "It's a trial and error process." This process will be examined in greater detail below. 8. DOES THE " F E D E R A T I O N OF N A T I O N S " NEED A COMMON CONSTITUTION? Closely linked with the Staatenbund/Bundesstaat issue is the question of whether Europe should continue to be bound by treaties or whether it needs a common constitution. One case statement maker in particular, disputed that a "constitutional demos" or "ethnos" is a precondition for a European constitution. In the discussion that followed, this precondition for a formal constitution was rejected by all sides. Firstly, it was pointed out that a constitution might itself help to create a "demos" (see also Habermas, 2001). Secondly, the positive example of Switzerland was held up as a counterweight to the negative examples of Canada and Spain.1 It was suggested that the reason for the "unstable compact" in Canada and Spain may lie in the imbalance between the majority and a clearly defined minority. As such, discrimination against, or the repression of the minority is seen as a latent risk. By contrast, this risk is much lower where cultural, religious, political and linguistic groups overlap and are always forming new coalitions with different constellations - as in Switzerland or Europe. In Switzerland, federalism means that everyone simultaneously belongs to both a majority and a minority (Rhinow, 1993, 779; Schindler, 1993, 35). In addition to a repeated emphasis that nothing (negative) stood in the way of a European constitution, discussions also returned to the (positive) need for such a document. The aim of a common constitution would also be to engender or strengthen a sense of European identity (referred to in German as a "Wir-Gefuhl"). Working with the general public, institutions can develop a common identity (Wessels and von Bogdandy, 2002). So far, the process of European union has been driven by primarily economic considerations, but the Euro should not be allowed to remain the only unifying element in the eyes of Europe's citizens. A community of values is needed, and the European Charter of Fundamental Rights has laid the first foundation stone. As early as 1961, the Swiss constitutional law expert Max Imboden, called for the European Community (EC) to draw up its own constitution as a deliberate contrast to the integration efforts determined by economic factors (Imboden, 1961, 128; Habermas, 2001, 8). Closely related to the goal of creating an identity is the carving out of a common constitutional reality. There are parallels here with the objectives set for the revision of the Swiss constitution in 1999. One of the tasks was to catch up with the unwritten constitutional law that had developed since 1874. It soon became clear, however, that such a process is prone to making

184 Benjamin Schindler

value judgments and occasional changes, which is why, with hindsight, the revision is more accurately described as an update (Rhinow, 2000). German participants were particularly keen to point out that the function of a European constitution would be to create primary legislation that clearly lays down the competences of the Union and its member states. According to the Germans, the regulation of these authorities is a political task that can no longer be delegated to the European Court of Justice. "Europa ist kein Amtsgericht".2 A clear delineation of the authorities of the Union and its member states also pursues another objective: the limitation of power. Montesquieu was concerned not only with the division of power, but also with its restraint: "Que le pouvoir arrete le pouvoir".3 Q. S T R U C T U R E S O F A F U T U R E E U R O P E A N FOREIGN POLICY:

W H A T is E U R O P E ' S T E L E P H O N E N U M B E R ? 9.7. 11 September 2001 as a test of strength Henry Kissinger, the Former United States Secretary of State, once complained: "When I want to call Europe, what number do I ring?" What Kissinger meant was that when a crisis occurred, Americans did not know who to turn to as the authentic and immediate voice of European opinion. That question has not been answered entirely, even though the EU now has a High Representative for CFSP in the shape of former NATO Secretary General, Javier Solana, and a Foreign Affairs Commissioner in former British Minister, Chris Patten. More than any other event, the response to the terrorist attacks on the United States on 11 September 2001 and the reactions to that response left an uneasy feeling that the EU as such was not able to coordinate and harmonise the views of the member states efficiently (see Wessels an Diedrichs, Part B). Smaller member states, in particular, criticised the approach of the "Big Three" (Britain, France and Germany). Firstly, President Chirac, Prime Minister Blair and Chancellor Schroder held a brief mini-summit (a huis clos) before the official EU summit in Ghent on 20 October 2001, then Blair convened a dinner in Downing Street o 4 November 2001. Initially, invitations went only to Chirac and Schroder, although they were ultimately also sent out to the Italian, Spanish, Dutch and Belgian prime ministers (the last representing the EU presidency), as well as Javier Solana. That the exclusive inner circle of the three countries was expanded indicates greater sensitivity towards the smaller states on the part of the larger ones. Yet the fact that invitations were sent out almost as an afterthought led a British journalist to describe the affair as the embarrassing "Downing Street dinner disaster".

185 Part B Theme I - Work Session Proceedings 9.2. Foreign policy also needs rules and stronger institutions To most of the participants in the discussions, one thing was clear in the wake of the events of 11 September 2001: "When the game gets bad then that lack of rule book and procedure gets really obvious". For two scientists, this very experience shows that the statement "foreign policy is basically about acts, not rules" does not always apply. Times in which foreign and security policy-related inter-governmental mechanisms must be observed are exactly the sort of context in which we need procedures and structures which facilitate coordination and harmonisation between member states, even in crisis situations. The creation of common foreign policy institutions and the strengthening of existing frameworks take things a step further. However, it soon became clear in discussion that it is an extremely difficult task. This is where a "pooling of sovereignties" takes centre stage. One proposal is to combine the functions of External Relations Commissioner and High Representative of CFSP (see Wessels and Diedrichs, Part B). A German politician, however, pointed to the danger that one individual could easily become a paper tiger or a puppet of the "Big Three" (a "Kaiser ohne Kleider"4). However, if a European "directoire" were to be created, there would be a very real risk - as with the United Nations Security Council - that the powerful EU states would dominate. Resistance from the smaller member states would be inevitable. A British case statement maker drew attention to the difficulty in appointing people to fill these newly created offices as - at least for the time being - there is no European "classe politique": "We don't have enough Solanas!" The issue of how sub-national bodies should contribute to the foreign policy of the EU attracted only marginal attention. The opinions that were voiced tended to reject this approach. A German participant for example, argued that reaching a consensus on foreign policy is complicated enough already without making the process even harder. The outcome was likely to be counterproductive, i.e. lead to greater centralism. And an analysis statement maker raised the difficulty caused by the significant differences in structures and constellations in some areas at sub-national level, making the relationship between the EU and these bodies highly complex. 9.3. Foreign policy is also about steel and bananas While discussion focused on the failure - real or imagined - of European foreign and security policy after 11 September 2001, a high-ranking European official underlined another important aspect: foreign policy is not limited to the settlement of international crises like 11 September, the Middle East or the Balkans. Foreign policy is also about the settlement of trade conflicts ("steel and bananas") and coordinated intervention in

186 Benjamin Schindler

financial and monetary markets. And it is in these very areas - i.e. the EC and the European Central Bank (ECB) - that an effective common foreign policy exists. In this case, unlike Henry Kissinger, Federal Chairman Alan Greenspan does not need to ask who to call. The ECB'S crisis management in the wake of 11 September can be regarded as a success. Working alongside the United States, it succeeded in preventing a collapse of the international financial markets. A Swiss scientist also indicated that military considerations have come to dominate the discussion too heavily. Europe's strength is not military - it lies in its commercial and financial relationships and its diplomatic network. "Our approach has to be dialogue-based, and not military-based. That's what sets us apart from the United States." However, at the same time, the coexistence of two systems of foreign policy - a communitarian system in the first "pillar" and an inter-governmental system in the second is less than efficient. 1O.

ATTEMPTED

CONCLUSIONS

Discussions were dominated - almost inevitably, given those taking part by the questions surrounding the form a future EU foreign policy should take. For example, one of the youth participants pointed out that the contrasts between individual national policy and policy at supra-national level were even sharper within the United Nations (UN). There was also an interesting contribution from a country that is very close to Europe but not part of the EU itself: a Turkish scientist (and journalist) described the EU'S difficulties with his country and vice-versa. The EU, he said, relied on Turkey specifically where foreign policy is concerned because the country forms a buffer zone to the "axis of evil". Yet at the same time, in the eyes of certain European countries, Turkey represents a religious and cultural threat (all the more so following the result of the elections in November 2002). Nonetheless, there are close economic ties between Turkey and Europe. The scientist believes that both the EU and Turkey would be perpetuating a myth if they were to continue to uphold the idea of accession. In summarising the outcome of the discussions on a common European foreign policy, one of the participants was probably right when he said: "Europe is not at all a failure in foreign policy terms. But the hard end of foreign policy is defence!" Security and defence is an area that highlights the European Convention's difficult task of finding a "golden blend between federal and confederal structures". After the second work session, it was clear to all participants that a revolution is not on the cards. In any event, politics is more a case of taking many small steps in the right direction. Mapping possible routes is the task of the scientist, deciding which

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Part B Theme I - Work Session Proceedings

route to take that of the politician. In seeking the right route, however, the Convention cannot allow its gaze to be diverted from the road ahead by fruitless semantic discussions about Staatenbund and Bundesstaat etc. Here it is worth remembering something that is recorded in the minutes of the Swiss "Convention" of 1848: "... reams ('Folianten') have been written about the terms Staatenbund and Bundesstaat; it would therefore seem sensible to suspend any basic terminology decisions ..." (Schiess, 1848, 13). There are no standard off-the-peg patterns of federal structure. The search for the right route must always start again at the beginning. This was just as true 150 years ago as it is today. NOTES

1 The "founding fathers" of modern Switzerland recognised that a constitution is not necessarily conditional upon the existence of a nation: "the term 'nation' has no place in our organism, because nationhood has nothing to do with systems of government; we talk about the German, French or Italian nations while these nationalities, divided into different states, have their own particular public law institutions and at the same time experience a feeling of belonging together" (Schiess, 1848, 13). 2 "Europe is not an inferior court." See Thiirer, 2002. 3 "So that power stops power." 4 An "Emperor's New Clothes" scenario. REFERENCES

Habermas, J., 2001. Why Europe Needs a Constitution. New Left Review, 11 (September-October), 5-26. Imboden, M., 1963. Die Verfassung einer Europaischen Gemeinschaft. In: Festgabe zum Schweiserischenjuristentag 1963. Basel: Helbing & Lichtenhahn. McKay, D., 2001. Designing Europe, Comparative Lessons from the Federal Experience. Oxford, New York: Oxford University Press. Rhinow, R., 2000. Die Bundesverfassung 2000, Eine Einfiihrung. Basel, Geneva, Munich: Helbing & Lichtenhahn. Rhinow, R., 1993. Die Zukunft Europas im Spannungsfeld von Integration und Foderalismus. In: W. Schluep et al., eds. Recht, Staat und Politik am Ende des zweiten Jahrtausends. Bern, Stuttgart, Vienna: Verlag Paul Haupt, 769-783. Schiess, J.U., 1848. Protokoll ilber die Verhandlungen der am 16 August 1847 durch die hohe eidgenossische Tagsatzung mit der Revision des Bundesvertrages vom 7 August 1815 beauftragten Kommission. Bern. Schindler, D., 1993. Philosophic und Instrumente des Foderalismus. In: Schweizerisches Institut fur Auslandforschung (SIAF) . Foderalismus - Mittel der Konfliktbewdltigung. Chur, Zurich: Verlag Riiegger, 23-38.

i88 Benjamin Schindler Thiirer, D., 2002. Aussenpolitik und Foderalismus - Schliissel zu einem neuen Verstandnis. Neue Ziircher Zeitung, 20 September 2002, 16. Thiirer, D., 1999. Werte in Europa - Werte in der Schweis. In: P. Forstmoser et al., eds. DerEinfluss des europaischen Rechts aufdie Schweis. Zurich: Schulthess, 139!55von Bogdandy, A., 2002. Kollektive Identitat durch Verfassungsrecht? Neue Ziircher Zeitung, 16 October 2002, 17.

DIALOGUE TABLE P R O C E E D I N G S : SUMMARY ADDRESS

JAKOB KELLENBERGER

Federalism and Foreign Relations (Dialogue Tables i and 4)

1.

FOREIGN

RELATIONS

OF SUB-NATIONAL

UNITS

The scope for sub-national units to develop foreign relations is very different in various federal states. However, the discussion demonstrated that it is wise to make a distinction between more formal agreements and informal arrangements (arte di arrangiarsi). While Article i, Section 10 of the United States constitution says that states shall not enter into agreements with other states or sub-national units without the consent of Congress, it was not entirely clear to me to what extent this provision also relates to more flexible forms of cooperation based on memorandums of understanding, conferences etc. There seems to be a certain latitude for informal agreements. For the understanding of the solution chosen for external relations of sub-national units in a federal state, it appears to be useful to understand the whole political system of the respective state. The large treaty-making power given to regions and communities in Belgium, for example, has to be seen in a context of exclusive allocation of powers (no need to cooperate) and a lack of true national political parties. Moreover, the particular development of federalism in Belgium must also be seen against the background of this country's history. One has to be aware of the limits to cross-border agreements between sub-national units in border regions if their competencies to conclude such agreements vary widely between the states they are part of. The Oberrhein region with two federal and one non-federal states is an interesting case in this respect. The procedures for concluding such agreements can

i go Jakob Kellenberger

also differ. A German Bundesland can conclude agreements with subnational units of another state, but needs the consent of the federal government. It has been mentioned that the process of European integration makes it more necessary for sub-national units to conclude cross-border agreements. The case of Switzerland indicates that this holds true for both European Union (EU) member and highly integrated non-member states. One might even argue Switzerland would have been more isolated in the process of European integration had the sub-national units not had considerable room for manoeuvre to conclude agreements with sub-national units of EU member states. 2. PARTICIPATION OF S U B-N ATI O N A L UNITS IN THE FOREIGN POLICY OF THE FEDERATION

The cases examined during the discussion were two EU member states (Germany, Belgium) and one non-member state (Switzerland). Switzerland developed its constitutional and legal basis for the participation of the sub-national units (cantons) mainly as a consequence of the process of European integration. The principles of participation of the cantons in the area of foreign relations laid down in the Federal Law of 2 2 December 1999, on the participation of the cantons in the foreign policy of the confederation, were already applied during the bilateral negotiations between the EU and Switzerland from 1994 to 1998, and proved to be fruitful. The importance given in the discussions to the question of whether there should be the same or different rules for participation of subnational units with regard to European integration and foreign policy in general came a bit as a surprise to me. Why? For a country located in Western Europe the process of European integration has a deeper and broader impact on its citizens than the process of globalisation in general. Even in a non-EU-member state like Switzerland it is more important for cantons to participate in the European policy of the federal state than in the foreign policy in general. The difficulty of recognising this fact in Switzerland may have something to do with the difficulty in recognising that non EUmembership is, in terms of shaping the future of Europe and in terms of an efficient defence of Swiss interests, a real handicap. The fact that the Swiss Confederation cannot participate in the decision making in Brussels also has as a consequence the fact that the sub-national units of Switzerland have no opportunity to influence the decision making. It was interesting to note that Austrian colleagues felt that the relationship between the federal state and the Lander had become much more intensive and substantial since Austria became a member of the EU. The legal and procedural situation of the Lander also improved as a consequence of EU

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membership. There were discussions about the effect of the number of sub-national units on their participation in the foreign policy of the federal state. It was felt the higher the number the greater the need for cooperation between the sub-national units in order to bring in the position of the sub-national units on time, during negotiations for example. My experience is that the Swiss cantons were quite impressive in this respect during the bilateral negotiations. 3. IMPLEMENTATION OF INTERNATIONAL AND

SUPRA-NATIONAL LAW

BY SUB-NATIONAL UNITS

It was largely felt that the more sub-national units are involved in consultations or negotiations leading to such law or the better informed they are, the more they are motivated to implement the respective laws. The less they are involved and informed, the less they feel concerned and accountable for implementation. We also heard of the difficulties in some federal states with regard to legal possibilities for imposing the implementation of international or supra-national law on sub-national units if the latter refuse to do so (United States, Austria). In Austria the federal state can only do so once the European Court of Justice has stated a violation of EU law by the Land concerned. 4.

FEDERAL

STRUCTURES

AND FOREIGN POLICY OF INTERNATIONAL AND SUPRA-NATIONAL ORGANISATIONS

This issue was, in fact, examined in the context of discussions about the relationship between the EU member states and the EU, mainly in relation to the Common Trade Policy and Common Foreign and Security Policy (CFSP). The debate was more political than legal. The prevailing feeling was that Europe was shaped in the EU and that the EU could not pull out of the great decisions taken on the global level. There was unanimity that the EU alone carried the necessary weight to promote European interests in the global debate. The view of die EU as a superpower attracted more sympathy than an image of it as a superstate. One foreign policy maker participating in this debate felt we should not only talk about democratic deficits, but worry more about decision-making deficits in the EU in an international environment where we might be exposed to conflicts. No directorate, but no lowest common denominators either. 5.

CONCLUSIONS

I will end with some more personal remarks. First, my experience is that the participation of sub-national units in the shaping of the foreign policy

ig2 Jakob Kellenberger

of the federal state whenever their powers or essential interests are concerned strengthens the foreign policy of the federal state. Sub-national units bring in know-how and experiences relevant to a negotiation, which are often lacking at the central level. The bilateral negotiations between Switzerland and the EU between 1994 and 1998 have also proved that 26 sub-national units can organise themselves in such a way that they are in a position to give their opinion on complex negotiating issues within days. The possibility for sub-national units to have their own foreign policy in areas of specific interest and concern, in my opinion, increases the flexibility of the foreign policy of the state as a whole. After all - and one can think here also of Switzerland - the degree of economic and social interdependence between sub-national units of different states can exceed the degree of interdependence between sub-national units within one federal state. For this flexible set-up to function, a climate of mutual trust between the federal level and the sub-national units appears to me to be indispensable. The federal authorities must feel secure that the state as a whole can defend its foreign interest with a strong voice when the interests of the federal state as a whole are at stake. Secondly, and without entering into the niceties of the precise legal nature of the EU with its complex structure, some of its federal characteristics are beyond doubt. There are similarities between the EU and federal states even if there is, as specialists will remind us, no constitutional demos. In other words, what we have in Europe with the EU, is an additional federal structure whose importance exceeds, for the members of the EU, the importance of globalisation, a more narrow, in many ways also more superficial development than regional integration. European integration has, in other words, a deeper and broader impact on citizens in Europe than globalisation. After the extensive quotes of Napoleon in speeches so far I may add one quote of Bismarck in this context: "die Geographic ist die einzige Konstante auswartiger Beziehungen" (Geography still matters). Switzerland is, with the exception of Liechtenstein, surrounded by member states of the EU. From this perspective I was somehow surprised that the debate on federal structures of supra-national organisations, that is on the relationship between EU member states and the EU, did not take place along similar lines to the discussion on the relationship between sub-national units of federal states and the respective federal state. I say so while being fully aware of the fact that the powers of EU member states in terms of foreign relations exceed by far the powers granted to subnational units by federal states. Had the discussion followed this pattern it might have appeared even more clearly that the creation of the EU in the second half of the last century was at least as normal and natural a development as the creation of federal states like Switzerland in the middle of the nineteenth century. I noted with interest that representatives of federal states which are mem-

193 Part B Theme I - Dialogue Table Proceedings

bers of the EU attending this conference found their EU membership not only normal, but did not give any impression of seeing their own federal structure threatened because of EU membership. Thirdly and finally, in my present activity, dealing with the causes and, above all, the consequences of armed conflicts in this world, I am faced more with questions related to Theme II of this conference: Federalism, Decentralisation and Conflict Management in Multicultural Societies. Whereas my earlier travelling took me to places like Brussels and London, my travel destinations are now Afghanistan, Angola, Columbia, Ethiopia and other countries at war or suffering from the consequences of war. It gives me the opportunity to reflect from time to time upon the relationship of different states' structures and armed conflicts. There are at present, as you are probably aware, internal armed conflicts both in federal and in centralised states. A federal state structure is no safeguard against armed conflicts, but, from what I have seen and felt, federal structures have an important conflict prevention dimension, because they imply and request a culture of what the French call the "respect de la difference". However, one can only really feel confident on the day that this respect for the other extends to each individual, independently of race, religion, nationality or other identities.

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PART C

T H E M E II

Federalism, Decentralisation and Conflict Management in Multicultural Societies

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SCIENTIFIC B A C K G R O U N D : THEME PAPER THOMAS FLEINER, WALTER KALIN, WOLF LINDER AND CHERYL SAUNDERS

Federalism, Decentralisation and Conflict Management in Multicultural Societies

1.

INTRODUCTION

Almost 95 % of people in the world today live in multicultural states, fragmented into different cultural communities. Forty percent of these people live in federal states. The others are in unitary states with greater or lesser degrees of decentralisation. Multiculturalism has become a challenge for most states in our world with divided and fragmented societies. Particularly after the fall of the Berlin Wall they have to cope with problems and conflicts that were formerly overshadowed by the potential for conflict between capitalism and communism, which split mankind into two worlds. In a "glocalised" international order, the question that now confronts many states is how best to bring together and to hold together multicultural societies. Until recently, questions of public power focused on good governance. In constituting a state, the principal questions were how people should be governed and how governments should be organised. Now, additional and much more controversial issues need to be determined. Who should govern whom? What majority or majorities should rule over what minorities? Who should control the political power of the state, and with regard to whom? Underlying these issues is another, more fundamental and difficult still: who should decide the procedure by which it is settled who should govern whom? Federalism is an approach to government that divides public powers not only horizontally, but also vertically. Federalism is traditionally considered to be a useful way of limiting governmental power. Thus it has been viewed as one particular solution to the organisation of power in order to secure good governance. However, at the same time, it has also been criticised as detracting from efficiency and equality.

198 Fleiner / Kalin / Linder / Saunders

We understand federalism as a constitutionally established balance between self-rule and shared rule. Viewed in this light, federalism offers an additional answer to the burning question of what can be done to bring or to hold multicultural societies together. Not only does it provide a solution to the traditional questions of governance, but it also assists with the problem of who should govern whom. Thus federalism is one of the main options to be taken into account in determining systems of government for multicultural societies. 2. WHY IS MULTICULTURALISM A PROBLEM?

2.1. Culture and equality

Most modern concepts of the state are based on the idea of a secular state based on a social contract of the people. Political power draws its legitimacy from the sovereignty of the people. Popular sovereignty is rooted in the liberal concept of universal homo sapiens, distinguished from other species by a capacity to reason. Different political theories view man variously as: • • • • •

Egocentric (Thomas Hobbes); The bearer of inalienable rights (John Locke); A Rational citizen (Jacques Rousseau's "Citoyen"); Exploiter or exploited (Karl Marx); Homo politicus: made for the political community (Aristotle, Thomas Aquinus); " Homo oeconomicus: driven by economic concerns (Adam Smith, John Rawls). All of them, however, rest on the assumption that human beings are essentially equal. This also is the assumption on which the secularised democratic state now is based. Acceptance of the equality of all people on the basis of a common humanity is in tension with acceptance of the diversity of individuals or communities by reference to culture, tradition or language. Given the equality of individuals, there is an obvious threshold question about the basis upon which certain people come together in a political community, excluding others. In a multicultural context, the question becomes even more difficult. On what basis is it legitimate for the will of a majority to override that of a minority, even when the minority is convinced that its essential cultural interests are threatened? On the basis of what criteria does a political unit include particular communities within the state, and fail or decline to include others? By way of example, why did the international community celebrate the unification of East and West Germany

199 Part C Theme II - Scientific Background

after the fall of the Berlin Wall but forbid the unification of Germany and Austria after the First World War? 2.2. Diversity and the nation concept

Today the peoples of the world are organised in "states". The people from whom each state draws its legitimacy are often referred to as a "nation". Citizens, as rational beings, are deemed to have come together in a social contract. At least three different approaches can be detected to the way in which nationhood is conceived and the values on which the state is consequently based. All of them are hostile to multiculturalism and diversity. • Nation made by the constitution. In some cases the nation is made by the state. Such a nation excludes diversity by reducing humans to the rational "citoyen". The state is held together by universal political values, for example, the republican values proclaimed by the constitutions of France or Turkey. All individuals can join it, notwithstanding their cultural background. However as soon as any group seeks to introduce cultural values into the political debate, the very basis of the political unity of the nation is threatened. The underlying rationale of such states requires them to deny the political relevance of culture. • State made by the nation. In a second category, the state is made by a nation that claims pre-state unity based on culture, history or religion. A state made by pre-constitutional cultural unity must exclude diversity, because it endangers the very roots of the mono-cultural people's sovereignty. If people are held together by culture, multiculturalism becomes a real threat to the unity of the nation. Germany is an example, as can be seen in the preamble to the German constitution: "The German People have adopted, by virtue of their constituent power, this Constitution". • Immigration countries. Finally, some states comprise peoples who have come together and are held together for social and economic reasons. Typically, these are the countries in the so-called "new world", formed by successive waves of immigration. They are constituted by reference to the peoples within their territory: "We the people of the United States", for example. Such states must ignore different cultures (including, problematically, the culture of their indigenous people) as political values. Economy has priority over culture. Culture is expected to integrate into the melting pot of society, driven by concern for common welfare. From this analysis, it can be seen that states are either held together by one homogenous culture that excludes other cultures, or by acceptance of one homogenous set of political or economic values that exclude culture as a political consideration. In either case, diversity becomes a threat to the nation concept.

2OO Fleiner / Kalin / Linder / Saunders

These days, almost all constitutions proclaim universal values. Underlying them, however, are varying conceptions of nationhood, all of which exclude multicultural diversity. Either they ignore it, deny it, or eliminate it. Constitutions have become instruments proclaiming political values for all individuals equally. A nation, on the other hand, separates its community from other nations by reference to its specific nation concept. Constitution makers have to confirm, provide and proclaim within the constitution, values that are good for all and in that sense universal. What is good for all excludes diversity. Values that are good for all are also good for us. Those who establish a constitution for a pre-political cultural nation do not have to ask what can hold society together, because it is held together by nature. Thus they also proclaim universal values within their constitutions, knowing that the nation is not in fact held together by these values but by the uniting factor of nature. 2.3. Taking cultural diversity seriously

It has been seen that none of the principal state and nation concepts take cultural diversity seriously. Culture is either denied or ignored, or is so central to the nation that all other cultures are excluded. The multicultural nature of the state is not a significant factor in constituting the political order. To a degree, of course, the different nation concepts contradict each other. The important point for present purposes, however, is that none of them readily accommodates different cultures within their concept of political unity. If a nation is held together by political values, it can incorporate other cultures as long as no political recognition is claimed for them. The multicultural nature of the state is ignored as a structural factor that might serve to unite or decentralise the political society. For this reason a political nation denies culture as a nation-building factor. The nation can exist only on the basis of the equality of individuals. This implies that individuals are conceived as rational human beings who ignore their cultural roots. Nations that deny culture thus assume rational citizens who may not pursue their cultural identity as part of the political identity of the state. On this basis, a secularised school forbids young Muslim girls to wear veils. All rational citoyens are equal with regard to each other. Their cultural identity is of no political value. If the unity of a polity is focused on the territory, as in immigration countries ("we the people of the United States"), culture or history are considered irrelevant as nation-building factors. Here too, culture may be considered a threat to the state, but in this case it is likely to be ignored. The basis on which immigration nations are typically established assumes the need to separate political unity from cultural unities, including the culture of any indigenous peoples. Immigrants belonging to different cultures can

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Part C Theme II - Scientific Background

identify with the political state because it has given them a new spiritual, cultural and economic freedom. However, should they seek political recognition for their culture (e.g. recognition of their language in schools), their claim is likely to be rejected as leading to political fragmentation. An immigration state can accommodate the different cultures of its immigrant citizens on the basis of private pluralism, but not as political instruments that fragment the unity of the state. This solution is possible only if cultural communities can accept the rationale for the political legitimacy of the state, and if they can be accommodated within the melting pot. Cultures that consider themselves excluded, and in particular those that previously inhabited the territory, may not find the ideology of the melting pot acceptable, and to that extent may threaten the legitimacy of the state. If individuals are held together by their common history, culture or religion, the cultural community will have priority within the territory, as in Germany, Albania and Serbia. In this case, the fragmentation that results from the cultural diversity of traditional minorities or from immigration becomes a major issue threatening the natural unity of the nation. Because the state has been made by the pre-constitutional cultural unity of the nation, other cultures must be excluded as nation-building factors. Cultural nations are held together not by reflection and choice, but by nature. State unity derives from the natural cultural identity of the nation. The state consequently cannot accommodate other cultures. At best, it can tolerate non-integrated minorities as guests, but not as equal citizens. The status of a fully recognised citizen can be attained only by integration. Those who want to become citizens must also change their cultural identity. States with nations held together by "nature" usually proclaim universal political values within their constitutions. As a political document, the constitution itself may contribute to identity by promoting a sense of constitutional patriotism. However, whenever it comes to questions of cultural identity, represented in these cases through full citizenship, the problem presented by other cultures once again comes to the fore (e.g. Art. 116 of the German constitution). If a cultural minority demands political recognition and identity, the state must reject the claim. Because it is unable to accommodate a fragmented political identity, it will ultimately come into conflict with its minorities. Either the minorities must be integrated within the majority culture, destroying their original cultural roots, or they must be denied the opportunity to enhance their cultural identity through political means. A fragmented political identity is rejected as a solution, because of is threat to the unity, homogeneity, and the very roots of the state's existence. Thus every nation held together by universal values, hosting several cultures, may sooner or later run into significant conflict on account of its multicultural society. Multicultural states will often be unable to accommodate cultural diversities through universal political values.

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Fleiner / Kalin / Linder / Saunders

3. THE CAUSES OF CONFLICT WITHIN

M U L T I C U L T U R A L STATES

Today's world is threatened by innumerable conflicts between ethnic communities or states and minorities. Some conflicts are open and violent. Some are hidden and may erupt at a later date. Any attempt to find and promote tools to prevent, manage and resolve such conflicts, must first identify what has caused them. The causes of ethnic conflict, however, are typically hotly disputed. Depending on the circumstances, the real stimulus may be: • Economic injustice; • Historic revenge for lost self-determination, past discrimination, or other past wrongs; • Intervention by neighbouring states with links to the ethnic minority, sometimes through shared fundamental religious beliefs; • Unscrupulous manipulation by warlords seeking power or money; • Illegitimacy of the state or the nation in the eyes on an ethnic minority because it excludes recognition of the minority culture; • Fear and mistrust caused by historically continuing conflict between the state and an ethnic minority, generating terrorism. Whatever the immediate cause, there is generally ready agreement that ethnicity somehow is inducing the conflict. One of the major reasons for the phenomenal advances of medical science in the twentieth century is that at the end of the nineteenth century, researchers began to focus on the causes and not simply the symptoms of illnesses. Similarly, effective tools for conflict management or resolution require an understanding of the causes of ethnic conflict as well as the capacity to mitigate its symptoms. In the absence of consensus on cause, the symptoms will be obvious, but no satisfactory lasting solution is likely to be found. 4. GLOBALISATION AND ETHNIC CONFLICT

It is sometimes suggested that, given the rise of the global market, nationstate sovereignty will fade away. The private market will erode the need for political and social policies. In these circumstances, controversies over who should govern the state and in what manner would lose much of their purpose. The political power of the state would have withered away and governments would have lost much of their capacity for political manoeuvre. Admittedly, ethnic claims might in these circumstances find a new "enemy" in the global market. Nevertheless, there would be no need for a national government if the state turned private.

203 Part C Theme II - Scientific Background

In reality, however, the needs and claims of human beings today are more complex, and present some contradictory features. Consumers favour a global market for their needs and expenses, and citizens claim the universality of human rights. At the same time however, people seek local security and have emotional needs that create local ties with their religious, language, historic, or cultural community. While there is a global market for many products and finances, the greater part of economic production and distribution of goods and services, including the labour market, remains regional. Despite growing migration, social security, public health systems and many other public goods are the domains of the national state. These contradictions suggest two opposing tendencies, between globalisation and universalism on the one hand, and localisation on the other. The more global the world, the greater the pressure to accommodate local needs and claims. It is not possible to analyse solutions to political and social problems by reference to globalisation or localisation in isolation from each other. This perception has particular significance for multicultural states. It suggests that the need for local identity and local security must be met not only through the privatisation of local needs, but also by political structures which can accommodate the demands of human beings rooted within their local communities, and seeking conditions for their families that can only be met locally. Therefore, as the global market expands, demands for local justice can be expected to increase accordingly. Local conflict will not fade away. On the contrary, it may become more open, more violent, and more explosive. While cost-benefit driven homo oeconomicus seeks advantage in the global market, homo politicus will require local compensation for the injustice for which globalism is responsible. There is no reason to expect that the challenges of multiculturalism will diminish in the future. 5. HOW CAN MULTICULTURAL STATES MEET THE C H A L L E N G E S THAT THEY F A C E ?

In the previous section we argued that as globalisation increases, localisation is likely to increase accordingly. The fragmentation of multicultural states will thus continue. If they do not develop the capacity to meet these new challenges, they will be unable to meet increasing demands for localisation, and will be confronted with major conflicts. In this section we suggest that to overcome these conflicts, states must achieve legitimacy in the eyes of the vast bulk of the individuals and communities living within their territory. States that wish to hold multicultural societies together must ask not only "what is good for all?" but also "what is good for us?" "Us" must be understood to mean all citizens and all peoples living within the territory of the state.

204 Fleiner / Kalin / Linder / Saunders

It is no longer sufficient to seek only good governance. In multicultural states, we must also decide who should govern whom. This requires a decision about what majorities should, in what instances, govern what minorities, and who should make these choices. The answers must be acceptable to all people and all communities in the manner that we have described. Only in this way will a multicultural state achieve the legitimacy that it needs. In the past, states have used a variety of different tools, instruments and procedures to meet the challenges of multicultural societies. In order to evaluate the usefulness of these tools, it is necessary to explore the causes and not merely the symptoms of potential multiethnic conflict. In other words, it is necessary to decide what really is needed to hold or to bring the multicultural society together. 5.7. Policy of tolerance

One option is for states to adopt tolerance as a major policy to hold or bring communities together. Someone who is tolerated will never feel fully accepted as an equal partner in a political community. On the other hand, tolerance at least entitles everyone to mutual respect as a human being with human dignity. Tolerance allows everyone to live within the community as a respected individual, free from discrimination on the grounds of race, religion or language. In the context of a legal system, tolerance implies the guarantee of human rights as individual rights. Protection of the human rights of individuals prevents the authorities of the state from discriminating against individuals who belong to minorities, on grounds of their language, religion or race. Those who are only tolerated, however, cannot constitute the "We". For members of minorities, such a state is "their" state, not "our" state. "They" have no legitimacy to define the policy of the "We". Diversity must be respected, but it is not a political value. Minorities are protected because that is required by the universal values enshrined in the constitution. Diversity is neither a policy nor a goal of a state that does not want to go beyond tolerance. Tolerance of minorities is a minimum requirement in every state that respects human dignity and the universal principles of human rights. Some states may go beyond tolerance by extending it not only to individuals but also to their communities, through a policy of affirmative action, falling short of collective rights. Affirmative action is directed to individuals who have unequal opportunities because they belong to a minority against which there is or has been discrimination. Affirmative action has the potential to discriminate against those who constitute the majority. Typically, this dilemma is resolved by taking into account the de facto discrimination against minorities, and the de facto privileges of majorities.

205 Part C Theme II - Scientific Background 5.2. Policy of reconciliation The preamble to the constitution of South Africa states that one purpose of its adoption "as the supreme law of the Republic" is to: "Heal the divisions of the past and establish a society based on democratic values ..." This points to a second option. Protection of individual rights, in whatever form, may not be adequate to bring and hold multicultural communities together. Reconciliation is also needed to assist with conflict management, contribute to better understanding, and foster cooperation between communities. In recognition of the importance of this tool, Section 235 of the South African constitution seeks a balance between the self-determination of the entire South African people "and any community sharing a common cultural and language heritage". The history of the constitution-making process in South Africa demonstrates the importance of paying attention to the means of reconciling communities who fear and mistrust each other at this critical stage. The South Africans adopted a two-stage constitution-making process. First, they negotiated an interim constitution in a way that accepted the concept of power sharing between communities equal in rights, but unequal in size and history. At the second stage, the constitution was adopted on the basis of the democratic majority principle. Even at this stage, however, it had to comply with the constitutional principles settled in the interim constitution. In the case of South Africa, time was available to transform enemies into adversaries. It was used to advantage to find procedural support for reconciliation. 5.3. Equalising minorities and majorities Democracy is based on the majority principle. However, the majority should not abuse its democratic power by tyrannising its minorities. If a state wants to hold its whole society together, the majority must recognise the right of the minorities to be treated equally both as individuals and as communities. A recent draft of a new constitution for Serbia recognises this, by acknowledging in its preamble the need to be: "Conscious of the state tradition of the Serbian people and determined to establish the equality of all the peoples [author italics] living in Serbia". A state that implements this fundamental principle must translate the concept of equality into effective collective rights. Thus Article 232 of the Brazilian constitution recognises that Indians have standing to sue and to defend their rights not only as individuals but also as a collectivity. How does the Serbian draft constitution, to which reference has already been made, implement its promise of the equality of its people? The answer, according to Draft Chapter III, is that: "Persons belonging to a national minority shall have special rights, which they exercise individually or in

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community with others." If peoples of fragmented societies are to achieve equality, the instrument of collective rights is available for the purpose. Taken to extremes, however, collective rights may limit and even violate individual rights. To what extent is this justified in the interests of collective rights? In Switzerland the federal tribunal has held that an individual language right can be limited by the collective right of a threatened language community for the sake of peace among the different communities. This provides yet another perspective. States that wish to hold multicultural societies together may need to recognise peace among communities as a goal of the state, in addition to individual liberty. Nevertheless, there are limits. Protection of minorities cannot be allowed to derogate from the essential content of human rights guarantees, which according to the covenants can never be limited, even in cases of emergency. 5.4. Enhancing diversity: the federal option

A multicultural state can promote diversity as a mechanism for holding its society together. Thus Article 2 of the new Swiss constitution requires the confederation to "promote the ... inner cohesion, and the cultural diversity of the country". What tools are available to enhance such a policy? It calls for the different communities to have powers and autonomy as well as rights and freedoms. These tools must be provided and secured through a constitutional framework. Decentralisation gives communities limited autonomy and thus selfgovernment. But central power continues to be exercised in accordance with the majority principle, and the decision as to what minority should have how much governmental power continues to depend on the majority. Only a balance between self-rule and shared rule can give communities the opportunity to promote their cultures within their territories. Only on this basis is it possible to provide the necessary base for the balanced development of all communities, together with the majority of the citizens and the people. Such a result can be constitutionally achieved only through a federal design. Any of the different tools, procedures and institutions that are available to assist states to deal with cultural fragmentation require an important change in state policies. If states want to meet the challenge of bringing or holding multicultural societies together, they must take cultural diversity seriously. They can neither ignore nor deny culture as part of their political order. Nor can a state based on the natural unity of a people continue to exclude other cultures. To take cultural diversity seriously means that constitution makers must seek values that are good for all their communities and citizens as well as values to which all human beings are entitled. Federalism offers a constitutional mechanism that not only tolerates but can also promote diversity. Not only does it limit state power, but it also enables diverse communities to participate in government. A federal state

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need not exclude culture, but can use the value of cultural diversity to enable the whole society to participate in the endeavour of the state to seek justice, promote peace and protect liberty. Thus understood, federalism is a tool for a multicultural state to derive maximum benefit from diversity. It is the constitutional implementation of the principle of unity in diversity. The diversity of a state becomes an advantage that merits protection and enhancement. While necessarily committed to universal values, such a state has an additional focus on its own specific values. It is equipped to answer its citizens' question: what is good for us and for our communities? 6.

WHAT ARE THE ISSUES?

Our earlier analysis of the underlying challenge to multicultural states and options available to deal with ethnic conflict raises a range of important questions. As yet, there are no clear answers to any of them. All merit further examination, by practitioners and scholars, and from the perspective of different multicultural states. The goals should be to advance understanding of the means by which ethnic conflict may be diminished in the interests of all peoples, and to enable the advantages of cultural diversity to be fully realised. Four of the principal issues are as follows: • How should systems of government be designed, and constitutions made for multicultural communities, so as to ensure the legitimacy of the state, promote reconciliation, and build a lasting polity? • Can federalism and decentralisation bring and hold multicultural societies together, and if so, why? To what extent do federalism or decentralisation provide specific tools for use by states fragmented by multicultural societies? • By the standards of the twentieth and twenty-first centuries, a democratic society is the sine qua non of a legitimate state. To what extent does a society fragmented into different cultural communities have a civil society capable of legitimising and controlling state power? Do we also need different political, legal and conceptual tools for this purpose in order to encourage a "united and composed diversity"? " Since the fall of the Berlin Wall, internal conflicts in multicultural states have caused increasing concern to the international community. In some cases it has intervened with military force. In a few it has gone so far as to install a quasi-protectorate using international forces. With regard to these new developments, the following questions are pertinent. On the basis of what concepts or principles does the international community intervene in multicultural conflicts? Are there any concepts and principles that justify international rule of multicultural societies and international intervention to bring and hold together separated societies?

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Fleiner / Kalin / Linder / Saunders THE FOUR S U B T H E M E S

Each of these four issues coincides with the perspective of one of the main players in most multicultural conflicts: the state itself, its decentralised or autonomous units, civil society, and the international community. j.i. Constitution Making and Nation Building

In the simplest terms, the challenge of state making and nation building in multicultural societies can be defined as finding a political compromise between two forces that results in an institutional equilibrium. A political compromise has to be found between a cultural majority having enough power to define a majority regime on the one hand, and cultural minorities seeking recognition in the constitutional framework and participation in political decision making on the other. The institutional equilibrium is always a compromise between a majority regime and institutional forms of minority protection and power sharing. As has been mentioned before, federalism is not the only means of achieving institutional compromise. In democratic regimes, recognition and participation of cultural minorities can be achieved through: • • • • • • •

Emphasis on the political rather than the cultural base of the nation; Separation of state and religious or other socio-cultural powers; Emphasis on human rights as protection of minorities; Emphasis on separation of powers, formal and informal; Executive power sharing; Multiparty system and proportional rule in elections of the parliament; Decentralisation or federalism, including bi-cameralism, as a means of vertical power sharing.

Most of these elements are in contrast to the widespread model of Anglo-Saxon "Westminster democracy". They suggest the different model of "Consensus or Power Sharing Democracy", which in the terms of the political scientist Arend Lijphart is more suitable for coping with multicultural conflicts. Federalism and decentralisation offer some of the most important elements insofar as they guarantee the vertical elements of power sharing. In state making and nation building, it may be difficult to end up with institutional arrangements of power sharing. This is particularly true for the process of federalisation. As federalism involves participation of the member states in the decision making of the central government, it goes' far beyond decentralisation. If "cntralising" and "decentralising" forces coincide with cultural divides, federalisation is confronted with major challenges. Some of them can be described as follows:

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• In both young and old democracies, federalisation means a fundamental change of a constitutional system with considerable risks. There must be sufficient confidence on both sides. How can such a process be stimulated as a social process in a more bottom-up way? • In young democracies, federalisation is often considered as an obstacle to the consolidation of nation building. Is this perception correct? Is there empirical evidence that, in the past, federal nations have had more difficulties in their nation-building process than unitary states? • While "centralising" forces fear that minorities will have too much power, "decentralising" forces argue that minorities are protected only in member states where they constitute a political majority. Obviously, federalism has a chance only if both parties see more advantages than disadvantages. What are the conditions for a successful federalist compromise? • In geographically segmented societies, federalism offers national minorities the chance to become majorities in some member states. From an optimistic perspective, this is an advantage for both sides, the cultural minorities as well as the majority, because it stimulates changes of political roles and the learning processes of the political elites. Is this true? • In highly polarised societies, parties may agree to design the geographic boundaries of the member states along the geographical boundaries of ethnicities. Critics say that this is a policy of ethnic separation that increases inter-cultural conflict potentials instead of reducing them. What does experience suggest? • Federalisation means giving "veto points" to member states and their political majority. Central governments can introduce veto points through a simple majority. Subsequently, however, they are likely to be difficult to take back. Federalisation, in this sense, is an irreversible process. Is this only a theoretical or also a practical problem? • Under subsistent political tensions, federalist systems are in a precarious equilibrium between unitarianism and secession. How should, and how can, secession be avoided or accepted and handled? 7.2.

Decentralisation and Good Governance

When states decide to hold their multicultural society together by decentralisation and by delegating governmental power to local authorities, what can and should be done as well as decentralisation to guarantee good governance within the autonomous units? What are the conditions and pitfalls associated with the success of decentralised governance, especially in multicultural societies? The creation of local governments helps to manage conflicts in at least two situations. First, ethnic, religious or linguistic minorities are often not concentrated in a particular region of a country but their members live in many of its parts. Second, where the central state is very weak, the

21 o Fleiner / Kalin / Linder / Saunders

introduction of federalism might lead to secessionism or even to the dissolution of the country, because some sub-national units are strong enough to challenge the central government effectively. Here, the introduction or strengthening of local governments allows accommodation of diversity without jeopardising stability and endangering national unity. Finally, decentralisation has a preventive function. If it is true that today's conflicts have much to do with political power and access to economic goods, and that ethnicity, language and religion are used as instruments to mobilise people in such conflicts, then decentralised forms of government help to dilute potential conflicts by giving some political power and some control over economic resources to all parts of the population, including minorities. Decentralisation undeniably leads to vertical power sharing. But what are the consequences for horizontal power sharing on the local or regional level? If decentralisation leads to more socio-cultural segmentation, local democracy is under a structural challenge to assure political pluralism. But how does local democracy deal with political elites? What conditions and instruments are necessary for and conducive to transparent and accountable governance at the local level? How can the optimal use of the often-scarce resources available to local governments be guaranteed? Is it easier or more difficult to combat corruption at the local level? The legitimacy of the state at the local level can only be strengthened if authorities are able to respond to the legitimate needs of the population. Decentralised government has some well-known advantages in this respect, but regularly meets technical and political difficulties, which are not easy to overcome. Decentralisation must face not only the issue of social inequality in general, but also the problem of inequalities between poor and rich regions. Moreover, the tension between human rights and local traditions can be considerable, and conditions to guarantee human rights and social equality difficult. If decentralisation is used as a tool to manage conflicts, another requirement should be mentioned. Where forms of decentralised governance are only granted to specific minorities, but not those belonging to the majority population, there is the danger that these minorities will feel excluded from mainstream politics, and thus marginalized. There is an equal danger that such asymmetric forms of decentralisation will help to introduce or reinforce ethnicity as the main factor in legitimising political action. 7.3.

Communities - Civil Society and Conflict Management

This issue concerns the role of civil society in multicultural states, and the interaction between the concept of civil society and the various tools for managing multicultural conflict.

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The very principles of the rule of law and the guarantees of inalienable rights are oriented towards the individual and not towards groups. The indispensable partner of the modern state is a civil society based on individuals. This raises a series of questions in its application to multicultural states: • Do the boundaries of federal units have to be identical with the different ethnicities? Is ethnic federalism a legitimate goal at all? • Does the very concept of civil society allow a fragmentation of the society into different parts? What might be the criteria for this division? • Can one envisage a federal state composed of different federal units, each of them having its own civil society (e.g. the European Union)? Collective rights are further potential tools for reducing multicultural tension. On the other hand, they may be considered to contradict individual rights: • Are collective rights appropriate tools to overcome the tension between group loyalty and individual citizenship? • How can a state, and in particular a federal state, meet the challenge of the tension between inalienable individual rights and the collective rights of groups? • What does a right to "autonomy" mean in the context of an ethnically divided state? • Who is the "holder" of this right? • What kinds of autonomy and/or shared powers should be granted within a federal state to federal units or to groups? • Can the right of self-determination restrict individual rights within their respective communities (e.g. the collective rights of native communities in immigration countries)? • Can federalism give autonomy to groups without territorial boundaries (personal federalism)? Both religious and language rights are linked to the very core of ethnicity. Both can be interpreted as community or as individual rights. If the principal focus of the constitution is on liberty, in the sense of individual liberty, it is likely to deny collective rights: • Can the language rights or religious rights of individuals be translated into group rights for the sake of peace among different conflicting communities? • To what extent can the particular collective rules of religious or language communities restrict individual rights and still be universally acceptable for the sake of the internal peace of multicultural societies?

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Language contributes to the identity of every individual. Language determines each person's way of thinking and communicating. It influences education and opens the door to one's own cultural roots. State authorities communicate with citizens in the official language. Court proceedings are held in official languages. Public schools provide for education in the state language. In a federal country, enriched by multicultural societies the following questions may require consideration: • How should a federation deal with the reality of the different languages of its communities? • Should federal units be allowed to "defend" their language territory and to what extent? • Can individuals identify with a state that does not use or even recognise their own mother tongue? Every state has a link of some kind to religion, if only through its history. Clearly, however, at the beginning of the twenty-first century, religions differ in their attitudes to states and politics. Some religions ignore the state. Some integrate with it. Some depend on the state. Some merge with politics. Some religions are inclusive and have universal claims, encouraging proselytising. Some are based on the idea of a "chosen people" and are thus exclusive. • How can federal states best accommodate different religions with different attitudes towards states? • To what extent should states allow religious communities or constituted federal units to give effect to collective religious rights to limit individual religious rights? • What instruments should be available to federal states in order to implement the basic standards of freedom of religion in all states? 7.4. International and Regional Action with regard to Conflicts in Multicultural Societies

The international community often and increasingly influences the course of dealing with inter-state ethnic conflict and its outcome. In some cases the states concerned are federal. Bosnia and Herzegovina, at that stage part of the Federal Republic of Yugoslavia, is an example. In such cases, one effect of international influence may be to cause secession of a part of the federation, and the creation of a new state. In turn, this creates a need for a new constitutional order. Even where a state in which there is ethnic conflict that attracts international attention was not originally federal in form, federalism may be an appropriate response to effect resolution of the conflict.

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Traditionally, the international community is composed of states, and each accepts the integrity of the others. Accordingly, it has long been accepted that the principal goal of the international community is to provide a framework for cooperation, and to maintain peace between states, not to resolve disputes within them. On the other hand, the international legal system is changing. The phenomenon was captured by Boutros Boutros-Ghali in An Agenda for Peace: "The time of absolute sovereignty ... has passed; its theory was never matched by reality". Human rights are a concern of international law, as evidenced by the International Bill of Rights and a host of other international instruments. Experience shows that states that are parties to human rights instruments often fail to meet their obligations, at a cost to their peoples. Ethnic conflict within a state may be associated with failure of the state, or can threaten or be perceived to threaten, international peace. Minorities increasingly invoke intervention by the international community on these grounds. A new phase in international intervention began with the use of Chapter 7 of the United Nations Charter to establish peacekeeping in the former Yugoslavia and Rwanda. The new focus on the threat from states that harbour terrorists may provide further grounds on which attempts may be made to justify international intervention in the future. The shortfall in the legitimacy of the international community to intervene in ethnic conflicts within states has practical consequences as well, that are relevant for present purposes. These concern both the effectiveness of international intervention and accountability for it. The relatively underdeveloped structure of the international community and of international law gives rise to problems of accountability from the outset of intervention in inter-state ethnic conflict. There are inadequate standards to guide the decision to intervene. In practice, intervention has been uneven, influenced to a greater or lesser degree by the national interest of leading states in the international community. By definition, there is no constitution for the international community to provide the restraints on power that are supposed to apply within states. Drawing on these pressures and difficulties, some of the key questions that arise in this work session therefore include the following: • What are the implications of changing concepts of state sovereignty for constitutionalism and the legitimacy of states? • When is international intervention justified to resolve ethnic conflict within a state? Is it possible to develop guidelines for this? • What are the countervailing considerations to be taken into account in determining international intervention for this purpose? • In what sense has international intervention succeeded in some cases of intra-state ethnic conflict?

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• How can the problems of the legitimacy and adequacy of a constitutional order forged through international intervention be overcome? • What should be done to ensure accountability for the integrity and outcomes of international intervention? The circumstances of international intervention create one set of issues. The manner of intervention by the international community presents others. The international community intervenes in the ethnic conflict within states in a variety of different ways. The most high profile are forms of direct intervention through enforcement or peacekeeping. Direct intervention by international forces creates the greatest difficulty from the standpoint of legitimacy and accountability. Some of the key questions that arise in relation to this form of intervention therefore are as follows: • What is the dividing line between enforcement and peacekeeping? • What is involved in each? " Is it possible to develop guidelines for the constitution of international teams/forces that intervene directly in the case of intra-state conflict? " In what circumstances are regional organisations likely to be more effective than international forces or coalitions? • What mechanisms might be used to ensure that intervention is effective in the long as well as the short term? Not all intervention takes this form, however. The international community also intervenes in other less high profile ways. Examples include the international monitoring of elections, the imposition of sanctions of various kinds, international mediation of multiethnic discussions, provision of advice on possible constitutional solutions. Many of these forms of intervention raise questions of legitimacy as well, but to a lesser degree than does full-scale international engagement. REFERENCES

Basta Fleiner, L. and Fleiner, T., eds, 2000. Federalism and Multiethnic States; the Case of Switzerland. PIFF No. 16, Etudes et Colloques. Fribourg: The Institute of Federalism. Cohen, C. and Arato, A., 1992. CivilSociety andPolitical Theory. Cambridge: MIT Press. Cohen, J.M. and Peterson, S.B., 1997. Administrative Decentralization: A New Framework for Improved Governance, Accountability, and Performance. Cambridge: Harvard Institute for International Development, Development Discussion Paper No. 582. Ghai, Y, ed., 2000. Autonomy and Ethnicity. Cambridge: Cambridge University Press.

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Gutmann, A., ed., 1994. Multiculturalism: Examining the Politics of Recognition. Princeton: Princeton University Press. Kymlicka, W., 1995. The Rights of Minority Cultures. Oxford: Oxford University Press. Kymlicka, W., 1995. Multicultural Citizenship. Oxford: Oxford University Press. Linder, W., 1994. Swiss Democracy, Possible Solutions to Conflict in Multicultural Societies. New York: St Martin's Press. Linz, J.J. and Stepan, A., 1996. Problems of Democratic Transition and Consolidation, Southern Europe, South America, and Post-Communist Europe. Baltimore: John Hopkins University Press. Manor, J., 1999. The Political Economy of Democratic Decentralization. Washington, B.C.: World Bank Institute. Marko, J., 1995. Autonomie und Integration, Rechtsinstitute des Nationalitdtenrechts im funktionalen Vergleich. Wien: Bohlau Verlag. Miall, H., Ramsbotham, O. and Woodhouse, T., 1999. Contemporary Conflict Resolution. Cambridge: Polity Press. Miiller, J-R, 1998. Wann existiert ein demokratischer Staat? Zeitschrift fiir SchweizerischesRecht (ZSR), 117 (II), 135-147. Report of the Commission on Global Governance, Our Global Neighbourhood. 1995. Oxford: Oxford University Press. Shapiro, I. and Kymlicka, W., eds, 1996. Ethnicity and Group Rights. New York: New York University Press, Nomos. Toepperwien, N., 2002. Nation-State and Normative Diversity. PIFF, Etudes et Colloques. Fribourg: The Institute of Federalism. Tully,J., 1995. Strange Multiplicity. Cambridge: Cambridge University Press. Watts, R.L., 1999. Comparing Federal Systems. Montreal & Kingston: McGill-Queen's University Press.

SCIENTIFIC B A C K G R O U N D : SUBTHEME PAPER NICHOLAS R.L. HAYSOM

Constitution Making and Nation Building

i. I N T R O D U C T I O N : IDENTITY AND POLITICS As the twenty-first century opened, analysts were able to point out that the nature of human conflict had profoundly changed, both in regard to its form and its subject matter. Whereas the previous century opened with inter-state wars - wars between sovereign states - by the 19905 the overwhelming majority of conflicts classified as "major armed conflicts" were intra-state conflicts. Between 1989 and 1996, for example, 95 of the 101 armed conflicts identified in the world were internal, and the vast majority had an "identity" component to them (Harris and Reilly, 1998, 1-10). Identity-driven conflicts are conflicts based on the mobilisation of groups sharing a communal identity trait such as race, ethnicity, tribe, religion, culture, language, regional origin or heritage.1 While such conflicts may be triggered by or combine with questions of distribution of economic resources or opportunities, their "identity"- driven nature has allowed them to be characterised as more intense, intractable, emotionally charged, and persistent (Harris and Reilly, 1998, 10; Stavenhagen 1996, 229). These conflicts are about the very sense of who the protagonists are, and about the survival or recognition of their identity. What is also noticeable is that these contemporary conflicts are, in character with their intensity, more brutal, more cruel and conducted without restraint. Michael Ignatieff has pointed out how these wars are conducted outside of both the codes of self-imposed military chivalry or internationally accepted humanitarian law (Ignatieff, 1998). The reason he offers for this is that these conflicts are not conducted within a "warrior tradition". Civilians have become the principal targets of the conflict. At the beginning of the twentieth century, civil-

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ians accounted for 5% of the casualties of war (Harris and Reilly, 1998, 14). By the 19905 that figure was 80%. In many instances, children have become both the object and perpetrators of the violence. The numbers of displaced persons and refugees rose dramatically as the twentieth century drew to a close and "ethnic cleansing" entered the lexicon of conflict terminology (Harris and Reilly, 1998, 15). Self-evidently these conflicts arise when a given national political framework no longer holds the loyalty of a rebellious cultural group (by which we mean a community sharing any one of the identity characteristics referred to above). The nation is no longer a home for one or more of its sub-national communities. Constitutional frameworks, whether inherited or long entrenched, appear incapable of managing the increasing assertiveness of identity politics. At the same time the cost of identity conflict is increasing in both human and economic terms (Harris and Reilly, 1998, 15). New democracies in particular find that their democracy dividend is squandered on managing divisive social or religious conflict, thereby rendering new governments incapable of improving the lives of their citizens. This has necessitated an increasing focus on methods of managing identity politics, and on constitutional approaches that allow for an inclusive polity embodying a wider national consensus, and to which all citizens share a degree of common loyalty. It is not only the proliferation of intra-state armed conflict that has drawn attention to the need to examine communal identity considerations, including "multiculturalism". In order to ameliorate the effects of the appropriation of state machinery by one or other dominant cultural community in a multicultural society, and to introduce stable and accountable government, the international community has, in the last two decades of the twentieth century, insisted on the practice of electoral democracy especially in previously authoritarian states in Africa, Asia and Eastern Europe. Paradoxically, it is in societies riven by fault lines of religion, ethnicity or culture, that electoral contests frequently have the unintended consequence of exacerbating volatile inter-group tensions, and eroding national identity. The nation "holds its breath" as these contests provide opportunities for ethnic, religious or other group mobilisation, which may spill over into inter-group violence. The understandable response by the democracy-monitoring institutes has been to identify the rules of the contest - the electoral arrangements as a remedy, the means by which the results of the electoral contest will be more readily accepted as an accurate reflection of the political preferences of the nation. To be sure, it is critical in such divided societies that the management of elections is transparent, manifestly free and fair, and yields a demonstrably accurate result. But there is an increasing realisation that the problem of election evidence is caused not only by the rules of the contest, but by the prize itself.2 Where minorities are consigned to be

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perpetual losers in a winner-takes-all contest driven by group mobilisation, and where the price of losing the contest carries loss of economic opportunity, the stakes appear too high. We will return to this issue. Suffice it to say that the proper treatment of nation building, as well as affirming, recognising and managing "difference" is receiving unprecedented constitutional attention at a time when constitution making itself is the subject of renewed interest.3 2.

NATION BUILDING AND SUB-NATIONAL IDENTITIES

The revolutionary, Garibaldi, having succeeded in creating the modern state of Italy at the end of the nineteenth century proclaimed, "We have made Italy, now let's make Italians!" (Fleiner et al., 2002). Garibaldi's statement draws attention not only to the difference between state making and nation building (or creating a national identity), but it also emphasises the fact that state making does not axiomatically or mechanically lead to the building of a nation. This statement is of particular relevance for practitioners of both constitutional reform and conflict resolution in societies deeply divided along fault lines of religion, language, culture, ethnicity, and regional identity. It reveals that even in a state that could be regarded as homogenous by virtue of its shared history, language and religion, a common national identity cannot be assumed. While nationality can be formally and legally ascribed by a constitution or law, the task of nation building is a more elusive one. National identity is that identity which citizens share with each other, in recognition of their common destiny and their shared values. A national identity must coexist with the competing and different identities those selfsame citizens possess - their religious, cultural, linguistic, as well as family, professional or gender identities, which at different moments of every day shape their emotional reactions and their objective material interests. Without a broadly shared national identity, the task of nation building, of constructing a nation with a sense of a common destiny and a shared loyalty to the rules by which that destiny is to be determined, is indeed difficult. Whether there is little or no shared concept of the "nation", only the group identities matter. There is no "we", there are only mutually exclusive "others". In societies in which there is "deep rooted conflict",4 the difficulty in resolving the conflict can in part be attributed to the fact that the ethnic identity overwhelms any sense of national identity. Those whose responsibility it is to derive a shared framework of governance must do so without the tools of a discourse of common values, a discourse based on shared aspirations. However the task of nation building, of creating a national identity, cannot be discharged at the expense of the equally important issue of rec-

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ognising and integrating citizens' other senses of belonging, their other identities. Political and constitutional frameworks for determining national destiny in divided societies are in many cases failing to embrace the whole nation. This may have as much to do with the suppression of difference. The failure of particular constitutions or the premises that underlie them, to meet the challenge of reconciling sameness and difference, promoting and integrating both national and sub-national identities is, we argue, manifest in multiplying intra-state conflicts. The politics of difference needs scrutiny. The perception of "difference" is always a social (or subjective) matter, unrelated to objective physical or cultural difference. Notwithstanding decades of anthropological approaches to tribal identity, people react to difference in a dynamic and changing way. The members of the Hutu and Tutsi groups, with which the author interacted in the Burundian Peace Process, share more in common with each other (physically and culturally) than residents of a cosmopolitan city do with their neighbours. Ignatieff also comments on the sense of shared identity that citizens of the former Yugoslavia had prior to its dissolution. He observes that the sharpest conflicts often occur between groups who are most similar - what he terms "the narcissism of minor difference" (Ignatieff, 1998). Whether this is true or not, it is clear that ethnic tension arises out of the social meaning, including mythical or fabricated meaning, of perceived difference. In this regard both the Balkan and the Central African ethnic massacres compel us to address the fact that the horrible cruelties perpetrated in these identity conflicts were perpetrated by neighbours, neighbours that had once been content to school with, play football with and intermarry with their ethnic enemies.5 The politics of difference concerns the way in which the political elite manufactures and utilises the social meaning of difference. The Balkans is an example not of the lid being lifted off a pot of steaming ethnic resentment by the collapse of authoritarian regimes, but of the removal of restraints on the promotion and manipulation of identity. Of course discrimination based on identity stereotyping is a powerful and real foundation for generating identity-based resentment and conflict. Although this article looks at the interrelationship of constitution making and nation building through the prism of sharply divided societies, the issue is of relevance to the more homogeneous or older democracies. Many of the older democracies were founded on assumptions of social solidarity, and forged in a context of inter-state rivalry. Wars make for robust nation building.6 Sigmund Freud noted that social solidarity is usually at the expense of an "enemy", although his apt observation was directed at the contribution made by the stigmatisation of Jews to national solidarity in pre-War Germany.7 The problem that many democracies face is that their earlier constitutional concerns were predominantly directed at the question of national sovereignty in the context of inter-state rivalry.

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This is equally true for the first post-colonial constitutions of Africa and Asia. Anti-colonial movements embraced the colonised people as a whole and made assumptions about the social cohesion of their post-colonial society. The constitution makers were diemselves captives of the constitutional imagination of their previous colonial powers (such powers being largely homogenous states themselves). Several decades later, many are required to re-examine the social contract which the constitution represented at the point of rupture with their colonial powers, and to judge whether it still reflects their social reality, whether it can still function as a constitutional contract between the members, and between the distinct communities of that society. Two examples of countries that must now engage with the reformulation of their social contract are Nigeria and Indonesia. Both are populous, both are riven by tribal, religious, and regional identity conflicts, compounded by the perceived exploitation by a national elite of the natural resources in otherwise neglected regions - the Niger Delta and Aceh respectively.8 In Indonesia's case the constitution - adopted in 1945 - is only a few pages long and was adopted as an interim measure to establish national independence. It is limited with regard to questions of regional governance, cultural rights, and democratic accountability. Nigeria has a constitution bequeathed to it by the last in a succession of military dictatorships. In both cases the terms of the relationship between the capital and the regions, between national and sectional interests is in dispute. Sporadic inter-group violence which may take a religious form can often express an overlay of identity-based resentments. The failure to address the inadequate fit of an old constitution to new circumstances, and to do so in a truly inclusive and legitimate way, can lead to contagious civil conflict in societies in which religious, regional or ethnic tensions exist. Some older constitutional democracies also face new claims in respect of self-determination, or in respect of more equitable distribution of resources, or for the recognition of cultural differences. Such claims challenge the premise of social uniformity on which earlier constitutional assumptions rested. Constitutional adaptation to the changing circumstances of the twenty-first century will, this article suggests, be required to meet the claim for recognition and integration of multiple identities into a new, more inclusive notion of national identity (Kymlicka, 1995). 3.

DEMOCRACY AND DIVERSITY IN DIVIDED SOCIETIES

In this presentation it has been observed that electoral democracy in culturally divided societies can serve to erode national identity, exacerbate the fault lines dividing the society and promote inter-group tension and vio-

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lence. It was suggested that part of the reason for this could be found in the way in which the political system and constitutional arrangements allocate the fruits of victory. This statement needs further explanation. Developing nations, particularly former colonial ones, exhibit an unfortunate confluence of several features. Firstly, many of these societies are divided along the lines of ethnicity, race, region, religion and language. This in itself is a product of the arbitrary national boundaries imposed by the colonial experience. Secondly, many of these countries inherited the constitutional models of their former colonial powers, constitutional models that were based upon assumptions of homogeneity, social cohesion and the centralised exercise of power. They also have a winner-takes-all character.9 Thirdly, the introduction of multiparty democracy invariably saw the membership of political parties correlate with the fault lines of that society. Through ethnic, tribal or group mobilisation, political preference was commanded via group-based affiliation or ethnic belonging, not through the material or other interests of the individual. Finally, in many developing countries there are simply no economic sector and no economic opportunities to speak of outside the state itself. The economy is the polity. Winning political power simultaneously ensures a preserve on all or most economic opportunity. The combination of this feature with the winner-takes-all nature of simple majoritarian political systems elevates the stakes in an electoral context to a very high level. When this is combined with the group-based politics of divided societies, the necessary implication is that minorities are destined to be perpetual losers both economically and politically. Not surprisingly, the temptation for such minorities is to choose to opt out of the constitutional framework, and to demand a separate existence within, or secession from, the new state. The consequence of this confluence of political, economic and demographic features is that many of the new democracies are immediately confronted by social and political instability and economically ruinous civil wars. To be sure, some of the new states compounded the problem by consciously opting for one-party states, suppressing tribal and ethnic difference, and following "socialist" models which went yet further in the monopolistic and exclusionary appropriation of the state machinery by an ethnic or other group elite. By the 19905 an appreciation of "stability" as a central element or value in the functioning of a viable democracy had become more widely accepted. Constitutions were increasingly required to address the preeminent concern and desire for inter-group harmony and peace. To do so would involve both a reversion to and a departure from the models of liberal democracy they had inherited.

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4. THE ROLE OF THE CONSTITUTION IN THE MANAGEMENT OF D I V E R S I T Y : THE CURRENT

THEORY

It would be incorrect to suggest that the intra-state conflicts that have plagued many of the new democracies in multicultural societies can be simply attributed to misconceived constitutional premises. But the political system as a whole is required to address identity politics, and the constitution is the central and pre-eminent instrument in a political system. In this presentation we view the constitution as a compact, a contract between the citizens of a country in regard to the manner in which they will jointly shape their collective destiny, manage their affairs, and make its rules. Succeeding generations accept that compact or adjust it to bring it into line with new ways in which the citizens view their relationship with each other whether as individuals or as members of distinct regional or ethnic groups. A constitution can be more than merely the rules of government. It may assemble the nation's aspirations and codify its common values. Constitutions may even address the nation's history.10 What is clear is that constitutions in multicultural, and especially divided societies, are invited to deal with this feature. It is argued here that even constitutions that do not treat this matter explicitly are informed by constitutional premises which reveal a vision according to which the interaction between national and other identities is to be dealt with. The constitution in a constitutional state is especially suited to dealing with the legacy of conflict. It is not only that it represents a social contract. It can put minority, including political minority, guarantees and protections beyond the reach of temporary parliamentary majorities. If the compact is firmly founded, the constitution is able to generate a sense of security amongst those that distrust the constancy or even the existence of majoritarian goodwill. Ways of dealing with multiculturalism, and especially identity-based conflict in multicultural societies, have fallen between two opposing paradigms. The first, drawn from the classical liberal democratic model and its variants, denies constitutional recognition to distinct communities as bearers of rights, but places emphasis on enforceable human rights, including the rights to individually practice one's religious, cultural or linguistic preference in a national democratic framework. The second asserts and constitutionally recognises cultural or community difference, and allocates to such groups a measure of self-government, group autonomy or group protection. In such a system, the citizens can be ascribed an identity, and exercise their rights through their separate communities. There is a third method that emphasises "inclusivity" in both the benefits of and responsibility for government, without expressly constitutionalising (and hence casting in stone) cultural difference. This approach departs from

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liberal democratic orthodoxy in ways that ameliorate the winner-takes-all features of such systems and promote stake holding by all communities in the national project. The classical liberal democratic model, or liberal constitutionalism informs the notion of the modern state.11 There may be differences in the extent to which cultural diversity is denied, or ethnic or national unity is asserted, but political intercourse in liberal democracies is articulated through individual political preferences in a system that guarantees democratic and civic rights. It is this paradigm that has served as a model in most parts of the world. Of course in the immigrant or settler states, such as the United States, Australia and Canada, the challenge of multiculturalism was encountered earlier. These polyglot states absorbed waves of immigrants, but their essential approach to multiculturalism has been to integrate immigrants into the system.12 As the older homogenous democracies also begin to experience the challenge of multiculturalism resulting from international population movements, they too are being required to tolerate and even affirm the diversity of the communities in their midst. The question, however, is not whether the liberal democratic model is meeting the challenge of multiculturalism as it is being experienced in these largely homogenous societies, or societies with a dominant culture and an integrating dynamic. The question is whether such a model can meet the challenge of mediating identity conflicts in deeply divided or segmented societies. Notwithstanding the rising number of incidents of racist or xenophobic violence in Western democracies, it should be acknowledged that the pluralist though integrating approach of the liberal democratic model has been successful on many fronts. It has allowed distinct cultural minorities a degree of social and economic opportunity, while granting civil rights protections and cultural choice. It has allowed national identities to coexist with other identities, and provided a common home for distinct and diverse minorities. It has enabled, even in the pluralist immigrant democracies, a sufficiency of national cohesion and unity of common purpose for citizens to be both different and one. However, the problem lies in identifying the concrete conditions for its successful functioning in multicultural situations, and assessing whether liberal democracy can be effective in the absence of these conditions. These conditions would include: enforceable rights in a legal system that respects the rule of law; conditions of economic opportunity that allow individual upward mobility regardless of group identity; absence of discrimination or at least a level of cultural and religious tolerance; a national identity that allows entry to members of culturally diverse groups; the practice of interest-based politics. It is no accident that South Africa, in its constitutional choice of a model by which it could reconcile its racial and ethnic differences and forge a common destiny, opted for a liberal constitutional state. It is notable that the

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South African compact relies on strong judicial institutions to enforce its terms. Its economy is sufficiently developed to allow economic opportunity outside the state. In its negotiations discourse it could rely on a common language of patriotism and of national identity. Its ample and full catalogue of fundamental rights was accepted as enforceable and accessible.13 By contrast, in Burundi, the state is the overwhelming source of formal employment. Politics is dominated by the claim of ethnic belonging. The legacy of brutal ethnic massacres and counter-massacres limits the possibility of a common discourse based on national unity, and few have faith in the capacity of the courts to protect them or guarantee their personal security.14 In short, a standard liberal democratic approach to identity-conflict resolution will fail to fulfil its promise of reconciling diverse minorities within an inclusive state, not because of its intrinsic flaws, but because the conditions in many deeply divided societies prevent its actualisation, prevent the integration of diverse identities within a cohesive polity. The second constitutional paradigm for dealing with ethnic (and similar) conflicts in divided societies is to expressly constitutionalise the distinct communal identities and to establish constitutional structures on the basis of group belonging. Many variations of such techniques are possible, some of which happily coexist in liberal democracies, for example in the form of ad hoc arrangements in respect of vulnerable or indigenous minorities. In deeply divided societies however, the purpose of constructing a collective pluralism is to politically segment the society along its fault lines. It represents recognition of the absence of common structure, that government or aspects of governance must be performed separately. In its radical form, it is represented by sub-national geographic units in a process of secession or complete separation. This paradigm animates many identity conflicts (Sri Lanka, Sudan, the ethnic nationalities of Myanmar/Burma, Chechnya, Georgia). Degrees or forms of political segmentation can be found in other societies (Lebanon), where it serves to secure minimum representation by all groups in the central institutions of government. If it is to work, it can do so only within a compact that also acknowledges the whole and integrates the group into the whole. However, the simple allocation of autonomy within a distinct geographical area, and without an integrating principle or mechanism is likely to lead to secession. In general there has been a reluctance to constitutionalise difference in nation states. There are several reasons for this. Firstly, autonomous geographically distinct entities that are "identity" driven can result in secessionary conflict and civil war. Human rights concerns are also pertinent. Sub-national units in which one cultural community is dominant can, and frequently do, lead to persecution of other minorities within this identitycharged atmosphere. At worst, the result is ethnic cleansing as each terri-

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tory seeks to establish ethnic homogeneity. The second set of reasons relate to the erosion of national unity and the promotion of ethnic hostility or inter-group rivalry. Apart from escalating ethnic tension such segmentation or separation erodes the limited national identity or sense of common political destiny. Moreover when competitive electoral contests are to be conducted within each ethnic group, this has a tendency to promote extremist ethnic fundamentalism, because those who seek popular support must strive to be the most authentic and "ethnic" of the candidates or parties, and the most resolute in asserting the ethnic interest as against the "others". Finally, the constitutionalisation of ethnicity entrenches group politics as the engine of political decision making. Individuals are consigned to their groups, make their political choice and exercise their political rights by virtue of their cultural/ethnic identity. The possibility of being non-ethnic, of being an urban professional with a national outlook is foreclosed. The ethnic/cultural elites ensure that their hold on power - secured precisely through the partition into ethnic blocks - and their share of the ensuing economic resources is guaranteed. A shift or reversion to interest-based politics is difficult and rare.15 The society is condemned to live within its segregated identities. Furthermore, national decision making may be complex and difficult, requiring consensus politics or the concurrence of several ethnic elites, or it may require super-majorities. Where there is a resulting de facto veto power in the hands of a minority, this can exacerbate inter-ethnic tension, even if it does not produce an undemocratic and ineffective system of governance. The third method is to promote and develop mechanisms and ways by which the democracy can function in a more inclusive manner, granting greater benefits for minorities, a stake holding and ownership of the system without recourse to the explicit constitutionalisation of ethnic/ cultural categories. This modality would accept the de facto overlap of party with the group fault lines. However, by choosing not to constitutionalise an ethnic basis of representation, it allows the society to move towards interest-based politics, and the impact of other cross-cutting identities (e.g. class, region, occupation) to blur the raw ethnic dynamic encouraged by opportunistic elites. This method would not suppress cultural ethnic identity, but would encourage its fullest representation and participation through ethnicity-neutral structures of party, federal unit, institutions of civil society, and would simultaneously strive for an even distribution of economic opportunity. It is the mix of identity denial with a corresponding mal-distribution of economic resources that provides the explosive combination for intra-community conflict. There is no blueprint, no universal solution to the constitutional default in promoting inclusivity, joint ownership, and joint stake holding in the constitutional political system. There are, however, emerging shifts in constitutional approaches that indicate best practice (in both the subject

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matter of the constitution and in the constitution-making process). These emphasise inclusivity in decision-making processes, stake holding in the system, and integrating nation-building mechanisms. Examples of constitutional initiatives from African states, which have had to confront this issue as a pressing nation-building priority, would include those listed below. • Amending the electoral system from a single member constituency system in order to provide for proportional representation (South Africa, Namibia, and Lesotho). This is intended to facilitate representation in proportion to political preference and, as importantly, to ensure small but distinct political tendencies or cultural communities are represented. • Requiring public officials, such as the president, to win regionally diverse support not just an overall majority (Nigeria). This ensures breadth of support for the executive, and not merely depth of support as the significant value. • Allowing the opposition to participate in the executive (cabinet) as of right. This facilitates direct participation by opposition parties, often representing a minority group, in the task of managing the country (South Africa, Zimbabwe). Integrating the opposition into the government can weaken the traditional liberal role of an adversarial opposition.16 • Requiring proportional representation party lists to exhibit a non-ethnic, non-sexist character (Burundi). This blunts the ethnic presentation of political choice and can dissipate ethnic hostility generated by raw ethnic mobilisation, even though it violates the freedom of association. • Making use of second chambers or sectoral representation (e.g. of women) to establish alternative cross-cutting or complementary forms of representation to those of the ethnically charged political party representation, or to supplement those of the ethnically neutral party representation (Uganda, Burundi). • Requiring posts in the national public service or the judiciary to be evenly distributed across regional, gender, racial or tribal lines (Nigeria, South Africa). This promotes visible representation of the diversity of the nation in its public appearance and encourages a sense of stake holding by all communities. The appearance of mono-ethnic control or appropriation of the national public service and the military has been the greatest spur to identity conflicts in Africa. • Protecting and promoting diversity of indigenous language use and custom. Even though it is impractical, in South Africa, a full 11 languages are recognised as official languages. The denial of recognition of a community's language, especially in monolingual states is another exclusionary practice that fuels secessionary emotions. • Affording vulnerable or small minorities a guaranteed representation or over-representation in parliament or government, thus pacifying their

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distrust in majoritarian democracy and giving an incentive to participation (Tanzania in respect of Zanzibar). The caveat to such a device is diat the over-representation should never amount to granting a small minority a veto over a larger majority, and that the representational device used takes a geographical form not an ethnic one.17 • In line with the adoption of human rights charters in Africa during the iggos, is the enforcement of the principle of non-discrimination, even in respect of marginal groups. The most contested aspect of the neutrality of the state in matters relating to identity is that relating to religion. The inability to resolve this question at state level in Nigeria is a source of periodic and extreme violence, and in Sudan constitutes one of the barriers to settlement of that country's long-running civil war. • In line with the concern that political leaders and the cliques around them come to appropriate the state in perpetuity, and the way in which this exacerbates the exclusion of outsider tribes and regions, is an attempt to formalise exit arrangements for such leaders. Typically this is expressed, at least in the Southern Africa context, in constitutional limits on the number of presidential terms diat a president can occupy (South Africa, Zambia, Malawi, Zimbabwe, Namibia, Tanzania, Botswana). What these initiatives indicate is a concern to promote inclusivity even at the expense of free choice and the adversarial fundamentals of liberal democracy, and yet a reluctance to constitutionally elevate identity segmentation. 5.

FEDERALISM AND SECESSION

There are many reasons why federalism and decentralisation can assist both in the project of making the national framework more inclusive (enhancing the nation-building project), and in allowing for greater expression of different identities within the national framework. Because of its geographical foundation, federalism does not require that citizens' identity be confined within ethnic tribal categories. It thus avoids the problems of permanently ascribing group belonging to individuals and their descendants. Yet at the same time it may allow for the expression of different identities in different parts of the federation, while not precluding an evolution to interest-based politics within the federation and within the sub-national unit. Most importantly what federalism brings to the table is that it allows losers at the national political level to be winners at the sub-national or local level. As such the national/federal losers can buy into the system as a whole. Federalism also allows for government that is closer to the people and greater local control over decisions which impact on citizens' daily lives. It allows for policies to be adapted to the particularities, including the cultural, demographic and political particularities, of the region.18 But if

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federalism is to offer a viable guarantee of respect for difference it would seem that it should meet certain ancillary requirements. The powers of the federal units must be protected from arbitrary federal intervention. There must, as far as possible, be equality as to the value of citizenship among all citizens of the federation regardless of the province or state in which they live, and there must simultaneously be respect for the rights of minorities within these federal units. In other words federalism should not be a recipe for discrimination against minorities within a sub-national unit. Finally there must be financial guarantees regarding the adequate provision of resources to the federal units. Without such financial guarantees or arrangements the federal arrangement is hollow, and the individual federal units are subject to potential persecution through the denial of resources. The controversy that inevitably accompanies constitutional debate on the federal question, frequently arises from the fear of increased ethnic or intra-community tension. In Burma, Sri Lanka and Sudan, three countries riven by enduring conflicts, the federal option is seen as insufficient by national minorities, while it is rejected as a precursor to dissolution and secession by the incumbent government.19 It is undeniable that federal arrangements animate a certain centrifugal tendency in the national state if only because of the truth that "all politics is local", and that the democratic politics at a regional level must lead to a competitive assertion of regional interests over national interests or the interests of other regions.20 It is for this reason that increasing attention is being paid to supplementing the notion of federalism as "autonomy" with the notion of federalism as the comanagement of the society at large (cooperative federalism). There is thus a need to find mechanisms by which the regions can be directly drawn into assuming greater responsibility for the management of the federation as a whole. Institutions such as the Bundesrat (Germany), the National Council of Provinces (South Africa), and inter-governmental committees in Canada are a response to the need for integrating mechanisms within the federal system (Watts, 2001). Such institutions support the nation-building project by requiring each region to take into account the interests of its neighbours. In addition to the integrating mechanism, the constitutional framework should also prescribe truly national institutions (national assembly comprised of representatives of truly national parties), and set out national symbols that are neutral and widely supported. Federal units do not usually have the right to secede as a matter of conventional practice or even under international law.21 Whether secession is a real option in a federal system often has little to do with the constitution itself. The 1937 Soviet constitution recognised a right of secession, but the monopolistic central political machinery denied it. The constitutional right was more mythical than real. On the other hand when a nation state disintegrates it may be pedantic to examine the legality of the disintegration.

22Q Part C Theme II - Scientific Background

Finally it should be noted that who participates, and how they participate in the constitution-making process can have a determinate effect on the federal outcome. It is in this sense that the possibility of a federal solution to an identity conflict needs to be anticipated. Federal arrangements agreed to without regional participation can lead to a subsequent rejection or abuse of the arrangement. Furthermore different parties, regions or communities may be animated by quite different federal considerations. Some parties may want a federal arrangement out of "self-determination" considerations while others may seek only good governance outcomes. In such a case asymmetrical federalism22 may be indicated, but not followed because the relevant regional players are absent. It needs to be emphasised that federalism is not always an indicated solution. Where the demography is inappropriate, resources and skills unavailable, or the identity conflict is geographically dispersed across the nation, federalism may not bring anything to the table save to allow for more intense persecution of minorities in far flung zones out of reach of the national/federal government. 6.

D I V E R S I T Y AND THE RULE OF LAW

Constitutional initiatives to promote inclusivity and to provide guarantees for minorities in multicultural societies usually rely on enforceable rights and a viable independent legal system. The rule of law is a condition for the effective enforcement of constitutional rights both as between individuals and the state, and in regard to respect for the constitutional provisions by institutions of government. Constitutionalism itself is premised on the notion that the constitution is a higher authority than that of the parliament or the executive. Such a schema is not possible unless there is a mechanism — the judiciary — to enforce the provisions of the constitution. However not all societies have robust legal institutions, or a tradition of independent judicial or other institutions of the kind that can act as the guardian of the constitution against the holders of power. In such societies, guarantees founded on fundamental rights provisions, fidelity to the constitution, or specified conflict resolution mechanisms involving a form of arbitration, do not serve as a guarantee. The citizens or communities simply have no confidence in the provisions purporting to offer such guarantees. In this regard we would only comment that where no such institutions or traditions exist, the resolution of conflict will rely increasingly on institutional composition, and on balances of power rather than guarantees in the constitution.23 In the long term however, the rule of law must be promoted as a better guarantee: institutional arrangements will last only as long as it suits the political players. In other words building the capacity of judicial institutions and constitutionally protecting them,

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is a vital element in providing a constitutional (and hence political) framework for managing ethnic diversity and conflict. 7.

CONSTITUTION MAKING AND NATION

BUILDING

In this presentation we have aimed to illustrate an increasing constitutional sensitivity to the need for stability. Inclusivity in approach, joint stake holding, common ownership of and loyalty to the overall political system promotes that stability. What is true for the substance of the constitution is also true for the constitution-making process. Once again it is necessary to caution that there is no ideal model of constitution making applicable to all societies. It is clear that certain considerations would inform best practice in regard to constitution making in a divided and multicultural society. This is so in as much as the constitution-making process itself has a contribution to make to the building of a culture of democracy, to understanding the need for inter-group tolerance, and to forging a common loyalty to the political framework. It is a rare opportunity for nation building - especially if conducted in a way that elicits popular participation in a bottom-up manner. There appear to be three important considerations that should inform the constitution-making process in a multicultural society. Firstly, the process should ensure that the constitution is legitimate and legal. By "legitimate" we mean that the constitution should be popular, and enjoy the endorsement of the majority of the people, either directly or through their representatives. A constitution that does meet the aspirations or reflect the values of the majority is unlikely to survive. Its provisions are not likely to be respected. This requirement should not be under-emphasised, even if it is asserted at the expense of other considerations. It places emphasis on the need for those responsible for making the constitution to have a representative nexus with the population. This condition is met where the constitution is drafted and adopted by elected constitutional assemblies, elected parliaments or approved by popular referendum. 24 The second consideration to inform good constitution-making practice is that of inclusivity and of respect for diversity. This requirement is met by ensuring that the body consulting, drafting or adopting the constitution allows for the participation of the full diversity of a multicultural society in a meaningful way. This requirement can be met by allowing all political groups, regardless of their size, a significant influence or even a veto over the provisions of the text. This requirement leads to or secures near universal or unanimous consent to the new constitution and provides a basis for the breadth rather than the depth of its support. There is tension, even contradiction, between the first and second requirements. The first would insist on a majoritarian process, whereas the

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second places a premium on consensus between a wide diversity of tendencies. The first secures the aspirations of the majority, the second protects the interests of minorities. In South Africa, the sharp and violent conflict between the protagonists of either of these principles was resolved through the mechanism of "constitutional principles". These constitutional principles enshrined basic guarantees for all groups. A two-stage process was adopted, whereby in the first process emphasis was given to the second requirement. Fundamental constitutional principles were agreed to by "sufficient consensus" between all political tendencies without reference to each party's support basis. The same multiparty body drafted an interim but democratic constitution which would function during the second phase. The second phase saw a democratically elected constitutional assembly put flesh on the skeleton provided by the constitutional principles. In this second stage majoritarian decision-making processes were followed, although subject to special majorities on selected issues. This second phase was not viewed as the less important step. On the contrary the devil is in the detail, and this phase saw a more engaged and transparent debate on constitutional issues. This two-stage process is in truth quite widespread. Many constitution-making processes involve an initial settlement between adversaries at which guarantees and processes are agreed, and a second stage in which there is popular participation (Namibia, Zimbabwe). A third consideration in constitution making that is attracting increasing attention, is that of promoting the direct participation of the public in constitution making. It could be argued that a democratically elected constitutional assembly or constitutional reform commission would meet the requirement of public endorsement of the draft constitution. However direct public participation strengthens the compact which the constitution is expected to represent, and makes use of a unique opportunity to engage, consult and discuss constitutional choices with people directly. This has been done elsewhere using the media, popular consultations in town halls and villages, and by soliciting individual submissions (Canada and South Africa).25 A further advantage of allowing direct public participation is that it enables multicultural or identity concerns to be expressed through civil society institutions and in public forums in addition to formal involvement in the process. For all these processes to work, participation should not be seen to be a cosmetic pretence but to involve the actual processing of popular submissions and views. In this way the constitution does not simply "proclaim" democracy, but assists in building a democratic culture, educating all groups on the virtues of tolerance. It will only have a place in the hearts and minds of the citizens if they believe they have participated in creating it, if they support its values, if they can claim ownership of it, if it addresses their concerns and speaks to their hopes. Participation in constitution making is one of the few opportunities in the life of a nation to forge common values

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and engender respect for the rules by which the democracy will be practiced. Such popular support can protect the constitutional values. The public awareness of and participation in constitution-making processes need not be confined to a one-off process. It is possible for it to be continuous. School and public education on its values and provisions should be ongoing, especially in multicultural societies attempting to ground the constitutional compact on widespread support for cultural tolerance and human rights. The constitution-making process involves drafting or submitting or eliciting initial draft texts or proposals, negotiating the text, and finally procedurally appropriate adoption of the text. The considerations of legitimacy, inclusivity and direct participation can be made to apply at each stage of the process.26 A mechanism of constitutional reform that is receiving increasing support in Africa and in Asia is the specially established constitutional reform commission. The popular support such commissions have achieved is not necessarily a reflection of the intrinsic worth of such specifically established institutions, but is a reflection of a popular scepticism towards the parliamentary processes, party politics and the lack of transparency in many orthodox constitutional reform processes (Kenya, Indonesia). In Thailand and the Philippines, popular constitutional reforms have emanated and been adopted following processes driven by representative constitutional reform commissions.27 What is apparent from a consideration of constitution-making practice is that the desired outcome of the process should be a common and popular ownership of it. At least part of the lead in such a process should emanate from the negotiators or constitution makers themselves - a willingness to allow the text to reflect provisions, and formulations of provisions, which emanate from the opposition or from anxious minorities. Fidelity to a constitution will increase if all parties see their contribution to it, if they can see that no one party or group can triumphantly claim it as their own. Another stylistic "best practice" in constitution making that relates to broad ownership, concerns drafting style. The constitution can be drafted in a manner that allows ordinary people to read and understand it even though writing simply is more difficult than writing obscurely. Another method of promoting a national ownership of a constitution is to address the crosscutting issues of everyday concern to ordinary people regardless of their group belonging. When the constitution addresses the right of access to education, housing, land, potable water, welfare, and a healthy environment, whether in aspirational or other forms, it speaks to everyone's concerns. 8. CONFLICT RESOLUTION NEGOTIATIONS AND CONSTITUTIONAL REFORM

A distinction should be drawn between conflict resolution negotiations for the purpose of agreeing constitutional reform on the one hand, and the

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constitutional negotiations themselves. The object of the first is to provide a bridge to a constitutional democracy, a transitional dispensation. These transitional arrangements typically lead to interim governments of national unity as precursors to elections for a new democratic institutions. The variety of methods used in peace negotiations seldom comply with the values and best practices that have been suggested in this paper (Chopra, 1998). It is suggested here that peace negotiations, and negotiating transitional and then final constitutional arrangements are separate issues requiring separate processes. When the processes are conflated, the constitutionmaking process is unlikely to be transparent, inclusive or popular. Peace negotiations typically take place between the principal protagonists - government/military junta and insurgent leaders - in secret. They exclude significant players such as internal opposition parties, or other ethnic nationalities. This poses risks to the long-term or broader constitutional acceptability of any arrangements agreed to.28 Where a more open process is adopted in a negotiated settlement, a process in which a multiplicity of parties are involved (such as the Congo (DRC) and Burundi, in which 300 and 19 parties respectively are involved), the question arises as to who should attend the talks and how decisions are to be arrived at. This is a critical set of questions that must be determined in advance - not at the table. In an inclusive process a simple majoritarianism is unlikely to be acceptable, as it promotes a numbers game (inducing the parties to swell the number of parties allied to it) and gives no assurance to minorities. On the other hand a strict consensus requirement allows even the most unrepresentative and marginal selfappointed leader a veto right. A formula which was used in South Africa and has been replicated Northern Ireland is that of "sufficient consensus". "Sufficient consensus" requires substantial consensus, and consensus amongst the major protagonists, without requiring unanimity. While it is commended for the multiparty (all-inclusive) stage it need not foreclose on a more democratic or majoritarian form of decision making when adopting an enduring constitution. Transitional structures are only required to be a bridge to a process that will ideally be an inclusive one by which the nation will establish its ground rules. 9.

THE INTERNATIONAL COMMUNITY AND CONSTITUTIONAL

NEGOTIATIONS

This paper has suggested that the precondition for durable constitutional arrangements in a divided society is the sense of loyalty and ownership that all groups have towards them. The optimal circumstances for this arise when the groups themselves, through their representatives or parties, are responsible for negotiating and implementing it. They regard it as their product. In this sense international mediation or intervention is not usually or ordinarily recommended. But societies experiencing bitter

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identity conflicts cannot usually be described as "ordinary". International mediation, conciliation or facilitation is suggested where the legacy of inter-group conflict means that the groups can not speak to each other, let alone compromise with one another; where the power imbalance between the parties is so great that one or both will not negotiate; or where the agreement must be buttressed and supported by international guarantees. In the first and second cases case the mediator can offer compromises without one or other side losing face, and can convene or chair meetings where the parties are unwilling to grant one of the other parties this authority. In the third case the international community, or friendly states, serve to fix the parties in position in regard to their obligations under the agreement. Like a jigsaw puzzle, the range of tactical or opportunistic manoeuvres by the parties is limited unless the party is prepared to risk international disapproval. 10.

NATION

BUILDING

AND NEGOTIATING THE

PAST

One frequent and pre-eminent concern in a transitional process that aims to culminate in the making of a new constitution and the building of a new inclusive political culture, is how that society can break with its past practices of impunity, corruption, and specifically human rights abuses. Related to this is the question of accountability for such abuses, including the massacres perpetuated by one ethnic group on another. These are issues which cannot be dealt with comprehensively in this presentation, except to say that certain common considerations are receiving increasingly widespread attention. Firstly, it is not possible for a multicultural nation to sweep its skeletons under the carpet, or to ignore past human rights violations. Past injustices cannot be denied or buried (especially where there is a link between victim-hood and ethnic groups). In order to make a fresh start, most countries need to confront their past; otherwise it will re-emerge, possibly in a more ghastly form. In this regard, Truth Commissions have become the preferred instrument to establish the responsibility for past human rights abuses, to identify victims, and consider reparations for those victims. In South Africa the Truth and Reconciliation Commission attempted to balance the considerations of truth, justice and reconciliation.29 To the extent it was able to do so, it relied on a much bigger nation-building and reconciliation project, led and exemplified by the leaders of formerly antagonist communities. NOTES

i In this paper I will refer to ethnic or cultural groups, in place of repeating the full variety of identity traits by which humans distinguish themselves.

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2 An illustrative example of such a situation would be the last elections in Lesotho where in a single member constituency "first-past-the-post" electoral system, the opposition received 40% of the vote but won only i out of 80 seats in the national assembly. This situation led to a popular rebellion supported by the opposition. This was not a case of "cultural" exclusion, but the underlying rationale for introducing proportional representation is part of a wider imperative for inclusiveness (including political inclusiveness in political systems) that has obvious application to multicultural societies. 3 The emergence of new states in Eastern Europe, the democratic constitutional reforms in formerly one-party African states in the 19905, and the recent civilianisation of former authoritarian states in Latin America and Asia have contributed to a renewed interest in constitutional law and an explosion in the constitutional consultancy industry. 4 This is the term used in Harris and Reilly to refer to identity-driven conflicts in which there is also a perceived imbalance of resources correlating with the identity-related boundaries. 5 There are numerous recent publications that document the manipulation of identity in these two very different contexts, but see Gourevitch, 1998. 6 It is no accident that international sporting contests provide one of the most effective means of nation building - calling the nation together. A Nigerian colleague commented that: "there is no such thing as a Nigerian inside Nigeria we are only members of our groups - except for the two hours that the Super Eagles [the National Football team] are on the field". South Africa, India and Australia too have used sport to promote a national identity. This idea however has less resonance in SE Asia. 7 Ignatieff, 1998, 61: citing from "Civilization and its Discontents" In: S. Freud (Pelican Freud Library), Vol. 12, 305. 8 Democratization in Indonesia. An Assessment. International IDEA, Stockholm, 2000; Democracy in Nigeria: Continuing Dialogues for Nation Building. International IDEA, Stockholm, 2000. 9 These constitutional models derive from societies that have undergone decades, even centuries of religious, language or other identity conflicts, which have led to the eradication of difference (France, United Kingdom), to the inter-community compacts by which national survival was assured (Switzerland, Belgium), or the removal of historically founded boundaries between persons otherwise sharing a language or culture (Italy, Germany). 10 Thus for example, the South African constitution proclaims repeatedly that all South Africans are equal regardless of race, gender or ethnicity. Others may specifically speak of the civilian control of the military (Japan, Germany); many European constitutions insist on religious neutrality, others may address cultural autonomy (Ethiopia). 11 It is possible to distinguish between the various national forms of the European democratic state according to their original philosophical underpinnings or historical context. They are all premised, however, on the notion of the state as the

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collectivity of individuals, and assume explicitly or implicitly a national identity and dominant cultural homogeneity even if religious difference is accepted. 12 Increasingly, this integration dynamic has been contemplated with a constitutionally enshrined entitlement to individual expression of diversity. This variant of liberal democracy does not, however, constitutionalise collective pluralism, and rests, notwithstanding its melting pot image, on the foundation of a powerful monolingual and dominant national culture into which new cultural communities integrate. See Shapiro and Kymlicka, 1996; Ghai, 2000. 13 The jury may still be out on whether this compact will hold when South Africa confronts the economic disparity between black and white citizens. But the issue here is that for many divided societies the conditions necessary for the South African compact are simply not present. 14 The dominant, yet minority, Tutsi community had claimed that if they were to let go of their monopoly of political (and military) power in favour of a democratic system they would be consigned to being perpetual economic and political losers at best, at worst, the subject of genocidal retribution - even though it is their control over resources which has generated ever-higher levels of ethnic resentment. This observation is based on the author's experience as chair of the Commission responsible for the negotiation of Protocol II of the Accord d 'Arusha Pour La Paix Et Le Reconciliation Au Burundi. 15 The Netherlands are an exception, and constitute a successful example of a consociational model that eventually transformed into a unified democratic system in 1967, once religious difference no longer constituted the predominant clearance. Despite religious difference, however, it is not clear that the Netherlands could have been classified as a "deeply divided" society at least by the twentieth century. 16 The Ugandan experiment with no-party politics is an expression of the same concerns, but judgment has been reserved on whether the resulting impact on political choice weakens the accountability of government. On the other hand, no initiative to quell the Inkatha Freedom Party/African National Congress conflict in South Africa had such an immediate effect as President Mandela's appointment as opposition (IFF) leader, and Dr Buthelezi, as Acting President when he was absent from the country. Allowing the opposition to participate in tasks of governance is often referred to as "power sharing". It should be mentioned that power-sharing arrangements do not always work and can break down. This in turn can lead to a new round of mutual blaming and antagonism (Fiji). 17 Where ethnic or racial minorities are granted super decision-making powers over the majority as contended for by some white groups in South Africa and some Tutsi parties in Burundi, the result is ethnic/racial tension. Even disadvantaged minorities can be the source of inter-group envy if constitutionally advantaged. The recognition and licensing of religious communities to regulate family law and customary law disputes is not incompatible with state neutrality (Nigeria, South Africa).

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18 The issue of federalism, decentralisation and multicultural societies is dealt with in Theme II, Leading House. It is raised here only as an indicator of the issues to be canvassed in the constitutional choices the constitution makers can engage in, and for its implications for the constitution-making process. See generally Watts, 1999. 19 The same difference in perception of federalism was noted by former Ontario Premier, Bob Rae, in regard to Spain. Address to Murten Conference on Sri Lanka, April 2002. 20 This is particularly so in ethnically divided societies. See generally Elazar and Haysom, The Federal-type Solutions in dealing with Multi-ethnicity. Jerusalem Centre for Public Affairs. Cited in A. Nakaocedce, 2002. Civil Society, Federalism and Multi ethnic Conflicts, 12. 21 Nor does the right to self-determination imply the right to secede. However it is worth taking note of the recent Ethiopian experience in constitution making. Because ethnic identity had been suppressed under the Mengisto regime, the constitution makers of the current Ethiopian constitution founded their federalism on express ethnic considerations. When considering the question of secession the Ethiopian constitution makers opted to provide for such a right at the outset, thereby removing much of the emotion from the constitutional negotiations, and allowing the constitution makers the right to craft a federal but integrated system of government in which the practicality of secession is questionable. 22 In asymmetrical federalism the possibility exists for different sub-national units (provinces or states) to exercise greater or lesser (rather than uniform) degrees of autonomy and power. 23 In Burundi, for example, such a guarantee is to be found in the requirements of joint ethnic control and membership of the security forces. 24 Adopting a constitutional text by way of referendum alone is always unsatisfactory. The population's direct support for a large number of textual changes or provisions cannot be measured by a simple "yes" or "no" answer, a take-it-all or leave-it-all choice. 25 In South Africa a call for written submissions on issues of constitutional concern led to an astonishing nearly 2 million submissions — many from peasants and wives dealing with issues relating to agriculture, or spousal neglect or abuse. On the face of it these issues seem far removed from grand constitutional questions, but in fact they record important concerns directly related to the constitution gender equality, responsiveness of government etc. By allowing public input, the process was enriched by a sense of public ownership as well as by the submissions themselves. 26 What is true for constitution making holds true also for the process of amending the constitution. First principles suggest that special procedures and majorities are required to amend the constitution, firstly to ensure both popular and diverse support for any amendment, and secondly to ensure that the constitutional compact cannot be easily amended by new majorities. If the compact is to offer meaningful guarantees to minorities, it must be durable.

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27 In Kenya a recent poll suggested the constitutional reform commission under Professor Ghai enjoyed an astonishingly high level of popular support - in comparison to the support expressed for parliament. The legitimacy of these institutions in these circumstances derives from the fact that they are seen as accessible, transparent, and sensitive to the need to reach out to the public and civil society directly. As mentioned above, there is nothing intrinsically legitimate or popular in consigning the constitution-making process to a panel of government-appointed experts. In Zimbabwe the text prepared by an appointed commission was rejected in a popular referendum not least because the commission itself was considered hand picked. 28 Aspects of this approach have affected the efficacy of peace processes or dialogues in Sri Lanka, Sudan and Burma/Myanmar. While many of these conflicts originated as bi-polar conflicts, in fact there are significantly different groupings within each community. 29 The question of whether to grant amnesty to perpetrators of human rights violations is a dilemma that confronts most peace settlements. It is constitutionally relevant because the granting of amnesty and the conditions relating to any amnesty will form part of the new social contract. It appears that in most conflictridden societies, the granting of amnesty, at least to the military leaders of the protagonists in an intra-state conflict - such as in an inter-state war - is a precondition for peace, for a transition to democracy. But it is worth noting that where amnesty is granted by the perpetrators to themselves, it is seldom respected (Chile, Argentina) even where amnesty has been recognised as a necessary but expedient confidence-building measure to allow the transition to take place. Secondly, where an amnesty has been negotiated and agreed, even amongst representative negotiators, it has limited applicability outside the country concerned. Outside of these considerations, negotiators will be required to balance the need to build a culture of human rights and eradicate a culture of impunity on the one hand, with ensuring stability and effective management of conflict in a divided society on the other. See the Report of the Truth and Reconciliation Commission, Vols I to IV, TRC, 1999. REFERENCES

Democratization in Indonesia. An Assessment. International IDEA, Stockholm, 2000. Democracy in Nigeria: Continuing Dialogues for Nation Building. International IDEA, Stockholm, 2000. Elazar, J.D. (electronic version). The Federal-type Solutions in Dealing with Multi-ethnicity. Jerusalem Centre for Public Affairs. Cited in R. Nakarada, 2002. Civil Society, Federalism and Multiethnic Conflicts. Concept Paper, the International Conference on Federalism 2002. Fleiner, T., Kalin, W., Linder, W. and Saunders, C., 2002. Federalism, Decentralization and Conflict Management in Multicultural Societies. Concept Paper, the International Conference on Federalism 2002.

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Ghai, Y, ed., 2000. Autonomy and Ethnicity. Cambridge: Cambridge University Press. Gourevitch, P., 1998. We Wish to Inform You that Tomorrow We Will be Killed with our Families. London: Picador. Harris, P. and Reilly, B., eds, 1998. Democracy and Deep-rooted Conflict: Options for Negotiators. International IDEA, Stockholm, 1998. Haysom, N., 2001. The Origins of Co-operative Governance. In: N. Levy and C. Tapscott, eds. Intergovernmental Relations in South Africa: The Challenges of Co-operational Government. Cape Town: Idasa, 43-66. Ignatieff, M., 1998. The Warriors Honour - Ethnic War and the Modern Conscience. London: Chatto & Windus. Kymlicka, W., 1995. The Rights of Cultural Minorities. Oxford: Oxford University Press. Shapiro, I. and Kymlicka, W., eds, 1996. Ethnicity and Groups Rights. New York: University Press. Stavenhagen, R., 1996. Ethnic Conflicts and the Nation State. New York: St Martin's Press, Inc, 229. Cited in R. Nakarada, 2000. Civil Society, Federalism and Multiethnic Conflicts. Paper Proposed for the International Conference on Federalism 2002, !3Watts, R., 1999. Federalism in Fragmented and Segmented Societies. In: Kramer, J. and Schneider, H-P, eds. Federalism and Civil Societies. Baden-Baden: Nomos Verlagsgesellschaft. Watts, R., 2001. Intergovernmental Relations: Conceptual Issues. In: N. Levy and C. Tapscott, eds. Intergovernmental Relations in South Africa: The Challenges of Co-operational Government. Cape Town: Idasa, 22-43.

SCIENTIFIC BACKGROUND: SUBTHEME PAPER RICHARD CHARLES

CROOK

Decentralisation and Good Governance

1.

DECENTRALISATION AND CONFLICT MANAGEMENT IN MULTICULTURAL SOCIETIES

i.i. Types of decentralisation

In this paper, we shall be concerned mainly with forms of decentralisation other than federalism. Decentralisation is a very general term, conventionally used to describe the extent to which the political, administrative or fiscal powers of a central government have been shared or distributed amongst territorially defined sub-national agencies or authorities. This spatial distribution usually forms a series of nested hierarchies coinciding with the territorial subdivisions. But within this broad definition, governmental decentralisation in practice exhibits an enormous variety of forms, based on different principles, and with widely differing purposes. Three main types can be identified: de-concentration, delegation and devolution. Only the latter is based on the principle of power sharing between national and sub-national units, in which the sub-units are granted legal, financial and/ or political autonomy over agreed areas of activity (c.f. Turner and Hulme, !997)One critical variation in decentralisation schemes concerns the issue of delimitation of areas, which profoundly affects both the scale and viability of decentralised authorities and their political significance. Delimitation decisions are particularly critical in multicultural societies. Even if a decision has been made to use decentralisation to "recognise" cultural diversity, and thereby help to legitimise government, the decision itself raises

241 Part C Theme II - Scientific Background questions of which kinds of cultural segment to recognise. There may be competing identities on offer - ethnic, regional, cultural, religious, language, historic political units incorporated within the state, or simply localised traditional communities (especially in Africa). Decisions taken concerning the relative weight of political and cultural factors as measured against considerations of technical and economic efficiency, and resource viability relative to the functions allocated, are therefore highly political (Smith, 1985). But delimitation may also be used for the opposite purpose - to cut across and demobilise cultural units that are perceived as threatening. If a regime is nervous about providing an institutional base for sub-national, regional or ethnic political rivals, or even potential separatists, then it will often adopt a decentralisation scheme which deliberately fragments potential local power bases into smaller, weaker, non-politically significant units.1 This is often combined with central funding and control mechanisms that permit spatial redistribution and/or centrally focused patronage linkages. The Nigerian military regime in the 19905, for instance, used local governments to transfer resources from the oil-producing to the non-oil producing areas, whilst in Cote d'lvoire the government's fear of regional political opposition was reflected in the extreme weakness and fragmentation of the large number of small communes. In Uganda, the delimitation of local government areas has divided the main ethnic power bases that were seen as the causes of 20 years of conflict and civil war. In effect, delimitation of decentralised authorities can turn a "decentralisation" scheme into a device for enhancing central power! 1.2. Political conflict and cultural pluralism What kind of contribution might governmental decentralisation make to the management of culturally based political conflict? This question cannot be answered without a brief analysis of the nature of cultural pluralism and the circumstances in which it leads to conflict. i.2. i. Understanding politicised cultural pluralism. Comparative analysis suggests that the mere presence of cultural pluralism (differences of ethnicity, language, culture etc.) does not automatically lead to conflict. It should be recognised that probably a majority of contemporary states exhibit some degree of cultural pluralism. Yet not all countries are divided by the kind of mobilised ethnic or cultural conflicts that threaten the integrity of the state through violence, undemocratic behaviour, separatism, and even civil war. Cultural pluralism only threatens the stability of a state when it is politically mobilised, and institutional structures are unable to mediate the kind of competition that it produces. We have therefore to explain the factors that underlie such variation.

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Modern sociological theories stress the constructed and situational characteristics of ethnic and cultural identities, which are similar to the processes through which "nationalism" arose. Competitive political mobilisation of these highly variable identities tends to be "triggered" by a combination of factors: (i) the configuration of the cultural pluralism itself (which can vary from dominant group through bi-polar to multi-polar and cross-cutting multiplex), and (ii) the extent to which the political and economic context offers "cultural entrepreneurs" with some incentive or "pay-off to organise identity-based political competition (Young, 1976 and 1998). Thus if a context of uneven ethno-regional development, power transition and electoral competition is combined with dominant bi-polar or dominant core culture configurations, then powerful incentives exist both for cultural mobilisation and eventually irreconcilable conflict. This is particularly so where the political structure and culturally based voting patterns (caused by political mobilisation) produce a prospect of permanent exclusion or subordination for the minority or dominated groups, no matter how "democratic" the system (e.g. Fiji, Nigeria in the 19605, Northern Ireland, Sri Lanka). In multi-polar systems, such as former Yugoslavia, Uganda, or Nigeria after the civil war, a different logic is at work. The situation has to provide a pay-off to mobilise ethnically, even though one group can never win power on its own either through autonomy/secession or guaranteed shares of state benefits (Nigeria's "federal character" principle, Bosnia arid Herzegovina's constitutionalised ethnic balancing). 1.2.2. Decentralisation and politicised cultural pluralism. Decentralisation is one amongst a number of strategies or "institutional designs" that have been proposed as a way of managing the conflict that arises from politicised cultural pluralism (Ghai, 1998). To succeed it must address some of the "triggering factor" issues noted above. Its strengths and weaknesses in relation to these may be summarised as follows. The most obvious and frequently cited advantage of decentralisation is that it is the only strategy that addresses the issue of exclusion or subordination of mobilised minority or sub-national groups. It does so by offering some possibility of an autonomous sphere of political power or community, within which diversity can flourish, and the premium put on central power be reduced. Because it is inherently a spatial and political strategy, it is probably only relevant where there is some element of geographic concentration of the cultural segments, even at very local levels. Where the alternative is civil war, it can preserve the integrity of the state, provided there is some minimal agreement on the political community that forms the state. Federalism can underpin power-sharing arrangements by preventing the central state from appearing as the exclusive

243 Part C Theme II - Scientific Background

property of one cultural group, and thereby reduce the incentive to polarise identity-based attacks on the state, or to mobilise secessionist movements. On the other hand, decentralisation is not only a device for assuaging demands from culturally and geographically defined groups. If decentralisation based on recognising cultural segments is seen as too dangerous insofar as it encourages the separatism of large sub-national groups and ethnic mobilisation, then the contrary "fragmenting" logic of decentralisation can be used to defuse polarisation and encourage alternative political arenas that reinforce centripetal forces and coalition building. It should also be noted that it has been used to dis-empower and exclude groups from the central state, as in apartheid South Africa or various military/ authoritarian regimes. 2.

DECENTRALISATION, DEMOCRACY AND

PARTICIPATION

If democratic decentralisation (primarily to devolved or mixed authorities) is used as a device to give autonomy and political space to ethno-regional groups or to minorities, then there remain important questions about its effectiveness in ensuring fully inclusive participation, providing an equal standard of public services and economic development throughout the national territory, and protecting the civil and political rights of all groups. Particularly if the decentralisation is based on culturally defined territorial areas then, unless there is complete homogeneity in each local area, the system will create new "minorities within minorities", who may be subjected to domination by local elites who capture power by "democratic" means. Does this mean that power sharing and minority protection devices have to be put in place at the local levels, that simply reproduce and entrench the problems of the national level, as in Bosnia and Herzegovina? Or can the problem be avoided by the greater opportunities for participation offered by decentralised governance? 2.1. The problem of elite capture

It has long been recognised that representative or liberal democracy, despite its commitment to formal political equality, can simply reproduce existing social and economic inequalities. This is particularly so when institutions of social and economic domination substantially overlap with or coincide with the power structures and those who control them (Rueschmeyer, Stevens and Stevens, 1992). "Democratic deficits" can arise just as easily in local as in national democratic arenas. Smith, for instance, has argued that decentralisation is an inherently conservative strategy, on the assumption that local elites are likely to be predominantly hostile to reform

244 Richard Charles Crook

and to the empowerment of locally subordinate groups, precisely because of the proximity and intensity of their relationships and the dependency of the mass of the poor (Smith, 1985, 193). It is therefore harder for excluded groups to organise countervailing collective action against the social and economic power of local elites. Smith's view perhaps too readily dismisses the fact that the configuration of local social and economic structures will vary considerably even within one country. It is these variations that determine the likelihood of conservative elite capture. Echeverri-Gent (1992) proposes a revised model of what he calls the "paradox of participation", a paradox which, he argues, arises because the poor and disadvantaged remain disadvantaged in their capacity to benefit from the enhanced opportunities for representation provided by devolved, democratic decentralisation. He shows that in West Bengal elite capture by an "anti-poor" class was not inevitable in a competitive situation where a "counter-elite" (in this case the Communist Party) was able to mobilise a broad alliance of the poor, middle peasants and salariat, and to supplant the old landlord class. Another factor which affects the likelihood of elite capture is the relationship between local elites and the central political power holders, as determined by the political purposes of the decentralisation scheme itself. What kind of alliance does the ruling elite have, or seek to build, with local or sub-national elites? Is the ruling elite facing potential challenges that it must deal with either through attack, circumvention or cooptation? If there are already powerful and autonomous local elites with whom the central government is seeking alliances (often associated with a decentralisation plan aimed at buying off ethno-regional groups) then a conservative "elite-dominated" outcome is very likely. But even the absence of strong local elites does not guarantee an inclusively democratic outcome, if the central government's motivation is to use decentralisation to project its power more effectively into local areas, as with patronage-based party-building efforts in countries such as Bangladesh, Nigeria or Kenya in the 19808 and 19905. In effect, the comparative evidence suggests that elite capture of democratic decentralisation is a problem unless there is strong support from the central authorities themselves to prevent it happening. This is most likely in situations where the central ruling elite challenges or tries to circumvent locally powerful groups. The motives can range from party and ideological rivalry, class and ethnic conflict, through to the deep distrust often found in federal systems between institutional elites at different levels of government. The desire to challenge entrenched regional and provincial power holders can follow a popular revolution (as in post-Marcos Philippines) or the victory of reforming social democratic or communist parties, as in Brazil or the Indian states of West Bengal and Kerala (Crook and Sverrisson, 2001).

245 Part C Theme II - Scientific Background 2.2. Decentralisation and participation Can democratic participation at the local level prevent elite capture and/ or more conflict between majority/minority groups within a decentralised system of government? Participation may be defined as covering a range of activities, both representative and direct or community based. 2.2.1. Participation in representative government. The main forms normally involve electoral activities, contacting/influencing, and associational membership. The evidence from a wide range of studies of decentralisation suggests that in general, democratic decentralisation does lead to increases in the number of people who participate, and broadens the scope (social representativeness) of that participation (Crook and Manor (1998) on Ghana, Cote d'lvoire, Bangladesh and Karnataka, India; Blair's review of Bolivia, Honduras, India (Karnataka), Philippines, Ukraine and Mali (Blair, 2000), and Crook and Sverrisson's (2001) review of 12 cases in Asia, Latin America and Africa). This is particularly so in societies with an established history of political party activity, as in South Asia. Participation has even increased in countries with a long history of one-party or dominant-party rule, where the introduction of democratic local government was part of an overall liberalisation reform (e.g. Cote d'lvoire and Mexico in the 19908). But such reforms are less successful where local government already has a very bad record or there is no tradition of or experience of electoral politics. As is well recognised, elections are not sufficient on their own to deepen democracy, and the forms of the participation that engage people between elections are clearly crucial if formerly excluded groups and minorities are to be included. Here the record in both Asia (particularly South Asia) and Africa is much more encouraging, particularly where there are also links with traditions of community action and self-help (as in much of Africa) or mobilisation of disadvantaged groups (as in India and some Latin American countries). In Africa one has to note a very different cultural expectation of local government, which prefers to see successful "sons and daughters" of the area participating and thus bringing patronage (Jaglin, 1993; Crook, 1994 and 1996; Olowu, 1989). Crook and Manor, and Blair found in their range of case studies that groups such as women, the less well educated and youth were drawn into political activities such as public meetings, and contacting, and even into representative councils. This was especially so where there were affirmative action or quota systems, as in India where 30% of seats are reserved for women and additional quotas for "Scheduled Castes", or South Africa and Namibia (c.f. also Scandinavia). Even quotas however do not always lead to increased effective contribution, and India illustrates the enormous difficulty of overturning deeply entrenched social structures that sustain elite

246 Richard Charles Crook domination of local politics (Webster, 1994; Centre on Integrated Rural Development for Asia and the Pacific (CIRDAP), 1992, 105). 2.2.2. Community-based and direct participation. Direct participation is classically contrasted with representative government, as the "Athenian" ideal in which all citizens have an equal chance of actively taking part in decision making. It is now understood to refer to a wide range of small-scale community-level institutions and projects based on this ideal, ranging from village and neighbourhood councils to projects for local self-management of common property resources, and women's micro-credit groups. The association with decentralisation in less-developed countries grew with the participatory development movement of the late 19708 and early 19808 (Chambers, 1983), a movement which argued that "development" could only be equitable and effective if people (the beneficiaries) controlled the process themselves, rather than governments or experts. This trend was paralleled in new thinking about local government in the United Kingdom and Europe, through the introduction of reforms such as neighbourhood housing associations, citizens' juries and consultative assemblies, and participatory social audit and health campaigns. The new British government's policy initiative, "New Deal for Communities" launched in 1998, encapsulates the new approach very comprehensively (Goetz, Gaventa et al., 2001; Burns, Hambleton and Hogget, 1994; Batley and Stoker, 1991). In practice, many direct participation reforms involve linking community-level activities with the formal institutions of local government. One of the key problems of representative government even at the local level is the lack of social trust in the legitimacy of government institutions - a district or municipality may be seen to be as remote and untrustworthy as central government; hence the issue of how to make a transition from the community level of action to wider arenas. In Brazil, Bolivia and the Philippines, for instance, decentralised governments are required by law to incorporate or formally associate community, neighbourhood or "peoples" organisations with the deliberative procedures of local government, as well as to give them a role in the administration of various services and projects. The Brazilian experiments with "participatory budgeting", which began in the cities of Porto Alegre and Belo Horizonte as an attempt to combat the legacy of basismo, are perhaps the best known and most successful (see below) (Nickson, 1995). The Philippines law stipulates that municipal councils should include "private sector" representatives, including in every case a representative of the workers' and women's sectors, and at least one from organisations of the "urban poor", indigenous communities, the disabled and others. But there are real political problems with this reform in that the local governments regard the non-governmental organisations (NCOS) and peoples organisations as former adversaries, whilst the peoples organisations tend to

247 Part C Theme II - Scientific Background

see the new local government reform as an attempt to restore the power of the pre-Marcos feudal bosses and "warlords" under the banner of local and regional rights (Brillantes, 1996). This kind of conflict and distrust between NCOS and government is not peculiar to the Philippines. The most direct of all forms of participation - village-level community or self-help activities - are particularly popular in Africa. In Ghana and Uganda, for instance, they are incorporated into the formal local government structure. They are popular with donor-funded schemes for encouraging "community-driven development". Unfortunately, this kind of participation is most prone to reflect existing inequalities and power structures. In Asia, it would seem there is less willingness to contribute cash or free labour time. Where it does occur, it may have a forced aspect to it, or the costs to poor people may be recognised through the provision of "food for work" programs, as in India, Bangladesh or Nepal (CIRDAP, 1992)2.3.

Participation and elite capture

In general, it may be concluded that although participation in decentralised and democratic forms of government can widen the scope or social basis of participation, it is still very hard for it to prevent existing local elites from capturing control of the new institutional power opportunities (Blair, 2000; Crook and Sverrisson, 2001). Even strong forms of affirmative action do not always translate into actual effective influence in the decisionmaking processes by the special representatives, as can be seen in the record of local government in the Indian state of Karnataka. In Bangladesh, Nigeria, and Kenya, conservative elite capture of decentralisation was actually facilitated by the government's desire to create and sustain a power base in the countryside, and to prevent opposition forces coalescing. In Ghana a similar motivation took over after an initial commitment to radical reform faded. Cote d'lvoire and Mexico exemplify a third scenario in which decentralisation was used by a ruling party to renew and extend the party's support without any real commitment to pro-poor policies which might disturb the entrenched but dependent networks of influence and patronage. In the developing world there are only a few examples of decentralisation reforms that have benefited disadvantaged groups - the Indian states of West Bengal and Kerala, and a number of municipalities in the Brazilian states of Rio Grande do Sul, Minas Gerais and Ceara. Their common characteristic is that in each case conservative local elites were challenged locally by groups supported externally by an ideologically committed, reforming government and/or party (Crook and Sverrisson, 2001; Heller, 2001). A policy conclusion might be that decentralisation schemes should avoid delimiting the devolved areas in such a way as to give an enhanced power

248 Richard Charles Crook base to elite groups (particularly in a situation of ethnic stratification). If this cannot be avoided for reasons of cultural balancing or the need to grant autonomy to groups threatening national unity, then the central government must have a party organisation capable of sustaining popular control over or even displacement of local elites within the devolved areas. This needs to be combined with representative institutions that assure broad participation of all groups, both through electoral and affirmative action schemes. But affirmative action cannot be relied upon to produce the desired result unless the "quota representatives" of previously oppressed or excluded groups have considerable support from parties or other extra-local forces. 3.

DECENTRALISATION, AND

ACCOUNTABILITY

TRANSPARENCY

Enhancing participation at the local level through decentralisation is clearly not sufficient in itself to make governments more equitable, inclusive or responsive. Participatory activities can only effectively influence the outcomes or performance of local government if they are mediated through mechanisms of accountability, which ensure that the governments act in accordance with the wishes of representative bodies and implement authorised spending policies correctly. Transparency, or "open government" which gives citizens full information on what is being decided and how, is a kind of public accountability mechanism which only operates in systems which already have the basics of democratic accountability in place. 3.1. Accountability Political accountability is the requirement that governments be answerable for their actions, both in law and to the public. It is conventionally divided into "internal" or institutional accountability and "external" or public accountability (although O'Donnell (1999) uses the terms "horizontal" and "vertical" for more or less the same concepts). Internal accountability mechanisms include such devices as political accountability to elected bodies, formal hierarchies of administrative, fiscal and legal accountability, and professional value systems. External accountability mechanisms include elections, public opinion as articulated through the media and civil society organisations, political party and constituency linkages, and new forms of "citizen auditing" (see below). 3. /. i. Accountability mechanisms at the heal level. Decentralised government has certainly contributed to the development of some of the above mechanisms, most notably in the field of participatory citizen vetting

249 Part C Theme II - Scientific Background

and monitoring. Democratic decentralisation also introduces elections and elected office holders to arenas where they have not existed before or where they have been uncompetitive/authoritarian. Elections are still the most important form of accountability in that they introduce at the local level both a demand for internal political accountability, and new expectations of public accountability not just at election time, but also between elected representatives and their constituents, and through the new participatory devices mentioned above. There is in fact, a very wide variety of electoral systems and methods for appointing local officials and holding them to account. Comparative studies suggest that electoral democracy at the local level is most effective where the executive authorities are elected indirectly from amongst the body of elected councillors, and are subject to continuous monitoring through committees or "administrative commissions" of the council (Olowu and Smoke, 1992; Mawhood, 1993; Crook and Manor, 1998; Gasper, 1989). Direct popular election of mayors (as in Nigeria, Bangladesh, and most of Latin America) on the other hand, at least in the developing country context, seems to be associated with some of the worst cases of corruption, patronage politics and unaccountable behaviour. Another device that undermines accountability in less developed countries is political appointment of local chief executives by central government. This is usually done to ensure that central government loyalists are in charge locally and can enforce compliance with central government policies. It is also important that there is a balance between political control and legal/administrative constraints. In Indian states such as Karnataka, West Bengal, or Maharashtra, elected politicians are definitely "in control", in that they have the status, the social embeddedness, and the capacity to deal with civil servants, discuss policies and if necessary push them through against a reluctant bureaucracy (CIRDAP, 1992). But over-powerful political executives can cause problems too, and their actions need to be balanced by a well-established civil or public service that has sufficient autonomy to prevent politicians from breaking the law or financial regulations. The ratios of representation at the local level should also be as "close" as possible, and encourage close ward-based relationships between elected representatives and their constituents. It is for this reason that list systems are not conducive to effective accountability in local governments. In Latin America, for instance, a major problem is the political under-representation in local governments, characterised by representative ratios of between 1:20,000 and 1:80,000 in the urban municipalities, and over i:ioo,ooo*in some of the big cities (Nickson, 1995). Finally, it is worth stressing that competitive and regular elections remain a basic requirement. There is little point in executives reporting to elected bodies unless those bodies are prepared to challenge, demand information

250 Richard Charles Crook and debate alternative strategies; hence the need also for a free press and media. It is no doubt rare to find all of the benign contextual conditions combined. The development of genuine forms of accountability and participation at the local level is a challenge to power structures that can easily snuff them out if they remain isolated. That is why decentralisation is best introduced within a broader context of democratic and governance reforms at the national level, so that they are part of a "virtuous circle". 3.2.

Transparency

The idea that decentralisation will provide more transparent, honest and legitimate government is linked not just to the expected benefits of local accountability. It is also a product of expectations regarding the "process" aspect of institutional performance. These concerns may be subdivided into those relevant at the institutional level, such as decision making, imposition of taxes and allocation of resources, and those which involve relations with the public, such as the behaviour of officials, collection of taxes, and elections. Transparency is more properly about whether the public knows more about how and on what basis decisions have been taken. Whether they then find those processes acceptable will affect the extent to which the decisions themselves are accepted. J.2.J. Transparency, decentralisation and the control of corruption. There is some evidence that democratic decentralisation and its accompanying enhancement of transparency make corruption (in its narrower sense) more visible, particularly where, as in India, it is combined with the effects of political accountability, free press reporting and party competition. However, it may well have the perverse effect of causing the public to think that corruption has increased when, as reported by Manor for Karnataka, it actually decreased (Crook and Manor, 1998). In other countries however, for example Bangladesh, Nigeria, Tanzania, Papua New Guinea, Philippines, Kenya and Thailand (United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP), 1991), corruption and financial mismanagement is reported to have in fact increased at the same time as becoming more visible. And democratic decentralisation creates a new political class, which is not only responsible for public money but can also cost substantial sums insofar as allowances and other expenses have to be paid. In poor countries this can amount to quite significant proportions of local budgets (see especially Nigeria and Papua New Guinea (Ramm, 1993; Awotukun, 1995; Gboyega, 1998)). The most visible aspect of corruption for members of the public in less developed countries is not, however, the graft associated with contracts or

251 Part C Theme II - Scientific Background patronage allocations, but the extent to which they are dealt with fairly and honestly by government employees in every-day routine transactions at clinics, licensing offices, tax offices and the like (petty corruption). There is hardly any empirical research on this topic, but Crook and Manor (1998) found some evidence of improvement in the attitudes and behaviour of employees in Karnataka. Again, this was principally due to the willingness of members of the public to complain, and the accountability mechanisms of the new councils. On the other hand, it is not certain that greater transparency will reduce the incidence of patronage practices and nepotism. Some analysts have indeed argued that the closer government is to local society, the greater the likelihood of corruption as officials are more likely to be pressured by familial and friendship networks which they find it difficult to offend (Tanzi, 1995). The history of local government in Latin America would seem to confirm this picture. According to Nickson (1995) the vast majority of the region's 2.7 million local government employees are clientelistic appointments - whilst local government in Africa has the same image. 3.2.2. Financial transparency and "New Public Management" solutions. There is a trend in the literature to suggest that the most effective way to control corruption by decentralised authorities is to make the relationship between costs and benefits more transparent and direct. The intention is to make government decision makers "bear the financial and political consequences of their decisions" and force them to internalise costs. That is, they would not be able to shift the cost of services for local beneficiaries onto the shoulders of non-beneficiaries, or to "export" taxes (Tanzi, 1995; Bird, 1994; Werlin, 1992). A further important mechanism would therefore be extensive employment of "user charges" for services directly provided by the local authorities, and therefore the responsibility of those decision makers (Bird and Vaillancourt, 1998, 12). These "New Public Management" approaches, already extensively used in the industrialised economies since the 19805, have not been tested very much in the less developed country context, except in the area of "user fees" (see Paul, 1994). The key problem with the approach would seem to lie in the concept of a direct relationship between providing only services that can be paid for by available revenues or user charges, and the consequences for providers. Only if local governments were forced to be genuinely self-sufficient would there be real consequences, which would probably lead to the demise of most less developed country local governments outside the big towns, and a process of "de-development". Ultimately, therefore, these are arguments against government decentralisation and in favour of the market.

252 4.

Richard Charles Crook DECENTRALISATION AND GOVERNMENT

RESPONSIVENESS

Responsiveness of government is more than just accountability, although the two are inevitably linked. An "accountable" institution is not necessarily responsive - and perhaps should try not to be in the case of judicial or auditing authorities. The assertion that decentralisation will be more responsive to the needs of ordinary citizens is derived from the notion that local, more participatory forms of government and development activity will offer more than just greater effectiveness in promoting economic development. Institutional responsiveness has been defined as the achievement of "congruence between community preferences and public policies" such that the activities of the institution are valued by the public (Fried and Rabinovitz, 1980). Of course, this begs the question of "responsive to whom?" Does decentralisation benefit particular social groups or areas of the country, more than others? Decentralised government has been the focus for a number of "citizen voice" initiatives over the past decade, initiatives that attempt to enhance the responsiveness of government by linking with reforms in the way government agencies themselves work. Enhanced citizen voices cannot be effective unless government agencies are ready to hear them, and to change their behaviour accordingly (Goetz, Gaventa et al., 2001). The most successful initiatives have therefore involved participatory partnerships between citizens and government agencies, which are categorised below. • Citizen-based monitoring and evaluation: these are devices for citizens to review standards of service provision, and assess their likely impact on particular social groups. "Women's Budget Initiatives" for instance, have been developed in a number of countries, such as South Africa, Uganda, and Canada, inspired by a state-level scheme in Australia. • Citizens' auditing: for example in India, the best known and most radical program is that launched by a politically organised community group, the Mazdoor Kisan Shakti Sangathan (Peoples Right to Information Campaign) in Rajasthan, which uses public "naming and shaming" meetings to demand public information on local government spending. In Bolivia, officially recognised Neighborhood Vigilance Committees monitor municipal investment decisions, and have the power to use a legal denuncia against a local council if they suspect corruption. • Joint management of sectoral programs: joint state-civil society management and delivery of services such as forestry, watershed protection, or primary healthcare are an increasingly common form of responsive governance and have achieved acknowledged success, for example West Bengal's Forest Protection Committees, local healthcare rationing in Nova Scotia and Saskatchewan (Canada), and education user groups in Denmark.

253 Part C Theme II - Scientific Background

• Participatory planning and budgeting: in a number of countries, participatory planning mechanisms have been institutionalised through legislative reforms or government-sponsored programs which provide frameworks for participatory planning by local citizens. The most successful to date has been the participatory budgeting system pioneered in the Brazilian cities of Belo Horizonte and Porto Alegre after the election of the Workers' Party (PT). Researchers have found that the process did result in more responsiveness to the needs of poor areas (favelas) and outlying districts, and created a "culture change" in both government officials and citizens (Paixao, 1996; Avritzer, 2000). 4. i. Changing government behaviour

Making government agencies more capable of hearing citizen voices, and therefore able to be more responsive has also been the focus of various reform efforts. On the one hand, there is the New Public Management approach, which emphasises incentives, sanctions, and performance measurement. If the goal is to make public servants more client-oriented and responsive to the public, then individual incentive structures which mimic the market must be introduced into the public service so as to reward client-centric behaviour. On the other hand, a number of programs around the world have sought to improve and sustain public service responsiveness through the creation of a new public service ethos amongst its employees, based on a "human relations" management approach. One of the most successful was the Health Agent Program in Ceara State, Brazil. The case is frequently cited as an example of what can be achieved through the inculcation of a strong sense of dedication and job commitment amongst "front-line" employees. Unfortunately, decentralisation did not play a key role, in that one of the explanations for its success is that the governor ensured that the state health ministry was in charge of recruitment, thus by-passing municipal patronage networks (Tendler, 1997). Other methods for making local governments more responsive include better and more accessible information about services ("one stop shops"), and new rights for citizens to demand the delivery of publicly guaranteed standards, either through citizens' charters or even legally enforceable constitutional or statutory rights to a certain level of service. 4.2. Decentralisation and responsiveness

What factors are most associated with success in making these kinds of initiatives produce more responsive government? Systematic comparative research suggests that citizen voice initiatives need to be built into the legal and formal structures of the system, and cannot be left up to civil society

254 Richard Charles Crook

initiatives. Citizen groups need the power to demand formal investigations or seek legal redress for non-delivery of services (Goetz, Gaventa et al., 2001). 5.

DECENTRALISATION, EQUITY AND HUMAN RIGHTS

In this paper we are concerned primarily with the question of whether decentralisation can make a contribution to the management of systemthreatening conflict in multicultural societies. Therefore, if it is used as a device to give autonomy and political space to ethno-regional entities or to otherwise excluded minorities, then there is a potential problem over its ability to protect the rights of oppressed or disadvantaged minorities created within new, culturally defined political authorities. And if there is ethnic stratification associated with uneven development, there is also an issue of spatial equity. Will decentralisation ensure equal standards of human and economic development throughout the national territory, or will it exacerbate regional inequalities? 5.1. Group rights and human rights

In international law, the rights of minorities within states are protected as individual rights under the United Nations Declaration on the Rights of Persons Belonging to National, Ethnic, Religious and Linguistic Minorities. In other words, they are only protected as individual citizens in accordance with the standard human rights conventions. "Group" rights are seen as equivalent to the concept of self-determination and therefore fall under the restriction limiting the "right of self determination" to "peoples under colonial rule". Many indigenous or aboriginal peoples around the world are now therefore demanding various forms of decentralised autonomy within the states where they live, not as minorities but as "peoples under colonial rule" (Stavenhagen, 1998). But in general, ethnic or cultural groups living in the kinds of cultural pluralist situations described above are, if they are mobilised, looking to varieties of consociationalism, or decentralisation to deal with their problems. The system adopted in Bosnia and Herzegovina as part of the Dayton Peace Agreement is a classic example of the difficulties of trying to build minority protection into an ethnically defined system. The Dayton Peace Agreement created for Bosnia "probably the most decentralised state in the world" (Carl Bildt quoted in Chandler, 1999, 67). At every single level down to the municipality, formal rules enforce multiethnic power sharing and guaranteed places for "minorities". This is an acknowledgement of the fact that, in spite of "ethnic cleansing", communities are still mixed, with minorities in each area. The system therefore succeeds in simultaneously

255 Part C Theme II - Scientific Background exacerbating both sets of the key problems caused by cultural pluralism. On the one hand, it gives maximum autonomy to ethnically defined or ethnic majority areas that are capable of threatening the very integrity of the state. On the other hand, it gives maximum incentive to cultural entrepreneurs at the local level to mobilise ethnic categories in order to secure access to local government resources and patronage with veto powers to minorities. It is therefore a very good warning of the dangers of basing decentralisation on a logic of ethnic power sharing (Crook, 2001). 5.2. Social equity and human development There is very little evidence that decentralised governance leads to more redistributive or equitable economic policies. As noted above, comparative studies of decentralisation in developing countries found only a few examples, such as the Indian states of West Bengal and Kerala, and some progressive municipalities in Brazil. The key issue is that of elite capture. The difference between the positive cases and countries such as Bangladesh, Nigeria, or Mexico is not that the latter fail to allocate sufficient funds to the decentralised authorities, or that they lack centrally funded development and anti-poverty programs. The real difference is that the latter governments fail to ensure that central funds are used in a responsible and accountable manner, and fail to ensure implementation of pro-poor policies where these formally exist. The explanation for this is to be found in the politics of central-local relations: in none of these three countries was it likely that decentralisation would empower any kind of challenge to local elites resistant to or uninterested in the development of pro-poor policies. 5.3.

Spatial equity

Insofar as decentralisation enhances the political and fiscal autonomy of territorial sub-units, it is by definition likely to exacerbate spatial inequalities. The more dependent on local revenues and assigned taxes the system is, the more this is likely to be so. The only mitigating factor is that new decentralisation programs may result in net transfers to more remote rural areas, purely as a function of the setting up of government authorities in those areas and the allocation of minimum funds (Crook and Manor, 1998). Spatial equity can therefore only be assured if there are centrally directed transfers of funds or reallocations of tax revenues using equalisation formulae. These are particularly crucial in the cases of extremely distorted regional revenue bases found in states dependent on oil or mineral producing enclaves, which is why decentralisation is particularly dangerous in such situations. Equalisation formulae are in fact quite common, and are certainly easier to manage if decentralised authorities have minimal fiscal autonomy. In

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developing countries, central government transfers normally account for the largest single element — usually the majority — of local government revenues, other than the big city authorities. A few industrialised countries such as Ireland and the UK also have very high transfer levels - 80-90% of local government revenues (Litvack and Seddon, 1999; Nickson, 1995; World Bank, 2000; International Monetary Fund, 2000). Decentralisation in such settings therefore creates new tensions between local and central areas over allocation of revenues, which in a state riven by mobilised cultural conflict can again cause extra problems, and provides another reason to be cautious about the supposed benefits of decentralisation schemes based on culturally defined areas. NOTE

i Compare with Barkan and Chege's analysis of the Kenyan situation, in which they propose a hypothesis that "the probability that decentralization will serve the political interests of the regime varies inversely with the power and resources of the ethno-regional base on which the regime rests" (Barkan and Chege, 1989, 21). REFERENCES

Avritzer, L., 2000. Civil Society, Public Space and Local Power: A Study of the Participatory Budget in Belo Horizonte and Porto Alegre Brazil. Paper delivered to the Ford Foundation Civil Society and Governance Conference, Amsterdam, 24 September 2000. Aziz, A. and Arnold, D.D., eds, 1996. Decentralized Governance in Asian Countries. London and New Delhi: Sage. Awotukun, A.M., ed., 1995. New Trends in Nigerian Local Government. Ile-Ife: Department of Local Government Studies, Ofafemi Awolowo University. Barkan, J.D. and Chege, M., 1989. Decentralizing the State: District Focus and the Politics of Reallocation in Kenya. Journal of Modern African Studies, 27(3), 431-453. Batley, R. and Stoker, G., eds, 1991. Local Government in Europe: Trends and Developments. Basingstoke: Macmillan Education. Bird, R., 1994. Decentralizing Infrastructure: For Good orfor III (Working Paper; Background Paper for World Development Report, 1994), Washington, D.C.: World Bank Institute. Bird, R. and Vaillancourt, F, eds, 1999. Fiscal Decentralization in Developing Countries. Cambridge: Cambridge University Press. Blair, H., 2000. Participation and Accountability at the Periphery: Democratic Local Governance in Six Countries. World Development, 28(1), 21-39. Brillantes, A.B., 1996. Local Governance and Decentralization: The Philippine Experience. In: A. Aziz and D.D. Arnold, eds. Decentralized Governance in Asian Countries. London and New Delhi: Sage, 197-215.

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Burns, D., Hambleton, R. and Hoggett, P., 1994. The Politics of Decentralization: Revitalising Local Democracy. Houndmills: Macmillan Press. CIRDAP (Centre on Integrated Rural Development for Asia and the Pacific), 1992. Impact of Decentralization on Rural Poverty: An Asian Perspective. Dhaka: Centre on Integrated Rural Development for Asia and the Pacific. Chambers, R., 1983. Rural Development: Putting the Last First. London: Longman. Chandler, D., 1999. Bosnia. Faking Democracy After Dayton. London and Sterling VA: Pluto Press. Crook, R.C., 1994. Four Years of the Ghana District Assemblies in Operation: Decentralization, Democratization and Administrative Performance. Public Administration and Development, 14, 339-364. Crook, R.C., 1996. Democracy, Participation and Responsiveness: A Case Study of Relations between the Ivorian Communes and their Citizens. Public Administration, 74 (3), 695-720. Crook, R.C., 2001. Strengthening Democratic Governance in Conflict Torn Societies: Civic organizations, Democratic Effectiveness and Political conflict. IDS Working Paper 129, May 2001. Crook, R.C. andjerve, A.M., eds, 1991. Government and Participation: Institutional Development, Decentralization and Democracy in the Third World. Bergen: Chr. Michelsen Institute. Crook, R.C. and Manor, J., 1998. Democracy and Decentralization in South Asia and West Africa: Participation, Accountability and Performance. Cambridge: Cambridge University Press. Crook, R. and Sverrisson, A., 2001. Decentralization and Poverty Alleviation in Developing Countries: A Comparative Analysis or is West Bengal Unique ? IDS Working Paper 130, June 2001. Echeverri-Gent, J., 1992. Public Participation and Poverty Alleviation: The Experience of Reform Communists in West Bengal. World Development, 20(10), 14011422. Fried, R.C., and Rabinovitz, F.F., 1980. Comparative Urban Politics -A Performance Approach. Englewood Cliffs, NJ: Prentice Hall. Gasper, D., 1989. Multilevel Planning and Development Administration in Botswana. Harare: Department of Rural and Urban Planning, University of Zimbabwe. Gboyega, A., 1998. Decentralization and Local Autonomy in Nigeria's Federal System: Crossing the Stream while Searching for the Pebbles. In: J. Barkan, ed. Five Monographs on Decentralization and Democratization in Sub-Saharan Africa: Occasional Papers 45-49. Ames: University of Iowa, International Programs. Ghai, Y, 1998. Decentralization and the Accommodation of Ethnic Diversity. In: C. Young, ed. Ethnic Diversity and Public Policy. Chapter 2. Goetz, A-M. and Gaventa, J. et al., 2001. Bringing Citizen Voice and Client Focus into Service Delivery. IDS Working Paper 138, July 2001. Heller, P., 2001. Moving the State: The Politics of Democratic Decentralization in Kerala, South Africa and Porto Alegre. Politics and Society, 29(1), 131-163.

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IMF (International Monetary Fund), 2000. International Financial Statistics Yearbook, 2000. Washington, D.C.: International Monetary Fund. Jaglin, S. and Dubresson, A., eds, 1993. Pouvoirs et cites d'AJrique noire: decentralisations en question. Paris: Karthala. Korten, B.C., 1984. People Centred Development. West Hartford: Kumarian Press. Leonard, D.K. and Marshall, D.R., 1982. Institutions of Rural Development for the Poor: Decentralization and Organizational Linkages. Berkeley: Institute of International Studies, University of California. Litvack,J. and Seddon,J., eds, 1999. Decentralization Briefing Notes. Washington, D.C.: World Bank Institute. Mawhood, P., ed., 1993. Local Government in the Third World. 2nd ed. Pretoria: Africa Institute of South Africa. Moris, J.R., 1991 • Institutional Choice and Local Development: What Kind of Social Science Do We Need? In: R. Crook and A.M. Jerve, eds. Government and Participation: Institutional Development, Decentralization and Democracy in the Third World. Bergen: Chr. Michelsen Institute, 170-206. Nickson, R.A., 1995. Local Government in Latin America. Colorado and London: Lynne Rienner. Olowu, D., 1989. Achievements and Problems of Federal and State Transfers to Local Governments in Nigeria Since Independence. Washington, D.C.: Co-ordination and Development Administration Division, Economic Development Institute, World Bank. Olowu, D. and Smoke, P., 1992. Determinants of Success in African Local Governments: An Overview. Public Administration and Development, 12(1), 1-17. O'Donnell, G., 1999. Polyarchies and the (Un)rule of Law in Latin America. In: J. Mendez, G. O'Donnell and P. Pinheiro. The (Un)rule of Law and the Underprivileged in Latin America. Notre Dame: Notre Dame University Press, 303-335. Paul, S., 1994. Does Voice Matter1? For Public Accountability Yes. World Bank Policy Research Working Paper 1388, December 1994. Washington, D.C.: World Bank. Paixao, PR., 1996. Participative Budgeting in Belo Horizonte: Democratization and Citizenship. Environment and Urbanization, 8(1), 213-222. Ramm,J-F., 1993. Rethinking Decentralization in Papua New Guinea. Nagoya: United Nations Centre for Regional Development. Rueschemeyer, D., Stephens, E.H. and Stephens, J.D., 1992. Capitalist Development and Democracy. Cambridge: Polity Press. Smith, B.C., 1985. Decentralization: The Territorial Dimension of the State. London: George Allen & Unwin. Stavenhagen, S., 1998. Indigenous Peoples. In: C. Young, ed. Ethnic Diversity and Public Policy: A Comparative Enquiry. Basingstoke: Macmillan, United Nations Research Institute for Social Development, Chapter 6. Tanzi, V., 1995. Fiscal Federalism and Decentralization: A Review of Some Efficiency and Macroeconomic Aspects. Paper presented at the 1995 Annual Bank Conference on Development Economics, World Bank, Washington, D.C., 1-2 May 1995. Tendler, J., 1997. Good Government in the Tropics. Baltimore: Johns Hopkins University Press.

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Turner, M. and Hulme, D., 1997. Governance, Administration and Development: Making the State Work. Basingstoke: Macmillan. UNESCAP (United Nations Economic and Social Commission for Asia and the Pacific), 1991. Fiscal Decentralization and the Mobilization and Use of National Resources for Development: Issues, Experience and Policies in the ESCAP Region. Bangkok: United Nations Economic and Social Commission for Asia and the Pacific. Webster, N., 1994. Panchayati Raj and Democratic Decentralization in West Bengal, India. Paper presented at the Conference on Democratic Decentralization in Africa and Asia, Institute of Commonwealth Studies, University of London, July 1994. Werlin, H., 1992. Linking Decentralization and Centralization: A Critique of the New Development Administration. Public Administration and Development, 12(3), 223-235. World Bank, 2000. The World Development Report 2000. Washington, D.C.: World Bank Institute. Young, C., 1976. The Politics of Cultural Pluralism. Madison: University of Wisconsin Press. Young, C., ed., 1998. Ethnic Diversity and Public Policy: A Comparative Inquiry. Basingstoke: Macmillan, United Nations Research Institute for Social Development.

SCIENTIFIC BACKGROUND: SUBTHEME PAPER RADMILA NAKARADA

Communities - Civil Society and Conflict Management Federalism, Civil Society and Multiethnic Conflicts: Challenges in the Era of Globalisation

1.

PROLOGUE

We cannot proceed in our enquiries as if the tragedies of the 11 September and 25 October 2001 did not occur. The boundaries of destruction have been extended; a new spiral of violence has been set in motion by "global terrorism" and "global war against terrorism". The world is once again moving in a dangerous direction, casting a shadow on all our enquires, increasing the need for critical reflection and rehabilitating the need for alternatives, i.e. increasing the need to enhance local and global conflict prevention and peace-making capacities. 2.

EXTENDING THE FRAMEWORK OF ANALYSIS

The post-Cold War era is characterised by intensified globalisation, and a new cycle of ethnic conflicts. The upsurge of demands for territorial autonomy and secessions is violently redefining cartographies in a number of locations. A reassessment of the relevancy and reach of the federalist formula is becoming a pressing need. Although, in principle, the federalist formula provides the most accommodating framework for multiethnic societies, it is not a pre-packaged panacea. We must take note of the successes and failures of the federal model in diffusing and managing conflicts in multiethnic states, and preserving viable entities. Experiences of success and failure offer abundant edifying insights,1 but they do not generate coherent messages that can be systematised into a neat blueprint. A principle or policy that eases conflict in one situation may fuel it in another, the very federal arrangement that secures

261 Part C Theme II - Scientific Background

the state entity in one multiethnic setting, may lead to its violent break up in another. The problem is that no one principle, no one set of conditions, no one mode of responses to multiethnic challenges contains universal potency. Matters are complicated even more by the experiences of failed multiethnic states (e.g. Yugoslavia) that have tried, and applied in their evolution, different political and economic models (both unitarianism and federalism, capitalism and socialism), but have not suspended cycles of conflict and disintegration.2 It almost seems as if patterns of inevitability have been set at the heart of these societies, making failure an inescapable fate. How this historical logic persists is not fully comprehensible, but that it is there is asserted by the inability of a number of states (among others some in the former Soviet Union and the western Balkans) to attain irreversible assumption of development and stability, no matter which institutional setting they construct. The range of issues is further extended by the new round of challenges evolving after the end of the Cold War, leading to the advancement of the (con)federal dimensions within the European Union (EU) on the one hand, and the simultaneous dismantling of all three federations in exsocialist countries (in Yugoslavia by a devastating war) on the other. If anything, these observations indicate the complexity of conditions and factors that determine the reach of federal arrangements and their capacity to contribute to self-sustained peace3 in multiethnic entities. Among an array of factors, we wish to explore in this paper the significance of the character of civil society, as well as of globalisation. Our hypothesis is that in addition to such factors as federal arrangements and institutions, the character of civil society and the effects of globalisation as an overriding process transforming the nation state, local settings and actors are decisive in determining the conflict resolution capacities of federalism. Therefore, in our analysis of the peace enhancing capacities of federalism in multiethnic states, we propose an extension of the "framework of meaningful analyses" (Toynbee, 1953) in two directions encompassing: i) the relationship between federalism and the character of civil society, and ii) the nature of the deep transformations of the state and civil society taking place as a result of the increasing rhythm of globalisation, and its influence on the reach of the federalist project. 3.

THE NATURE OF CIVIL

SOCIETY

AND FEDERALISM

Civil society is a concept with a long history, changing significance, different meanings, and a strong normative charge (Keane, 1988; Elazar, 1999, 35-43). It is fundamentally linked to the history of the nation state and the extension of individual freedom. The dissident movements in Eastern

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Europe during the seventies and eighties recovered its emancipatory potential. Its contemporary conceptualisation reflects an array of interpretations of its normative and real content. A summary glance at the varied interpretations reveals a number of differences. The majority of interpretations preserve the classical idea according to which civil society derives its meaning in relation to the state, becoming a restraining agent against the state and its tendency to abuse its powers. Others, while recognising the distinction between the political and social realm and the need to limit the coercive powers of the state, resist the rigidity of this distinction as an over-simplification that overlooks the mutual intertwining of the state and civil society. Although the self-determining individual, voluntary human associations (Walzer), and social movements are widely recognised as central actors of civil society, differences appear in relation to the family, economy and political parties. Some authors include them, while others exclude them from the realm of civil society. In terms of values, individual autonomy, rights (individual and collective), pluralism, and tolerance (Sanders) are uncontested, while solidarity, common responsibility, unity and cohesion are subject to disagreement: "Civil society is the sphere of radical individualism and not of solidarity" (Elazar). Some perceive civil society as encompassing ethnicity while others perceive it as inherently being trans-ethnic. Some perceive it as unconditionally progressive and anti-totalitarian, others indicate its ambivalent nature (Walker).4 In spite of the differences and the nuances of interpretation, it is possible to distil those dimensions that are relevant for a normative project of civil society, congruent with federalism's potential for conflict prevention and preservation of multiethnic states. The character of civil society in a multiethnic state is crucial in determining whether integrative or disintegrative tendencies will prevail. Having the challenge in mind, civil society should be posited as a sphere of common values, where the balance of self-interest, common responsibility and inter-communality is advocated and demonstrated, together with multiple and changing identities (Parekh) within an inclusive "WE" (Fleiner). Civil society is the realm where the memory of the great task - bettering the existing society - is preserved. It should be a space of dense and overlapping networks preventing radical polarisation, and working against the intolerant universalisation of religions and exclusivity of ethnicity (Walzer). Participatory responsibility5 should be the foundation of its democratic character and consensual capacity. Moderate, non-violent actors should be the bearers of the will for "historical compromises". As such it would provide the natural societal basis for a democratic federalism, creating the framework for decentralisa-

263 Part C Theme II - Scientific Background

tion, territorial autonomy and democratic integration, consolidating and sustaining the common state. However, in reality, such features of civil society and its integrative function are not abundant. Their principal locations are modern, developed, prosperous societies. In multiethnic countries of the periphery, civil society has more often than not been a weak means of conflict prevention. Instead, in a number of cases, the civil society itself has become ethnicified, fragmented along ethnic lines (torn, fragmented civil society), actively participating in the process of disintegration. 4.

FEDERALISM, MULTIETHNIC CONFLICTS, AND TORN CIVIL SOCIETIES

Contrary to the initial euphoric conclusions that with the end of Cold War an "end to all dramatic conflicts has come about" (Fukuyama, 1992), the fire of ethnic conflicts, as already noted, has not been quenched.6 On the contrary, it seems as if with the end of Cold War a "lid" was lifted, releasing a number of ethnic conflicts, both violent and less violent. This rather unexpected outcome demonstrated the complex fragility of multiethnic entities, in particular of ethnic federalism, confirming that "in fact, ethnic federations are among the most difficult of all to sustain and are least likely to survive ... They run the risk of secession" (Elazar). Second, contrary to the simplified stereotyped explanations of the cause of conflicts in multiethnic societies - ancestral hatred, lack of democracy, economic poverty - these societies are characterised by plural sources of conflict, that intersect, accumulate, and inevitably become violent. The roots of ethnic conflicts7 are multifaceted and deeply embedded in the social structures. Although "ancestral tribal hatreds" may be present, insisting exclusively on this dimension ignores the concrete circumstances and issues of conflict, insists on intractability, and invites external patronage and solutions. Those who speak or write glibly about "ancestral tribal hatreds" as a presumptive explanation of a conflict usually betray more of their own ignorance than knowledge about the situation they report on. Ethnic conflicts evolve out of specific historical situations, they are moulded by particular and unique circumstances, and they are constructed to serve certain interest by ... political leaders and "ethnic power-brokers" of various kinds. (Stavenhagen, 1996, 229)

One should note in this context, that the weight of power elites on the social scale of semi-peripheral and distinctively multinational society is greater than in their developed Western counterparts. Under the influence of elites and their spiritual bombardment, an extraordinary scale of mass intoxication can be achieved by the opium of nationalism - a change of the public mood

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from a rather low degree of hibernated nationalistic feelings to the chauvinism embittered by mutual hate and "remembrance" of past grievances. Lack of democracy, discrimination against minorities, and economic stagnation are all part of the picture, but they are not the whole picture, or the whole explanation for this resurgence. In some cases, economic poverty and deprivation are triggers of ethnic rebellions or secessionist movements. However, secessionist movements often have their cradle in the richest parts of the country (Canada, Spain, Congo). The same goes for the lack of democracy. If it were the explanation for the upsurge of ethnic conflicts, then problems with multi-ethnicity would not appear in democratic, economically developed states. However this is not the case. In addition, if the lack of democracy were the basis for secession, the newly formed states would be devoted to the development of democracy, and particularly sensitive to their own minorities, which by and large is also not the case. Even in the best examples, such as the democratic and economically prosperous Czech Republic, the position of the Roma minority has remained an acute problem. Cultural segregation of minorities and their language and education is a powerful cause of ethnic conflict, but encouragement in accommodating collective rights and identity may be the very impetus for future secessionist movements. Federal arrangements themselves can create an appetite for the successive creation of new states within states, which becomes a barrier to the formation of a stronger civil society. Centralised structures based on the consensus of ethnic elites (Malaysia) or a strong supranational elite (former-Yugoslavia) can, at least for a time, limit the scale of ethnic conflict. Repressive regimes may be an incentive for ethnic conflict, but the dismantling of a repressive political system can bring about an explosion of ethnic conflict as well (Ethiopia). The case of Yugoslavia is a very telling example of some of the mixed messages and challenges facing the federalist project. First, Yugoslavia was one of the three socialist federations that disappeared in a most violent manner. In spite of the political limitations of its federalism during socialism, it went a long way towards accommodating the ethnic plurality of its society. Yet it was unable to undergo a peaceful transition after the Cold War, and embark on a path of political pluralization without producing radical ethnic divisions from the outset of its transition. Wavering between unitarianism and federalism in the past, the last chapter of its evolution bore the imprint of federalism, resulting in a high degree of autonomy for its federal entities and a weak federal state. Therefore, the outcome after the end of the Cold War suggests that federalism can be a favourable political framework for the incubation and accumulation offerees leading to the disintegration of the state. Second, the break-up of Yugoslavia speaks of the ambivalent relation of the international community to the right of self-determination. The unilat-

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eral secession of some of the Republics was internationally recognised, while the quest for self-determination of others was opposed by sanctions. Third, new entities evolving after the break-up, instead of applying federal principles in order to accommodate their own minorities, applied ethnic cleansing, creating homogenous states. Creating ethnically clean states and resolving the minority problem by ethnic cleansing is currently the most dangerous tendency hindering the affirmation of federal principles. Fourth, in the current phase of the drama of the former Yugoslavia, we are witnessing growing external pressures to centralise Bosnia and dissolve its (con)federal aspects, which runs contrary external pressures on Macedonia to federalise in order to ease ethnic tensions. However, the constitutional changes have not suspended the danger of breaking up. In federal Yugoslavia, Montenegro is seeking independence, while Serbia (one autonomous region) is seeking further federalisation of the present Yugoslavia and the constitution of new federal units, and Kosovo (the other autonomous region) has attained a de facto independence under foreign protectorate. In other words, the process of disintegration has not yet come to an end in this region, irrespective of whether the federal formula is applied or not. If anything, the contradictory experience of former Yugoslavia confirms that the deepest roots of its past and potential collapse lie in the character of the society8, and not in the federalist arrangements as such. This brings us to a short examination of the consequences of a fragmented civil society. Torn civil societies are a reflection of the intensity of the conflict axis within an entity. Therefore one of their foremost characteristics is the high potential for explosive violence (potential "explosive multiculturality"). However, a fundamental feature of torn, fragmented civil society is also the coexistence of several embryonic civil societies within one entity. These embryonic civil societies may coexist as enclaves of ethnic exclusivity with little interconnection, or they may become the basis for future independent states. The embryonic civil societies are in fact carrying out "social secession" prior to the secession of federal units, placing themselves at the service of the state in statu nascendi. Media, education and cultural associations all become architects of a reinvigorated exclusive ethnic identity. The paradox of federalism in a torn, fragmented civil society is that the development of autonomy and collective rights are unavoidable, while at the same time greater collective rights do not stabilise the community, since collective rights are perceived only as steps toward the final aim - the independent state - thus leading to secession. Success in resolving ethnic conflicts requires a double operation. Firstly, there should be intervention into the social infrastructure and civil society, and its transition from a fragmented to a normal, trans-ethnic civil society. This Herculean task presupposes a number of operations from economic development through, as Burton termed it, "conflict prevention" (prevention

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as distinct from prevention, meaning the satisfaction of basic human needs, including the need for identity and security), to more ethnically (socially) balanced distribution of wealth. All this could strengthen the "ethnically cooperative" dimensions of civil society, those strands that have preserved the need for multiple identities. The second operation is to establish the decisive balance between individual and collective rights, freedom and self-limitation, i.e. the integrative capacity of the community. Preserving multi-ethnicity per se means developing and cultivating a balance between the two poles, establishing a "degree of cohesion" as the basis for the realisation of both individual and collective rights. The Magna Charta of societal federalism presupposes linking (individual and collective) rights with limitations, i.e. responsibilities. This means pursuing rights together with the preservation of the community, or at least a commitment not to secede violently. A summary of some of the messages relevant for our discussion would point out the following. • We are witnessing a strange paradox, at a moment when processes of integration are advancing and political and cultural pluralism is being celebrated at the global level, disintegrative processes are occurring in a number of multiethnic settings, and the need for homogeneous states is being strongly articulated. It seems that at this juncture, the drive to resolve conflicts by secession is stronger than opting for a viable federalist formula. • There are similarities between Tilly's description9 of the pre-Westphalian scramble for states, in which "most contenders lost" and those who survived (e.g. Britain, France and Spain) succeeded in establishing their states, and the present occurrences. These suggest that following the end of the Cold War we are witnessing another similar cycle of state making through violence, with new winners and losers. The need to reaffirm federalist principles in the face of this new cycle of violence should be self-evident. • An effective preventive mechanism that can be assured by democratic federalism is that secession-prone entities perceive that there is "nothing to gain" by secession (Kymlicka, 2000, 8), i.e. that the independent state cannot override the benefits of remaining part of a larger whole. However, for some ethnic groups, the state per se is perceived as a gain worth all sacrifices. This seems to reflect the potency of a demand that is not entirely rooted in the rational realm. • Following the unfortunate dramatic experience in former Yugoslavia, the international community may provide an impetus for federalisation (granting territorial autonomy to minorities, for example) by rehabilitating the Helsinki principle of inviolability of borders, and grant states "strong assurances regarding secession" (Kymlicka), guaranteeing the integrity of borders, an integrity that is recognised by the minorities.

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However, it seems equally reasonable to provide firm, enforceable rules and procedures for those ethnic groups that persist in seceding. Unilateral, violent secession would not be acceptable for the international community. If undertaken, no international recognition or economic assistance would ensue. Negotiations would be required until an acceptable solution for all parties is found, possibly envisioning the realisation of secession in phases. Ethnic generosity should be encouraged (instead of ethnic egotism), as well as a sense of responsibility for the larger whole in the very process of leaving it. The dictum, do not do to others what you do not wish to be done to you, is applicable to this situation. It would mean that the rights of the minorities in the new state would have to be recognised and upheld, including the possible loss of parts of its own newly acquired territory. • Finally, to reconstitute local civil society as a trans-ethnic sphere, a network of identities, a sphere of tolerance and trust, and the evolution of a stronger global civil society10 on the basis of global democracy, are essential. 5.

GLOBALISATION, TRANSFORMATION OF CIVIL SOCIETY,

FEDERALISM

The point of departure for our analysis is twofold. Civil society is a crucial determinant of the success or failure of the federal formula. However, a decisive historical novelty is the profound transformation of the nation state and civil society brought about by the wave of globalisation. Globalisation, this central planetary process, consists of two substantial dimensions. One dimension is the objective planetary process: the unprecedented speed of globalisation in terms of compression of time and space, the increasing density of networks of interconnecting societies, and the rise of transnational and supra-national economic and political forces. This process has reached such proportions that it has turned into an over-determining force, a force reshaping national economies and polities, together with their options and reach.11 Globalisation tends to be depicted exclusively as an objective, historical, irreversible, self-propelling, incontestable process generating progress.12 It is viewed as an expression of an immutable law similar to the one governing the movement of planets.13 The inevitability of globalisation is comparable, as T. Friedman notes, to the inevitability of the sun rising every morning on the East (Friedman, 1999). It is not a matter of will or choice but of historical determinism. The question of alternatives is to be dispensed with.14 The imperative is adaptation, contesting voices are disqualified as voices of the defeated past. Although technological advancement and the expansion of world market and communication networks are substantial, globalisation is not only

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an objective process. It is also a concrete historical project, the result of a worldview and interest, ideals, and illusions of the dominant sector of the global trans-national elite of power. The distinction between globalisation as an objective process and its particular historical form is important because, among other things, it recaptures the right to choice. Whether it is leading to the globalisation of poverty or to the gradual extension of welfare to broader social strata, whether it is signifying the annulment of diverse cultures or their fruitful interaction, whether it is strengthening global democracy or authoritarian forms of global governance - in short whether it is democratic "globalisation with a human face" or a neo-liberal globalisation based on market fundamentalism,15 ethnic conflicts may be mitigated or become increasingly explosive, the prospects of extending the federal principles may become stronger or bleaker. The current neo-liberal form of globalisation is highly ambivalent, and the ambiguity of its effects permeates all spheres of society, in particular civil society. As far as global economy is concerned, hand in hand, with the new global mobility of trans-national capital, the growth of fabulous wealth marches with oceans of poverty and deprivation. More and more people are redundant, "everyone is potentially replaceable", and collective defences of workers rights (trade unions) are less and less effective. Solidarity has been one of the main victims of the neo-liberal project, humane consideration is dismissed as hindering economic efficiency. Poverty is interpreted as an individual and not a structural problem. Indifference to human distress and misery are growing. Undermining solidarities, the current version of globalisation undermines the powers of civil society and its capacity to recognise common causes, common good.16 The connecting of the world by information and communication technology is creating assumptions for a cosmopolitan culture, while at the same time coercive homogeneity is being pursued, suspending local cultures and producing fundamentalist responses. In the sphere of political life the same ambivalent logic persists. The distinctive feature of political globalisation is the spreading of democracy and human rights to all corners of the world. Since the overthrow of the dictatorship in Portugal 1974, the number of democracies in the world has grown at a meteoric speed, jumping from 39 to 117 (1995). In addition, a planetary network of non-governmental organisations (NGOS) has emerged, promoting democracy and human rights. However, while universalising democracy, celebrating freedom and human rights, the neo-liberal version of globalisation is producing "low intensity democracies", i.e. expansion of formal not substantive democracy at the level of nation state (in the old and new peripheries), and a number of symptoms of authoritarian governance at the global level. These include: new planetary military inter-

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ventions (often in the guise of "humanitarian intervention"), the re-enforcement of the principle "might makes right" instead of the rule of law, the marginalization of the United Nations (UN), and the instrumentalisation of international institutions (International Monetary Fund, World Bank etc.) for geo-strategic interests, resolving conflicts by establishing new modes of protectoratship. Globalisation is also redefining the historical setting in relation to the civil society. However we define civil society, the relationship toward the state, as we noted, remains a marking relevancy. This relationship has never been a simple duality, but one of complex intertwining, as Gramsci pointed out. Due to the character and magnitude of globalisation, this relationship has become additionally complex. The complexity relates to the transformation (or, according to hyper-globalists, death) of the nation state, and the weakness of global civil society. The transformation of the state is uneven, resulting in the simultaneous existence of different types of sovereignties. These can be classed as "pre-modern" (weak states with only the formal aspects of sovereignty), modern (strong states possessing classical positive sovereignty indisputable rule of their territory - and preserving a number of key functions in the realm of welfare, human rights and security), and postmodern (a new kind of sovereignty of interdependent states; the power of decision making lost at the nation level is compensated by the participation in the decision making at a higher regional and global level).17 Summarising the character of the unevenness, we can say that globalisation is producing a proliferation of weak states, loosing monopoly over internal sovereignty, hand in hand with the evolvement of one all-powerful superstate (the United States).18 This differentiation certainly has implications for the strength and agenda of civil societies and their different capacities to deal with local and global challenges. In the classical interpretation the raison d'etre of civil society is to limit the power of the state, and contest its reification, in other words to oppose the world of power in the name of individual freedom and collective solidarity. If the structures of power are now extra-territorial, i.e. at locations beyond and above the nation state, then the challenge facing civil societies has also changed. Contestation now extends to the new trans-national locations of power; the defence of autonomy entails a visible response to trans-national political and economic imperatives and pressures that may run counter to local or national interests and needs. Instead of extending its struggle for autonomy and freedom of individuals "to influence the conditions of their own life, to formulate the common good, examining, renegotiating the range of choices" (Bauman, 1999, 107), local civil society may be incorporated and appropriated by the global project. In other words, civil societies can become in the new constellations simultaneously a force for de-legitimising an authoritarian

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regime, and also for weakening the nation state in relation to the demand of trans-national forces and structures of power, tying the social order to trans-national interests (Robinson). In situations when authoritarian regimes are being dismantled, and the society is embarking on a path of democratisation and transition, global forces have undertaken political interventions in a number of locations (Robinson) in order to establish control over the civil society, "shaping the contours of antiauthoritarian movements and establishing the terms and conditions under which social and political struggles would unfold". Modes of political intervention have included political aid, elaborate machinery for electoral assistance ("get out to vote" drives, ballot box watching, poll taking, parallel vote counts), civic training, establishing parallel women and youth organisations, unions, education of the educators, i.e. creating opinion leaders and networks of influence. Due to this type of intervention, broad antiauthoritarian convergence can in fact mask different and competing political projects and different functions of the civil society. Depending on the scale of appropriation of the civil society, antiauthoritarian struggles may end with a state that is more responsive to the needs of the local population or global interests. The influence of global forces may thus produce a schism in dependent civil societies, a division between those that are victimised by the incorporation of the state into the global economy (by the effects of shock therapy for instance), and those that are becoming the local beneficiaries of global processes. One side will include organisations, associations and NGOS that directly transmit the imperatives of the global forces and act as tentacles of global powers and their interest, with a lifestyle far above the prevailing local standard. On the other side, we will find the victimised, particularly the work force (unions), unemployed, church and youth organisations, with some of these embracing various strands of nationalism. The victimised will probably perceive the nascent global civil society as a natural (but distant and weak) ally; others will suspend it as an irrelevant, old leftist (anarchistic) adagio. However, if we bear in mind that the distinction between the state and civil society was crucial for the extension of freedom and autonomy at the nation-state level, then the development of a strong global civil society is important for establishing a similar distinction at the global level. This would also be a crucial assumption for the reconstitution of local civil societies as realms of freedom and solidarity in this era of globalisation. The previous discussion has shown that globalisation is a movement of hegemonic and emancipatory paradoxes. These ambivalences are relevant for assessing the prospects of existing federations and for the further reach of its principles. They have extended the space for the federal option, but they have also increased the complexity of its challenges. The integrative

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processes are supportive of the expansion of federalist arrangement, although Elazar has predicted that the confederal mode will be better suited in a situation of transformed nation states.19 The disintegrative tendencies of globalisation, the increasing gap between the prosperous few and impoverished many will, however, fuel conflicts and increase the number of failed states in the old and new peripheries. Neo-liberalism has a vested interest in increasing the number of weak states since they are less likely to resist the globalisation of financial capital. Thus, "the separatists of all colours enter an unholy alliance with the forces of ruthless globalisation" (Bauman, 1992, 194). In addition, exclusionary practices will diminish the incentive for members to remain in a federal state if they judge that they have a better chance of becoming part of the privileged world if they act alone.20 However, exclusionary practices will also lead to increasing attempts to "exclude the excluders" (i.e. unpredictable outbursts of violence), and thus to widespread feelings of un-safety (particularly among citizens in the rich countries who will be turning their homes into electronic fortresses). Fear will undermine the autonomy and reflective abilities of individuals and their sense of community. The globalisation of democracy and the extension of the protection of human rights to the non-state actors are conducive to the extension of federal principles. But the exercise of "consensual hegemony" in civil and political society at the level of individual nations, results in low intensity democracy and rudimentary respect for human rights (social rights are by and large excluded), leading to a new round of conflicts.21 Finally, the nascent cosmopolitan culture heralds the possibility of a "WE" (we the citizens of the one world/many worlds), while coercive cultural homogenisation generates a resurgence of ethnicity and religious exclusivity. In short, the effects of globalisation on the success or failure, revitalisation or degradation of federalism are contradictory. At one pole, as the experience of the EU in vivo demonstrates, federalism is being revitalised at a new level, the level of the supra-national state. At the other pole, in multiethnic countries of the (European) periphery, a la Yugoslavia, federalism is "withering" away. That is, in the first act of the Yugoslav drama, the federation was dismantled in a violent, malignant form by the nationalist elites. This dismantling was co-authored by the global powers. In the current act of the drama, the global powers are imposing the federal solution on the elite of Serbia and Montenegro. In the first round, federalism underwent a violent death, in the second it is reincarnated but in the form of an externally imposed "protectorate federalism". To conclude, in the era of dominant influence of trans-national forces on the nation states and local civil societies, the global order and its actors are becoming a decisive factor for the success or failure of the federal

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formula, for the sustainability of democratic multicultural states, and for determining the reach and agenda of civil society. The ambivalences of the current process have created both a need for federalism and obstacles to its implementation, the need for strong civil societies and their appropriation by the global power structures. 6. F E D E R A L P R I N C I P L E S OF C O N F L I C T PREVENTION AND RESOLUTION

The conflict prevention potential of federalism is determined by its ability to recognise the "impurities" of dichotomies, and to resist translating complex linkages and complementarities into opposing poles and/or choices. The federalist project promotes instead delicate (dialectical) balances, simultaneously aiming to accommodate diversities22 and develop a sense of community, i.e. promote collective rights and responsibilities.23 This implies that individual rights should include the right to a community and that communal responsibility is an expression and fulfilment of self-interest.24 Therefore, one can say that the central concept of the federalist project is balance, a balance that enables a community to function, develop, and resolve its conflicts in a non-violent manner. "Balance" is not a rhetorical, empty category, but an existential imperative in traumatised, impoverished, multiethnic societies. In such a setting, balance has a mobilising and healing potential. "Balance" implies transcending conflicting dualities in a consensual, compromising manner, a win-win logic that is a fundamental precondition for developing the social capacity for the non-violent resolution of conflicts. The conflict prevention capacity of federalism depends on its institutional and political arrangements, and practical implementation of the dialectics of balance, but also on the "will to federate" (Elazar) being rooted, upheld and promoted in civil societies, as well as on strong external (global) incentives to stay together. In other words, today the preconditions for enhancing the conflict prevention and resolution capacity of federalism, in multiethnic societies have become local and global. Moreover, external factors may be of decisive importance. It should be added that the conflict prevention potential of civil society in multiethnic entities, depends not only on its will to federate, but on its capacity to establish and articulate the connections between issues, and in this way prevent fragmentation along one axis, that is to say extend the social basis for coalitions. Deprivations exist in a number of different locations and there is no one natural frame (culture, ethnicity etc.) for summing them up (Bauman) for the purpose of their collective rectification. Connections between different locations of deprivations should be

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made in order to secure both justice and peace.25 This is where the transethnic potential of civil society resides. Federalism has a peace-building capacity in a conflict situation where a stalemate has evolved, i.e. where neither side can win and where civil societies are fragmented. In such cases, federal arrangements can accommodate a negotiated compromise between the secessionist demands of a minority and the demand of the government to re-establish complete control. This can be achieved providing that the compromise itself (and not one of the conflicting parties) is supported by global actors. Furthermore, it is important that civil society initiates efforts for a collective understanding of the roots and nature of conflict, and various forms of reconciliation. Pointing out the relevance of the local-global linkage in assessing the conflict resolution potential of federalism means that extending democracy to the global level, establishing the rule of law in place of "might makes right", addressing the plight of the poor, developing an authentic cosmopolitan culture, dismantling the war machinery and seeking non-violent solutions to conflict, all have direct bearings on the local processes, options and agencies. Global democracy would be supportive of local autonomy, and rational national interests defined by a broad social consensus. The rule of law at the global level would diminish the geo-strategic arbitrariness in relating to the local crisis, and reinforce the credibility of the rule of law within states, as well as the emancipatory, integrative potential of civil society. Embarking on a coalition for developing globalisation with a human face, i.e. rehabilitating solidarity, would diffuse an array of local social conflicts between the excluded and included, and the ethnification of social tensions. Developing an un-coercive, authentic cosmopolitan culture would give practical meaning to the concept of multiple identities, and multiple un-conflicting loyalties. In short, a project of globalisation with a vested interest in creating weak states, dismantling all obstacles to the free flow of capital, securing profits independent of social costs, securing resources and defending privileges by all means, and a project with a vested interest in strengthening the rule of law, extending democracy to the global level, and promoting solidarity with the poor would obviously affect local situations, the strength of civil society and relevancy of the federal principles in two entirely different ways. It will either increase their capacity for conflict prevention and resolution or it will contribute to their historical irrelevancy. 7.

EPILOGUE

The possibility for extending the range of options, and the chance to recapture the right to an alternative and respond to the call for ingenuity utilising accumulated insights and experiences, seems drastically

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suspended by the fury and rage of the desperate, and the violence of the privileged. The global war on terrorism will increase the uncertainties, the irrationalities and the authoritarian tendencies, giving an impetus to further painful fragmentations, weakening the relevancy of the principles of federal liberty and possibilities of non-violent resolution of conflicts. Failed states will increase in numbers, and fortress states will emerge. The network of civil society energies, both local and global, faces a dramatic challenge. NOTES

1 See Watts, 1999; Fleiner, 1999, in Federalism and Civil Societies. 2 See Berand, 2000, 3. Berand notes the long duree of economic trends in this region. 3 By self-sustained peace we mean organic peace that is upheld by the very nature of the social and state order without violence and external intervention. See Miall, Ramsbotham and Woodhouse, 1999, 191-194. 4 See Saunders, 1999, 83-96; Parekh, 1993, 160; Walzer, 1995. 5 Althusisus' theory is very inspiring as Hueglin points out. It offers a concept of civil society in which state and society appear organised by one common and universal logic of communicative action. Instead of separating social plurality from political unity, politics itself becomes a pluralized, federalised sphere for the accommodation and coordination of diverse social interests. See Hueglin, 1999, 106. 6 For Huntington, the clash of civilisations is going to be the major new axis of conflict at the global level in the post-Cold War era. If there is any substance to the "clash of civilisations" hypothesis, then it is highly probable that we will witness a further fuelling of ethnic conflicts at the capillary level as well. Just taking one recent example, when the United States began bombing Afghanistan, Muslim groups attacked Christian minorities in Pakistan and Nigeria, an indication perhaps of some of the developments that may await us. 7 "Ethnic conflicts constitute a particular kind of social and political confrontation that is more related to the question of identity and deeply rooted values than to issues of rational interest. Consequently they tend to be protracted, linked to collective historical memories and their reinterpretations, suffused with highly charged emotions and passions, imbued with myths and fears and perceived threats, entwined with deeply held beliefs and aspiration and thus much more difficult to reduce to the ordinary give-and-take of political bargaining" (Stavenhagen, 1996, 229). 8 See Watts, 1999. 9 See Tilly, 1975, 15: "State-making involved ruthless competition in which most contenders lost". 10 "This global civil society must be both respectful of and celebratory toward cultural diversity, and mindful of human solidarity and planetary unity in the strug-

275 Part C Theme II - Scientific Background gles against cruelty, violence, exploitation and environmental decay." Cf. Falk, 1995.311 This unprecedented local/global interdependence is well expressed by the term "glocalization", devised by R. Robertson (Baumann, 1998, 70). 12 Weisbrot et al. (2001) have examined the major economic and social indicators for all countries for which data are available, and compared the last 20 years of globalisation (1980-2000) with the previous 20 years (1960-1980). They have found that for economic growth and almost all of the other indicators (life expectancy, infant, child and adult mortality, literacy, education) the last 20 years have shown a very clear decline in progress as compared with the previous two decades. 13 As John Gray puts it: "Global market and free trade are not natural phenomena but an end product of social engineering and unyielding political will." We may add that substantial coercion is required to make it into a natural phenomena (Heldetal., 13). 14 This more so with the death of communism. "It is assumed that the practical discrediting of communism ... disqualifies in advance any doubts about the unchallengeable superiority of the really existing regime of freedom and the consumer market..." See Bauman, 1992. 15 Soros, argues that market fundamentalism is a greater threat to open society than any totalitarian ideology (Soros, 1998, xxii). 16 See Walzer, 1995, 308. 17 See Holm and Sorenson, 1995, 195-197. 18 "The main difference between international politics now and earlier is not found in the increased interdependence of states but in their growing inequality. With the end of bi-polarity, the distribution of capabilities across states has become extremely lopsided. Rather than elevating economic forces and depressing political ones, the inequalities of international politics enhance the political role of one country" (Waltz, 1999, 700). 19 Elazar, D.J. Federalism and Peace-making. Electronic version. 20 That is one reason why more affluent parts of the peripheral countries, but also of some developed countries, have been interested in seceding. 21 See Robinson, 1995. 22 One should note that the tendency to celebrate differences divorced from the issues of equality and solidarity, leads, for instance, to poverty being treated as one expression of diversity, and indifference being disguised as tolerance. 23 When seeking a viable balance between the individual and collective needs and rights, the Buddhist principle that "the community should provide for everybody's need but not for somebody's greed" is instructive as well. 24 Or in the words of Althusisus, "dialectical balance between individual freedoms and communal belonging" should be established. 25 As Eraser (1997, 57) points out, group identity cannot supplant class interest, nor can cultural recognition displace socio-economic redistribution as the remedy for injustice. "Justice today requires both redistribution and recognition,

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cultural politics of difference that can be coherently combined with the social politics of equality". REFERENCES

Barry, T., 2001. Global Economic Governance: Strategic Crossroads. FPIF Discussion Paper #6, 2001. Basta, L.R. and Fleiner, T., eds, 1996. Federalism and Multiethnic States. PIFF, 1996. Bauman, Z., 1992. Intimations ofPostmodernity. London: Routledge. Bauman, Z., 1998. Globalization, The Human Consequences. New York: Columbia University Press. Bauman, Z., 1999. In Search of Politics. Cambridge: Polity Press. Beck, U., 1992. What is Globalization? Cambridge: Polity Press. Berand, I., 2000. From Plan to Market, From Regime Change to Sustained Growth in Central and Eastern Europe. Electronic version, 3. Castells, M., 1998, 2000. End of Millennium. Vol. IV. Oxford: Blackwell. Cohen, J. and Arato, A., 1992. Civil Society and Political Theory. Boston: MIT Press. Elazar, D.J., 1997. Three Federal-type Solutions in Dealing with Multi-ethnicity: Confederal Examples. Jerusalem Centre for Public Affairs, electronic version. Elazar, D.J., 1998. Covenant and Civil Society. New Brunswick and London: Transaction Publishers. Elazar, D., 1999. Federalism and Civil Society- Defining the Issue. In: J. Kramer and H-P. Schneider, eds. Federalism and Civil Societies. Baden-Baden: Nomos Verlagsgesellschaft, 35-43. Falk, R., 1995. On Humane Governance. Cambridge: Polity Press. Fleiner, T., 1999. Federalism and Society during the Nineteenth Century. In: J. Kramer and H-P. Schneider, eds. Federalism and Civil Societies. Baden-Baden: Nomos Verlagsgesellschaft. Fleiner,T., 2001. Aging Constitution. Paper presented at the National Conference of the Australian Association of Constitutional Law, Perth, September 2001. Fraser, N., 1997. JusticeInterruptus. London: Routledge. Friedman, T., 1999. The Lexus and the Olive Tree. New York: Farrar. Fukuyama, F.,igg2. The End of History and the Last Man. Penguin Galtung,J., 1996. Peace by Peaceful Means. Oslo: PRIO. Gana, A.T., 2000. Federalism and Civil Society in Africa: The Nigeria Experience. Paper for the World Forum on Democracy, Warsaw, Poland, June 2000. Held, D. et al., Global Transformations. Cambridge: Polity Press. Held, D., ed., 1993. Prospects for Democracy, North, South, East, West. Cambridge: Polity Press. Held, D., 1995. Democracy and the Global Order. Cambridge: Polity Press. Holm, H. and Sorenson, G., 1995. Whose World Order'? Boulder: Westview Press. Hueglin, T.O., 1999. Early Modern Concepts for a Late Modern World. Waterloo, Ontario: WLU Press.

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Katz, E. and Tarr, A.G., eds, 1996. Federalism and Rights. Lanham, Maryland: Rowman & Littlefield Publishers, Inc. Keane,J., 1988. Democracy and Civil Society. London: Verso. Kymlicka, W., 2000. Federalism and Secession: At Home and Abroad. Canadian Journal of Law and Jurisprudence. 13(2), 207-224. Kramer J. and Schneider, H-P., eds, 1999. Federalism and Civil Societies. BadenBaden: Nomos Verlagsgesellschaft. Miall, H., Ramsbotham, O. and Woodhouse, T., 1999. Contemporary Conflict Resolution. Cambridge: Polity Press. Nordstrom, C., 2000. Shadows and Sovereigns. Theory Culture and Society. Vol. 17(4), August 2000, 28-39. Parekh, B., 1993. The Cultural Particularity of Liberal Democracy. In: D. Held, ed. Prospects for Democracy. Cambridge: Polity Press, 160. Robinson, W., 1995. PromotingPolyarchy. Cambridge Mass.: Cambridge University Press. Saunders, C., 1999. Federalism and Society in the Twentieth Century. In: J. Kramer and H-P. Schneider, eds. Federalism and Civil Society. Baden-Baden: Nomos Verlagsgesellschaft, 83-96. Soros, G., 1998. The Crisis of Global Capitalism (Open Society Endangered). New York: Public Affairs. Stapleton,J., 1995. Group Rights. Bristol: Thoemmes Press. Stavenhagen, R., 1996. Ethnic Conflicts and the Nation-State. New York: St Martin's Press, Inc. Tilly, C., 1975. The Formation of Nation States in Western Europe. Princeton: Princeton University Press. Toynbee, A., 1953. The World and the West. New York: Oxford University Press. Walzer, M., 1995. The Civil Society Argument. In:]. Stapleton, Group Rights. Bristol: Thoemmes Press, 308. Waltz, K.N., 1999. Globalization and Governance. Political Science and Politics, December 1999, 700. Watts, R., 1999. Federalism in Fragmented and Segmented Societies. In:]. Kramer and H-P. Schneider, eds. Federalism and Civil Societies. Baden-Baden: Nomos Verlagsgesellschaft. Weisbrot, M. et al., 2001. The Scorecard on Globalization 1980-2000: Twenty Years of Diminished Progress. CEPR, Briefing Paper, 2001.

SCIENTIFIC BACKGROUND: SUBTHEME PAPER

MICHAEL}. KELLY AND TIMOTHY L.H. McCORMACK

International and Regional Action with regard to Conflicts in Multicultural Societies

1.

INTRODUCTION

Failing states promise to become a familiar facet of international life. They will necessarily exact heavy tolls on their own people and on all countries. Even if the international community were to continue its current ad hoc approach, it would find itself facing mounting costs - for peacekeeping troops, humanitarian aid and coping with refugees. The real challenge to UN members is to address the problem directly, by creating a conceptual and juridical basis for dealing with failed states as a special category, and by forming institutions to succour them. The international community needs a cost-effective way to respond to growing national instability and human misery.1

The relationship between the topic of military intervention in states fragmented by multicultural conflict and federalism is probably the least obvious of any of the topics under consideration in the current conference. That does not mean that the connection is tenuous. On the contrary, there are a number of federal issues that arise here. It is simply the case that they may not be as immediately apparent as with other topics under consideration. First, it should be acknowledged that when the international community takes collective decisions on whether to intervene militarily within states, it usually does so in a manner akin to federal decision making. Although the United Nations (UN) itself often bears the brunt of criticism about, for example, perceived failures to intervene in crises quickly enough, or about the inadequacy of a particular military deployment, the reality is that the UN is subject to the political will of its member states. The organisation itself is utterly dependant upon the willingness of member states to commit

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troops, finances, military equipment, and support to a particular deployment. In this sense, UN decision making is heavily decentralised and subject to the same vagaries and benefits as federal decision making. Secondly, some collapsed states that are the subject of military intervention have federal structures of governance. In choosing to intervene in such states, the international community may have to decide whether or not to attempt to preserve the integrity of the constituent parts of the federal structure. This happened, for example, in the military intervention in Bosnia and Herzegovina. The international community, following the leadership of the European Union (EU), worked hard to preserve the territorial integrity of Bosnia and Herzegovina against the military and political realities of disintegration of Bosnia and Herzegovina as a unitary entity. In extending de jure recognition to the separate republics of the former Yugoslavia in acknowledgment of the de facto reality of the dissolution of the federation, the international community comforted itself with its nonviolation of the doctrine of uti possidetis - the preservation of existing territorial borders. In the case of Bosnia and Herzegovina, however, the desire not to disturb the territorial integrity of Bosnia and Herzegovina is, in reality, a fiction - particularly because of the Bosnian Serb control of the Republika Srpska. Thirdly, the international community will sometimes need to decide whether or not a federal, or decentralised, solution will be the most appropriate for the longer-term resolution of a multicultural conflict. Had the UN not abandoned its intervention in Somalia, the longer-term solution to the conflict there may well have involved a decentralised system of governance. The conflict was fought more on the basis of familial or clan-based membership than on the basis of culture or ethnicity. A negotiated settlement to the conflict and the first steps of nation building in Somalia - had the intervention been permitted to reach such a stage - may well have focused on a political allocation of the territory of Somalia on the basis of clanship. The federal model of governance also finds resonance in the manner in which many internal conflicts must be stabilised and managed in the transition from conflict to peace. In Bosnia and Herzegovina, Kosovo, and Somalia, for example, internal groupings that are distinguishable by one means or another have been engaged in such brutal violence that the first priority is some kind of separation. This separation on peace operations will often become the subject of, or be emphasised by, administrative demarcations. The peace operation's administrative separation in the case of Bosnia and Herzegovina and Kosovo not only closely resembled a federal model in the constitutional sense, but in these cases also evolved into some form of federal solution as a final form of political entity. The international community desires that this construct will be lightly drawn, and that resettlement,

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inter-mixture and interrelation will be fostered across the boundaries. The reality is that the strong elements in these communities at present see, or would like to see, these boundaries as defensive walls of total separation, closer in nature, or in fact, to sovereign statehood. In Somalia the concept of using a federal model by creating semi-autonomous provinces containing the separated major clan groups was seen by some Somalis as the answer to the problem of reassembling some type of viable political entity. The positive aspect of this type of solution is that it tends to prolong the period of peace following conflict. The negative aspect is that it also has the tendency to reinforce division and the sense of irreconcilable "otherness". The merits of the former tend to outweigh the demerits of the latter, as the longer the period of peace, the better the chance of gradually reconstructing some form of dialogue which in the longer term may reach the desired level of civility and interrelation. In any event, when there is international intervention in such situations and the first priority is to stop the killing, administrative solutions will be based on this urgent need and will be characterised by their interim nature. The main concern for these interim administrations will be establishing the legitimacy of their right of initiative in defeating violence, and achieving this victory in practical terms. The battle for legitimacy is essential to maintain local and international support as well as the support of the domestic communities of the troop-contributing nations. This explains why the legal framework for administrative action is so critical. In this context then, we look to the challenge of crafting the overall framework. A discussion of the role and responsibility of the international community to intervene militarily in fragmented societies is a multidimensional one. It involves debate over the moral and legal right or obligation to "do something" about a situation that usually involves human suffering on a large and unconscionable scale, the financial ability or commitment required, and the administrative and social complexities of implementation. A major area of legal discourse in recent times concerns the legitimacy of humanitarian intervention,2 whether under the auspices of the UN or on a unilateral basis. The existence or otherwise of a legal "right" of humanitarian intervention in the absence of UN Security Council authorisation has been discussed at length - particularly since the NATO intervention in Kosovo. It is clearly unsatisfactory for the decision making of the Security Council to be obstructed by the narrow political interests of one of the five permanent members of the Council - particularly in the face of gross violations of human rights, and where the political will exists among the remainder of the Security Council members to act. At the same time, it is also unacceptable to extend a carte blanche to any state (or group of states) to intervene militarily in the internal affairs of another state on any pretext. The temptation to misuse the purported justification to cloak aggression will be real indeed. If there is to be an emerging "right" to intervene mili-

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tarily on humanitarian grounds without Security Council approval, the criteria for a valid exercise of this "right" will need to be agreed and clearly articulated. Given the extent of the attention paid to the discussion of the scope of the right of humanitarian intervention, we do not intend to focus on that aspect of the problem in this paper. It is sufficient for our present purposes to note that there would appear to be a reasonable consensus that the UN Security Council has the authority to mandate humanitarian interventions, and that there have been, and will continue to be, crises warranting intervention resulting in international action. It is our intention to focus on the issues consequent upon the execution of such interventions. From this perspective, a discussion of the legal role and responsibility of the international community for dealing with fragmented societies revolves around the provision of appropriate frameworks and resources. There are two main approaches to the issue: • Establish a regime that might be available under general treaty/ customary law; • Establish a regime that is UN-centred, either under the auspices of a new or existing institution, or as laid down in a more comprehensive casespecific Security Council resolution framework. When we talk of the role and responsibility of the international community in fragmented states we really mean how far the international community can and should go in intruding on the sovereignty of the state traditionally considered the inviolable province of that state. A legitimate military intervention on humanitarian grounds in a failed state situation can involve a minimalist provision of some aspects of governance, such as basic public and external security to ensure the delivery of humanitarian relief, or it can involve the provision of the entire apparatus of governance. The dilemmas involved in selecting the most appropriate level of assistance are compounded by the fact that the military and non-governmental organisations (NCOS) are usually on the ground well before civil administrative elements are able to assume any governance functions. The intervention then involves two distinct phases. First, immediate actions of the military and the NCOS to secure the environment and avert a humanitarian catastrophe; second, the civil administrative assumption of interim functions and the identification of broader functions that remain to be addressed. The crucial dimension to these two phases is transition. This includes transition from military/NGO primacy to international civil administration, and then transition from international civil administration to sovereign control by the emergent indigenous authorities. In achieving the second transition, crucial issues will emerge as to how to produce a polity and constitutional framework that will match the social/economic and

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physical landscape. The resulting solutions will, by definition, be different in each case. The constant, however, should be a fundamental legitimacy underpinning both the international as well as the national succession, particularly in the key areas of constitutional and criminal law. The second of these two transitional phases, from a humanitarian focus on securing the environment to prevent further atrocity to the institution of interim administrative authority and the consequent decisions about institutional structures and procedures, is the focus of discussions in the subtheme entitled "Constitution Making and Nation Building". Our focus is upon the application of a legal framework governing the initial military deployment, and the role of the military before the transition to interim administrative authority. 2.

THE S E A R C H FOR A LEGAL F R A M E W O R K

The Australian military approach both in Somalia and in East Timor in the initial transitional phase of military intervention, has been to rely upon the provisions of the Fourth Geneva Convention of 1949 to provide an interim reference for establishing a basis for administrative action, including the temporary administration of justice. This Convention is well suited to such situations as it is in effect designed to provide for an ad interim sovereignty over a civilian population, while leaving as far as possible the fundamental laws and institutions of the temporarily occupied state intact. In Somalia this was exercised to the extent of rehabilitating and facilitating the reestablishment of local indigenous governance in a particular area of operations (Kelly, igggb, 33-63). In East Timor the policy was employed to provide, under the broad and necessarily vague mandate of Security Council Resolution 1264, for the full responsibility of temporary governance throughout the territory during the INTERFET phase (Kelly, McCormack, Muggleton and Oswald, 2001, 130-136). This approach has been taken due to the lack of a clear legal framework for such situations. The search for a framework for international action is compelled by a number of factors. States are reluctant to be bound by the laws of military occupation in terms of the obligations imposed by the law and the political opprobrium that is perceived to attach to the label "occupying power". The law of occupation is an interim framework, and there may be a need for a much longer-term administrative framework that is more in tune with an environment in which armed conflict is no longer taking place. As the context for these interventions is removed from inter-state conflict and involves the complexities of internal conflict resolution, such situations may be viewed as requiring a "tailor-made" regime. What then should the framework be? The options for a legal framework for interim and longer-term administration that will be considered here will include:

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• Reliance on the laws of occupation as guidelines without recourse to a legal debate over de jure application; • Inclusion of the laws of occupation as the point of reference for specific peace operations by their adoption in the Security Council resolution creating or authorising an operation; • Amendment of the Fourth Geneva Convention; • Development of an entirely new convention dealing specifically with military intervention in failed state situations; • Reliance on the evolution of custom through state practice; • Revitalisation of the UN Trusteeship Council to manage collapsed states, having at its disposal similar rights to those available under the laws of occupation as an ad interim sovereign; • Creation of a new UN mechanism which could be designated as a "conservatorship" or "stewardship" to be raised on an ad hoc basis; • Utilisation of a detailed Security Council resolution framework for each particular mission, either in the body of, as an annex to, or adopted by, the resolution; • Assumption of sovereign functions within a formal agreement framework if the possibility of dealing with local agents exists. These options will be considered from the perspectives of practicality, appropriateness (legal and moral), political acceptability, the implications for a viable international law regime, and the impact that the possible range of operational circumstances may have in practice on these alternatives. This treatment is not intended to be comprehensive, as this would be beyond the scope of the paper, but to illustrate the need for a more considered approach to this issue by the international community. 3.

TREATY AND CUSTOMARY LAW OPTIONS

3.1. The law of occupation as guidelines

The inevitable bureaucratic rush to respond to humanitarian crises often precludes a full and deliberate consideration of the appropriateness or otherwise of the proposed actions under international law. Suggestions that a particular international law regime is appropriate will often meet with scepticism and a reluctance to unambiguously adopt the regime, for fear of possible ramifications that are not yet comprehensively considered. There may also often be a reluctance to risk being held strictly to account under clear "black letter" international law provisions, which may restrict liberty of action. The labels "occupying power" or "neo-colonialism" carry with them sensitivities associated with images of the Nazi occupations of the Second World War, the Afro-Asian colonial experience, or the international ignominy attached to Israel's management of its occupied territories. One

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approach then, is to simply avoid the discussion of de jure application of the law of occupation by stating that, as a matter of public policy, a military force or an operation will rely on the laws of occupation as guidelines to the extent that they are relevant or appropriate. This was the approach taken by Australia during the INTERFET phase of operations in East Timor from 20 September 1999 - 23 February 2000 (Kelly, McCormack, Muggleton and Oswald, 2001, 115). Denying the application of the law of occupation, or stating that the law will be applied only as a matter of policy can promote an argument that international human rights law is the appropriate international legal regime (Benvenisti, 1992).3 It is not intended here to debate the application of human rights law versus international humanitarian law. It is sufficient to make the point that the lex specialis takes precedence over the lex generalis, so that whenever the laws of occupation apply dejure, they will exclude the operation of the international human rights regime.4 In the exigent circumstances of the initial phase of intervention, where military operations are paramount and civil administration is yet to form, it is more appropriate that a humanitarian law regime should apply. We are of course considering a collapsed state scenario where the normal machinery of interaction between state and citizen has disintegrated or was, in fact, an instrument of human rights abuse in the first place. Those who would deny the application of humanitarian law in such situations may find they are bound by an even more demanding human rights law framework that provides for the rights of the administered, but gives no guidelines or framework for the administrator. 3.2. Treaty amendment/generation

Amendments could be made to the Fourth Convention to clarify the extent of its application and affirm in clear terms that peace operations, including those that are UN commanded, are governed by it. New provisions could also be introduced to specifically address peace operations scenarios. One element of reform that would be timely, given the gradual decline in the acceptance of the use of the death penalty internationally, would be to open to the discretion of the occupying power the ability to ignore, override or delete such punishment provisions from the local law for at least the duration of the military occupation. The Fourth Geneva Convention could be amended to include a delineation of what, if any, aspects of the international human rights regime should apply in peace operations, and indeed in conventional armed conflict occupations. In this respect, clear statements of derogation circumstances should be set out. Following from this, the Protecting Power regime could be modified to provide for a mandatory arrangement utilising a new neutral institution such as a UN Ombudsman who could, perhaps, share some of the Protecting Power re-

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sponsibilities with the International Community of the Red Cross (iCRc). 5 An alternative to amending the Fourth Convention could be the creation of an entirely new convention designed specifically for peace operations. The major problem with either the amendment of the Fourth Convention or the creation of a new convention is that mobilising the international community for such an effort would be extremely difficult. While the negotiation of the Anti-Personnel Land Mines Convention6 demonstrated that it may be possible to generate new treaties much more rapidly than previously experienced, it is unlikely that the same level of political and popular enthusiasm could be generated for a new law of occupation convention.7 Certainly clear treaty expression of such a legal regime would provide the best framework on which to rely, given the binding force and certainty that could be attained. 3.3. Custom and state practice

The alternative to these more proactive solutions is to adopt the passive, evolutionary approach. Such an approach allows the law to evolve by observation of state practice in peace operations situations. The problem with such an approach is that there are insufficient peace operations to date to be able to draw firm, and at least relatively uncontroversial, legal principles. This approach would also leave a great deal open to opinion and uncertainty, particularly in determining clear opinio juris.8 State practice outside of treaty regimes is at best useful only in identifying the broadest principles relating to major issues such as national self-defence and the use offeree. 9 It would hardly be able to provide the proper basis for situations where a systematic and extensive framework is necessary to address the maintenance or restoration of order in a collapsed state scenario, particularly in relation to issues such as detention and the administration of due legal process.10 4.

UN I N S T I T U T I O N A L O P T I O N S

4.1. Security Council resolutions

One prospect that has materialised since the termination of the Cold War is the greater use of Security Council authority under Article 25 of the UN Charter. While there has been a greater recourse to Security Council resolutions for a broadening array of peace operations, the resolutions themselves have tended to be rather limited documents establishing broad mandates for missions, but often posing more questions than they have answered. * 1 Given the binding nature of a Security Council resolution as a type of lex societatis (Schwarzenberger, 1968, 48) on members of the UN, the possibility exists to extend the simple broad mandate approach to one

286 Michael J. Kelly / Timothy L.H. McCormack that endorses or promulgates more prescriptive guidelines for aspects of an operation that require this. UN Security Council resolutions could state, for example, that "the Fourth Geneva Convention will be applied as a matter of policy and guidance, where appropriate, by all UN or UN-authorised forces in their dealings with the civilian populations in their area of operations resulting from the absence of a recognised state authority". An alternative approach for the UN Security Council could be to actually lay a purpose-designed set of provisions in, or annexed to, the resolution. There have also been calls to create a standard UN Criminal Code that could be used in collapsed state scenarios (Chopra, 1996, 355; Plunkett, 1994, 7577; Evans, 1993, 56; Vieira de Mello, 2001, 20-21). Such a code could be endorsed through Security Council resolutions. The problems with such an approach include issues of retrospectivity and fairness, as well as respect for local law and custom, and the rehabilitation of local capacity. Formulating a standard code would also prove quite difficult in welding together different legal traditions and approaches. The idea of a standard code has been rejected by the legal office of the UN for these very reasons (Corell, 2000, 8-9). Endorsement by UN Security Council resolution of the application of the Fourth Convention as policy in the military phase of administration is possible given the preparedness of the UN Security Council to endorse other overarching documents such as the Paris Accords for Cambodia and the Dayton Accord for Bosnia. The problems that may arise with this option, however, reflect the limitations of the UN Security Council itself - the potential for politicisation and the whims of the Permanent Five (Righter, 1995, 67-89; Evans, 1993, 180-181; Roberts and Kingsbury, 1993, 1-104, 441-445). UN Security Council endorsement may no longer be necessary in any case, given the possible interpretation of the Secretary General's Bulletin on the Application of the Law of Armed Conflict to UN Forces.12 Under the Bulletin, the principles of international humanitarian law are to be applied by UN forces as far as they are relevant to an operation. 4.2. Administrative functions assumed by agreement

With regard to the international civil administration phase of an intervention, it is noteworthy that, since the inception of the UN, there have been proposals for, and occasions during which, UN administration of territory has occurred by agreement. It was once assumed that there would never be any other situation in which a UN administration of territory might occur (James, 1969, 130-174). Agreement would be either a means of settling a dispute between conflicting states, or of facilitating a post-colonial transition. It was not envisaged that agreement might have to be between internally conflicting parties. This occurred in relation to the United Nations Transitional Authority in Cambodia (UNTAC) operations in Cambodia, re-

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lying on the Paris Accords (Kelly, igggb, 163-164), and the International Fellowship of Reconciliation (IFOR)/Stabilising Force in Bosnia and Herzegovina (SFOR) operations in Bosnia, based on the Dayton Agreement (Kelly, igggb, 166). Another interesting example of non-Trusteeship Council UN administration occurred in West New Guinea (to become West Irian or Irian Jaya). That was not based on Security Council action but instead involved the initiative of the General Assembly (GA) from ig6sig&3 (Russell, ig64, 126-133; Bowett, ig64, 255-261). While the Paris Accord set out wide-ranging powers for a UN administration to run Cambodia on behalf of a Supreme National Council, the Dayton Accords provided for significant intrusions on aspects of sovereignty, without assuming a comprehensive administrative role for the international community in Bosnia. As the West Irian experience was the first instance of the UN assuming the administration of territory not under the auspices of the Trusteeship Council, it is instructive to look at the framework in that case. After a lengthy dispute between the Netherlands and Indonesia over the territory of West New Guinea, an agreement was concluded on 15 August ig62.13 The agreement provided for the temporary transfer of administration of the territory to a UN Temporary Executive Authority, established by, and under the authority of, the UN Secretary General, to be assisted by a security force. Sovereignty of the territory was to pass to Indonesia subject, by implication, to a plebiscite that was to be held by ig6g.14 In the interim, the UN was to assume extensive sovereign functions over the territory, and was tasked in particular with the maintenance of law and order. A UN Administrator acceptable to the parties was to be appointed with full authority under the direction of the UN Secretary General, with the UN flag to be flown during the period of administration.15 The UN Security Force was to supplement the Papuan police in maintaining law and order. Interestingly, even Indonesian forces present in the territory were to come under the authority of the Administrator.16 In fact the UN Security Force was intended to be exclusively an internal security force. The distinction to be made here is that this was not a force assisting a state apparatus to maintain internal order, but a security force supporting a subsidiary organ of the UN which was the status of the UN Temporary Executive Authority (Bowett, ig64, 258). To conduct the administration, the UN Temporary Executive Authority was authorised to employ former Dutch, Papuan and Indonesian personnel as part of its apparatus, with the requirement that as many Papuans as possible be brought into administrative and technical positions.17 The UN Temporary Executive Authority had the power to amend existing laws, and promulgate new ones within the spirit and framework of the agreement. Existing laws that were consistent with the agreement were otherwise to remain in effect.18 The rights of the inhabitants were set out in terms of basic human rights guarantees, as were arrangements to ensure that the transfer to Indonesia was in accord with the self-determination

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and will of the Papuans.19 The provisions of the Convention on the Privileges and Immunities of the United Nations were recognised as applying to all UN personnel and property.20 The agreement was to enter into force with its adoption by resolution of the General Assembly.21 Here was an example of a non-Trusteeship Council administration of territory. The essential ingredient, however, was that the administration was handed over to the UN by agreement of two powers while the actual sovereignty of the territory was still in dispute. What was the basis on which this approach was used? There were two aspects to this issue. What was the authority of the General Assembly to establish the operation, and what was the authority of the Secretary General to accept the responsibility and carry out the task? There was no real challenge or debate about these issues at the time, nor was the constitutional basis or the agreement between the parties set out in the General Assembly resolution, so the search for an answer lies in an examination of the UN Charter. It appears that the authority for the approach was based on Article 98 of the UN Charter.22 This article allows for functions to be entrusted to the Secretary General by the organs of the UN. These functions would also be exercised in accordance with the Secretary General's powers, provided for in Article 97, as the Chief Administrator of the Organisation which has as its primary function the maintenance of international peace (Higgins, 1970, 120). Another basis for the action would be Article 14 which allows the General Assembly to "recommend measures for the peaceful adjustment of any situation, regardless of origin, which it deems likely to impair the general welfare or friendly relations among nations", this being subject to the prohibition on the General Assembly dealing with any matter which is being dealt with by the Security Council, contained in Article 12. It has been clearly established by the International Court of Justice (icj) that the General Assembly does have the authority to initiate peace operations with the consent of the government on whose territory it is to be stationed.23 The substantial limitation on the General Assembly is that it cannot authorise enforcement, or Chapter Vll-type operations that are exclusively the preserve of the Security Council. As the collapsed state scenario is often one where there is either no state authority with which the General Assembly or Secretary General can come to an agreement, and/or the deployment is a Chapter VII action, the use of a UN Temporary Executive Authority-type mechanism would have to be effected through the Security Council. The Security Council would do this as a measure taken to ensure international peace and security, in terms of the expanded concept of that power in recent years to include internal conflicts.24 Laying out the authority of a UN transitional administration in a document similar to that employed for UN Temporary Executive Authority would be the best approach to take, perhaps supplemented with interim regulations where necessary. Particular problems likely to be encountered would relate mainly to achieving a

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framework, and employing interim regulations that were suitable for the municipal legal tradition and culture. Other issues could be the transition to domestic control, and how actions taken under the interim framework would carry over. Other versions of the assumption of administrative responsibility by agreement have been the UN authorities established in Kosovo (United Nations Interim Administration Mission in Kosovo (UNMIK)) and East Timor (United Nations Transitional Administration in East Timor (UNTAET)). Neither agreement specifies any detail of the administration or creates a framework for them. The details of the administration were left to be included in regulations promulgated by the UN administrations themselves on the basis of die implementation of the Security Council mandates under Chapter VII of the Charter. The difference between the two examples is that UNMIK seeks to return Kosovo as a province to Yugoslav sovereignty (and must therefore eventually reconcile their actions with Yugoslav domestic and Constitutional law),25 while UNTAET seeks to establish an independent state, and therefore is presented only with the issue of transition to a new state polity and succession.26 For the purposes of this paper UNTAET is the more interesting example of the two, due to the total assumption of sovereign functions by a UN administration, pending a lengthy process to create an indigenous legitimised polity. It also had to contend with an almost total absence of local administrative capability, as all the functionaries had been either Indonesian or pro-integrationist who fled after the referendum on autonomy in September 1999. This process involved establishing local administrative capabilities at the same time as actually administering, registering an electorate and political parties/ candidates, conducting an election, and creating a constitutional assembly. This assembly drafted a constitution and then became the national Legislative Assembly, conducted a presidential election, and transferred independence on 20 May 2002. 27 Given the scope of the task the mission has proved to date to be very successful, with the main area of difficulty being the administration of justice. The UNTAET mission involved the careful balancing of many sensitivities and challenges, which increased as the operation matured and progress was made. This, at various times, involved reconciling and dealing with the threats, mandates, roles and interests of UNTAET civil administration, the East Timorese political actors, popular expectations and conditions, the Peacekeeping Force (PKF), the International Civilian Police, the Human Rights Office, and UNTAET Justice Department including the Office of the General Prosecutor and its Serious Crimes Investigation Unit. In addition, it was necessary to deal with the emerging East Timorese Police Service, the emerging East Timorese Defence Force, the Indonesian government, the West Timorese based Indonesian National Army (TNI) and their Commander in Denpasar, Maj. Gen. Da Costa, the militia, and refugees in West

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Timor. Added to this were the ponderous problems of budget, reconstruction and planning for an economically sustainable future. It is interesting to note the provisions under UNTAET Regulation No. 1999/1 of 27 November 1999 concerning the applicable law in East Timor. These state that: • 3.1 Until replaced by UNTAET regulations or subsequent legislation of democratically established institutions of East Timor, the laws applied in East Timor prior to 25 October 1999 shall apply in East Timor insofar as they do not conflict with the standards referred to in section 2, 28 the fulfillment of the mandate given to UNTAET under United Nations Security Council resolution 1272 (1999), or the present or any other regulation and directive issued by the Transitional Administrator. • 3.2 Without prejudice to the review of other legislation, the following laws, which do not comply with the standards referred to in section 2 and 3 of the present regulation, as well as any subsequent amendments to these laws and their administrative regulations, shall no longer be applied in East Timor: Law on Anti-Subversion; Law on Social Organizations; Law on National Security; Law on National Protection and Defense; Law on Mobilization and Demobilization; Law on Defense and Security. Capital punishment is abolished.

Through these provisions the UNTAET administration drew on the existing body of Indonesian law. This was not without controversy given that only one country had recognised Indonesian sovereignty over East Timor, while the UN and the remainder of the international community never had. Indonesian criminal law is based on its Dutch colonial predecessor, which shared the Napoleonic heritage of the Portuguese Criminal Code. After 25 years of Indonesian rule it was logical that the Indonesian Code be relied upon, given the local familiarity with it and the excising of some of the political laws that had been utilised for repression. This local criminal law was supplemented by a Regulation on Transitional Rules of Criminal Procedure to ensure fairness in accord with fundamental international human rights standards.29 UNTAET was provided with the ability to promulgate laws and the Special Representative of the Secretary General/Transitional Administrator was empowered to issue Directives.30 One problem that emerged was the attitude to the Regulations exhibited by the Special Representative of the Secretary General. This was illustrated in the deployment of the East Timorese Defence Force in the period leading up to the elections on 30 August 2001. Under UNTAET Regulation No. 2001/1 of 31 January 2001, as amended by UNTAET Regulation No. 2001/9 of 29 June 2001, the East Timorese Defence Force was prohibited from being mobilised or utilised in matters linked to internal public order, police issues or social conflicts. The

2g i PartC Theme II - Scientific Background Special Representative of the Secretary General indicated his desire to deploy over 200 East Timorese Defence Force personnel to assist with security for the election, and to boost their public profile and their acceptance by the indigenous community. The PKF strenuously objected to this approach as it violated the Regulation, would send conflicting messages to the East Timorese Defence Force and to the local population about the role of the East Timorese Defence Force, could not be logistically sustained, and would interrupt training. Ultimately 66 East Timorese Defence Force personnel were deployed on civil assistance tasks compatible with the Regulation, which achieved the intention of the Special Representative of the Secretary General. However, this example points to the need for personnel in key positions to understand the critical importance of the promotion of the rule of law and other concepts which are critical to the efficacy of such missions. The administrative framework for East Timor was adequate for the task from a juridical perspective, with the main difficulty arising in the administration of justice, which still remains an ad hoc solution and suffers from a serious delay in marshalling the requisite human and financial resources.31 The current approach to the administration of justice in East Timor also results in significantly variable aspects of quality and approach, which ideally ought to be neutralised through a professional cadre under an organised response mechanism. There is certainly a growing number of personnel with experience in performing these functions, but it has to be said that in the UNTAET experience, the energy of a few compensated for the inactivity, apathy or incompetence of the many. The efforts of the second Deputy Special Representative of the Secretary General, Mr Dennis McNamara, to remedy these deficiencies demonstrates, however, that one determined and insightful individual in a key position can achieve a great deal even with limited resources. It must be stressed, however, that these are criticisms of detail in a broadly successful mission to date.3* The Brahimi Report on Peace Operations makes many constructive suggestions that relate directly to this "professionalisation of response" issue and will assist greatly if implemented effectively.33 4.3. The Trusteeship Council The possibility also exists to revitalise and utilise the Trusteeship Council given its past record of successfully bringing administered territories to independence. This suggestion has been raised, for example, as a means of resolving self-determination disputes. For central governments under political siege or embroiled in bloody civil wars, the Trusteeship Council would be a way out of a seemingly unsolvable dilemma. There would be a procedure and a means by which to address a self-determination claim. The trusteeship system could save untold numbers from humanitarian crises and avoid the devastation of civil

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war - tragedies that ultimately can imperil the very existence of a ruling government (Halperin, Scheffer and Small, 1992, 114). There have also been calls for use of trusteeship mechanisms for collapsed state scenarios, such as Somalia (Johnson, 1993; Krauthammer, 1992). Yehezkel Dror, for example, suggested that: Where societies are disintegrating or evil rulers engage in crimes against humanity, more drastic measures are required. In such circumstances, the United Nations should impose a trusteeship regime, approved by a special majority vote of the Security Council or the General Assembly, without veto rights. Trusteeship regimes should last for a maximum of two years, unless renewed by special majority vote of both the Security Council and the General Assembly. Such radical steps, subject to other safeguards including judicial review by a global court, are necessary to protect individuals and humanity against the aberrant behaviour endemic during a period of global transformation. (Dror, igg6) 34

The problems with such an approach are numerous. In relation to the resolution of self-determination disputes, many governments are unlikely to accept a role for a revitalised Trusteeship Council when those same governments have a vested interest in preventing the independence of territories currently under their own sovereign control. Where a civil war continues to the point of collapse of a central government there is a real difficulty in identifying who has the authority to make such an arrangement. Warring factions are inevitably reluctant to relinquish hard fought advantage over rivals - as was demonstrated by the violence with which Aideed opposed UN initiatives in Somalia. Once a state has reached the point of collapse, there are no means by which the trusteeship system under the UN Charter can be used. Articles 75 and 77 of the UN Charter require that territories be administered under this system only when an individual agreement between a sovereign authority and the UN has been arranged.35 The charter emphasises the existence of an agreement as a necessary precondition for the activation of the Trusteeship system: the Charter places greater emphasis (than the League of Nations Covenant on Mandates) on the agreement stage and makes the conclusion of these agreements appear to be a voluntary matter subject to moral compulsion than was implied in the Covenant. (Goodrich and Hambro, 1949, 435-436)

This emphasis on agreement reflects the prevailing view in 1945 that the trusteeship system should not be part of the regime of collective enforcement under Chapter VII of the UN Charter. The agreements by which territories would be placed under trusteeship would be treaties between sovereign, independent states and the UN and, by implication, exclude any arrangement with local factions that did not carry the recognised authority

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of a state (Simma, 1995, 952). A further complication arises pursuant to the exclusion in Article 78: the system will not apply to territories that have become members of the UN.36 One final problem with any attempt to revitalise the Trusteeship Council is the association of the Council with the political and historical context of the de-colonisation process (Goodrich and Hambro, 1949, 419-459; Simma, 1995, 933-948). Any attempt to amend the UN Charter to permit the extension of the original role of the Trusteeship Council would be subject to the predictable allegations of "neo-colonialism", and would be unlikely to gain the necessary two-thirds majority in the General Assembly, let alone escape the use of the veto by one or more of the ?5 in the Security Council. This was in fact the concern voiced by Mr Kofi Annan in his former capacity as the Under-Secretary General for Peacekeeping Operations, when considering a trusteeship for Somalia in 1993-37 The proposal was raised more recently in relation to Rwanda and Burundi along with other possibilities - all of which were subjected to the similar objection of "benevolent colonialism" (Griggs, 1997, 10). From a purely practical point of view, however, it would be far more sensible to make the necessary reforms to enable the idle framework of the Trusteeship Council to be put to use than to have to construct a new institutional regime. 4.4. A new UN mechanism

Given the legal and political impediments to the revitalisation of the Trusteeship Council, an alternative proposal is for the creation of an entirely new mechanism specifically designed to deal with collapsed states. Jarat Chopra, for example, has raised this possibility on the basis of the de facto circumstances in which the UN, and operations authorised by it, often find themselves in contemporary peace operations: The UN cannot remain aloof from its relationship to territory and local population, over which it may have claimed jurisdiction, and therefore must recognize its role in the exercise of executive political authority. It may have to fulfill this role independently in anarchical conditions, or jointly with an existing regime. Even in the latter case, if the UN is to ensure accountability effectively, it needs an independent political decision-making capability, as well as law and order institutions at its disposal. In both cases reliance on local authority structures, either coherent and oppressive or fragmented and probably non-existent, and at the same time attempting to reconstitute a new authority, prevents the achievement of this objective. (Chopra, 1996, 339)

Chopra claims the UN must establish a centre of gravity in such situations claiming jurisdiction over the entire territory of such peace operations, deploying throughout if possible. A direct relationship with the population should be established to build leaderships that will eventually

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assume responsibility for reconstituting authority and institutions (Chopra, 1996, 339). This is an argument for a move away from a concept of UN intervention as diplomacy based in the collapsed state context, to an all-pervasive political framework, using an international mandate to give effect to local self-determination, and to break the nexus of oppressive "malevolent institutions" (Chopra, 1996, 339). Chopra points to failed administrative efforts by the UN in Cambodia and Somalia to illustrate how, without this conceptual approach, a peace operation can become dysfunctional. He talks of the error of relying on rather than challenging prejudicial local structures. Being also sceptical of the ability of current UN organisational frameworks to come to grips with such tasks, he argues for the establishment of a new UN "interim executive body" to operate as a joint authority which would combine legitimacy with effectiveness (Chopra, 1996, 340). When dealing with the potential "neo-colonialism" allegation Chopra states: Peace-maintenance is not some colonial enterprise. While there are generic principles that can be learnt regarding the administration of territory and population from any model of governance, the purpose and behaviour of peace-maintenance is the opposite of colonialism. Colonial domination is a unilateral enterprise; a joint authority is a collectively accountable body. While a colonial power draws resources from a colony, an international authority directs resources into a nation. A colonial power plays the role of master and the colonised that of servant. But in peace-maintenance, the international authority is the servant of both an international and locally supported rule of law and order. The goal of peace-maintenance is not imposition of an alien system, or a preconceived style of operation functioning in a social vacuum. The intention of a local international authority is precisely to create a flexible decision-making capability that can respond to local needs with political, anthropological and sociological sensitivity. (Chopra, 1996, 340-341)

Regardless of the merits of the logic of Chopra's argument, there will still be a political and "perception" battle to be won for implementation of the proposal (James, 1969, 132-135). Given the increasing occurrence of the peace-building circumstances that Chopra refers to, the proposal may be worth fighting for. The legal basis for such a mechanism would rely upon expanded concepts of humanitarian intervention and a broader definition of a breach of international peace and security than have been applied in the course of recent UN Security Council decision making. It is also doubtful, in the worst-case scenarios of collapsed states that any legal entity that could be called a "state" actually exists.38 In such circumstances, it is preferable that ad interim sovereignty, in trust for the local population post-conflict, be exercised by a dedicated multilateral organisation rather than on the ad hoc basis that currently prevails.

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Chopra envisages the UN political directorate that he advocates as having the capacity to play four key roles (although not necessarily all of those roles in one operation): Governorship: the UN assumes full responsibility for government (obviously in the worst-case scenarios of total breakdown) either on its own, or by appointing a single power or group of powers to exercise the function under the authority of some UN mechanism to assure accountability; Control: the UN deploys through existing state instrumentalities, overseeing the conduct of civil administration and possessing the power to take corrective action where necessary; Partnership: where resources and structures may be reasonably adequate but there is a transition process required, for example from a totalitarian regime to democracy, so that there would be a "UN authority-in-trust" that would act as a partner of local authority but be "first among equals" having "the final say" in the transition period; Assistance: where there is disarray in administrative functions and the "trust authority" provides "an overall coherence and international standard for the development of government structures", the idea being that flaws in the system would be corrected through this authority (Chopra, 1996, 353-354). Chopra's identification of different functions leads him to the logical conclusion that such activities would require effective means of governance to be available to the UN authority. These would include, for example: UN civilian police forces, an independent means of criminal prosecution and a criminal law developed for UN operations generally that takes account of human rights issues. These activities may only be possible in the context of a secure environment provided by UN military forces. (Chopra, 1996, 354)

This would require a more robust civilian policing approach than has previously been undertaken, where real powers of arrest and investigation were assigned. It would require the possibility, both legally and administratively, of establishing an independent means of administering justice, including an interim criminal law code for UN use which he says would be: "a simplified document which takes account of various legal systems and is likely to be limited in the first instance to blatant violations. Practice and application will create the larger body of law for this activity" (Chopra, 1996, 355)-39 Similar views are expressed by Gerald Helman and Steven Ratner, who talk of the need for a UN "conservatorship" mechanism (Helman and Ratner, 1992-3, 12). They argue that such a concept is compatible with the principle of sovereignty enshrined in the UN Charter because "the purpose of conservatorship is to enable the state to resume responsibility for itself

296 Michael J. Kelly / Timothy L.H. McCormack

(Helman and Ratner, 1992-3, 17). These authors argue that consent would be required from a "host state", but concede that: Whether that consent must be a formal invitation or simply the absence of opposition [emphasis added] would seem to depend upon the circumstances. The only exception to the principle ought to be rare situations involving major violations of human rights or the prospect of regional conflict where warring factions oppose international presence. (Helman and Ratner, 1992-3, 13)

Helman and Ratner seem not to have considered the situation where there is no state authority to deal with at all. To implement this conservatorship mechanism they say the UN would have to introduce a set of criteria for determining whether a state qualified for such support, based on the notion of a request from the state for conservatorship in the knowledge that dysfunctionality is imminent, and voluntary surrender of temporary authority to the UN is in the longer-term interests of the state (Helman and Ratner, 1992-3, 18). This would seem highly implausible. Helman and Ratner advocate the use of the Security Council, perhaps establishing a subgroup "not all of whose members need be on the council" (Helman and Ratner, 1992-3, 19), as the appropriate UN organ to manage conservatorships under its own mandate with a budget approved by the General Assembly. Thus the Security Council might set up a board of trustees for Somalia by resolution, specifying the terms of the plan, and appoint five countries (perhaps three from Africa on the recommendation of the Africa Group) as members (Helman and Ratner, 1992-3, 19). To supplement such arrangements Helman and Ratner suggest the UN Secretariat develop a "management facility" to administer and coordinate the conservatorship and provide relief (Helman and Ratner, 1992-3, 19). This would involve centralising various activities undertaken by separate UN organs, and obtaining political acceptance for an institution that would be designed potentially to exercise government of all or part of the territory of member states - in certain cases without the consent of a state apparatus. Clearly this would take a major effort of international political will. Even if that level of support could be mustered, problems of using countries from the region could arise in relation to self-interest or antagonism. There have also been tremendous difficulties with internal UN management arising from the age-old problem of "equitable geographical representation", and the politicisation of personnel appointments rather than selection of staff on the basis of competence and efficiency that do not augur well for a new UN "management facility" (Righter, 1995, 93-202). The proposal by Helman and Ratner is credible and welcome. However, as with all proposals for new initiatives within the UN system, it is unlikely that any such proposal would materialise expeditiously. An alternative

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model that may achieve similar results but have a greater prospect of more immediate implementation could be the establishment of a new international institute for good governance. Such an organisation could be established as an NGO or even, perhaps preferably, by an alliance of federal states, and the organisation could address the need to develop a register of experts and veterans of collapsed state interventions. There is an increasing body of expertise in the international community that currently tends to dissipate after each new intervention. These people could be drawn upon as human resources for future operations, or consulted in the development of a database of lessons learned and precedents for future operations. The organisation could provide support on a number of levels, from advising and facilitating the evolution of legislative and good governance frameworks for developing or transitioning states through to involvement with international efforts under UN or regional auspices to provide temporary administrative functions. We are not suggesting that there would be no role for the UN here - on the contrary, an organisation like the one proposed could well relate very closely to relevant UN bodies. 5. C O N C L U S I O N Despite some of the practical obstacles to these proposals, the logic of Helman and Ratner's comments that head this chapter still rings true. There is a need to come up with a better institutional approach to collapsed states. This would be best achieved under UN auspices, both from a juridical and a practical perspective. Certainly there will be significant impediments to achieving this, including political sensitivities and the difficulty in mobilising the will of member states. It is also not a subject likely to readily capture international public opinion for the application of pressure on the intergovernmental community to act. Similar difficulties would confront an attempt to construct a purpose-designed convention. The negotiation of any new multilateral treaty would have to be undertaken consistently with the provisions of the UN Charter and the principles of sovereignty. However, it is submitted that a supportive legal basis can be found in the expanded UN Security Council concept of the maintenance of international peace and security, and the consequent authorisation of military interventions on humanitarian grounds during the course of the 19905. A fundamental challenge confronting the international community, however, is the approach to be adopted in the absence of a principled solution. No institutional framework yet exists to deal with the problems of ad interim sovereignty, and is not likely to for some time. An intervention into a collapsed state can take place in circumstances of extreme urgency and could occur at any time. This can happen, for example, where genocide or other massive violations of human rights are taking place. In such cases, whatever approach the international community adopts to the revival of the collapsed

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state, there is likely to be an interim period when the intervention forces are the only authority in the country capable of exercising control and influencing subsequent developments. In the absence of any institutional alternative, it is submitted that the law of occupation provides the only framework available, unless the details of intervention are more fully addressed in the UN Security Council mandate. If the latter is to occur, the mandate ought to express exactly what the nature of the relationship with the population is from the point of view of the restoration and maintenance of order, and then provide for either the application of the Fourth Geneva Convention and ancillary provisions as guidelines, or a reasonably detailed prepared model. If this approach is preferred, then work on preparing the model should begin as soon as possible. In the meantime the only framework upon which we can draw is that which currently exists in the form of the law of occupation. In the absence of any superseding framework there may be circumstances where this law will in fact apply de jure. Professionalising the civilian administrative dimension, providing for ready reaction and adequate resources, having an effective approach to the administration of justice, and a well-considered plan for sustainable selfrule both in economic and social/geographic terms, are the key issues still to be resolved, as illustrated by the experiences of Bosnia, Kosovo and East Timor. In some cases federalism will provide the best chance of a peace "circuit breaker" (such as in Bosnia and as proposed by many Somalis for their country). In other environments the emphasis will be on transitional justice and reconciliation (East Timor). In either case there will need to be interim administrative frameworks and transfer to a legitimate indigenous authority. The complexities of restoring and maintaining order in collapsed state interventions mean that something more than a broad and vaguely worded mandate is essential. One aspect of this issue that is certain is that the promotion of international law and the rule of law within states will not be served by the total absence of any standard or means of accountability for intervening forces. On the other hand, setting unrealistic standards could discourage the participation of states in such vital rescue operations and undermine the willingness to apply legal regimes. NOTES

1 Helman and Ratner, 1992-93. 2 The definition of humanitarian intervention we will rely on for this paper is as follows: "coercive action by states involving the use of armed force in another state without the consent of its Government, with or without authorization from the UN Security Council, for the purpose of preventing or putting to a halt gross and massive violations of human rights or international humanitarian law" (Kelly, iggga, 11).

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3 See Appendix A. 4 The Legality of the Threat or Use of Nuclear Weapons Case, icj, 8 July 1996, General List No. 95, para. 25; Meyrowitz, 1972, 1098-1099; Roberts, 1987, 39; Qupty, 1992, 122-123; Bernstein, 1989, 533-537; Dinstein, 1985, 346, 349, 350-352, 355; Curtis, 1991, 476. It is interesting to note in this respect that during the Diplomatic Conference which drafted the Fourth Geneva Convention a proposal by the Mexican delegation to include wording that modifications to the law of the occupied territory could only occur in accordance with the Universal Declaration of Human Rights, was overwhelmingly rejected (Final Record of the Diplomatic Conference of Geneva of 1949, 2A, p. 671). 5 See Appendix B. 6 Convention on the Prohibition of the Use, Stockpiling, Production and Transfer of Anti-Personnel Landmines and on Their Destruction, Ottawa, 3 December 1997. 7 The International Campaign to Ban Landmines (ICBL), launched in 1991, is coordinated by a steering committee of 11 organisations. It brings together over 1000 non-governmental organisations in over 60 countries who work locally, nationally, regionally, and internationally to ban antipersonnel (AP) landmines. It was able to generate worldwide enthusiasm for a stark humanitarian problem where it was easy to draw attention to horrific injuries and idle arable land. This lead to the ICBL campaign winning a Nobel Prize on 10 October 1997. Mustering the same enthusiasm for a "dry" legal document dealing with aspects of regulation of the relationship between foreign troops and civilians would certainly not attract the same attention, nor would it be as easy to demonstrate its physical benefits. See for example the Internet sites maintained by the ICBL (www.agora.stm.it/politic/c-landmines.htm) and Vietnam Veterans of America (www.waf.org/lanmine.html). 8 "To acquire the status of customary law, state practice must not only be general but accepted as law. This has been clearly set out in the North Sea Continental Shelf cases, icj Reports, 1969, 44, where it states: "the acts concerned ... must also be such, or be carried out in such a way, as to be evidence of a belief that this practice is rendered obligatory by the existence of a rule of law requiring it. The need for such a belief, i.e. the existence of a subjective element, is implicit in the very notion of the opinio juris sive necessitatis. The States concerned must therefore feel that they are conforming to what amounts to a legal obligation. This reasoning was confirmed in the Case Concerning Military and Paramilitary Activities in and Against Nicaragua" (Nicaragua v. USA) Merits, icj decision 27 June 1986, icj Reports 1986, 14 (Nicaragua case), at 108-109. 9 See Nicaragua case, 97-98: "The mere fact that States declare their recognition of certain rules is not sufficient for the Court to consider these as being part of customary international law, and as applicable as such to those States. Bound as it is by Article 38 of its Statute to apply, inter alia, international custom 'as evidence of a general practice accepted as law', the Court may not disregard the essential role played by general practice ... in the field of customary interna-

300 Michael J. Kelly / Timothy L.H. McCormack tional law, the shared view of the Parties as to the content of what they regard as the rule is not enough. The Court must satisfy itself that the existence of the rule in the opinio juris of States is confirmed by practice." 10 To support this assertion consider the sources of state practice, which can include diplomatic correspondence, general declarations, opinions of national legal advisers, instructions to state representatives, positions taken before tribunals and the actual behaviour of states. Such sources are highly unlikely to produce the detail or level of consistency, uniformity and duration required to produce such a framework. See Villiger, 1997, 15-46. 11 Most of the Somalia resolutions were in this category from UNSCR 794 ("use all necessary means to establish a secure environment for humanitarian relief operations"), UNSCR 814 ("to assist in the re-establishment of Somali police, as appropriate at the local, regional or national level, to assist in the restoration and maintenance of peace, stability and law and order, including the investigation and facilitating the prosecution of serious violations of international humanitarian law"), and UNSCR 837 ("to take all necessary measures against all those responsible for the armed attacks ... including to secure the investigation of their actions and their arrest and detention for prosecution, trial and punishment"). In Bosnia UNSCR 824 UN SCOR (1993) (creating "safe areas" in Srebrenica, Zepa, Sarajevo, Tusla, Bihac and Gorazde), UNSCR 836 UN SCOR (1993) (authorising "all necessary measures" to secure the safe areas, by force if necessary), UNSCR 1031 UN SCOR (1995) (authorising "all necessary measures" to protect the United Nations Protection Force and the implementation of the Dayton Agreement). In Rwanda UNSCR 929 UN SCOR (1994) (authorising "all necessary means" to meet humanitarian objectives, including the protection of displaced persons). In Haiti UNSCR 940 UN SCOR (1994) (authorising "all necessary measures" to remove the government, and "maintain a secure environment"). 12 Secretary General's Bulletin on Observance by United Nations Forces of International Humanitarian Law, 6 August 1999, UN Doc. ST/SGB/iggg/i3. 13 Indonesia and Netherlands: Agreement (with annex) Concerning West New Guinea (West Irian). Signed at the Headquarters of the United Nations, New York, on 15 August 1962, 437 UNTS 273. 14 Articles XVIII, XIX and XX. 15 Articles IV-VI. 16 Article VII. 17 Article IX. 18 Article XL 19 Articles XVIII-XXIII. 20 Article XXVI. 21 Article XXVIII. 22 "The Secretary General shall act in that capacity in all meetings of the General Assembly, of the Security Council, of the Economic and Social Council, and of the Trusteeship Council, and shall perform such other functions as are entrusted to him by these organs ..."

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23 Certain Expenses Case, icj Reports, 1962, 151 & 163; Nicaragua (Jurisdiction and Admissibility), icj Reports, 1984, 392 & 434. 24 sc Resolutions governing Northern/Southern Iraq (e.g. UNSCR 688, UN SCOR 1991), Somalia and Bosnia. 25 See Appendix C. 26 See Appendix C. 27 UNSG Reports to UNSC 8/2000/53 of 26 January 2000, 8/2000/738 of 26 July 2000, 8/2001/42 of iGJanuary 2001, 8/2001/436 of 2 May 2001, S/2OO1/ 983 of 18 October 2001. 28 "Section 2 Observance of internationally recognized standards In exercising their functions, all persons undertaking public duties or holding public office in East Timor shall observe internationally recognized human rights standards, as reflected, in particular, in: The Universal Declaration on Human Rights of 10 December 1948; The International Covenant on Civil and Political Rights of 16 December 1966 and its Protocols; The International Covenant on Economic, Social and Cultural Rights of 16 December 1966; The Convention on the Elimination of All Forms of Racial Discrimination of 21 December 1965; The Convention on the Elimination of All Forms of Discrimination Against Women of 17 December 1979; The Convention Against Torture and other Cruel, Inhumane or Degrading Treatment or Punishment of 17 December 1984; The International Convention on the Rights of the Child of 20 November

1989They shall not discriminate against any person on any ground such as sex, race, color, language, religion, political or other opinion, national, ethnic or social origin, association with a national community, property, birth or all other status. 29 UNTAET/REG/2OOO/3O of 25 September 2000. 30 "Section 4 Regulations issued by UNTAET In the performance of the duties entrusted to the transitional administration under United Nations Security Council Resolution 1272 (1999), the Transitional Administrator will, as necessary, issue legislative acts in the form of regulations. Such regulations will remain in force until repealed by the Transitional Administrator or superseded by such rules as are issued upon the transfer of UNTAET 's administrative and public service functions to the democratic institutions of East Timor, as provided for in United Nations Security Council Resolution 1272 (1999). Section 6 Directives 6. i The Transitional Administrator shall have the power to issue administrative directives in relation to the implementation of regulations promulgated." 31 See the Amnesty International Report on this subject (East Timor, Justice Past, Present and Future, AI Index: ASA 57/001/2001 of July 2001). While this re-

302 Michael J. Kelly / Timothy L.H. McCormack port contains many justified criticisms, the enormity of the task and the lack of human and financial resources must also be taken into account. 32 These are observations by Lt. Col. L. Kelly from his tenure as Chief Legal Adviser to the PKF Force Commander in East Timor from 24 July 2001 to 31 January 2002. This period covered the constitutional assembly elections and formation of the assembly, the drafting of the constitution, the conclusion of key agreements with Indonesia, the Presidential election, the return and reintegration of the militia families and members, the establishment of the Truth and Reconciliation Commission, the conclusion of guidelines on the processing of returnees and the conduct of reconciliation meetings, as well as cooperation between the International Civilian Police and PKF, the management of the operational deployment of the East Timorese Defence Force, and the establishment of the indigenous government. 33 Report of the Panel on United Nations Peace Operations, A/55/3O5 s/2ooo/ 809, 17 August 2000 (The Brahimi Report). 34 See also Weiss, 1995, 12-13. 35 "Article 77 1. The trusteeship system shall apply to such territories in the following categories as may be placed thereunder by means of trusteeship arrangements: a. territories now held under mandate; b. territories which may be detached from enemy states as a result of the Second World War; and c. territories voluntarily placed under the system by states responsible for their administration. 2. It will be a matter for subsequent agreement as to which territories in the foregoing categories will be brought under the trusteeship system and on what terms." 36 "Article 78 The Trusteeship system shall not apply to territories which have become Members of the United Nations, relationship among which shall be based on respect for the principle of sovereign equality." 37 Meeting at United Nations Operation in Somalia (UNOSOM) Headquarters 16 May 1993 which also included the Special Representative of the Secretary General Admiral Jonathon Howe, Ms Elizabeth Lindenmeyer of the UN Department of Peacekeeping Operations, Ms Anne Wright seconded from the us State Department to UNOSOM, Maj. Mark Inch the UNOSOM Provost Martial and Lt. Col. Kelly. 38 Article i of the Montevideo Convention on the Rights and Duties of States sets out the criteria for statehood as being that a state should possess: (a) a permanent population; (b) a defined territory; (c) government, and a capacity to enter into relations with other states. Brownlie (1990, 72-3) defines "government" to mean a stable political community, supporting a legal order, in a certain area. 39 See however comments at note 16 & 17 para, referring. Perhaps such a code may be useful in the extreme conditions where there are no local functionar-

303 Part C Theme II - Scientific Background ies, the law is ridden with unacceptable provisions and/or impossible to administer for other reasons. REFERENCES

Benvenisti, E., 1992. The Applicability of Human Rights Conventions to Israel and to the Occupied Territories. Israel Law Review, 26 ( i ) , 27-30. Bernstein, M.E., 1989. Freedom of Speech in the Israeli Occupied Territories: The Search for a Standard. International Law and Politics, 21, 533~537Bowett, D.W., 1964. United Nations Forces: A Legal Study of United Nations Practice. London: Stevens & Sons. Brownlie, I., 1990. The Principles of Public International Law. 4th ed. Oxford: Oxford University Press. Chopra, J., 1996. The Space of Peace-Maintenance. Political Geography, 15 (3/4). Corell, H., 2000. The Role of the United Nations in Peacekeeping - Recent Developments from a Legal Perspective. Keynote address delivered to the Conference National Security Law in a Changing World: The Tenth Annual Review of the Field, Washington, i December 2000. This paper can be found at http://www.un.org/law/ counsel/info.htm. Curtis, M., 1991. International Law and the Territories. Harvard International Law Journal, 32 (2), 476. Demotses,J.A., 1992. Israeli Actions in Response to the Intifada: Necessary Security Measures of Violations of International Law? Suffolk Transnational Law Review, 16, 97-100. Dinstein, Y, 1985. Human Rights in Armed Conflict: International Humanitarian Law. In: T. Meron, ed. Human Rights in International Law. Oxford: Oxford University Press. Dror, Y, 1996. The Capacity to Govern: Designing Governance for Global Transformations. The Club of Rome, 13-14. Evans, G., 1993. Cooperating for Peace: The Global Agenda for the icjgos and Beyond. Sydney: Allen & Unwin. Fireman, S., 1991. The Impossible Balance: The Goals of Human Rights and Security in the Israeli Administered Territories. Capital University Law Review, 20 (2), 426-427. Goodrich, L.M. and Hambro, E., 1949. Charter of the United Nations: Commentary and Documents. London: Stevens & Sons. Griggs, R.A., 1997. Geostrategies in the Great Lakes Conflict and Spatial Designs for Peace. Centre for World Indigenous Studies. Halperin, M.H., Scheffer, DJ. and Small, P.L., 1992. Self-Determination in the New World Order. New York: Carnegie Endowment for International Peace. Helman, G.B. and Ratner, S.R., 1992-3. Saving Failed States. Foreign Policy, 89 (Winter). Higgins, R., 1970. United Nations Peacekeeping 1946-1967: Documents and Commentary, Vol. II-Asia. Oxford: Oxford University Press.

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James, A., 1969. The Politics of Peace-Keeping. London: Chatto & Windus. Johnson, P., 1993. Colonialism's Back - and Not a Moment Too Soon. The New York Times Magazine, 18 April 1993, 22. Kelly, M.J., iggga. Humanitarian Intervention: Legal and Political Aspects. Danish Institute of International Affairs, 1999. Kelly, M.J., igggb, Restoring and Maintaining Order in Complex Peace Operations: The Search for a Legal Framework. The Hague: Kluwer Law International. Kelly, M.J., McCormack, T.L.H., Muggleton, P. and Oswald, B., 2001. Legal Aspects of Australia's Involvement in the International Force for East Timor. International Review of the Red Cross, 841 (March), 83. Krauthammer, C., 1992. Trusteeship for Somalia: An Old — Colonial - Idea Whose Time has Come Again. Washington Post, 9 October 1992, A27Martin, I., 2001. Self-Determination in East Timor: The United Nations, the Ballot, and International Intervention. International Peace Academy Occasional Paper Series, 2001. Meron, T, 1997. Convergence of International Humanitarian Law and Human Rights Law. In: D. Warner, ed. Human Rights and Humanitarian Law: The Quest for Universality. The Hague: Martinus Nijhoff Publishers, 97-105. Meyrowitz, 1972. Le Droit de la guerre et les droits de rhomme. Revue deDroit Public et de la Science Politique en France et a I 'Etranger, 88, 1098-1099. Oraa, J., 1992. Human Rights in States of Emergency in International Law. Oxford: Clarendon Press. Pictet, J.S., 1958. IV Geneva Convention Relative to the Protection of Civilian Persons in Time of War. Geneva: The International Committee of the Red Cross. Plunkett, M., 1994. The Establishment of the Rule of Law in Post-Conflict Peacekeeping. In: International Peacekeeping: Building on the Cambodia Experience. Canberra: Australian Defence Studies Centre. Quigley, J., 1989. The Relation Between Human Rights Law and the Law of Belligerent Occupation: Does an Occupied Population Have a Right to Freedom of Assembly and Expression? Boston College International and Comparative Law Review, 12 (1).

Qupty, M., 1992. The Application of International Law in the Occupied Territories as Reflected in the Judgements of the High Court of Justice in Israel. In: E. Playfair ed. International Law and the Administration of Occupied Territories. Oxford: Clarendon Press, 122-123. Righter, R., 1995. Utopia Lost: The United Nations and World Order. Twentieth Century Fund. Roberts, A. and Kingsbury, B., eds, 1993. United Nations, Divided World: The UN'S Role in International Relations. 2nd ed. Oxford: Clarendon Press. Roberts, A., 1987. The Applicability of Human Rights Law During Military Occupations. Review of International Studies, 13, 39. Russell, R.B., 1964. United Nations Experience With Military Forces: Political and Legal Aspects. Washington D.C.: The Brookings Institution. Schwarzenberger, G., 1968. International Law as Applied by International Courts and Tribunals: Volume 2, The Law of Armed Conflict. London: Stevens & Sons.

305 Part C Theme II - Scientific Background Simma, B., ed., 1995. The Charter of the United Nations: A Commentary. Oxford: Oxford University Press. Stiftung, F.E., 1995. Germany; Life and Peace Institute, Sweden; Norwegian Institute of International Affairs. DPKO Lessons Learned Unit, December 1995, 18-19. Vieira de Mello, S., 2001. Briefing to the Security Council on East Timor by the Special Representative of the Secretary General and Transitional Administrator. 30 July 2001. Villiger, M.E., 1997. Customary International Law and Treaties: A Manual on the Theory and Practice of the Interrelation of Sources. 2nd ed. The Hague: Kluwer Law International. Weiss, T.G., 1995. Overcoming the Somalia Syndrome: Operation Rekindle Hope? Paper presented to Experts Meeting on State Sovereignty, Human Rights and Humanitarian Action, International Centre for Human Rights and Democratic Development, Montreal, 1-2 March 1995. APPENDIX A

In Cyprus v. Turkey International Law Reports (1978, Vol. 62, 230-232), the European Human Rights Commission determined that the European Convention for the Protection of Human Rights and Fundamental Freedoms, to which Turkey was a High Contracting Party, applied to the Turkish military occupation of northern Cyprus. It found that the term, "within their jurisdiction", contained in Article i of the Convention, referred to all persons under the High Contracting Party's, "actual authority and responsibility, not only when that authority is exercised within their own territory but also when it is exercised abroad" (230). This decision is limited by the fact that Turkey did not seek to argue that a military occupation was in place and that the laws of occupation applied and overrode the European Convention. It instead based its case on the fact that a new state had been created (the Turkish Federated State of Cyprus), and therefore it claimed no occupation existed and no jurisdiction by Turkey was being exercised in the territory of this entity (132-140). There was therefore no evaluation by the Court of the status of the human rights provisions of the European Convention in relation to the laws of occupation. In fact the violations complained of by the Republic of Cyprus against Turkey would also have constituted violations of the laws of occupation, and the situation would therefore have been adequately covered by the occupation provisions (102-130). The decision is also limited to situations involving High Contracting Parties of the European Convention. See Oraa, 1992, 256-257; Quigley, 1989; Demotses, 1992, 97-100; Fireman, 1991, 426-427; Meron, 1997, 97-105. APPENDIX B

At the UN Department of Peace-Keeping Operations-sponsored Comprehensive Seminar on Lessons-Learned From United Nations Operation in Somalia, Plainsboro, New Jersey, 13-15 September 1995, the possibility of a UN Ombudsman who could share some of the Protecting Power responsibilities with the ICRC featured in discus-

306 Michael J. Kelly / Timothy L.H. McCormack sions in the Syndicate dealing with "Political Aspects and Institution Building". The Syndicate recommended to the Plenary Session that some form of Ombudsman mechanism be established on a mission-by-mission basis for peacekeeping scenarios, to consider grievances by the population against the UN. The recommendation stated that: "Without such a mechanism built into the mission, the UN was perceived by many in Somalia to be 'above the law' which undercut its own efforts to promote human rights" (Comprehensive Report on Lessons-Learned From United Nations Operation in Somalia, April igg2-March 1993. Stiftung, 1995). The concept of Protecting Powers has very old roots, but it was only introduced to the law of armed conflict by the 1929 Prisoners of War Convention. The subject is first raised in the Fourth Convention in Article 9, and there are a further 36 references to the Protecting Power. Article 9 does not define a Protecting Power or indicate how one is nominated. Pictet describes the procedure as follows: The belligerent Power which wishes its interests to be protected asks a neutral Power if it is willing to represent it. Should the neutral power agree, it asks the enemy Power for authorisation to carry out its duties. If the enemy Power gives its consent, the neutral Power then starts its work as a Protecting Power. (Pictet, 1958, 81) The problem with such an arrangement is that it begs the question as to what happens when there is no power to request a neutral state to act as Protecting Power, for example in the collapsed state scenario in Somalia. The Protecting Power system is a creature of international usage, and is not modified or regulated in its form by the Fourth Convention. In international usage the establishment of a Protecting Power arrangement depends on the existence of three juridical state entities party to the contract. If the occupied territory has no such entity capable of filling this role then the Protecting Power arrangement of international usage cannot exist. Those drafting the Convention viewed the role of Protecting Powers as essential to the complete functioning of the occupation provisions, and put much effort into expounding on the parameters of it. They were also aware, however, that it was distinctly possible that such a role may not be filled in practice due either to difficulties in coming to agreement over a suitable party, the incapacity or demise of the power of origin as an entity, or because of the reluctance of a state to assume the burdens of the office. With this in mind they included Article 11 in the Convention and passed Resolution 2 at the conclusion of the Diplomatic Conference, providing and calling respectively for the establishment of an international body to fulfil the duties of a Protecting Power. This suggestion was never followed through. Final Record of the Diplomatic Conference of Geneva of 1949, Vol. II-B, pp. 19-20, 27, 28, 57-58, 59, 65-66, 74, i3°>35 1 >487-

307 Part C Theme II - Scientific Background APPENDIX C UNMIK was established following the conclusion of an agreement with the Republic of Yugoslavia under Security Council Resolutions 1244 (*999) °f 10 June 1999, and was provided with an administrative framework under the authority of the resolution through the promulgation of UNMIK Regulation 1999/1 of 25 July 1999. This regulation among other things established a democratically elected Assembly for self-government, its responsibilities, a judicial system and provision for reserved powers to the Special Representative of the Secretary General. UNTAET came into being after a process involving a three-party agreement amongst Indonesia, Portugal and the UN which led to a referendum rejecting a provincial relationship with Indonesia, followed by Indonesian agreement to provide for the separation of East Timor and its placement under UN administration (UN Secretary General report to UN General Assembly 54 A/54/654 of 13 December 1999). The UNTAET administration was a fully responsible UN "government" providing all the organs of administration and staffing them with predominantly expatriate personnel. This was established under Security Council Resolutions 1272 (1999) of 25 October 1999 and 1338 (2001) of 31 January 2001, and through the promulgation of UNTAET Regulation No. 1999/1 of 27 November 1999. A later regulation (No. 2001/28 of 19 September 2001) established the Council of Ministers of the Transitional Government in East Timor. See also Martin, 2001.

WORK SESSION PROCEEDINGS: REPORT

LIDIJA R. BAST A FLEINER

Constitution Making and Nation Building (Work Sessions 5 and 17)

i. I N T R O D U C T I O N : KEYQ U E S T I O N S Constitution making and nation building in multicultural societies is in fact an issue of state building. The authors of the Theme II Paper rightly say that the critical challenge can be defined as "finding a political compromise between two sources that results in an institutional equilibrium" (see Fleiner, Kalin, Linder, Saunders, Part C). Given that "state making does not axiomatically or mechanically lead to building of a nation" (see Haysom, Part C), this political compromise has to be reached at a constitutive, state-building level. The nature and even viability of pouvoir constituant for multiethnic societies is a major stake. The constitutions in this case also have to "reconcile sameness and difference" by addressing identity politics. This objective implies that a constitution may receive an additional role as an instrument that can mediate identity conflicts where major liberal virtues supporting liberty and popular sovereignty - those of tolerance and trust respectively - are not at hand. In consequence, the interrelationship of constitution and nation building is an area where major policy recommendations necessarily have to flow almost directly from basic conceptual considerations about constitutive particularities of multiethnic societies. Together with federalism, multiculturalism calls for revision of the major liberal democratic principle, namely that majority as such is the legitimate expression of the sovereign will of the people. One can indeed talk of a twofold structural challenge to constitutionalism. First, multiculturalism questions the intrinsic premise behind the modern nation state, which is that only a society homogenised in (one) identity can lead to political

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consensus as democratic consensus. Second, the demand that ethnic, religious, and cultural identities should publicly matter makes an epochal departure from the constitutive principle of modern politics, that of the neutrality of the public sphere against ethnic, cultural and religious group identities. When translated into demands for minority rights and territorial autonomy, identity politics cast a new light on the citizenship as the principle symbolising universality within a particular nation state. Minorities do not fit into the constitutive principles of modern polity as (through majority defined) democratic polity. In terms of constitution making and nation building, this means that two major problems have to be revisited: that of design of pouvoir constituant, and that of citizenship as the principle defining members of a polity. Put differently, a new answer is needed for the critical question on legitimacy: whose is the state? To ensure that the work sessions provided the vital link between the conceptual and the empirical, the following key questions formed a leitmotif in the case statements: Does the promotion of a common national identity complement or erode the existence of ethnic or sub-national identities in a multicultural society? What are the conditions for a positive interrelationship? In what circumstances, and how should the constitution itself expressly address and codify identity divisions in a multicultural society? How and in what circumstances can the federal model reduce (or assist in managing) ethnic conflict in a multicultural society? How and in what circumstances does it exacerbate such conflict? Can the design of a constitutional reform process yield a constitution more likely to address and manage identity-based divisions in a multicultural society? 2.

MAJOR POINTS, LESSONS LEARNED AND POLICY RECOMMENDATIONS

2.1. Constitution-making process - the cases of Cyprus and Serbia/Montenegro

2.1.1. Major points. To start with, the two cases indeed demonstrated quite a few commonalities. Illegitimate pouvoir constitutant and absence of a democratically constituted nation lie behind the present disputed state and constitutional design. The existing constitutional design was also instrumental in creating the political impasse and confrontation between elites.

310 Lidjia R. Basta Fleiner

Absence of tolerance and trust as necessary conditions for peaceful and democratic society is evident; in the case Cyprus this seems likely to be irreversible, since a profoundly different perception was apparent in terms of key factors causing the conflict, as well as in terms of the assessment of present situation. Minority lines of argument (that of Montenegrins and Gyp riot Turks respectively) and majority lines of argument (that of Cypriot Greeks and Serbs respectively) are similar among themselves: in both cases, the two correlating sides of the conflict are producing analogous "simulations". Turks and Montenegrins "simulate" that the two independent states already exist; Yugoslav and Serbian government and the Government of the Republic of Cyprus "simulate" the existence of democratic legitimacy for the whole, neither of which is the case. There is international community moderation in both cases, and the "internationalisation" of otherwise nation-state constitution making is taking place. Nevertheless, significant, and even structural differences were also observed. Given different historical background, the case of Serbia and Montenegro is not a case of bi-communal ethnic conflict. Here the crucial issues of the conflict initiated by political elites, are crosscutting through Serbia and Montenegro. In Cyprus, the long-lasting conflict seems to have irreversibly radicalised the situation and in the last decades has generated new "facts". In consequence, the conflict dominates all spheres of politics and society within Turkish and Greek communities respectively. 2.1.2.

Lessons learned and policy recommendations

The minority always tries to get as many "veto points" as possible in order to remain protected from overruling. It is minorities that focus on external rights for their territorial entities. This shows that they take negotiated solutions as somehow "transitory". In the "internationalisation" of their position they sometimes see a "manoeuvring space" to reopen their issue. The categorical nature of ethnic conflicts inevitably leads to different readings even of the causes of the conflict. In this situation it is almost impossible to reach agreement on the constitutive nature of future common state framework. It is important that the foundations of commonalities as a road to common identity start with identifying common benefits of "staying together". This presupposes ceasing to look backwards (turning away from history) and starting to look forwards. In addition, the political will to understand the "other side" is of major importance. In this context, fed-

gii

Part C Theme II - Work Session Proceedings

eralism can play a major role. Constitutionally, federalism is not only a device for self-rule, but also a structure for shared rule, and this sharedrule structure is equally important for commonalities. The role of the elite is critical, and the paradox of the situation lies in the fact that the positions of the elites cannot be democratically verified. Democracy is possible only when the state exists. If the state issue has not been solved, or has been reopened, there is not much space for democratic legitimacy as the only solid basis for nation building. Whatever institutional design for the solution of such conflicts is pursued, it is essential that it does not leave space for "reopening" or re-negotiating constitutive foundations of the common state on a day-to-day basis, when differences occur between the elites representing different communities. The paradox of the involvement of the international community lies in the fact that it operates under geo-strategic terms of reference, and these usually have nothing to do with internal viability, i.e. inside legitimacy of the proposed solution. Geo-strategic stability in the region, not common identity, is the subject of major concern. An internationally defined/imposed framework for the solutions remains in principle non-negotiable. At the same time, interventions from the outside in such cases have not demonstrated major positive effects to date. This is particularly the case if the international community intervenes during the nation-building process. Namely, nation-building processes form power relations from the inside, which foreign interventions can only distort. In addition, this is also the reason why foreign pressure usually proves ineffective: power relations are distorted and there remain no reliable actors to respond to the pressure. 2.2. Nation and federal-unit building - the cases of Switzerland and South Africa 2.2.1. Major points. Given their profoundly different historical background, hardly any commonalities between Switzerland and South Africa were identified in the debate. Instead, significant comparative differences were addressed. Considerable time was devoted to the case of internal secession of the canton of Jura from the canton of Bern, because the discussion on the Jura case was primarily pertinent to the interrelationship between nation building and federal-unit building. On the other side, the South African case proved critical in displaying the role which constitution making can play in nation building. Last but not least, the debate on these two cases clearly mapped two structurally different types of federalism. The difference affects not only institutional design, but also underlying structural tenets and the role assigned to federal instruments in each of the two cases respectively. Several points arose during the debate.

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Specific features of the Jura internal secession can be explained only by basic principles of Swiss federal design: political pragmatism, long historical evolution, participative nature of Swiss issue-driven half-direct democracy, and the understanding of diversity as a virtue to be accommodated and further promoted through federalism. This, quite untypical, understanding of cultural diversity is an inherent part of the common Swiss identity. Swiss "Willensnation", (i.e. political concept of nation) is built upon democratic integration of cultural diversities. This explains why over-proportional representation of minorities remains immanent in the Swiss understanding of minority accommodation. Switzerland is a unique case of "strong cantons in a strong federalism". The constitution combines every mechanism to allow checks and balances. In other words, energy is used to reach consensus, not to build majority. The Jura case can indeed be seen as part of the "laboratory of federalism", since some of the major issues relating to federalism in multiethnic societies have been paradigmatically displayed. Since the French-speaking Catholic minority was not irredentist, the central state could play a role together with the unitary canton of Bern. On the other side, unlike Switzerland, South Africa is a case of federalism understood purely as devolution of power, a system of vertical checks and balances in a constitutionalist sense of power control. Whereas in Switzerland asymmetric federal design accommodates national cohesion that relies upon maximal accommodation of sub-national identities, in South Africa as in most multiethnic countries, minorities are an "inevitable evil". There is no paradigm as to what to do with them or how to build up democratic unity based on the pluralist nature of society. However, equally important is that nation building in South Africa has relied for almost ten years first upon reconciliation, and then transformation. In consequence, the South African case demonstrated a specific, inclusive nature of the constitution-making process that gave people the feeling of "ownership" of the constitution. Politically controlled devolution as a process and federalism as institutional design, have been part and parcel of the nation-building process since 1999. Paradoxically enough, constitutional safeguards have played a rather ineffective role to date. 2.2.2.

Lessons learned and policy recommendations

In academic discourse, federalism has been predominantly discussed as a reluctantly adopted solution for multiethnic societies instead of being viewed as an opportunity to reflect on the advantages of federal solutions in terms of good governance. There is a misapprehension that multiculturalism is a problem per se. This is empirically wrong. It becomes true only if multicultural prop-

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erties cumulate into segmentation. This is why examples such as Switzerland are "success stories". Federalism can protect only certain minorities, geographically concentrated on smaller territories. When federalism as a system of vertical checks and balances aims at accommodating multicultural pluralism (as in Switzerland), it inevitably builds on vertical power sharing and proportional representation, unlike the Westminster model of horizontal checks and balances. Federalism should also be understood in terms of power relations. It is an anti-majoritarian device and one of the major checks-and-balances instruments. This is why in a constitutionalist setting, instruments of legal control of political power, rule of law, human rights, independent judiciary and the like, are indispensable in order for federalism to work. Federalism should not only be related to minority issues, not even in cases such as Switzerland. It is equally important as a set of designs for accomplishing devolution and making the subsidiarity principle effective. Both history and institutions play major roles. It is the power-sharing institutions that can induce a political culture of compromise and respect for the arguments of others (Swiss case). Procedure design is critically important in cases of secession, as the Jura case convincingly demonstrated. The cascade referendum tried to avoid an ethnic foundation for the new canton. It also had a strong democratic line of argument: people, not elites, should decide. Put differently, the Jura case gives an example of how a civic answer can be provided for cultural and ethnic divisions. The role of the procedure in a case of secession is of key importance in another sense, too. As the cases of Quebec and Jura showed, it is necessary to design a procedure that could discourage and thus prevent secession. The question of how federalism can contribute to nation building remains equally relevant for federal-unit building. In this regard, the South African case was most instructive. It showed that the inclusiveness of the constitution-making process in developing a constitutional compact (involvement of the people through public debates, "representativeness" of the constitution-making body) is decisive for the development of common identity to underlie nation building ("sense of building constitutional institutions"). 3.

CROSSCUTTING ISSUE! LEGITIMACY

As has already been pointed out, the interrelationship of constitution making and nation building in multicultural societies in fact addresses the issue of state building. Democratic integration of multicultural societies remains a major challenge, not only as an objective, but also as a strategy.

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In this respect the problem can be taken as a common denominator for the discussion in both work sessions. Violent elections and refusal to accept the outcome of democratic procedure remain one of the major paradoxes of majoritarian democracies in multicultural societies. The "winner-takesall" system within pluralist and segmented societies inevitably produces illegitimate group politics. In consequence, people start to turn away from constitutional designs - the stakes are too high! Here, federalism can offer something. The major line of argument in both sessions showed that - when analysed within the context of constitution making and nation building in multicultural societies - federalism gains still more relevance: that of a legitimacy model. It is federal design organised as a structural link to consensusdriven democracy within a given nation state, which becomes relevant here. Put diffferently: it is federalised democracy both as an objective and as a strategy of constitution making, which can critically contribute to nation building in multicultuiral societies. REFERENCES

Basta Fleiner, L.R., 2000. Minority and Legitimacy of a Federal State. An Outsider's Perception of the Swiss Model. In: L.R. Basta Fleiner and T. Fleiner, eds. Federalism and Multiethnic States. The Case of Switzerland. Fribourg: PIFF and Helbing & Lichtenhahn. Basta Fleiner, L.R., 2002. Can Ethnic Federalism Work? Forthcoming in: Jahresbericht Institut fur Foderalismus 2002. Freiburg. Basta Fleiner, L.R., 2000. Federalisme, multiculturalisme et droits humains: le principal defi pour les politiques post-modernes. In: M. Borghi and P. Meyer Bisch, eds. Societe civile et indivisibilite des droits de 1'homme. Fribourg: Editions Universitaires. Fleiner, T., 2002. Recent Developments in Swiss Federalism. Publius: The Journal of Federalism, 32 (Summer). Kymlicka, W., 1995. Multicultural Citizenship. Oxford: Clarendon Press. Linder, W., 1994. Direct Democracy and Power-Sharing. In: W. Linder. Swiss Democracy. Possible Solutions to Conflict in Multicultural Societies. New York: St Martin's Press, 84-137. Rosenfeld, M., ed., 1994. Constitutionalism, Identity, Difference and Legitimacy. London: Duke University Press. Taylor, C., 1994. The Politics of Recognition. In: A. Gutman, ed. Multiculturalism. New Jersey: Princeton University Press.

WORK S E S S I O N PROCEEDINGS.' REPORT

THOMAS

O. HUEGLIN

Decentralisation and Good Governance (Work Sessions 6 and 18)

1.

OVERVIEW

This report begins with a brief conceptual clarification of decentralisation and governance in the context of federalism, and continues with a discussion of the four country cases: Italy, Nigeria, Mexico and the United Kingdom. The concluding critical evaluation presents common insights and lessons, which include the need for a federal balance between centralisation and decentralisation, emphasis on negotiated agreement rather than majority rule, a predisposition for bargaining, the inevitable versatility of outcomes, and a general spirit of getting along rather than getting it right. 2.

THE DISCUSSIONS

The overall purpose of these work sessions was to discuss democratic possibilities of decentralisation in a number of countries with strong centralist traditions. Good governance was predefined as a move towards increased transparency of the political process, accountability and responsiveness of governments to the people, and respect for human rights. From various angles the debate revolved around the central question of whether decentralisation can improve democratic qualities of governance in the context of increasingly diverse societies. In general, most participants tended to answer this question positively. All agreed, however, that decentralisation in this sense must involve more than mere administrative devolution. Real autonomy in terms of fiscal capacities was seen to be as important as support from organised civil society at the regional and especially local level.

316 Thomas O. Hueglin 3.

CONCEPTUAL FRAMEWORKS

Decentralisation and governance were the main concepts framing the discussions in the work sessions. In the context of a conference on federalism it seems appropriate to clarify the conceptual relationship between federalism as an institutionalised form of divided government, decentralisation as a procedural move towards strengthening lower-level governments, and the general paradigmatic switch from government to governance. j. i. Federalism and decentralisation

Decentralisation simply means that certain powers of the central government, legislative, regulatory or administrative, are redistributed or delegated to a lower level of government. This can happen in federal or in unitary political systems. Britain, for example, a strongly unitary state until recently, nevertheless has had a long tradition of decentralised local government. In the context of federalism as an institutionalised form of divided government, decentralisation includes a constitutional guarantee that these powers cannot be taken away from the lower level of government without its own formal consent. Decentralisation in federal systems means, in other words, a formal shift in the constitutionally designed balance of powers. The notion of balance is crucial. Federalism is a system of mutual checks and balances. Minimally, it gives expression to two manifestations of the popular will: national and regional. Decentralisation in the context of federalism therefore cannot be understood as a unilateral withdrawal from joint responsibilities. Particular autonomies remain embedded in a commitment to universal solidarity. It should be noted here that this understanding of federalism as solidarity among autonomous communities has its roots in a continental European tradition (Hueglin, 1999) that is different from the American understanding of competitive federalism (Dye, 1990). It is fair to say that the discussions of the two work sessions were inspired more by the European than the American understanding of federalism. 3.2.

Federalism and governance

Federalism is traditionally understood as divided government on the basis of shared sovereignty. As in unitary states, there is an assumption that responsibility for the process of governing lies exclusively in the hands of elected political representatives. This assumption has proved untenable in complex modern societies. The process of governing routinely involves all kinds of non-governmental actors, regulatory agencies, civic organisations and the private sector. This is what the paradigmatic shift from government to governance is meant to express.

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In the context of democratic federalism and decentralisation this raises the question of multilevel governance beyond the state (Kohler-Koch and Eising, 1999). Federal governance must find means of extending mutual control, via checks and balances, to all governing agents, governmental, non-governmental, public and private. If that is not the case, there will be only a federalism of governments. 4. CASES The four cases discussed were very different. Italy is a unitary state with regions and provinces. The main issue is constitutional change that would transform the status of the regions from administrative decentralisation to federalism. Nigeria has only recently re-emerged from military dictatorship as a democratically constituted federal state. The main issues are ethical reconciliation and government accountability. The United Kingdom has finally begun a process of devolution. Scotland in particular has gained extensive domestic legislative powers, but it remains dependent on fiscal transfers from the central state. Mexico has been a federation since 1917 but for most of the twentieth century, the political process was controlled almost entirely by one-party rule at the centre. The main issue has been the use of existing federal structures for democratisation from below. 4.1. Italy

Federalism and decentralisation have become catchwords in Italian politics for two main reasons. One is the ongoing process of European integration in which the regions want to play a more autonomous role that is encouraged by European Union (EU) structural programs and other regional policies. The other reason is connected with domestic constitutional reform. Federalism is widely regarded as a structural means of disentangling the notoriously corrupt networks of the central state. The presentation and discussion started from the revised Title V of the constitution, which declares that Italy is a republic constituted by municipalities, provinces, metropolitan cities, regions, and the state. While this is certainly innovative (by comparison, the United States constitution famously begins with "we the people", whereas the Swiss constitution mentions the people and the cantons), it creates more questions than answers. The problem appears to be twofold. On the one hand, Italian pluralized or multilevel governance to date lacks a more autonomous distribution of resources. It is only a system of decentralised administration. On the other hand, a satisfactory delivery of service seems impossible given the unevenness of municipal resources and organisation. In addition, the strongest opposition to serious efforts towards decentralisation continues to come from the central bureaucracy.

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A good deal of faith was accorded to the principle of subsidiarity (Follesdal, 1998). In line with Article $b of the European Maastricht Treaty, subsidiarity means that decisions in a multilevel system of governance should be made as close to the people as possible. Subsidiarity, in other words, is a political principle of guidance rather than a legally binding stipulation. This means that its application requires negotiated agreements. In the EU such negotiations are organised into the community method. In Italy, it is not so clear where negotiated agreements on who should do what might come from. It would require some formal degree of federalisation granting lower-level units constitutionally guaranteed bargaining positions. Such a position is available only, and then only to a certain extent, to regions with special autonomy status. In this context, Southern Tyrolia was presented as a success story where decentralisation had indeed lead to internal solutions for the accommodation of the three language groups, Germans, Italians and Ladinos. More generally, it was convincingly pointed out that decentralisation by means of constitutional federalisation would be an appropriate response to Italy's endemic transparency and accountability problems. The main reason is the existence and long tradition of deeply embedded regional cultures that have survived the formation of the modern Italian state. The generation of economic incentives and the delivery of welfare services could be placed more autonomously in the hands of already existing political classes at the regional and local level. Italian civil society, in other words, appears well positioned to embrace federalism more fully. As a note of caution, it should be mentioned that federalist initiatives have mainly come from the rich north of the country, and that they have been forwarded as a new endorsement of competitive federalism with the intention to end the current regime of fiscal redistribution to the poorer south. The transformation of Italy into a fully developed federal state would obviously require the opposite, a strong commitment to fiscal equalisation. 4.2. Nigeria

The case of Nigeria appears to be almost the exact opposite to that of Italy. Constitutional federalism has been imposed from above, yet overwhelming transparency and accountability problems persist because civil society is unprepared and lacks the socio-economic tools necessary to take an active part in it. The Nigerian state is an artificial colonial construction. Episodes of military dictatorship and constitutional federalism have followed one another during ongoing power struggles among three dominant ethnic groups in a poly-ethnic tribal society. In order to accommodate tribal elites, the dynamic of federalisation has been escapist in the sense that ever more states have been created so that 36 states have now replaced the original three.

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Ironically, this dynamic appears unable to cope with ethnic tensions because of its inherent divide-and-rule tactic. It was intelligently observed that democratic federalism increases these tensions, because federalism is understood as licence to self-rule without at the same time fostering a cooperative spirit of living together. This is the issue of balance mentioned earlier. The main challenge for the Nigerian federal state under these conditions is to decrease ethnic tensions via the joint experience of collective progress. Even more daunting is the task of developing a civil society capable of participating in such a joint federal enterprise. The principal obstacle is the overwhelming level of state corruption in collusion with the international corporate sector. Nigeria is one of the world's richest oil producers, yet the mainstream of society lives at third world subsistence levels or worse. This would obviously help to explain why local government is described as weak and unable to strengthen federalism from below. As it was pointed out, there is an anti-corruption commission at work in Nigeria; but while the state governments can use it to control local government, the federal government cannot control the state governments. Herein exactly lies the problem, because it is at the state level that the corruption of political elites combines with ethnic rivalries and a general jockeying for power. A good deal of discussion was devoted to the question of whether the problems of Nigerian federalism are embedded in the divided nature of its society, or whether these divisions are in fact creations of military rule. This allows the point to be made that there are indeed two strategies of federalism at work here. One is a bottom-up strategy aiming at federalisation as a process of growing civic involvement by bringing government closer to the people. The other, which is particularly prevalent in post-colonial societies, is a top-down strategy aiming at the utilisation of regional and local elites in administering stable governance from the centre. It seems that in the Nigerian case neither is possible, because civil society is not ready to assume its role under the first strategy, and regional elites are too divided for stable cooperation under the second. Nigeria nevertheless has an impressive record of national civic organisation, including its media. However, government and opposition are mostly played out at the elite level. Viable federalism would require a cooperative learning process at the popular level. 4.5. Mexico

Mexico, which has used existing federal structures for democratisation from below, in many ways illustrates what should happen at the next stage in Nigeria. However, this is easier said than done. Unlike Nigeria, Mexico has a long liberal tradition and few ethnic divisions.

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Mexico has been a federal state since 1917, but since the 19308 Mexican federalism has been overshadowed by corrupt one-party rule at the centre. During the past two decades, however, the existence of federal structures of government allowed the democratic opposition to gain ground from the periphery. This process began with the electoral success in Baja California in 1989 and ended, for the time being, with the electoral victory of Vicente Fox as Mexican president in 2000. This success story does not mean, of course, that the process of Mexican democratisation is complete, though it underscores the existence of regional liberal elites capable of using federal structures and processes to their advantage. Nor has it eradicated the problem of local corruption. The dangers of local tyranny were pointed out during the discussions, once again highlighting the necessity of understanding federalism as a system of mutual checks and balances. Particular emphasis was given to Article 115 of the Mexican constitution, which stipulates that municipalities are to be autonomous legal bodies within the states. The article also contains a long list of municipal responsibilities, and as in the Italian case, the issue of insufficient autonomous fiscal resources was raised. In the context of the work session's emphasis on human rights, the question was asked whether the inability to organise efficient garbage collection constitutes a violation of basic human rights. It is at this level that federalism intersects with real life. The human rights issue became much more dramatic and urgent in the context of the indigenous struggle for autonomy in the Chiapas state. While this issue is now at the forefront of Mexican politics, it has been long neglected in the context of federalist theory and practice, because federalism has traditionally been a project of liberal elites who have not readily welcomed competition from other social strata. The Chiapas struggle demonstrates powerfully that the formal structures of territorial federalism are not a sufficient safeguard for minority rights when these structures are used as a transmission belt for autocratic rule from the centre. It also highlights the need to rethink federalism as a regime of norm differentiation. In order to protect human rights as cultural rights it may not be sufficient to organise the legitimate exercise of the same set of universal norms into different levels of governance. It is necessary to develop an understanding of culturally differentiated sets of norms that finds its boundaries and limitations in negotiated understandings of the common good. 4.4. The United Kingdom

At first glance it may appear odd that the United Kingdom should provide particularly important insights into federalism and decentralisation. It is the oldest unitary parliamentary democracy, in which the very notion of

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federalism has remained a contested concept of legitimate governance. Indeed, the very concept and terminological choice of devolution indicates that a federal division of sovereignty is not on the agenda. However, for at least two reasons, the United Kingdom may very well develop into a model case of how legitimate governance can be organised in complex societies. The first reason has to do with the accommodation of asymmetry. Although this was not a central part of the discussion, it is obvious that the United Kingdom has to cope with three very different scenarios of decentralisation. The most intriguing of these pertains to Northern Ireland and the attempt, in the Good Friday Agreement, to find a formula of shared governance that not only involves the two conflicting parties within Northern Ireland itself but also the two adjacent nation states, Britain and Ireland. The two other contenders for home rule, Scotland and Wales, differ from one another in the level and intensity of national identity. Consequently, home rule provisions for Scotland have become more comprehensive than those for Wales. The second reason points to federalism as a political process. The Scottish parliament now possesses jurisdiction over all matters previously only administratively devolved. While this may not have revolutionised Scottish social life in material terms, especially since the new parliamentary powers do not include fiscal autonomy, it has certainly brought new life and a new dynamic to the political process. Often overlooked in this context is the gender dimension. As reported, 37% of members in the Scottish parliament are now women. This is not to say that decentralisation automatically promotes gender equality. But insofar as it opens up political spaces not yet occupied by the usual suspects and vested interests, it may allow the political process to become more inclusive. 5.

CRITICAL

EVALUATION

Can decentralisation bring about good governance? This was the central question for both work sessions. If anything emerged as a common denominator linking the four cases, then it was that the answer to this question had to be: it depends. 5. i. Decentralisation and balance

Good governance was generally understood in terms of the four work session sub-headings: transparency, accountability, responsiveness and human rights, and there was almost universal agreement that decentralisation would strengthen these goals and values. This was not surprising since all four cases involved political systems with a long record of centralised power abuse. Thus decentralisation in the Nigerian case was seen as a strategy for strengthening civil society against the spectre of renewed dictatorship. In

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the case of Mexico, federalism was clearly recognised as an opportunity to structure democratisation from below. The Italians embraced federalism as a remedy for bureaucratic corruption organised from the centre, and in the context of the United Kingdom, the case of Scotland was celebrated as the beginning of a new political openness and inclusion. It was mainly among the participants from the older and established federal states that a more cautious endorsement of decentralisation prevailed. Here, the notion of balance was referred to time and again. Federalism, it was pointed out, could only bring about good governance if it found a middle path between self-determination and living together, fiscal autonomy and solidarity, respect for cultural identity and a commitment to a mutually agreed common good. A concept and vision of federalism emerged according to which a commitment to power sharing is at least as important if not more important than the - legitimate - quest for autonomy. This was also echoed in a reference to Romania where the first timid steps towards decentralisation beg the question of how to combine sufficient levels of local self-government with the need to organise and maintain a presence in central decision making. 5.2. Negotiated agreement Particular emphasis was placed upon the political process. Human rights in particular, it became clear, often cannot simply be defined in the abstract but require mutual respect and negotiated agreement among the various members of diverse societies. At the same time, however, they must be justiciable by a strong and independent court system - albeit a court system that is itself reflective of diversity. The principle of inclusion overrides all numerical formulae of federal representation. As was pointed out in the case of India, for example, the protection of small minorities might call for representative affirmative action such as the reservation of a certain number of parliamentary seats (at all levels of government) regardless of numerical strength. 5.3. Spirit of the federalist bargain The two most compelling comments heard at the two work sessions referred neither to improved institutional design nor to procedural efficiency. They appealed to the spirit rather than the letter of the federalist bargain. The first one occurred in the context of cultural accommodation among Italians and Germans under South Tyrolia's autonomy statute. The autonomous organisation of official bilingualism, it was declared with emphatic enthusiasm, not only resulted in understanding each other's language but also each other's mentality. Differences, in other words, must not just be tolerated, they must be understood and even appreciated. This is the spirit of living together.

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The second comment spoke of federalisation and decentralisation as processes that aim at creating a more complex system in order to simplify things. Nothing could capture the essence and spirit of federalism more accurately. The modern nation state has operated on exactly the opposite premise. At least for complex and diverse societies, it has enormously complicated things by creating a system of governance based on simple majority rule. Federalist governance is not meant to be easy. One could also describe the difference in this way: while decision making in a unitary state is comparatively simple, policy implementation may be intensely complicated in diverse or fragmented societies. Conversely, the process of decision making in federal systems is usually arduous and complicated, yet once a negotiated agreement has been reached among all constituent members of a federation, policy implementation may be simpler indeed. 5.4. Federalist versatility

The comparison with unitary statehood also leads to a further observation. The four cases under consideration in the work sessions were very different from one another. If the mandate of political accommodation in diverse societies is to be taken seriously, one might ask how one can possibly hope to find the solution in federalism and decentralisation for all. Is not the advocacy of one uniform system of governance substituted by another? Satisfactory answers to these questions are difficult, but this much can perhaps be said: the unitary model of modern statehood has itself existed more in theory than in practice. Variations between, say, the French, the British and the Scandinavian form of statehood, for example, have been and are significant. They have been shaped by differences in the composition, mentality and aspirations of different peoples, and by the compromises among different groups of people sharing the same nation-state boundaries. If the unitary state model allowed that much variability, it should be reasonable to assume that this variability is enhanced if not multiplied by federalism as a form of multilevel governance. The ultimate point of all discussion in this context was not to construct a firm vision of decentralised multilevel federalism and then to see how these different cases could be made to fit. Rather it was to attempt to understand these cases in their own right, and then to investigate whether the general principles of decentralised federal governance can be adapted accordingly. 6.

CONCLUDING OBSERVATION: GETTING IT RIGHT VERSUS GETTING ALONG

These two work sessions and their participants would be misrepresented by attributing to them an undue indulgence in relativism. The discussions were carried throughout by a firm commitment to basic human values and

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rights including the right to make meaningful individual choices within the context of one's own cultural identity, and the right to political participation. What was particularly impressive was that the search for possible solutions was less driven by the insistence on getting it right than by a spirit of getting along (Williams, 2001). This is what strikes this author as federalism at its best. REFERENCES

Dye, T.R., 1990. American Federalism: Competition among Governments. Lexington: Lexington Books. Follesdal, A., 1998. Survey Article: Subsidiarity. The Journal of Political Philosophy, 6 (2), 190-218. Hueglin, TO., 1999. Early Modern Concepts for a Late Modern World: Althusius on Community and Federalism. Waterloo: Wilfrid Laurier University Press. Kohler-Koch, B. and Eising, R., eds, 1999. The Transformation of Governance in the European Union. London: Routledge. Williams, M.S., 2001. Toleration, Canadian-Style: Reflections of a Yankee-Canadian. In: R. Beiner and W. Norman, eds. Canadian Political Philosophy. Don Mills: Oxford University Press, 216-2 31.

WORK SESSION P R O C E E D I N G S : REPORT

ASH NARAIN ROY

Communities - Civil Society and Conflict Management The Federal Experience in Sri Lanka, India and Nigeria: Unity in Diversity or Diversity as Unity? (Work Sessions 7 and 19) 1 .

INTRODUCTION

Peace is not the absence of war; it is the product of justice. Respect for plurality and accommodation of diverse demands create a sense of justice among the people as well as inspiring confidence in institutions. Federal states appear to provide better frameworks in which to articulate the aspirations of diverse religious, cultural and linguistic groups within a nation state. However, for a federal system to succeed, a climate of tolerance, compromise, and the recognition and respect for diversities is imperative. The experience of India suggests that a federal democratic structure has the wherewithal to withstand better the stresses and strains arising out of diverse and competing demands often bordering on secessionism. But federalism is not cast in stone. It grows differently on different soils. In fact, federalism was viewed initially by many as the precursor to the physical dismemberment of the nation state. In Sri Lanka it came to be identified as separatism itself or as a form of organisation which inevitably led to separatism. Hence Sri Lanka opted for a unitary constitution. The success of federalism also depends on civil society and the political culture. India seems to have managed its diversities well, while Sri Lanka has had difficulties in doing so primarily because of its unitary constitution. The Nigerian case is very different again: it did adopt a federal constitution, but political instability and the military rule undermined federalism and its principles. The country is still struggling to come to terms with its ethnic, religious and linguistic diversities. The main challenge that Sri Lanka has had to contend with since its independence in 1948 is how to reconcile its ethnic and cultural diversity

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with the concept of mature and cohesive nationhood. This problem is by no means confined to Sri Lanka. Nearly all South Asian states are wrestling with this central policy dilemma. South Asia is a mosaic of multiethnic, multilingual and multicultural societies. This diversity is manifested in different languages, religions and diverse cultural backgrounds. Ethnic, linguistic and cultural conflicts are largely absent in some countries, latent in others and prominent in some others. Ethnic conflict is a significant factor in Sri Lanka but not in India. The unitarianist ideal which dominated Sinhala politics did not allow any patch-up formula to succeed. In contrast, India, with greater and more complex diversities, opted for a federal solution. It achieved national unity not by military might, but through devolution of power and empowerment of smaller, minority groups. Today, both the Sinhalas and Tamils are exploring a lasting political solution founded on internal self-determination based on a federal structure within a united Sri Lanka. Sri Lanka's search for a federal option is a manifestation of its need to invest the state with legitimacy. Many societies are still devising a formula to accommodate linguistic demands, but India found it way back in the 19605. The critical challenge that all states in South Asia and elsewhere began to face from day one of their independent life was how to build a development model which would enable all segments of society to feel one, without inferiority or any element of exclusion from the decision-making process, and how to construct political and economic institutions which would preserve this diversity without compromising the unity and integrity of the country. 2.

PARADIGM SHIFT

Sri Lanka is one of the few examples of a post-conflict independent state making a success of its democracy. It has one of the longest democratic traditions in Asia. Regular free democratic elections and absence of a military coup give a high degree of legitimacy to its political system. At the same time, it has faced serious problems in managing separatist and ethnically inspired violence which has taken a toll of over 60,000 lives. Sri Lanka rejected a federal system of government and instead opted for a Unitarian system. The dominant view among the majority of the Sri Lankan community was that federalism would lead to disintegration of the country because of its small size. Smaller federal units, it was then argued, would not be geographically homogeneous, economically viable or environmentally sustainable. But Sri Lanka's unitary constitution became incompatible with its multiethnic society; it led to an absurd contradiction where a monoethnic state was imposed on a multiethnic polity. The demand made by the Tamils for regional autonomy was rejected out of hand. Even their language rights were undermined. In the 19505, while

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India sought to resolve linguistic demands by devising a three-language formula, ultimately recognising 18 languages as national, Sri Lanka introduced Sinhala as the national language, which restricted the access of the Tamil youths to the labour market. The political, economic and cultural claims of the minority groups were neglected. As one analyst rightly says, "what could have been solved with the help of a federal state structure failed because of ideological prejudices" (Wagner, 1997). In other words, decentralisation was given a short shrift and federalism became suspect. Sri Lanka has now reached a watershed. With the Liberation Tigers of Tamil Eelam (LTTE)'S clear articulation that it does not back a separate Tamil state, Sri Lanka seems well on road to a negotiated end to two decades of war. The LTTE'S stance marks a refreshing change from its earlier pursuit of violence for political ends. The Sri Lankan government's desire to seek a negotiated settlement is equally positive and encouraging. Work Session 7, entitled "Autonomy and Collective Rights", and the Work Session 19, "Religious and Linguistic Diversities", discussed, analysed and reflected on the various aspects of the Sri Lankan conflict and also on how India and Nigeria had tackled their amazing religious and linguistic diversities. No single model emerged, and it was maintained that what worked in India may not be replicable elsewhere. The participants discussed a whole gamut of issues which have a bearing on the Sri Lankan conflict, including ethnic, socio-economic and party dynamics, development, human rights, external actors etc. This report seeks to analyse the key points that emerged from the discussion. The participants felt that Sri Lanka has undertaken a course which, if it succeeds, will provide a useful reference point for other societies struggling to preserve their diversities and unity. But violence has a habit of acquiring its own autonomy and momentum. Tremendous and sustained efforts would be needed by all the sides to work for what is needed most: reconciliation, and reconstruction of the country while rebuilding trust. Two decades of violence and four decades of increasing ethnic polarisation have left deep wounds that require sensitive handling. While international players can help, solutions to ethnic violence can come only from within. A change of mindset within Sri Lankan society with regard to cooperative majority-minority relations would be the key. The more immediate task is to keep the peace process moving without loss of momentum. It could be derailed by hardliners that inevitably exist on both sides, and the vested interests that tend to perpetuate confrontation and violence. Sri Lanka has a highly articulate minority. Much of the ethnic violence in the country is confined to the northern and the eastern regions where Tamils constitute the majority of the population. But Tamils are also scattered over other parts of the country. Past experiments in power sharing failed because these half-hearted attempts sought to resolve the issue on

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the cheap. Now that a serious process of peace and reconciliation is underway and the LTTE has renounced armed struggle, it is necessary to work out extensive power sharing within the framework of one nation. The consensus emerged that the following parameters must be borne in mind. First, any power-sharing arrangement must empower the minorities. Adequate powers must be devolved to those regions where the minorities are concentrated. Secondly, there must be a power-sharing mechanism at the centre. Thirdly, there should be a clear demarcation of functions between the centre and the provinces. The power sharing at the centre must be accompanied by appropriate mechanisms to accomplish that goal. The following four factors are critical to the success of the peace process. First, there is need for clarity about the delineation of functions between the centre and the provinces. Second, for such an arrangement to be effective, the balance between the two is essential. The centre should retain powers with regard to defence, foreign policy and the national budget, and other powers should be devolved to the provinces. It is equally important to ensure that the provinces are given resources and the wherewithal to discharge these functions. Otherwise, the arrangement may appear to be near perfect in theory but will be unworkable in reality. Third, there is also need for pragmatism in working out such arrangements: haphazard devolution of powers must be avoided. Finally, regional structures must be buttressed by a degree of confidence. Political polarisation has been the bane of politics in South Asia. Sri Lanka particularly has suffered from this affliction. Disappearance of the middle ground and the unwillingness to compromise and to rule by consensus have exacerbated the problems. Sri Lanka has therefore done well to make provision in the constitutional arrangements for the regional governments to accommodate the parties in opposition in the decision making. It has departed from the principle of "winner takes all". While the effort to give the opposition a voice in making and implementing policies is laudable, the arrangement can yield the desired results only when there is a change in the political culture. What Sri Lanka needs is to focus on the vigour and vitality of civil society - a vigorous trade union, a vigilant press, political parties that are internally democratic, an Ombudsman, a human rights commission. Pluralism and diversity are the strengths, not the weaknesses, of a democratic polity. Whatever democratic structure one may create or recreate, it will be successful only when the ethos of a society is taken into account. 3.

THE INDIAN

MODEL

Federalism is the bedrock of India's democratic edifice. In a country of India's size and bewildering diversity, federalism has come to be identified with national identity and national aspirations. It is a key to the preser-

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vation of the multiplicity and also the peculiarity of a diverse society. India has developed a paradigm which many nascent democracies may find worth emulating. It has followed a principle of "unity in diversity". India exemplifies a society in which the celebration of diversity strengthens the bonds of the modern nation. India's diversities are not merely numerous, but also alive and assertive. This unity in diversity is based on democracy, federalism, tolerance, and the secular character of the state. The key to India's success as a federal democracy is the recognition of its diversities. Octavio Paz has rightly noted that: "The most remarkable aspect of India and the one that defines it, is neither political nor economic, but religious: the existence of Hinduism and Islam" (Paz, 2000, 37). Paz further says: "Are they two civilisations occupying a single territory, or are they two religions nurtured by a single civilisation? It is impossible to say" (Paz, 2000, 38). The success of Indian democracy and federalism is due to a paradox: India is both an old civilisation and a young nation. The reference to the millennium-old Indian civilisation is not just a nostalgic memory of past glory. It is the very foundation of the Indian mind. In this prestigious history, enriched by the long anti-colonial freedom struggle, Gandhi's moral leadership and ambitious post-independence years, lie the roots and the sap of present-day India. How the Indian political system was inaugurated apparently had something important to do with how it drew strength and sustenance from its ancient civilisations and its great philosophies. The evolution of India's identity over the centuries was based on the recognition of its linguistic, cultural, religious and socio-economic diversities. India moved ahead in stages. A relative success at each stage reinforced the need to sustain and review the vitality of the institution. The free press, fiercely independent judiciary, the strong civil society and its institutional depths, have given Indian democracy an edge over many countries in the region. As Bernard Levin, the eminent British columnist says, the single most important achievement of India has been "to keep the flame of democracy alight despite the darkness in the surrounding world" (Levin, 1993). India is a federation. But India is also a pluralistic society. But there is a difference between being pluralistic and being a federation. Even a unitary state can have a pluralistic society. Devolution, decentralisation of power and the guarantees of fundamental rights to all citizens alone can sustain a federation. The case statement makers and discussants all agreed that the reason India was considered a success lay in the institutionalisation of aspects of its federal polity and plural society. To reinforce religious, linguistic and cultural diversities, the Indian constitution laid down a framework of constitutional safeguards to protect citizens' fundamental rights, including the right to freedom of religion. This right is guaranteed under fundamental rights whereby Indians of all religious persuasions have the freedom to practise and propagate their religion. Preferential treatment to

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minorities is not a privilege but an entitlement flowing from the mandate of equality. The Indian constitution makers laid a solid base for Indian federalism. 4.

SECULARISM

India is host-to all conceivable religious faiths: Hindus, Muslims, Christians, Sikhs, Buddhists, Jains, Jews, Zoroastrians, four of which were born there, while the others were brought in by the successive political and cultural invasions, and assimilated by the people. It is this tradition of tolerance and assimilation which makes India a mosaic and not a melting pot. As they say, "India first beckons you, then it slowly seduces, assimilates and transforms you". Secularism suits the genius of a multi-religious, multicaste and multilingual country like India best. A democracy works best in an environment of pluralism, and respect for and tolerance towards others, where there is freedom to practice one's beliefs. The secular ethos, furrowed deep by Gandhi in the minds of Indians, nurtured a sense of tolerance that has kept Indian society together, and democratic. As Gandhi said, "I do not want my house to be walled in on all sides and my windows to be stuffed. I want the cultures of all lands to blow about my house as freely as possible. But I refuse to be blown off my feet by any".1 India's freedom movement provides insights into how the main pillars of the Indian constitution - democracy, secularism, social justice and fundamental rights - were forged over a period of time. The underlying message of the freedom struggle under Gandhi, was that no group was privileged even if it happened to be in huge majority, and that minority groups would be protected against majoritarian agendas. These principles were enshrined in the Indian constitution. India is secular because the people, its culture and national ethos are secular. Secularism is India's manifest destiny. This is not to say there are no conflicts between the majority and the minority groups. There are periodic outbursts of inter-religious violence, known commonly in India as "communal riots". In early 2002, Gujarat, a prosperous western state, passed though the worst Hindu-Muslim riots in decades. Hindu fundamentalists have sought to recast Indian politics in a dangerous "communal" mould. But the Indian state remains secular to the core, as do state institutions, the judiciary, the press and civil society. The most pertinent question in the fast-changing national and international contexts, is whether India can preserve its secular character amidst all the new threats, both internal and external. Few can claim that India has lived up to its commitment of the state's neutrality in all religious matters. Yet, in the face of great odds, most governments in India have sought to follow it in letter if not in spirit. The question of whether the secular ideal is viable or not in practice, as some social scientists wonder, is

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irrelevant in the case of a pluralist society like India's since there is no other way for it to maintain its cohesion. 5.

LINGUISTIC DIVERSITY

India's linguistic diversity is even more bewildering. As many as 1,652 languages and dialects are spoken. India has 18 officially recognised languages. Within a decade of India's independence in 1947, the language issue threatened to tear apart the national fabric. Linguistic movements in various parts of the country posed a serious threat to India's unity and integrity. However, the political leadership showed exemplary political wisdom and foresight by not only recognising all major languages as national languages, but also creating linguistic states. Many analysts in the West feared that the emotive language movements would lead to India's disintegration. But the results were just the opposite: they strengthened Indian nationhood. The socio-linguistic map of India was radically altered. India created political units that became coterminous with large linguistic identities. India has thus provided an exemplary model for resolving the language problem. There is a lot that the newly independent states can learn from the Indian experience. India certainly had the advantage of a well-functioning federal, democratic polity when the language issue threatened to snowball into a major challenge. But it also had the advantage of a strong civil society. 6.

CAN THE INDIAN EXAMPLE BE REPLICATED?

The biggest challenge to any society is the challenge of survival. India's unique nonchalance and a grand strategy of drift have produced a culture of sheer survival. India has learnt to live with uncertainty, chaos and decay. No wonder India, a land of "million mutinees" has been described as a "functioning anarchy". Great nations are the end product of political Darwinism. Neither the savage communal onslaught on secularism, nor the language movement, nor for that matter, the separatist movements in some of the peripheral states have brought India anywhere near fragmentation. It is a testimony to India's both democratic and civilisational resilience. Whereas nations are often torn asunder by internal contradictions, civilisations have sufficient resilience to overcome forbidding challenges. In this sense, India's success cannot be easily replicated. The role of society has been a crucial factor in India's success in managing its diversities. India became a society long before it became a state. Society in India evolved through accommodation and compromise. The party system in India is an extension of civil society. India has evolved from social coalition to political coalition.

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Federalism provides an institutional solution to intra-societal conflicts and tensions in pluralistic and multicultural societies. Federalism also accommodates multiple identities and loyalties within a state. Federalism has given a measure of strength and stability to the Indian polity. As Susanne Rudolph and Lloyd Rudolph maintain: Forty years ago, there seemed good reason to fear that Selig Harrison was right to warn that India's "fissiparous tendencies", particularly its linguistic differences, would soon lead to Balkanisation or dictatorship. Today such worries seem unpersuasive. The federal system has helped India to live peacefully with its marked difference. (Rudolph and Rudolph, 2002, 54)

India's survival rests, and will rest in decades to come, on plurality and not uniformity, on secularism and not majoritarianism, on heterodoxy and not orthodoxy. 7.

N I G E R I A ON TEST

Nigeria and India have many things in common. Both are multiethnic, multilingual, multi-religious and multicultural societies. The two also have common a colonial heritage. If India chose federal solutions to its complex problems, Nigeria adopted a federal constitution. And yet the two countries have had contrasting experiences in managing their diversities. Even though India encompasses a large number of ethnic groups and communities, it is difficult to identify any dominant ethnic group that has a large share in power. To a great extent the ethnic heterogeneity of the Indian institutions of power, alongside its multiple strategies of incorporation and accommodation, have helped the Indian state to deal with its multi-layered identities effectively. Despite being an archetypal plural society, the colonial government of Nigeria chose a unitary framework. While federalism was retained on paper, Nigeria under the military dispensation moved towards Unitarian rule. The way in which Nigeria inaugurated its federal institutions led to a lopsided development. The northern region of the country emerged as a larger player and the eastern and western regions began to nurse a feeling of exclusion and marginalization. Power-sharing arrangements failed to address the grievances of small entities and communities. In the end power sharing became a quest for hegemony. Even though the three main ethnic groups - the Hausa-Fulani, Yoruba and Igbo - prospered in the struggle for the share in the national cake, to the exclusion of other smaller ethnic groups who became minorities, the Hausa-Fulani group emerged as victor and the two other dominant groups themselves became marginalized. The federal power structure became an instrument in the hands of the Hausa-Fulani. The threeyear civil war in the late 19605 brought Nigeria to the brink of disintegration.

333 Part C Theme II - Work Session Proceedings

Nigeria is a very complex and diverse country comprising over 400 ethnic groups. The geographical divide along religious lines has added a disturbing element of tension and confrontation. Nigeria, with a population of 126 million people, has 36 states and 774 local governments. The three tiers of government and their specific powers have been well defined by the federal constitution. On paper, Nigerian federalism looks good. But in practice, it has a lot of structural vulnerabilities. While the three regions of the country were brought together under federal arrangement, no effort was made to integrate them through national institutions. The military not only intervened from time to time thereby undermining democracy, it also played footsie with the federal institutions. Religious and ethnic conflicts in Nigeria are also a result of elite manipulation. Mobilisation of religion and ethnicity for political gains has been a bane of Nigerian polity. Economic crisis and mass deprivation of the people are at the root of the gathering crisis. Long cycles of military rule have bred corruption. The civilian governments too have been tainted by corruption. Lack of transparency in government also contributed to the gradual loss of faith in federalism. There was also an external factor. Military dictators were propped up by outside forces during the long years of the Cold War. Nigeria's constitution is far from perfect. The present constitution was promulgated by the military government only days before the civilian government took over power. There is a widespread feeling that even though it has reverted substantially to the 1979 presidential constitution, it does not sufficiently address the problems of a multiethnic, multi-religious and multicultural country. One suggestion has been made that Nigeria should revert to the regional form of federal government, which is what the founding fathers negotiated with the colonial rulers at the time of independence, except that Nigeria should have six regions in place of the existing three. The suggested regions would correspond to the present six zones of the country, which have not been recognised in the constitution but are recognised practically in Nigerian politics. These regions should have their own regional constitutions which must reflect their diversities through administrative structure. In some regions a solution could be found by way of creating a federation within a federation, in others it could be based "on layers of federations, one federation enclosing another, and that enclosing yet another like an onion bulb" (Ekwueme, 1999). To some extent Nigeria's current problems emanate from presidential federalism, which accumulates rather than delegates powers. A parliamentary system of government is better suited for a federal country. It ensures accountability of the executive to the legislature. The power structure is more broken down. It plays a greater integrative role and its political base is far wider. Rotating presidency and other key power positions can go a long way towards stabilising the polity and creating a sense of belonging among the stake-holders.

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There is a lot that Nigeria can learn from Indian experience. Like India, Nigeria must ensure subordination of the military to civilian authority. In Nigeria the army is subservient to constitutional authority only on paper. In India the army is often called in to restore order when the state police and other forces fail to contain a given situation; but it functions under a democratically elected government. Nigeria would also require steps to facilitate greater democratisation. 8.

CONCLUSION

Federalism today is experiencing a renaissance. There was a time when newly independent states viewed federalism as the precursor to the disintegration of the nation state. Even multicultural states preferred a highly centralised federal framework, and stressed unity and integrity of the nation state. The post-Cold War era and the present age of globalisation, which has witnessed a plethora of ethnically inspired conflicts leading to die emergence of dozens of new states and the disintegration of others, have given a new lease of life to federalism. Today the federal formula seems to be the most viable one to hold together nation states with disparate ethnic, religious and cultural groups. Many unitary states are introducing elements of federalism. It is being viewed as an attractive option. The Sri Lankan case is most instructive. Here is a country which has always been a unitary state. Having failed to resolve the Tamil question it is now contemplating a change in its unitary structure to admit a degree of power sharing. India is a success story. India's success lies in the evolving and dynamic nature of federalism. India has sought new multilevel arrangements and new modes of adaptation to the pressures and demands created by democratic development in order to make its federal system more responsive. The way India has handled linguistic demands exemplifies a successful model for other multilingual societies to follow. India's experience with local self-government and the de facto recognition of local bodies at district, block and village levels as the third tier of governance can be equally relevant for other multicultural societies. Given the manifold dimensions of India's pluralistic society, the federal principle has been the only viable basis for the maintenance of a strong and united Indian state. Nigeria is still struggling to preserve its federal character. The successive military rulers have sought to weaken the country's federal structures. For a major part of its independent existence, Nigeria has oscillated between the retention of a broad federal structure and the near abandonment of its guiding principles. In Nigeria the institutional links between the elite and the masses are weak. This has led to a highly personalised and often despotic rule. Federalism does not provide a panacea for all the ills of a multiethnic, multi-religious and multicultural society. But it does offer greater capacity

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for solving problems. There is no single model to follow. Federalism 's success in one state may not be replicable in another. Its success depends on how a given state copes with the group rights and cultural rights of its diverse people, and how it creates a feeling of security among them. India has made a success of its federal polity largely because of its impressive democratic record, the role of the civil society, its institutional strengths and its vibrant political culture. On the other hand, Sri Lanka's unitary state failed to accommodate the aspirations of the minority groups despite its good democratic record. Minority rights and minority cultures should not only be safeguarded but should also be preserved by the state. Democracy is not merely a game of numbers. The majority must learn to rule by consensus. Group rights must be protected through constitution. The minority groups must also get fair representation in government institutions. All said, respect for diversity is the cornerstone of a democratic polity and society. Unity in diversity is slowly giving way to diversity as unity. Federalism is a big idea whose time has come. NOTE i Quoted in Copps, 1998. REFERENCES

Azam, KJ., ed., 1998. Federalism and Good Governance: Issues across Cultures. New Delhi: South Asian Publishers. Babawale, T. and Bash, O., eds, 2000. Devolution of Powers in a Federal State. Lagos: Friedrich Ebert Foundation. Copps, S., 1998. On the Cultural Ramparts: Celine Dion for Canada. International Herald Tribune, 17 November 1998. Ekwueme, A.I., 1999. Nigeria's Federal Constitutions and the Search for "Unity in Diversity ". Paper presented at the Citizens and Social Diversity Theme Plenary Session at the International Conference on Federalism, Mont-Tremblant, 6 October

!999-

Glickman, H., ed., 1995. Ethnic Conflict and Democratization in Africa. Atlanta GA: African Studies Association Press. Kymlicka, W., 1995. Multicultural Citizenship. Oxford: Oxford University Press. Levin, B., 1993. The Paradoxes of Democracy. K.C. Mammen Mappillai Memorial Lecture. New Delhi, 10 November 1993. Madan, T.N., 1993. Whither Indian Secularism? Modern Asian Studies, 27(3) (July). Manor,J., 1999. The Political Economy of Democratic Decentralization. Washington, D.C.: World Bank Institute. Mitra, S.K. and Rothermund, D., 1997. Legitimacy and Conflict in South Asia. New Delhi: Manohar. Nnoli, O., 1980. Ethnic Politics in Nigeria. Enugu: Fourth Dimension Publishers.

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Osaghae, E., 1994. Ethnicity and its Management in Africa: The Democratization Link. Lagos: Malthouse Press Limited. Paz, O., 2000. In Light of India. New Delhi: Harper Collins. Phadnis, U., 1989. Ethnicity and Nation-building in South Asia. New Delhi: Sage Publications. Ranjan, N., 2002. Democracy and the Limits of Minority Rights. New Delhi: Sage Publications. Ratnapala, S., 1999. Federalism as a Response to Ethnic Regionalism. In: I. Copland andj. Rickard, eds. Federalism: Comparative Perspectives from India and Australia. New Delhi: Manohar, 113-136. Rudolph, S.H. and Rudolph, L.I., 2002. New Dimensions of Indian Democracy. Journal of Democracy, 13 January 2002, 52-66. Rupesinghe, K., ed., 1998. Negotiating Peace in Sri Lanka: Efforts, Failures and Lessons. Colombo: International Alert. Saxena, R., ed., 2002. Mapping Canadian Federalism For India. New Delhi: Konark Publishers Private Ltd. Seth, D.L., 1995. The Great Language Debate: Politics of Metropolitan Versus Vernacular India. In: U. Baxi and B. Parekh, eds. Crisis and Change in Contemporary India. New Delhi: Sage Publications, 187-215. Stavenhagen, R., 1996. Ethnic Conflicts and the Nation-State. New York: St Martin's Press. Tambiah, S.J., 1996. Leveling Crowds: Ethnonationalist Conflicts and Collective Violence in South Asia. New Delhi: Vistar Publications. Vijapur, A.P. et. al., 1997. Pluralism, Minorities, National Integration: Problems and Prospects. New Delhi: South Asia Publishers. Wagner, C., 1997. Sri Lanka: Crisis in Legitimacy. In: S. Mitra and D. Rothermund. Legitimacy and Conflict in South Asia. New Delhi: Manohar. Watts, R.L., 1999. Comparing Federal Systems. Montreal: McGill-Queen's University Press.

WORK S E S S I O N P R O C E E D I N G S : REPORT

DAUDA

ABUBAKAR

International and Regional Action with regard to Conflicts in Multicultural Societies (Work Sessions 8 and 20)

1 .

INTRODUCTION

The post-Cold War international system has been characterised by a resurgence of ethnic, religious, and identity-based conflicts that not only threaten the nation-state system, but also exacerbate regional instability, leading to humanitarian tragedies. Collapsed states such as Yugoslavia and Somalia clearly represent instances of failed states in which autocratic rule, deprivation and exclusion of minorities by privileged groups led to outbreaks of political violence. The subsequent displacement of large segments of the population presented major challenges to the international community. These challenges included, first, the problem of ensuring safe delivery of humanitarian relief to the affected populace. Second, the mobilisation of international support and devising the conceptual/juridical framework for intervention to restore peace, and third, the formation of an interim civilian administrative machinery that could pave the way for a transition to a stable democratic order based on social justice, the rule of law, equity, transparency and accountability. This chapter briefly synthesises the discussions on international and regional action with regard to conflict in multicultural societies held in Work Sessions 8 and 20 during the International Conference on Federalism 2002. The specific cases examined in the two sessions included Bosnia and Herzegovina, Kosovo, Somalia and East Timor. Although these cases taken collectively illustrate instances of state collapse and international intervention under regional peacekeeping initiatives or multilateral efforts under the auspices of the United Nations (UN), closer examination of the crises reveals specific peculiarities in terms of ethno-religious

338 Dauda Abubakar

pluralism, the relevance or otherwise of regional actors and the level of success in the restoration of peace and political stability. 2.

INTERNATIONAL AND REGIONAL ACTION IN THE BALKANS

The crises in Bosnia and Herzegovina and Kosovo erupted not only because of the disintegration of the Yugoslavian Republic but also because of perceived deprivation and marginalization by the various ethnic nationalities. Kosovar Albanians, for instance, were not only denied basic human rights by the Milosevic regime, but were constrained from exercising the right to self-determination (Caplan, 1998). In Bosnia and Herzegovina, internal violence and conflict arose as part of the generalised collapse of the Yugoslavian state. In both instances, there arose humanitarian tragedies that demanded international intervention to restore security, peace and stability. Peace initiatives by the European Union (EU) in the early 19905, the Dayton Peace Accord of 1995, and subsequent deployment of UN peacekeeping troops restored stability in the Balkans. Participants at Work Session 8, which covered the crises in the Balkans, made several key observations. Where humanitarian tragedies erupt as a result of state collapse, international intervention under the framework of the UN or regional initiatives is relevant for the restoration of peace, security and stability. The legitimacy of international intervention should be spelt out clearly in the mandate from the outset in order to avoid unnecessary confusion in the course of implementation. The UN should always be the forum for the legitimation of international intervention. It is imperative for the international community to establish an "Early Warning System" to avert humanitarian catastrophes. However, where such tragedies have erupted and peace is restored through collective intervention, it is also necessary to ensure that a "transitional administration" is put in place (see Kelly and McCormack, Part C). Institution building is imperative for the process of social and political reconstruction in the post-conflict phase. In the process of peace building, international action should ensure that the local community is not alienated, but rather actively involved, so that there is a collective sense of transparency, accountability and ownership. As part of the process of peace building and reconciliation, international action needs to ensure that rule of law prevails. Thus, the establishment of an International Criminal Court is imperative as part of a holistic approach to international intervention in crisis areas. The veto power in the Security Council, which privileges the five permanent members in the decision-making process, should be reviewed as

339 Part C Theme II - Work Session Proceedings

part of a comprehensive reform of the UN system. Democratising the UN system along the lines of majority rule would enhance the legitimacy of the world body and strengthen its capacity for international intervention and the restoration of peace and security. 3. SOMALIA: THE LIMITS OF INTERNATIONAL INTERVENTION IN C O L L A P S E D STATES If international intervention in the Balkans led to the cessation of warfare and the subsequent restoration of peace and stability, Somalia presents another side of international action, especially when the mandate of the multinational peacekeeping force is not well defined, and excessive military force is deployed to pursue political ends. Somalia, a country with a population of approximately 9.2 million people is a plural society with diverse ethnic groups, and social identity that is built from diverse competing clans. In its search for foreign economic and military aid during the Cold War, Somalia was a client of both the former Soviet Union and later the United States. The influx of external financial resources not only provided the economic basis for the privatisation of state power, but also the context for patronage, corruption and internal struggles over access to wealth and power (Simons, 1996). With the cessation of the Cold War and the subsequent overthrow of the Siad Barre regime in 1991, Somalia, like Yugoslavia, became another victim of the end of the Cold War. The fall of Barre's autocracy meant an open political space for the warlords, and access to all kinds of light armaments used in the volatile Horn of Africa. As violence over the control of power erupted among warlords and their clans, a humanitarian tragedy developed which provided justification for military intervention under the auspices of the UN. The United States was a key actor, contributing a large part of the intervention force in "Operation Restore Hope". However, confusion in the implementation of the peacekeeping mandate, coupled with excessive use of force by American troops to disarm clan warlords such as Farah Aideed culminated in the failure of international action in Somalia. Other factors that contributed to the failure of the UN peacekeeping initiative in Somalia included: Lack of neutrality or impartiality of the intervening force; Lack of centralised coordination amongst the 37,000 troops drawn from 30 different countries; Over-dependence of the UN intervening force on the United States, which had its own national interests and agenda in the Horn of Africa, with Somalia being a strategic springboard; Warlords on the ground simultaneously pursuing their selfish group and clan interests, making the situation more complex, violent and destructive;

34° Dauda Abubakar

Endless supplies of lethal armaments in local markets, within easy reach of the different factions, exacerbating the disintegration of the state and its institutions; Failure to observe international laws and respect for human rights: instead of protecting and defending the civilian populace from protracted factional conflict, the intervention force in Somalia engaged in violation of human rights, thereby eroding the legitimacy of the whole mission; Failure to engage and carry on board local civil society groups and the citizenry in the peacekeeping and peace-building process leading to distrust and disenchantment on the part of the populace; Increasing absence of transparency, accountability, participation and ownership in the process, de-legitimating the international intervention force in Somalia. The Somalia experience suggests that there are important lessons to be learned from international intervention in multicultural societies, especially where the state and its basic institutions of authority have completely collapsed. These lessons include: • The objective (s) of an intervention force should always be clearly stated and defined in its mandate to avoid confusion in the process of implementation; • There is need for the UN to ensure the transparency, neutrality and objectivity of the intervention force in terms of its composition, mission statement and deployment; " The means must be proportional to the end: 37,000 troops from 30 different countries was certainly too large for Somalia; • International intervention forces should endeavour to gain the support of the local civilian population not directly involved in the conflict. 4. EAST TIMOR: IMPERATIVES OF INTERNATIONAL INVOLVEMENT Although Somalia presents a case of total failure in international humanitarian intervention, East Timor demonstrates that the processes of rapid social change in plural societies and the attendant conflicts which they unleash in multicultural societies, make international intervention in crisis areas very necessary. The role of the UN Transitional Administration in East Timor (UNTAET) as well as the International Force in East Timor (INTERFET) contributed greatly to the restoration of peace, security and stability in the country. Although cases of human rights abuse were also reported along with marginalization of the citizenry in the peace-building process, the UN involvement in East Timor suggests that the international community should endeavour to strengthen the institutional and adminis-

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trative frameworks of international peacekeeping missions. It is necessary, for example, to introduce a mechanism for monitoring and evaluating standards - human rights compliance, rule of law etc. - in peacekeeping missions. Some form of Ombudsman should be introduced to enhance accountability, equity and justice. 5.

CONCLUSION

The cases presented on the crises in the Balkans, Somalia and East Timor all suggest that federalism as a mechanism for decentralisation and power sharing is relevant to conflict resolution in multicultural societies. While international intervention under the auspices of the UN could help in the restoration of peace and security where humanitarian tragedies occur, implementation of federal principles could avert the tragedies in the first place. REFERENCES

Caplan, R., 1998. International Diplomacy and the Crisis in Kosovo. International Affairs, 74 (4), 745-761. Simons, A., 1996. Somalia: A Regional Security Dilemma. In: E.J. Keller and D. Rothchild, eds. Africa in the New International Order: Rethinking State Sovereignty and Regional Security. Boulder, Col: Lynne Rienner.

DIALOGUE TABLE PROCEEDINGS:

SUMMARY ADDRESS

NAFIS SAD IK

Federalism, Decentralisation and Conflict Management in Multicultural Societies (Dialogue Tables 2 and 5)

1 .

INTRODUCTION

Some of you will be wondering what I am doing here, since obviously you are all experts on federalism and I am not. But I have good credentials - after 30 years in development work, I have a great deal of experience in telling experts what they should be doing. Or maybe I was invited because I am a woman and therefore have some experience of being treated like an oppressed minority. I certainly have some experience in addressing such problems. So perhaps I am in the right place after all. Let me briefly summarise some of the important points from Theme II, Federalism, Decentralisation and Conflict Management in Multicultural Societies. I would note that whereas the other two themes are fairly clearly defined, Theme II is very broad and covers a great deal of territory, much of it full of pitfalls and uncharted minefields. So please forgive me if I have left out your favourite topic or failed to reflect the full depth and complexity of the discussion. From what we have read and heard in the sessions we might conclude that even in ideal conditions, successful federalism is like the flight of the bumble-bee: it is technically impossible, but somehow it works. For example, we have heard the following. Federalism is complicated to arrange, difficult to manage, and cumbersome in operation. Federalism has to be constitution-based, but there is no constitutional model to follow - each society must work out its own version of federalism according to its own unique past history and current conditions, starting

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from its first principles. Essential pre-requisites for success include a favourable political environment, respect for the rule of law, acceptance of the principles of democracy, time, tolerance of differences, willingness to experiment, and enough money to make expensive mistakes. Federalism celebrates variety and creates unity out of diversity. But even the most successful countries have not found the panacea. I heard on the radio yesterday that a local bank here in Switzerland is so worried about non-communication across language lines that they are offering an incentive to people who open accounts: the incentive is courses in English, in London. No wonder Napoleon said he couldn't govern Switzerland. We heard from Justice Scalia that in the United States there are still serious disagreements about state and federal powers (See Scalia, Part E), although maybe they don't threaten the Union: most of them seem to have something to do with fruit. We heard from someone else that Americans invented federalism - but the first confederacy had nothing to do with Thomas Jefferson. It was the Six Nations of the Iroquois, Native Americans: and to survive they had to emigrate to Canada. So what has federalism to offer nations in or emerging from conflict, and how can a federal or decentralised approach help avoid or resolve potential conflicts? In effect, we have to consider the alternative. In principle, as Daniel Thiirer said on the first day (see Thiirer, Part A), federalism offers a greater capacity for solving problems than its centralist counterpart. That sounds like a modest claim, but in situations of tension and actual conflict, it may mean, and has meant in the recent past, the difference between a viable and a non-viable state, and the difference between life and death for many of its citizens. Federal solutions can protect human and group rights, create the space for peaceful coexistence, stabilise economies and promote development. 2.

A R E S P O N S E TO C R I S I S , PREVENTING CRISIS

We have been discussing for the last three days some specific instances in which federalism or decentralisation might help to resolve, repair and prevent conflicts. We have reached no general conclusions, except to say that all situations are specific to current pressures and historical background, and that each state must develop its own unique and pragmatic approach, if necessary with the disinterested help of the international community and trans-national institutions. The result will be a great variety of systems with some common characteristics, a galaxy of brighter and lesser stars of different types. Today's global galaxy has some clusters or maybe circles of stars; it has a few black

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Nafis Sadik

holes, and one red-white-and-blue giant. Maybe it is less a system than a spectrum, which has highly centralised states with some limited local powers at one end, and confederations and associations of sovereign states at the other. Somewhere on the outer edge lies the United Nations (UN). 3.

INTERNATIONAL

INTERVENTION

AND CONFLICT RESOLUTION

Since the end of the Cold War the UN has been drawn into an increasing number of crises of different kinds, some of which we discussed. The first point is that the UN was not set up and still is not properly equipped for such action, whether military, political or humanitarian. I won't go into detail on the shortcomings of the international response and the reasons for them. But it is clear that discussants want the UN to have a stronger capability for decisive intervention, a legal framework for action, some clear and enforceable rules for engagement, a recognised system for its operations with effective oversight mechanisms, a professional staff trained in the various skills, and a reliable source of funding. Some of us would like a reformed and veto-proof Security Council which could make majority decisions on interventions. Some would like to give the Secretary General power to act with the minimum of consultation rather than evolve a painstaking international consensus on intervention. As opposed to the present situation where the Secretary General has a huge responsibility but little power, this would give awesome powers to one person. I wonder who (s)he might be? The UN is made up of sovereign nations. But today, every nation's sovereignty is dented and diluted to some extent by supra- and international requirements, from the free flow of investment resources to the accumulation of butter mountains. De facto if not dejure, this amounts to a growing international federalism. If states use this opportunity to build the necessary international institutions and secure the necessary flows of resources and technologies, the hand-wringing in some quarters over loss of national sovereignty may turn to bell-ringing to celebrate economic and social improvements. In that sense the poorer countries of the world may be seen as the disadvantaged groups in the world community. We can already see the usefulness of international norms in helping to arbitrate or avoid internal conflicts. The various treaties now amount to a framework protecting group as well as individual rights, and references to them can be found in a number of national constitutions. In his address, the President of Belgium (see Verhofstadt, Part E) mentioned world federalism, and we might see the UN as the very shadowy outline of some kind of global federal institution (though if we pursue that line of thought, the UN might have to find a new site for its headquarters).

345 Part C Theme II - Dialogue Table Proceedings 4.

SECURITY AND DEVELOPMENT

Given the communal roots of contemporary conflicts, it is clear that only federal arrangements can offer the affected populations the security they need before they can resume anything like normal life. There is also burgeoning interest in the federal idea as an approach to longer-term stability and development, attacking the roots of conflict, heading off crisis before it starts. All situations and therefore all solutions are individual, but we can see the outlines of some helpful ways to arrive at an approach. • Ethnic minorities, indigenous peoples and other interest groups often find themselves left out of the division of the national pie. Poverty, inequality, injustice, oppression and deprivation are powerful causes of conflict. Federal arrangements, we have heard, can address these disadvantages, by addressing common concerns at federal level, speaking to and for the needs and interests of minorities, and setting up separate administrative units with a greater or lesser degree of autonomy, and by introducing social solidarity or equalisation to support the poorer ones. As long as there is a perception of fairness, states can arrive at different arrangements to suit different interest groups. • There was some discussion of the risks of devolution. Subdivision into small and powerless units - I nearly said balkanisation - is a betrayal of the federal idea. We were warned to beware of fragmentation, though at least one brave soul felt that secession should be an option for all who wanted it. What that would do for UN membership, not to mention real estate values in New York, I can't begin to think. " More seriously, a willingness on the part of central government to allow states and interest groups to explore the possibilities of devolution can prevent this point being reached. I think we agreed that federalism can respond to needs and strengthen the broader polity in all cases, except those where majorities feel themselves unequivocally threatened by the expression or satisfaction of minority interests, or minorities are determined to collapse the national structure. • Some situations are too loaded even to allow using the term federalism. In these cases, another term such as partnership can be employed: the terms are less important than the outcomes. We had some discussion of the place of terms and concepts, or what were called "notions" in resolving and preventing conflicts, as opposed to addressing practicalities. It may be true that theoretical constructs may appear too abstract and other-worldly, and that what is needed is pragmatic approaches to everyday, real-world problems. Yet, as a practical matter, people find it hard to relate to a solution that is only about housekeeping, and that lacks a vision of what the house itself should look like.

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In the end federalism is about identity. Every individual or group enjoys more than one identity. Insofar as the identities overlap, they form what Radmila Nakarada, in her paper (see Nakarada, Part C), calls a network. The effect of a successful federal approach is to tie the different identities together, so they reinforce rather than conflict with each other. This can extend even to the sense of nationality - "one nation with several nationalities" as one discussant put it. The identities can be geographical or communal, ideological or religious. As the Chancellor of Austria said yesterday (see Schiissel, Part E), federalism can create unity out of diversity. The political and fiscal effects of devolution or decentralisation are complex and much discussed. The principle should be that no protection conferred at the national level should be diminished at the local level, as with gender rights, and that accountability should be no less at the local than at the national level. Democratic elections can help prevent what Richard Crook has termed "elite capture" (see Crook, Part C), otherwise known as cronyism, the old-boy network or patronage politics. There is a series of practical issues here, from traditional patterns of power sharing and resource distribution to the sheer expense of maintaining various levels of elected government. There can also be disadvantages to democratic elections, for example when everything down to civil service clerkships and market licenses is subject to party political affiliation. Attempts to avoid these pitfalls by appointing local governments can raise their own problems, such as over-mighty local officials armed with the power of the purse and responsible to no one but the central executive. Again, societies will need to find their own solutions. Civil society clearly has a role in protecting and promoting identity, but exactly what that role should be was the subject of much discussion. In the first place, what is civil society and who does it represent? Do indigenous peoples lack civil society or do they not need it? Do indigenous institutions, such as traditional assemblies and kinship groups, constitute civil society? What should be the response if civil society groups such as religious fundamentalists threaten stability? If by civil society we mean non-governmental institutions responding to and guiding social and economic change, they should grow naturally out of a culture. If it does not exist, can it be successfully introduced, and if so, how? Micro-credit organisations were mentioned as one very successful example of civil society, because they address questions such as gender equality and empowerment of the poorest segments of society. International nongovernmental organisations (NGOS) came in for some criticism as alien surrogates for the international community, but it is not clear that such criticism is always justified. NCOS often become lightning rods for local dissatisfactions that have much deeper roots. I had a hard time getting gender issues discussed in the context of conflict prevention or resolution, and I am very grateful for those who did

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bring them up, notably in Work Session 18. One participant pointed out that each indigenous society should adapt in its own way to international norms on gender equality. She stated that she herself was glad not to be married at 15, and was grateful to have had the opportunity to found and run her own business. Others in that session noted that the oppression and exploitation of women were not confined to indigenous populations, and that change in autonomous regions can spur change elsewhere. Women are not of course a minority, but the fact is that they are often treated as if they were. I would like to promote some discussion of federalism as it applies to gender - after all, the federal idea can go beyond geographical or ethnic groups. Finally, one participant hit the nail on the head when he said that eventually federalism is not about the engineering of government, but about the architecture, and the principles of harmony, proportion and balance. I am not an expert, but I am a convert to federalism. On the basis of my experience here and the way it applies to the work I have been dong all my life, I see that a federal approach can liberate people and serve their needs, protect their security and promote their development. It is as Amartya Sen's book tide has it Development as Freedom. I am very grateful to have had this experience and I thank you for listening to me. I look forward to the next phase of the discussion.

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PART D

T H E M E III

Assignment of Responsibilities and Fiscal Federalism

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SCIENTIFIC B A C K G R O U N D : THEME PAPER

RICHARD BIRD, BERNARD DAFFLON, CLA UDE JEAN REN A UD AND GEBHARD KIRCHGASSNER

Assignment of Responsibilities and Fiscal Federalism

1.

INTRODUCTION

Over the past 30 years, a clear trend has emerged worldwide towards the decentralisation of spending and revenue-raising responsibilities to subnational levels of government (states, regions, provinces, cantons, Lander) and to the third tier (the local, communal, municipal level). For TerMinassian (1997, 3), "this trend is evident not only in federal, but also in many unitary countries, including some that have a long tradition of centralist government". Political developments in post-communist Central and Eastern Europe (the countries in transition and the Balkans), together with recent discussions in the European Union (EU), and new trends in Latin America, Asia and Africa, show that this tendency does indeed exist worldwide. Decentralisation requires us to rethink the role and responsibilities of the various government layers in relation to the traditional policy objectives of allocation, distribution and stabilisation. Fiscal federalism can no longer be accepted solely as an "economically efficient" means of providing and financing public services. Decentralisation can more effectively promote democratic and participatory forms of government, seeking to improve the responsiveness and accountability of politicians and bureaucrats, and to ensure closer correspondence of the basket of publicly provided goods and services with the preferences of beneficiaries and taxpayers in the various sub-central jurisdictions. Carried out efficiently, fiscal federalism or fiscal decentralisation can provide an alternative to the market as a way of promoting the coincidence between the three circles of budgetary policy: those who decide, those who benefit, and those who pay.

352 Bird / Dafflon / Jeanrenaud / Kirchgassner

The argument that decentralisation of spending responsibilities and revenue sources promotes efficiency and welfare has a long history in economic literature. But for the purposes of this discussion, we can start with what may be called the TOM model of fiscal federalism, after the first modern authors (Tiebout, 1961; Gates, 1968; and Musgrave, 1961) who built the existing theoretical parts into a consistent and coherent framework. The canonical view is that decentralisation has definite advantages in the allocation branch, but can entail significant costs in terms of re-distributive policy and macroeconomic management. The theory is based on four key assumptions: local public goods, the territorial variant of benefit taxation, mobility, and no spillovers. The main analytical task of fiscal federalism has been to define the appropriate assignment of allocative responsibilities to decentralised government levels and matching revenue sources. Initially, distribution and stabilisation were considered essentially "central" responsibilities (Gates, 1999, 1121). Much of the established theoretical literature of fiscal federalism has been based on issues that arose within developed countries in a quest for efficiency. Thus, consideration of economic decentralisation alternatives is littered with normative problems and propositions: The best assignment of responsibilities (but who assigns?); The tier most capable of performing this or that function, often paying too little attention to the distinction between decentralisation, devolution and de-concentration (Bird, 2001, 3); The highest capability of managing the production function; How to gain economies of scale and internalise benefits, and the costs of such provision; The right level of government at which taxes should rest; Why there should be fiscal competition but no tax competition; Why and how fiscal disparities should be corrected. The value judgments from which such prescriptions derive may be clearly articulated. But this commonly amounts to the allocative and distributive propositions associated exclusively with economics, perhaps embellished by minor additions that recognise certain distinctive local characteristics of federalism. The objectives and relationships of federal countries are much more complex than this. They cannot be confined within a framework that treats general resource allocation and income distribution questions as the only, or even the predominant, policy problems. Evidence for this interpretation is to be found both in the general suspicion of economists' prescriptions among policy makers, and in the otherwise surprising lack of communion between economists' writings on federalism and that of other specialists, such as political scientists, constitutionalists and politicians. The funda-

353

Part D Theme III — Scientific Background

mental criticism is that for many years, students in the theory of federal public finance, with a few exceptions (Wiseman, 1989 and 1990; Wildasin, 1997), have treated economic objectives as separate from the political and constitutional aspects of federation. Policy-oriented research has clearly demonstrated that the tendency in public policy discussion to distinguish between economic objectives on the one hand, and political and constitutional objectives on the other, was inappropriate. When the constitutional and regional aspects of federalism are considered, there are certain constraints on federal public policies. These cannot conveniently be waived either by assuming a "centralist" federal structure, or by postulating that federal constitutions may easily be adapted to fit in with the policy norms derived from economic arguments. The theory cannot neglect the fact that the constitutional (formal) reservation of power to sub-national levels of government places the conflict of policy ends versus means in the centre of the picture. And this alone adds a dimension to the study of fiscal policy that is perhaps more significant here than in other policy environments. Real world fiscal arrangements rarely follow the idealised model; they are loaded with historical developments and political ad hoc solutions. It would be very difficult to change them in a significant way following the canon of fiscal federalism, especially when they are specified in the countries' constitutions. It is simply not realistic to start from tabula rasa. In any case, are economic fundamentals the only adequate logic of good governance? What about the significance - and the policy consequence - of a top-down versus a bottom-up political procedure for the assignment of functions and revenues at (de)centralised levels? It is clear that while the theory is a powerful tool for understanding the key issues, it does not lead to solutions for specific situations. On the other hand, comparative studies of specific issues in various countries contain a wealth of information on the great variety of national experiences, which help to reformulate the conceptual or theoretical underpinnings. According to Ebel and Yilmaz (2001, 2): Developing Countries are turning to decentralization to escape from the traps of ineffective and inefficient governance, macroeconomic instability, and inadequate economic growth ... Throughout post-communist Central and Eastern Europe, decentralization of the state is the direct result of the transition from socialist system to market economy and democracy ... In Latin America, the origin ... is the political pressure from the people for democratization ... In Africa, decentralization has served as a path to national unity ...

This diversity of causes and reasons creates a challenge to understand, appreciate and compare fiscal federalism and decentralisation across different countries, and to present a general framework helpful for understanding the issues and policy design for adequate solutions in the various

354 Bird / Dafflon / Jeanrenaud / Kirchgassner

national situations. With three main themes, the present conference is a tentative multidisciplinary answer to this challenge. 2.

A GENERAL FRAMEWORK

This paper is organised in the following way: this section presents in general the major policy-relevant topics in inter-governmental fiscal relations, while in the following section we develop four major issues, selected as subthemes for this part of the conference owing to their importance and actuality. First let us consider fiscal federalism and decentralisation in general. What have been the most frequently debated issues during the last decade, on which both theoreticians and practitioners should concentrate their analytical efforts, and for which a common applicable positive theory is needed? As a possible gateway to this question, the following table summarises several recent publications on inter-governmental fiscal relations. The authors or institutions that produced these texts (mentioned in the top line), are all involved in practical policy design, policy making or training programs at the forefront of decentralisation. In the first vertical column of the table, 19 major topics are enumerated, all of which are mentioned or analysed in detail in the given sources. In counterpoint, we have introduced in the last column the issues that were initially proposed for the preparation of the sessions on fiscal federalism. One can readily see in the table that some topics, like those numbered 5 to 8, are present in each selected source. From this frequency, one could infer that they are essential to the understanding of fiscal federalism and decentralisation. Others like the concept of decentralisation (i), budgeting (10), borrowing and debt (i i), score four or five times, thus giving a good image of actual problems. Some topics have been left out of the debate: these are numbers 4, 7, 11, 12, 15, 16 and 19 in the table. This is not because they are less relevant or important, but because a selection had to be made for reasons of time and space. We now turn to the four subthemes. The first is about political decision structures in fiscal federalism. It concerns two major and highly relevant issues. One pertains not only to topics 5 and 6 but also to topics 10, 13 and 18 in the matrix below. The question that must be asked is: how can federal fiscal structures be augmented with political decision rules in order to get an optimal political and economic outcome of public budgetary processes? The geographical area covered by many locally provided (public) goods and services seldom coincides with the borders of the jurisdictions. Therefore, new forms of federal structure are necessary, which do not make the old ones obsolete, but supplement them. If these problems are solved, the second issue is how the actual budgetary process is to be organised. Concrete budgetary institutions can have a major effect on the fiscal outcome of the jurisdictions. But what is at stake here is really how budgetary procedures can respect democracy and promote accountability.

355 Part D

Theme III - Scientific Background

Table i Major topics in inter-governmental fiscal relations Major topics

1

Concepts of fiscal decentralisation

2 3 4 5

Political mechanism necessary to make fiscal decentralisation work Constitutional and legal framework Macroeconomic perspective Expenditure assignment

6 7

Revenue assignment Local revenues/taxes

8 9 10 11 12

Inter-governmental grants, equalisation Financing infrastructure Budgeting Borrowing and debt Poverty alleviation

13 14

Accountability and transparency Measures of decentralisation Measures of fiscal disparities Tax administration Metropolitan areas

15 16 17 18 19

Fiscal competition Functional federalism: drawing new boundaries, alternative institutional structure Minimum service level, guaranteed access to local public goods

WBI

TM

BIRD

X X X X X X X X

COE

LH3

X X

X

X X

X

X

X X X X X X

UI

X

X X

X X X

X X X

X X

X

X

X

X X

X X

X X X

X

X X

X

X

X X X

X X

X X

X X

X X X

X X

X X

X

SoMre«: WBI: World Bank Institute, 2001; Ter-Minassian, T., ed., 1997; Bird, R.M., 1999; Conway, F. etal., 2000; Council of Europe, 1998; Dafflon, B.,Jeanrenaud, C. and Kirchgassner, G., (2001). Assignment of Responsibilities and Fiscal Federalism. Preparatory mimeo for the Internauonal Conference on Federalism 2002, St Gallen.

The second subtheme is concerned with equalisation (topic 8) and fiscal disparities (topic 14). Fiscal equalisation refers to attempts within a federal system of government to reduce fiscal disparities among jurisdictions. Because sub-national jurisdictions do not have the same revenueraising capacities to meet comparable needs, some sort of inter-jurisdictional financial compensation may be needed, and indeed justified, not only on equity but also on allocative grounds. In addition, since a balance between the assignment of responsibilities and the assignment of revenue sources at decentralised level is not guaranteed over time, fiscal equalisation is becoming increasingly relevant, and a much-debated political issue.

356 Bird / Dafflon / Jeanrenaud / Kirchgassner Fiscal competition (topic 17) is analysed in the third subtheme. In developed federations, competition between jurisdictions at the same level is usually valued as beneficial for the provision of public services, because it gives choice to potential residents. But it is not necessarily beneficial for tax, and the issue is hotly debated at the moment in the EU (1997) and in many countries belonging to the Organisation for Economic Cooperation and Development (OECD) (1998). The last subtheme relates to fiscal decentralisation in transition economies and developing countries. It is transversal to topics i, 2 and 3. What is the meaning of the terms: decentralisation, de-concentration, delegation, and devolution? How do we proceed from the existing political and economic organisational structures? These questions, which are at the core of fiscal federalism, are set out in the specific context of transition economies and developing countries. This is a particular challenge, since in these countries, the search for new forms of fiscal arrangement is keen, not only for efficiency reasons, but also to break away from collective ownership and control in transition economies and from colonialism and ethnic strife in developing countries. 3.

SELECTED SUBTHEMES

3.1. Fiscal Federalism and Political Decision Structures 3.1.1. Assignment of functions and revenue sources. The main question for any federal structure is which task should be assigned to which governmental level, and how it should be financed. Following the distinction of Musgrave (1959), the government has to perform three main tasks: changing the allocation by providing public goods and correcting the external effects of private economic behaviour; redistributing income in order to equalise income distribution which is the result of market forces; and stabilising the economic process in order to reduce business cycle fluctuations. The solution usually proposed is that redistribution and stabilisation should be performed at a national level whereas, according to the "correspondence principle" stated by Gates (1972), the provision of public goods should be performed at the lowest governmental level. This allows an approximate correspondence between those who benefit from their provision, those who have to pay, and those who decide on the amount provided. While the correspondence principle is generally accepted and can also be applied to the relation between national and supra-national governmental levels (e.g. to account for the existence of international public goods), the Swiss example shows that, under certain conditions, redistribution can also be successfully performed at the state (cantonal) level. Although today it is questioned whether any government should really try to stabilise business cycle fluctuations at all.

357 Part D Theme III - Scientific Background

Most traditional discussion takes only the three usual governmental levels into account: federal, state and local government. On the other hand, the geographical area covered by many locally provided (public) goods and services does not always coincide with the borders of the jurisdictions, and this violates the correspondence principle. New forms of federal structure may be necessary, which supplement existing ones. However, even in well-functioning democracies such new elements of the federal structure often have a "democratic deficit", because the existing (direct-democratic and/or representative) political structures do not fit with them. A second issue is which revenue sources should be assigned to which federal level. Principally, there are two different kinds of federal structure to handle this problem: the "Swiss-type" (or "us-type") and the "Germantype". In the Swiss-type, there is a certain separation between revenue and expenditure of the different federal levels, and each level has its own revenue source. This gives the different political units at state and local levels considerable leeway in designing their tasks and fulfilling their responsibilities. Moreover, it allows a reflection of the preferences of citizens in the different regions of a country. As a result, there is fiscal competition on the tax and revenue side of the public budget. However, this can result in significant disparities between regions, and in some instances demand a well-developed system of fiscal equalisation. By contrast, the German-type takes all major revenue sources together, and different governmental levels receive (fixed) shares of total revenue, distributed at state and local levels according to certain criteria. The leeway of sub-federal units to collect taxes is strictly limited; there is expenditure competition but hardly any tax competition between these units. This makes it difficult for them to follow the correspondence principle, because their revenues are more or less fixed. On the other hand, disparities between the regions are, ceteris paribus, smaller, and there is less demand for an extensive system of fiscal equalisation. In reality of course, all federal systems are located somewhere between these two extremes. But as the Swiss and German examples show, there can be considerable variation between different countries. In a Swiss-type system with tax competition especially, there is the additional question of which taxes should be assigned to which government levels. Following the arguments presented above, the traditional solution is that progressive income taxes should be assigned to the federal level because they are the main tax instruments used for income redistribution. Thus, indirect and/ or property taxes could be assigned to lower levels. The United States tax system is - more or less - designed in this way: for example, sales taxes differ between states, and property taxes between local jurisdictions. On the other hand, it has been argued that progressive taxes, with their built-in tax increase because of inflation and/or economic growth, should instead be assigned to levels where citizens have more ability to control the politicians, i.e. at

358 Bird / Dafflon / Jeanrenaud / Kirchgassner

lower governmental levels, whereas proportional (indirect) taxes might be assigned to the higher levels. This is the Swiss solution, where the value added tax (VAT) is a federal tax, whereas personal and corporate taxes (as well as property taxes) are mainly at the disposal of cantons and local communities. As the two examples below show, both solutions are possible. Many problems arise in federal states because sub-national governments are commonly assigned revenue sources that are inadequate to finance the expenditures for which they are responsible. Traditionally, central governments have claimed as their own most of the major revenue sources, notably income, payroll, and sales taxes, leaving little room for sub-national governments to levy their own taxes on these bases and hence rendering them dependent on federal transfers. According to conventional criteria, the only revenues clearly suitable for local and state governments are those they can administer efficiently, and which fall primarily on their own residents. Sub-national governments should not, for example, be allowed to impose taxes that are shifted to other jurisdictions, and it is normally assumed that they are not appropriate jurisdictions to apply progressive taxes. User charges and taxes on land and real estate generally seem to qualify under these criteria; income taxes and VATS do not. Retail sales taxes and excise taxes, such as those on motor vehicles and fuel, in many circumstances may also be appropriate sources of revenue at least for regional (state) governments, which are likely to be able to administer them more efficiently. Taxes on payrolls and labour income may also in some cases be effectively applied by larger sub-national governments, but taxes on capital and business income, other taxes on business, and multistage sales taxes such as the VAT, are clearly unsuitable at any but the national level, both for administrative and policy reasons. Though popular, subnational business taxes are generally highly distorting and undesirable. However, the prospect for sub-national revenues sketched above is too limited. Experience in a number of countries shows that personal income taxes and even VAT can be employed successfully as regional revenue sources. The critical element to ensure efficiency and equity is that the subnational government is politically responsible for imposing its own rate, even though the most efficient way to administer it is usually as a surcharge on a central tax. 3.1.2. The budgetary process. No matter how the assignment problem is solved, another problem remains: that of how the actual budgetary process is organised. One of the major questions is to what extent, and at which governmental level, direct popular rights should be granted in this

359 Part D Theme III - Scientific Background

process. Both Switzerland and the United States have broad experience regarding this question, because in both countries at state (cantonal) and local levels, the form and extent of such rights varies considerably. The available empirical evidence shows that in most situations, ceteris paribus, such rights tend to result in lower public expenditure and revenue, as well as in lower public debt. Moreover, greater participation of the citizens in sub-federal fiscal decisions can reduce the tendency to a "race to the bottom" at these levels, and therefore allow for some income redistribution at state and local levels. On the other hand, decentralised fiscal decisions may make it difficult if not impossible to meet national fiscal objectives, for example the Maastricht criteria. Thus, it has to be asked how federal fiscal structures can be augmented with political decision rules in order to get an optimal political and economic outcome from public budgetary processes. The budgetary process itself also has to be taken into account. Budgetary rules, such as a strong position for the head of the financial department in the state or local government, transparency rules providing the citizens with reliable information about both sides of the public budget, or rules creating close connections between public expenditure and revenue, can induce fiscal discipline which might also result in lower public expenditure and/or revenue, as well as lower public debt. Thus, specific budgetary institutions can have a major effect on the fiscal outcome of the jurisdictions. Moreover, transparency of the budgetary process not only allows the citizens to control their (state or local) government more effectively, but also gives them the opportunity to compare the results of different jurisdictions at the same level. Thus it is possible to learn more easily from each other, and in this way improve the budgetary process as well as its outcome. 3.2. Problems of Equalisation in Federal Systems

Inter-governmental transfers form a large and sometimes predominant portion of lower-level government expenditure. The design of the transfer system therefore plays a key role in federal financial systems. The assignment of tax and expenditure between the centre and sub-national levels is often not coordinated, and lower-level governments have revenues that do not match their needs. This can be explained by the fact that the most appropriate level of government for taxation (the federal government) and the optimum level for applying the policies (sub-national governments) are not the same. This gives rise to a vertical financial imbalance: the federal government has fiscal income available that exceeds its needs as defined by its expenditure assignment, while the local governments find themselves in the reverse situation. Inter-governmental transfers can compensate for vertical fiscal imbalance. Transfers are a means of allowing the centre to

360 Bird / Dafflon / Jeanrenaud / Kirchgassner

carry out federal policy using lower-level governments. Often, the federal government does not have an administrative structure that permits it to implement its policy on its own, or the local governments are able to do so more efficiently. 3.2. i. Objectives of the transfer system. Inter-governmental transfers target four principal objectives. • Correcting vertical fiscal imbalance: transfers are used to fill the gap between revenue-raising capacity and needs. • Implementing federal public policy through local governments: transfers make it possible to achieve the same result as, for instance, a minimum standard imposed by regulations, while leaving local governments more freedom in the choice of instruments. • Compensating for jurisdictional spillovers: local government units providing services to people living in other jurisdictions (and thus not carrying the fiscal burden) must receive adequate compensation. The rationale for transfer is both equity and allocative efficiency. • Reducing horizontal fiscal imbalance and harmonising tax burdens: transfers mean bringing in additional resources to government units with a lower fiscal capacity or too heavy a revenue effort. In addition to the above-mentioned objectives (main objectives) the transfer system must be organised so as to avoid, to the greatest possible extent, undesirable side effects such as loss of autonomy for government units, incitement to inefficiency, reduced accountability, and high monitoring costs. 5.2.2. Types of grant. The design of the specific instruments used, and of the overall transfer system, should match the problems to be solved. There exists a large variety of instruments, each with its own effect on the behaviour of the recipient. The taxonomy of transfers is based on a limited number of criteria. First, there is the question of whether the amount received can be used freely (general or unconditional grant) or must be spent for a specific purpose (selective grant). Moreover, the transfer can represent a fixed proportion of the expenditure (matching grant) or bear no relation to it (non-matching grant). The aid received can be reserved for a limited area (narrow-based selective grant), or can be used to finance expenditure in a large area (comprehensive block grant). In addition to types of aid where the amount is based on a formula, there is also aid based on projects where the grantor decides to provide resources, or not, depending on its interests in the project. The

361 Part D Theme III - Scientific Background Figure i Traditional transfers categories:Traditional transfers categories:

Transfers

General (unconditional)

Selective (earmarked)

Matching

Non-matching

Related or not related to the recipient's financial capacity

theory of fiscal federalism provides a certain number of recommendations that make it possible to select the type of instrument best adapted to each objective. 5.2.3. Choosing the appropriate grant design. Several criteria must be considered when selecting the appropriate type of grant: allocative efficiency, cost efficiency, accountability, autonomy of sub-national government units, and equity. Allocative efficiency: transfers reduce the perceived cost of services in subnational jurisdictions, thus distorting local spending priorities. Consequently, transfers lead the recipient to offer services that do not correspond to local preferences, or that lead to a loss of well-being. The value of the service for the population is then less than what should have been spent in order to produce it. A selective transfer linked to expenditure (a selective matching grant) is the one that produces the greatest inducement effect, and thus also creates the most distortion in local priorities. Cost efficiency: firstly, the reduced tax price of services favours lower efficiency and higher costs. In fact, incitement to put pressure on costs is reduced when expenditure is largely covered by federal government funds. The federal government would then benefit most from cost reduction. From this point of view, grants based on products (output-oriented transfers) offer an advantage compared with grants based on inputs (inputoriented transfers). Accountability: for lower-level governments to feel accountable towards their electors, it is important that the greater part of resources necessary in

362 Bird / Dafflon / Jeanrenaud / Kirchgassner order to supply a service are levied in the region where the service is delivered. In other words, government units responsible for service provision should also be responsible for levying taxes. However, transfers distort this principle. Autonomy of lower-level governments: the more restricted the area covered by the transfer, the higher the rate of aid becomes - it becomes politically difficult to do without it - and the more the autonomy of lower-level governments is reduced. From this point of view, general (or unconditional) grants are the most appropriate. Transfers covering a broad field (comprehensive block grants) also contribute towards preserving the decision-making power of lower-level governments. Equity: matching grants benefit rich government units that can afford to finance these requirements. This is also true when rates are not in line with the jurisdiction's resources. A poor government cannot afford to spend money, even if a higher proportion of the costs are covered by the centre. Unconditional grants or revenue-sharing arrangements thus constitute the appropriate means of achieving horizontal equity. 3.2.4. Transfers in developing and transition economies. In developing countries and transition economies, setting up a transfer system raises particular problems. Sub-national governments, which often lack the capacity to mobilise revenues, depend on transfers for a large proportion of their financial needs. The negative consequences of transfers (reducing accountability and efficiency) are then even more apparent. In the absence of a formula, the attribution of the amounts often results in a political bargaining process. Without a well-designed transfer system that follows economic objectives, successful decentralisation cannot be achieved. 3.2.5. In search of an improved grant design. Bearing in mind past experiences, it is possible to propose a variety of improvements in grant design in order to limit undesirable side effects. Rewarding results obtained: grants should be linked to output (a lumpsum amount for each service unit) instead of representing a fixed percentage of expenditure. Rewarding cost-cutting efforts: the profit from a cost reduction should return to the government where it originated. This condition is fulfilled with transfers based on outputs. If input-oriented transfers are used, the transfer formula should take into account a specified percentage of standard costs (and not a percentage of expenditure). In both cases, the above-mentioned condition is fulfilled. Limiting loss of local autonomy: comprehensive block grants offer the recipient the possibility of bearing local preferences in mind when allocating

363 Part D Theme III - Scientific Background

funds within the area covered by the grant. A bargaining process between the grantor and the recipient regarding policy objectives, program planning, and the selection of performance indicators can preserve local autonomy. No detailed regulations: it is necessary to avoid a link between obtaining resources and following specific rules. Grants must remain an incentivebased instrument, and detailed implementation rules change their nature. Regulations mean that grants become a form of compensation for accepting uniformity, and diminish the opportunities for expressing local preferences or innovation. Contracting: a federal task may be delegated to a lower-level government by means of a contract. Preservation of local autonomy depends on the way in which this contract is negotiated (whether or not the objectives are discussed, and whether or not program planning is included). Efficiency is greater if the central government can choose the entity that will provide the service through a competitive process (tender to potential public and private suppliers). 3.2.6. Regional disparities. In older federations, differences between the constituent members, in terms of size, geography, population and economic potential may be so great that without equalisation measures, fiscal federalism would result in regional disparities which would be unacceptable. Local and regional governments differ greatly in their ability to raise local/ regional (tax) revenue to meet the expenditure demands placed upon them. Yet at the same time, virtually all federal countries recognise diversity to some extent in the way they establish and run their (inter-governmental) fiscal systems. Pressure on the expenditure side of public budgets can not only be different from one electorate to another, but may also necessitate differentiation to attain both economic efficiency (e.g. to attain some minimum standard in service delivery) and political stability (e.g. among regions with different languages or traditions). Of course, these disparities (or differences) have their own costs in the traditional triumvirate of expenditure assignment, distribution of tax sovereignty, and transfer payments. The resulting problem is really one of balance: how much differentiation is acceptable; are local/regional disparities (and the consequent costs) the result of local choice or the consequence of exogenous circumstances; what, if any, should be the design and level of equalisation? For new democracies and economies in transition, these questions are difficult to answer, not only from a technical point of view, but also politically. What could or should be solidarity when one has not much above a mere decent level of resources? The European Charter of Local SelfGovernment, for example (Council of Europe, 1998), gives only general guidance. It states that (i) local governments should have full discretion

364 Bird / Dafflon / Jeanrenaud / Kirchgassner over the execution of their responsibilities, (ii) resources available to local governments should match their responsibilities and be sufficient to enable them to keep pace with changes in the costs of their functions, and (iii) financially weaker local governments should be protected by equalisation procedures that do not diminish local government discretion. Fiscal equalisation here refers to attempts within a federal or significantly decentralised system of government, to reduce fiscal disparities among sub-national jurisdictions by using explicit transfer of monetary resources. 3.2.7. The concept of equalisation: is it a good idea ? The fundamental question that precedes equalisation is: should a reassignment of functions and responsibilities and/or of revenue sources be considered before any attempt is made to equalise? This question presupposes that, even with a balanced initial position in the assignment of functions and resources, the eventual evolution of the two sides of the decentralised public budget will not be concomitant. There are three possible answers: leave it, reassign or compensate. Admittedly, equalisation follows negative answers to the first and second. But if reassignment is partially achievable, would equalisation in one form or another still be necessary? In this context, there is an array of related questions. Is there any correlation between the importance of expenditure decentralisation and the need for equalisation? Is expenditure/cost/need equalisation a frequent or a sound policy? Is there any evidence that revenue equalisation is easier or more effective than need equalisation? Turning to the contributors to equalisation, why should the centre or rich regions be willing to support poorer ones? Efficiency and equity arguments are generally put on the table when fiscal equalisation stricto sensu (vertical or horizontal) is considered. But jurisdictions that are potential contributors may prefer targeted regional policy - especially if paid exclusively by the centre (e.g. in Switzerland: assistance to mountain areas with the aim of strengthening structurally weak regions). Regions with large urban areas, which would be potential contributors, often argue that despite higher financial capacity, their public sector also has greater needs due to their role as labour market and production centre (workplaces need more or specific public infrastructure; jobless people tend to concentrate in cities). It is also argued that implicit equalisation (e.g. the effects resulting from a progressive national income tax, or unemployment benefits) should be measured before any step towards explicit equalisation is organised. Or inversely for poorer jurisdictions, adverse effects in the form of the regional impact of direct central expenditures or investments which allegedly benefit already richer jurisdictions should be measured and first compensated. These questions inevitably raise other difficult questions, such as the equalisation target, and the classic "who decides what?" Two objectives are generally considered, (i) Relative and partial equalisation, which sets out nationwide minimum standards for the provision of public services and a

365 Part D Theme III - Scientific Background nationwide admissible difference in fiscal burden (e.g. ± 10% of the national average), (ii) Minimal equalisation, when there are no constitutional provisions and no claims from the regions (local governments) that equalisation measures should compensate entirely for the difference between the regions (local jurisdictions) in order to obtain identical economic or fiscal conditions. The pragmatic objective would be to render regional (local) disparities politically acceptable so that the remaining differences do not endanger the cohesion of the nation. The additional crucial question is whether the decision for (i) or (ii) belongs to the centre alone, or is a joint decision of the both the centre and the regions, rich and poor. The same question can be duplicated at the regional-local level and need not be answered the same way. 3.2.8. Financial capacity of sub-level government. Measuring the fiscal disparities between regions or local governments, or setting out a benchmark indicator of their fiscal capacities is another crucial problem. Measurement is not easily separable from the objective, and the indicator components often directly influence the calculation of the equalisation entitlements. Other features of the equalisation formula could be a ceiling or a floor, the marginal rate of compensation and the tax-back (the automatic decline in equalisation entitlement that results when a region's measured revenueraising capacity increases). 5.3. Fiscal Competition The third subtheme examines fiscal competition between governments. It has often been attacked as wasteful and distorting. It has been said to result in such undesirable outcomes as "tax jungles" which impose high compliance costs on taxpayers, or "fiscal wars" or "races to the bottom" as competing jurisdictions lower their tax rates (and spending) in an effort to retain their tax bases. On the other hand, fiscal competition has also been said to be beneficial, providing both a useful check on the propensity of governments to expand, and a stimulus to use scarce fiscal resources more efficiently. While there is still much to be learned about inter-governmental competition, what we know so far does not lend strong support to either position in this debate. Neither the theoretical nor the empirical literature concludes that fiscal competition is inevitably harmful or beneficial (Wilson, 1999). The outcome, it seems, depends upon a variety of factors that need to be carefully specified in each setting in which the question is considered. To the extent, for example, that taxes finance cost-reducing public infrastructure, they do not distort private decisions. Most taxes are not "benefit taxes" in this sense, however, and hence may produce "spillovers" that reduce government accountability and may result in distortions and

366 Bird / Dafflon / Jeanrenaud / Kirchgassner

hence reductions in economic well-being. When, for example, governments impose taxes that are borne to some extent by non-residents, the economic cost of taxation is lower than it should be, and the result is likely to be excessive government spending. In effect, non-residents end up paying for services to residents. On the other hand, if taxes result in some taxbase shifting to other jurisdictions, the perceived economic cost of taxation will be higher and there may be too little spending. Evidence in the United States (Wasylenko, 1996), Canada (Mintz and Smart, 2001), Switzerland (Feld and Kirchgassner, 2000), and Germany (Buttner, 1999) shows that fiscal competition between sub-national jurisdictions exists and may be important. Fiscal differentials appear to be more important within nations than between nations, and to affect location choices most within smaller areas. In general, the greater the number of governmental units the shorter the "economic distance" between them, and the greater their autonomy with respect to business-related taxes the more intense fiscal competition is likely to be (Grewal and Mathews, 1977). Even if fiscal competition among regions to some extent exerts a desirable constraint on public sector expansion, it may at the same time exacerbate regional inequalities, and in some circumstances affect the sustainability of the public sector in general, as has happened on occasion in Brazil and Argentina (Webb, Perry and Dillinger, 2001). Moreover, there may be competition not only between jurisdictions at the same level (horizontal competition) but also between governments at different levels (vertical competition), when different levels of government tax the same base, or if taxes at one level are deductible or creditable at another. The nature and effect of both horizontal and vertical fiscal competition may also be affected by the structure of inter-governmental fiscal transfers. In Canada, for example, the equalisation system tends to reduce horizontal spillovers and fiscal competition, but at the same time has probably resulted in provincial governments being larger than would otherwise have been the case. Theory and experience both suggest that the key to productive fiscal competition, whether vertical or horizontal, is to make the relevant decision makers at all levels fully accountable for their decisions. In the end, the ultimate mechanism driving "good" competition between governments is on one hand the ability of citizens to compare governments in terms of the services they provide and the taxes they levy, and on the other their ability to affect and alter the decisions of those governments (Bird, 2000). Both information and democracy are therefore necessary at all levels of government, though they are not necessarily sufficient to ensure that governments will operate both efficiently and effectively in the interests of their citizens.

367 Part D Theme III - Scientific Background 3.4. Fiscal Decentralisation in Transition Economies and Developing Countries

3.4.1. General background. There is little difference between the expected outcome of decentralisation in transition economies, developing countries, and the industrialised world. Transferring expenditure and responsibility for taxation to sub-national government units theoretically improves efficiency in service delivery, allows better mobilisation of resources, and makes governments more accountable for and responsive to the needs of the population. One key question is how to adapt the decentralisation process to existing organisational and economic structures. In transition economies, the problem is to set up a new system of intergovernmental finance. In developing countries, the aim is to improve performance in public service delivery and to promote macroeconomic stability. However, the question of whether the benefits of fiscal decentralisation exceed its costs is less obvious in transition economies and developing countries, because the basic conditions for successful empowerment of local governments are rarely met. Local governments in developing countries often lack the institutional and technical capacity to manage resources efficiently; they have limited capacity to raise revenues, and frequently no capacity to borrow. They are also less accountable to citizens than sub-central government units in the industrialised world. In transition economies, setting up well-designed inter-governmental fiscal relations is a key factor for a successful economic transition. The choice of the most appropriate arrangements for sharing fiscal responsibilities between the different levels of government (de-concentration, delegation or devolution) is also less clear-cut. This choice also depends on the weight attached to the objectives of the central government (correcting macroeconomic imbalance, improving welfare for the national population) and the local governments (cost-effective service production, more efficient allocation, improved responsiveness). The process of fiscal decentralisation in formerly planned economies started in 1990 in Poland and Hungary, and a year later in Romania, Bulgaria and the Russian Federation. Now, about 40 countries are undergoing a transition from central planning to a decentralised government system and a market economy. Eastern European countries and the republics of the former Soviet Union and former Yugoslavia form the majority of these. Before the reforms began, most of the resources of the sub-national governments came from transfers from the central government. Usually these transfers were the result of bargaining, and so were not based on clearly defined allocation rules. The downward shift of responsibilities, without sufficient resources being provided to local governments

368 Bird / Dafflon / Jeanrenaud / Kirchgassner through revenue assignment or increased transfers, has resulted, in some countries, in vertical imbalance and excessive borrowing at subnational level. A primary source of concern arising from expenditure decentralisation in developing countries is that local governments may lack the institutional capacity to assume their new functions. However, this should not be an absolute barrier to decentralisation, and there are several ways to improve administrative and technical capacity at the lower level. These include reforming recruitment policy (competitive hiring), pooling the services of professionals, sharing equipment, or outsourcing services to private providers. Technical knowledge can also be borrowed from higher-level governments. Moreover, decentralisation can be adapted or organised according to the capacity of each sub-national government to provide public services (asymmetric decentralisation). Central governments often have a paternalistic approach regarding their fiscal relations with sub-national government units, which is not compatible with accountability and the efficient use of resources. At the end of the year, local governments receive deficit grants to balance their budget (soft budget) or can expect a bailout if they accumulate too much debt. However, enforcing a hard budget constraint is a first precondition for accountability and the efficient use of resources. To achieve this objective, it is also necessary to enable and induce sub-national governments to cover a significant part of their expenditures dirough taxes or user charges. A further question is whether, and to what extent, sub-national governments should be allowed to borrow. If the budget must be balanced every year, how should inter-generational equity be achieved, since many investments in infrastructure are made by local governments? 5.4.2. Main issues in the decentralisation process in transition economies and developing countries. Following the failure of central governments to fulfil their tasks in a satisfactory manner and also because of pressure resulting from globalisation, a large number of developing countries - about 70 according to Shah (1998) - have opted for greater decentralisation. Governments decide to shift some tasks down when they think that sub-national governments or some other type of organisation can achieve their goals more effectively. When the decentralisation process is initiated from the top, an approach that has been adopted in most developing countries, the rationale of shifting down responsibilities is to achieve the goals of the central government more efficiently (Bird and Vaillancourt, 1998). The weakest forms of decentralisation - de-concentration or eventually delegation are generally adopted. What are the pre-requisites for successful decentralisation? One obstacle to the transfer of expenditure and tax responsibilities to sub-central governments seems to be the lack of administrative capacity at the local level. The first question is thus how to build

369 Part D Theme III - Scientific Background

decentralised governments' capacity to deliver public services and mobilise the local tax bases. Which functions should be shifted down? Is asymmetric assignment based on population size and/or fiscal capacity a strategy that can be recommended? Can de-concentration (or delegation) be seen as a first stage in the process of building a devolved system? How should fiscal discipline be enforced? Finally, is it possible to identify a pattern of success or failure? Regarding revenue assignment in transition economies and developing countries, the first task is to assign sufficient resources to governments in order to make them accountable. The reduction of the sub-national governments' dependence on revenue from enterprises and other assets (housing, retail units) is another important problem. The decentralisation of public services and markets should take place in a coherent manner, whereby privatisation is the ultimate form of decentralisation. The involvement of local governments in purely private activities may hamper the market decentralisation process. Another question to consider is whether the inter-governmental transfer system should be redesigned (from a bargaining mechanism to a formula-based system). The aim of vertical transfer is not only to correct vertical and horizontal imbalance, but also to make subnational governments accountable and promote the efficient use of resources. In transition economies, sub-national governments often have unlimited access to borrowing and are used to soft budgets. Hard budget constraints must be implemented (no deficit grants, no expected bailout), and borrowing at the local level must be controlled (e.g. passive control through guidelines, direct control of new state borrowing by central government or control of capital spending) in order to avoid macroeconomic mismanagement. Finally, it is necessary to consider how local governments will be permitted access to capital markets (by direct borrowing, borrowing though the central government, or borrowing through a public financial institution). When decentralisation is a bottom-up process (Bird and Vaillancourt, 1998), the economic rationale of shifting down responsibilities is to allow citizens to express their preferences and receive public services according to their needs. Decentralisation, here in the sense of devolution, also improves accountability, responsiveness, and microeconomic efficiency. However, while improving allocative efficiency, decentralisation may be a threat to macroeconomic stability. We must consider how sub-national borrowing should be controlled and what the appropriate mechanisms might be (e.g. equalisation programs) to compensate for horizontal fiscal imbalance. With the reduction in barriers to exchanges and the movement to integrate markets on a major regional or world scale, the mobility of goods and above all of capital, both human and physical, has increased. The effect of market integration on the decentralisation process is a matter on which economists have been unable to agree. There are sound arguments

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for concluding that globalisation and regional economic integration are factors that facilitate decentralisation by reducing the economic cost of smallness (Alesina and Spolare, 1997). The trend towards decentralisation, observed in developing countries and transition economies, can be interpreted as a by-product of increased market integration at a global and regional level. In a borderless world, local governments may be in a better position than the central one to compete for direct international investments through tax incentives or the provision of better services to business (Shah, 1997). Political and fiscal decentralisation allows countries to make more credible commitments to international investors. There is also evidence showing that economic integration exerts new pressures on fiscal centralisation. In a borderless economy, as a result of regional specialisation, different regions within a country face unequal risks of being adversely affected by an economic shock of some kind. Regions more at risk would move in favour of a strong central government. In fact, building larger fiscal units may be seen as a way of sharing the risk on a broader base (Garrett and Rodden, 2000). It is also possible that fiscal policy will become more important even if the business cycle is symmetric, which will mean more responsibilities for the centre. REFERENCES

Alesina, A. and Spolare, E., 1997. On the Number and Size of Nations. Quarterly Journal of Economics, 112(4), 1027-1056. Bird, R.M., 1999. Fiscal Federalism. In: J. Cordes, R. Ebel andj. Gravelle, eds. The Encyclopedia of Taxation and Tax Policy. Washington: The Urban Institute Press, 127-130. Bird, R.M., 2000. Fiscal Decentralization and Competitive Governments. In: G. Galeotti, P. Salmon, and R. Wintrobe, eds. Competition and Structure: The Political Economy of Collective Decisions. Cambridge: Cambridge University Press, 129-149. Bird, R.M., 2001. Rationales and Forms of Decentralization. In: R. Bird and T. Stauffer, eds. Intergovernmental Fiscal Relations in Fragmented Societies. Basel and Fribourg: Helbing & Lichtenham, Publications of the Institute of Federalism, Series Etudes et Colloques 33, 1-13. Bird, R.M. and Staufer, T., eds, 2001. Intergovernmental Fiscal Relations in Fragmented Societies. Basel and Fribourg: Helbing & Lichtenham, Publications of the Institute of Federalism, Series Etudes et Colloques 33. Bird, R. and Vaillancourt, F., eds, 1998. Fiscal Decentralization in Developing Countries. New York and London: Cambridge University Press. Buchanan, J.M., 1950. Federalism and Fiscal Equity. American Economic Review, 40,

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Buttner, T., 1999. Determinants of Tax Rates in Local Capital Income Taxation: A Theoretical Model and Evidence from Germany. CEsifo Working Paper No. 194, September

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Conway, F. et al., 2000. Intergovernmental Fiscal Relations in Eastern Europe, a Sourcebook for Policy Analysts and Trainers. Washington: The Urban Institute Press. Council of Europe, 1998. European Charter of Local Self-Government (1985) and Explanatory Report. Strasbourg: Council of Europe Publishing. Dafflon, B., ed., 2002. Local Public Finance in Europe: Balancing the Budget and Controlling Debt, Studies in Fiscal Federalism and State-Local Finance. Cheltenham: Edward Elgar. Ebel, R.D. and Yilmaz, S., 2001. Concept of Fiscal Decentralization and Worldwide Overview. Room document, International Symposium Quebec Commission on Fiscal Imbalance, Quebec, 13-14 September 2001, mimeo. European Commission, 1997. Toward Tax Co-ordination in the European Union: A Package to Tackle Harmful Tax Competition. COM (97) 495 final. Feld, L. and Kirchgassner, G., 2000. Income Tax Competition at the State and Local Level in Switzerland. CEsifo Working Paper No. 238, January 2000. Garrett, G. and Rodden,J., 2000. Globalization and Decentralization. Paper prepared for delivery at the 2000 Annual Meeting of the American Political Science Association, Washington, B.C., 31 August- 3 September 2000. Grewal, B.S. and Mathews, R.L., 1977. Intergovernmental Tax Competition and Coordination. In: R.L. Mathews, ed. State and Local Taxation. Canberra: Australian National University Press, 83-93. Mintz,J. and Smart, M., 2001. Income Shifting, Investment, and Tax Competition: Theory and Evidence from Provincial Taxation in Canada. Paper presented at the Conference on World Tax Competition, Institute of Fiscal Studies, London, May 2001. Musgrave, R., 1959. The Theory of Public Finance. New York: McGraw Hill. Musgrave, R., 1961. Approaches to a Fiscal Theory of Political Federalism. In: NBER. Public Finance: Needs, Sources and Utilization. Princeton: Princeton University Press, 97-133. Gates, W., 1968. The Theory of Public Finance in a Federal System. Canadian Journal of Economics, i, 37-54. Gates, W., 1972. Fiscal Federalism. New York: Harcourt Brace. Gates, W., 1999. An Essay on Fiscal Federalism, journal of Economic Literature, 37, 1120-1149. Gates, W.E. and Schwab, R., 1988. Economic Competition among Jurisdictions: Efficiency-Enhancing or Distortion-Inducing? journal of Public Economics, 35, 333-354OECD, 1998. ConcurrenceJiscale dommageable: un probleme mondial. Paris: OECD. Shah, A., 1997. Fiscal Federalism and Macroeconomic Governance: For Better or For Worse? Keynote paper for the International Conference on Decentralization, Intergovernmental Fiscal Relations and Macroeconomic Governance, Brasilia, Brazil, 16-17 June 1997, sponsored by the Government of Brazil and the OECD. Shah, A., 1998. Indonesia and Pakistan: Fiscal Decentralization - an Elusive Goal? In: R.M. Bird and F. Vaillancourt, eds. op. cit., 115-151. Sinn, S., 1992. The Taming of Leviathan: Competition among Governments. Constitutional Political Economy, 3, 177-196.

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Ter-Minassian, T., ed., 1997. Fiscal Federalism in Theory and Practice. Washington, B.C.: International Monetary Fund. Tiebout, C., 1956. A Pure Theory of Local expenditures. Journal of Political Economy, 64, 416-424. Tiebout, C.M., 1961. An Economic Theory of Decentralization. In: NBER. Public Finance: Needs, Sources and Utilization. Princeton: Princeton University Press, 79-96Wasylenko, M., 19976. The Role of Fiscal Incentives in Economic Development: How Ohio Stands Relative to its Competitor States. In: R. Bahl, ed. Taxation and Economic Development: A Blueprint for Tax Reform in Ohio. Columbus: Batelle Press, 467-510. Webb, S., Perry, G. and Dillinger, W., 2001. Developing Hard Budget Constraints in Decentralized Democracies of Latin America. Paper presented at the Conference on Public Finance in Developing and Transitional Countries, Stone Mountain, Georgia, April 2001. Wildasin, D.E., 1997. Fiscal Aspects of Evolving Federations. Cambridge: Cambridge University Press. Wilson, J.D., 1999. Theories of Tax Competition. National Tax Journal, 52, 269-304. Wiseman, J., 1989. The Political Economy of Federalism: A Critical Appraisal. In: J. Wiseman. Cost, Choice and Political Economy. Aldershot: Edward Elgar, 71-111. Wiseman, J., 1990. Principles of Political Economy: An Outline Proposal, Illustrated by Application to Fiscal Federalism. Constitutional Political Economy, 1/1, 101-124. WBI: World Bank Institute, ed., 2001, Intergovernmental Fiscal Relations and Local Financial Management Program. Washington, D.C.: World Bank Institute.

S C I E N T I F I C B A C K G R O U N D : SUBTHEME PAPER JURGEN VON HA GEN

Fiscal Federalism and Political Decision Structures

1.

INTRODUCTION

Federal systems are characterised by a large degree of decentralisation of the public sector, which consists of at least two levels of government, each vested with well-defined competencies and financial resources. Federalism is more than just decentralised administration. The all-important feature is that the governments at the individual levels make decisions regarding public policies and resources in their own area of responsibility and according to their own preferences (Riker, 1964). The assignment of public responsibilities (or competencies) and revenues to the different levels of government is a key question of federalism. It can be discussed from various perspectives. The classic economic theory of fiscal federalism regards it as a static allocation problem and derives answers based on principles of efficiency. Public choice theory and the new theory of market preserving federalism (Weingast, 1995; MacKinnon, 1997) interpret federalism primarily as a way of imposing discipline on self-interested politicians and governments, and a hedge against the abuse of power and excessive growth of the public sector. From this perspective, the allocation of responsibilities and resources should create a maximum degree of competition among governments. Finally, federal systems can be interpreted as arrangements for risk sharing among regions or jurisdictions. This paper reviews these different perspectives of federalism and their answers to the assignment problem. Firstly it discusses the classical view of fiscal federalism. Secondly it considers federalism as a competitive device. Thirdly it discusses the implications of the risk-sharing view for the

374 Jurgen von Hagen assignment problem. Fourthly, it looks at tax assignment and financial arrangements in federal systems. The final section concludes. 2.

FEDERALISM AS AN ALLOCATIVE DEVICE

2.1. Fiscal equivalence

Traditional theory of fiscal federalism deals with the distribution of responsibilities across jurisdictions as a static allocation problem. The goal is to achieve a welfare-maximising provision of public goods and services. The basic allocative rule is the principle of reciprocity (Musgrave, 1986) or fiscal equivalence (Olson, 1969). It says that the spatial incidence of the benefits of a public policy should coincide with the geographical boundaries of the government operating and financing the program. Otherwise, benefit or cost spillovers to other jurisdictions would create external effects. The government operating the policy would disregard these externalities and fail to achieve a welfare optimum for society as a whole.1 Fiscal equivalence also rules out "internalities", i.e. situations in which a policy's area of incidence is smaller than the area of the jurisdiction, which leads to similar welfare losses.2 The correspondence of the region benefiting from a policy and the region paying for it assures Pareto-efficient outcomes in the provision of public goods and services. The equivalence principle provides an important benchmark for the design of federal entities. As an organising principle, it says that public policies with important spillovers between local jurisdictions should be administered and financed by higher-level governments, while policies with little or no spillover should be administered and financed by lower-level governments. Pure public goods such as national defence, whose benefits fall on the entire population of a country, should be provided by the central government, while local public goods, whose benefits are locally limited (such as street lighting) or which are strongly congestible (such as parks or schools) should be provided by sub-central governments. The principle also implies that the optimal size of a jurisdiction is determined by the rule that the per-user cost of providing a congestible public good or service at a given level equals the marginal cost of adding one additional user (Inman and Rubinfeld, 1997). It follows that the more important its congestion costs or the more locally limited its benefits, the smaller a jurisdiction administering a given public good should be.3 Fiscal equivalence establishes a preference neither for centralised nor for decentralised government per se. Its main tenet is to justify the coexistence of multiple levels of jurisdictions, including jurisdictions with overlapping geographical domains, structured according to the geographical incidence of their policies. Frey and Eichenberger (1999) take this principle to the extreme, advocating multiple layers of "functional, overlapping,

375 Part D Theme III - Scientific Background

competing jurisdictions" to achieve an optimal provision of public goods. The geographical borders of the jurisdiction for schools could be different from those for universities. There are certainly practical limits to this that arise from economies of scale in administration and political governance. Nevertheless, the principle is important. A more practical interpretation would be that fiscal equivalence can justify and encourage cooperation among local jurisdictions, for example, to facilitate the efficient provision of public services in metropolitan areas, which often cut across historically fixed city and state borders. Like the principle of equivalent taxation,4 the principle of fiscal equivalence seems to rule out re-distributive policies. Clearly, however, it does not rule out re-distributive policies within jurisdictions. To the extent that relatively rich citizens dislike poverty in their immediate neighbourhoods, economic support for the poor has the character of a local public good and, according to the principle of fiscal equivalence, should fall under the competence of local governments for efficiency reasons (Pauly, 1973).5 Nevertheless, traditional fiscal federalism assigns the responsibility for redistribution to the central government (Musgrave, 1997). The main argument is that decentralisation would lead to too litde income redistribution. When taxpayers are mobile, local governments will compete for rich taxpayers by offering them low tax rates; meanwhile, poor individuals will move to jurisdictions offering generous welfare programs. As a result, rich and poor individuals will tend to cluster in different jurisdictions, which implies that there is little scope for redistribution at the local level. 2.2. Preference heterogeneity and economies of scale

The efficiency principle behind fiscal equivalence implies that the level and quality of public goods and services should vary across regions according to citizen preferences and local cost conditions. Indeed traditional fiscal federalism regards the ability of local governments to tailor the provision of local public goods and services to local demands and circumstances as the principal justification for decentralised government (Olson, 1969). This is the essence of Gates' (1972) Decentralisation Theorem, which holds that: in the absence of cost-savings from the centralized provision of a good and of interjurisdictional externalities, the level of welfare will always be at least as high (and typically higher) if Pareto-efficient levels of consumption are provided in each jurisdiction than if any single, uniform level of consumption is maintained across all jurisdictions.

Decentralisation gives citizens the opportunity to form local clusters of people with similar preferences, and to move to jurisdictions offering the packages of taxes and public goods they like best. This is the essence of

376 Jiirgen von Hagen Tiebout's (1956) theory of decentralised government. Households "vote with their feet" to obtain the best combination of taxes and public goods. If all jurisdictions are small and all households are very mobile, decentralised government can achieve the welfare optimum that a social planner would achieve. The implication is a version of the principle of subsidiarity, i.e. the rule that decentralisation of public policies is always preferable, and should be applied unless there are strong reasons for centralisation. The basic idea behind this reasoning is to create a market environment for public policies and services, in which households reveal their demand, and local governments offer services for which they charge taxes that play the role of market prices. While the idea has obvious appeal, it is not uncontroversial. One important question is whether household mobility sends the right market signals. Households certainly differ in terms of mobility, and the preferences of the most mobile ones, like single-person households or the elderly and retired, are not necessarily representative of the general population (Donahue, 1997). Local governments offering tax-service packages to attract mobile households thus do not necessarily maximise public welfare. Furthermore, one may question the viability of competition among local governments, a point we return to below. When public goods or services involve large externalities, the assignment of competencies may face a trade-off between the efficiency gains from moving the relevant policies to higher levels of government that internalise the externality, and the welfare loss from not responding to preference heterogeneity (Alesina et al., 1999, 2001). The presence of large economies of scale in the production of public services poses a similar trade-off. With homogeneous preferences, large externalities or economies of scale simply suggest assigning the production of the relevant public good to a higher-level jurisdiction. But if preferences differ across regions, and governments are constrained to deliver their services at uniform levels and qualities throughout their entire jurisdiction, the welfare costs of uniformity can exceed the efficiency gains from centralisation. Thus, preference heterogeneity and economies of scale add more specificity to the above version of the principle of subsidiarity. Public policies for which regional preferences are heterogeneous should be assigned to local governments, unless there are strong externalities or large economies of scale that justify moving them to the next highest level of government. The uniformity constraint, i.e. the assumption that governments cannot vary the level or quality of public services across their geographical domains, is critical for this argument. It could be the result of imperfect information at the centre, or of political or legal limits to the diversifiability of services provided by higher-level governments (Gates, 1999). However, it is quite clear that this constraint is less binding in practice than it might appear at first. For example, there is little doubt that in

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responding to the perceived military threat from the Soviet Union and the resulting worries of local populations, Germany's federal government supplied increasingly intense military defence services to eastern as opposed to western regions of West Germany before ig8g.6 But since there are important spillovers of military defence activities between the eastern and the western part of the country, efficiency still demands that defence be a national prerogative. One might think that regional differentiation is most difficult when it comes to transfers and entitlements, as these create quasi property rights, and central governments are constitutionally bound to treat all individuals equally before the law. But again, practical experience suggests a fair degree of variation in the administration of centrally provided welfare or transfer programs. If higher-level jurisdictions can operate public policies with regionally differentiated levels of activity, the tension between externalities, economies of scale and preference heterogeneity is greatly reduced and the assignment rule of fiscal equivalence remains applicable. The critical question then is, what determines the responsiveness of higher-level governments to regional variations in preferences?7 This is primarily a question of political participation of the citizens in decision making at the higher level, and of the democratic accountability of the political actors at the higher level to the citizens, i.e. a question of agency cost. Direct democracy is a powerful participation mechanism, but difficult to implement at the central level of government. Under representative democracy, small district size8 promotes electoral competition and makes centralised policies more responsive to local preferences. First-past-thepost elections and the opportunity for local voters to change the selection and hierarchy of candidates on party lists have similar effects (Persson and Tabellini, 2000). This suggests that the assignment of competencies should be evaluated and discussed in the context of the political mechanisms for participation and accountability. This refines our assignment rule. The weaker the mechanisms for democratic participation and accountability at the central level of government and the more heterogeneous local preferences, the greater the weight given to demands for decentralised assignment of public policies should be. 2.3.. Shared responsibilities

So far, we have followed the general approach of the literature, and assumed that the responsibility for individual public policies can only be assigned exclusively to one level of government, i.e. it is either a local, regional, or national task. This is unnecessarily restrictive. Shared responsibilities can provide some improvements in dealing with the welfare trade-off between centralisation and decentralisation. Classic welfare economics suggest that externalities between local jurisdictions can be

378 Jiirgen von Hagen

addressed by Pigovian taxes and subsidies imposed by the central government. By paying conditional, per-unit grants to local governments subsidising the cost of public goods generating positive externalities, or by imposing financial charges on public goods generating negative externalities, the central government can change the marginal costs of the relevant policies faced by the local governments, and induce them to provide the levels of public goods that maximise social welfare at the national level. The provision of the relevant public goods then remains a task of the local governments, subject to financial incentives set by the central government. The advantage is that such arrangements preserve the responsiveness of public policies to local preferences and conditions, and yet correct for externalities. Since the geographical design of local and regional jurisdictions is more often the result of historical developments than of deliberate planning exercises, shared responsibilities should be the norm rather than the exception. However, the efficient use of Pigovian taxes and subsidies requires the verifiability of local preferences and conditions. When local governments can misrepresent costs, preferences, and the size of the relevant spillovers, Pigovian taxes and subsidies can distort choices at the local level and create more inefficiency rather than less. For example, in an empirical analysis of federal grants in the United States, Inman (1988) concludes that the link between inter-jurisdictional spillovers and the size and structure of grants received is very weak at best. In practice, therefore, informational constraints may be too large to use this approach extensively. Alternatively, shared responsibilities can take the form of central government programs providing certain public goods in parallel with local governments, or of federal mandates. In the former case, the central government provides a uniform level of a public good to all local jurisdictions, allowing local governments to provide additional levels financed out of local taxes if they wish to do so. Under a federal mandate, the central government requires local governments to produce a minimum level of a certain public good, leaving it to their choice to provide more of it. In both cases, the federal government can achieve a better position in the trade-off between welfare gains from centralisation and losses from uniform central services, by setting a minimum standard or providing a level of the public good lower than it would do if it were the sole provider. While the central government policy alleviates the externality problem in these cases, the possibility of additional local production of the public good reduces the cost of uniformity. To conclude, we have a further refinement of our assignment rule. Where externalities and preference heterogeneity are important, shared responsibilities leaving the primary competence for a public policy with

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the local government and giving the central government the authority to intervene, can be used to find a better position in the trade-off between the welfare gains and losses from centralisation. 3.

COMPETITION

AS A D I S C I P L I N A R Y D E V I C E

The efficiency considerations behind fiscal equivalence rest on the traditional view of government as a neutral body maximising public welfare. Public choice theory takes a radically different view. It regards politicians as rent-seeking individuals using their positions to pursue private goals, and government as an institution that encroaches on individual freedoms and seeks to increase its grip on the private economy as much as possible. This view of government as a "Leviathan" emphasises the importance of institutional rules and arrangements forcing politicians to serve the public interest in the pursuit of their own goals and limiting their discretionary powers (Brennan and Buchanan, 1977). The Leviathan view leads to a different perspective on the optimal regional structure of government. Brennan and Buchanan argue that competition among local jurisdictions constrains the discretionary powers of politicians and leads to lower levels of government spending and taxation. By creating and promoting such competition, federalism puts a check on the growth of Leviathan and on the abuse of power by rent-seeking politicians. In Hirschman's (1970) terms, federal structures give citizens opportunities for "exit" - moving themselves or taking their assets to jurisdictions whose economic and fiscal policies they like - in addition to the "voice" of their democratic votes. This has an immediate implication for assignment. Decentralised government is beneficial even in the presence of homogeneous preferences over public goods, and even in the presence of large economies of scale in public goods production, because it yields better government. The Leviathan view poses the general assignment rule that policies should be generally assigned to the lowest levels of government to promote competition, unless there are strong reasons for more centralised solutions. This generates another version of the subsidiarity principle. Policies should be delegated to the lowest level of government, unless it is proven that the latter cannot fulfil the tasks connected widi it satisfactorily. This is, in essence, the version of subsidiarity that found its way into the Maastricht Treaty on European Union. Note that, according to this principle and its traditional interpretation prevailing in Germany, it is not sufficient to prove that a certain task cannot be fulfilled optimally by lower-level governments in order to justify moving it up to the next level of government. Satisfactory is a much weaker standard, and by putting it this way, the principle recognises the trade-off between optimality derived from static

380 Jiirgen von Hagen

efficiency principles assuming benevolent government and the benefits of competition among self-serving governments. Weingast (1995) and McKinnon (1997) take these ideas one step further to the concept of "market preserving federalism." Weingast (1995, i) regards federalism as a solution to the fundamental political dilemma of an economic system: A government strong enough to protect property rights and enforce contracts is also strong enough to confiscate the wealth of its citizens. Thriving markets require not only the appropriate system of property rights and a law of contracts, but a secure political foundation that limits the ability of the state to confiscate wealth.

Market preserving federalism solves this dilemma by combining strong local government with a federal government enforcing nationwide free markets and free mobility of factors, goods and services. The same author classifies a federal system as market preserving if the primary responsibility for regulatory and economic development policies remains with the subnational governments, a common market is enforced, and sub-national governments have no access to money creation or to central government bailouts for bad local projects or policies, or excessive debts. The first condition limits the central government's power to confiscate wealth. Together with the second condition, it establishes competition among the sub-central governments, ensuring that individuals can leave regions with unfavourable regulatory regimes, and that local governments cannot abuse their power by erecting artificial barriers to trade and mobility. This keeps local governments from appropriating excessive economic rents. The third condition ensures that local governments are responsible for their actions. Market preserving federalism demands the following assignment rule. Local governments should be responsible for all policies of economic regulation and development, while the central government is responsible for developing a federal constitution committed to the principles of free and open markets, and for monitoring and enforcing its proper implementation. Rules such as the inter-state commerce clause in the United States or the principle of mutual recognition of national regulation in the European Union (EU) are essential elements of a constitution promoting competition among local governments. Apart from the assignment rule itself, the assignment principles resulting from the Leviathan view and market preserving federalism have an important procedural aspect. A federal constitution must answer the question: who has the right to change the assignment of competencies over time? Both views of federalism predict that giving this right to the central government would result in a too-powerful central government in the long run. Giving it to the local governments would have the same result in the long run, as politicians at the local level would allow the higher-level gov-

381 Part D Theme III - Scientific Background

ernments to assume new competencies in exchange for the permission to erect local monopolies and barriers to trade, in an attempt to weaken their accountability to the local voters. The implication is a procedural assignment rule as a safeguard against excessive centralisation. Citizens at the local level should have strong gate-keeping or veto powers, including access to the courts, against attempts to move any competence from the local to a higher level of government. As indicated before, the claim that competition among governments improves the efficiency of the public sector is not uncontroversial. Not surprisingly, theory suggests that the effectiveness of competition depends on the circumstances. Gates and Schwab (1988) show that interjurisdictional competition can yield efficient outcomes if consumer preferences are relatively homogeneous and local governments have access to efficient tax instruments. Otherwise, it can result in sizeable welfare losses. Other contributions demonstrating the efficiency of interjurisdictional competition typically assume that such competition operates in an environment where all jurisdictions are small and act like price takers, and no potential taxpayers have any market power. This is obviously unrealistic in practice, and the results of imperfect interjurisdictional competition are less well understood. Practical experience suggests that it can lead to inefficient outcomes, for example when a large potential taxpayer such as a multinational company shops around regional governments for infrastructure investments as a precondition for building a new production site. As all regional governments deliver such investments but only one obtains the production site, the others are left with wasteful, unused infrastructure. Under such circumstances, some collusion among the regional governments ensuring that no government invests resources before location decisions have been made can improve the outcome. Sinn (1997, 1999) challenges the idea of useful competition among Leviathans even more strongly. He notes that government interventions in the economy tend to respond to market failures due to increasing returns to scale or problems of asymmetric information. Sinn calls this the selection principle. Under such conditions, competition among governments cannot replace competition among private suppliers without leading to the same problems of market failure. Sinn (1997, 270) summarises succinctly: "Competition is bad, when government intervention is good." This suggests that competition among Leviathans can be useful to discipline government in areas where their intervention is not essential from an economic point of view, but the general applicability of the concept to the design of federal entities is limited to that. Empirical evidence on the outcomes of competition among governments remains scant and inconclusive.9 United States literature on education suggests that competition improves the performance of public schools, but the applicability of these results for other areas of public policy remains in question.

382 Jiirgen von Hagen 4.

FEDERAL

SYSTEMS

AS RISK-SHARING

ARRANGEMENTS

Federal systems can be interpreted as arrangements for sharing idiosyncratic risks among regions.10 Regions enjoying positive idiosyncratic shocks pay transfers to regions suffering from negative idiosyncratic shocks. Such transfers could be paid to individuals or exchanged among the regional governments. In the first case, the federal arrangement provides individual consumption smoothing. In the second case, the federal arrangement insures regional government budgets against exogenous fluctuations, and this serves indirectly to smooth individual consumption and taxes. There is now a large literature on risk sharing in federal systems, showing that fiscal mechanisms in existing federations smooth a significant part of idiosyncratic shocks at the level of provinces or states.11 Risk sharing can be provided vertically, through the budget of the federal government or a federal unemployment insurance program, or horizontally through fiscal equalisation. The United States is a prime example of the former, while Germany is a prime example of the latter. Buchanan (1950) regards fiscal equalisation as an outflow of the principle that equal citizens deserve equal fiscal treatment regardless of where they live in a federation.12 In our context, risk-sharing arrangements are relevant for two reasons. The first issue is whether risk sharing should be a federal program or a program of the regions or states. The difference is important if the regions differ in terms of their mean incomes or their exposure to idiosyncratic shocks, and risk-sharing arrangements result in insurance and permanent income redistribution. Persson and Tabellini (iggGa) show that vertical federal programs tend to oversupply, while horizontal programs tend to undersupply insurance under such circumstances. The second issue relates to moral hazard problems. Persson and Tabellini (igg6b) assume that regional governments can invest public resources in projects that reduce their exposure to adverse idiosyncratic shocks. As usual in an insurance context, the prospect of receiving transfers when bad shocks occur reduces the incentive to invest in such projects. Migue (igg3) observes more generally, that risk-sharing arrangements in federations reduce the incentives for regional governments to conduct economic policies aiming at strong economic development. In the current German debate about fiscal equalisation, it is often pointed out that states that are likely to be net contributors to the system have very low returns on projects increasing tax revenues. Persson and Tabellini (igg6b) show that these moral hazard problems strengthen the case for assigning the responsibility for risk-sharing arrangements to the central government. The latter can pay investment subsidies to the regional governments to mitigate the moral hazard problems. Thus, there is a strategic complementarity between risk sharing and federal investment with (subsidy) programs justifying federal government engagements in the latter type of policy.

383 Part D Theme III - Scientific Background 5.

FINANCIAL ARRANGEMENTS IN FEDERAL SYSTEMS

5.7. Tax assignment

The assignment of taxes of different types to the different levels of government is called the "tax assignment problem" in fiscal federalism (McLure, 1983). Again, static efficiency considerations are used to answer the question of which kinds of taxes are best used at the different levels of government. The key issue is to avoid distortions in the location choices of mobile households and firms, which could arise if tax rates charged at the local level differ widely across jurisdictions. For example, large differences in excise taxes between local jurisdictions could induce consumers to spend resources on inefficient travel to places with low tax rates. Similarly, low business tax rates may bias investment decisions away from locations where the pre-tax marginal return on capital is maximised. Gordon (1983) identifies several sources of inter^jurisdictional spillovers connected to local taxes. They include tax exporting, changes in congestion costs faced by residents of other jurisdictions, changes in tax revenues received in other jurisdictions, and changes in output and factor prices in other jurisdictions. The first occurs when residents of other jurisdictions pay part of the tax revenue, for example because they buy a product produced and taxed locally. The other effects are the result of taxpayer relocations due to changes in local taxes. For example, the congestion of local schools and parks declines if taxpayers move away from a community in response to lower taxes elsewhere. The basic insight from such considerations is that local governments should avoid non-benefit taxation of economic agents, factors or goods characterised by a high degree of mobility (Gates, 1999). While mobile agents, factors or goods could be charged benefit taxes by local governments (Gates and Schwab, 1988), immobile factors are ideal objects of taxation for them. Thus, local governments should be assigned taxes on land and real estate in addition to service charges for water, sewage etc. Non-benefit charges, in contrast, should be left to higher levels of government. A further implication of these considerations is that non-benefit charges on mobile individuals, factors or goods imposed by sub-central governments, if they are not avoided, should focus on resident-based taxation rather than source-based taxation (Inman and Rubinfeld, 1996). Since the implementation of resident-based taxation is difficult for taxes on output and consumption, this strengthens the argument against assigning such taxes to local governments. 5.2.

Tax competition and harmonization

An important issue in the assignment of taxes arises from the potentially detrimental effect of tax competition under decentralised taxation. One

384 Jiirgen von Hagen

version of the argument holds that local governments compete for businesses and new jobs or for rich taxpayers by promising low tax rates or generous tax breaks for firms locating in their region (Break, ig67). 13 As a result, they are faced with low revenues, and forced to limit the quantity and quality of (non-business-oriented) public services. As other local governments follow, tax competition leads to an equilibrium with inefficiently low public services. Each local government finds it optimal to keep its tax rate low to attract taxpayers, although all governments and citizens collectively would prefer higher tax rates and higher levels of public goods. The extreme case is a "race to the bottom", with no public services provided in equilibrium. Although empirical evidence on the importance and effects of tax competition is scant (Musgrave, 1997), the argument plays an important role among policy makers and in discussions about tax assignment in practice.14 The traditional theory of fiscal federalism responds to this with an efficiency-based theory of tax harmonisation among local governments and a theory of vertical grants, i.e. transfers from higher- to lower-level governments (Olson, 1969; Break, 1980). Limiting regional differences in tax rates reduces the importance of tax considerations in citizens' location choices, and thus inefficient competition for tax resources. Once the allocational role of vertical transfers has been acknowledged, it is straightforward to argue that fiscal equivalence has no implications for the assignment of individual taxes to specific jurisdictions at all. Instead, the assignment of the task of tax collection should be governed by efficiency criteria too (Spahn, 1988). Economies of scale in the collection and administration of taxes then suggest that the highest level of government should be given the right to collect the most important taxes, such as taxes on income or value added. Centralised tax collection can be combined with revenue sharing and vertical transfers ensuring that the revenues and expenditures match at all levels of government. However, centralised tax collection and heavy reliance on vertical grants by local governments weaken incentives for local governments to maintain a sufficiently large tax capacity at the local level. Local governments relying on vertical grants, however, have at best weak incentives to engage in such activities, since the pay-off from doing so accrues to all governments, and is therefore too low for the individual one. Such incentive problems can be reduced by firmly tying the size of vertical grants to the taxes collected in the local or regional government's jurisdiction, or by allowing local governments to piggy-back on central government taxes, i.e. to charge a local tax in addition to the federal tax collected by the central government. By contrast, from the public choice perspective, tax harmonisation and vertical transfers are harmful forms of inter-governmental collusion that limit beneficial competition and generate more discretionary power for the politicians. Similarly, market preserving federalism argues against tax

385 Part D Theme III - Scientific Background

harmonisation and vertical grants, and demands instead that local governments have sufficient own-tax resources to operate, as this promotes responsibility. A further issue concerns the form of competition under decentralised tax policies. The potential for harmful competition is probably greater when individual taxpayers like large corporations enjoy considerable market power. In such cases, it is important to ensure that local governments do not engage in resource-wasting bidding wars. Transparency of the process can probably do much to limit the potential damage. Furthermore, agreements to harmonise tax rates among local governments create incentives for moving competition to the dimension of local tax administration, for example by promising variable levels of enforcement to potential taxpayers. Such competition is worse than competing on tax rates, as it promotes "price-discrimination" between taxpayers. Again, transparency is important in this context. To conclude, rather than suppressing tax competition among local governments, the central government's role is to design and enforce rules promoting transparency and efficient competition. 5.5.

Vertical imbalance and the fiscal commons problem

The discussion of tax assignment and tax competition above suggests that finding suitable taxes for local governments is difficult, and that the tax capacity of local governments is typically small (Tanzi, 1996). Most federations therefore have some form of vertical transfer from the central to the local governments. The resulting vertical imbalance - the financial dependence of lower-level governments on vertical transfers from higher-level governments - causes important incentive problems. Consider a local government that fully retains all revenues collected from local taxpayers and receives no transfers from the centre. Budgeting decisions of this government are characterised by two conditions. The first is that spending on all policy projects will be expanded to the point where the marginal benefit accruing to local residents equals the marginal cost of increasing the size of the project, including the marginal welfare cost of local taxation. The second condition is that the marginal rate of substitution between public investment (i.e. spending on development projects that increase future tax revenues) and public consumption (i.e. non-productive spending including corruption) equals the net marginal tax revenue from investment (Careaga and Weingast, 2000). Compare this government to one that receives all its revenues in the form of a transfer paid from common tax fund financed by taxes collected in all jurisdictions and administered by the central government. The first condition will change to equating the marginal benefit of all spending projects to q times the marginal cost, where o < q < i is the share of the local taxpayers in the total tax fund. This implies that the local government expands spending beyond

386 Jiirgen von Hagen

the efficient level. The second condition changes to equating the marginal rate of substitution to q times the marginal tax revenue from public investment less the marginal cost. This implies that the local government reduces investment spending and increases consumptive spending. Note that the second effect is even worse if revenue sharing operates through vertical grants fixed by the central government, as the local government will perceive no benefit from public investment, and hence cut it altogether. Vertical transfers thus cause two important distortions in local financial decisions: they create a tendency for excess spending at the local level, and for biasing the composition of local spending against public investment, strengthening the local tax base. The first distortion is known as the "fiscal commons problem" (von Hagen and Harden, 1994; Velasco, 1999), since it resembles the coordination failure of common properties. The more directly local governments or the representatives of the regions or states of a federation can influence the size of the common tax fund (e.g. by determining the size of matching grants to local governments in the federal budget), the more important it becomes. Taking the necessity of vertical transfers as given, the fiscal commons problem can be addressed by an appropriate design of the federal budget process.15 This can be achieved by horizontal coordination or vertical coordination. The former entails negotiations among the local governments leading to binding agreements on the total size of the common tax fund before the individual governments determine their spending. Vertical coordination entails delegating the power to determine this size to a "fiscal entrepreneur", i.e. an individual representing a comprehensive view of public finances in all states, such as the central government prime minister or finance minister. The fiscal entrepreneur then fixes the total size prior to the state governments' budget decisions. Both approaches require limited amendment power of the legislature in the central government budget process, assuring that regional representatives cannot increase the total size of funds available for vertical transfers. Where vertical transfers take the form of central government financing of local public goods in individual states or regions, the same logic applies.16 Here, mitigation of fiscal commons problems can be achieved by strengthening the role of the central government finance minister, combined with amendment controls imposed on the legislature, or a dominating role for the finance committee in the federal parliament. Again, the main point is that the total size of such spending is fixed by a policy maker or a political body taking a comprehensive view of federal finances. At the local level, there are three institutional arrangements to mitigate the fiscal commons problem. One is direct voter participation. Empirical evidence suggests that fiscal discipline is better in Swiss cantons where direct participation is stronger (Kirchgassner and Feld, 1999). The second is

387 Part D Theme III - Scientific Background

strengthening the role of the finance minister relative to spending ministers in local budgeting decisions. Empirical evidence for the us states shows that states where the governor has more power in the budget process exhibit lower spending levels and less borrowing (Strauch, 1998). The third is to start the budget process with negotiations among the coalition partners on binding budget targets. The choice between these alternatives depends on political parameters at the local level - the degree of direct democracy constitutionally permitted and the prevalence of single-party versus coalition governments. The composition bias in local government spending under revenue sharing can be institutionally addressed in two ways. One is to rely on federal controls, using as far as possible the incentive effects of conditional and matching grants and avoiding block grants and unconditional grants. The informational constraints of this approach are similar to those related to Pigovian taxes and subsidies. The alternative approach is to increase direct voter participation in budgeting decisions at the local level. 5.4. Soft budget constraints

Soft budget constraints prevail in a federal system when local governments are able to obtain more vertical grants to finance local expenditures ex post than ex ante, i.e. to spend more money than originally foreseen when local and federal budget decisions were made. An important context in which soft budget constraints arise is when central governments bail out over-indebted local governments. When bailouts can be anticipated, they create similar incentive problems to budgeted vertical transfers. Local governments borrow excessively to finance additional spending; when they eventually find themselves unable to service their debts, the central government or central bank intervenes and comes forward with the necessary funds. A necessary condition for soft budget constraints is the central government's willingness to grant bailouts. There are several important challenges to the credibility of a no-bailout commitment by the central government. If local governments are allowed to default on dieir debts, ripple effects can be transmitted through the financial system, and the entire country may face an increase in its risk premium due to the damage to its reputation. Important recent examples of this are Argentina and Brazil, where debt problems in the igSos and financial crises in the late 19905 and in 2001-2 are largely due to excess borrowing at the level of provincial governments (Aizenman, 1998). Sharp fiscal adjustments may force local governments to cut spending on health, home security, and education, which can have significant negative spillovers to other jurisdictions. Given the cost of letting local governments default, central governments may find granting more attractive than denying a bailout, even if they were determined to

388 Jiirgen von Hagen

enforce hard budget constraints ex ante, a classic problem of "time inconsistency" (Kydland and Prescott, 1977). Even if the central government is unwilling to grant bailouts, it may be forced to do so by a legal mandate. An example is Germany, where the Constitutional Court ruled in the early iggos, that the federation must grant state governments the resources to fulfil the tasks assigned to them by the federal constitution. In practice soft budget constraints are a significant problem in many federations, including Argentina, Brazil, India, Mexico, Australia, and Germany. The idea that large jurisdictions are "too big to fail" is a popular one closely connected to the bailout issue. Wildasin (1997) develops a model of "too big to fail" based on the notion that negative externalities from local government default are proportional to the size of the jurisdiction. Thus, the cost of denying a bailout increases with the size of the jurisdiction and large states or regions are more likely to obtain bailouts. However, empirical evidence for countries belonging to the Organisation for Economic Cooperation and Development (OECD) (Australia, Germany, Italy, and Sweden) and several Latin American countries lends little support to this notion (von Hagen, 2000). In fact, bailouts are often granted first to small states or regions. An example is Germany, where the federal government bailed out two of the smallest states in the early 19905. Political considerations and the perception that the cost of bailing out small jurisdictions is small may explain that observation. A second empirical observation is that bailouts often follow an increase in un-funded central government mandates, or a shift of fiscal responsibilities from the centre to local governments that is not matched by an increase in vertical transfers. In such scenarios, bailouts may reflect local governments' unwillingness to assume the responsibilities imposed on them by the centre and to use local tax resources to fund them. In order to enforce hard budget constraints at the local level, many existing federations subject local governments to ceilings on borrowing or debt. Such ceilings pose complex questions in practice. Empirical evidence suggests that borrowing constraints invite creative accounting and borrowing through off-budget entities, local financial institutions, or payment arrears with the private sector, allowing local governments to incur large financial liabilities nevertheless.17 As the example of the EU suggests, debt and deficit ceilings must therefore be combined with enforcement of transparent accounting rules. By relying on numerical limits on deficits and debts, debt and deficit ceilings also constrain the ability of local governments to react to negative fiscal shocks and, therefore, to contribute to macroeconomic stabilisation (Poterba, 1994). Where local government is relatively large, the resulting macroeconomic costs can be significant. Vertical imbalance is again important in this context (von Hagen and Eichengreen, 1996). The larger the share of a local government's spending financed by own taxes, the more a local government in financial dis-

389 Part D Theme III - Scientific Background

tress can be expected to make the necessary adjustments itself and raise additional taxes. In contrast, where local governments almost entirely depend on federal grants, denying bailouts is hardly credible, as the required adjustment can only come by cutting important local public services. Von Hagen and Eichengreen (1996) show that the empirical incidence of borrowing constraints is greater in countries with greater vertical imbalance. This suggests that reducing vertical imbalance is an important element in assuring hard budget constraints at the local level. 6.

CONCLUSIONS

The assignment of competencies and financial resources to individual levels of government is a key issue in the design of federalist systems. Several considerations emerge from our review of the various perspectives from which the assignment issue has been discussed in the literature. Public policies should be decentralised as much as possible to create choices for individuals according to their preferences and circumstances, and to create competition among local and regional governments. This is the essence of our preferred version of the principle of subsidiarity. Policies should be assigned to the local level unless there is sufficient evidence that local governments cannot fulfil the relevant tasks in a satisfactory way Note that "satisfactory" is different from "optimal", which is a technical condition, while "satisfactory" makes room for the citizens to decide on the trade-off between welfare gains and losses from decentralisation. Where central government intervention is required to correct externalities, shared responsibilities (where the central government sets a minimum level of public services) are preferable to assigning the policy to the central government alone. The key role for the central government in a federal system is to define and maintain an appropriate competitive order among lower-level governments. This includes both the enforcement of a unified market for goods, services, factors of production and financial assets, and rules governing local government behaviour in areas like tax and regulatory competition to avoid races to the bottom or wasteful bidding strategies for mobile taxpayers and businesses. An important pre-requisite for effective competition among local governments is the enforcement of financial responsibility. Vertical imbalance should be kept small and vertical transfers should be avoided as much as possible. Hard budget constraints and proper budgeting institutions at the local and the federal level are essential to maintain financial discipline, without which competition among governments cannot work properly. Redistribution and risk sharing across regions fall under the competence of the central government. In contrast, there is considerable scope for interpersonal redistribution at the local level.

39° Jurgen von Hagen Finally, the assignment problem has an important procedural side, which is perhaps more important even than the answer to the question of who should do what in a federation. The procedural aspect is the answer to the question of who is allowed to change the assignment of tasks and resources over time. Theories of federalism that are more critical of the motivations of politicians and governments than the traditional approach of fiscal federalism, suggest that strong control rights in this regard should be given to the citizens at the local level to ensure that a federal system does not become excessively centralised and lose its market preserving function. NOTES

1 Defence is a classic example. If the operation of the military were left entirely to city governments, no city would take into account that strengthening its forces has a positive impact on the security of neighbouring cities, and therefore these cities would invest too little in defence. Hence, defence policies are typically allocated at the national level. Macroeconomic stabilisation is another classic example. 2 Here, a classic example is regional infrastructure. If regions can obtain infrastructure funding from the national budget, their representatives will ask for more projects than they would if the funding came entirely out of the region itself, since the cost of each project is spread over all taxpayers in the country. 3 Inman and Rubinfeld (1997) point out that important public services such as health, water supply, sewage, and public education can be produced efficiently by relatively small communities. 4 This principle requires that individuals should be taxed according to the amount of public goods they consume. 5 Following this logic, critics of unemployment support in Germany demand a stronger role for city governments in the administration of these programs. See for example Berthold, 2002. 6 There is also no doubt that Eastern regions paid (marginally) more for these services than Western regions as the government used land for military bases there. 7 Inman and Rubinfeld (1997) distinguish between three types of federalism, "economic", "cooperative", and "democratic", characterised by different modes of representation of local interests in the central government. Note that the responsiveness of local politicians to local preferences should not be taken for granted. When candidates for local government are nominated by national party leaders, local politicians depend on their benevolence and have strong reasons to cater to their interests. 8 District size is the number of representatives in parliament elected per electoral district relative to the total number of seats in parliament. 9 See Taylor (2000) for a recent review. 10 For example Persson and Tabellini, igg6a, b; von Hagen, 2000; Bayoumi and Masson, 1995.

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11 For the United States, estimates indicate that the federal fiscal system smoothes between 10% and 15% of idiosyncratic shocks. Similar magnitudes are found for Canada. The German federal fiscal system, in contrast, provides very little smoothing of individual incomes, but almost complete insurance of state budgets against idiosyncratic shocks. See Kletzer and von Hagen (2001) for an overview. 12 In Germany, the mandate to maintain uniform living conditions for all citizens of the Federal Republic is regarded as the constitutional basis for equalisation among the states. For Canada, the Rowell Sirois Commission in the 19405 first argued explicitly that equalisation was an important part of national solidarity and nation building (Gumming, 1986). 13 Similar arguments pertain to local regulatory policies. For example, Donahue (1997) reports that Alabama offered Mercedes a subsidy package worth us$ 168, ooo per job to attract the company's new automobile plant. 14 Theoretical literature on the issue shows that tax competition can generate efficient equilibrium, and indeed be beneficial for local government. The latter is based on the idea that incumbent residents of a jurisdiction ultimately benefit from efforts to attract capital and business. However, as Gates (1999) points out and Sinn (1999) critically remarks, this requires assumptions that turn local governments into the equivalent of price-taking firms in perfectly competitive markets. In an interesting empirical study of tax competition in pre-first World War Germany, Hallerberg (1997) shows that Prussia enjoyed considerable market power and was able to hold taxes high. 15 For an analysis of the importance of the budget process to overcome fiscal commons problems see von Hagen and Hallerberg (1999) and von Hagen and Harden (1994). 16 Central government funding of local public goods is the classic case of porkbarrel spending considered in the United States literature; see Weingast et al., 1981. 17 For example, Italian local governments whose tax basis was thin in the igSos, and which were subject to a complete ban on borrowing nevertheless managed to incur large debts through payment arrears. These arrears were then presented ex post to the central government with the threat of closing hospitals and schools unless a bailout was provided. Italian local governments thus contributed significantly to the expansion of national debt in the igSos (Bordignon, 2000). For evidence on us states see von Hagen, 1992. REFERENCES

Aizenman,J., 1998. Fiscal Discipline in a Union. In: F. Sturzenegger and M. Tommasi, eds. The Political Economy of Reform. Boston: MIT Press. Alesina, A. and Wacziarg, R., 1999. Is Europe Going too far? Carnegie-Rochester Conference Series on Public Policy, 51, i -42. Alesina, A., Angeloni, I. and Schuknecht, L., 2001. WhatDoes theEuropean UnionDo? Working Paper, Harvard University, Cambridge.

392 Jiirgen von Hagen Bayoumi, T. and Masson, P. R., 1995. Fiscal Flows in the United States and Canada: Lessons for Monetary Union in Europe. European Economic Review, 39, 253-274. Berthold, N., 2002. Die Kommunen in der Wohlfahrtsfalle. Frankfurter Allgemeine Zeitung, 3 January 2002. Bordignon, M., 2000. Problems of Soft Budget Constraint in Inter-governmental Relationship: The Case of Italy. Working Paper, Catholic University of Milan. Break, G.F., 1967. Intergovernmental Fiscal Relations in the us. Washington, B.C.: Brookings Institution. Break, G.F., 1980. Financing Government in a Federal System. Studies in Government Finance. Washington, D.C.: Brookings Institution. Brennan, G. and Buchanan, J.M., 1977. Towards a Tax Constitution for Leviathan. Journal of Public Economics, 8, 255-273. Caraega, M. and Weingast, B.R., 2000. The Fiscal Pact with the Devil: A Positive Approach to Fiscal Federalism, Revenue Sharing, and Good Governance. Working paper, Stanford University. Gumming, P., 1986. Equitable Fiscal Federalism: The Problem in Respect of Resources Revenue Sharing. In: M. Krasnick, ed. Fiscal Federalism. Toronto: University of Toronto Press. Donahue, J.D., 1997. Tiebout? Or not Tiebout? The Market Metaphor and America's Devolution Debate. Journal of Economic Perspectives, 11, 73-82. Frey, B.S. and Eichenberger, R., 1999. FOCJ. In:], von Hagen and M. Widgren, eds. Regionalism in Europe. ZEI Studies in European Economics and Law. Boston: Kluwer Academic Publishers, 3-22. Gordon, R., 1983. An Optimal Tax Approach to Fiscal Federalism. Quarterly Journal of Economics, 97, 567-586. Hallerberg, M., 1997. Tax Competition, Political Institutions, and Democratization: The Development of State Taxes in Wilhelmine Germany. Doctoral Dissertation, UCLA. Hirshman, A.O., 1970. Exit, Voice, and Loyalty. Cambridge Mass.: Harvard University Press. Inman, R.P. and Rubinfeld, D., 1997. Rethinking Federalism. Journal of Economic Perspectives, 11, 43-64. Kirchgassner, G. and Feld, L.P., 1999. Public Debt and Budgetary Procedures: Top down or Bottom Up? Some Evidence from Swiss Municipalities. In: J. Poterba andj. von Hagen eds. Fiscal Institutions and Fiscal Performance. Chicago: University of Chicago Press. Kletzer, K. and von Hagen, J., 2001. Monetary Union and Fiscal Federalism. In: C. Wyplosz, ed. The Impact of EMU on Europe and the Developing Countries. Oxford: Oxford University Press. Kydland, F.E. and Prescott, E.F., 1977. Rules Rather Than Discretion: The Inconsistencies of Optimal Plans. Journal of Political Economy, 85, 473-491. McKinnon, R., 1997. Market Preserving Federalism in the American Monetary Union. In: M. Blejer and T. Ter-Minassian, eds. Macroeconomic Dimension of Public Finance: Essays in Honour of Vito Tanzi. London: Routledge, 73-93.

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Melitz, J. and Zumer, F., 1998. Regional Redistribution and Stabilization by the Centre in Canada, France, the United Kingdom, and the United States: New Estimates Based on Panel Data Econometrics. CEPR Discussion Paper 1829, London. Migue, J-L., 1993. Federalism andFree Trade. Hobart Paper, London Institute of Economic Affairs. Musgrave, R., 1986. The Economics of Fiscal Federalism. In: R. Musgrave. PublicFinance in a Democratic Society, Collected Papers. Vol. 2. New York: New York University Press. Musgrave, R., 1997. Devolution, Grants, Competition. Journal of Economic Perspectives, 11, 65-72. Gates, W., 1972. Fiscal Federalism. New York: Harcourt Brace. Gates, W., 1999. An Essay on Fiscal Federalism. Journal of Economic Literature, 37, 1120-1149. Gates, W.E. and Schwab, R., 1988. Economic Competition among Jurisdictions: Efficiency-Enhancing or Distortion-Inducing? Journal of Public Economics, 35, 333-354Olson, M. (Jr), 1969. The Principle of Fiscal Equivalence: The Division of Responsibilities among Different Levels of Government. American Economic Review Papers and Proceedings, 59, 479-487. Pauly, M.V., 1973. Income Redistribution as a Local Public Good. Journal of Public Economics, 2, 35-58. Persson, T. and Tabellini, G., iggGa. Federal Fiscal Constitutions: Risk Sharing and Redistribution. Journal of Political Economy, 104, 979-1009. Persson, T. and Tabellini, G., igg6b. Federal Fiscal Constitutions: Risk Sharing and Moral Hazard. Econometrica, 64, 623—647. Persson, T. and Tabellini, G., 2000. Political Economics. Boston: MIT Press. Riker, W.H., 1964. Federalism: Origin, Operation, and Significance. Boston: Little Brown. Sinn, H.W., 1997. The Selection Principle and Market Failure in Systems Competition. Journal of Public Economics, 66, 247-274. Sinn, H.W., 1999. Systemwettbewerb. Y. Jahnsson Lectures, University of Munich, Mimeo. Spahn, P.B., 1988. On the Assignment of Taxes in Federal Polities. In: G. Brennan, B.S. Grewal and P. Groenewegen, eds. Taxation and Federalism. Sydney: Australian National University Press. Strauch, R., 1998. Budgetprozesse und Haushaltsdisziplin —Eine Analyse der U.S.Amerikanischen Staaten. Doctoral Dissertation, University of Bonn. Tanzi, V., 1996. Fiscal Federalism and Decentralization: A Review of Some Efficiency and Macroeconomic Aspects. In: Proceedings of the World Bank Annual Conference on Development Economics 1995. Washington, D.C.: World Bank Institute. Taylor, L.L., 2000. The Evidence on Government Competition. Federal Reserve Bank of Dallas Economic and Financial Review (2nd quarter), 2-10. Tiebout, C.M., 1956. A Pure Theory of Local Expenditures. Journal of Political Economy, 64, 416-424.

394 Jurgen von Hagen Velasco, A., 1999. A Model of Endogenous Fiscal Deficits and Delayed Fiscal Reforms. In:]. Poterba andj. von Hagen, eds. Fiscal Institutions and Fiscal Performance. Chicago: University of Chicago Press. von Hagen, J., 1992. Fiscal Arrangements in a Monetary Union - Some Evidence from the us. In: D. Fair and C. de Boissieux, eds. Fiscal Policy, Taxes, and the Financial System in an Increasingly Integrated Europe. Deventer: Kluwer Academic Publishers. von Hagen, J., 2000. Subnational Government Bailouts in OECD Countries. ZEI Working Paper, University of Bonn. von Hagen, J. and Eichengreen, B., 1996. Federalism, Fiscal Constraints, and European Monetary Union. American Economic Review, 86, 134-138. von Hagen, J. and Hallerberg, M., 1999. Electoral Institutions, Cabinet Negotiations, and Budget Deficits in the EU. In: J. Poterba andj. von Hagen, eds. Fiscal Institutions and Fiscal Performance. Chicago: University of Chicago Press. von Hagen, J. and Harden, I., 1994. Budget Processes and Commitment to Fiscal Discipline. European Economic Review, 39, 771-779. Weingast, B., 1995. The Role of Political Institutions: Market Preserving Federalism and Economic Development. Journal of Law, Economics, and Organization, 11, 1-31. Weingast, B., Shepsle, K.A. and Johnson, C., 1981. The Political Economy of Benefits and Costs: A Neoclassical Approach to Distributive Politics. Journal of Political Economy, 89, 642-664. Wildasin, D.E., 1997. Fiscal Aspects of Evolving Federations. Cambridge: Cambridge University Press.

SCIENTIFIC B A C K G R O U N D : SUBTHEME PAPER BERNARD DAFFLON AND FRANCOIS VAILLANCOURT

Problems of Equalisation in Federal Systems

1 .

INTRODUCTION

Fiscal equalisation refers to attempts within a federal, or at least a significantly decentralised system of government, to reduce fiscal disparities among sub-national jurisdictions by using transfers of monetary resources. These can be either explicitly identified as equalisation transfers or linked to other types of grants or spending. Given a set of sub-national entities with defined borders, it occurs after the first two steps in the decentralisation process - the assignment of functions and responsibilities to various tiers of government, central, regional and local, and the assignment of own-revenue sources to these same governments - have been carried out. It can be seen as an important part of the third step, the setting of intergovernmental transfers. Its design may play a role in setting the borders between newly created sub-national entities. While the discussion that follows will refer to transfers between two levels of government, equalisation can occur on more than two levels, with transfers either from level I to level II then from level II to level III (central-provinces/states-municipal), as is the case in Canada or Pakistan, or transfers from level I to both levels II and III, as in the United States and Switzerland. Equalisation is defined as vertical when the policy is conducted by central government and financed out of the central budget. It is horizontal when it intervenes between government units at the same level, through monetary transfers from units with "high" to units with "low" capacity (however defined). Fiscal disparities are the variations occurring across sub-national jurisdictions in their ability to raise revenue to meet the public expenditure needs of their residents. Such variation is not only linked

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to differences in revenue-raising capacity, but also to differences in the cost of providing public services. Given that the accelerated pace of economic change associated with globalisation is likely to affect differences in capacity between sub-national jurisdictions, fiscal equalisation is becoming increasingly relevant both economically and politically. This is particularly the case in countries where fiscal disparities are the result of geographically concentrated high-revenue resources such as oil. Yet regional economic circumstances can rapidly change with changes in the use or price of natural resources or the introduction of new technologies, so that equalisation could also be considered by jurisdictions with high capacity as an insurance against a future reversal of their economic position. Alberta, for example, now Canada's richest province, originally received equalisation payments during the 19508. In older federations, differences between the constituent members, in terms of size, geography, population and economic potential may be so great that, without equalisation measures, fiscal federalism would yield regional disparities that would be unacceptable. Yet at the same time, virtually all federal countries recognise diversity to some extent in the way they establish and run their (inter-governmental) fiscal systems. This dual approach is accepted since differentiation may be needed to attain both economic efficiency (e.g. some minimum standard in service delivery) and political stability (e.g. between regions with different languages or traditions). The resulting problem is really one of balance: how much differentiation is acceptable; are fiscal disparities (and their consequent cost) the result of local choice or the consequence of exogenous circumstances; what, if any, should be the design and level of equalisation? More recently, partly in response to changing economic circumstances (e.g. globalisation) or because new political situations have emerged (e.g. economies in transition in the Balkan states, or the urge for participatory democracy in Latin America), many countries throughout the world have partly "decentralised" their public sectors in various ways. In Eastern Europe, for example, the influence of the European Charter of Local SelfGovernment has increased substantially during the years since the fall of the Berlin Wall. The charter states that local governments should have full discretion over the execution of their responsibilities; supervision of local governments should be limited. At the same time, the resources available to local governments should match their responsibilities and should be sufficient to enable them to keep pace with changes in the costs of their functions. Since, over time, it could be difficult to maintain a good balance between evolving responsibilities and own revenues, any fiscal imbalance raises the case for financial transfers between government tiers. But should these be equalising transfers? Differences to be taken into account occur for reasons that are out of the direct control of the individual governments: (i) on the expenditure side

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(demography, high population density and/or scattering, topography etc.); (ii) on the revenue side (differences in economic development, industrial specialisation, central versus peripheral position, availability of natural resources etc.). Again, the European Charter of Local Self-Government recognises this situation and suggests that financially weaker local governments should be protected by equalisation procedures that do not diminish local government discretion. In these circumstances, equalisation may be a "double dividend" policy which (i) allows decentralised governments to provide a somehow comparable service level without too many (or with acceptable) differences in tax burdens; (ii) creates conditions for political stability. In the next section of this paper we outline a brief history of equalisation. In the section following that we present the main characteristics of equalisation. The next section addresses the economic impacts of equalisation, while the penultimate section addresses special topics in this area. In the final section we make some proposals. 2.

A B R I E F H I S T O R Y OF E Q U A L I S A T I O N

No formal worldwide history of explicit equalisation schemes in federal countries appears to exist. Nor is there a history of the concept of equalisation. The first modern federal state, the United States of America (1776/1783) formally introduced equalisation only in 1972, but they abolished it for states in 1981, and for cities in 1986. In the second modern federation, Switzerland (1848), the first measures of fiscal equalisation, a 25-40% reduction of various federal-specific grants according to the cantons' tax capacities, were introduced in 1938. This financial package was prorogued several times until 1957. Eventually in 1958, the principles of fiscal equalisation were written in the federal constitution (Dafflon, 1995, 51). In the third modern federation, Canada (1867), equalisation, while mooted in 1940, was introduced as part of tax-sharing arrangements in 1957, and written in the constitution in 1982. Thus, it is the fourth modern federation, Australia (i go i) that can claim the honour of being the first to introduce equalisation to the realm of intergovernmental relations in 1933 (Spahn, 1993, 83-87). This was done for the year 1932-1933 on the recommendations of the new Commonwealth Grants Commission (created in 1933). It took account of both "differences in the standard of expenditures ... [and] differences in the severity of taxation ..." (Copland, 1935, 284). After the Second World War, new federations, such as India (1948) and Germany (1949), took equalisation into account in the design of their federal financial arrangements (Spahn, 1993, 92-93). Turning to the history of the concept of equalisation, the seminal academic paper was written by Buchanan (1950). In that paper, the author developed an equity argument for "geographically discriminatory central government personal income taxation ... income tax rates could be made to vary from state to state so as to offset differences in state fiscal capacities" (595).

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However, recognising the difficulties (constitutional amongst others) of implementing such a scheme, the author put forward the idea of equalisation grants from the federal to sub-national units. He stated that: "units of equal fiscal capacity should be able to provide equivalent services at equivalent tax burdens". He concluded that the absence of equalisation would result in: the ultimate centralization of a large share of effective political power ... therefore those who desire to see maintained a truly decentralized political structure ... must take some action in support of proposals aimed at adjusting these interstate fiscal differences. (599)

The equity argument was countered by efficiency critiques, such as those of Courchene (1970), which argued that equalisation and more generally equalising policies reduce labour mobility between regions, and thus adjustments within national economies. A counter-argument based on efficiency was developed by Roadway and Flatters (1982), relying on the view that labour mobility can be inefficient if it is the result of rent-seeking behaviour by citizens moving from a resource-poor to a resource-rich part of a country. The arguments for and against equalisation were fiercely debated in the 19605 and 19705 in Canada, both at the theoretical and policy levels in the context of regional-provincial economic development, neutrality of public sector interventions, and mobility (Dafflon, 1977, 24-33) Empirical work examines these questions together with the question of whether equalisation induces recipient governments (potential or actual) to modify their behaviour. Interestingly, some of these issues have reemerged in the present context of global markets and fiscal competition. 3.

WHAT IS E Q U A L I S A T I O N ? A FORMAL PRESENTATION

Up to now we have discussed equalisation in general terms. In this section, we present a treatment of equalisation using a graphic tool that allows most specific schemes to be represented on it, and thus easily compared to others. In order to simplify the presentation of equalisation, we have limited ourselves to revenue equalisation. There are four issues that need to be addressed; these are illustrated in Figure i. The first issue concerns the source and the importance of the tax revenues to be shared and redistributed. Since beneficiary jurisdictions are different in terms of size and population, the redistribution cannot take place on an equal basis between jurisdictions, but must take into account the population (size) of each jurisdiction; it is thus relative. This is accounted for on the vertical axis by using revenue on the basis of population (per capita). At

399 Part D Theme III - Scientific Background

point A on the vertical Y-axis, the beneficiary jurisdiction receives an exactly average amount of public revenue per resident for that type of jurisdiction (province, municipal etc.), represented by the value i.o (to avoid using national currencies). The basic question is which revenue (tax) source is to be shared, according to which decision procedure? Several answers are possible, each with pros and cons; three are discussed below. First, the amount is financed out of the general resources of the paying unit(s) and established in their annual budget. This is a very flexible solution, adaptable from one year to the next. But it has two main defects: (i) recipient governments are not sure that they will receive a comparable amount (in real value) from one year to another, which renders mediumterm planning and pluri-annual policies very difficult; (ii) annual budgetary debates are subject to ad hoc political arrangements, which, by definition, have unstable contours. Second, the exact calculation of the amount is explicitly stated in the constitution or in a law, in the form of revenue sharing from at least one, but preferably several or all specific tax sources used at the central level. The use of only one tax source for sharing purposes may result in the central government not collecting it as rigorously as if it were exclusively reserved for central source revenues, since its efforts in part reward sub-national governments. The advantages of this solution are twofold. Firstly, with a specific legal foundation, the political debate on the extent of equalisation takes place when the constitution is amended or the law is passed, and not on an annual basis when the budget is decided. Secondly, if the tax sources are sufficiently diversified, and chosen in a way that partly alleviates macroeconomic cycles, it avoids important variations in the amounts available. The inconvenience is that revenue sharing from specific tax(es) might be subject to the fluctuations of the economy, following ups and downs with perhaps pro-cyclical results. Third, it is possible to solve this problem, in part, with the constitution of an equalisation fund fuelled with several tax-sharing sources written in the law. This solution has the two advantages described above, together with a third: it can smooth equalisation payments by leaving some reserves in the funds during good years, which can be used during bad ones. It is this intertemporal stabilisation that distinguishes this option from the preceding one. The second issue is addressed by the positioning of the various regions along the horizontal x-axis. Equalisation requires jurisdictions to be ranked according to some indicator of entitlement to equalisation. In this example, this is revenue capacity since we are presenting revenue equalisation; in other cases, need would also be taken into account. The basic concept is formulated thus: "jurisdictions with higher-than-average capacity should receive less (pay more); jurisdictions with lower-than-average capacity should receive more (pay less)". In Figure i, average capacity, however defined, is given a value of 100. For simplification, the lower value

400 Bernard Dafflon / Francois Vaillancourt Figure i A stylised representation of an equalisation scheme

Note: on the x-axis, the SNGS are lined up from the poorest (30) to the richest (150) with their number unspecified.

for the "poorest" jurisdiction is given a value of 30. Of course, this concept is easier to state than to implement. An overview of the theoretical literature indicates that there is no simple solution to this problem. While a comparison of "best practices" shows that they are numerous, and each one can claim good ad hoc reasons for being "best", this depends on whether "best" is envisaged from the point of view of a public finance economist, a macroeconomist, a politician, the winning jurisdiction (s) or the losing jurisdiction (s). Let us assume that these two issues have received an appropriate answer. The third issue is the equalisation formula. To understand this, let us compare the "before" and "after" situations. With no equalisation, and the possibility of identifying exactly the origin of the tax revenues, "poor" jurisdictions would certainly receive less than average per capita endowments, and "rich" ones higher than average amounts, something like the line DEG (labelled "before equalisation public revenues") in Figure i. Any equalisation formula would have to give more to "poor" jurisdictions than they would receive following the origin principle, and "rich" jurisdictions would receive less, something along the CEF line. The equalising performance is represented by the distance between lines DE and CE for beneficiary jurisdictions, and between EG and EF for the jurisdictions supporting

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the financial cost of equalisation. Thus, for example, for the poorest jurisdiction with a fiscal capacity of 30, equalisation increases public revenue per capita from 0.40 (at point D) to 0.55 (at point c), but for a rich region with capacity of 125, equalisation reduces public revenues available to it from 1.15 to 1.10. Of course, a balanced solution with horizontal (H) equalisation requires that benefits (amounts received, represented by the surface of triangle CDE) and payments (amounts contributed, represented by the surface of triangle EFG) coincide. The importance of equalisation depends on the equalisation formula, which gives the position of the slope CF around the central point E. The fourth issue is whether an equalisation policy would introduce further limits to the redistribution formula. In Figure i, E represents an exactly neutral position with regard to equalisation: with an average financial capacity and average per capita tax revenues, a jurisdiction at this point would neither pay nor receive any equalising amount. But the central point need not be at E. Other equalisation targets are possible, and often controversial. In Germany, for example, the degree of equalisation was alleged to be too high by three rich Lander, and was examined by the Constitutional Court in the late nineties (Zimmerman, 1999, 168). Two specific points must be noted. First, it can be debated whether jurisdictions with just below average financial capacity should also benefit from equalisation. One could argue on financial, political and equity grounds that only jurisdictions below a certain level (e.g. 90) should qualify. Financial considerations could be one argument: at 90, the triangle equivalent to CDE would be smaller, which means less payment. But the more crucial question is political. The signification of the limit is where fragmentation of the nation into poor and rich jurisdictions would endanger national coherence: how much poorer is too poor? A second related question is illustrated with the triangle BCK. The incidence of the horizontal equalisation formula runs along line CE: the poorer a jurisdiction, the more it receives. But the equalising payments in the example are far from giving poor jurisdictions sufficient finance. Should they be increased? In the affirmative, what would be the appropriate limit? The example in Figure i ensures that poor jurisdictions receive equalising payments so that their revenue endowment reaches at least 85% of the national average, along line BK. And who pays this complementary endowment? Since "rich" jurisdictions already pay EFG to cover CDE, where are financial resources for paying BCK to be found? In our example, the additional resources come from a contribution from the centre: vertical equalisation. Again, there are no simple answers. Fragmentation and equity are relevant. But incentives must also be considered. With a complementary endowment such as the one depicted in Figure i, beneficiary jurisdictions have no incentive to take initiatives for

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their development if they are satisfied with 85% of the national average, and if they have no preference for autonomous revenues rather than transfers. In closing this section, we want to pull back from the mechanics of equalisation and emphasise that economists cannot study and propose a good equalisation scheme (and later estimate its incidence) widiout political input. A proper solution cannot be implemented without central and regional politicians taking responsibility for deciding how much (on the Y-axis), according to which criteria (the x-axis), to what extent (the for mula giving slope CEF), and for which target, if any (the BK line), equalisation should take place. Of course, the final result will also depend on the financial resources available, that is, either the small CDE triangle or the larger area CDE + BCK. These are choices that are in the hands of politicians, not those of economists. Having described equalisation in general terms, let us now turn to why it should be used. 4.

WHY EQUALISATION?

The existence of equalisation must be examined in the context of the overall design of federations. As a rule, in federations, the allocation of revenues should follow the allocation of functions. This usually occurs through gradual constitutional changes. But over time, decentralised functions will have an evolutionary path linked to changes in preferences for local provision, or in the technology of public service production. On the other hand, might the issue of which type of tax is allocated to which level of government in turn also influence budgetary growth, and thus the functions? If one level is allocated a tax such as the income tax, which in creases over time at a rate that is higher than Gross National Product (GNP), and another level receives taxes like the property tax, which tend to stagnate, this will lead to questions of balance between functions and revenues (Watts, 2001, 23). But even the best vertical allocation will not prevent the existence of regions with high tax base and low expenditure need, side by side with regions with low tax base and high expenditure need. Since the periodical re-allocation of functions and revenues has proved a difficult if not impossible exercise in many federations, financial transfers have been the usual answer to compensate for these differences. If transfers are unavoidable, the next key political questions are whether equalisation should be introduced, and whether it can be justified on efficiency or equity grounds. If we turn to the fiscal side only, one may attempt to categorise the main causes of disparities between intermediate and local governments in the following way.

403 Part D Theme III - Scientific Background

• Economic position and opportunities ( i ) First, opportunities for regional growth and local development can be very different between the member states of a federation. Some states may have higher revenues owing to their geographical position or to their raw-material resources; peripheral regions and regions without marketable natural resources have lower resources. As a result, the revenue-raising capacity of the jurisdictions varies widely, and endangers the provision of public service at a desired minimal (national) service level. Regional economic disparities can be exacerbated as a result of increasing openness in the economy. But what should be done, and more importantly, how much will it cost? • Economies of scale in the production of public services (2) Some governments cannot attain a sufficient threshold of production capacity, for example because the population is scarce (in a valley or a remote region) or is spread over a large territory. This is so when we accept the residents' right to minimum service delivery, with that minimum perhaps linked to a minimum geographical mobility of the recipient (children spending more time going to school in rural regions than in urban ones, for example). • Differences in unit costs of production of local public services (3) Local geographical conditions and topography may raise the costs of producing and delivering local public services (roads, bridges, tunnels, water and sewage pipes are examples). In peripheral or mountainous regions (as in Switzerland), the absence of economies of scale and higher unit costs of production can combine, making things worse. • Local preferences (4) Local preferences for specific public services, or for services above any required national minimum level, the choice between user charges and taxation, and between the various forms of local taxes, also introduce differences in the fiscal position of decentralised governments. It is generally accepted that explicit revenue equalisation, if any, takes into account (i), based on some fiscal/financial capacity indicator. Extra funding for intermediate or local levels of government facing additional charges due to socio-demographic challenges (2) and/or to their geographical location (3), would necessitate some form of cost equalisation through specific ad hoc measures. But equalisation should not include (4) because these differences result from a jurisdiction's own choices. Of course, the significance of any equalisation policy depends in the first place on the assignment of functions and responsibilities between the three layers of government: more decentralisation is likely to create greater cost disparities, and exacerbate differences in the tax burden due to the revenueraising capacities of the decentralised governments.

404 Bernard Dafflon / Francois Vaillancourt 5. D E S I G N I N G EQUALISATION: SOME ISSUES 5. i. Six issues to consider The following six issues are worth noting. 5.1.1. Representative tax system approach or macro approach for fiscal equalisation. In order to implement equalising aid programs, state policy makers require accurate measures of the fiscal condition of their regional/ local governments. Such measures are needed to determine whether disparities justify action, and to design the appropriate equalising formula (Ladd, 1999, 37). Quite a few equalisation systems use a representative tax system indicator of taxable capacity of the following type: Transfer to region i, total = ((tax base target, pc)—(tax base i, pc)) x tax rate x population where pc stands for per capita and target is the target of the equalisation program. Some use a single indicator or tax (Belgium, personal income tax), while others sum these transfers across a large number of taxes (33 in Canada). While Bird and Slack (1990) have examined the weaknesses of such a system as the one used in Canada, the representative tax system approach is criticised by some authors such as Barro (1986) and Boothe (1998), who argue that it is preferable to use a macro-type indicator such as Gross Domestic Product (GDP) per capita, personal income per capita (used in some transfer formulas in the United States, the most important being Medicare), or the total taxable resources (used in one transfer program in the United States), which is derived from gross state product measures. They argue that this is better than a representative tax system for reasons of simplicity, and because it is less subject to manipulation by equalising provinces that minimise tax bases to increase equalisation, or at least do so in the knowledge that such minimisation is partly or fully compensated by equalisation. In representative tax system schemes, the choice of an indicator of taxable capacity can become difficult as states use new sources of revenues. In Canada, for example, federal taxable income is used as the capacity indicator for the personal income tax; this is a logical choice, well linked to the measure sought. But personal income is also used, along with other indicators, to measure the tax capacity associated with video lotteries and casinos. The latter in some provinces are heavily export-oriented, and so their revenues are not linked strongly to provincial personal income (at least not in the province where they are located). On the other hand, a macro indicator can face measurement issues (Aubut and Vaillancourt, 2001), and its use moves the aim of the equalisation system from equalising

405 Part D Theme III - Scientific Background the capacity to provide comparable levels of public services at comparable taxation levels (to use the Canadian definition), to equalising a per capita measure of income, thus giving it a re-distributive role. 5.1.2. Cost equalisation. Since revenue equalisation and cost equalisation are distinct, the question of how to design compensation for additional charges in mountainous regions arising from low population density or distance to service delivery, immediately arises. Functions concerned with this kind of compensation include forestry, water control and embanking, and the protection of main roads against natural danger. Australia has the greatest expertise in cost equalisation. This is an area that Canada has been reluctant to take into account, since it is felt that cost differences are more arbitrarily measured than fiscal capacity differences. In Switzerland, cost equalisation is taken into account both in the general formula measuring the cantons' financial capacity, and in specific conditional grants - but this is not very conclusive (Dafflon, 1995, 82-84). j.j.j. Explicit or implicit equalisation in transfers. Some countries, such as Canada or Germany, have explicit equalisation transfers with amounts clearly identified for this purpose and paid out explicitly to attain this goal. Other countries, such as Switzerland have transfer schemes that pursue both equalisation and other goals. When this is the case, there is a risk of many goals being pursued by a single instrument, which can result in confusion. In Switzerland, there is confusion over the responsibilities for delivery of public services. In addition, because equalisation is linked to specific conditional grants-in-aid, access to equalisation is reserved for those jurisdictions that can pay the remaining expenses - a condition impacting negatively on poorer jurisdictions (Frey et al., 1994, 35-46). The Swiss have recently launched a major policy initiative aimed at disentangling these transfers and reforming equalisation through unconditional grants. Some countries that avowedly do not pursue equalisation goals, such as the United States, are introducing equalisation into some of their transfer formulae. For example, in the case of the United States Medicare program, federal transfers can range from 50% to 83% of state costs, according to an inverse relation with state personal income per capita. Finally, even equal per capita transfers from the central government can be equalising, if financed by a revenue source that takes more from rich regions than from poor ones. For example, vertical transfers financed by a proportional or, a fortiori, a progressive income tax will draw a greater share of the amount to be distributed from rich areas than from poor ones. 5.1.4. Implicit equalisation outside of transfers. Equalisation can also occur in public policies that do not use transfers to states. One possibility is

406 Bernard Dafflon / Francois Vaillancourt social security schemes, such as unemployment insurance, that do not adjust their premiums for risk. Thus, in the case of Canada, unemployment insurance premiums are the same across all provinces, but unemployment rates vary substantially with poor provinces having higher rates than rich ones. Another possibility is through the wage policy of the central government. If nominal wages are equal across the country, while the cost of living (usually the housing component) is lower in poor regions, then there is also an equalisation component. A third possibility is through the de-concentration of public employment, with some footloose branches being located in poorer regions to create employment. This is the case with the location of Canada's tax processing centres. Finally, there can be central government infrastructure programs that spend proportionally more in poor regions than rich ones. However, the inverse can also happen. With open tenders, government procurements for material, equipment and technical investments may concentrate on already developed and industrialised regions, increasing the disparities (Jeanrenaud, 1985). 5.7.5. Designing an equalisation scheme with imperfect data. The choices described above are choices faced by statistically well-endowed countries. Other countries may not have this kind of information, and must rely on imperfect indicators of wealth/taxable capacity such as housing-stock characteristics (fuels used, building material used) or demographic indicators (schooling attainments, urban population). Vaillancourt, who recommends using maximum values and not mean values as targets, has recently examined this issue using numerical simulations (Vaillancourt, 2001). 5.7.6. Equalisation and ethnic/linguistic differences. Sometimes a poor region of a country is also the region of origin for a minority group, and may be the only region where they form a majority. This may mean, depending on a country's language policies, that equalisation contributes to the survival of this ethnic/linguistic group by lowering its mobility. Some economists, such as Grin and Vaillancourt (2000), would argue that this is a factor that should be taken into account when setting regional finances, including equalisation. 6.

WHAT IS THE IMPACT OF E Q U A L I S A T I O N ?

When examining the impact of public policies, economists distinguish between efficiency and equity issues. Efficiency issues relate to the change in behaviour of economic agents induced by a given public policy (taxation, subsidy etc.). Such a change can be a source of increased or decreased welfare for society. Equity issues relate to who wins and who loses, who pays for and who benefits from a given public policy.

407 Part D Theme III - Scientific Background 6.1. Efficiency

There are two efficiency arguments raised with respect to equalisation. The first is related to citizens' mobility, and the second to the behaviour of recipient governments. 6.1.1. Mobility. The mobility argument has swung between two views. One is that equalisation induces inefficient immobility of labour, and the other that the absence of equalisation induces inefficient mobility of labour. Courchene (1970) forcefully put forward the first view. He argued that in Canada, a combination of explicit and implicit equalisation through regionally differentiated unemployment insurance parameters (a variable number of weeks worked required to be eligible, and a variable pay-out period) reduced the level of out-migration from the Atlantic provinces to below what was optimal for the country. These arguments were put forward in the context of regional disparities that were not the result of large differences in natural resources endowments. Roadway and Flatters (1982) put forward the view of equalisation as an efficiency-enhancing program. This was developed in the context of a model with one region rich in natural resources, and with the state government collecting a substantial share of the natural resources rents (difference between production cost and world price). In that case, the only way that residents of other regions of the country could access the revenues from these resources would be by moving to that region to benefit from lower personal taxation (income, consumption, property), higher public spending, or both. In such a case, the labour force migrating to the resource-rich region would be too large, with some workers willing to accept lower wages than they could earn elsewhere (i.e. being paid less than their marginal productivity in the poor region), since the overall returns on migration (wage income and lower taxes/more public services) would still make migrating worthwhile. Put differently, low provision of local public services, high taxation and poverty will bring about out-migration. But it can also polarise difference between residents and newcomers in regions of immigration, and improve social balance. Or, more simply, it can cause congestion costs in the region of destination. In this case, financial transfers from the centre or from rich to poor regions could alleviate the pressure, and allow for better public provision or lower taxes in the poor region with potential emigration. This is a view that is strongly supported by regional economists who advocate central aid to peripheral regions not in the sole interest of equity, but for allocative reasons when the price of equalisation is lower than the congestion and social costs in the jurisdictions of destination. 6.1.2. Behaviour. The existence of a representative tax system equalisation scheme means that a reduction in the per capita tax base of an

408 Bernard Dafflon / Francois Vaillancourt

equalisation-receiving region can be well if not fully compensated by an increase in equalisation. Some economists such as Smart (1998) thus argue that in the Canadian case at least, some provinces engage in this behaviour by either delaying new economic activity or setting tax rates at such a high level that it significantly reduces some tax bases. One outcome worth noting is that when in a federation, one observes simultaneously equalisation and tax competition. This occurs when (i) regions have the right to set their own tax levels and can do so for a significant part of their revenues; (ii) rich regions are sufficiently richer than poor regions that they can finance their own public services and their contribution to equalisation (if any), while still setting lower tax rates than poor regions; (iii) poor regions choose to offer a level of public services similar to rich regions, financing it through their own revenues and equalisation. Tax competition may then result in increasing disparities in tax bases between poor and rich regions. This type of outcome appears more likely when equalisation is: (i) not very generous in terms of the difference in spending potential it offsets; (ii) vertical rather than horizontal, i.e. there are no explicit inter-regional transfers; (iii) when the rich region is able to export part of its tax burden, something often associated with natural resource rents. But large fiscal disparities are not necessarily tolerated by the electorate at large, and richer regions may prefer to engage in more generous equalisation schemes rather than see centralisation of service delivery and taxation solve the question of regional disparities. 6.7.5. Equity. The debate on equity in the context of equalisation often refers to the distinction between people and place prosperity. Opponents of equalisation argue that if individuals in a region are poor and thus unable to finance public services similar to those offered in rich regions, it is they, and not their regional government, who should be the recipients of grants. Alternatively, they could be beneficiaries of measures such as job search grants or skill-enhancing training, which would allow them to prosper outside the poor region, and enhance their individual prosperity. Individual aid would be adequate without inter-governmental transfers. For proponents of equalisation, the equity argument is simple and straightforward: large differences in fiscal burden between local and/or regional governments are unacceptable if their causes are out of the control of local/regional authorities. There are ceilings in tax burden and lower limits to the provision of local public services that should not be exceeded. If this happens, compensation should be paid. It belongs to the beneficiary jurisdiction to decide how to allocate the sum received, be it providing more services, better provision of existing ones, or lowering taxes, with the latter choice being problematic from a political perspective.

409 Part D Theme III - Scientific Background 7.

CONCLUSION AND POLICY PROPOSALS

Equalisation is a common feature of both federal and unitary countries, since most countries do not have uniform tax potential/production costs of public services across their territories due to demographic (age, health, density), topographic (weather, nature of soil) and other variations. This paper has shown that: • Equalisation has existed explicitly in federations for 70 years; • Both equity and efficiency considerations can be used to justify it, with their relative weights depending on each country; • Some issues in the design of equalisation schemes still need to be addressed; • Any equalisation scheme is both an economic and a political choice which is, for some countries, of crucial importance to their survival and prosperity. Given the importance of equalisation, and that most discussions will be about reforming existing equalisation schemes (something more difficult than creating an equalisation scheme, since reform often leads to winners and losers), we would argue that holding to the rules listed below is appropriate when designing an equalisation scheme. • Make the terms explicit, and use a strong legal framework such as a constitutional provision or a general law to set them out. Do not review them annually as part of the budget debate. " Think things through before introducing an equalisation scheme. Project not only the current situation but also various possible future scenarios. Reflect particularly carefully on the sharing of natural resources rents. Use data that are agreed on by all parties, and which are not subject to manipulation. • Use a stable revenue source with a high level of predictability. A set of taxes (as opposed to one), and a fund which allows smoothing of ups and downs in transfers (as opposed to an annual amount which is more subject to macro fluctuations) are preferable. • Do not mix equalisation transfers and conditional grants. Explicit equalisation transfers should be unconditional grants. If equalisation cannot account for all revenue or cost disparities in the provision of some specific public service (e.g. the provision of health services to the elderly re siding in disproportionate numbers in one sub-national unit for weather reasons, having moved there after retirement and not paid taxes during their employment years to that government), then cost differentials may be taken into account in setting the level of specific grants.

41 o

Bernard Dafflon / Francois Vaillancourt

• Set up an autonomous body to inform the public and advise governments on best practices. This will allow a more dispassionate debate. REFERENCES

Aubut, J. and Vaillancourt, E, 2001. Using GDP in Equalisation Calculations: Are there Meaningful Measurement Issues ? Paper presented at the Evaluating the RTS and the Macro Approach Roundtable, Department of Finance, Charlotte town, 2001, mimeo. Barro, S.M., 1986. State Fiscal Capacity Measures: A Theoretical Critique. In: H.C. Reeves, ed. Measuring Fiscal Capacity. Boston: Lincoln Institute of Land Policy, 50-86. Bird, R. and Slack, E., 1990. Equalisation: The Representative Tax System Revisited. Canadian Tax Journal, 38, 913-927. Boadway, R. and Flatters, F, 1982. Efficiency and Equalisation Payment in a Federal System of Government: A Synthesis and Extension of Recent Results. Canadian Journal of Economics, 15 (November), 613-633. Boothe, P., 1998. Finding a Balance: Renewing Canadian Fiscal Federalism. Toronto: C.D. Howe Institute. Buchanan, J.M., 1950. Federalism and Fiscal Equity. American Economic Review, 40, 583-599Copland, D.B., 1935. Problems of Federal Finance. Economic Journal, 45 (June), 280-285. Courchene, T, 1970. Interprovincial Migration and Economic Adjustment. Canadian Journal of Economics, 3 (November), 550-576. Dafflon, B., 1977. Federal Finance in Theory and Practice, with Special Reference to Switzerland, Bern: Verlag Paul Haupt; Stuttgart: Schriftenreihe Finanzwirtschaft und Finanzrecht 21. Dafflon, B., 1995. Federalisme et solidarite, etude de la perequation en Suisse. Fribourg: Helbing & Lichtenham, Publications of the Institute of Federalism, Series Etudes et Colloques 15. Fossati, A. and Panella, G., 1999. Fiscal Federalism in the European Union. London and New York: Routledge Studies in the European Economy. Frey, R.L. et al., 1994. La Perequation financiere entre la Confederation et les cantons. Bern and Lucerne: Expertise mandatee par 1'Administration federale des finances et la Conference des Directeurs cantonaux des Finances. Grin, R, and Vaillancourt, R, 2000. On the Financing of Language Policies and Distributive Justice. In: R. Phillipson, ed. Rights to Language: Equity, Power and Education. New York: Lawrence Erlbaum Associates, 102-110. Jeanrenaud, C., 1985. Regional Impact of Government Procurement. Bern: Verlag Ruegger, Griisch CH and FNRS, Direction du Programme PNR "Problemes regionaux". Ladd, H.R, 1999. Measuring Disparities in the Fiscal Condition of Local Governments. In: The Challenge of Fiscal Disparities for State and Local Governments, selected essays. Cheltenham: Edward Elgar.

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Smart, M., 1998. Taxation and Dead-weight Loss in a System of Intergovernmental Transfers. Canadian Journal of Economics, 31,189-206. Spahn, B., 1993. The Design of Federal Fiscal Constitutions in Theory and Practice. In: The Economics of Community Public Finance. Luxembourg: Commission of the European Communities, Reports and Studies 5, 63-99. Vaillancourt, F, 2001. Simulating Inter-governmental Equalisation Transfers with Imperfect Data. Paper presented at the meeting of the National Tax Association, Baltimore, November 2001, mimeo. Watts, R., 2001. The Dynamics of Decentralisation. In: R.M. Bird and T. Staufer, eds. Intergovernmental Fiscal Relations in Fragmented Societies. Basel and Fribourg: Helbing & Lichtenham, Publications of the Institute of Federalism, Series Etudes et Colloques 33, PIFF 33, 15-34. Zimmermann, H., 1999. Experience with German Fiscal Federalism: How to Preserve the Decentral Content? In: A. Fossati and G. Panella, eds. op. cit., 162-176.

S C I E N T I F I C B A C K G R O U N D : SUBTHEME PAPER

JOSE ROBERTO AFONSO, SERGIO GUIMARAES EERREIRA, AND RICARDO VARSANO

Fiscal Competition

1.

INTRODUCTION

Federalism may be defined as a system in which a central government and a number of decentralised units, which are to some degree autonomous, cooperate to some extent to attain common goals. Though some may prefer a stricter definition, this one is convenient for the treatment of fiscal competition. First, it includes not only countries with federal constitutions, but also those where public service provision and taxation are decentralised, as well as sovereign units forming an economic union. Second, it makes clear that fiscal competition is an event related to one of the extremes of the continuum of possible federal arrangements, namely when autonomy is fully exerted and no coordination exists among the units.1 Inter-jurisdictional competition may be passive, in the sense that independent actions do not intentionally influence conditions faced by the unit or by other jurisdictions. Or it may be active, meaning that tax or expenditure is deliberately used as an instrument to pursue a given goal. Fiscal competition may be horizontal, involving governments at the same level, or vertical, involving competition between higher and lower levels of government. In either case one cannot presume that fiscal competition is either welfare enhancing or harmful. This is the main question addressed by the vast and fast-growing literature on fiscal competition originating from a seminal article by Tiebout (1956), and from Gates's systematisation of the existing economic theory on federalism in the early 19705 (Gates, 1972). There is no simple answer. The general inference is that the answer depends on several issues, prominent among them the objectives of competing governments; what they are

413 Part D Theme III - Scientific Background

competing for; how they compete; the behaviour of economic agents, especially their mobility in response to fiscal stimuli; and the characteristics of the economic environment, particularly the possibility of interjurisdictional externalities arising from government actions. This article does not set out to be a comprehensive survey of the extensive literature on fiscal competition, but rather to extract from it typologies, and some analyses and results that may help to organise a debate on the subject. Therefore, this paper deals firstly with the objects and instruments of fiscal competition. Secondly it presents some empirical evidence on the existence of fiscal competition, and on the reaction of economic agents to inter-jurisdictional differences in tax burdens and benefits from public spending. Thirdly it considers the main tools that may be used to avoid or counteract possible harmful effects of fiscal competition. Finally it summarises the argument presented and speculates on the effect of globalisation on the roles of central and decentralised government units. 2.

HOW TO C O M P E T E , FOR WHAT?

The traditional theory of fiscal federalism discusses the assignment of economic functions of the public sector - allocation, distribution and stabilisation - to different levels of government. The general conclusion is that central governments should be responsible for macroeconomic stabilisation and income redistribution, as well as for the provision of national public goods, i.e. those for which the benefit area is the whole country (or economic union). 2 The economic case for decentralised governments rests on the existence of public goods, the benefits from which are limited to a specific area or subset of the population (local public goods). The financing of local public goods in federations comes mainly from three sources: taxes assigned to lower-level governments, inter-governmental grants, and debt. Grants are inherently cooperative instruments, which if well designed can serve several different objectives in a federation. Decentralised taxation on the other hand, unless some degree of harmonisation exists, is independently exerted and may distort resource allocation when economic agents are mobile. To avoid distortions, theory recommends that only benefit taxation should be applied to potentially mobile tax bases. But in the real world, non-benefit taxation is the norm, being frequently used as an instrument of active governmental competition. According to its object, fiscal competition may be classified in three categories. First, decentralised units compete in the provision of a bundle of public goods and services, trying to improve their quality, reduce their cost and adjust supply to match residents' preferences. Second, they compete for funds to finance the provision of public goods at the lowest possible tax price for residents. And third, competition may have business investment as its object, to increase production, employment levels and income within the unit.

414 Afonso / Ferreira / Varsano 2.1. Competition in the provision of public goods

Competition in the provision of public goods is the subject of the original Tiebout model (Tiebout, 1956), as well as of more recent and richer models (Gates and Schwab, 1988), which conclude, under a set of strong assumptions, that this kind of competition is efficiency improving. In brief, uncoordinated decision making would result in the provision of a variety of fiscal packages (bundles of public goods plus a tax price), so that mobile individuals (or firms) could enjoy their preferred package by choosing to reside in the locality where it is provided ("voting with the feet"). Competition is also said to promote innovation in the provision of public goods and their diffusion and, by benchmarking with other governments, to minimise organisational costs of the public sector and reinforce accountability. Shah (2001) reports that in Chile and Canada, school financing mechanisms encourage informal benchmarking by citizens to guide their choice of schools. Models that relax some of the strong assumptions mentioned in the preceding paragraph show the reverse side of the coin. For instance, models employing game theory drop the assumption that there is no strategic interaction in response to policies of neighbouring jurisdictions, and find outcomes that involve sub-optimal levels of public outputs (Wildasin, 1988). When strategic behaviour exists, competition may stimulate the underprovision of merit goods and social policies. In Brazil, for example, municipalities are responsible for a large share of expenditures in public health, financed partly by earmarked federal block grants and partly by their own revenues. In metropolitan areas, individuals commute frequently across cities, and since eligibility for public health services is not attached to residence, municipalities providing better quality services are prone to attract clients from surrounding cities. In fact, Ferreira (2002) found that municipalities neighbouring die city of Rio de Janeiro spend less than the expected value in public health services, both in per capita terms and as a percentage of their respective tax revenues. In turn, the government of the city of Rio de Janeiro did not seem to take into account the positive externalities generated by its expenditures. The overall result is under-provision of public health services in the metropolitan area.3 Another interesting example is provided by the United States welfare system. A 1996 reform decentralised welfare policy. States now have a large degree of autonomy to decide on forms and levels of assistance to the poor. However, if a state decides to increase its welfare benefits, it runs the risk of attracting the poor from other localities. Their immigration increases state welfare expenditures, but not the income tax revenue. To avoid becoming a "welfare magnet", and hence increasing the tax burden on the state's better-off residents, each state tends to reduce the value of the benefits provided. As Brueckner (2000) points out:

415 Part D Theme III - Scientific Background because the concern about welfare migration depresses benefits in every state, no state succeeds in repelling the poor by keeping its benefits low, and each ends up being less generous than it would have been in the absence of migration.

This reasoning points to a downward bias in the value of welfare benefits under current institutional arrangements. Gates (1999) recognised the shortcomings of decentralised systems in terms of relief to the poor, but argued that a decision was made to accept the downward bias as a price to be paid for the possibility of abandoning unsatisfactory federal welfare programs, and looking for superior policy alternatives. He asserted: in a setting of imperfect information with learning-by-doing, there are potential gains from experimentation with a variety of policies for addressing social and economic problems. And a federal system may offer some real opportunities for encouraging such experimentation and thereby promoting "technical progress" in public policy.

He called policy experimentation in decentralised units "laboratory federalism". 2.2.

Competition for funds

The second category of fiscal competition is competition for funds to finance the provision of public goods to residents at the lowest possible tax price. This includes policies that aim to enlarge tax bases (or revenues), as well as disputes for usually scarce costless or low-cost funds provided by a higher level of government. Where the personal income tax is assigned to sub-national governments, these units may attract the wealthy from other jurisdictions by reducing tax rates or by providing a package of public goods tailored to their taste. Insofar as pure (or almost pure) public goods are provided - and therefore additional consumers do not imply increase in the total cost of production - newcomers reduce the tax bill of the other residents. This beggar-thy-neighbour policy, if successful, would imply higher tax prices for public goods elsewhere, and therefore their under-provision. It might also weaken the power of income redistribution policies. On the other hand, fiscally induced mobility may result in a more homogeneous population in each jurisdiction, and lead to a closer match between provision of and demand for local public goods. Switzerland offers the best conditions for undertaking empirical analysis of these points. Though there is a small federal income tax, cantons have the basic power to tax income and wealth, while local jurisdictions levy property taxes and a surcharge on cantonal direct taxes. Public spending is very decentralised, and social assistance is a concern only of local and cantonal governments.4

416 Afonso / Ferreira / Varsano

Feld and Kirchgassner (2000) addressed their work to the question of whedier fiscal competition exists and what its effects might be. They concluded that there is competition both among cantons and among cities; that taxes are more important instruments than social transfers; and that tax competition is stronger at local than at cantonal level. High-income earners' choice of where to reside depends on the amount of income tax they have to pay. Self-employed earners are more responsive to tax stimulus than dependent employees or retirees. For this last group, provision of public services plays a more important role than taxation in making residence decisions. Feld and Kirchgassner could not find any evidence that homogenisation of the population brought any efficiency improvement. Fiscal competition on the other hand, has not harmed decentralised income redistribution. When origin-based commodity taxes are used, a jurisdiction may attract consumers as opposed to residents by setting its tax rate below that of neighbouring units. In this case, residents of higher tax areas can escape taxation by incurring the transportation costs necessary to purchase certain private goods in the low-tax jurisdiction. They will do so whenever the tax differential exceeds the extra cost incurred. Though cross-border trade and distance selling have always posed a problem to tax designers, the recent expansion of e-commerce has made the need for a solution more pressing. One such solution is the adoption of destination-based commodity taxation. In this case, cross-border shopping and e-commerce would compete in equal conditions with local retailers' sales. Nonetheless, destination principle schemes are administratively difficult to implement.5 When business, capital income or property taxes are in force in decentralised government units, depending on economic conditions, tax exporting may occur. Income and property taxes may be exported to foreign owners of domestic companies or land. Business taxes may be shifted to residents of other jurisdictions who consume the goods, through increases in the prices of local output. Tax shifting is more likely when a locality produces a highly specialised commodity like natural resources or tourist attractions. When tax exporting occurs, residents of a particular area do not bear the full cost of the public goods provided by the local government. This may give rise to inefficient over-provision of these goods. Brazilian municipalities provide a case in which tax exporting is preceded by tax-base importing. These units levy an origin-based tax on services. The tax base is determined nationally by means of a list of taxable services; and municipalities are autonomous to set the tax rate. Most units charge a rate of (or near) 5%; but some, which in normal conditions would have almost no tax base, charge a lower rate of 2 % or less, in order to attract tax base. Note that, in contrast to the type of fiscal competition to be considered later on, the lower rate does not attract investment or pro-

417 Par"t D Theme III - Scientific Background

duction to the territory of the unit, but only the fiscal residence of the firm. To qualify as a resident, all a firm needs, besides a signboard, is a rented room with a chair, a table, a telephone and an attendant, costs which may be shared with several other firms. After the tax base is imported, business continues to take place elsewhere; but the tax on the services there rendered and consumed is paid to the municipality where the "headquarters" is located. Vertical tax competition may provide additional revenue to a subnational government at no extra cost for its constituency. This can happen whenever central and decentralised units impose a tax on the same tax base, and the lower-level tax may be credited against federal tax liability. If the compensation takes the form of a deduction from the federal tax base, there will be some increase in the overall burden faced by the taxpayer. This may result in a reduction of the tax base available to both units, amplifying the loss of revenue for the central government and reducing the gain of the decentralised unit. As noted by Wilson (1999), the negative externality imposed by the subnational unit - reduction of the tax base - does not necessarily imply that taxes are inefficiently high in the new equilibrium. Under certain conditions, the federal government may use its policy instruments to partially offset inefficiencies at the sub-national level, or in some cases to achieve even an efficient equilibrium. Another form of lowering residents' payments for public services is to compete for access to funds provided at low or no cost by higher levels of government. Shah (2001) notes that these funds are often allocated by programs, the objectives of which are vaguely specified, and which lack focus on service delivery and accountability to residents. This may give rise to pork-barrel politics and waste. He illustrates his arguments with examples from Brazil and Pakistan, where the president (prime minister) directed a substantial parcel of disposable resources to his (her) home state (district), and from South Africa, where provinces strategically overspent in local functions. They then claimed they had no funds to provide the national functions, such as health and education, which they administer. Of course, this is not to say that inter-governmental transfers are undesirable. On the contrary, well-defined grants play important roles in federal systems, including that of counteracting the possible ill effects of fiscal competition. 2.3.

Competition for business investment

Fiscal competition may aim to attract business investment to increase production, employment levels and income within the jurisdiction. Passive competition - with the use of different non-benefit tax burdens being explained, for example, by differences in tastes - may lead to the same or the opposite result. Instruments of this type of competition may be the tax

418 Afonso / Ferreira / Varsano

structure, the expenditures mix and regulatory policies, as well as tax incentives and public services provided to specific firms. Tax competition through lowering corporate income tax has been one of the major fiscal issues in the European Union (EU) for many years. Those who fear that fiscal competition will bring taxes on capital income to unduly low levels, claim some degree of tax coordination. Another significant group takes the opposite view that tax competition is welfare improving, and therefore that corporate income tax should not be harmonised. A recent paper (Zodrow, 2001) provides an overview of what economic literature has to say in support of each of these opposite views. Zodrow starts from a basic model (Zodrow and Mieszkowsky, 1986) which, under a set of assumptions, concludes that tax competition leads to an inefficiently low level of public services in all jurisdictions. Next, he reviews a wide variety of extensions of the basic model that alter one or more of its assumptions. The results are mixed: some identify potential gains, others losses, from tax competition; little is said about their magnitude. Coupling these results with the observable reluctance of countries to give up their fiscal sovereignty, and with the fact that some countries would be net losers from tax harmonisation, Zodrow concludes that the case for it is tenuous. He suggests that modest initiatives, like the Code of Conduct on Business Taxation (European Commission, 1997), instead of attempts at full harmonisation of the income tax, should be preferred. However, unfettered tax competition in the EU ushers in a concern about the future of re-distributive policies in the area (Sinn, 1994; Gates, 2001). Though redistribution should preferably be assigned to central governments, the European Community budget is too small to provide such programs, and there is no intention to enlarge it significantly in the future. Therefore, each member of the EU will have to support its own programs. The contention is that increased factor mobility in the EU, in the absence of income tax coordination, will force countries to rely more heavily on benefit taxation (which rules out redistribution programs), or to incur a significant cost in terms of economic growth, by taxing mobile factors to finance such programs. Furthermore, as capital supply is generally more price-elastic than the labour supply, and skilled labour is more mobile than unskilled, it may be expected that a wage tax will fall more heavily on unskilled than on skilled labour, and that taxation of capital income will be low, resulting in a more regressive tax system. Another interesting question, addressed by Keen and Merchant (1997), concerns the composition rather than the level of public spending in the context of fiscal competition. They divide public spending into two categories: utility enhancing (either public goods which complement private consumption like recreational facilities, or re-distributional payments to some poorer groups), and production improving (public inputs such as infrastructure or general training). Since they assume that

419 Part D Theme III - Scientific Background

citizens are immobile and firms are mobile, their conclusion is quite intuitive. In their own words, "fiscal competition leads to too many business centres and airports but not enough parks or libraries". Has this trend been observed in federal systems? And what is the impact of expenditure competition among countries in a world with increasing mobility of capital across borders? Those are open questions. But Keen and Merchant's result suggests that there is a case for coordination not only of taxes on mobile bases, but also of domestic public expenditures. A case may also exist for coordination of regulatory policies. The purpose of regulation is to remedy market failures such as externalities and monopolistic power. But it can affect a jurisdiction's competitiveness. In particular, if profit-maximising manufacturers take into account the compliance costs of local regulation, governments may use lax regulation to attract business to the territory of the unit. For example, there is a flow of literature on fiscal competition that looks at the impact of environmental regulations on business location (Levinson, 1996). In addition, the design of financial regulation can potentially be used as an instrument to attract portfolio investment. Since banking regulations are usually set at federal level, such competition generally takes place among sovereign governments. Instead of lowering taxes in an attempt to attract business, decentralised governments may resort to concession of tax incentives, subsidies, and provision of public inputs to specific firms. These are typical regional development policy instruments. When used for decentralised industrial policies, they may bring about destructive competition. The so-called fiscal war among Brazilian states illustrates this point. The practice of reducing state value added taxes (VATS) to attract investment has been unlawful in Brazil since 1975, except in cases in which the intended reduction is unanimously approved by the 26 states and the Federal District. Yet the law has been disregarded, and tax competition among Brazilian states has intensified since the beginning of the 19905. Foremost, in many cases, is the competition for the wave of new automotive vehicle industrial plants that have looked for a location in the country since 1995-6 From the standpoint of any particular state, granting fiscal incentives to attract investment seems worthwhile. Unless the beneficiary would choose to locate his business in the state even in the absence of the incentive, the tax revenue forgone would not exist anyway. In addition, aside from their direct impact on production and employment, newly attracted firms induce additional economic activity, creating still more jobs and income, and, of course, some tax revenue. If this were the whole story, state tax incentive would be a valuable development tool. But when other states replicate the successful experience of one, a destructive tax competition starts. As the practice of granting incentives spreads, its efficacy fades. Since taxes have been equally reduced everywhere, the fiscal benefit ultimately

420 Afonso / Ferreira / Varsano

loses its power to induce relocation of production. But revenue goes down in all states. When the process reaches this stage, firms choose their location considering only market and production conditions. Pressed by greater spending and reduced tax collection, the less developed, financially weaker states become unable to provide the services and public works necessary to attract new business. In the final stages of the fiscal war, the more developed states win all battles. Disparities - already very large in the case of Brazil - naturally tend to increase. The fiscal cost of the tax war for the country is very high. A recent dissertation analysing three cases of newly installed vehicle factories (Silva, 2001), concludes that in two cases the present value of the flow of subsidies exceeds the value of private investment, and that the fiscal cost of creating ajob is over us$ 350,000. Furthermore, this does not seem to be a cost incurred to attract investment to the country. The plants would probably be located in Brazil even in the absence of the tax break.7 Rather, this is the cost of attracting the investment to one particular location within the country that, if the incentive had been truly effective, would not be the one recommended by efficiency considerations. An implicit assumption of most of the preceding discussion is that governments are benevolent, i.e. they act in the best interests of the residents of the jurisdiction. Public choice literature contends that a more realistic assumption is that government officials and politicians have their own objectives, act in their own interests or serve the interests of powerful interest groups. In both these cases, instead of maximising the welfare of the population, they will seek to maximise the size of the government budget. Under this assumption, tax competition has the welfare-improving role of counteracting Leviathan state tendency to over-expansion. In this context, harmonisation of tax policies would serve the interest of the bureaucrats, assuring monopoly of power to keep government revenue higher than it would otherwise be.8 3.

SOME EMPIRICAL EVIDENCE

Do firms and individuals, as beneficiaries of welfare programs, consumers of public and private goods, or factory owners, respond to fiscal stimuli? This is an important question. A negative answer would mean that one should not expect benefits or worry about the costs of fiscal competition. Though there is substantial theoretical material on how economic agents react to tax and expenditure differences across jurisdictions, there is not much empirical work strictly related to the elasticity of tax bases in relation to observed differences in the pattern of public spending or taxation. One extensively debated question in the literature on expenditure competition is whether there is welfare-motivated migration, i.e. whether or not welfare recipients move from low to high-benefit jurisdictions. Consid-

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ering the case of welfare migration across us states, six out of a sample of eight studies found evidence of migration, though two of them concluded that its magnitude is small.9 By contrast, Walker (1994), and Levine and Zimmerman (1995) could not detect any evidence of welfare migration. Hence, the evidence is moderately in favour of the hypothesis that migration exists, which may indicate that states in the United States are in a noncooperative equilibrium, under-providing relief to their poor compared to what would be the optimal outcome. However, the sensitivity of migration to welfare benefits is not high. Meyer (1998), for example, found that a us$iooo increase in the annual welfare benefit raises migration of single women to a region by only 6% over a five-year period.10 Instead of reducing overall welfare spending, states may protect themselves from in-migration of the poor by limiting access to public goods. This is generally done by restricting the status of residence. One can say that welfare spending becomes a "club" good, since it is possible to exclude some individuals from its consumption. Such action reduces incentives for the poor to move, and as a consequence should lead to higher welfare transfers compared to a situation without any exclusion. Evidence of such restrictions is common in the history of the United States.11 The existence of eligibility conditions may partly explain why empirical studies do not find more significant effects of welfare benefit differences on migration of the poor. The studies of Figlio et al. (1997) and Saavedra (1998), instead of looking at the responses to differences in welfare transfers, test the existence of strategic interdependence between different states directly.12 They provide strong evidence that benefit levels in nearby states affect a given state's choice of benefit level. Turning to tax competition, since there are not many federal systems where sub-national governments have great freedom to set tax rates, the existing evidence pertains to a few countries. Countries belonging to the Organisation for Economic Cooperation and Development (OECD) for which there is enough data available are the United States, Canada, Germany and Switzerland. Even in Germany, the local taxing autonomy is mainly confined to the business tax. Most of the literature does not test the existence of tax competition, but the sensitivity of a given tax base to the level of the tax rate. There is a vast set of empirical studies looking at the impact of capital taxes on several different measures of business activity. Most of the studies are applied to the United States, studying the impacts of differences in income tax rate across states, and differences in property taxation within a given state. Table i summarises the results found in a survey of the United States (Wasylenko, 1997). The cells of the table report the number of studies where an elasticity measure was estimated, the number of those studies in which the tax elasticity was statistically significant (in parenthesis), the range of elasticity estimates (in brackets), and the median elasticity.

422

Afonso / Ferreira / Varsano

Table i Summary of econometric results of tax effects on business location Inter-regional or Inter-state Studies

Infra-regional Studies

Overall Tax Elasticity

Business Tax Elasticity

Property or Business Tax Elasticity

Total Employment

6 studies (5) [-0.85, 0] -0.58

3 studies (2) [-0.16, 0] -0.11

4 studies (3) [-1.95, -0.81] -1.85

Manufacturing Employment

13 studies (8) [-1.54,0.05] -0.10

2 studies (1) [-0.26, 0]

1 study (1) -0.79

Investment in Manufacturing

6 studies (3) [-1.02,0.54] -0.60 or 0

7 studies (6) [-0.36, -0.10] -0.20

Gross State Product, Income or Value Added

12 studies (7) [-0.88, 0.27] -0.07

1 study (0) -0.14

3 studies (2) [-0.40, 0] -0.18

19 studies (15) [-15.7, 0.6] -0.20

Dependent Variable AGGREGATE DATA

MICRO DATA

Manufacturing Plant Berths or Location

5 studies (4) [-2.70; 0.62] -1.59

Estimates in Table i indicate the percentage decrease in the dependent variable when the tax rate in a given location is i % higher than in a nearby location. For example, the impact of a business tax i % higher in a given state, compared to other states, is a o.i i % decrease in employment in that state (column 2, line i). The main conclusions are summarised below. • Estimates of response to tax differentials vary widely. Intra-regional differences in tax rate have a larger impact on business location than differences across states (or inter-regional). The inference is that once the locality is chosen (taking into account a set of regional attributes like agglomeration, cost of labour, size of the market, quality of education, infrastructure of transportation etc.), the specific location (in which neighbourhood or suburb) will be strongly determined by tax considerations.13 • The wide range of the elasticity estimates has less to do with the type of activity being measured than with the variations in data, time periods, and other variables used in the estimation equation. In effect, the results change depending on which variables are included in the estimation equation, or which time period is analysed.

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Part D Theme III - Scientific Background

• In particular, adding controls for the type and level of public goods supplied by each location significantly affects the econometric results. Business-friendly regulations and public spending that enhances productivity enable a given location to set a higher capital and/or property tax rate. In other words, local attributes increase the "tax setting power" of a given jurisdiction and should be taken into account when estimating business responses to tax differences. In a different vein, some studies test the existence of strategic complementarity on business tax setting between jurisdictions. Ladd (1992) found statistical support for the hypothesis that neighbouring jurisdictions mimic each other's tax policy in the United States. Buttner (1999) tested the existence of tax competition from the relationships between the levels of capital income tax rate in German districts. Like Ladd (1992), he found evidence that tax rates are positively related to neighbours' tax rates.14 Some evidence on cross-border shopping may also be found in the empirical literature on tax competition. Using data from the United States, Due and Mikesell (1994) find that a i % differential in sales taxes results in a shift from i % to 6 % of purchases from higher to lower tax areas. In Canada, a study of this phenomenon found little evidence of cross-border trade in the Ottawa-Hull area in the 19708, when the inter-provincial rate differential was 3% (Dufour and Vaillancourt, 1982). In Europe, some regimes of tax exemption for non-residents lead to "cross-country" shopping. For example, in the Schleswig-Holstein border between Denmark and Germany, Germans used to buy cars in Denmark while Danes bought spare parts in Germany. This was a consequence of regulation and taxation, which led to completely different final prices in the two countries (Economist, 29.11.2001). 4.

HOW TO COPE WITH F I S C A L C O M P E T I T I O N

One of the challenges facing areas (countries, unions or even the whole world) where fiscal competition develops is how to reduce the welfare loss from its many facets without sacrificing the benefits of decentralisation. A country may impose restrictions on beggar-thy-neighbour policies by means of a constitutional provision or national laws binding the decentralised units. However, such restrictions may be difficult to enforce. Authorities would have to keep track of a large assortment of fiscal instruments, including disguised ones. It would be difficult to tell whether these instruments were directed to competition, or to other objectives that they can also serve. And long judicial battles might be necessary to determine whether or not the act of one decentralised unit caused any damage to the affairs of another. Besides, there is a risk of putting welfare-enhancing competition in the same bag, and preventing it as well.

424 Afonso / Ferreira / Varsano

A high degree of centralisation of taxing powers, coupled either with transfers to decentralised units (as in the case of Argentina), or the assignment of tax legislation to the federal government (as in Germany), are possible solutions. They have in common the disadvantage of eliminating one important facet of federalism, namely the autonomous determination of the size of each sub-national unit's budget. Vertical coordination (tax collection agreements, tax-base sharing, abatement of sub-national from federal taxes), which is extensively used in Canada, results in more uniform tax bases, leaving space for decentralised decisions on the size of the budget, but also for some competition. Inter-governmental transfer mechanisms can be designed to reduce the detrimental effects of fiscal competition without sacrificing the benefits of decentralisation. The theory of fiscal competition is concerned with the existence of externalities generated by the action of a given jurisdiction over the residents of another, and with the consequences when tax and expenditure decisions do not take such externalities into account. Economic theory prescribes the use of a system of inter-jurisdictional transfers whereby a given unit pays taxes for the negative spillovers, and receives subsidies for the positive spillovers that it promotes. Such "Pigouvian" transfer systems would theoretically drive the system to an efficient decentralised equilibrium (Varian, 1992). Unfortunately, implementation of this ideal transfer scheme is impossible, and federal countries use non-optimal schemes. In the case of expenditure competition, the under-provision of transfers to the poor resulting from decentralisation may be partially offset by earmarked grants from the central to sub-national governments. This is the case with the decentralised provision of public education and health in Brazil, as well as that of us states' direct assistance to families below poverty line. Earmarked transfers may either take the form of block grants or matching grants. Under the block grant system each jurisdiction receives a lump sum from the central government, the magnitude of which is independent of the level of the jurisdiction's contribution to the provision of the public good. Under the matching grant system, individual jurisdictions determine the level of expenditure, and the central government pays a fixed share of a jurisdiction's total outlay. The theory of expenditure competition prescribes a matching-grant system because it reduces the marginal cost (faced by the states) of providing welfare programs, leading to a higher equilibrium level of expenditure. Under the block grant system, states tend to spend only the amount of the lump-sum transfer coming from the central government.15 Harmonisation of fiscal policies may also be used as a tool to reduce the negative effects of fiscal competition, while preserving the advantages of decentralised policies. In the case of unions where "central governments" have a very small budget and decentralised units are sovereign jurisdictions that cannot be legally bound except by voluntary subscrip-

425 PartD Theme III - Scientific Background

tion to a treaty, harmonisation may well be the only feasible instrument to cope with fiscal competition's undesirable effects. As mentioned in the introduction, fiscal competition is an extreme case in which members of a federation act independently, without any scope for cooperation. Harmonisation is a move to a position in which some cooperation exists. This may range from token coordination, which is presendy the position with respect to EU corporate income taxes, to full integration, a position in which the units give up their autonomy or sovereignty, as is the case with the monetary policies of countries in the European Monetary Union. Much has been said about the need for harmonisation of fiscal policies among the European countries as they engage in deeper integration. And much has been said against harmonisation, particularly by those who believe in Leviathan. But even discarding the hypothesis that harmonisation will be the instrument to assure large-scale government, it must be recognised that the implementation of such a coordination scheme is far from trivial, especially in the economic union. Firsdy, a contract among sovereign countries must consider a wide range of possible non-cooperative strategies that should be ruled out. It is probably impossible to cover every alternative. For example, harmonisation of the tax structure may be put at risk by lenient enforcement in a given jurisdiction. Secondly, when dealing with sovereign countries, such a "federalist pact" is not enforceable if one party decides to act uncooperatively. Hence, an organism to supervise and enforce the agreement must be built before such a contract is designed. The question is: are EU members prepared to give up their fiscal sovereignty? This is a sine qua non condition for deepening the harmonisation process. The answer to this question is dependent on a number of factors, important among them the answer to another question: how significant are the gains to be reaped from tax coordination? There are few answers to this question in economic literature, and most of them are provided in the context of highly simplified models. A recent paper (Sorensen, 2001) developed a tax competition model that relaxes many of the restrictive assumptions of previous modelling efforts, in an attempt to provide more reliable guidance to policy makers. Sorensen uses die model to offer quantitative estimates of the welfare gains from tax coordination. He considers the example of global coordination, whereby all countries worldwide coordinate their tax policies, and of regional coordination whereby only a subset of countries (the "union") coordinates their policies. His main conclusions are: that the gain from regional tax coordination is only a small fraction of the potential gain from global coordination if capital mobility is perfect. With imperfect capital mobility between the tax union and the rest of the world, there is greater scope for

426 Afonso / Ferreira / Varsano regional tax coordination, although the welfare gain will almost certainly be well below 1% of GDP and will accrue mainly to countries with high initial capital income tax rates.

In short, the reward for surrendering fiscal sovereignty seems to be too low. 5.

S U M M A R Y AND A NOTE ON G L O B A L I S A T I O N

Fiscal competition is a natural companion of decentralisation. Potentially it always exists, since it is the consequence of differences among jurisdictions, and not necessarily of intentionally promoted discrepancies; there are no two identical government units in the world. Practically, the manifestation of fiscal competition depends on the intensity of the divergences, and on the reaction of the economic entities in face of the array of options offered by decentralisation. Fiscal competition takes several forms, uses diverse instruments and may bring about a number of different outcomes. An impressive amount of theoretical work tries to model the phenomenon. Overall the results are quite sensitive to the set of assumptions adopted in the analysis. Therefore there are results to almost all tastes. The state of the art, as expressed by Wilson (1999), is that "competition among governments is now seen as a less straightforward phenomenon than perhaps originally envisioned." And of course, there is space for further modelling, with the introduction of complexity that may bring the ideal closer to the real world. Proving the practical existence of fiscal competition, and verifying its impact on factors of production and consumer movement across jurisdictions is an important step. Knowledge about the effects of competition on the economic agents, and on the intensity of their reaction to the fiscal stimulus, is helpful for the conception of mechanisms to curb or invigorate government competition, whichever is the case. But which is the case? The results given by what may be called the traditional tax competition models show that tax competition tends to distort the allocation of resources, promoting welfare losses. Given that these losses exist, they should be weighed against the possible concomitant gains from expenditure competition (e.g. ideal environment for public policy innovations, and a closer match between public goods provision and local preferences). The existing literature provides almost no evidence about the magnitude of these gains and losses, and further research on this difficult empirical problem is necessary to fill this fundamental gap. In the absence of clear-cut conclusions from either theoretical or empirical literature, the wisest attitude toward fiscal competition seems to be to avoid extreme measures either to impede or to enhance competition. Hence, controls or re-centralisation may be welfare-reducing measures in-

427 Part D Theme III - Scientific Background

sofar as they eliminate political competition among jurisdictions or create the environment for the Leviathan to rise. Of course the best course of action is, whenever possible, to adopt measures that reduce welfare losses without sacrificing the benefits of decentralisation. Carefully designed inter-governmental transfers and cautiously conducted harmonisation processes seem to be the most promising instruments. Finally, some conjectures should be made on the impact of the globalisation of economic activities on fiscal competition. Globalisation and regional integration restrain fiscal sovereignty, insofar as factor mobility and growing trade-flows require that domestic policies, including taxation, follow international patterns more closely. Homogenisation of central governments' practices may induce decentralised units to assume the task of attracting foreign direct investment by increasing the provision of local public inputs. Furthermore, international competitiveness is increasingly contingent on the existence of skilled labour, which depends on education and training outlays that are typically decentralised government functions. Therefore, it should be expected that the intensity of fiscal competition will increase in the near future, and that sub-national units will be competing not only among themselves, but also in the world market. They will probably bypass the national governments and negotiate directly with firms regarding the location of their business. Given that skilled labour, infrastructure and other local public inputs are tokens in these negotiations, the less developed regions of a country, or indeed the world, will be at a disadvantage. Regional disparities (as well as personal income concentration) will tend to increase, which suggests that central governments and international institutions should amplify their personal and regional re-distributive efforts in order to neutralise this undesirable trend. NOTES 1 Fiscal competition occurs in a situation in which each federate unit independently decides a tax or expenditure policy. This does not preclude concomitant cooperation in other fiscal and non-fiscal policies. 2 Typically, decentralised units do not have monetary policy instruments, and being highly open, are unable to influence macroeconomic conditions using fiscal devices. Income redistribution policies on the other hand, are constrained by the mobility of economic agents. If a tax-the-rich-benefit-the-poor policy were locally pursued, higher-income households would tend to leave a jurisdiction and an inflow of poor families would be stimulated. Notwithstanding, decentralised government units often perform functions financed by the wealthy or by all, where benefits accrue mainly to the poor; local programs that provide cash or in-kind relief to the poor are not uncommon.

428 Afonso / Ferreira / Varsano 3 It is said as a joke - but it is not too far from reality - that Osasco, a municipality in the metropolitan area of Sao Paulo, solved all its health problems by buying ambulances that remove its sick residents to hospitals in the city of Sao Paulo. 4 It should be noted, however, that social assistance expenditures are a small fraction of total expenditures. 5 On the design of such schemes see Poddar, 1999; Varsano, 2000; Bird and Gendron, 2000; McLure, 2000; and Keen, 2000. 6 This and the next few paragraphs on Brazilian states' fiscal war draw on Mora and Varsano, 2001. 7 A possible but improbable alternative location, given that the market to serve is chiefly the Mercosur, would be Argentina. If this alternative had, in fact, been considered and discarded because of the incentives, the fiscal cost cannot be said to be in vain. But Brazilian state policy would be unduly inflicting a loss on the partner. 8 Some formal Leviathan-type models are presented in Sinn (1992), Edwards and Keen (1996), Rauscher (1998), and Gordon and Wilson (2001). 9 Southwick, 1981; Blank, 1988; Borjas, 1997; Enchautegui, 1997; Meyer, 1998. 10 Most of these studies are based on the AFDC (Aid to Families with Dependent Children), in which money is given to the single mother. Meyer (1998), for example, finds that single mothers migrate more readily in response to higher welfare benefits than single women without children, who are not eligible for the benefit. This is additional evidence of welfare migration. 11 Brueckner (2000) observes that some states imposed severe restrictions by denying any welfare benefits to poor migrants over a waiting period as long as one year. Such restrictions were struck down by the Supreme Court in 1969, but states responded by instituting a "two-tier" benefit scheme, under which the benefits earned by migrants during their waiting period corresponded to the benefit level in their state of origin. The most well-known case is that of Wisconsin, which protected itself against migration from Illinois, a traditionally less generous state. 12 In the presence of fiscal competition, one should expect strategic complementarity among governments. For example, when the neighbour increases the tax rate on capital, the given state (or country, or municipality) will act in the same direction, and vice versa. 13 At the intra-provincial level, two papers concerning tax competition in Canada should be mentioned. Locke and Tassounyi (1996) found that business migrates from metropolitan Toronto to the vicinities which charge lower nonresidential property tax. Slack (1994), looking at data from Ontario, inferred that higher non-residential property taxes may discourage businesses from location in a given municipality. She also concluded that property tax differentials are not a major factor in the decision to locate in one metropolitan area or another; but once a metropolitan area is chosen, they affect the decision about the specific municipality in which to locate.

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14 The explanation for a positive correlation between tax rates in a neighbourhood may be a result of classic competition, since the tax base is volatile. Alternatively, it might be a result of political competition. Voters compare policies in the neighbouring district with those of their own district. The mayor does not get re-elected if his (or her) policy happens to be worse than the one in the neighbouring district (Besley and Case, 1995). 15 The United States welfare reform of 1996 changed from a matching grant to a block grant system, and gave more freedom to the states to define their own policies. Brueckner (1999) argues that this switch may cause a reduction in welfare spending in the long run, which could only be corrected by going back to the matching grant mechanism. REFERENCES

Blank, R.M., 1998. The Effect of Welfare and Wage Levels on the Location Decisions of Female-Headed Households. Journal of Urban Economics, 24, 186-211. Besley, T. and Case, A., 1995. Incumbent Behavior: Vote-Seeking, Tax Setting, and Yardstick Competition. American Economic Review, 85(1) March, 25-45. Bird, R.M. and Gendron, P.P., 2000. CVAT, VIVAT, and Dual VAT: Vertical Sharing and Interstate Trade. International Tax and Public Finance, 7 (6), 753—761. Borjas, G.J., 1997. Immigration and Welfare Magnets. Harvard University, mimeo. Brueckner, J.K., 2000. Welfare Reform and the Race to the Bottom: Theory and Evidence. University of Illinois - Urbana-Champaign, mimeo. Biittner, T, 1999. Determinants of Tax Rates in Local Capital Income Taxation: A Theoretical Model and Evidence from Germany. CEsifo Working Paper Series No. 194, September 1999. Due,J. and Mikesell, J.L., 1994. Sales Taxation: State and Local Structure and Administration. Washington: Urban Institute Press. Dufour, J-M. and Vaillancourt, F, 1982. Provincial and Federal Sales Taxes: Evidence of Their Effect and Prospects for Change. In: W.R. Thirsk andj. Whalley, eds. Tax Policy Options in the icjSos. Montreal: Canadian Tax Foundation. Edwards, J. and Keen, M., 1996. Tax Competition and Leviathan. European Economic Review, 40, 113-134. Enchautegui, M.E., 1997. Welfare Payments and Other Determinants of Female Migration. Journal of Labor Economics, 15, 529-554. European Commission, 1997. Toward Tax Co-ordination in the European Union: A Package to Tackle Harmful Tax Competition. COM (97) 495 final. Feld, L. and Kirchgassner, G., 2000. Income Tax Competition at the State and Local Level in Switzerland. CEsifo Working Paper Series No. 238, January 2000. Ferreira, S.G., 2002. Municfpios: Despesa com Saude e Transferencias Federais. Informe~SF~No. 38. Area de Assuntos Fiscais e de Emprego/BNDES. Figlio, D.N., van Kolpin, W. and W. Reid, 1999. Do States Play Welfare Games'? Journal of Urban Economics, 46 (3) November, 437—454.

43° Afonso / Ferreira / Varsano Gordon, R.H. and Wilson, J.D., 2001. Expenditure Competition. National Bureau of Economic Research Working Paper 8189, March 2001. Keen, M., 2000. VIVAT, CVAT, and All That: New Forms of Value Added Tax for Federal Systems. Canadian Tax Journal, 18(2), 409-424. Keen, M. and Marchand, M., 1997. Fiscal Competition and the Pattern of Public Spending. Journal of Public Economics, 66, 33-53. Ladd, H., 1992. Mimicking of Local Tax Burdens among Neighboring Counties. Public Finance Quarterly, 20(4), 450-467. Levine, P.B. and Zimmerman, D.J., 1995. An Empirical Analysis of the Welfare Magnet Debate Using the NLSY. National Bureau of Economic Research Working Paper No. 5264. Levinson, A., 1996. Environmental Regulations and Manufacturers' Location Choices: Evidence from the Census of Manufacturers. Journal of Public Economics, 62, 5-29. Locke, W. and Tassounyi, A., 1996. Local Tax Base Endogeneity and Tax Competition: A Consideration of the Greater Toronto Area. Paper presented in the Canadian Economics Association Annual Meeting, Brock University, Ontario, 1996. McLure, C.E. (Jr), 2000. Implementing Subnational Value Added Taxes on Internal Trade: The Compensating VAT (CVAT). International Tax and Public Finance, 7(6), 723-740. Meyer, B., 1998. Do the Poor Migrate to Receive Higher Welfare Benefits ? Northwestern University, mimeo. Mintz,J. and Tulkens, H., 1986. Commodity Tax Competition between Member States of a Federation: Equilibrium and Efficiency. Journal of Public Economics, 29, 133-172. Mora, M. and Varsano, R., 2001. Fiscal Decentralization and Subnational Fiscal Autonomy in Brazil: Some Facts from the Nineties. IPEA, Texto para. Discussao No. 854, December 2001. Gates, W., 1972. Fiscal Federalism. New York: Harcourt Brace. Gates, W., 1999. An Essay on Fiscal Federalism. Journal of Economic Literature, 37, 1120-1149. Gates, W.E., 2001. Fiscal Competition and European Union: Contrasting Perspectives. Regional Science and Urban Economics, 31, 133-145. Gates, W.E. and Schwab, R., 1988. Economic Competition among Jurisdictions: Efficiency-Enhancing or Distortion-Inducing? Journal of Public Economics, 35, 333-354Poddar, S., 1999. Considerations in the Design of a VAT at the State Level in India. Paper prepared for the VAT Seminar for Senior Officials from the Centre and the States, July 1999. Rauscher, M., 1998. Leviathan and Competition among Jurisdictions: The Case of Benefit Taxation. Journal of Urban Economics, 44, 59-67. Saavedra, L.A., 2000. A Model of Welfare Competition with Empirical Evidence from AFDC. Journal of Urban Economics, 47 (2) March, 248-279.

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Shah, A., 2001. Interregional Competition and Federal Cooperation - To Compete or to Cooperate? That's not the Question. Paper presented at the International Forum on Federalism in Mexico: Local and Global Challenges. Vera Cruz, Mexico, November 2001. Silva, M.A., 2001. Guerra Fiscal e Financas Federativas no Brasil: o Caso do Setor Automotivo. Universidade Estadual de Campinas, Masters dissertation. Sinn, H-W., 1994. How Much Europe? Subsidiarity, Centralization and Fiscal Competition. Scottish Journal of Political Economy, 41, 85-107. Sinn, S., 1992. The Taming of Leviathan: Competition among Governments. Constitutional Political Economy, 3, 177-196. Slack, E., 1994. Non-Residential Property Taxation and Competitive Advantage in the Greater Toronto Area. Canadian Urban Institute: Urban Focus Series No. 94. Sorensen, P.B., 2001. International Tax Coordination: Regionalism versus Globalism. CEsifo Working Paper No. 483, May 2001. Southwick, L. (Jr), 1981. Public Welfare Programs and Recipient Migration. Growth and Change, 12, 22-32. Tiebout, C., 1956. APure Theory of Local expenditures. Journal of Political Economy, 64,416-424. Varian, H., 1992. Microeconomic Analysis. 3rd ed. New York: W.W. Norton & Co. Varsano, R., 2000. Subnational Taxation and the Treatment of Interstate Trade in Brazil: Problems and a Proposed Solution. In: SJ. Burki et al., eds. Decentralization and Accountability of the Public Sector. Proceedings of the Annual Bank Conference on Development in Latin America and the Caribbean. Washington, D.C.: World Bank, 339— 356. Walker, J.R., 1994. Migration among Low Income Households: Helping the Witch Doctors Reach Consensus. Institute for Research on Poverty, University of WisconsinMadison, mimeo. Wasylenko, M., 1997. Taxation and Economic Development: The State of the Economic Literature. New England Economic Review, March/April, 36-52. Wildasin, D.E., 1988. Nash Equilibria in Models of Fiscal Competition. Journal of Public Economics, 35, 229-240. Wilson, J.D., 1999. Theories of Tax Competition. National Taxjournal, 52, 269-304. Zodrow, G.R., 2001. Tax Competition and Tax Harmonization in the European Union. Paper presented at the Conference on Tax Policy in the European Union, The Hague, October 2001. Zodrow, G.R. and Mieszkowski, P., 1986. Pigou, Tiebout, Property Taxation, and the Under-provision of Local Public Goods. Journal of Urban Economics, 19, 356-370.

SCIENTIFIC B A C K G R O U N D : SUBTHEME PAPER ANWAR

SHAH1

Fiscal Decentralisation in Transition Economies and Developing Countries Progress, Problems and the Promise

1.

INTRODUCTION

During the past 50 years, by subscribing to different variants of central planning paradigms of development, developing and transition economies have by and large followed a path of centralisation, and as a result they are more centralised than industrialised countries were in their early stages of development. A number of recent developments, discussed below, are prompting most developing and transition economies to re-examine the respective roles of various levels of government, the private sector and civil society as partners in development.2 This paper examines the reasons for the rekindling of interest in fiscal rearrangements in developing and transition economies, and reviews the progress to date using a systemic framework. It draws general and institutional lessons to advance the agenda for creating an enabling environment for responsive and accountable local governance. The overall conclusion of the paper is that citizens' voice, choice and exit options are critical to the success of decentralised decision making. These areas require significant attention in ongoing reform efforts. The paper is organised as follows. Firstly there follows a discussion of the motivation behind the mega change. Secondly comes a simple framework to evaluate and cope with the forces of change. The next section reviews the broad trends in the division of powers in developing and transition economies and their implications for public sector governance. The following section reviews the operational capacity and orientation of the public sector in support of the reform efforts. The final section draws general lessons from experience in adapting to a changing world.

433 Part D Theme III - Scientific Background 2. THE Q U E S T FOR THE RIGHT B A L A N C E

The reasons for rethinking fiscal arrangements are manifold, and the importance of each factor is country specific. The demise of the collective ownership model prompted a major change in government organisation and geographical boundaries of some countries, especially in Eastern Europe and the former Soviet Union (Horvath, 2000). These countries sought guidance from the principles and practices pursued in industrial countries where market preserving systems of public decision making have evolved over a long period of time. In Africa, both former French and English colonies inherited highly centralised systems of governance geared towards command and control, with litde concern for citizens' preferences. Resolution of ethnic conflicts required greater protection of minority rights in politically disenfranchised and fragmented societies in Africa (Bird and Stauffer, 2001). In Latin America, political reforms empowered people who in turn demanded greater accountability from their governments. In most countries, national governments have failed to ensure regional equity, economic union, central bank independence, a stable macroeconomic environment or local autonomy. The record of subnational governments is also not very commendable. Sub-national governments have often followed beggar-thy-neighbour policies, sought free rider-ship with no accountability, and have often undermined national unity in pursuit of narrow self-interest. The judicial systems in some countries are also providing stimuli for change by giving a broader interpretation of basic rights, and requiring national and sub-national legislation to conform to the basic rights of the citizens. The emergence of a new "borderless" world economy complicates this picture by bringing new challenges to constitutional federalism (Courchene, 1995; Shah, 2002). These challenges arise from the reduced role of nation states in carrying out the regulation of certain economic activities as borders have become more porous, and information technology has weakened their ability to control information flows. With globalisation, it is becoming increasingly apparent that nation states are too small to tackle the large things in life and too large to address the small things. More simply nation states are fast losing control of some traditional areas of control and regulation, such as regulation of external trade, telecommunications, and financial transactions. National governments are experiencing diminished ability to control the flow of goods and services, ideas, and cultural products. These difficulties are paving the way for the emergence of specialised institutions of global governance, such as the World Trade Organization (WTO) and the Global Environmental Facility, with many more to follow, especially institutions regulating information technology, satellite communications, and international financial transactions. Thus nation states may well be confederalising in the coming years, and relinquishing responsibilities in these

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Anwar Shah

areas to supra-national institutions. However, this trend contributes to a democracy deficit, as citizens do not have the opportunity for direct input in vital decision making by supra-national institutions. The European Union's (EU) policies and principles regarding subsidiarity,3 fiscal harmonisation and stabilisation checks are also having demonstrable effects on the policies of developing and transition economies. Similarly the success of decentralisation in improving public participation, efficiency and equity of public provision, and accountability of the public sector in some Latin American countries, especially Brazil, Chile and Colombia, has encouraged other countries to review their own fiscal arrangements. Finally, resurgence of interest in new public management and federal principles and practices, has served as a powerful basis from which to restructure and reorient the public sector. 2.1. Emerging governance structure

This re-examination has resulted in a silent revolution sweeping the globe. This is gradually bringing about rearrangements that embody diverse features of supra-nationalisation, confederalisation, centralisation, provincialisation and localisation. Nevertheless, the vision of governance structure that is slowly taking hold through this silent revolution is one that indicates a gradual shift from unitary constitutional structures to federal or confederal forms of governance for a large majority of people.4 It implies that we are likely to move from a centralised to a globalised and localised world.5 In such a world, the role of the central government changes from that of a managerial authority to that of a leader in a multi-centred government environment. The culture of governance is also slowly changing from a bureaucratic to a participatory mode of operation; from command and control to accountability for results; from being internally dependent to being competitive and innovative; from being closed and slow, to being open and quick; and from being intolerant of risk, to allowing freedom to fail or succeed. Financial crises around the world are hampering this change by encouraging protectionist policies. As a result, the new vision will take some time to shape in the twenty-first century (Table i), and in many developing and transition economies, it may not actually materialise for some time due to the institutional impediments noted in the following sections. The overall thrust of these changes is a trend towards either devolution (empowering people politically) and/or localisation (decentralisation of decision making to the local level). Localisation has been pursued through varying combinations of political, administrative and fiscal decentralisation initiatives. • Political or democratic decentralisation implies directly elected local governments, thereby making elected officials accountable to citizens.

435 Part D Theme III - Scientific Background Table i Governance structure - twentieth versus twenty-first century 20th Century

21st Century

Unitary Centralised Centre manages Bureaucratic Command and control Civil service with life-long tenures Input controls Top-down accountability Internally dependent Closed and slow Intolerance of risk

Federal/confederal Globalised and localised Centre leads Participatory Responsive and accountable to citizens Civil service with contractual employment Results matter Bottom-up accountability Competitive Open and quick Freedom to fail/succeed

Administrative decentralisation empowers these governments to hire and fire local staff (thereby making local officials accountable to elected officials) without any reference to higher-level governments. Fiscal decentralisation ensures that all elected officials weigh the joy of spending someone else's money carefully against the pain associated with raising revenues from the electorate, and the possibility of being voted out. Administrative de-concentration, where decision making is shifted to regional and local offices of the central government, would not be consistent with administrative decentralisation. Similarly administrative delegation, where local governments undertake activities on behalf of the higher-level governments, falls short of administrative decentralisation. Thus, localisation of authority is intended to bring decision making closer to the people being served by the public sector. This change has proved to be a controversial proposition in developing and transition economies. This is because localisation is being perceived both as a solution to problems such as dysfunctional public sector and lack of voice and exit, as well as source of new problems such as capture by local elites, aggravation of macroeconomic management due to lack of fiscal discipline, and perverse fiscal behaviour by sub-national units. There are also conceptual difficulties in making choices with the right balance (Shah, 1994). Beyond these conceptual issues, a number of practical considerations have a bearing on a nation's quest for balance. These include the level of popular participation in general elections, feudal politics, civil service culture and incentives, governance and accountability structure, and capacities of local governments.

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Figure i Public sector institutional environment in developing and transition economies

3. L E A D I N G C H A N G E : D E V E L O P I N G A V I S I O N AND A S T R A T E G Y Coping with or adapting to the silent revolution requires a vision and a strategy in the absence of which a nation may not have full control of its destiny. A closer look at the public sector mandate, its authorising environment (institutional mechanisms/rules of the game, and organisational structures to translate constitutional mandates or societal objectives to con crete policies and programs, and make the public sector responsive and accountable to citizens),6 and its operational capacity (determined by skills and bureaucratic culture) in developing and transition economies, yields important insights into the dysfunctionality of public governance. The challenge of public sector reform in any such country is to harmonise the public sector mandate, its authorising environment, and its operational capacity so that there is a close if not perfect correspondence between these three aspects of governance (Figure i). The intersection of these three elements has a bearing on public sector performance in the delivery of its mandate. Thus the goal is to maximise this intersecting space. Such a task is daunting for many developing and transition economies since they often have lofty goals, but lack an authorising environment capable of translating these goals into a policy framework. This problem is often compounded further by bureaucratic incentives making any available operational capacity to implement such a framework dysfunctional. 4.

REALIGNING THE AUTHORISING E N V I R O N M E N T TO A F O C U S ON SOCIETAL

GOALS

Certain levels of government will have a greater focus on societal goals if they and the citizens understand clearly their respective roles in public ser-

437 Part D Theme III - Scientific Background

vice delivery. This "assignment problem", or the division of powers among various levels of government, has been the most fundamental issue in public governance from time immemorial. It remains a central concern in the literature of federalism. The Maastricht Treaty introduced a guiding principle, the "principle of subsidiarity", for assignment of responsibilities among members of the EU. According to this principle, taxing, spending and regulatory functions should be exercised by the lowest levels of government, unless a convincing case can be made for assigning the same to higher levels of government. Fiscal federalism's literature has also provided principles that broadly support the subsidiarity principle (Gates, 1999). The application of these principles to achieve the right balance in the number and size of jurisdictions requires voting with feet, voting by ballots or other community formation processes, or the redrawing of jurisdictional boundaries. In applying principles of jurisdictional design, the literature of fiscal federalism argues that the assignment of responsibility for spending must precede, or at least take place at the same time as, the assignment of responsibility for taxation. This helps to ensure a better match between taxing and spending powers for better accountability, and to avoid over-reliance on transfers in financing own expenditures. In the following, conceptual guidance and the practice on allocation of responsibilities are reviewed briefly. 4. i. Clarifying the roles of various governments in public service delivery

Conceptually, central government expenditure responsibilities should include: (i) functions to preserve national efficiency objectives such as the maintenance of the internal common market, provision or finance of efficient levels of public goods and services whose benefits transcend subnational borders; (ii) those expenditures needed to safeguard national equity objectives such as vertical equity based upon incomes and other characteristics, horizontal or fiscal equity across regions, and equality under the law through the legal framework; (iii) stabilisation programs. Responsibilities for all other functions are best exercised by regional and local governments. The national government can ensure attainment of minimum standards of public services through regulatory supervision or the conditional transfer of funds (see Appendix i for a representative assignment of expenditure responsibilities). Asymmetric arrangements may be useful sif regions are heterogeneous in terms of population, skills, culture, size and economic base. Assignment of public services to various types of local and regional authorities necessitates taking into consideration factors such as economies of scale, economies of scope (proper bundling of local public services to improve efficiency through information and coordination economies, and

438 Anwar Shah enhanced accountability through voter participation and cost recovery), cost/benefit spillovers, proximity to beneficiaries, consumer preferences, and flexibility in budgetary choices on composition of spending. The particular level of government to which a service is assigned determines the public and/or private production and distribution of the service based upon considerations of efficiency and equity. As local governments' financial capacities are quite limited in most developing and transition economies, fostering private sector participation in the delivery of local public services assumes a greater significance. Such participation enhances voice, choice and exit options for citizens. 4.1.1. Special challenges in expenditure assignment from globalisation. In the emerging borderless world economy, interests of residents as citizens are often at odds with their interests as consumers. In securing their interests as consumers in the world economy, individuals are increasingly seeking localisation and regionalisation of public decision making to better safeguard their interests. With greater mobility of capital, and loosening of the regulatory environment for foreign direct investment, local governments, as providers of infrastructure-related services, would serve as more appropriate channels for attracting such investment than national governments. As borders become more porous, cities are expected to replace countries in trans-national economic alliances. People across Europe are already discovering that national governments have diminishing relevance in their lives. They are increasingly more inclined to link their identities and allegiances to cities and regions. With mobility of capital and other inputs, skills rather than resource endowments will determine international competitiveness. Typically however, education and training is sub-national government responsibility. Therefore, there would be a need to realign this responsibility by giving the national government a greater role in skills enhancement through education and training. The new economic environment will also polarise the distribution of income in favour of skilled workers, accentuating income inequalities, and possibly wiping out lower-middle income classes. Since national governments may not have the means to deal with this social policy fallout, sub-national governments will have to devise strategies for dealing with the emerging crisis in social policy, working in tandem with national governments. International trade agreements typically embody social policy provisions. But social policy is typically an area of sub-national government responsibility, as in Canada, Brazil, India, Pakistan and the United States. This is an emerging area of conflict among different levels of government. To avoid these conflicts, a guiding principle should be that to the extent that these agreements embody social policy provisions, they must be subject to ratification by sub-national governments, as is currently the case in Canada. In macroeconomic governance, supra-national institutions such as the International Monetary Fund and the World Bank are assuming ever more

439 Part D Theme III - Scientific Background important roles. Within the nation, independent central banks and subnational governments are seeking enhanced roles in macroeconomic management, leading to a diminished direct role of federal government in stabilisation and macroeconomic control. However, federal governments' role in coordination, support and supervision will increase.7 4.1.2. Emerging jurisdictional realignments. Box i presents a newer federalist perspective on the assignment of responsibilities by taking into account the considerations noted above. This box shows that functions such as regulation of financial transactions, international trade, global environment and international migration will gradually pass upwards (centralised) beyond nation states. Some sub-national functions such as training will have greater central government inputs (centralisation), and local functions would gradually be completely decentralised and involve greater participation by civil society and the private sector. In general, globalisation and localisation trends reinforce each other, diminishing the relative importance and centrality of central governments.

Box i Emerging rearrangements: globalisation, centralisation and localisation Beyond Nation States: International conflict resolution, stabilisation, regulation of financial transactions, corporate taxation, international trade, global environment, telecommunications, international standards, international migration, surveillance of governance conditions, global security and risk management, trans-national production, investment and technology transfer, suppression of money laundering, drug smuggling and terrorism. Centralisation: Social and environmental policy through international agreements, skills enhancement for international competitiveness, social safety nets, macroeconomic coordination, supervision and technical assistance to sub-national governments. Regionalisation/Localisation/Privatisation: All regional/local functions. Source: Shah, 1998.

4.1.3. Expenditure reassignment: progress so far. Expenditure assignments in developing and transition economies have undergone significant changes during the past two decades. In transition economies such changes reflect a new role for the public sector in support of a market economy. As a consequence, sub-national expenditures contracted as a percentage of Gross Domestic Product (GDP) from about 17.2% in 1980 to 10.8% in 1999. Subnational expenditures in transition economies, as a proportion of total public sector expenditures, experienced even an even sharper decline during the same period from 44.9% to 22.3%. In developing countries on the

44° Anwar Shah other hand, there has been a gradual, generally piecemeal, yet persistent decentralisation of expenditure responsibilities. Sub-national expenditures in developing countries as a percentage of GDP rose from 3% of GDP in 1980 to 6.1% of GDP in 1997. Sub-national expenditures as a percentage of total public sector expenditures increased from 12.7% of total expenditures in 1980 to about 19.6% of total in 1998 (Ebel and Yilmaz, 2001). Sub-national government roles in education and health spending show divergent trends in transition economies and developing countries. In transition economies, sub-national educational expenditures, as a percentage of public sector education expenditures, declined from 71% in 1981 to 55% in 2000, while in developing countries such expenditures rose from 21% in 1980 to 40% in 2000. In health, the role of sub-national governments in total public sector health expenditures in transition economies declined from about 92% in 1977 to 39.2% in 2000, while in developing countries the same role expanded from about 22% to 57% in 1999. In transition economies the central governments have often attempted to shift social expenditures downwards to regional and local governments without providing additional finances. These largely un-funded mandates have therefore been seen as attempts by national governments to shift deficits downwards, creating disharmony and conflict among governments at different levels. Quite a large number of central governments are involved in purely local functions. Out of a sample of 33 countries for which details on the assignment of local functions are available, primary education is the sole responsibility of the centre in 12 countries, and in an additional nine countries, central government is involved in this service together with local governments. Division of expenditure responsibilities within nations has been further complicated by the role of external donors. In their attempts to create islands of integrity associated with the use of their funds, external donors have often supported the creation of parallel structures of decision making, which bypass local government institutions. Finally expenditure autonomy (percentage of own expenditure under effective control of sub-national governments) is on average higher (74% overall, but 96% in Croatia and 7% in Albania) in transition economies than developing countries (58% overall, but 95% in Dominican Republic and 23% in South Africa). 4.2.

Taxing choices: determining who taxes what, at what rate and how ?

Four general principles require consideration when assigning taxing powers to various governments. First, taxes on mobile factors and tradable goods that have a bearing on the efficiency of the internal common market should be assigned to the centre. Sub-national assignment of taxes on mobile factors may facilitate the use of socially wasteful beggar-thy-neighbour

44 ! Part D Theme III - Scientific Background policies by regional and local governments to attract resources to their own areas. In a globalised world, even central assignment of taxes on mobile capital may not be very effective in the presence of tax havens, and because of the difficulty in tracing and attributing incomes from virtual transactions to various physical spaces. Second, national equity considerations warrant that progressive re-distributive taxes should be assigned to the centre. This limits the possibility of regional and local governments following perverse redistribution policies, which use both taxes and transfers to attract high-income persons and repel low-income ones. Third, taxes should be assigned to the jurisdiction most capable of monitoring relevant assessments. This minimises administration costs as well as the potential for tax evasion. For example, property and land taxes are good candidates for local assignment, as local governments are in a better position to assess the market value of such things. Fourth, to ensure accountability, revenue means (the ability to raise revenues from own sources) should be matched as closely as possible to expenditure needs (see Appendix 2 for a representative assignment of taxing responsibilities). The above principles suggest that the case for decentralising taxing powers is not as compelling as that for decentralising public service delivery. This is because lower-level taxes can introduce inefficiencies in the allocation of resources across the federation, and cause inequities among citizens of different jurisdictions. In addition, collection and compliance costs can increase significantly. These problems are more severe for some taxes than others, so the selection of which taxes to decentralise must be made with care. A balance should be found between need to achieve fiscal and political accountability at the lower levels of government, and the disadvantages of having a fragmented tax system. These trade-offs can be mitigated by fiscal arrangements that permit joint occupation and harmonisation of taxes to overcome fragmentation, and fiscal equalisation transfers to reduce fiscal inefficiencies and inequities arising from different fiscal capacities. 4.2.1. Reassigning taxing powers - an update. The above discussion suggests that decentralisation of taxing powers may not fully match the decentralisation of expenditure and regulatory functions. However, in developing and transition economies, centralisation of taxing responsibilities is much more pronounced than it would be if based on economic considerations. In 1999, sub-national own revenues constituted about 7.9% of GDP in transition economies and 5.5% of GDP in developing countries. In transition economies in 1997, sub-national governments raised 18.4% of public sector revenues on average, and in developing countries they raised slightly less - about 16.6%. During the past two decades, transition economies have shown a decline in these revenues as tax collection was centralised, whereas in developing countries, there has been a modest increase due to a small degree of tax decentralisation. In 1999, sub-national revenues financed 55% of sub-

44 2 Anwar Shah

national operating expenditures in transition economies, and 40% of the same in developing countries. The rest of the financing came from shared taxes, transfers and borrowing. Overall tax decentralisation remains an unfinished agenda for developing and transition economies. In 1999, in transition economies 49.3% of sub-national government revenues were obtained from shared taxes (World Bank, 2001). In developing countries, the role of shared taxes in financing sub-national governments is of lesser significance as general revenue sharing is widely practiced. 4.3. Designing fiscal transfers: dividing the spoils, or creating an enablingframework for innovative and competitive service delivery Inter-governmental transfers the dominant source of revenues for subnational governments in most developing and transition economies. The design of these transfers is of critical importance for the efficiency and equity of local service provision and the fiscal health of sub-national governments (see Appendices C and D for criteria, general principles and better practices in grant design). To enhance accountability, it is desirable to match revenue means (the ability to raise revenues from own sources) as closely as possible with expenditure needs at all levels of government. However, higher-level governments must be allowed greater access to revenues than they need to fulfil their own direct service responsibilities, so that they are able to use their spending power through fiscal transfers to fulfil national and regional efficiency and equity objectives. We can identify six broad objectives for national fiscal transfers, each of which may apply to varying degrees in different countries, and each of which calls for a specific design of fiscal transfers. 4.3.1. Bridging the fiscal gap. A fiscal gap is defined as an imbalance between the revenue-raising ability of regional and local governments, and their expenditure responsibilities. To deal with a fiscal gap, it is important to deal with the causes of this gap through reassignment of responsibilities, tax decentralisation, tax abatement by the centre, and tax-base sharing (allowing sub-national governments to levy supplementary rates on a national tax base). Only as a last resort should unconditional formula-based transfers, or revenue sharing based on the origin/derivation (point of collection) principle, be considered as options to deal with this gap. This is because such transfers weaken accountability to local taxpayers. In developing and transition economies, general revenue sharing is typically used to deal with the fiscal gap. A number of countries, including China, India, Malaysia, Pakistan and South Africa, have previously tried deficit grants to fill fiscal gaps at sub-national levels, with unwelcome results in terms of mushrooming subnational deficits. These grants are still in vogue in China, Hungary and South Africa.

443 Part D Theme III - Scientific Background 4.3.2. Correcting fiscal inequities and fiscal inefficiencies arising from differentials in regional fiscal capacities. Decentralised decision making results in net fiscal benefits (imputed benefits from public spending minus tax burden), which vary according to place of residence, due to variations in fiscal capacities of local and regional governments. This leads both to fiscal inequity and fiscal inefficiency in resource allocation. Fiscal inequity arises as citizens with identical incomes are treated differently, depending on their place of residence. Fiscal inefficiency in resource allocation results from people comparing gross income at new locations (private income plus net public sector benefits, minus cost of moving) when making their relocation decisions, whereas economic efficiency considerations warrant comparing private income minus moving costs. Thus a nation that values horizontal equity (i.e. the equal treatment of all citizens nationwide) and fiscal efficiency will need to correct the fiscal inequity and fiscal inefficiency that naturally arise in a decentralised government. Central-state grants can eliminate these differences in net fiscal benefits if the transfers to each region depend upon the tax capacity of the region relative to others, and upon the relative need for and cost of providing regional public services. The more decentralised the tax system is, the greater the need for equalising8 transfers. Most transition economies have equalisation components in their grant programs to sub-national governments. Latvia, Lithuania, Poland, Romania, Russia and the Ukraine have adopted transfer formulae that explicitly incorporate either fiscal capacity and/or expenditure need equalisation concerns. In developing countries, programs using an explicit standard of equalisation are untried, although equalisation objectives are implicitly attempted in the general revenue-sharing mechanisms used in Argentina, Brazil, Colombia, India, Nigeria, Mexico, Pakistan and South Africa. These mechanisms typically combine diverse and conflicting objectives into the same formula, and fall significantly short of individual objectives. Because the formulae lack explicit equalisation standards, they fail to address regional equity objectives satisfactorily (Shah, 1996, 2000; Shankar and Shah, 2001). 4.3.3. Compensating for benefit spillovers. This is the traditional argument for matching conditional grants. Regional and local governments will not have the proper incentive to provide the correct levels of services yielding spillover benefits to residents of other jurisdictions. A system of openended matching grants, based on the expenditures giving rise to the spillovers will provide an incentive to increase expenditures. Typically, the extent of the spillover will be difficult to measure, so the correct matching rate to use will be somewhat arbitrary. Although benefit-cost spill out is a serious factor in a number of countries, such transfers have typically not been implemented in developing countries. Among the few countries that do, South Africa provides a

444 Anwar Shah closed-ended matching grant to teaching hospitals, based upon an estimate of benefit spillovers associated with enrolment of non-local students, and use of hospital facilities by non-residents. 4.3-4- Setting national minimum standards to preserve the internal common market and attain national equity objectives. Setting national minimum standards in regional-local services may be important for two reasons. The first is that there is an advantage to the nation as a whole from such standards, as they contribute to the free flow of goods and services, labour and capital, and reduce wasteful inter-jurisdictional expenditure competition, improving the gains from trade from the internal common market. Second, these standards serve national equity objectives. Many public services provided at the sub-national level, such as education, health, and social welfare, are re-distributive in their intent, providing inkind redistribution to residents. In a federal system, lower-level provision of such services - while desirable for efficiency, preference matching, and accountability - creates difficulty in fulfilling federal equity objectives. Factor mobility and tax competition create strong incentives for lower-level governments to under-provide such services, and to restrict access for those most in need, such as the poor and the old. This is justified by their greater susceptibility to disease and potentially greater risks for cost curtailment. Such perverse incentives can be alleviated by conditional non-matching grants, where the conditions reflect national efficiency and equity concerns, and where there is a financial penalty associated with failure to comply with any of the conditions. Thus, conditions will not be on the specific use of grant funds, but on attainment of standards in quality, access and level of services. Such grants do not affect local government incentives for cost efficiency, but do encourage compliance with nationally specified standards for access and level of services. Properly designed conditional non-matching transfers can create incentives for innovative and competitive approaches to improved service delivery (see Box 2 for an example of such a grant). Conditional non-matching transfers to ensure national minimum standards are rarely used in developing and transition economies. However, central government transfers to provincial and local governments in Indonesia, central per capita transfers for education in Colombia and South Africa, and the capitation grant to Malaysian states come close to the concept of such a transfer. 4.3.5. Influencing local priorities in areas of high national but low local priority. In a federation, there is always some degree of conflict between the priorities established by various levels of government. One way to induce lower-level governments to follow priorities established by the higherlevel government is for the higher-level government to use its powers of the

445 Part D Theme III - Scientific Background Box 2 An example of a performance-oriented grant: education grant to set minimum standards, while encouraging competition and innovation Allocation basis among local governments: school-age population. Distribution to providers: equal per pupil to both government and private schools. Conditions: universal access to primary and secondary education regardless of parents' income; improvements in achievement scores; no condition on the use of grant funds. Penalties for non-compliance with standards: public censure, reduction of grant funds. Incentives for cost efficiency: retention of savings.

purse, or so-called spending power, by using matching transfers. Openended matching transfers, with matching rate (percentage of expenditures financed from own sources by the recipient) varying inversely with fiscal capacity, would be consistent with this use. The use of ad hoc grants or openended matching transfers for local tax effort would be inadvisable. The former is unlikely to have behavioural responses consistent with grantor's objectives, and the open-ended nature of the latter may create budgetary difficulties for the grantor. India, Malaysia, and Pakistan use conditional closed-ended matching programs. Pakistan in late 19905 got into serious difficulty by offering open-ended matching transfers for provincial tax effort. Central government had to abandon this scheme in mid-flow as it could not meet its obligations under the program. 4.3.6. Creating macroeconomic stability in depressed regions. Fiscal transfers can be used to serve central government objectives in regional stabilisation. For this purpose capital grants would be appropriate, provided that funds for the future upkeep of facilities were available. Experience with capital grants shows that such grants often create facilities that are later not maintained by sub-national governments, as they either remain unconvinced of the utility of such facilities or do not have the means to provide for their regular upkeep. Capital grants are pervasive in developing and transition economies, and most countries have complex processes for initiation and approval of submissions for financing capital projects. These processes are highly susceptible to lobbying, political pressures and grantsmanship, and often favour projects that give the central government greater prominence. The projects typically lack citizen and stake-holder participation, and often fail due to lack of proper local ownership, interest and supervision. In view of this difficulty, it may be best to limit the use of capital grants by requiring matching funds from recipients, and by encouraging private sector participation in infrastructure through provision of political and policy risk guarantees.

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4.3.7. Special issues in state/province-local transfers. General purpose transfers to local governments require special considerations as local governments vary in population size, area served, and the type of services offered (e.g. urban versus rural). In view of this, it would be advisable to classify local governments by population size, municipality type, and urban/rural distinction, and to have a separate formula for each class of municipality. Some common useful components in these formulae are: equal permunicipality component, equal per capita component, service area component, and fiscal capacity component. The grant funds should vary directly with service area, but inversely with fiscal capacity. 4.4. Facilitating responsible credit market access The need for capital finance to overcome infrastructure deficiencies is of astronomical proportions in developing and transition economies, and cannot be financed from current revenues and transfers. Facilitating local credit market access can also reduce the need for beggar-thy-neighbour policies by local governments. Local access to credit requires properly functioning financial markets and creditworthy local governments. These pre-requisites are easily met in industrial countries. In spite of this, traditions of higher-level governments assisting local governments are well established in these countries. In developing countries, undeveloped markets for long-term credit, and weak municipal creditworthiness limit municipal access to credit. Nevertheless, the predominant central government policy emphasis is on central controls, and consequently less attention has been paid to assistance for borrowing. Argentina, Bolivia, Brazil, Chile and Colombia have cooperative controls on domestic borrowing, and administrative controls on foreign borrowing. Ethiopia, India, Indonesia Korea, Mexico and Peru have administrative controls on domestic borrowing. India, Indonesia, Korea and Peru also have administrative controls on foreign borrowing. Foreign borrowing is prohibited in Thailand, Pakistan, Armenia, the Czech Republic, Kazakhstan, the Kyrgyz Republic, Lithuania, Poland, Russia and Slovenia. Domestic borrowing is prohibited in Ethiopia, Mexico and Thailand (World Bank, 2000 and 2001). Almost no developing and transition economies, with the exception of South Africa and Hungary, have a regulatory framework for declaring local government bankruptcy. In a few countries, such assistance is available through specialised institutions and central guarantees to jump-start municipal access to credit. The menu of choices available to local governments for financing capital projects is quite limited, and available alternatives are not conducive to developing a sustainable institutional environment for such finance. This is because macroeconomic instability, and lack of fiscal discipline and appropriate regulatory regimes have impeded the development of financial and capital

447 Part D Theme III - Scientific Background

markets. In addition, revenue capacity at the local level is limited due to tax centralisation. A first transitory step to provide limited credit market access to local governments may be to establish municipal finance corporations run on commercial principles, and to encourage the development of municipal rating agencies to assist in such borrowing. Tax decentralisation is also important to establish private sector confidence in lending to local governments and sharing the risks and rewards of such lending. 4.5. Supervision of local governments: freedom and responsibility within boundaries

Monitoring and supervision of local governments is an area of concern in both federal and unitary countries alike. The constitutional obligations regarding these provisions require a significant and superior evaluation capacity at provincial and national levels. Evaluative measures that can assist in this supervision include fiscal rules for expenditure and debt creation and management, requirement of annual commercial corporate audits of local governments; fiscal capacity measurement using a common yardstick (i.e. equalisation of municipal assessments); greater emphasis on formula grants over project grants in provincial-local transfers; greater emphasis on public-private/civil society partnership in public provision; opinion polls on service standards and citizen satisfaction; performance ratings of local governments based upon outputs, outcomes and citizen satisfaction. In developing and transition economies, supervision of local governments is typically exercised through process and input controls. Such controls compromise local autonomy without advancing national objectives. In 1999, central governments exercised some control over 25% of subnational expenditures in transition economies, and nearly half of the same in developing countries. Local autonomy, accompanied by accountability to citizens for service delivery, offers a better alternative in local government supervision. Thus local governments should have the freedom to raise money from local residents and spend as they wish, and also to hire and fire personnel as they please. In a study of 29 public organisations in six developing countries, Grindle (1997) found that where decentralisation was matched by such local autonomy and supervision, governments were "good performers" (achieving high levels of capacity, completed tasks, responsiveness and effectiveness). As an alternative to centralised controls, some governments have developed ways of relating higher- to lower-level governments through resultsoriented lines of accountability that do not stifle performance. The model of decentralisation for healthcare in Brazil is an example. Results-oriented contracts are developed between central government (providing funds) and local clinics (providing services), ensuring accountability between levels of

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government without a process bias. The contract system institutionalises greater autonomy for local governments than do other decentralisation regimes, holding them accountable for their results - and not binding their processes. The creation of "vigilance committees" in Bolivia follows the same principle. These committees are made up of representatives from civil society organisations. They are charged with monitoring performance of local governments in fulfilling their mandates in service delivery and satisfying local citizens, and reporting the results to central authorities. 4.6. Institutional considerations

Adherence to federal principles, "getting prices right" or even "getting the rules of the game right" as discussed earlier, is a necessary but not a sufficient condition for the success of decentralised decision making. Complementary formal and informal institutions are needed to ensure that all players in the game adhere to a set of ground rules that has been agreed on, and that deviant behaviour is properly dealt with. In the following, we discuss selected aspects of this consideration. 4.6.1. Institutions and processes of inter-governmental coordination. Federal countries require both formal and informal institutions of intergovernmental coordination. In some federal countries, areas of potential conflict among different levels of government are minimised through clear separation of national and sub-national responsibilities (the so-called layer-cake model of federalism, practiced in Australia, Canada, India and Pakistan). In this model, the two levels interact through meetings of officials and ministers (executive federalism), and in Australia, India and Pakistan through federal unilateral actions. Some countries place a greater premium on a common response through shared or joint tasks, such as Germany (a federal country) and the Republic of South Africa (a pseudo-federal country). In these countries, in addition to executive federalism, the upper houses of parliament (Bundesrat and the Council of Provinces) play a key role in inter-governmental coordination. In countries with overlapping responsibilities (the so-called marble-cake model of federalism), such as the United States and Brazil, state lobby of Congress and inter-state relations serve coordinating roles. In China, where growth concerns have imposed a federalist structure on a unitary country, regional communist party bosses/ governors exercise a moderating influence on an otherwise monolithic orientation of the State Council. In Switzerland, there is also a strong tradition of coordination through consensus initiatives by cantons. 4.6.2. Institutional arrangements for fiscal relations. The structure of intergovernmental fiscal relations, especially the system of grants, must be de-

449 Part D Theme III - Scientific Background

termined by somebody. There are five main alternatives. The first is for the federal government alone to decide on it. This alternative negates federalism and would not be acceptable in many countries. The second is to set up a quasi-independent body, such as a grants commission, the purpose of which is to design and reform the system, as practiced in Australia, India and the Republic of South Africa. This alternative is more prone to ideal solutions than pragmatic approaches, and therefore runs the risk of presenting complex solutions and recommendations that may not be politically palatable. The third alternative is to use federal-state committees to negotiate the terms of the system, as in Canada. The fourth alternative is to have a joint inter-governmental cum inter-legislative commission, such as the Finance Commission in Pakistan, and the fifth alternative is to have an inter-governmental legislative body, such as the upper house of the German parliament (Bundesrat) in Germany. The last three systems allow for explicit political inputs from the jurisdictions involved, and are therefore likely to opt for simple and feasible, but less than ideal (compromise) solutions. 4.6.3. Institutions of accountability. Institutions of accountability hold the key to the success of decentralised decision making. These entail institutions and mechanisms for citizens' voice and exit norms and networks of civic engagement ("social capital" according to Putnam, 1993), social consensus (Williamson, 1994; Weingast, 1993), the preservation instinct of a "stationary bandit" who monopolises and rationalises theft in the form of taxes (Olson, 1993), judicial accountability, and vertical and horizontal accountability. The citizens' voice and exit requires institutions of democratic participation, and accountability provisions for elected officials. The origins and success of decentralisation programs in Latin America are traceable to the democratic traditions that emerged there during late 19805. While norms and networks of civic engagement were reasonably well developed in pre-colonial traditionalist societies found in many developing countries, such as the Panchayat Raj in pre-British India, these institutions withered away either under colonial rule, or subsequently under centralised bureaucratic governance structures. The net result has been the rise of opportunism and social distrust, culminating in dysfunctional societies when formal institutions of governance failed. The African and the South Asian development fiascos share this common underpinning. Societal consensus on economic and political rights is also conducive to accountability at all levels. This consensus need not take any formal expression, but can work so long as a majority of people shares a common belief as to the limits of governmental intervention, and are willing to police those limits by withdrawing their support from a government that fails to abide by them (Weingast, 1993, 306). Preservation instincts of a stationary bandit also respect accountability (Olson, 1993), because the stationary

45° Anwar Shah

bandit strengthens his grip on power only so long as economic performance is strong and citizens see their well-being improved. This partly explains the success of the Asian Tigers and the failure of some South/South East Asian regimes. The latter were controlled by "roving bandits", whose main aim was to collect the loot to pad their overseas bank accounts, and then disappear to a foreign haven. 5.

ALIGNING

OPERATIONAL CAPACITY

WITH THE AUTHORISING ENVIRONMENT

In developing and transition economies operational capacity for local governance is deficient. This deficiency, however, can be overcome in the short term by borrowing such capacities from the national government, from other local governments, from the private sector, and from civil society. In the long term, training of staff and the creation of an enabling environment for competitive service delivery through partnership with the private sector and civil society, can augment operational capacity. A matter of greater concern in developing and transition economies is that the available capacity is not geared towards serving the citizen-voters. A similar bureaucratic culture prevailed in Western Europe not long ago. Over the years, industrial countries have shown a remarkable change in the performance of their public sectors. It is interesting to note that this change was brought about not through a system of hierarchical controls, as is the focus in most developing countries, but more through strengthened accountability for results to citizens at large. A recent empirical study by Gurgur and Shah (2002) supports this view, showing that in a sample of 30 countries, political and bureaucratic culture, and centralisation of authority represent the most significant determinants of corruption. In view of this evidence, a management framework where the public service is held accountable for delivery of public services consistent with citizen preferences offers great potential in developing countries for improving public sector governance, by nurturing responsive and accountable governance (See Shah (1999) for details and implications of civil service reform). 6.

ADAPTING

TO A C H A N G I N G

WORLD

BY L E A R N I N G FROM EACH OTHER

The developing and transition economies have undergone a major transformation of their public sector in the last decade. The transition economies have moved rapidly from central planning to market-dominated economies, whereas in developing countries the process of moving decision making closer to the people remains painfully slow and modest. Developing and transition economies have also attempted to forge new partnerships within and beyond governments, with varying degrees of commitment and

451 Part D Theme III - Scientific Background

success. Brazil, Chile, the Czech Republic, Hungary, India, Malaysia and Poland are examples where a stable authorising environment, with a significant degree of societal consensus on the roles and responsibilities of various levels of government and their partnership with civil society, has been achieved. Other countries, such as China, Indonesia, Nigeria, Pakistan, South Africa, Russia and Uganda, are still groping for a consensus on the right balance. In some other countries in Africa, Central and East Asia, these issues have not yet received the political attention they deserve. Thus for a large number of developing and transition economies, the quest for right balance remains largely elusive. Further progress on this agenda requires learning from the experiences of industrial countries as well as the more recent experiences of developing and transition economies. Important lessons that can be distilled from these experiences are listed below. Periodic review of jurisdictional assignments is essential to realign responsibilities with changing economic and political realities. An enabling environment for decentralisation (i.e. institutions of citizen participation and accountability) must be addressed in any serious reform of fiscal systems. These elements have not been sufficiently addressed in most reform efforts. The charter of rights in Canada and Malaysia, and the Swiss requirement of approval of major legislative changes by referendums are helpful in enhancing accountability and bringing about a consensus. A decentralised civil service with task specialisation and performance contracts is critical to the success of a decentralisation program. Traditional administrative capacity matters, but should not be considered as an impediment to decentralisation; such capacity can be borrowed from supportive higher-level governments and elsewhere. An asymmetric program of decentralisation which recognises the nature and type of local government, its clientele, and its fiscal capacity should be developed, and various local governments should be assigned differential powers by taking into account the above-mentioned factors. A major separation of spending and taxing decisions leads to lack of accountability in the public sector. The role of performance-oriented fiscal transfers in enhancing accountability and competition for the supply of public goods should not be overlooked. For example, transfers for basic health and primary education could be made available to both public and the not-for-profit private sector on an equal basis, using as criteria the demographics of the population served, school-age population, student enrolments etc. The continuation of the grant in future years would be conditional on achievement of service delivery performance goals. This would promote accountability for results, and competition and innovation as both public and private institutions would compete for public funding. Such

452 Anwar Shah

financing options are especially attractive for providing greater access to public services in rural areas. Fiscal rules accompanied by "gate keeper" inter-governmental councils/ committees provide a useful framework for fiscal discipline and fiscal policy coordination. To ensure fiscal discipline, governments at all levels must be made to face the financial consequences of their decisions. This is possible if the central government does not backstop state and local debt, and the central bank does not, in the last resort, act as a lender to the central government. In addition, ownership and preferential access to the financial sector should not be available to any level of government. In such an environment capital markets and bond rating agencies would provide an effective fiscal policy discipline. Societal norms and consensus on the roles of various levels of government, and limits to their authorities are vital for the success of decentralised decision making. In the absence of such norms and consensus, direct central controls do not work and inter-governmental gaming leads to dysfunctional constitutions. Tax decentralisation is a pre-requisite for sub-national credit market access. In countries with highly centralised tax bases, unrestrained credit market access by sub-national governments poses a risk to macrostabilisation policies of the national government, as the private sector anticipates a higher-level government bailout in the event of default, and does not discount the risks of such lending properly. Higher-level institutional assistance may be needed for financing local capital projects. This assistance can take the form of establishing municipal finance corporations run on commercial principles to lower the cost of borrowing by using the superior credit rating of the higher-level government and municipal rating agencies to determine creditworthiness. An internal common market is best preserved by constitutional guarantees. National governments in developing countries have typically failed in this role. Finally, contrary to a common misconception, a developing country's institutional environment calls for a greater degree of decentralisation than that of an industrialised one. This is because information requirements and transaction costs are minimised by moving decision making closer to the people who are affected by those decisions. Closeness also serves to enhance better participation, preference matching for public services, transparency, and greater accountability. NOTES

i The author is grateful to Professors Richard Bird, Bernard Dafflon and Claude Jeanrenaud for comments.

453 Part D

Theme III - Scientific Background

2 This rethinking has caused much heated controversy and debate in the development policy forum. Regrettably, this debate has focused on straw men of "centralisation" versus "decentralisation". Contrary to focus in this debate, the literature of fiscal federalism is concerned with clarifying the assignment of responsibilities among different levels of government in support of good governance (Bird and Vaillancourt, 1998; Shah, 1994; Boadway and Shah, forthcoming). 3 The subsidiarity principle states that public service responsibilities must be exercised by the lowest level of government unless a convincing case can be made for higher-level assignment. 4 A unitary country has a single or multi-tiered government in which effective control of government functions rests with the central government. A federal form of government has a multi-layered structure with decision making shared by all levels of government. In a confederal system of government, the central government serves as the agent of member units, usually without independent taxing and spending powers. The EU is an important example of a confederal form of government. Switzerland has a confederal constitution but is considered a federal country in practice. 5 The total number of countries has risen from 140 in 1975 to 192 in 2001, and of these 25% were democracies in 1975 compared to 60% in 2001. In 2001 there were 24 federal countries with 25.4% of the world population, and another 20 decentralised unitary countries with some federal features, containing 35% of the world's population (Watts, 1999). 6 In Switzerland, legislative bodies, fiscal rules and popular referendums on major budgetary proposals ensure that citizens' preferences are respected. 7 Macroeconomic management under decentralised decision making is the subject of an ongoing debate. An overall conclusion from this controversy is that contrary to common misconception, decentralised fiscal systems offer a greater potential for improved macroeconomic governance than centralised fiscal systems (see Shah (1998) for a summary of the debate). REFERENCES

Bird, R.M. and Staufer, T, eds, 2001. Intergovernmental Fiscal Relations in Fragmented Societies. Basel and Fribourg: Helbing & Lichtenham, Publications of the Institute of Federalism, Series Etudes et Colloques 33. Bird, R. and Vaillancourt, F, eds, 1998. Fiscal Decentralization in Developing Countries. New York and London: Cambridge University Press. Boadway, R. and Shah, A. Forthcoming. Fiscal Federalism -Principles and Practices. Washington, B.C.: World Bank. Courchene, T, 1995. Macrofederalism. In: A. Shah, opus cit (forthcoming). Ebel, R. andYilmaz, S., 2001. The Measurement and Impact of Fiscal Decentralization. Unpublished Paper, Washington, B.C.: World Bank Institute. Grindle, M., 1997. Bivergent Cultures? When Public Organizations Perform Well in Beveloping Countries. World Development, 25(4), 481-495.

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Anwar Shah

Gurgur, T. and Shah, A., 2002. Localization and Corruption: Panacea or a Pandora's Box. In: E. Ahmad and V. Tanzi, eds. Managing Fiscal Decentralization. New York and London: Routledge Press. Horvath, T.M., ed., 2000. Decentralization: Experiments and Reforms. Budapest: Local Government and Public Services Reform Initiative. Oates, W., 1999. An Essay on Fiscal Federalism. Journal of Economic Literature, 37, 1120-1149. Olson, M., 1993. Dictatorship, Democracy and Development. American Political Science Review, 87 (3), 568-576. Putnam, R., 1993. Making Democracy Work. Cambridge, Mass.: Harvard University Press. Shah, A., 1994. The Reform of Intergovernmental Fiscal Relations in Developing and Emerging Market Economies. Washington, D.C.: World Bank. Shah, A., 1996. A Fiscal Need Approach to Equalization. Canadian Public Policy Analyse dePolitiques, 22 ( 2 ) , 99-115. Shah, A., 1998. Balance, Accountability, and Responsiveness: Lessons about Decentralization. World Bank Policy Research Working Paper Series No. 2021, December 1998. Washington, D.C.: World Bank Institute. Shah, A., 1999. Governing for Results in a Globalized and Localized World. The Pakistan Development Review, 38(4, Part I, winter), 385-431. Shah, A., 2000. Federalism and Regional Equity: Building Partnerships or Transfer Dependencies ? Paper presented at the International Conference on Cooperative Federalism: Globalization and Democracy organised by the Presidency of the Federative Republic of Brazil, in Brasilia, 9-11 May, 2000. Shah, A., 2002. Globalization and Economic Management. In: M.G. Asher, D. Newman and T.P. Snyder, eds. Public Policy in Asia: Implications for Business and Government. Westport Connecticut and London: Quorum Books. Shankar, R. and Shah, A., 2001. Bridging the Economic Divide Within Nations: A Scorecard on the Performance of Regional Development Policies in Reducing Regional Income Disparities. World Bank Policy Research Working Paper Series. Washington, D.C.: World Bank Institute. Watts, R., 1999. Comparing Federal Systems. Kingston, Ontario: Institute of Intergovernmental Relations, Queen's University. Weingast, B., 1993. Constitutions as Governance Structures: The Political Foundations of Secure Markets. Journal of Institutional and Theoretical Economics, 149, 286311. Wiliamson, O., 1994. The Institutions and Governance of Economic Development and Reform. In: Proceedings of the World Bank Annual Conference on Development Economics. 171-197. World Bank, 2000. Entering the 2ist Century. World Development Report 7999/2000. Oxford: Oxford University Press. World Bank, 2001. Decentralization in the Transition Economies: Challenges and the Road Ahead. Europe and Central Asia Region. Washington, D.C.: World Bank.

455 Part D Theme III - Scientific Background APPENDIX A REPRESENTATIVE ASSIGNMENT OF EXPENDITURE RESPONSIBILITIES

Function

Policy, standards and Provision/ Production/ oversight administration Distribution Comments

Inter-regional and International Conflict Resolution

U

U

N, P

Benefits and costs international in scope

External Trade

u

U, N, S

P

Benefits and costs international in scope

Telecommunications

U, N

P

P

National regulation not feasible " "

Financial Transactions

U, N

P

P

Environment

U, N, S, L

U, N, S, L

N, S, L, P

Externalities of global, national, state and local scope

Foreign Direct Investment

N, L

L

P

Local infrastructure is critical

Defence

N

N

N, P

Benefits and costs national in scope

Foreign Affairs

N

N

N

Benefits and costs national in scope

Monetary Policy, Currency, Banking

U, ICB

ICB

ICB, P

Independence from all levels essential Some international role for common discipline

Inter-state Commerce

Constitution, N N

P

Constitutional safeguards important for factors and goods mobility

Immigration

U, N

N

N

U due to forced exit

Transfer Payments

N

N

N

Redistribution

Criminal and Civil Law

N

N

N

Rule of law, a national concern

Industrial Policy

N

N

P

To avoid beggarthy-neighbour policies

Regulation

N

N, S, L

N, S, L, P

Internal common market

Fiscal Policy

N

N, S, L

N, S, L, P

Coordination is possible

Natural Resources

N

N, S, L

N, S, L, P

Promotes regional equity and internal common market

Education, Health and Social Welfare

N, S, L

S,L

S,L, P

Transfers in kind

456 Anwar Shah APPENDIX A (continued)

Function

Policy, standards and Provision/ Production/ oversight administration Distribution Comments

Highways

N,S, L

N, S, L

S, L, P

Benefits and costs of various roads vary in scope

Parks and Recreation

N, S, L

N, S, L

N, S, L, P

Benefits and costs vary in scope

Police

S, L

S, L

S, L

Primarily local benefits

Water, Sewers, Refuse, Fire Protection

L

L

L, P

Primarily local benefits

Note: U is supra-national responsibility, ICB is independent central bank, N is national government, S is state/provincial government, L is local government and P is non-government sectors/civil society.

457

Part D

Theme III — Scientific Background

APPENDIX B ASSIGNMENT

A REPRESENTATIVE OF TAXING POWERS

Determination of Base

Collection and Rate

Administration

Comments

CUSTOMS

F F, U

F F, U

F F, U

International trade taxes

CORPORATE INCOME

F

F

F

Highly unequally distributed tax bases

Royalties, fees, S, L charges; severance taxes; production, output, and property taxes

S,L

S, L

Benefit taxes/charges for state-local services

Conservation charges

S, L

S, L

S, L

To preserve the local environment

PERSONAL INCOME

F

F, S, L

F

Re-distributive, mobile factor, stabilisation tool

WEALTH TAXES (TAXES ON CAPITAL, WEALTH, WEALTH TRANSFERS, INHERITANCES, AND BEQUESTS)

F

F, S

F

Re-distributive

PAYROLL

F, S

F, S

F, S

Benefit charge, e.g. social security coverage

MULTISTAGE SALES TAXES (VALUE ADDED TAX

F

F

F

Border tax adjustments possible under federal assignment; potential stabilisation tool

Types of Tax

Mobile factor, stabilisation tool

RESOURCE TAXES

Resource rent (profits/income) tax

[VAT])

SINGLE STAGE SALES TAXES

(MANUFACTURER/WHOLESALE/RETAIL)

Option A

S

S, L

S, L

Higher compliance cost

Option B

F

S

F

Harmonised, lower compliance cost

Excises on alcohol and tobacco

F, S

F, S

F,S

Healthcare a shared responsibility

Betting, gambling

S, L

S, L

S, L

State and local responsibility

Lotteries

S, L

S, L

S, L

State and local responsibility

Race tracks

S, L

S, L

S, L

State and local responsibility

"SIN" TAXES

45 8 Anwar Shah APPENDIX B

(continued)

Determination of Base

Collection and Rate

Administration

Comments

Carbon

F

F

F

To combat global/ national pollution

BTU taxes

F, S, L

F, S, L

F, S, L

Pollution impact maybe national, regional, or local

Motor fuels

F, S, L

F, S, L

F, S, L

Tolls on federal/ provincial/local roads

Effluent charges

F, S,L

F, S,L

F, S, L

To deal with inter-state, inter-municipal or local pollution issues

Congestion tolls

F, S, L

F, S, L

F, S,L

Tolls on federal/ provincial/local roads

Parking fees

L

L

L

To control local congestion

Registration, transfer taxes, and annual fees

S

S

S

State responsibility

Driver's licenses and fees

S

S

S

State responsibility

Types of Tax TAXATION OF "BADS"

MOTOR V E H I C L E S

BUSINESS TAXES

S

s

S

Benefit tax

EXCISES

S, L

S,L

S, L

Residence-based taxes

PROPERTY

S

L

L

LAND

s

Completely immobile factor, benefit tax

L

L

Completely immobile factor, benefit tax

FRONTAGE,

S, L

L

L

Cost recovery

POLL

F, S, L

F, S,L

F, S, L

Payment for local services

USER CHARGES

F, S,L

F, S,L

F, S, L

Payment for services received

BETTERMENT

Note: U is supra-national agency, F is federal, S is state or province, L is municipal or local. Source: Shah, 1994.

459 Part D Theme III - Scientific Background APPENDIX C

C R I T E R I A FOR THE

DESIGN

OF INTER-GOVERNMENTAL FISCAL TRANSFERS

Autonomy: sub-national governments should have complete independence and flexibility in setting priorities, and should not be constrained by the categorical structure of programs and uncertainty associated with decision making at the centre. Tax-base sharing - allowing sub-national governments to introduce their own tax rates on central bases, formula-based revenue sharing, or block grants - is consistent with this objective. Revenue adequacy: sub-national governments should have adequate revenues to discharge designated responsibilities. Equity: allocated funds should vary directly with fiscal need factors and inversely with the taxable capacity of each jurisdiction. Predictability: the grant mechanism should ensure predictability of sub-national governments' shares by publishing five-year projections of funding availability. Efficiency: the grant design should be neutral with respect to sub-national government choices of resource allocation to different sectors or different types of activity. Simplicity: grant allocation should be based on objective factors over which individual units have little control. The formula should be easy to comprehend so that grantsmanship is not rewarded. Incentive: the design should provide incentives for sound fiscal management and discourage inefficient practices. There should be no specific transfers to finance sub-national government deficits. Safeguard of grantor's objectives: this is best done by having grant conditions specify results to be achieved and giving the recipient flexibility in the use of funds. Singular focus: each grant should be focused on a single objective. The various criteria specified above could be in conflict with each other and therefore a grantor may have to assign priorities to various factors in comparing design alternatives. Source: Shah, 1994.

460 Anwar Shah APPENDIX AND

D

PRINCIPLES

BETTER PRACTICES

IN GRANT DESIGN

Better Practices

Grant Objective

Grant Design

To bridge fiscal

• Reassign responsibilities Tax abatement and tax-base sharing in • Tax abatement • Tax-base sharing Canada

Deficit grants Tax-by-tax sharing

To reduce regional fiscal disparities

Fiscal equalisation General non-matching fiscal capacity equalisation programs of transfers Australia, Canada and Germany

General revenue sharing with multiple factors

To compensate for benefit spillovers

Open-ended matching transfers with matching rate consistent with spillout of benefits

Republic of South Africa grant for teaching hospitals

Setting national minimum standards

Conditional non-matching block transfers with conditions on standards of service and access

Indonesia pre-sooo roads and primary education grants Colombia and Chile education transfers

Influencing local priorities in areas of high national but low local priority

Open-ended matching transfers (with preferably matching rate to vary inversely with fiscal capacity)

Matching transfers ad hoc grants for social assistance as in Canada

Stabilisation

Capital grants provided maintenance possible

Limit use of capital Stabilisation grants grants and encourage with no future upkeep requirements private sector participation by providing political and policy risk guarantee

gap

Source: Shah, 1994, 1998.

Practices to Avoid

Conditional transfers with conditions on spending alone ad hoc grants

WORK SESSION P R O C E E D I N G S ! REPORT

LARS P. FELD

Fiscal Federalism and Political Decision Structures (Work Sessions 9 and 21)

1 .

INTRODUCTION

A central issue in the theory of economic federalism is the assignment of competencies to different tiers of government. Scholars of fiscal federalism usually aim at providing convincing arguments for a specific assignment of public services and taxes to the federal, regional and local levels of government. The bottom line of their reasoning is that public services should be allocated to the different levels so that the citizens obtaining benefits from, those paying the costs of, and those deciding on public services belong to the same group (Olson, 1969; Gates, 1972). Distortions arise if citizens from other jurisdictions do not pay the cost of or politically decide on public goods in the jurisdiction considered. In such cases, public services may not be provided efficiently. Arguments for the assignment of taxes, income distribution and macroeconomic stabilisation to different government levels follow similar lines of reasoning (Musgrave, 1983). Departing from this outcome-oriented assignment of competencies, the more recent discussion focuses on legal and constitutional procedures for sustainable public finances in a federation. It asks which type of procedures help to adapt the assignment of competencies in a federal state to changing needs in a dynamic environment and prevent the political decisions from deviating too much from citizens' preferences (Weingast, 1995). Three main areas of analysis can be distinguished. First, the role of political decision-making rules in determining fiscal policy is discussed. Some argue that presidential systems can achieve sustainable public finances more easily than parliamentary systems (Persson and Tabellini,

462

Lars P. Feld

2001). Others focus on different forms of democracy, perhaps even instruments of direct democratic decision making such as referendums and popular initiatives (Feld and Kirchgassner, 2001; Feld and Matsusaka, 2002; Matsusaka, 2002). Second, budgetary procedures are analysed in order to find out which procedural safeguards secure sound public finances. Von Hagen argues, for example, that a strong finance minister helps to prevent different groups or spending ministries from exploiting the fiscal commons (von Hagen, 1992; Hallerberg and von Hagen, 1999). Third, constitutional provisions are inspected: is it possible to keep the government within certain limits by imposing constitutional constraints (Buchanan, 1987; Bohn and Inman, 1996)? What are the constitutional procedures for changes in the assignment of competencies, and which of diem brings constitutional outcomes as close as possible to citizens' preferences (Schaltegger and Feld, 2001)? A synthesis of both lines of thought, the traditional question on the optimal assignment of fiscal responsibilities in a federation, and the political economy question on procedures shaping favourable fiscal outcomes, is of high practical relevance given that a constitutional assignment of responsibilities is often unstable. In a recent comparative study on the evolution of fiscal constitutions in Australia and Canada, Winer (2000) demonstrated that a strong centralisation to the federal level happened in Australia despite the general will of the framers of the Australian constitution. This is quite different in Canada where the basic act allocates taxing powers exclusively to the federation and the provinces, but leaves any residual power to the federal government. Nevertheless, Canada developed into one of the most fiscally decentralised countries in the world. Winer emphasises the procedures of the two types of federalism that were important for a constitutional evolution of the federations. The two work sessions on fiscal federalism and political decision structures at the International Conference on Federalism 2002 brought these two lines of thought more closely together. Three cases were discussed. For an understanding of the Swiss case, the interaction between the constitutional design of fiscal federalism and the procedural rules is crucial. That the effectiveness of one class of institutions cannot be assessed without considering the other class is illuminated by the cases of Mexico and Argentina. In particular the imbalance of spending and revenue competencies in these two countries, but also the political struggles between different tiers of government, allow for an understanding of which policy may help to enhance citizen confidence in government action. The discussion is summarised in diis paper as follows: the institutional rules of the budgetary process are discussed using the Swiss case as a prominent example. The proper assignment of governmental tasks and revenue sources is analysed by drawing extensively on the experiences of Mexico and Argentina

463 Part D Theme III - Work Session Proceedings

together with the controversial discussion surrounding these cases. These discussions are followed by a conclusion and some general remarks. 2.

I N S T I T U T I O N A L RULES OF THE BUDGETARY PROCESS

The theory of fiscal federalism starts with the basic observation that the individual citizens are customers of the public services provided by the government. As many economists emphasised in the discussion, the individualist basis of the state should thus also be reflected in institutional rules. In that sense, Switzerland stands out in terms of the degree of voter participation, in the form of referendums and popular initiatives, that helps citizens to have a say in determining the level and cost of public services. However, voter participation may stop jurisdictions from having sufficient financial resources, since selfish citizens may not accept an unfavourable redistribution of funds. In such a situation, tensions between the principle of fiscal responsibility and the principle of equity in the federation may arise. According to proponents of the theory of fiscal federalism participating in the work session, federal systems are generally characterised by tensions between these principles. If jurisdictions differ significantly, situations may arise where stressing the principle of responsibility (equivalence) creates inequity between cantons or states. From a purely fiscal perspective, one way of dealing with these tensions is a system of fiscal equalisation. However, such a system creates problems on the other side of the equation. First, a common pool problem arises. People who spend see the full benefits but do not pay the full bill, giving rise to a tendency for overspending. Second, the transfer system establishes soft budget constraints. Local governments can extract more resources from the centre ex post by excess borrowing compared to their ex ante plans. Problems of soft budget constraints and fiscal commons may be mitigated by a reliance on ex ante rules like balanced budget restraints such as those in many us states and the Stability and Growth Pact in the European Union (EU). On the one hand, balanced budget rules appear to force governments to keep public finances sustainable. On the other hand, balanced budget rules provide incentives for creative accounting and off-budget activities. The Portuguese deficit for example was 2 % larger than officially stated in the last two years. In any case, there is a trade-off for balancing out the requirements imposed by the principles of (fiscal) responsibility and of equity. The more widely income differences among jurisdictions are politically accepted, the more easily jurisdictions' fiscal responsibility for their own business can prevail. In that trade-off, the basic rules for fiscal responsibility as well as the details of the fiscal constitution may play an important role in the fiscal stability of the federation. In addition, the question emerges of what the

464

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role of direct popular rights in the budgetary decision-making process of the different government levels in a federation may be. 2.1. Basic rules for fiscal responsibility in Switzerland

From the point of view of the upper house of the legislature, the assignment of responsibilities is crucial. However, the procedures for a dynamically stable distribution of powers are equally important. Though the principle of subsidiarity was only recently imported from the EU debate to the Swiss discussion on fiscal federalism, it does apply to the Swiss case. The principle of subsidiarity states that the higher levels of a federation are not allowed to cover those tasks which the individual or lower units can satisfactorily cope with on their own. At first sight, the principle therefore seems to call for as much decentralised provision of public services as possible. It is, however, not clear how the principle is to be actually implemented. Should a higher level of government intervene when it observes that lower levels cannot cope with certain tasks? When is a task satisfactorily coped with? Who decides when a shift of responsibilities occurs? In that respect a conflict between the principle of subsidiarity and the principle of democracy and the rule of law may arise. According to legislators present in the work session, Switzerland resolves the conflict between the different principles by putting the strongest weight on the principle of democracy. The decision as to which responsibility is allocated to which government level is usually decided upon directly by using instruments of direct democracy. A centralisation from the cantonal to the federal level can only occur if a majority of the Swiss people and the majority of the cantons accept such a shift of responsibilities. Procedurally, the people are the final decision-making body, not the cantonal or federal governments. The relationships between cantons are settled by inter-cantonal cooperation. From the above perspective, additional conflicts arise between the agreements reached through that cooperation and the democratic requirement that legislatures and the citizens of single cantons should be able to state their consent ex ante. The more parties are participating in this cooperation, the more strongly democratic control is excluded. This holds with respect to the cantonal and the federal level alike and is considered problematic from the point of view of the legislature, in particular the upper house representing the interests of the cantons. The control is even more difficult ex post, since contractual agreements do not exhibit the same degree of transparency as democratic decisions. And most importantly, multilateral agreements are difficult to change. In that cooperative struggle, Switzerland has decided to conduct a reform of Swiss fiscal equalisation that also aims at redesigning the assignment of competencies at the Swiss cantonal and federal levels.

465 Part D Theme III - Work Session Proceedings 2.2.

Budgetary rules and the role of the citizens in the budgetary process

The predominance of the principle of democracy that is observed when making changes in the assignment of (fiscal) responsibilities in Switzerland prevails in the design of budgetary procedures as well. To differing degrees, the cantons have additional fiscal procedures to augment citizens' ability to influence budgetary outcomes by fiscal referendums. In that respect, the canton of St Gallen is an interesting case. Each public spending project with costs exceeding 15 million CHF in the case of non-recurring expenditures and 500,000 CHF in the case of recurring expenditures has to be approved by the citizens in a fiscal referendum. An optional fiscal referendum exists for lower spending thresholds if at least 4,000 voters sign up for such a referendum. Under these procedures citizens set the level of public service they prefer. However, citizens in St Gallen are not allowed to change the tax rates of personal or corporate income taxes or wealth taxes as the main sources of state revenue. The parliament has the ultimate jurisdiction for tax rate changes. If cantonal spending exceeds revenue, an additional procedure starts in St Gallen as particularly emphasised by participants from the cantonal administration in the work session. It is legally fixed that only investment spending is allowed to be covered by borrowing. Spending qualifies as investment if the outlays for durable assets exceed the credit requirement of 3 million CHF. In short, legally binding depreciation periods are used to write off investment. The government current account must be balanced. Anti-cyclical policy in the current account is only possible if public equity can be used to cover deficits. If nevertheless a deficit is budgeted in the current account, it must be carried forward to the next budget year. In order to build up equity in booms, tax rates can be reduced only if a minimum amount of equity is reached. In sum, these provisions have helped to keep public debt in the canton of St Gallen at relatively low levels as compared to other cantons. 2.3. The gap between the Swiss case and economic considerations The Swiss experience appears to contradict economic considerations. The citizens in the cantons have obviously accepted the legal constraints imposed without demanding off-budget activities. In more general terms, instruments of direct democracy have been successful in restricting government spending (Feld and Kirchgassner, 2001; Feld and Matsusaka, 2002). The Swiss solution to resolve the trade-off between fiscal responsibility and equity appears to be successful. Given the fiscal commons problem it can indeed be questioned whether it is at all equitable to equalise. The youth participants

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particularly emphasised this point: is it fair to take funds from St Gallen and give them to cantons which do not perform so well? While the economic theory of federalism focuses on subsidiarity and fiscal equivalence, the Swiss experience helps to highlight the role of a dynamically sustainable decision-making system. In the economic theory of federalism, the question of who gives the upper level the right to vote over a majority of lower levels, or more generally, who decides what and who can overrule, is often neglected. In reality, such questions have to be answered. In each federal system, diversity has to be accepted. This not only holds with respect to income, but also politically. For example, in Switzerland a person in the small canton of Appenzell Inner Rhoden has 35 times the power of a person in Zurich. The key for an understanding of why Switzerland is successful in coping with political and cultural differences without putting the sustainability of public finances at risk is the Swiss type of federalism and direct democracy. It was emphasised by economists in the session that although these Swiss institutions appear to be peculiar and have provided Switzerland with a special culture for more than 150 years, Swiss people are not different from odier people. That is to say that a culture of fiscal responsibility and democratic participation can also emerge in other countries. 3.

ASSIGNMENT OF GOVERNMENTAL TASKS AND REVENUE SOURCES

While the Swiss case highlights the role of constitutional provisions in creating sustainable fiscal federalism, it implicitly rests on a precondition seldom mentioned: the shares of spending and revenue at each level roughly correspond to each other. This is important for the stability of fiscal federalism in a country. Otherwise, the wisdom of economic federalism may not apply as fully as is suggested by the theoretical arguments. The political tensions in cases of strong imbalances between spending and revenue authority are best illustrated by the experiences of Mexico and Argentina. 3.1.

Underlining the power of the centre: the case of Mexico

Mexico is composed of 32 states and 2,430 municipalities. According to data presented in the work session, the most important revenue sources - the income tax, the value added tax, excise and import taxes - are collected by the federal government, so that about 77% of total tax revenue is collected by the federal level. States collect only 18% of total government revenue with payroll taxes being the most important source of state taxation. The local level collects less than 5% of government revenue, mainly in the form of property taxes. The real estate tax and the tax on purchase of real estate are fully in the hands of local authorities so that their current disbursements can

467 Part D Theme III - Work Session Proceedings

be financed. However, sub-federal jurisdictions have more spending than revenue responsibilities. In the case of government expenditure, the federal government covers about 49%, the states 44% and the local jurisdictions 8% of combined government spending. Education, health, police, regional and local infrastructure are mainly financed by the states and local jurisdictions. The dependency of states on centrally collected revenue amounts to 85%, that of the local jurisdictions to 70%. According to the participants from Mexican regional administrations, additional taxing powers must be granted to the states in order to make them less dependent. The Mexican assignment of fiscal responsibilities should be interpreted along with the current political change in Mexico. Until recently, regions like Baja California with governments that did not belong to the formerly dominant party, the Institutional Revolutionary Party (PRI), had difficulties in obtaining their fair share of state spending. It must be understood that the federal government did not provide grants on a regular, legally secured basis, but made use of its discretion to distribute funds. But recently the PRI has lost power. The new Mexican president, Vicente Fox, as a member of the Partido Accion Nacional (PAN), has federalism and more effective procedures of citizen participation on his agenda. Currently, however, the attempts to provide a more balanced assignment of fiscal responsibilities in Mexico are endangered because the president's party is in a minority in the Mexican senate and the PRI is in a majority among state governors as well. Fox tries to accomplish a consensus on the issue, but the states still largely depend on federal grants. The discussion in the work session revealed the political differences between the regional administrations belonging to the different political camps in Mexico. In the current system there is no direct fiscal competition between the Mexican states. The most important state tax is the payroll tax, which exhibits only small inter-state differences. The main reason for the current tax system is the political control of the country, as some Mexican participants explained. The federal government aims at having the state governors under its control. Transfers are made as donations. In a unimodal political system such as the Mexican one, fiscal competition would impose restraints on the collusion of the federal government with state governors. 3.2. Underlining the power of the regions: the case of Argentina

The Argentine case is similar to that of Mexico, but there are important differences. Mexico benefits from relatively stable macroeconomic conditions while Argentina does not. At the beginning of the year 2002, the federal government had to declare default of public and private debt that induced a breakdown of the financial system. Work session participants from Argentina claimed that about 16 different local currencies are in circulation in Argentina today. Between 1998 and 2001, the country had to

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cope with a loss of 10% of Gross Domestic Product (GDP); in 2002 an additional 15% loss of GDP occurred, according to the data presented in the work session by representatives of the provinces and the local jurisdictions. People in Argentina suffer from an unemployment rate of 22%. The income gap between the rich and the poor is enormous: the rich earn 40 to 50 times the (average) income of the poor. The current economic turmoil in Argentina can only be understood if the influence of the regional governments is properly considered. Today, Argentina is comprised of 23 provinces with Buenos Aires as an autonomous city, 1,178 municipalities and 977 communes. According to official statistics, Argentine federalism suffers from a similar imbalance between spending and revenue responsibilities as Mexico. The federal level collects about 75% of total government revenue, the provinces 19% and the local level 6%. In contrast, the federal government only covers 53% of total government spending, while the provinces have to cover 38% and the local level 9%. Legally, Argentine federalism appears to be more advanced than the Mexican system, but it experiences the same disproportional vertical allocation of resources. Representatives of the Argentine provinces and local jurisdictions complained that like Mexican states, Argentine provinces suffer from the distribution of grants according to political favouritism. The situation is, however, more complex than it might appear at first sight and as emphasised by legislators from regional parties or the administration at the local level. It is common knowledge today that each government level in Argentina attempts to keep the financial resources that it gets. While representatives of the provinces claim that "nothing came down to the municipalities" and point at the "great corruption in the government", the provinces appear to hide financial resources from the federal government and see "federalism as a way to defend against the main federal parties". Corruption appears to prevail at each government level and not only in the federal government. For example, provinces which received huge funds to finance education were not able to pay the teachers' salaries. Additional government revenue is sometimes created by privatisation as in the case of oil firms. However, privatisation attempts were considerably hampered by the current provincial wastage. Some provinces have still not privatised their state banks. Overall it appears that "the political market in Argentina contains a lot of transaction costs" as one participant put it. 3.3. The link between fiscal federalism and political economy

The cases of Mexico and Argentina are more about the political economy than the efficiency of economic federalism. In general, they illustrate the strong relationship between the development of federalism and democ-

469 Part D Theme III - Work Session Proceedings

racy. In Mexico, federalism appears to be a means to overcome the oneparty system and to be a check on the Leviathan government that suppresses individual freedom. The key condition for a federalist system to function as a check on the government is a strong and viable democracy at the local level. In the discussion of both cases there was general agreement on responsibilities, but disagreement on the distribution of resources prevailed. Both countries are characterised by a large degree of vertical imbalance. In both countries, favouritism and lack of transparency destroy accountability. In this environment, co-participation is even worse. It combines a lack of transparency with the creation of a common fiscal resource from which each province tries to get as much as it can. Bailouts through inflation or through national debt for state debt create an additional tendency for exploitation of the fiscal pool. According to the economists in the session, one solution for this unsustainable situation is the exclusive assignment of certain taxing powers to the provinces: x% of certain taxes should be given to the cities or provinces as a fixed rule. One final point was also highlighted by the economists in the discussion. There is a close relationship between democracy, federalism and the development of local markets: decentralised government has a role in developing local markets, but there can also be incentives to create trade barriers favouring special business. The central government should therefore maintain a market constitution, while the local governments take care of traditional public goods. 4.

CONCLUSIONS

The three cases emphasised the strong relationship between traditional economic theory and the political economic rationale for federalism. The Latin American countries Mexico and Argentina suffer from vertical fiscal imbalances, but their main problem is a general lack of accountability to citizens. In both cases the solution could not consist in a demand for additional responsibility for the sub-federal jurisdictions in the sense of collecting and distributing funds. There must be an increase in democratic accountability in order to gain the trust of the people that have to be served. Institutional change is what is needed. Compared to the situation described above, the Swiss experience appears as relatively favourable. Despite some criticism by Swiss participants of their own system, the Swiss assignment of competencies is quite balanced, and democratic accountability is secured by strong elements of direct democracy. Samuel Huntington once said that the solution to the challenges of democracy is more democracy. Similarly, the answer to the challenges of federalism is more federalism. If challenges come from both sides, the answer may be the Swiss model.

47° Lars P. Feld REFERENCES Bohn, H. and Inman, R.P., 1996. Balanced Budget Rules and Public Deficits: Evidence from the us States. Carnegie-Rochester Conference Series on Public Policy, 45, 13-76. Buchanan, J.M., 1987. The Constitution of Economic Policy. American Economic Review, 77, 243-250. Feld, L.P. and Kirchgassner, G., 2001. The Political Economy of Direct Legislation: The Role of Direct Democracy in Local and Regional Decision-Making. Economic Policy, 33, 329-367. Feld, L.P. and Matsusaka, J.G., 2002. Budget Referendums and Government Spending: Evidence from Swiss Cantons. Forthcoming in: Journal of Public Economics, 2002. Hallerberg, M. and von Hagen,J., 1999. Electoral Institutions, Cabinet Negotiations, and Budget Deficits in the European Union. In: J. Poterba andj. von Hagen, eds. Fiscal Institutions and Fiscal Performance. Chicago: Chicago University Press and NBER, 209-232. Matsusaka, J.G., 2002. For the Many or the Few: How the Initiative Process Changes American Government. University of Southern California at Los Angeles, mimeo. Musgrave, R.A., 1983. Who Should Tax, Where and What? In: C.E. McLure, ed. Tax Assignment in Federal Countries. Canberra: Center for Research on Federal Financial Relations, 2-19. Gates, W.E., 1972. Fiscal Federalism. New York: Harcourt Brace Jovanovich. Olson, M., 1969. The Principle of "Fiscal Equivalence": The Division of Responsibilities among Different Levels of Government. American Economic Review, Papers and Proceedings, 59,47 9-48 7. Persson, T. and Tabellini, G., 2001. Political Institutions andPolicy Outcomes: What Are the Stylized Facts ? CESifo Working Paper No. 459, Munich. Schaltegger, C. and Feld, L.P., 2001. On Government Centralization and Budget Referendums: Evidence from Switzerland. CEsifo Working Paper No. 615, Munich. von Hagen, J., 1992. Budgetary Procedures and Fiscal Performance in the European Communities. Economic Papers. Commission of the European Communities. Economic Papers No. 96, October. Weingast, B.R., 1995. The Economic Role of Political Institutions: Market-Preserving Federalism and Economic Development. Journal of Law, Economics and Organisation, 11, 1-31. Winer, S.L., 2000. On the Reassignment of Fiscal Powers in a Federal State. In: G. Galeotti, P. Salmon and R. Wintrobe, eds. Competition and Structure. The Political Economy of Collective Decisions: Essays in Honor of Albert Breton. Cambridge: Cambridge University Press, 150-173.

WORK

SESSION PROCEEDINGS: REPORT

ISABELLE JOUMARD1

Problems of Equalisation in Federal Systems The Concept of Equalisation (Work Session 10)

1.

INTRODUCTION

The need for fiscal consolidation and the search for higher public sector efficiency have led many countries to reconsider the assignment of spending responsibilities and revenue-raising powers across government levels, as well as their inter-governmental grant system. Revenue-raising powers of sub-national governments have recently been raised in a number of countries, including Spain, while efforts to reduce the overlapping of spending responsibilities are currently under consideration in Switzerland. One key objective is to reach a better congruence between them, thus allowing a more consistent implementation of one of the basic principles of fiscal federalism - "(s)he who decides, spends and pays". Such moves would probably promote sub-national governments' accountability and contribute to reducing the size of inter-governmental transfers. However, they leave open the question of how poor jurisdictions can finance high quality public services with tiny tax bases. Another salient feature of recent reforms in fiscal relations across government levels is the move from earmarked to block grants, as earmarked grants in many cases have failed to promote public sector efficiency. Canada and the Nordic countries have replaced most earmarked grants with block grants over the past two decades, while in the United States the trend towards block grants initiated in the 19705 has continued in the 19908. However, in many countries earmarked grants often contain a re-distributive component. In this context (less reliance on earmarked grants and a better match between spending and revenue-raising powers), discussions on the role and need for redistribution across jurisdictions are brought to the fore. Whether or

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not fiscal equalisation schemes entail a conflict between efficiency and equity objectives is an important aspect to take into account. 2.

REASSESSING THE ASSIGNMENT OF SPENDING RESPONSIBILITIES AND REVENUE-RAISING ACROSS GOVERNMENT

POWERS

LEVELS

Many participants heralded a de facto and progressive erosion of effective powers of sub-national governments as central governments tend to introduce binding minimum standards for the domains that are formally the responsibility of sub-national governments. As an illustration, the German federal government has a strong influence on the design of the tertiary education system, which used to be the sole responsibility of the Lander. More recently, the poor educational outcomes, as measured by the Programme for International Student Assessment (PISA) international comparisons, have led the central government to plan the introduction of national standards in primary and secondary education (OECD, sooia). The Canadian federal government has also had a history of influencing the design of the healthcare system despite the fact that the provinces have the constitutional responsibility for healthcare (OECD, 2ooib). The system of cost sharing tied to specific expenditure was abandoned in the 19905. However, the central government has made federal funding to the provinces conditional on respect for comprehensiveness and universality in the healthcare system. Swiss cantons were also reported to have lost effective control over some of their spending programs, and to be increasingly acting as the operating agents of the central government (described as a "centralisation process by the back door"). A similar development occurs within the European Union (EU) area, where decisions taken at an EU level cover an increasing range of domains (e.g. water treatment), while the costs are being borne by the individual countries, in many cases at a local or regional level. The overlapping of spending responsibilities across government levels is often accompanied by an extensive reliance on inter-governmental transfers. These two features of fiscal federal relations have raised serious efficiency concerns: they reduce the autonomy and accountability of subnational governments and they dull incentives to contain costs and excessive demands by generating "fiscal illusion" (as sub-national governments and/or local citizens do not bear the full cost of local public services). Many participants suggested that realigning spending responsibilities and revenue-raising power of sub-national government levels would contribute to an easing of these tensions. In fact, new taxing powers have recently been granted to sub-national government levels in a number of countries. As an illustration, Spanish regions can now set tax rates on 30% of the per-

473 Part D Theme III - Work Session Proceedings

sonal income tax base and introduce tax credits. Some participants argued in favour of granting more taxing powers to sub-national governments in Germany and Poland, for example by allowing them to raise surcharges on federal taxes. 3.

COULD SUCH A REASSESSMENT BE A SUBSTITUTE FOR EQUALISATION TRANSFERS?

A regular reassessment of revenue-raising powers and spending responsibilities, and their better alignment, would probably help to lower reliance on extensive inter-governmental transfers. As an example, the Swiss authorities have put forward an ambitious program to revamp spending assignments across government levels. The project aims at reducing existing overlapping in cantonal and federal spending responsibilities by applying the subsidiarity and fiscal equivalence principle more consistently. If consistently implemented, it would allow the cantons to tailor the supply of pure "local public goods" more closely to their residents' needs and willingness to pay. However, the reassessment of revenue-raising powers and spending responsibilities is often a lengthy process. In the Swiss case, a wide-ranging discussion and negotiating process was launched in the early 19905 and the project, if approved by the cantons and the Swiss population, is expected to enter into force in 2006. Large fiscal disparities associated with local taxation and provision of public goods across jurisdictions and externalities are likely to persist, however, together with vertical and horizontal imbalances. In this context, reconsidering the assignment of spending and revenue-raising responsibilities across government levels could not be a substitute for fiscal equalisation. For instance, the proposed reform in Switzerland, if adopted, would be accompanied by a strengthened emphasis on equalisation, in the form of block grants. International comparisons indeed suggest that the vertical fiscal gap - measured by the share of sub-national governments in total public spending compared with their tax revenue (and the corresponding inter-governmental transfers) - tends to be greater in countries where subnational governments are responsible for a large share of public spending. In particular, the role of fiscal equalisation schemes is likely to increase when sub-national governments are responsible for the provision of social and re-distributive policies and when securing roughly equal living conditions and/or public services is a principle embedded in the constitution (e.g. in Canada, Germany, Spain and Switzerland) and/or supported by the population. While formal fiscal equalisation schemes mobilise a significant amount of public resources in many countries, redistribution also stems from a number of other mechanisms. In fact, formal equalisation schemes no

474 Isabella Joumard longer exist in the United States: they were abolished for states in 1981, and for cities in 1986 (Dafflon and Vaillancourt, 2002). However, some spending programs managed by the states are largely financed through conditional grants which contain an element of fiscal equalisation (i.e. the federal contribution rate in state spending varies from one state to another to reflect their income per capita). Medicaid is the most prominent example, but roughly the same principle applies for the State Children Health Insurance Programme introduced in 1997-2 Conditional grants with equalisation supplements have also been used widely in Switzerland. Progressive federal income taxes also introduce some form of redistribution by taking more from jurisdictions with wealthier inhabitants. In addition, national social insurance schemes - and in particular unemployment insurance do not set differentiated risk premiums across regions. In Canada, the national unemployment insurance program further discriminates in favour of high-unemployment regions (concentrated in the Atlantic provinces and Quebec) by granting more generous benefits for the same contribution rates (OECD, 200ib). 4.

I F A R E A S S E S S M E N T OF

SPENDING

AND REVENUE-RAISING

RESPONSIBILITIES

C A N N O T BE A S U B S T I T U T E FOR EQUALISATION TRANSFERS, THE CENTRAL RICH

WHY SHOULD

GOVERNMENT OR

REGIONS BE WILLING TO SUPPORT

POORER

ONES?

Participants widely acknowledged that most politicians and a large part of the population do agree on the need to ensure that citizens have access to reasonably comparable levels of public services at a similar level of taxes i.e. the basic solidarity and equity objectives of equalisation transfers. As an illustration, a 2001 survey revealed that the Canadian equalisation program is strongly supported by 45% of Canadians, and moderately supported by another 38% (Environmics - CROP - CRIC). Broadly similar results were obtained for the rich provinces of Ontario and British Colombia, which are both net contributors to the program. An important factor influencing the view of citizens is the (perceived) probability that they (or their children) could move to a poorer province in the future. Thus they desire some guarantees on the provision of public goods of a comparable quality throughout the country. Furthermore, rich Canadian provinces often ally with the poor ones in their negotiations with the central government to increase the scope of fiscal equalisation. Indeed, they prefer these unconditional transfers to other forms of the central government intervention, in particular conditional grants. Some participants noted that vertical

475 Part D Theme III - Work Session Proceedings

fiscal equalisation - such as the scheme in place in Canada where, at least formally, the central government pays for the costs of fiscal equalisation was likely to gain more political support than horizontal equalisation schemes. This is of particular concern in Germany where tax revenues are redistributed both vertically and horizontally, and where political debates are mostly focused on the horizontal component.3 Specific historical and sociological factors were considered to make fiscal equalisation legitimate. The separation of Germany after the Second World War significantly affected the growth prospects of some eastern Lander in western Germany. Equalisation transfers partly compensated the most affected regions. Later, the fall of the wall in Germany could have led to mass migration from eastern and western Lander, which was widely considered as an undesirable development. Generous financial transfers to eastern Lander helped to prevent this from happening. More generally, participants recognised the role of fiscal equalisation transfers in preserving regional/linguistic identities (e.g. by maintaining the presence of French-speaking people in Quebec), and thus contributing to political stability. Redistributing income from rich to poor jurisdictions also entails economic efficiency considerations. Some participants argued that spill-over effects associated with the provision of local public goods could warrant equalisation transfers. As an illustration, city centres often bear the significant costs of developing infrastructure networks (e.g. for public transport) which also benefit residents from suburban jurisdictions. For these jurisdictions, the "user-payer principle" is often difficult to apply, in particular when the personal income tax is based on the residence criteria, as is the case in Germany.4 To compensate city centres for this special burden, fiscal equalisation transfers in Germany partly account for the differentiated costs of providing public services according to the size of the municipalities. The underlying assumption is that the cost per inhabitant follows a u-shaped curve according to the population density. Some participants further noted that contractual solutions could be envisaged to internalise spill-over effects. As an example, cooperation agreements between cantons have been developed in Switzerland - e.g. for the financing of universities.5 These agreements make it possible to reap economies of scale and to internalise spillovers by concentrating the supply of these services in some cantons and by requiring other beneficiaries to pay for the benefits. Some participants suggested that strengthening equalisation transfers could provide economic benefits for the whole country. Inter-regional transfers could contribute to the avoidance of self-perpetuating regional disparities, especially if low income levels are due to a lack of infrastructure or education. Strengthening the demand and the growth potential of the poorer jurisdictions could bring indirect benefits for the richer ones through trade and investment linkages. In addition, fiscal equalisation

476 Isabella Joumard

transfers can smooth temporary regional revenue shortfalls. Acting as an insurance against asymmetric shocks, they would avoid temporary shocks being translated into long-lasting consequences. However, the issue of whether fiscal equalisation helps to boost the growth potential of receiving jurisdictions or conversely creates "poverty traps", was a subject of debate. Some participants suggested that high outflow rates - such as those embodied in the German fiscal equalisation schemes - for any tax revenue generated by developing a jurisdiction's tax base were discouraging these jurisdictions from introducing growth-promoting policies (see also Baretti et al., 2000). However, the new fiscal equalisation scheme across Lander to be introduced in 2005 is expected to improve economic incentives.6 The economic literature suggests that similar disincentive effects were at work in other countries, including Austria and Canada.7 Some studies have shown that equalisation transfers have had a negative incidence on economic growth in Australia. However, most participants argued that this "disincentive effect" was muted by the fact that the main objective of policy makers was to create employment. The fact that Canadian receiving provinces have grown faster than others over the past two decades, was presented as evidence against the "poverty trap" hypothesis. 5.

DOES

FISCAL EQUALISATION

PROMOTE FISCAL

COMPETITION?

Fiscal equalisation levels the playing field between poor and rich jurisdictions and could therefore in principle be considered a pre-requisite for effective fiscal competition. Equalisation transfers reduce ex-ante fiscal disparities across regions (i.e. their ability to provide a given basket of publi goods and services at a comparable level of taxation). Thus, differences in the quality of public services and in levels of taxation across jurisdictions should mainly reflect differences in local citizens' preferences as well as their ability to reap efficiency gains. As an example, in the presence of complete fiscal equalisation, rich sub-national governments deriving substantial revenues from natural resources (e.g. in Canada or Norway) could in principle, only lower their tax rates or improve the quality of their public services compared to other jurisdictions if they were able to improve the cost efficiency of their public spending programs. In the absence of equalisation transfers, rich provinces would dominate and competitive pressures would be lower. Fiscal equalisation could thus, in principle, allow poor jurisdictions to enter into fair and effective fiscal competition with the richer ones via the quest for greater efficiency. In practice, some features of fiscal equalisation schemes have reduced sub-national governments' incentives to improve public sector efficiency, thus limiting the gains of effective fiscal competition. In Switzerland, con

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ditional grants received by the cantons - which often contain an "equalisation supplement" - largely reflect actual ex-post costs, instead of ex-ante standardised costs. In this context, high contribution rates from the confederation weaken the incentives for cantons to contain costs. The poorest ones are likely to be the most affected, since conditional transfers account for a larger share of their budget - more than 40% in some cantons, compared with a national average of about 17% in 1999. Fiscal equalisation based on actual, instead of potential, fiscal capacities could also result in "unhealthy" tax competition. German Lander cannot cut their tax rate or narrow their tax base as they have virtually no effective taxing powers. However, some participants argued that a lax enforcement of the tax rules could be considered as one form of tax competition. German Lander could, for instance, limit their effort to improve compliance with the federal tax laws, especially since they bear the cost of the tax collection and tax auditing processes, while they benefit very little from collecting more tax revenues. This would not only reduce the effective tax burden within their jurisdiction - and thus contribute to boosting economic activity - but it would also bring down their contribution to the country's fiscal equalisation since it is largely based on actual tax revenues. However, some participants underlined that there is no empirical evidence to prove this effect. Discretionary features of the grant system could further reduce the incentives for sub-national governments to cut taxes, thus preventing effective tax competition. Norway provides an example whereby all the municipalities have kept the marginal personal income tax rate at the maximum level set by the central government since 1979. This partly reflects the fear that any cut in local taxes would result in lower discretionary grants from the central government (OECD, 2OO2b). 6.

CONCLUSIONS

Reassigning spending and tax responsibilities should contribute to reducing the size of inter-governmental transfers. Many participants drew attention to a gradual erosion of effective spending responsibilities, with the central government - and the European Commission for EU area countries - more frequently dictating norms and standards. At the same time, revenue-raising powers of sub-national governments are still rather limited in many countries, and do not match their spending responsibilities. More effective application of the principle of" (s)he who decides, spends and pays", by devolving more taxing powers to sub-national governments would promote their autonomy and accountability, and would be likely to promote public sector efficiency. However, participants did not believe that getting the alignment of functions "right" would suffice on its own in order to meet the objectives of fiscal equalisation.

47 8 Isabella Joumard Fiscal equalisation has one'key objective - ensuring minimum quality standards for key public services across the country. But the accepted degree of variation in the quality of public services between jurisdictions varies significantly from one country to another - and so does the degree of fiscal equalisation. Furthermore, fiscal equalisation schemes may have other objectives. Most participants acknowledged strong political, constitutional and social reasons for fiscal equalisation. In particular, many participants stressed its role in strengthening national and social cohesion, in particular in countries with strong cultural and/or ethnic fractionalisation. Popular support was also described as high in some countries, as people appreciate being able to get high quality public services everywhere in the country. There was some discussion as to whether there is a strong "economic case" for fiscal equalisation: does it contribute or is it detrimental to economic efficiency? Participants mostly agreed with the idea that fiscal equalisation schemes act to slow migration flows within countries. While the vast majority considered it to be a good thing (reducing congestion and security costs), a few wondered whether this could hinder structural changes within the economy. Participants also expressed mixed views on the impact of fiscal equalisation on the growth potential of receiving jurisdictions. It is often argued that revenue equalisation schemes create adverse incentives: a region could prefer not to foster economic development (and hence its tax revenues) if this results in lower equalisation grants. However, many participants were sceptical about whether this force is really at work. They argued that sub-national governments often prefer to have more fiscal autonomy and/or that the impact on employment is a key policy objective. There was, however, wide consensus on the need to avoid fully compensating poor regions through equalisation grants. In order to preserve the sub-national governments' incentives to improve the cost efficiency of their spending programs and/or set competitive tax rates, fiscal equalisation schemes should also reflect "standardised" instead of effective, measures of fiscal capacities (i.e. the schemes should aim to equalise standard provision costs of public services, rather than effective costs, and/ or potential rather than actual revenues). NOTES

1 The author works in the Economics Department of the OECD. The opinions expressed in the paper do not always correspond to the author's views and do not engage the OECD or its member countries. 2 The State Children Health Insurance Programme is a partnership between the federal and state governments that helps to provide children with the health coverage they need to grow up healthy and strong. Funds are allotted to each

479 Part D Theme III - Work Session Proceedings

3

4 5 6

7

participating state according to their number of uninsured and low-income children, accounting for regional cost differences. This initiative set aside $40 billion over i o years for states to provide new health coverage for millions of children - the largest children's healthcare investment since the creation of Medicaid in 1965. Allocations for the fiscal year 2002 ranged from $363,825 for Northern Mariana Islands' relatively small population to $528 million for California. For more information on this programme: http://www.dhhs.gov/ topics/childhealth.html. The first stage of horizontal tax equalisation amounted to €8.7 billion in 2000. The second stage of horizontal tax equalisation amounted to €8.3 billion. The first stage of the vertical tax equalisation (unconditional grants from the central government to poor Lander) amounted to €3.7 billion. On top of this, the second stage of the vertical equalisation (need-based grants) amounted to €9.6 billion. In addition, co-financing grants with a redistributive element from the federal government to the Lander amounted to €23.6 billion in 2000. For more information on the German fiscal equalisation scheme, see Wurzel (1999). Horizontal apportioning of personal income tax revenues between states is based on the residence principle in Germany, i.e. revenues accrue to the taxpayers' state of residence. The proposed reform of spending assignment and fiscal equalisation should give a further boost to such contractual arrangements (Joumard and Giorno, 2002). First, transfer rates between Lander with relatively strong and weak financial positions respectively, have been reduced. Second, a "premium" was introduced to reward states whose increase in tax receipts - measured against the year before - exceeds the average revenue increase of all states combined. Moreover, the average transfer rate of a donating state is now limited by a new cap that replaces the previous system of side conditions (Garantieklauseln). See OECD (2002a) for more details. In Canada, it has been argued (OECD, 200ib) that equalisation can adversely affect economic expansion in the have-not provinces, particularly the lowest-income Atlantic Provinces, and can therefore stand in the way of badly needed regional adjustments that would reduce horizontal imbalances. Negotiations on a major industrial development of mineral deposits in Newfoundland's Voisey's Bay were reported to have stalled in part because the province would have seen only a small fraction of the mineral royalties and business and personal income tax revenues from the project, since equalisation payments would have declined almost as much as such revenues increased. Smart (1998) also argued that some provinces set tax rates at a high level to reduce their tax bases - the negative effects of higher tax rates on a province's tax base being partly compensated by higher equalisation transfers from the federal government. On the Austrian case, see Schneider (2002).

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REFERENCES

Baretti, C., Huber, B. and Lichtblau, K., 2000. A Tax on Tax Revenue. The Incentive Effects of Equalising Transfers: Evidence for Germany. CEsifo Working paper No.333, September 2000, ftp://i2g.i87.96.i24/CEsifo_WP/333.pdf. Joumard, I. and Giorno, C., 2002. Enhancing the Effectiveness of Public Spending in Switzerland. Economics Department Working Paper No. 332, http:// applii.oecd.org/olis/2OO2doc.nsf/linkto/eco-wkp (2002 )i8/$FILE/ JTooi29276.PDF. OECD (2OOia), Knowledge and Skills for Life - First results from PISA 2000. OECD (2OOib), OECD Economic Surveys, Canada. OECD (2OO2a), OECD Economic Surveys, Germany, forthcoming. OECD (2OO2b), OECD Economic Surveys, Norway. Schneider, M., 2002. Local Fiscal Equalisation Based on Fiscal Capacity: The Case of Austria. Fiscal studies, 23 ( i ) , 105-133. Smart, M., 1998. Taxation and Dead-weight Loss in a System of Inter-governmental Transfers. Canadian Journal ofEconomics, 31, 189-206. Wurzel, E., 1999. Towards More Efficient Government: Reforming Federal Fiscal Relations in Germany. Economics Department Working Paper No. 209. http://www.oecd.org/pdf/Mooooiooo/Mooooi486.pdf

WORK SESSION PROCEEDINGS: REPORT

NICOLAS

SCHMITT

Problems of Equalisation in Federal Systems Revenue Equalisation versus Cost Equalisation (Work Session 2 2)

1.

INTRODUCTION

This topic is essentially technical. While participants at the work session hardly touched the quite complicated elements that constitute its tide: revenue equalisation and cost equalisation, the input of these outstanding politicians and experts who have to deal on a day-to-day basis with equalisation, provided an excellent account of the reality of the matter. Federalism is like the engine of a Formula i car: efficient but complicated From this point of view, equalisation is typical of federalism. It reflects its complexity, because it encompasses financial, economical, political, legal and even ethical components. Moreover, it reflects the heterogeneity of federal systems, because problems (and solutions) are different from one country to the other. This explains why the technical question ("How do we equalise?") has been replaced by the ideological one ("Do we need equalisation?"), and why clear answers could not be given to the problems launched in this panel, even if interesting elements could be synthesised. 2.

LESSONS LEARNED FROM S W I T Z E R L A N D

Switzerland is a good example of the challenges linked to financial equalisation, because it is engaged in a process of re-drafting its policy. 2.1.

The current system

Differences among cantons in terms of size, geography, population and economic potential are so great that, without equalisation measures, fiscal

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federalism would lead to intolerable regional disparities. The largest cantons have a natural burden: for example many expensive roads have to be built. Certain rural areas benefit from services provided by agglomerations, but do not pay for them. Large tax disparities drive to movements against federalism. The federal government must therefore equalise burdens that are not fault of the cantons. Therefore, it intervenes to correct the primary distribution of resources between the cantons with three main policy measures which aim to strengthen structurally weak regions: fiscal equalisation, agricultural aid policy and assistance to mountain areas. Three sets of federal equalisation programs have been developed since 1959: firstly, conditional federal grants to the cantons; secondly, revenue sharing of certain federal tax revenues, and thirdly contributions by the cantons to certain social security expenditures (Dafflon, 1999). 2.2. Critics of the system The current system favours cantons that are already strong. The two main elements of the transfer system (federal grants and revenue-sharing quotas of federal direct tax) are deficient in their redistribution from a quantitative point of view. Moreover, the allocation of the greater part of federal contributions is linked to similar investment by the cantons themselves through residual expenditures. 2.3. The new system Switzerland is about to reform its equalisation policy.1 Key features of the new draft are: clear definition of responsibilities and powers; protection of the lower level; separation when joint tasks are performed; linking of local power to incentives; economic thinking as part of the implementation of the principle; careful financing of the task; avoidance of wrong incentives. Its objective is to allow cantons to maintain their potential to fulfil tasks and to maintain autonomy. It is based on four principles, which show that an equalisation policy should not be reduced to fiscal equalisation: Measures on assignment of competences and tasks: subsidiarity will become a federal principle and legally binding; Reform of cooperation between confederation and cantons: some joint tasks will be formally identified; Strengthening inter-cantonal cooperation: a catalogue will be edited, and there should be financial equalisation for tasks accomplished at the super-cantonal level; Fiscal equalisation in strict terms.

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Among the features that characterise the new system, are three funds that allow for unconditional transfers and horizontal equalisation.2 3.

LESSONS LEARNED FROM

CANADA

In Canada, the fiscal capacities of less well-off provinces are raised to 97 % of the national average through the equalisation program. Moreover, there are no conditions attached to the formal equalisation program. As a result, equalisation is strongly supported by federal and provincial governments (and even by those which do not receive equalisation pay ments) and - most importantly - by the general public. 4.

LESSONS LEARNED FROM AUSTRALIA

This seems to be the world's most egalitarian country. States are quite similar and the majority of population lives in large cities. As a result, the main feature of financial equalisation is connected to the underlying value of equality: all Australians should have access to the same level of public goods and services. The key to equalisation is the Grant Commission. Exhaustive enquiries provide it with information on the situation of different states, their advantages and disabilities. It favours vertical transfer payments over horizontal. States have limited revenue: 50% of their income comes from federal transfers. Financial equalisation seems to be accepted, despite the fact that the Grant Commission is a paradigm of independence and obscurity. For instance, it distinguishes between disabilities or natural advantages, whose scientific delimitation remains problematic. 5.

LESSONS LEARNED FROM GERMANY

Financial equalisation in Germany has a political dimension, with a judicial touch. The system is considered as one of the most stable in the world.3 Following an appeal by three Lander, the Karlsruhe Constitutional Court ruled in November 1999 that the equalisation system would have to be reformed by 2005. In the wake of this decision, the federal government and the 16 Lander agreed on a new equalisation scheme at the end of June 2001: donor states as well as recipient states are expected to be better-off. The new system aims on the one hand to allow the donor Lander to keep a higher portion of their above-average tax revenue. On the other hand, the recipient Lander will benefit from an increase in the contribution made by the Bund to the revenue equalisation system, and from a higher weighting for municipal revenues

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(64% instead of 50% at the present time), since recipient Lander tend to have less wealthy municipalities than donor Lander. 6.

WHY FINANCIAL EQUALISATION?

The technical dimension cannot be separated from the question of principle: why financial equalisation? Federalism has four main functions that have to be constantly improved: To create favourable environment; To create an efficient and flexible system; To create a certain competition among sub-national entities; To implement the principle of subsidiarity. Besides competition, it is an open question as to how a federal system can tolerate differences. It is necessary for the survival of the federation that states and citizens should feel a certain level of solidarity. Horizontal gaps are increasing, not only in the four federations we have examined, but also in countries like Brazil or Argentina. The main purpose of financial equalisation is to address disparities among sub-national governments, i.e. to reduce the gap between revenue means across regions. Such policies are typically adopted in order to ensure equity among citizens, notably by ensuring that citizens have access to reasonably comparable levels of public services at reasonably comparable levels of taxation, regardless of their region of residence. Some experts are opposed to any form of financial equalisation, arguing that it destroys the very basis of democracy and market freedom (Nef, 2002), but they seem to form a minority. The evidence that equalisation creates a trap is not convincing. Why should a government be less efficient with equalisation money? Politicians have voters whom they need to convince of their efficiency, and obviously voters do not accept a government that does not create conditions for economic growth. In Canada, the output is very high, even among growing provinces. Nevertheless, knowledge about equalisation remains limited. In Quebec for instance, almost nobody knows that it exists, and citizens believe that Quebec is donor, when it is in fact a recipient. Equalisation also has side effects that can be beneficial. For instance, the reduction of internal migration motivated only by fiscal differences promotes economic efficiency. In Canada, this may have helped to maintain the Francophone presence in Quebec. Equalisation allows less well-off provinces to provide similar public services at similar levels of taxation, and therefore reduces fiscally induced migration. Another argument is linked to globalisation. Recent economic collapses (Enron or Worldcom in the United States, Swissair in Switzerland) have

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shown that the market has its limits. It is not possible to let it influence the life of the regions without any state intervention, because this could lead to severe economic and social problems. Financial equalisation can therefore be perceived as a political question and even - if we dare say it - as an ethical one, with a cultural dimension. Canada, Switzerland and Germany have entrenched the principle of equalisation at least in their constitutions. This shows its basic importance. The ethical nature of equalisation can also be seen from the care taken about terminology. Instead of "poor" states, it is preferable to speak of "less rich" or "financially weaker" ones. 7.

HOW TO IMPLEMENT F I N A N C I A L EQUALISATION?

Life is a jungle and inequalities are everywhere. Participants agreed about the need to "socialise" economic life at a sub-national level. But how is it possible to put this into practice? The first equalisation policy is in fact the allocation of powers. Then, the greater the regions' responsibilities (in terms of finances) and the greater the disparities among them, the greater the need for some sort of equalisation in the strict sense of the word. But what kind of disparities need to be equalised? Once technical questions are dealt with, solutions differ from one federation to another. Table i Country

Canada

Switzerland

Australia

Revenue disparities reduced

Extensively

Moderately

Extensively

Expenditure disparities reduced

Not at all

Moderately

Extensively

Disparities between regions can be reduced by transfers between governments, which can take two forms. Firstly, a formal equalisation program; secondly, specific transfers based on some sort of measures of need or revenue capacities. Given that the measurement of disparities on the expenditure side appears to be much more complex than on the revenue side, another consideration may be a country's preference for relatively simple fiscal arrangements, especially if this were to ensure greater transparency and accountability. This table shows that among six federations, there are five different patterns of equalisation. And although the United States seems not to have anything in its "row", equalisation does exist there.

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Table 2 Country

Equalisation Formal equalisation program

Who equalises ?

Entrenched in constitution

Federal to sub-national governments

Australia

X

Belgium

X

Canada

X

X

Germany

X

X

X

Switzerland

X

X

X

Sub-national governments to federal

Among sub-national governments

X X X X X

United States

8.

HOW MUCH TO E Q U A L I S E ?

This is another basic technical question whose answer shows that there is no unanimity among federations. Differences are due to the fact that the answer depends on two factors. First, the extent of regional responsibilities: a federation that is not very decentralised probably needs less equalisation than a highly decentralised one. Second, the level of disparity between the revenue capacity and expenditure needs of the regions: the more unequal regional public services and tax levels are between regions, the more equalisation is needed. 9.

WHAT RESULT?

Experts discuss the merits of financial equalisation, and the fact that it is currently at the heart of delicate political debates shows that the regions at least are convinced of its importance. In Canada, some experts have argued that equalisation has increased the dependency of some provinces and augmented disparities within the country. But there is no empirical evidence to sustain this argument. In fact fiscal disparities have decreased over the past 20 years. Instead of becoming more dependent, less well-off provinces have become less dependent on equalisation.4 Of course, the increase or decrease of economic disparities among the regions sometimes has nothing to do with equalisation, and can be due to factors such as the discovery of oil (in Alberta, Canada) or decline of mining industry (in Lorraine, France). These examples show how the state has to take care of economic fluctuations in order to compensate them.

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Nevertheless, given that disparities have decreased in the countries where there are equalisation programs, it could be argued that the latter do not have the negative economic impacts some experts assign to them. Table 3 Canada

Different contexts

Switzerland

Australia

Germany

Degree of decentralisation

High

High

Moderate

High

Revenue disparities

Large

Large

Relatively small

Moderate

Expenditure need disparities

Small

Small

Relatively large

Large

Degree of equalisation

Not full

Not full

Full

Not full

Revenue disparities reduced

Extensively

Moderately

Extensively

Extensively

Expenditure disparities reduced

Not at all

Moderately

Extensively

Not at all

Resulting design choices

10. ARE THERE SYNTHETIC

ELEMENTS?

Apart from the idea that equalisation is necessary and useful, the legal description of equalisation policies varies considerably from one country to another, and the different definitions of the concepts in use make it very difficult to draw on national approaches. The federal share of direct government spending is lower in Canada and in Switzerland than in Australia. As a result, synthetic elements are rare. Politically, financial equalisation is disputed in Germany, less in Switzerland - even if it took many years to achieve the new draft - and not at all in Australia or Canada. Cost equalisation exists neither in Canada, nor in Germany, where it is considered as a "taboo". A list of the Lander according to their financial capacities would be almost inconceivable. On the other hand, such a list is published every two years by the Swiss government (RS 613.11). There are new schemes in Germany and in Switzerland, but not in Australia or in Canada. 11.

COMPLEXITY OF EQUALISATION

All participants pointed out that in every country only a few experts were able to understand the ins and outs of equalisation. Therefore they did not present figures, but rather concepts. In Canada, even though expenditure needs are not taken into account in the formal equalisation program, there are less than 30 experts in the whole country who know the intricacies of its calculations. In fact, the complexity of equalisation is linked to its very nature.

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Firstly, it requires a state structure that allows sub-national units to enjoy a certain level of financial decentralisation. It means that the state structure itself has to reach a certain level of complexity before discussing equalisation. In a federation, one of the most delicate questions is the allocation of tasks. Financial equalisation has then to integrate into a complicated context. Secondly, there is a problem of measurement and indicators. Equalisation means a certain harmonisation among fiscal, financial and economic disparities. But can one measure these inequalities? How is it possible to measure property tax? Equalisation requires excellent statistics. This is not so easy: it requires a lot of administrative work and costs a lot of money. Even more difficult is the measurement of immaterial factors like the satisfaction of citizens. 12.

DIFFERENCES BETWEEN

FEDERATIONS

The great diversity of systems found among federations can be explained only through their history. History alone allows us to understand, for example, why competitive federalism is encouraged in Switzerland, or why equalisation is complete in Australia. No one can say whether the first pattern is better than the second, or vice versa. Equally, only history can explain the details and content of policies in the field of equalisation, which often depend on an undefined distinction between participation and devolution. The same applies when we seek to understand why market freedom remains the priority in certain countries, while in others the social constraints of the electorate have become more important. Equalisation is not only mathematics. It responds to the basic values of each federation and of its politicians at the federal and sub-national level. Accordingly, one should not claim to provide an accurate and rational interpretation of situations that are frequently the result of a long process which politicians and administrators have learnt to work with. 13.

COMPETITIVE FEDERALISM VERSUS COOPERATIVE FEDERALISM

Linked to this issue is the concept of cooperative federalism versus competitive federalism. On the one hand, great importance can be attached to cooperation at all levels and to the governmental processes that deal with it. This is called cooperative federalism. It helps to reduce conflicts and improve coordination, but over-intricate coordination mechanisms drive to the "joint decision trap", which eventually reduces autonomy and room for manoeuvre at both levels of government. In Germany, the intricacy of the whole system has resulted in a certain level of inefficiency (Arndt, 2002).

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On the other hand, supporters of competitive federalism argue that competition among state levels (of course within the constitutional framework, in particular, the principle of federal faithfulness) is as fruitful as competition between firms. It brings better goods and services to the citizens. Argentina for instance is trying to develop a system based on the Canadian model, considered to be better than the Australian one, because it demands fiscal responsibility from sub-national units. For these experts, cooperative federalism is a kind of collusion, aiding governments instead of citizens. But one has to take into account the fact that an excess of competitive federalism can lead to inter-governmental conflicts, and that fears and angers are destructive in a federation. As usual, a good balance between these two principles has to be reached, and this should also be the goal of equalisation. 14. R E V E N U E E Q U A L I S A T I O N V E R S U S COST E Q U A L I S A T I O N STRICTO

SENSU

Participants hardly dealt with technical questions. The point was made that it is less complicated to equalise revenue than expenditure. That is why Canada focuses on revenue equalisation. Moreover, vertical transfers are less disputed than horizontal ones. But let us examine an example of cost equalisation. This happens in a u-form production situation (V N **), with productivity increasing - according to the number of users - in the left part of the pattern, up to an "optimal" point N where production costs are maximised, and then decreasing in the right part of the pattern. Typical examples are natural monopolies like water supply or cleaning. If a regional collectivity has to deliver this service, but is too small to reach the optimal point where the number of users allows for the lowest cost, there are two ways to overcome the difficulty. The first one is for the collectivity to cooperate with its neighbours. This is a "management variable": the collectivity can decide for itself. But such cooperation may be impossible, perhaps for geographical reasons. This is a "situation variable": the collectivity cannot decide for itself. In such cases, compensation of the costs can be necessary in order to approach the optimal point allowing for the delivery of the service at a same net cost as other collectivities. The level of government that decides the rule should bear the financial consequences: the result is usually vertical equalisation. 15.

CONCLUSION -

MORE QUESTIONS

THAN ANSWERS

A democratic system simply cannot allow people to feel neglected with regard to public service access. Over time, equalisation strengthens the

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financial capacity of the member states. The gap between richer and less well-off provinces has decreased over the years. The work session showed that there were two points upon which it was possible to reach a consensus among participants. The first is that financial equalisation has good results and is its own justification. The second is that it is so complicated that only a few experts are able to deal with it. This complexity explains clearly why discussions hardly touched upon the technical issues that the work session title evoked. On the contrary, this paper has first of all dealt with principles of equalisation. As a result, people looking for definitive answers to their questions will have been disappointed. As it is often the case with such a complicated system as federalism, there is no one solution. Nevertheless, the scientific evidence of this fact has its importance. At a time of globalisation and (dis)information, people tend to have a Manichean view of the world. They seek simple answers to complex questions. In St Gallen the most reliable experts have proved that there is no evidence. The best solution can only be the one which reflects and takes into account in the most scrupulous way the deepest needs and desires of a country. Equalisation is a necessity, perhaps even an ethical one. But it is not then possible to say whether cost equalisation or revenue equalisation is the best solution. Its implementation depends on too many factors. Moreover, Switzerland, Germany, Australia and Canada represent "classical" federal cases, when compared with emerging federations or other political systems. The final point follows from the varying national conditions of equalisation that have been dealt with above. It is difficult to transfer elements from a model in one country to a model in another country. Because of historical and cultural traditions, the same conclusion pertains to the transferability of entire equalisation systems. The lessons to be learnt from others deal mostly with the type of considerations involved when entering the equalisation process, procedures used by others in solving problems, and with the elements that have to be dealt with in constructing equalisation systems. When borrowing ideas and solutions from other countries, one should always be attentive to what type of federal system the ideas and solutions are taken from. Federations differ from each other and the interdependencies between components within the systems may work differently. NOTES

1 < http://www.parlament.ch/Internet98/f/dossiers/nfa/nfa.htm> 2 An indication of the complexity of the topic is the fact that experts disagree about current horizontal equalisation in Switzerland. Some pretend that there is none, and others explain that there is a technical explanation. In fact there is

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horizontal equalisation in the cantons, limited to the assignment of revenue. Cantons have accepted that the federal government can raise taxes, on the condition that it gives back 30% of federal direct taxes with formulas of taxation. So despite the fact that it is apparently vertical, in reality analysis proves it is horizontal. 3 For more detail on the system see Standard & Poor's report: "Increasing German Lander Bond Issuance Focuses Attention on Credit Quality", published on RatingsDirect, Standard & Poor's Web-based credit analysis system, 2 July 2001. 4 The evolution of the provincial per capita real Gross Domestic Product (GDP) also shows that less-well-off provinces are catching up with the richer provinces. REFERENCES

Arndt, H-W., 2002. Wie der Finanzausgleich einen foderativen Wettbewerb behindert: Der Fall Deutschland. In: U. Wagschal and H. Rentsch, Avenir Suisse, eds. DerPreis des Foderalismus. Zurich: Orell Fussli Verlag, 249. Dafflon, B., revised 1999. Fiscal Federalism in Switzerland: A Survey of Constitutional Issues, Budget Responsibility and Equalisation. Working Paper No. 278. Dafflon, B. and della Santa, M., 1995. Federalisme et solidarite: etude de la perequation en Suisse. Coll. PIFF N° 15, Fribourg. Fleiner, T, 2001. Federalism: Basic Structure and Basic value for Switzerland. Recent Developments in Swiss Federalism. Tijdschrift voor Bestuurswetenschappen & Publiekrecht, 2001 ( i ) , 291 (298). Fleiner, T, 2001. Foderalismus zwischen Integration und Sezession. In: F. Hufen, ed. Bundesstaat -Parlament - Opposition. Baden-Baden: Nomos Verlag Gesellschaft, 53. Nef, R. et al., 2002. Foderalismus, Subsidiaritat und Non-Zentralismus: Das Doppel- gesicht des Foderalismus - attraktiv und verwirrend (Dossier). Schweiser Monatshefte, 7-8/2002, 25. Williams, R., 1995. State Government Expenditures in a Federal System: Cost and Revenue Equalisation Effects in Australia. Applied Economics, 27, 139.

WORK SESSION PROCEEDINGS: REPORT

NICHOLAS

ARONEY

Fiscal Competition (Work Sessions 11 and 23)

1. INTRODUCTI The work sessions on the subject of fiscal competition focused on questions of tax competition versus tax coordination and the re-distributive incidence of fiscal competition. Such questions suggest a problem of conflicting values: between competition and efficiency on one hand, and coordination, redistribution and equity on the other. Can the efficiency benefits of fiscal competition be maintained, without leading to suboptimal re-distributive outcomes? The economic rationale for federalism assumes the existence of territorially defined local public goods, and claims that federal structures enable responsive variation, experimentation, competition and efficiency in the provision of such goods. However, some experts believe that fiscal competition can lead to "skewed" outcomes in revenue, regulation and the provision of public goods between different regions. Competition may encourage sub-national units to reduce taxes in order to attract investment and to reduce welfare to deter immigrants with lower incomes. It is therefore argued that central governments must retain coordination and redistributive powers to overcome these problems. But in response it is said that centralised solutions foreclose the efficiency gains and local choice entailed in fiscal decentralisation. Centralised solutions may lead to excessive public sector growth - the so-called "Leviathan" state. A tension between opposed policy outlooks is thus recognised, and attempts are made to secure the benefits of fiscal competition while avoiding the problems associated with it. However, the design of such systems is vexed by significant theoretical and practical limitations. Firstly, the empir-

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ical literature seems to be inconclusive; it appears that different variables and models produce different outcomes. Secondly, the literature is beset by the normative problem of identifying an optimal revenue and expenditure mix. Thirdly, there is the practical problem of implementing idealistic fiscal reforms in the unique political, economic and social contexts of each country. Economists may agree on the goal of utility maximisation, but formidable empirical, normative and practical obstacles lie in the way of implementing schemes that maximise the benefits of fiscal competition while minimising the detriments. 2.

THE WORK SESSIONS

The three cases considered - Brazil, India and the United States - offer very different examples of fiscal organisation, each within a relatively large federal system, but with different levels of economic development. In the United States, federal, state and local governments exercise their capacities to levy a wide range of taxes independently, enabling them to engage in fiscal competition. Given the substantial autonomy and fiscal competencies recognised by the federative pact of 1988, Brazilian states also engage in extensive horizontal competition. India, by comparison, has a vastly more centralised fiscal system, which substantially eliminates fiscal competition. However, both Brazil and India adopt re-distributive formulae to allocate federal government funds among the states, whereas there is no formal redistributive mechanism in the United States. 2.1.

Tax competition versus tax coordination

Fiscal competition in Brazil is largely conducted through reductions in the incidence of state value added tax (VAT) at the point of origin. Critics argue that the ensuing "tax war" diminishes revenue, reduces expenditure and concentrates firms within the more developed states. One case statement maker argued that fiscal competition in Brazil was neither effective nor benign. Infrastructure, rather than tax incentives, is the strongest determinant of business relocation and investment. Paradoxically, tax incentives enable firms to "blackmail" the state for continued incentives. Tax wars therefore encourage distorted and unsustainable investment, while entailing a decline in tax revenues in a competitive "race to the bottom". As a solution, a state destination tax collected at source, together with a system of inter-governmental transfer, was proposed. Expenditure competition and competition for federal funds could be maintained, the latter being made conditional on performance in the provision of public goods. The success of such reforms would depend, however, on the negotiation of a new federative pact and the development of robust local and regional government, with strengthened civic participation. As was later pointed

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out, reform would also have to satisfy the interests of the larger and wealthier states, and maintain a politically sustainable level of state revenues. Another case statement maker drew attention to efficiency improvements among the Brazilian states resulting from competitive incentives to best practice in the provision of public goods. However, negative side effects were also observed, such as localities "free riding" on superior health services provided in adjacent localities. It was agreed that tax competition is only a secondary factor in investment decisions, but politicians behave as if competitive policies were a decisive factor. Indeed, firms can respond unpredictably, sometimes undergoing corporate restructuring in order to take advantage of concessions. It was also agreed that fiscal competition entails a degradation of the tax system in general. A youth participant further observed that fiscal competition can be in tension with regional development policy, particularly in countries where there are substantial socio-economic disparities. Government negotiations with businesses are also likely to undermine political transparency. Other participants agreed with and elaborated these points. Can problems such as these be avoided through better institutional design? An analysis statement maker explained the limitations of the various kinds of economic models, but argued that dynamic, repeatable "game theory" models show that fiscal coordination is possible. Agents may free ride on services provided by others, but agreements to coordinate fiscal policy can be drafted to prevent such problems. Another analyst observed that it is difficult to reform origin-based service taxes to make them destination-based; it would be better to avoid service taxes in general. In the case of state VAT, a destination tax could eliminate the incentive to fiscal competition, but enforcement would be inefficient. It would thus be better to levy a destination-based tax at source. It was observed that vertical fiscal competition is also a problem in Brazil: the federal government now relies on sub-optimal turnover and labour taxes. Another case statement maker pointed out that the centralised fiscal system of India substantially eliminates harmful competition. The rationale for federalism in India is cultural and social, rather than economic, and the federation is highly centralised in order to counterbalance centripetal social forces. This includes fiscal centralisation in order to address the economic weaknesses of many of the Indian states. The states assert their autonomy for cultural and political reasons, but remain financially dependent upon the centre. Inter-governmental fiscal relations are generally prescribed by the Indian constitution. Some central taxes are automatically assigned to the states, others are collected and appropriated by the states, while others are distributed by the centre to the states. The Finance Commission makes general distributions, the Planning Commission allocates funds for special development projects, and the various central ministries may make addi-

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tional transfers. However, the funds available to the Finance Commission are dependent on decisions of the central government, and the states complain that the scheme is overly centralised. Yet ironically, the states are politically reluctant to exercise the taxing powers they do have. They are also reluctant to transfer funds to localities, and it is argued that the centre should fund localities directly. The small amount of fiscal competition that does occur in India is largely ineffective because the main determinant of investment decisions is the availability and quality of infrastructure. Another factor is that the financial health of the centre and the states is poor. Moreover, there is a lack of fiscal-policy coordination. Governmental bodies often plan for projects for which the necessary funds do not materialise. Fiscal reform is therefore on the political agenda. One analysis statement maker argued, however, that the elimination of state taxing powers may be a remedy that is worse than the disease. Fiscal competition is probably inevitable in fiscally decentralised systems, and the goal is to structure the system to secure the benefits of competition while avoiding the problems. In this respect, tax competition must be assessed in the wider context of competition in the provision of infrastructure, services and regulatory policies. Despite its problems, Brazil has adopted a clear allocation of taxes to each level of government, which makes the system more transparent and encourages accountability. Adopting a destination principle for state taxes may help to alleviate the problems that do exist. It was also noted that there is little empirical evidence for a race to the bottom. For example, there is no evidence that the devolution of environmental policy in the United States has resulted in reduced environmental protection. Models that measure "distortions" as a result of fiscal competition usually report only minor effects, in the order of 3 % of revenues. And an assessment of fiscal competition must take account of the "Leviathan" tendency of governments. Lower revenues may reflect efficiency gains, not merely welfare losses. It was observed that capital mobility in the United States entails a high level of investment competition. Poorer regions make bids to induce investment, with a kind of "balancing" tendency. Problems of harmonisation within the European Union (EU) were also discussed. Destination-based taxes in the EU were compared to origin-based taxes in the former Soviet Union. In the latter case, the structure of products may be significant. The production of goods with high elasticity of demand can depend on products with low elasticity, reducing the effectiveness of fiscally competitive policies. It was also noted that the allocation of taxes to each level of government may not fully resolve the issue. Firstly, the characterisation of particular taxes can be disputed and judicial determination may be necessary. Secondly, executive discretion in enforcement can be used as a mechanism of tax competition notwithstanding the legal position.

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Recent fiscal responsibility legislation in Brazil and Argentina was also discussed. The effectiveness of the Brazilian scheme, it emerged, may have been enhanced by lower interest rates and the restructuring of state debts. In Argentina, fiscal reforms had only been implemented effectively at a national level. In this respect, it was considered that the best sanction to encourage fiscal responsibility is for the central government to resist pressure to bail out improvident regions. However, national economic credibility may also be at stake and a federal government may be politically or constitutionally obliged to intervene in major regional fiscal crises. Finally, it was noted that the dialogue had focused on the "problems" of fiscal competition in Brazil. It would have been better, it was argued, to identify the general principles of beneficial competition, and to work out specific policy proposals in that light. 2.2. Fiscal competition: re-distributive incidence

In the United States, the federal and state governments levy a wide range of taxes. This allows a wide variety of revenue policies and extensive fiscal competition. Some federal conditional grants have equalising characteristics, but there is no systematic attempt to redistribute finance among the states. One case statement maker argued that fiscal decentralisation in the United States significantly undermines incentives for re-distributive policy among local and state governments. In California, state taxes on property, income and retail sales leave little scope for horizontal competition. However, there is a high degree of vertical competition as well as a kind of lateral competition within governments among various projects and services. Much of this competition is the result of the democratisation of fiscal policy. Citizens have repeatedly voted for constitutional guarantees of fiscal responsibility, weakening the capacity of governments to provide welfare services. Democratic approval of new taxes has been limited to popular programs, such as increased spending on roads and police, but not health. It was concluded that central governments must not abandon their responsibilities to engage in re-distributive policy. Another case statement maker pointed out that within countries belonging to the Organisation for Economic Cooperation and Development (OECD) there are significant levels of fiscal competition. For example, most Swiss cantons have significant tax competition schemes. Low tax rates seem to be more effective than special incentives to particular firms. There is a correlation between low tax regions and high personal income, but it is not clear which causes which, and the effect of low tax policies can be diminished by high property prices. The experiences of Switzerland and Canada, it was said, also suggest that decentralisation does not necessarily entail a break down in progressive taxation and welfare expenditure, al-

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though this is complicated by disparities between rural and urban areas. Rural areas require less infrastructure and can more easily engage in fiscal competition through lower tax rates, whereas urbanisation can entail concentrations of poverty and high welfare costs. To counteract "harmful" fiscal competition, it was proposed that central governments retain re-distributive functions, horizontal cooperation be encouraged and, more radically, poor and rich localities be merged. Whether harmonisation can be achieved will depend, however, on the size, territorial organisation and constitutional framework of each country. If sub-national units are prevented from imposing externalities on other units, fiscal competition can be efficient, but principles of tax neutrality and transparency are necessary to avoid discriminatory policies. Another case statement maker noted that the four significant categories of government in the United States - federal, state, local and tribal - are each expected to be self-sustaining. The federal government in fact raises 100% of its revenue, the states raise around 75% (with 25% in federal grants), local governments receive small grants from the federal government, and tribal administrations receive federal monies and raise additional revenues through various enterprises. Some federal expenditures such as social security and regional tax breaks have a re-distributive effect, and particular federal grants provide funds for social services. However, in the State of Washington, for example, fiscal policy has been deeply influenced by a strong "anti-tax" mood, entailing under-funding of various public services. By contrast, it was noted that in Germany changes in social policy are translated into changes in revenue and resource allocation. It was also observed that in Canada there are serious fiscal imbalances, with long-term trends to deficit budgets in the provinces, and problems for vital public services such healthcare for the elderly. Federal intervention may resolve such inequities, but with negative consequences for provincial "sovereignty". The discussion then turned to vertical fiscal competition in the United States, noting that the states usually resist un-funded and partially funded federal mandates. Inter-state fiscal competition in South Dakota was also discussed. The state is seen as a "low tax state", with no income tax, and must therefore rely on regressive taxes, such as sales taxes. However, even those adversely affected appear to prefer this. Recent popular rejection of an estate tax also had a competitive effect (encouraging retiree immigration), but voters were not apparently motivated by the competitive aspects of the policy. It was argued that fiscal competition can be inefficient, with high costs in foregone revenue and low returns in terms of job growth. In addition, the firms liable to be induced by tax benefits are likely to be financially "weak" in any case. However, competition has not produced an observable race to the bottom, and the states have engaged in voluntary tax harmonisation, such as

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attempts to prevent sales tax avoidance through Internet sales. It was therefore concluded that fiscal competition is mostly beneficial. States with high unemployment and poverty seek to attract investment, with a long-term tendency to "balance out" inequalities. It was noted that in the EU the "destination principle" resolves uncertainties about catalogue and Internet sales. It was also noted that in India, fiscal and legislative centralism prevents any comparable fiscal conflict from occurring. At first glance, the United States is a curious choice of case, given the absence of equalisation measures at an inter-state level, although there is equalisation at an intra-state level. However, generalisation is difficult - there are remarkable differences among the various states, towns and counties. The system appears chaotic, but functions reasonably well, despite the problems. It was agreed that block grants had altered the incentive structure of state revenue arrangements, and one might expect a race to the bottom. However, the evidence is not forthcoming. Concern with welfare dependency led to fiscal decentralisation and the imposition of outcome conditions on federal grants to encourage innovation, experimentation and employment growth. Federal conditions have included a requirement that historical levels of state welfare spending be maintained. The scheme appears to have been very effective, with many people finding work. It was concluded that fiscal competition certainly has an impact. Infrastructure is the most important factor, but there remains a correlation between low taxes and increased investment. However, calling fiscal competition a "fiscal war" places an unfortunate spin on the evidence. Fiscal competition can increase efficiency and need not entail a race to the bottom. Economists generally applaud the efficiency of market competition and it is somewhat incongruent to then critique competition in the provision of public goods. In the work sessions, it was generally agreed that fiscal competition can entail a competition for funds and public goods, and that taxpayers may be prepared to raise taxes for enhanced service provision. Governments have to establish that they are being efficient, and fiscal competition can have a positive impact. Some participants, however, observed that competition could still have a negative impact on poor regions, especially in less developed countries - although it was countered that corruption and weak infrastructure were often the significant factors. One analysis statement maker observed that the Brazilian states are legally required to obtain the agreement of all the states before implementing tax incentives, but that this law has not been enforced. The implication was that economic incentives are a better way to regulate fiscal relationships. It was then asked whether the absence of any race to the bottom in the United States could be explained by the use of "eligibility" requirements (e.g. residency periods) for welfare entitlements. It was observed,

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however, that such requirements had been struck down as unconstitutional, except for schemes where migrants are initially entitled only to a level of benefits equal to those available in their state of origin. It was then asked whether fiscal competition encourages spending on infrastructure rather than welfare? It was said that despite the devolution of welfare responsibility, welfare payments are not a large proportion of state budgets. Health expenditure is more significant, and here low government reimbursements have encouraged the avoidance of the provision of medical care for the poor. However, significant variations among the states were also noted. It was observed that healthcare has both a re-distributive and a local public good dimension. Efficiency and accountability may be strong at a local level, but local revenues are relatively weaker. It was also observed that historically, the Catholic Church had provided welfare throughout Europe, but that Protestants often made welfare a civic responsibility, so that communes tended to make citizenship a criterion of entitlement. As welfare responsibilities were shifted to cantonal and national levels, "club membership" continued to be a criterion. Recent fiscal decentralisation means a return to localised responsibility, with renewed affirmations about limited entitlement and payment for services. At this point, one participant pointed out that the discussion had lost sight of the human dimension: the impact of financial policy on actual living standards. Attention was also drawn to the background issue of tradeoffs between efficiency and equity involved in arguments between "club" goods and public goods. Another observation was that too much political attention is often given to the role of large firms, when small businesses constitute the largest sector in many Western economies. However, governments are reluctant to negotiate with small firms, and larger firms have more political influence. It was also observed that a range of intangible factors, unrelated to government policy or fiscal design, were responsible for the success of many emergent commercial regions, such as Silicon Valley and the Seattle region. The general consensus was that fundamentals such as infrastructure and social capital are the key determinants of economic development. Why, then, do political leaders continue to engage in tax competition? It was noted that politicians tend to make short-term decisions, whereas fiscal design and re-distributive incidence are long-term issues. But then how do we account for the divergent directions taken in the United States and the EU, as well as significant variations between similarly organised countries, such as Switzerland and Germany? An analysis statement maker concluded that genuine fiscal decentralisation is bound to produce fiscal competition, whereas harmonisation forecloses the benefits of diversity. The basic problem, therefore, is how to prevent the most destructive forms of tax competition, while retaining its benefits. For example, two governmental entities in Bosnia and Herzegovina

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adopted different retail and import taxes, and businesses restructured their processes to avoid paying tax in both jurisdictions. One response to this was that such situations justify reform, but not necessarily tax harmonisation. Another was that tax uniformity, as in India, completely avoids problems such as these. It was pointed out, moreover, that different social, cultural and political backgrounds of countries such as India and the United States correlated with very different attitudes to fiscal competition, harmonisation and re-distributive incidence. 3.

CONCLUSIONS

The choice of cases was a significant determinant of the discussion. Focusing attention on transitional economies in the first work session oriented the dialogue towards problems of fiscal competition, rather than problems of fiscal centralisation. By comparison, the focus in the second work session on a highly developed national economy brought the case for fiscal competition more clearly to the fore. In developed nations, fiscal competition is often viewed in comparatively benign terms. In such countries, infrastructure levels are relatively uniform, so that competition can be effective. Also, poverty and regional economic disparities are less serious, so that any race to the bottom is less ominous in its implications. Thus even those who drew attention to the regressive re-distributive incidence of fiscal competition in the United States tended to see competition as a natural and mostly healthy aspect of economic and political life. It was widely agreed that factors other than tax competition are the key determinants of firm location and investment decisions. Infrastructure, social capital and other intangibles appear to be the most important economic success factors. The short-term orientation of politicians who behave as if tax incentives were a decisive factor was frequently noted. However, proponents of fiscal competition did not rest their case on a "competition" for business, but on the opportunities for variation and experimentation in the provision of public goods, and the incentives to efficiency and effectiveness that this entails. The underlying economic and political values of participants from different countries were an important factor in the discussion. Here, many of the usual dichotomies - such as those between equality and freedom, solidarity and diversity, and between absolute and relative measures of utility or welfare - seemed to lie beneath the surface. It also appeared easier for participants to agree on abstract generalisations concerning trade-offs between fiscal competition and coordination, just as it was easy to agree on the specific technicalities of particular tax regimes. However, it was more difficult to find common ground on "middle-level" questions concerning the evaluation and reform of economic policies adopted by particular countries. As noted at the outset, the inconclusiveness of the empirical evi-

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dence, and differences in normative perspective are compounded by practical obstacles imposed by the historical, social and political circumstances of each country under consideration. One general conclusion was that the design and operation of federal economic systems is heavily dependent on the unique political, social and historical factors of each country. For example, in India cultural diversity is countered by a high degree of fiscal and political centralisation, whereas the terms of Brazil's federative pact make any concession of state fiscal powers difficult to procure. Fiscal arrangements in both countries are thus shaped by both economic considerations and historical circumstances. It was concluded that economic reforms can be effectively implemented only if they are sensitive to these factors. So, how far did the work sessions advance beyond the existing literature? Perhaps the real benefit of the dialogue was that it brought together a range of participants who contributed a diversity of national and professional experiences, and analysed from an array of scholarly disciplines and a variety of political and economic perspectives. Perceptive commentators might have anticipated the general results of the discussion, but the forum brought home the complexity of the issues and the variety of frameworks from which fiscal competition can be assessed. As mentioned in the introduction, a pragmatic path may seem to beckon: one which unites meticulous research with careful design and cautious, gradual implementation. However, the orientation to design, it seems, must always be balanced - particularly in federal systems - with principles of autonomy, negotiation and consensus. And thus it may be that federal decision-making processes (which give regions and localities a distinct voice in national decisions) are an appropriate and effective way to facilitate the negotiated arrangements that can resolve issues of fiscal policy as they emerge.

WORK SESSION PROCEEDINGS: REPORT

FLORA

MUSONDA

Fiscal Decentralisation in Transition Economies and Developing Countries (Work Sessions 12 and 24)

1 .

INTRODUCTION

Fiscal decentralisation - the devolution of taxing and spending powers to lower levels of government - has become an important theme of governance in many transition economies and developing countries. Accordingly, the restructuring of governmental functions and finances of national and lower-level governments has entered the core of the development debate. The transition country case presented the Russian situation while those for developing countries examined Pakistan and Indonesia. There have been reforms in all three countries, which had previously been more centralised. These have led to a system of fiscal rearrangement that enhances democratic participation and improves the service delivery performance, responsiveness and accountability of the public sector. 2.

THE NEED FOR DECENTRALISATION

It was advanced that in transitional countries the main motive for decentralisation is political (achieving democracy) rather than economic, while in developing countries the aim is to improve performance in public service delivery and promote macroeconomic stability. The chosen countries were regarded as very important in the sense that they exposed major complications in undertaking reforms leading to fiscal decentralisation. However it was revealed that the need for fiscal decentralisation was different in each country and thus the pace was also dissimilar.

503 Part D Theme III - Work Session Proceedings 3. THE Q U E S T FOR THE RIGHT B A L A N C E

There is a wide range of reasons for rethinking fiscal arrangements for transitional and developing countries, both external and internal to the countries concerned; they may include things such as witnessing the success of such processes in other countries. While some reasons may be country specific some cut across many countries. 3.1. Internal reasons • The downfall of centrally planned models, ushering in the end of the collective ownership model and prompting a major change in governmental organisation and geographical boundaries (e.g. in Eastern Europe and the former Soviet Union). • Highly centralised systems that were prevalent in many developing countries depended on command and control with little concern for citizens' preferences: these systems have eventually proved inadequate in public service delivery. • Failure by national governments to ensure regional equity, economic union, central bank independence, a stable macroeconomic environment, or local autonomy. However, political reforms have empowered citizens who in turn demand greater accountability from their governments. • Poor record of sub-national governments: they have followed "beggar-thyneighbour" policies; sought "free rider-ship" from the centre with no accountability, and often undermined national unity in pursuit of narrow self-interest. " Judicial systems in some countries which provide stimuli for change by giving a broader interpretation of basic rights, and requiring national and sub-national legislation to conform to the basic rights of the citizens. 3.2. External forces The emergence of a new "borderless" world economy is bringing challenges to constitutional federalism. The nation states' responsibility for carrying out regulation of certain economic activities has been reduced as borders have become more permeable, and information technology has undermined the state's power to control information flows. Nation states are now in dilemma as they are too small to tackle the large things in life and too large to address small things. Because of the new trends in globalisation and regionalism, nation states are swiftly losing power in some traditional areas of control and regulation, for instance external trade, telecommunication, and financial

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transactions. Nation states are therefore experiencing diminished ability to control the flow of goods and services, ideas, and cultural products. Nation states should move towards co-federalising and relinquishing responsibilities in some areas, such as technology, satellite communication, and international financial transactions that need specialised institutions of global governance (e.g. World Trade Organization (WTO)). However, the new trends add to democracy deficits, as citizens do not have the opportunity for direct input in fundamental decision making by supra-national institutions. 4.

E X P E R I E N C E S OF FISCAL DECENTRALISATION IN TRANSITION ECONOMIES AND DEVELOPING COUNTRIES: THE CASES OF RUSSIA, INDONESIA AND PAKISTAN

The guiding principle in fiscal decentralisation is clarity regarding the respective roles in public service delivery: the so-called "assignment problem". This should be based on the subsidiarity principle as far possible, while assignment of spending responsibilities must be aligned to the responsibility for taxation or raising of funds. Matching between taxing and spending powers ensures better accountability, and reduces over-reliance on transfers. The general goals of fiscal decentralisation programs are: To increase national allocative efficiency and regional government operational efficiency; To meet regional aspirations, improve overall fiscal structure, and mobilise regional and therefore national revenues; To enhance accountability, increase transparency, and expand constituent participation in decision making at the regional level; To mitigate fiscal disparities among regional governments, assure delivery of basic public services to citizens across the country, and promote government efficiency objectives; To improve the social welfare of the people. 5.

ACTUAL PERFORMANCE IN FISCAL

DECENTRALISATION

IN RUSSIA, INDONESIA AND PAKISTAN

The speakers were from different areas of responsibility in the three countries. They included public sector employees from central ministries and local governments, local bureaucrats, consultants and civil servants. The conference discussions revealed that there are commonalities as well as differences in fiscal decentralisation in developing and transitional countries. The starting points were:

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The origin of the reform process; How extensively it has been instituted; The laws and regulations supporting it; The division of responsibility; Fiscal transfers. 6.

IMPLEMENTATION OF REFORMS IN FISCAL DECENTRALISATION

From the cases presented it was revealed that in all the three countries, some progress in the reform of fiscal decentralisation has been made. All three countries have carried out a series of comprehensive reforms of their inter-governmental fiscal relations. Core issues in fiscal decentralisation in these countries are offered below. 6.1. Division of responsibilities between different layers of government through legal and institutional structures

In all the three countries there have been reforms in the legal and institutional structures to back up the fiscal reform process. While the legal and institutional structures have clarified the division of responsibilities to a certain extent they have also introduced their own difficulties. Difference of theory and practice: in Russia the political and administrative organisation is described as a unique blend of de jure federalist structure and de facto elements of confederation and of a unitary state. It is advanced that while in theory the division of responsibilities between the layers of government is clear, in practice this is not the case. Overlapping of responsibilities: in Indonesia the legal and institutional framework is based on Law No. 2 2 of 1999 on Regional Autonomy and Law No. 25 of 1999 on Central Local Fiscal Balance. The two laws have resulted in overlapping legal authorities for two ministries. Lack of coordination: there are other technical problems caused by institutions, as they lack coordination and cooperation. Problem of interpretation: in the case of Pakistan reforms backed by law and comprehensive institutions have been created. The problem is that the legal framework has been difficult to interpret at the local level. Too many institutions have been created, both elected and non-elected, which has resulted in implementation problems. In practice, the reform document has been difficult to follow, and some units have been created whose functions are not clearly spelt out. Formality and informality: there is considerable disparity between what is offered in laws and regulations and what is practiced. Russia, for example, is described as having a contradiction between a highly centralised formal

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system and substantial informal sub-national autonomy. The highly centralised and often unfeasible nature of the formal system prevents effective delegation of financial responsibility to lower levels of government. Existing laws that contradict the law on decentralisation: these need to be revised and synchronised in order to be able .to implement the law on decentralisation. 6.2. The relationship between the central and lower-level governments in fiscal matters

From the presentation it was clear that the actual relationship between the national and sub-national governments has changed. For the three cases, the sub-national share of total national revenues and expenditure has increased. In Indonesia for instance, sub-national revenue as a percentage of total national revenue grew from 4.7% in 1989-90 to 6.1% in 1994-95, but dropped again in 2001 to 5.3%. Sub-national expenditure as a percentage of total national expenditure grew from 16.6% in 1989-90 to 23% in 1994-95, and to 28% in 2001. In Russia, 90% of taxes are collected by the federal government, and 10% by regional or local governments (note that this figure was disputed by the different speakers from Russia). In Pakistan 83% of taxes are colleted at the federal level, and provincial governments depend to a large extent (90%) on transfers. Because the federal or central governments are commandeering a large percentage of revenue resources, such as high-yielding and buoyancy taxes, they have to transfer large amounts of revenue to lower levels of government. In all three cases this creates a lot of problems in practice: Local governments are constrained to operate without resources, because transfers are incommensurate with the numerous responsibilities assigned to them; The transfers cause delays resulting in many problems, especially given that salaries depend on these transfers; The central government still determines the taxes that local governments are allowed to levy, and this has sometimes meant getting rid of certain taxes, leaving the local governments with no source of own resources (as in Pakistan); Bureaucracy has been a big problem in the transfer schemes; Transfer formulas exist, but the basis for actual transfers is not very clear; the basis for both horizontal and vertical formulas is muddled by lack of transparency and discretion; Because the local governments have been given many responsibilities without matching resources it has encouraged lower-level local governments to institute some regressive means of getting funds, including levies, patriotism, special funds contributed by private companies etc.;

507 Part D Theme III - Work Session Proceedings The transfers have encouraged "soft budget constraint" syndrome, as the lower levels of government do not collect the revenues, and thus problems of accountability still exist. 6.3.

Equalisation in inter-governmental transfers

In all three cases, the objective of regional equalisation was mentioned. This was based on the fact that the three countries are large with differing levels of revenue-raising capacities across the regions. Some regions possess natural resources with higher revenue-raising capacities, others do not. The motive for revenue sharing and transfers should thus encompass vertical and horizontal distributive equity. In practice however some difficulties were cited. The bulk of shared revenues go to relatively few regional governments, while some regions in need of these funds are missed out. There is lack of transparency in the sharing of the revenues: some relatively wealthy regions get more. Where matching grants are targeted at offering incentives for efforts in tax collection, there is a contradiction of the regional balancing principle, since those with high revenue-raising capacities get more funds (this point was raised in relation to Russia). Similarly, Pakistan's matching grant for resource mobilisation rewards relatively rich provinces for additional tax effort. It also calls into question the credibility of federal commitment, as the federal government has not been able to meet its commitment arising from the grant program. The formulas are complicated, and the data needed to implement them are not readily available, which results in discretionary allocations. Regional balancing is also blamed for a reduction in local revenueraising capacity efforts, and lack of motivation among local authorities to search for innovative ways of consolidating their revenue. 6.4. Capacities in financial management The cases presented indicated different levels of financial management in such areas as financial planning, budgeting, accounting framework and standards, information and reporting requirements, audit arrangements etc. Problems associated with this include: Inadequate capacity at local level, especially in cases where tax assignments are not clear, although if the system is clear, the inadequate local government capacity is not a significant problem; Problems in interpreting the complicated legal documents leading to "elite capture" of the process by those who can understand them;

508 Flora Musonda Inadequate capacities of many regional and local governments to implement projects or financial planning and budgeting; Problems encountered with the institution of local accountability and central spending requirements by many local authorities at a particular time has resulted in insufficient planning and procurement spending (as in Pakistan). 6.5. Increase in employment and regulations The cases discussed show that all the countries concerned have moved from highly centralised systems to decentralised ones. In the process of decentralisation there have emerged parallel administration/bureaucracies at the centre, at regional, and at local levels. In Pakistan, for instance, the current reforms have increased the number of institutions (including many local councillors) with no clear responsibilities, all requiring privileges and office space. The process has also necessitated an increase in regulations and has resulted in some complicated legalities. Central ministries regulate the local governments, sometimes two or more ministries' authorities overlap, and at the same time have their own regulations at regional and local levels. The decentralisation process has thus increased employment and regulation, a fact that has been pointed out by Tanzi (2000) among others. In addition, in some countries such as Russia, fiscal decentralisation has been top-down rather than bottom-up, with no clearly instituted system for involving local people. Indonesia's education and health grants use simple and objectively quantifiable indicators in allocation of funds, conditions for the continued eligibility for these grants emphasise objective standards of access to these services. Indonesian grants for public sector wages on the other hand, represent an example of not-so-thoughtful design as they introduce incentives for higher public employment at sub-national levels. 6.6. Involvement of other non-governmental players In the cases presented, the involvement of other players in fiscal decentralisation and reforms is shown to take place at different levels. In Russia, for example, it is claimed that non-governmental organisations (NCOS) are still not well integrated into the reform system, while the private sector (especially organisations with large capital) plays a very large role at the sub-national level. Companies control resources in local areas and have even become governors. Private bodies have also been used to deliver certain services, and ways to incorporate them further in social service delivery at a local level are still being examined. In Pakistan, private sector participation

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in the provision of public services is more common. Decentralisation has also led to more balanced gender participation, for example in Pakistan 33% of councillors are now women. Donors have also had a big role to play in the reform process. Their presence has complicated the issue at times, for instance it was revealed that there are 32 donors in Russia and it was suggested that they undermine its fiscal decentralisation. 6.7.

Cross-cutting issues

While it was demonstrated that positive progress of reform in fiscal decentralisation has been noted in all the three cases. Wide-ranging conclusions were drawn. The reform process in some countries has been described as too quick, eroding their institutional and administrative capacities. This is true for instance in Russia and in Pakistan. The rapid (shock therapy) process was not accompanied by political reforms, and so devolution took place in a political vacuum and an absence of overall democracy. This also resulted in a lack of improvement in public service delivery. The recommendation was that reforms should be taken at a slower pace, based on local capacities to manage the process. Lack of clear-cut allocation of responsibilities between the centre and lower levels of government has resulted in parallel administration and "elite capture", while service delivery has not improved. In addition, regional redistribution has not succeeded due to lack of sufficient resources and unclear formulas. Lack of transparency in practice has exacerbated the problems. Some participants advanced that in transition and developing countries it is more important to ensure local participation than regional redistribution and equalisation. Central control of significant levels of resources and reliance by lower levels of government on transfers has resulted in a "master-servant" relationship, leading to clientism, favouritism, soft budget constraint based on bailouts, financial irresponsibility, lack of encouragement for local-level initiatives as the centre is expected to deliver to lower levels etc. On the other hand the centre has de-concentrated its activities to the lower levels without giving them sufficient financial autonomy. Management of the change has to be well monitored, with responsibilities matched to capacities in terms of human and financial resources. Institution building is necessary but so are information flows. If one wants to empower local government, money should not come from the top but should be sourced from local levels as much as possible. It is important to be careful and critical when comparing principles with reality, and when discussing how to move from a point of free resources to one of "hard budget constraint". Monitoring and overall control are very important in order to technically audit

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corruption. Transparency and dialogue widi local government should be encouraged, but borrowing by local governments should not be allowed. 77.7.

CONCLUSIONS AND RECOMMENDATIONS Conclusions

From the discussions it was generally agreed that the aims when introducing local authority are the same in all countries. Such reforms bring power closer to the people, increase responsibility and therefore improve public services. They ensure local management of conflict, increased public services, introduction of a code of accountability, operating and execution, control of accounts etc. The three cases discussed showed that there is a need for reform in fiscal policy, and that fiscal decentralisation has been motivated by internal as well as external factors. The pace and achievement of reforms has been different in these countries, and in general reforms implemented too quickly generated more problems than they solved. Other constraints in the economies such as lack of legal clarity also complicated the process. The discussions showed that there is considerable divergence between what is offered in theory and the practical realities, for instance the dual (formal and informal) system existing in Russia. Responsibilities are not clarified and the centre still controls the lower levels of government through transfers or retention of greater authority in taxation. Capacities to implement the reforms have sometimes been insufficient, and duplication of responsibilities evident. The process has in many cases been topdown, and the local citizens have not benefited from fiscal reforms. 7.2. Recommendations There should not be only one competency: it is necessary to empower lower levels of governance and for them to have their own revenue sources. Governments at all levels must be made to face the financial consequences of their decisions in order to ensure fiscal discipline. This is possible if the central government does not backstop local authorities and local debt. The relations between different levels of government should be clearly defined, but a means of coordination should also be provided. Fiscal rules accompanied by "gate keeper" inter-governmental councils/committees provide a useful framework for fiscal discipline and fiscal policy coordination. One principle rule is that civil servants should serve under elected politicians and information on hiring and firing should be readily available and transparent. Democracy should have strong institutions with checks and balances.

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There should be some institutions that equalise the financial disparities between regions. Inter-governmental transfers in transition and developing countries can undermine fiscal discipline and accountability, while at the same time building transfer dependencies that cause a gradual economic strangulation of fiscally disadvantaged regions. Properly designed inter-governmental transfers, on the other hand, can enhance fiscal harmonisation, competition for the supply of public goods, sub-national government accountability, and regional equity. Change of management is tough but it needs political leadership, authority, and the opportunity to convince people. In addition, it should be introduced at the right pace. Societal norms and consensus on the roles of various levels of government, and limits on their authorities are vital for the success of decentralised decision making. In the absence of such norms and consensus, direct central controls do not work, and intergovernmental gaming leads to dysfunctional constitutions. It is necessary to adapt the general principle of decentralisation to the specific condition of the country. The system should operate so that local people feel the system is working for them. Established democracy should learn and revise all the time, constantly re-enforcing democratic principles. Periodic review of jurisdictional assignments is essential to realign responsibilities with altering economic and political realities. With globalisation and localisation, the direct role of national governments in stabilisation and macroeconomic control is likely to diminish over time, but their role in coordination and control is expected to increase as regimes and sub-national governments presuppose increased responsibilities in these areas. Constitutional and legal systems and institutions must agree to opportune modifications that allow adaptation to changing circumstances. Decentralised fiscal systems in transition and developing countries offer a greater potential for improved macroeconomic governance, and therefore increased growth, than centralised ones. However, decentralised fiscal systems require greater clarity in the roles of the various players and centres of decision making, and transparency in rules that govern their interactions. Decentralisation should also be a country-specific process, governed by local knowledge and history, and directed by local priorities. Sub-national governments need to be given access to adequate resources to do the work assigned to them; but at the same time they must be accountable for what they achieve with their resources. Like many other public policy reforms, reform in fiscal policy must take into account the political constraints faced by policy makers, disparities in the strength of different regions and localities, and different interest groups. Other constraints such as economic development and financial intermediaries should also be taken into account.

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REFERENCES

Bahl, R., 2000. Intergovernmental Transfers in Developing and Transitional Countries: Principles and Practice. Washington, D.C.: World Bank. Bird, R. and Vaillancourt, R, 1998. Fiscal Decentralisation in Developing Countries. Cambridge: Cambridge University Press. Dabla-Norris, E., Martinez-Vazquez, J. and Norregaard, J., 2000. Fiscal Decentralisation in Russia: Economic Performance and Reform Issues. Washington, B.C.: International Monetary Fund. Fjeldstad, O-H., 2001. Intergovernmental Fiscal Relations in Developing Countries, a review of issues. CMI Working Paper No. 11. Sidik, M., 2002. Fiscal Decentralisation: A Policy Agenda for Indonesia. (Unpublished paper). Tanzi, V., 2000. On Fiscal Federalism: Issues to Worry About. Paper presented at the Conference on Fiscal Decentralization. Sponsored by the International Monetary Fund Fiscal Affairs Department, 20-21 November 2000, Washington, D.C.

DIALOGUE TABLE PROCEEDINGS:

SUMMARY

ADDRESS

BOB RAE

Assignment of Responsibilities and Fiscal Federalism The Federal Idea and Its Enemies (Dialogue Tables 3 and 6)

There has been a profound resurgence of interest in the federal idea in the last decade. I choose the phrase "federal idea" carefully because the "ism" in federalism has a way of limiting debate and understanding. In Spain, the central government is reluctant to use the word because it seems to connote the dissolution of sovereign authority; conversely the Catalonians won't use it because in their eyes it does not sufficiently represent the unique nature of the Catalan claim to self-government. In South Africa the word fell into disrepute because it had some official approval from the apartheid government; similarly the African National Congress's vision of "one South Africa" made the party reluctant to describe any new constitution as "federalist." These are hardly new debates: the Jeffersonian tradition in American politics was proud to call itself "anti-federalist" because it concluded that the centralising forces behind John Adams and Alexander Hamilton had branded the "f word". Yet both Thomas Jefferson and John Adams were clearly federalists who shared far more key assumptions than the rhetoric of democratic debate might have led some to believe. What is happening today in South Africa, Spain, Mexico, Nigeria, the United Kingdom, Russia, Brazil, India, Pakistan, Cyprus, and Sri Lanka, to mention just a few countries, is a reflection of some important common tendencies that need to be understood. There is certainly more than one way to be a federalist; it is the common idea that matters. Political arrangements of cooperation and association have their roots in many ancient societies, from African tribal councils to city-state pacts to the Iroquois Confederacy. The modern federal idea is first and foremost a democratic idea. It implies a respect for people's identities and their

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political choices, freely expressed, and has to start from that premise. It is incompatible with populist concepts of democracy that are not based on a respect for individual rights, constitutional process, and the rule of law. It also runs against those elements in society who believe they have a pipeline to the "real" or "best" interests of the people. Ideologies that express a certain knowledge of political truth (or religious truths as made manifest in the world) are implacable enemies of the federal idea. The federal idea, therefore, understands the vitality of politics and rival notions of the public interest. It also speaks to a common concern about limiting the sphere of government. Constitutions that set out which level of government can do what, and then also guarantee rights and freedoms, if they are combined with a court structure with the capacity to interpret this balance - and to enforce that interpretation - are inevitably about the boundaries of popular sovereignty and the protection of both group and individual rights. These points are fundamental to the defining element of the federal idea, namely that a federal country is one where power is at once divided and coordinated. That, of course, is the central tension in federalism: it is not just "one idea". It implies a common agreement to do certain things separately and other things together. It is about more then just devolution, because the premise is that state or provincial governments have as much sovereignty in their sphere as the national or federal governments have in theirs. There are no "higher" or "lower" governments, no "senior" or "junior" governments, just different governments doing different things within a common framework. Nor is the national government a mere creature of the provinces, delegated by them to do certain tasks. It too has its own sovereignty, its own direct connection to the people. The federal idea, therefore, implies an ongoing, indeed a never-ending dialogue about who does what. There are significant concerns in each federation about fiscal issues, how money is raised, how it is shared, how it is spent. In Canada resources are provincially owned and the windfall from that flows to different provincial governments. In Nigeria the central government claims all oil revenue and then divides it up according to a formula. With the return of democratic federalism to that country, the issue of how revenue should be divided is now being argued in court. Australia's revenue-sharing formula is said to be so complicated that it brings to mind the British statesman's comment that "there are only three people who know the causes of the Crimean War. Two of them are dead and I can't remember." There is a growing consensus that local and state governments need to be able to raise the money to spend on their own programs: this increases both transparency and accountability. Where this is not possible, central revenue sharing needs to be both clearer and less unilateral. When this doesn't happen, as is often the case, it gives rise to inevitable conflict.

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Those opposed to federalism point to these conflicts, the sometimes bewildering complexity of federal institutions, and the alleged cost of "too many governments" as justification either for separatism or simply abolishing regional governments altogether. In Sri Lanka, for example, federalism has often been opposed by elements of the majority because it is said to imply costs in a country that is too small for federal arrangements. Canadians will remember Quebec Premier Jacques Parizeau's famous promise in Toronto that the appeal of separatism to the rest of Canada was that it would mean "no more trips to the dentist". To which one might reply that if you don't go to the dentist your teeth fall apart. Yet we know from our own experience in Canada that metropolitan Toronto was a federation before it was unified by the provincial government. This new government is neither more efficient nor less expensive than what we had before. On a much larger scale, it would be hard to point to the "efficiency" of a one-party Mexico or the Nigeria of the military dictatorships. Switzerland is geographically small, and politically complex. Yet it has remained for decades a symbol of efficiency and tolerance. The federal idea is indeed about the complexity of things, but better the give and take of an endless negotiation - isn't that what much of life itself is anyway? - than the simple desert of the Jacobin, the Leninist, the militarist, the religious fanatic, or even the old-fashioned ethnic nationalist whose world has difficulty with any kind of pluralism. The resurgence of the federal idea has at its core many different causes. The vitality of the values of democracy, the revolutions in the politics of identity and human rights, the twin collapse of apartheid and bureaucratic communism, the impact of the technological revolution, the economic changes we associate with the word "globalisation", all these have made their contribution. In Mexico, for example, one-party rule for most of the twentieth century meant that while the constitution spoke of the federal nature of the country, the reality was quite different. The same was even more true for the Soviet Union. The man on horseback had an equally brutal effect in Brazil and Nigeria: the federal idea is quite incompatible with the command control mentality of the military hierarchy. The debate on fiscal federalism demonstrates clearly that there is no one "correct" economic model of a federalist fate. Each country's method of sharing responsibilities and financial powers is inevitably a reflection of different histories and values. What, then, can we learn from each other? The idea of this conference is that globalisation is more than an economic or technological phenomenon. Practical people need to share experiences, academics need to share ideas: no federation is an island unto itself. All politics may be local, but we benefit by understanding not just the values, but the workings of other systems.

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Some modest conclusions would seem to flow from our comparative discussion. First, the level of government which is responsible for a particular service should have the capacity to raise taxes to pay for that service: this increases accountability and efficiency. Second, where this is not possible, the system of transfers from one government to another - either "horizontal" or "vertical" - must be transparent, objective, and non-discriminatory. Third, new technologies must be understood when dealing with arguments about the efficiencies of various kinds of taxes (e.g. tolling technologies, user fees etc.); value added tax, for example, can be local or provincial. Fourth, equalisation can take a variety of forms, depending on the level of commitment to "solidarity" as a working principle (e.g. Canada versus Australia versus Switzerland). Fifth, in developing and transition economies, local capacities are key, but it must be remembered that central bureaucracies rarely give up power easily, and overweening patriotism is an enemy of the federal idea. The economists in our midst were inevitably frustrated by die messy pragmatism of many existing systems. Yet politicians have much to learn both from each other and from subjecting their proposals to the scrutiny of rigorous academic cross-examination. The International Conference on Federalism 2002 was an ideal place for this dialogue to occur.

PART E

PLENARY SPEECHES

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KASPAR VILLIGER President of the Swiss Confederation, Head of the Federal Department of Finance, Switzerland

On behalf of the Federal Council I would like to bid you a warm welcome to Switzerland and to St Gallen. It is a great honour for our country over the days ahead to welcome so many state and government heads, ministers, politicians and academics from over Go countries for a discussion on federalism. I regard federalism as an important structural principle for a modern state. In a country with a variety of languages and cultures, it may even be an indispensable structural principle. Switzerland accordingly warmly welcomed Canada's initiative in holding the first international conference on federalism three years ago in Mont-Tremblant. I am delighted that we are now able to continue the process that was launched in Mont-Tremblant here in Switzerland. Although Switzerland is a small country, its governmental structures are distinctly federalist. Its member states, or cantons, such as the proud canton of St Gallen, have a marked degree of autonomy. Without federalism, Switzerland as an "artificial" nation, as it were, with no common language or culture, would be incapable of survival. We are modest enough to realise that Switzerland as a federalist model cannot simply be exported worldwide. However, it is an interesting example, a governmental experiment in a political test-tube, so to speak. We can undoubtedly learn lessons from this for the political organisation of a community that will be of general application. Each country has its own history and must implement political principles in a manner that is appropriate to its needs. This is what Switzerland itself did in 1848. We have, for example, borrowed important elements of our political structure from the federal constitution of the United States and tailored them to our own circumstances, as can

520 Kaspar Villiger be seen in our bi-cameral parliamentary system. The fact that the French Revolution and Napoleon's invasion of Switzerland have left their mark need only be mentioned in passing. I am therefore hopeful that the discussion here in St Gallen under the title "Federalism in a Changing World - Learning from Each Other through Dialogue" will provide instructive initiatives for the dynamic process of the development and modernisation of our own federalist system too. The constant critical reflection on what has been already achieved is indispensable for a community. There is a need for such reflection so that, secure in the knowledge of our traditions and our history, we will make the changes as well as we can. Political structures must regularly be adapted to new circumstances. The democratic and federalist principles, however, always retain their validity. History is change, as the great Swiss historian Jacob Burckhardt so succinctly put it. Only those who are aware of the past, who build on it and draw lessons from it, can shape the future. But the task of looking critically at what has gone before, at times pondering on it and recreating it, is something that each generation has to learn anew. This also applies to federalism. I have already mentioned the crucial importance of federalism for our country. In essence it fulfils four functions. Identity: minorities, regional units and language groups can create their own close political living space, thereby giving themselves a stronger identity. Efficiency: devolved systems are generally more capable of change and more robust. Problems are solved in close consultation with the citizens themselves, which means that the solutions are transparent, uncomplicated and efficient, and this leads to efficient political control and also to improved control over state finances. Competition: there is a competition of different systems between the member states, which always gives rise to new and creative solutions. One of the most important locational advantages Switzerland has is its low per capita tax burden by European standards. This is primarily the result of tax competition between the cantons, and not, I am afraid, a consequence of political wisdom. Power sharing: the power of the state is held in check by a three-way division. I will come back to these functions later. Swiss federalism is, however, also part of a more complex political system. Switzerland is one of the few multi-nation states that has been successful over a long period of time. This is quite surprising as our natural cohesiveness is basically rather limited and we cannot draw our identity from a clear-cut common history and a common culture and language. We

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are not a natural nation but a "Willensnation", a nation forged out of will, and have therefore had to develop a political culture that allows all sorts of minorities to live side by side. This political culture is shaped not only by federalism but also, for example, by a deep-rooted sense of solidarity and respect for minorities (Switzerland itself consists of all sorts of minorities!). Direct democracy is also an essential pillar of the political culture. It binds the nation in its political responsibility and gives political decisions a high degree of legitimacy. The so-called concordance arising from our referendum democracy unites the main political forces and the electorate in their political responsibility and acts as an integrating force in a state which otherwise might be inclined to drift apart. Even minorities can put their concerns on the political agenda by means of an initiative and force a popular vote. The principle of having part-time politicians, however hard it is to put into practice today, integrates the dominant forces in society into politics and makes politicians relatively independent of their office. I should return to federalism. As federalism is based on competition, and member states must bear different natural burdens, federalism by its very nature gives rise to inequalities. These must be accepted to a certain extent so as not to reduce the incentives to improve performance. The differences, however, must not be too great. As a result regional political instruments are required. The most important of these is an efficient system of financial equalisation that must not seriously weaken the powers a canton itself has to rectify these inequalities. Over the years, Switzerland has also become unclear in the federalist allocation of public duties, and the financial equalisation system is full of false incentives and has accordingly become inadequate. Our parliament is currently working on an ambitious project on federalism. This is a major federalist worksite bringing lasting modernisation to our form of federalism with a reallocation of tasks between the confederation and the cantons, and a more efficient financial equalisation system. Various cantons are also currently involved in reforms at commune level and in the reorganisation of the relationship between communes and cantons. Even the cities and towns are looking for a new role in the federal state. The question arises at the European level as to how far the European Union should base itself on federal principles as it consolidates and expands. As you can see, federalism is a highly topical issue. Throughout these discussions federalism is proving to be a concept with a very promising future. It will be able to, indeed, will have to serve Switzerland, Europe and the whole world as a significant system of political organisation, particularly in view of increasing globalisation. The four functions of federalism I mentioned at the beginning of my speech can act as a guideline. There is a danger that people will lose their identity. Many people are finding it difficult to cope with the pace of global change. Letting go of what

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is familiar is hard. Despite being the basis of our affluence, globalisation is feared. However, those who feel they are an integral part of their immediate surroundings both politically and economically and can express themselves freely will cope with this phenomenon far more confidently. Federalism creates identity and gives people security in these fast-moving times. Globalisation requires enormous flexibility and efficiency on the part of political systems as well. A decentralised, federalist system has far more opportunities for testing out innovations on a small scale. When the innovations have passed the test, they can be adopted or adapted by other member states or the central state. This "trial and error" system is a much slower process at central level and carries greater risks. Competition between the systems is now global. Member states in a federalist system are large political laboratories. They create incentives to be constantly on the lookout for better solutions to political, economic and social problems. Federalism is the political counterpart of the free market economy, which is also based on an ordered discovery process and creates performance incentives. I do not mean that cantons should be converted into limited companies. Political systems are not economic systems or businesses that have primarily to provide the best possible products and services and create material wealth. Political systems must guarantee abstract products such as freedom, democracy and solidarity. Even federalism is not merely a form of political organisation but more the expression of a system of values that has freedom, democracy and solidarity as its three goals. This brings me to the function of sharing power. Freedom is not possible when state power reigns supreme but only when it is limited, shared and kept under control. Democracies have found different ways of meeting this demand as, for example, in the case of the sanctity of human rights. In this way, state power is confronted with a protected area. The establishment of an International Criminal Court is the most recent attempt to implement this concept on an international level. A federal state is in essence a division of power between individual states and central government. It is more effective the more autonomous member states are in their own regions. Both engage in a system of checks and balances, thereby preventing a high-handed exercise of power by the central government on the one hand, and any arbitrariness on the part of individual states on the other, as both must abide by a common set of rules. This gives individuals a substantial amount of freedom. Individuals who are unhappy in one state can move to another one better adapted to their needs. Every federal state is confronted with the problem of creeping centralisation. Central government is always inclined to extend its influence to the

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detriment of member states. Member states for their part continually try to delegate to central government the responsibility for solving new problems, which is why rules are needed in order to protect federalism. In Switzerland, one instrument is the Council of States, which has two representatives from each canton and which has the same powers as the people's chamber, the National Council. In our reform project we would like to enshrine the subsidiarity principle in the constitution and prevent central government from interfering in the powers of the cantons through the jurisdiction of a constitutional court. Federalism is also closely linked to democracy. In our country, this is direct democracy. Dynamic federalism with strong individual states is barely conceivable without effective democracy, both nationally and within member states. When citizens are able to cast their votes, they create a close-knit community and are able to identify with the community on a variety of levels. Direct democracy, just like federalism, has an important control function, ensuring that a majority of the people are involved in the political problem-solving process. Of course, this control system also has its price. Political decision processes often take longer, but the resultant decisions have a high degree of legitimacy. The last element in the system of values which strikes me as being of particular importance, is solidarity. Efficient problem solving is not enough to ensure the continued existence of a federalist system. There is a need for some kind of binding force. Solidarity is a key ingredient providing cohesion among individual states. Solidarity is, as it were, the counterbalance to die federalist principle of competition. It requires the awareness that some areas are privileged while others are disadvantaged, and that a certain equalisation between the rich and the poor is necessary. When regional differences are too great, they undermine acceptance of federalism. Solidarity is also a key element in the project on the new financial equalisation system in Switzerland. At the beginning of my speech, I mentioned that each country must develop its own form of federalism, one that is tailored to its needs. I am, however, convinced that the functions fulfilled by the federal principle are of enormous significance worldwide. I am equally persuaded that the basic values of federalism, including freedom, democracy and solidarity play their part in making the world a more peaceful and fairer place. If this conference can heighten our awareness of the roles and values of federalism, and help to refine and extend these roles and values, then it will be a success.

JOHANNES

RAU

President of the Federal Republic of Germany

For two weeks now, we have been witnessing a new solidarity among the people of Germany. The disastrous flooding has galvanised many individuals, and they are not just thinking about those in need but are also lending a helping hand. We are also experiencing an outpouring of international readiness to help. From America, from England, from Russia, from Switzerland, from the Principality of Liechtenstein - from all over the world people are coming to assist us. Before I begin my remarks on federalism here today, I would like to express my heartfelt thanks to all who are standing by us during these difficult weeks. I would like to thank you, President Villiger, on their behalf. For the Germans, there is a locus classicus reflecting the idea of federalism. In literary terms, it can be found in the works of Friedrich Schiller; geographically it lies in Switzerland. In The Ruetli Oath, Schiller expressed it this way: We will become a single land of brothers, nor shall we part in danger and distress. We shall be free, just as our fathers were, and sooner die, than live in slavery.

Liberty, indivisibility, brotherhood - today we say "solidarity" — these are still the core values of federalism. They are a unique and longstanding tradition of the citizens of the Swiss Confederation. That is why I cannot envision a better host for an international conference on federalism, and that is why I have gladly come here to St Gallen.

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By the way, Germany's federal tradition is notable as well. It is older and more constant than the tradition of our state as such. The Holy Roman Empire of the German Nation was already a federation, although it never developed into a state in the modern sense. The federalist principle lived on in the Confederation of the Rhine (1806) and the German Confederation (1815), but not until the North German Confederation (1867) and the German Reich of 1871 was the step actually taken to adopt a federal constitution. And while the Empire founded in 1871 was admittedly monarchical, as early as 1848 the democratic revolutionaries in St Paul's Church in Frankfurt had drafted a federal constitution. The Weimar Republic too, was constituted as a federal state. After the Second World War, the Lander in western Germany carried on this worthy tradition. The three military governors of the western occupation zones charged them with drafting a democratic constitution that would "establish a governmental structure of federal type". At the end of the deliberations, the Basic Law emerged, the Federal Republic of Germany emerged as the union formed by the Lander and the German people in the western Lander. Incidentally, even back then the Basic Law also expressly provided for the accession of the eastern Lander to its area of application, a step that could finally be taken 41 years later. I would like to follow up this brief review with two initial general remarks that could certainly also be backed up with other examples of federalism besides Germany's. First, federal constitutions are not ready-made items where "one size fits all". Rather, they are custom-made. Cut from fabric woven of the most diverse historical developments and experiences, they are tailored to each nation's circumstances and respond to the special challenges and problems with which each is confronted. This does not, however, mean that they fit perfectly once and for all. Even a tailor-made garment needs some care. It must be aired out and pressed from time to time, a seam or two may need to be repaired, and over the years it may have become too short or a little snug here or there and need to be altered accordingly. Second, precisely because federal constitutions are as unique and distinctive as peoples and countries, a comparison of them is just as difficult as it is intriguing. Anyone who knows something about the subject will not search for patent recipes and will not force a patent recipe on anyone else. An international collection of good solutions and an analysis of the conditions conducive to their success, on the other hand, are of great value to any discussion of constitutional policy. Time and again, however, debates on constitutional policy are unfortunately dominated by the patent recipe peddlers instead of the wise federalists. I am not here today as a patent recipe peddler. I would merely like to say a few words to you about some of our experiences in Germany that could perhaps prove useful for your further work during this conference.

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Let me begin by pointing out where we Germans see the successes and advantages of our federal constitution. Like the two speakers before me, I deliberately place respect for regional diversity at the very top of the list. The federal order not only tolerates the historical, cultural and regional uniqueness of Germany's Lander, but also allows them to develop unfettered. That releases valuable creative energy. In all the Lander there is a strong feeling of identity, of belonging together, a great willingness to cooperate in a spirit of solidarity, and a healthy regional self-awareness. All this has also grown very swiftly in the Lander that were newly formed after 1945. In eastern Germany, where the Lander were effectively abolished in 1952, the memory of them endured unbroken until the peaceful revolution of 1989. Perhaps some of you remember: just a few days after the fall of the Berlin Wall, the demonstrations for democratic reform came to be peppered with more and more flags in the colours of the old Lander - Thuringia, Saxony, Mecklenburg - and more and more banners calling for the reestablishment of the eastern German Lander. In 1990 this demand was met - by the first and only democratically elected parliament of the German Democratic Republic. The tasks of government in which regional awareness and identity figure particularly prominently have taken on even greater importance in recent years. Conservation of landscapes and protection of nature, protection of historical monuments and sites, cultivation and preservation of culture, and even regional television give rise to and intensify a feeling of homeland and a sense of belonging. All the Lander make a point of exercising their rights to shape policy in these areas, and this ultimately serves to further the political stability of the federation as well. Its unity is based not least on this unfettered diversity. Thus federalism maintains a golden mean; it prevents the emergence of both nationalism and separatism. The federal system in Germany has led to a relatively high degree of decentralisation, self-government and pluralism. This has promoted greater proximity to issues and greater transparency of governance in many areas, and has usually tapped greater expertise as well. Moreover, the subdivision of the federation into Lander gives citizens a twofold opportunity for active involvement in democratic processes, for democratic control and for democratic utterance of the public will in elections and votes. Precisely at the local and regional level, where people still know one another personally and have a better grasp of the overall situation, these increased rights to shape policy, and the greater proximity of policy to the citizen make it easier to master important integrative tasks concerning the body politic as a whole. I would like to give you a few examples. It was no accident that the acceptance and integration of the refugees from the eastern German territories after 1945 proceeded so successfully

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in the Lander that the Sudeten Germans, for example, have long since come to be the "fourth Bavarian tribe". Precisely at local and Land level, the integration of foreigners has been fostered particularly effectively - through the establishment of foreigners advisory councils, first at local and later also at Land level - this has helped pave the way for further important progress such as the right of citizens of the European Union (EU) to vote in local elections. The Lander are already testing forms of direct democracy such as popular initiatives, petitions and referendums that are still lacking at federal level. This is, by the way, a subject that has been on the agenda of the debate on reform of the Basic Law for quite some time. To sum up, it has been our experience that the federal structure significantly strengthens the integrative force of the body politic and increases the opportunities for participation in democratic processes. The federal system also promotes creativity of governance. Greater leeway for responsible creative action increases the possibilities for finding new and better ways to enhance public welfare. The risk of failure increases as well, of course, but contrary to the situation in centralised states, mistakes then tend to be limited to only part of the country. In terms of both successes and failures, the federal state is a learning community. The federation and the Lander look very closely over each other's shoulders. What consistently proves successful is incorporated into general practice, what fails is studiously avoided henceforth if at all possible. Moreover, the diversity and self-confidence of the Lander fosters healthy competition. During my visits as Federal President I am often treated to glowing recitals of accomplishments that are intended to prove that the given host Land ranks first in the national league - or at least near the top of the list. There is much to be said for this competitive aspect of federalism - as long as it does not flourish at the expense of the necessary solidarity. For the currently fashionable use of economic terminology in the context of federalism notwithstanding: within the federation there are no "constituent peoples" who could go it alone economically without concerning themselves with the needs of the others. The federal populace is one people, indivisible. The federation and the Lander are merely different tools and trustees of the commonwealth. The federal state is an indivisible community based on solidarity. To this day, the federation and the Lander have invariably demonstrated this solidarity. In particular, the financial equalisation regime between the federation and the Lander, and among the Lander themselves has proved its worth for decades. Together the federation and the Lander have also mastered the tremendous financial challenge posed by Germany's unification. Within the framework of two "solidarity pacts", they have succeeded in generating the enormous amounts needed by the eastern Lander to offset the disadvantages resulting from Germany's division and to rebuild

528 Johannes Rau

their economies. There is nevertheless also a need for reform of the financial system laid down in the Basic Law. A prominent indication of this is the fact that the Federal Constitutional Court has instructed federal legislators to revise the allocation and equalisation criteria governing federal financial relations by the beginning of next year and to restructure the entire financial equalisation regime by the beginning of the year 2005. I would like to mention one last fundamental success of German federalism. It does not thrive on unilateral decision making but rather on dialogue and negotiation, on consultation and cooperation. Because there are a number of political centres and because the federation and the Lander are dependent on one another in many different ways in their enactment of legislation and application of the law, all the parties involved must accommodate one another and seek discussion and compromise. The fact that nearly all the political parties operate nationwide, as well as their equally nationwide strategies, fosters this intermeshing of policy without, however, blunting the distinctive features of the Lander or reducing their interests to a common denominator. At the same time, the federal system is "more open" than others - it offers more leeway for responsible creative action by individuals and groups. The precise allocation of rights and responsibilities under the constitution thereby serves to promote objectivity and hence also the maintenance of peaceful relations under the law - if the worst comes to the worst, the parties simply meet again at the Federal Constitutional Court. This type of articulation of political will is too slow a process for some observers. It does promote good governance, however; it accommodates regional interests and distinctive features, and it reduces the influence of ideologists who have an easy answer for everything, but a viable solution for nothing. There is no doubt that there have also been times when the federal decision-making process has been deliberately blocked - a course of action loudly decried - as a rule by federal governments without a majority of their own in the Bundesrat, the upper house of parliament. But if one follows up the accusation of frequent blockades, one finds relatively few instances where no compromise could be reached despite the intercession of the Mediation Committee. In most cases it was not just political party machinations that were involved, but also very real divergent interests of the Lander. Resistance in the Bundesrat has always also served to strengthen the separation of powers and the parliamentary opposition. At any rate, ill-considered blockades are not worth the effort - the electorate, after all, are watching on the sidelines and can severely punish a policy of obstruction. Such a constitutional order predicated upon dialogue and cooperation is dependent on good team mates. It demands of the federation and the Lander the resolve and ability to exercise their rights and perform the

529 Part E Plenary Speeches

tasks incumbent upon them, to demonstrate initiative in their own areas of competence, and vigorously to repudiate any overstepping of authority by others. It also needs citizens who are interested in this interplay of forces and are willing to take an active role. It is therefore perhaps especially dependent on political education and the cultivation of civic virtues. Georg Christoph Lichtenberg, a physicist and man of philosophical bent who lived in Gottingen in the eighteenth century, often comforted himself with humour. His writings on constitutional issues contain the following note: "Two men fighting on one horse - a fine symbol for the constitution of a state." I will leave it up to you to decide whether Lichtenberg was right or not. At any rate, however, Germany's experience with federalism has been this: it tends to increase the number of horses rather than the number of people fighting. This, however, brings me to the developments that have given rise to an already lengthy and ongoing debate on a reform of federalism in Germany. These developments can be outlined quickly. Over the years the federation has made extensive use of its powers in the areas of concurrent and framework legislation, a course of action justified above all by the desire for uniformity of living conditions and the call for uniformity of the law. There was also consent to this on the part of the Lander and, in cases of conflict, the approbation of the Federal Constitutional Court. In the process, the Lander lost innumerable legislative powers of their own. To be sure, in return they acquired greater rights to participate in the framing of federal legislation via the Bundesrat, but it was above all the Land governments that benefited from this, whereas the influence of the Land parliaments declined markedly. This trend towards cooperative federalism within the executive branch was further strengthened by other developments, such as the emergence of a multitude of formal and informal bodies in which the governments and administrations of the federation and the Lander work together. In the igGos and 19705, moreover, the legislative powers of the federation were significantly broadened and the so-called "joint tasks" of the federation and the Lander were introduced, thus institutionalising the system of mixed financing. For the Lander, this meant an alleviation of their financial burdens but also a further loss of influence on policy making. On top of that, responsibility for tasks and for the financing of these tasks has long since ceased always to lie in one set of hands as the Basic Law in principle envisions. Already on a number of occasions the federation has assigned tasks to the Lander and the municipalities without ensuring the availability of the necessary funding. All this has led to a loss of democratic transparency as well: it is becoming increasingly difficult for citizens to figure out who is responsible for what and who pays for what. This poses a threat to the acceptability of

53° Johannes Rau

policy. The framers of the Basic Law actually wanted a clear delineation of responsibility between the federation and the Lander, one similar to a layer cake. Today, however, the federal system in Germany more closely resembles a marble cake. There is one more development that is profoundly changing the face of federalism in Germany: as integration within the European Communities has progressed, more and more sovereign rights of the federation and the Lander have been transferred to the supra-national level. For a long time the federation alone was compensated for this, for it was the federation that exercised the rights to participate in policy making at the European level - also in areas formerly falling within the purview of the Lander. As a result, however, the Lander were threatened with an evergreater loss of power. It is precisely in the context of European integration, however, that German federalism has demonstrated its capacity for reform. A number of important powers of the Lander have been enshrined in the new Article 23 of the Basic Law and in an implementing statute: The right to be comprehensively informed by the federal government on matters concerning the EU ; The right of the Bundesrat to participate in the decision-making process of the federation insofar as it would have been competent to do so in a comparable domestic matter, or insofar as the subject falls within the domestic competence of the Lander; Depending on the domestic distribution of interests and powers, graduated participatory rights of the Lander at EU level as well, which can extend as far as the exercise of the rights of the Federal Republic of Germany as an EU member state by a representative of the Lander. This reform has placed cooperation between the federation and the Lander on a firm foundation and has simplified and furthered this cooperation as well. It shows that a federal state can remain capable of entering into treaties and negotiating effectively at international level without having to sacrifice or even impair its internal federal diversity. At the same time, this new Article 23 of the Basic Law was one of the most important outcomes of a constitutional debate that began with German reunification, led to the establishment of a Joint Commission on the Constitution and ended, for the time being, with the implementation of the bulk of the commission's recommendations in 1994. That, too, demonstrates capacity for reform, even though some people had hoped for more extensive modernisation - for example in the area of direct democracy - and even though a major debate on constitutional reform failed to materialise within society as a whole.

531 Part E Plenary Speeches

The federation and the Lander now want to reconsider the distribution of powers among them. The lists of demands and wishes are nowhere near completion. A number of tendencies are already clear, however. The Lander will insist that responsibilities once again be more clearly delineated and that die areas now subject to mixed competence and interdependency be drastically reduced. Various ways of accomplishing this are under discussion: A reform of the financial system laid down in the Basic Law that will give the Lander and the municipalities more breathing space and abide by die principle: "He who orders also pays"; Significantly higher thresholds for the need for federal statutory regulation; A form of inverted concurrent legislative power regime favouring the Lander and according the Bundestag a right of objection; A disentanglement of functions, in other words, a re-shifting of legislative powers back to the Lander and their parliaments. It remains to be seen what will come of the talks between the federation and the Lander. I have no doubts whatsoever as to the earnestness of all the parties involved. I am refraining from making suggestions of my own, as the neutrality of my office requires, but when the time is right I will gladly pose a few questions to help provide guidance. This finally brings me to the question of whether the federalist experience of countries like Germany could prove useful in the context of the discussion on the future shape of the EU. Time and again the fear, and occasionally also the hope, is voiced above all by the other member states in the EU - that Germany seeks to structure European cooperation according to the German federal model. I do not think this would be a good idea, for the EU will not become a federal state in the foreseeable future. The vision of a "United States of Europe" is not a goal of European cooperation. Rather, the aim is to establish a federation of nation states with clearly defined competences at the European Community (EC) level and at the level of the nation states. In the process, the federally organised member states could bring their experiences to bear on the further development of the EU. From Germany's perspective, the challenge is to preserve the important role of the Lander and municipalities, the entities with which the citizens identify themselves, and at the same time ensure the ability of the supra-national organisation "European Union" to take action. Only in this way can we hold our own in a globalised world. Only in this way can we preserve and safeguard the shared values of freedom, peace, respect for human rights, and prosperity.

532 Johannes Rau

In our opinion, particular importance attaches to a clear delineation of competences between the member states and the EU. It will come as a surprise to no one that this is also one of the demands of Germany's Lander. The issues involved in the division of competence are now a central topic of the European Convention, which began its work in February 2002. It has already become apparent that the division of competence and the elaboration of the subsidiarity principle associated therewith will figure prominently in the work of the European Convention. This is well documented by the large number of contributions submitted by the members of the convention on the subject of subsidiarity and by the establishment of a special working group. The subsidiarity principle can be found in every federally organised body politic as an important structural principle. The concept means - to put it simply - that the higher level of government should only take action when the problem in question cannot or cannot as capably be resolved by the constituent states. What can be decided at the lower level should not be decided at the higher level. It is also, moreover, an expression of the idea that a claim to competence entails the obligation to take action. At European level, subsidiarity above all means that EC action must always generate some "added value". This was expressly laid down in the Maastricht Treaty and applies not just to measures of the EC but also to the entire EU. In the past, differences of opinion have arisen between the EC and the member states concerning the scope of the competence of EC institutions. This is attributable not least to the fact that the subsidiarity principle has not always been observed. Precisely this, however, shows how important it is for the success of a project like the EU that the supra-national level only takes action where the individual states cannot act, or cannot act effectively. Only in this manner can the acceptance be generated on which a project as ambitious as European integration depends. To be sure, even the most meticulous adherence to the subsidiarity principle will not make it possible to avoid all resistance and persistence on the part of individual states. That is not its function anyway. Rather, the crux of the matter is that effective implementation of the subsidiarity principle is one of the basic conditions for responsible participation in the European project by all the parties involved. This is all the more so in the light of the upcoming enlargement. If Europe wants to avoid foundering on the shoals of divergent interests and reciprocal blockades, it must create clear and functional structures today. The subsidiarity principle will play an important role in this context. In addition to the subsidiarity principle, there is another federal element at the European level that I would like to mention: the Committee of the Regions. As in the case of the subsidiarity principle, it is envisioned in the Treaty on European Union and has been an integral part of European policy for over eight years. It is composed of very different regional struc-

533 Part E Plenary Speeches

tures of the member states - Lander, cantons and departments as well as districts and municipalities. To be sure, at least for now the powers and authority of the committee are still limited to merely advisory functions and rights to be heard. The treaty likewise makes no provision for a right of the committee to bring an action before the Court of Justice of the European Communities. Nevertheless, it represents a first step towards affording the regional entities a common forum. The establishment of the committee creates a framework for a dynamic process of development in the area of regional cooperation. Its impact is already visible today. Several regions in the committee have grown closer and pursued cooperation more tangible to the citizen than their respective nation states. All these federal elements at European level have an important aim. They counter the risk of a loss of identity on the part of the people at local and regional level. The approval and support of Europe's citizens for further integration can only be ensured if on the one hand the desire for independent decision making and identity building is respected, and on the other, the advantages of a new supra-national body politic continue to be perceived. The latter will become all the more visible as the economic and political processes at global level gain momentum. Ultimately each member state must and will decide for itself how it should be internally organised, both now and in the future. Within a European federation of nation states, federal states such as the Federal Republic of Germany or Belgium can work very well together with centrally organised states such as France or the United Kingdom. I said it at the beginning and I will say it again here at the end. Federal states are learning communities. That is true both domestically and in their external relations. At home, German federalism faces the prospect of internal reforms. At supra-national and international level, we Germans will strive to bring our experience with federalism to bear without, however, presuming to suggest that we have all the answers. We want to learn from others — also from you. That is why I am very pleased that this conference is taking place, why I am curious as to what it will bring, and why I wish you a very fruitful discussion.

JOSEPH DEISS

Federal Councillor, Head of the Federal Department of Foreign Affairs, Switzerland

Federalism in Swiss Foreign Policy

Switzerland and federalism are inseparable. Without its federal system, Switzerland would be a different country. The Switzerland we know today was only made possible by the conscious decision to forgo an all-powerful central government and to devolve power and responsibility. Federalism is a radical idea and an incredibly successful one. For me therefore, the International Conference on Federalism 2002 has a special meaning: it is the conference this year in Switzerland. And the fact that it is taking place in St Gallen rather than in the federal capital, Bern, is a conscious expression of Switzerland's conviction about federalism. I am aware that in Switzerland a Federal Councillor must be careful not to extol the virtues of federalism too enthusiastically. Everything he says can be turned against him. And he may also find himself reminded of the remark that Napoleon once made to the Swiss: "How can you hope to set up a central government? You don't have enough great men. You would even find it hard to find a competent country squire." 1. THE ROLE OF THE C A N T O N S IN SWISS F O R E I G N POLICY

For me, federalism as the form of government in Switzerland is not up for discussion. However, we do need constantly to discuss improvements and adaptations. This is the only way to keep our model of federalism dynamic and up-to-date. And over the last few years, there has been intensive discussion on the role of the cantons in Swiss foreign policy. The traditional split between foreign policy and domestic policy is becoming increasingly difficult. The Swiss foreign ministry is called the Fed-

535 Part E Plenary Speeches

eral Department of Foreign Affairs. But the line between what is foreign and what is domestic is becoming increasingly blurred. For me, therefore, it was logical that in our new 1999 federal constitution and in a new law on the participation of the cantons in foreign policy, the cantons which make up the confederation have been drawn more closely into the processes of opinion forming, decision making and implementation. This law came into force in 2000 and includes the following objectives: • To ensure the participation of the cantons in foreign policy; • To keep the cantonal governments informed about foreign policy matters; " To take cantonal interests into account in preparing and implementing foreign policy decisions; • To defend those areas of cantonal power which are affected by bilateral and multilateral international treaties; • To increase the acceptance of foreign policy in the cantons. This law does not involve a transfer of power to the cantons, but it ensures their right to a say in foreign policy. Take, for example, the participation of the cantons in those European Union (EU) committees where Switzerland has a place because of its bilateral agreements with the EU. The cantons participate in those discussions that are directly relevant to them. Although the responsibility and management of Swiss foreign policy remain with the confederation, the cantons have autonomy in certain crossborder matters. I am referring here to cross-border cooperation in particular. In foreign policy, as in domestic policy, the principle of subsidiarity is important. The cantons have the authority to defend their interests in those areas of foreign affairs that directly affect them. Nowadays, borders are no longer seen as obstacles but as valuable opportunities. It is often forgotten that the majority of Swiss cantons, that is 15 of the 26, share a border with a foreign country. This is why Switzerland attaches ever-greater importance to crossborder cooperation. Nowadays, the cantons are active to varying degrees in cross-border cooperation in many fields including cultural affairs, tourism, energy, regional planning, transport, and civil protection. As a result, cross-border cooperation has become increasingly institutionalised in Switzerland. This canton, St Gallen, for example, participates in the Internationale Bodenseekonferenz (the International Conference of Lake Constance), which was set up in 1972. The Conference members include representatives of the St Gallen government and the governments of the two Appenzell half-cantons, Schaffhausen and Thurgau, on the Swiss side, and the governments of the Lander of Bavaria and Baden-Wurttemberg on the German side, as well as the governments of Liechtenstein and of the Austrian Land of Voralberg.

536 Joseph Deiss

For me, this devolution of part of our foreign policy to the cantons is not a problem. As foreign minister, I am convinced that this cantonal foreign policy can be better developed and more efficiently implemented at the regional level than if I, in Bern, had to deal with important questions on behalf of the affected areas. I also believe that no one loses .by shared sovereignty - not only in foreign policy, of course. In fact I believe the opposite: shared sovereignty strongly benefits everyone in a country. 2. F E D E R A L I S M AS AN I N S T R U M E N T OF SWISS P E A C E POLICY

As a result of its experience with federalism, Switzerland has been able to make major contributions to some current peace processes. The issues of the right of peoples to self-determination and the unity of the state have become very contentious in recent years. The disintegration of both the Soviet Union and the former Yugoslavia have made us acutely aware of the importance and complexity of the issue. Today's conflicts are often caused by two relatively simply identifiable factors. First, tensions arising in connection with how groups of people see their identity, for example, their membership of a particular ethnic, religious, cultural or linguistic group. Second, tensions arising from problems concerning the distribution of economic, political or social resources. Many modern conflicts are caused by both these factors simultaneously. I can hardly think of a recent conflict that does not involve issues of power sharing and the protection of minorities. Resolving such problems is usually a lengthy and tedious process. Solutions require both in-depth knowledge of the region in question and a high level of competence in specialised areas. Switzerland has therefore decided to deepen its expertise in the fields of constitutional law, decentralisation, power sharing and minority protection, and to increase cooperation with networks of experts outside the federal administration. As a result, we have succeeded in making a useful contribution to solving a number of recent conflicts. Let me give you a few examples. " In 2000, at the request of the transitional government of Somalia, Switzerland set up a working group which has since been dealing with various technical questions concerning the process of constitutional reform in that country. The working group is chaired by a Swiss constitutional expert from the Institute of Federalism at the University of Fribourg. • In Sri Lanka, with the prospect of a possible peace settlement and the post-conflict period that will follow, Switzerland will make experts available on constitutional law and on federalism.

537 Part E Plenary Speeches

• In Sudan, Switzerland's Special Representative for Conflict Issues has designed a comprehensive "architecture for peace", one of the main objectives of which is to launch a process for the establishment of local institutions. In addition, earlier this year, military delegations from the north and south of Sudan were invited to Switzerland to look at the Swiss army and to see how federal approaches can work in the military context. • And who would be surprised to know that during the negotiating process in Cyprus, in which Swiss legal advisers took part, the "Swiss model" was frequently mentioned? • In South-Eastern Europe, Swiss peace-building programs are focusing on projects to improve the protection of individuals and of minority rights. Here too, progress can only be achieved by different ethnic and religious groups gaining a deeper understanding of each other. And in many cases this understanding can only be achieved in the long term through federal structures. Switzerland's contributions to peace settlements do not just appear out of the blue. Our contributions inevitably bear the hallmarks of our own political identity. And federalism is an integral part of that identity. It is not my intention to promote this model of government as a magical solution for conflict regions. Our federalism cannot be exported or prescribed. Federalism is also not always the best way to avoid conflict. But we try, on the strength of our own experience, to explain the pros and cons of the federal system within individual peace processes. We also want to apply our experience to our development policy, which brings me to my third point. 3.

DECENTRALISATION AND DEVELOPMENT

As a result of the failure of numerous centralised governments, decentralisation - and by this I mean the development towards federal structures - has become fashionable. I see four particular advantages of decentralisation: • • • •

It strengthens democratic development; It can adapt to local conditions and needs; It better protects the rights of minorities; It is more efficient.

For many years, Switzerland's development cooperation agency has been supporting local efforts to promote decentralisation in a number of countries in the South, as well as in eastern European and the Commonwealth of Independent States countries. We also support the World Bank through our programs. But support for local development only bears fruit if it is tailored to people's needs. Closer proximity to the local population

538 Joseph Deiss

enables local and regional governments to identify and solve important grass-roots problems. Governments themselves become efficient partners in development cooperation. But here again, it should be stressed that decentralisation is not a panacea for all the problems which central governments find themselves powerless to solve today. I want to emphasise that badly conceived decentralisation programs can exacerbate regional differences. Each country must therefore find its own solution, with an appropriate balance of centralisation and decentralisation tailored to its own conditions. And, I should add, decentralisation cannot be achieved overnight. Decentralisation is a political culture. It permits all individuals and groups to strengthen their identity in a spirit of tolerance and mutual respect. It helps people to live with differences and to cope with them. If decentralisation helps to promote such a culture, then federalism is not only a lasting answer to the challenges facing Swiss society. It is an answer to the challenges facing societies all over the world. 4.

CONCLUSION

In concluding, I would like to return to Napoleon, who is reported to have said: "A series of fortunate events have called me to lead the French government, but I still consider myself incapable of governing the Swiss." I would answer him as follows: "Switzerland still exists, and exists in peace and prosperity. We owe this not to an emperor or an imperator but to federalism, and we want to share our experience with the world."

ANTONIN

SCALIA

Associate Justice, Supreme Court of the United States of America

One of the most troublesome complexities of a federal system is the necessity of deciding upon the separate competencies - and resolving conflicts between the separate competences - of the federal government and the separate component states. As Europe is on the verge of experimenting with federalism, it may profit from the experience of the United States. As you know, in the United States, the federal government derives all of its authority from a document, only a few pages long, written over 200 years ago. The powers possessed by the federal government are limited to those enumerated in that constitution. The founders vested the federal government with important powers, most of which are listed in Article I, § 8 of the Constitution. For example, the federal government has been given the power to collect taxes, to borrow money, and to coin money. One power vested in the federal government warrants particular notice for our purposes: the constitution confers upon the federal government the power to "regulate Commerce ... among the several States." This provision, known as the "Commerce Clause", has become the most important of the federal government's domestic powers, justifying virtually all of its economic regulations, not to mention its criminal laws and civil rights laws. Moreover, the federal government's power to regulate interstate commerce has been at the centre of many controversies regarding the power-sharing arrangement between the federal government and the several states. One of these controversies has been whether the constitution's conferral of a particular power upon the federal government means that the federal government holds that power exclusively, or, instead, that the several states exercise that power concurrently with the federal government. In some

540 Antonin Scalia

instances, the constitution clearly made the federally conferred power exclusive. For example, Article I, § 10 explicitly prohibited the several states from entering into treaties and from coining money. In other instances, however, the constitution neither explicitly prohibited the several states from exercising the same power it conferred upon the federal government, nor explicitly provided that the several states retained concurrent power. One of these instances is the Commerce Clause: the constitution says that the federal government can regulate interstate commerce, but does not say whether the states can continue to do so as well. As I have written,1 I do not believe that the constitution's intent to leave the states' concurrent power to regulate interstate commerce can reasonably be denied: the text and the history of the document show that it was not meant to exclude such regulation. For one thing, it would be strange to read a document that in some instances explicitly prohibits the states from acting concurrently, to prohibit as well the concurrent exercise of powers that were not so limited. Second, the founders considered a competing draft of the constitution that did confer the power to regulate interstate commerce exclusively upon the federal government, but they did not adopt this version.2 Despite the lack of evidence that the Commerce Clause was meant to strip states of their power to regulate interstate commerce, many argued in favour of that proposition from the very beginning. For example, in the First Congress, members supporting a bill to build lighthouses on the Eastern seaboard argued that, not only could Congress build lighthouses, but that only Congress could build them.3 Similarly, in the Fourth Congress, members supporting a bill to involve the federal government in the quarantining of foreign ships argued that only the federal government could enforce quarantine regulations.4 Perhaps even more surprising is the encouragement this view received from my Court. Through the first half of the nineteenth century, Supreme Court opinions expressed the view that only the federal government could pass laws regulating interstate commerce. As early as 1824, m tne cele~ brated case of Gibbons v. Ogden, one Justice went on record in favour of voiding a state law because it regulated interstate commerce.5 The state law in question granted a monopoly to operate steamboats in the waters of New York to a single company. Although a majority of the Court did not vote to invalidate the state law because it regulated interstate commerce, the majority opinion, written by one of the most celebrated Chief Justices in the history of the United States, John Marshall, nonetheless endorsed this argument.6 For over two decades following Gibbons, many other Justices endorsed the view that the federal government held exclusive power to regulate interstate commerce, but never did we dispose of a case on that reasoning.7 It was not until the latter half of the nineteenth century that a majority be-

541 PartE Plenary Speeches

gan to coalesce around a resolution. In the celebrated case of Cooley v. Board of Wardens,8 we arrived at the novel conclusion that the Commerce Clause sometimes gave the federal government exclusive power to regulate commerce and sometimes did not. We said it all depended on the nature of the regulation: the federal government had exclusive power to regulate those things that, by their nature, demanded uniform regulation, and the states had concurrent power to regulate those things that did not.9 The regulation at issue in Cooley was a state law requiring ships entering or leaving state ports to engage a local pilot as a guide. We concluded that, the nature of piloting being what it is, this type of regulation did not demand uniformity, and, therefore, the state law was valid. Although introduced in 1852, the Cooley doctrine was not used to invalidate a state law until i873.10 And, although the contours of the line between those things that, by their nature, demand uniform regulation and those that do not has shifted over the years since Cooley, the gist of the formulation is still with us today.11 This doctrine that the constitution prohibits the states from regulating some forms of commerce has come to be known as the doctrine of the "negative Commerce Clause" or the "dormant Commerce Clause" - presumably because it rests upon a negative inference from the Commerce Clause, and constitutes a prohibition that does not actively appear, but rests dormant in the operative text. 12 1 consider it to be the product of judicial invention rather than sound constitutional interpretation. And the proof of that proposition is the peculiar fact that my Court's (supposedly) constitutional determinations under the negative Commerce Clause are the only constitutional determinations that we have held to be reversible by Congress. We have permitted Congress, for example, to except the business of insurance from the negative-Commerce-Clause restrictions our decisions have imposed on other businesses, enabling the states to regulate that industry in a manner that discriminates against out-of-state insurers.13 But if the dictates of the negative Commerce Clause were really constitutional imperatives (the only legitimate basis for my Court's imposing them) how could Congress accord dispensations? (Congress has no power, of course, to suspend the constitution.) It seems clear, therefore, that the negative Commerce Clause is not a constitutional command, but a sort of judicial presumption regarding congressional intent, which can be overcome by an explicit congressional statement to the contrary. But "presuming" the existence of laws that have never been enacted is certainly an odd judicial activity. The modern contours of the negative Commerce Clause lead to the invalidation of two types of state laws. First, my Court has held that state laws which discriminate on their face against out-of-state commerce are unconstitutional, virtually irrespective of any state interests proffered on their behalf.14 We have, for example, struck down state laws prohibiting

542 Antonin Scalia

the importation of out-of-state waste,15 and state laws taxing the storage of out-of-state waste at a higher rate than in-state waste.16 We have also repeatedly invalidated state laws requiring raw materials to be processed locally before they can be shipped out of state.17 We have even extended this doctrine to strike down facially discriminatory laws enacted by localities within a state.18 My Court has often justified this prohibition of discriminatory state economic regulation by invoking free market principles (condemning protectionism),19 and democratic theory (invoking the need to protect those who have no political recourse against the laws of a neighbouring state).20 I have no doubt that this "discriminatory state laws" branch of our negative Commerce Clause jurisprudence reaches a proper result, though I would prefer to rest it not upon such policy grounds (sound though they may be), but upon the provision in our constitution which prohibits states from discriminating against out-of-state citizens.21 The second type of state laws we have invalidated under the negative Commerce Clause are those that fail a complicated balancing test set forth in 1970 in the case ofrPike v. Bruce Church, Inc.22 That opinion invalidated a state law because "the burden [it] imposed on [interstate] commerce [was] clearly excessive in relation to the putative local benefits."23 The state law in question was an Arizona law that required cantaloupes grown in the state to bear the state of origin on each package. It was not a law that discriminated against out-of-state companies; all exporters of cantaloupes from Arizona, whether Arizonans or New Yorkers, had to comply. We concluded, however, that "the State's tenuous interest in having the company's cantaloupes identified as originating in Arizona cannot constitutionally justify that the company build and operate an unneeded $200,000 packing plant in the State."24 I am assuredly opposed to laws that generate more "costs" than they do "benefits". But the notion that judges, rather than legislators, should decide whether Arizona's interest in letting people know it is a great place to grow cantaloupes outweighs a company's interest in avoiding construction of a $200,000 processing plant strikes me as bizarre. I know nothing about how much it will benefit Arizona to have consumers nationwide know that the best-tasting cantaloupes come from there; and I know little about the commercial burden of constructing a processing plant in Arizona rather than elsewhere. And even if I knew a lot about both subjects, it does not strike me as an exercise in legal reasoning to "balance" the one against the other. As I have written, "the scale analogy is not really appropriate, since the interests on both sides are incommensurate. It is more like judging whether a particular line is longer than a particular rock is heavy."25 In short, it seems to me a political and economic question whether advertising the Arizona origin of cantaloupes is more important than avoiding the expense of an Arizona processing plant. Congress can decide such a question - and if it did, its affirmative power to regulate in-

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terstate commerce would enable it to prohibit such laws as Arizona's. But that is not in my view - even apart from the text of the constitution - an appropriate question for a judge. In any event, my dissenting views notwithstanding, the Bruce Church "balancing test" is a continuing part of our negative Commerce Clause jurisprudence. I have thus far been discussing the question of when the states have concurrent authority with the federal government, with particular reference to the regulation of interstate commerce. I now turn to the question of how we have gone about reconciling concurrent state and federal authority when the exercise of that authority appears to conflict. Concisely put, if both the federal government and the state governments wish to enact laws regulating the same activities of their citizens, then whose laws prevail and when? The word usually applied to this question is "preemption" - as in "when does federal law preempt state law?" The answer to the first question - whose laws prevail - is clearly provided by Article VI, clause 2 of the Constitution. This provision, known as the Supremacy Clause, states: "This Constitution and the Laws of the United States which shall be made in Pursuance thereof ... shall be the supreme Law of the Land ... any Thing in the Constitution or Laws of any State to the Contrary notwithstanding." So there you have it: when the federal government passes a law pursuant to one of the powers conferred upon it by the constitution, that prevails over any state law "to the contrary". The original understanding of the Supremacy Clause is a bit less controversial than that of the negative Commerce Clause; preemption was applied by my Court to strike down a state law as early as the celebrated case of Gibbons v. Ogden, which I discussed earlier.26 As I am sure you can imagine, the simplicity of the constitutional text "to the contrary" has not prevented my Court from developing a series of complex doctrines to answer the second question: when do federal laws preempt state laws? At their core, however, these doctrines all seek to answer the same enquiry: what did the federal law intend?27 This is the central enquiry in preemption cases because, whenever Congress acts pursuant to one of its enumerated powers, it can preempt state law to whatever extent it likes. Sometimes Congress makes the Court's job easy by stating expressly in a statute whether and to what extent state law is preempted. This is known as "express preemption". For example, in the 1992 case of Morales v. Trans World Airlines, Inc., I wrote an opinion for the Court holding that several state regulations of airline advertising were expressly preempted by a federal statute that prohibited states from enacting or enforcing any law "relating to rates, routes, or services" of any air carrier.28 Because the state laws regulated airline price advertising, they "relat[ed] to rates", and were preempted. In that case, Congress clearly set forth both that it intended

544 Antonin Scalia the federal law to preempt state law, and which particular state laws it intended to preempt. Rarely, however, is the task so easy, because rarely does Congress make both die fact and the extent of its intent to preempt explicit. My Court has, accordingly, developed several doctrines that recognise the implicit intent of Congress to preempt state law. First, and most understandable, is the doctrine that Congress implicidy intends to preempt those state laws that positively conflict with what it has decreed. The most obvious instance of so-called "conflict preemption" occurs when it is a "physical impossibility" to give simultaneous effect to both the federal and state laws.29 In such circumstances, whether or not Congress was actually thinking about preemption of state law when it enacted the federal provision, the very effectiveness of the federal provision demands diat state law be overridden. Because it is impossible to apply both laws at the same time, one must yield, and, under the Supremacy Clause, it is the state law. An example of this most basic form of conflict preemption is another case involving fruit - this time, oranges called Adams Fruit Co. v. Barrett.^0 There migrant farm-workers, injured in an automobile accident while travelling to the orange grove in their employer's van, sued for damages under the federal Migrant and Seasonal Agricultural Worker Protection Act (AWPA), which contained motor-vehicle safety requirements and provided a private cause of action for injuries resulting from failure to observe them. The employer claimed die protection of the Florida workers' compensation law, which provided that the remedy to employees under that law would be exclusive. My Court had no difficulty concluding that, even if the Florida statute was intended to eliminate federal causes of action, it was preempted by the AWPA. A more subtle and more difficult to identify form of conflict preemption occurs when, although applying both die state and federal commands is not impossible, the state law "stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress."31 One Supreme Court opinion exemplifying this form of conflict preemption involved a state-law negligence claim (actually, District of Columbia law, but the principle is the same) against an automobile manufacturer, for its failure to provide a driver's side airbag in the vehicle in which the plaintiff was injured.32 The conflict arose because the Federal Motor Vehicle Safety Standard for the relevant model year (promulgated by the Federal Department of Transportation pursuant to statutory authority) required manufacturers to equip only 10% of their vehicles with passive restraints, none of which had to be airbags. If the state law of negligence held the manufacturer to an obligation to provide airbags in all cars, the manufacturer could still technically comply with both state and federal prescriptions - 100% airbags complies with at least 10% passive restraints. The purpose of the 10% passive-restraint provision, however, was to enable gradual introduction of the new restraints, thereby lowering costs, overcoming technical safety problems, and inducing

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ultimate consumer acceptance; and the purpose of not requiring airbags in particular was to encourage experimentation with various passive-restraint options. These purposes, we held, would be frustrated by a state law requiring 100% airbags, and the state law was therefore preempted. To provide another example of how conflict preemption works, I may progress from cantaloupes and oranges to avocados. In 1963, my Court considered a case involving the regulation of avocados, Florida Lime & Avocado Growers, Inc. v. Paw/.33 You may not know this, but, if picked prematurely, an avocado will not ripen properly, and will tend to decay or shrivel after purchase, becoming all but inedible. Obviously, a near national disaster would have befallen the country if people were allowed to go around prematurely picking avocados, and therefore more than one sovereign government decided to regulate the harvesting of that fruit. First, the avocado-state of California got into the act by prohibiting the sale of any avocado picked unless it had an oil content of 8% by weight. Not to be outdone, the federal government instructed a federal agency to establish "minimum standards of quality and maturity" for avocados, and the agency promulgated regulations prohibiting the picking of avocados before a certain date, or before they reached a certain size and weight. The difficult question presented is clear for all to see: what would happen if an avocado grower picked an avocado that complied with federal regulations on date, size, and weight, but that still did not contain an 8% oil content? Could California keep the avocado off the market? Or was the California law preempted by the federal erection of maturity standards? My Court sided with California. We held, first of all, that it was physically possible for a grower to comply with both regulations. Applying our wellknown expertise in horticulture, we observed that all the grower had to do was "leav[e] the fruit on the trees beyond the earliest picking date permitted by the federal regulations", until the oil content met the California standard.34 We next confronted the question whether the California regulation of avocado maturity obstructed the purposes of the federal regulation. After all, if the federal government had certified an avocado as mature, who was California to second-guess it? We sided again with California. The California law did not impede the purposes behind the federal statute, because that statute, by its terms, sought only to establish ''minimum standards" of avocado maturity.35 Thus, there was no reason to think "compliance with minimum federal standards immunize [d] the [federally]licensed commerce from ... more demanding state regulations."36 Besides conflict preemption, the other type of implied preemption recognised in our cases is called "field preemption". This occurs when the nature and scope of Congress's regulation in a particular field is "so pervasive as to make reasonable the inference that Congress left no room for the States to supplement it."37 Sadly, I have run out of examples involving fruit, so, for an example of field preemption, I will use immigration. In 1939,

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Pennsylvania enacted a law which required immigrant aliens to register with die state each year, to pay an annual registration fee, and to carry at all times an identification card. Unsurprisingly, the federal government also had enacted regulations, indeed numerous regulations, regarding immigrant aliens, including registration requirements of its own. None of die federal regulations conflicted with the Pennsylvania registration law - neither in the sense that it was impossible to comply with both nor in the sense that the state law frustrated the purpose of the federal one. Nonetheless, in a 1941 case entitled Nines v. Davidowitz,^ my Court held that die Pennsylvania law was preempted because the federal scheme regulating immigrant aliens, of which the federal registration requirements were only a small part, was so "broad and comprehensive" that it displayed an intent to occupy the field. We have applied field preemption in other rare circumstances, such as safety regulation of nuclear facilities.39 In addition to applying these doctrines of conflict and field preemption, we of course seek to determine the preemptive or non-preemptive intent of federal law (for that is the ultimate touch-stone) through the traditional tools of statutory interpretation - looking to the text, structure, and purpose of the federal statute.40 In that exercise, we have applied the reasonable presumption that Congress does not ordinarily mean to preempt state laws in areas traditionally occupied by the states alone - as, for example, family law,41 or local utility regulation.42 In such areas, we have said, the evidence in favour of intent to preempt must be "clear and manifest".43 If there are lessons to be learned from the brief summary I have provided, they are perhaps the following: • Where both the federal government and the component states have competence in the same fields, it is critically important for the federative document to say which competence is supreme. The task of my Court would be enormously more difficult if we had to decide, when there is overlapping regulation, not only whether there is preemption, but also by which sovereign. (By reason of the Supremacy Clause, the answer in our system is always the United States.) • As the example of the negative Commerce Clause illustrates, it is of great consequence which court - state or federal - gets to make the preemption decisions. It is a 100% certainty that judges appointed by the federal legislature or executive will, in the long run, resolve ambiguities (and perhaps even ignore some textual certainties) in favour of the power of the central government. Not only because they feel themselves to have a special attachment to the federal government, but also because judges who refuse to affirm federal power will tend to be replaced by judges who are eager to do so. (Those familiar with American legal history will recall that the Supreme Court's narrow interpretation of the federal government's commerce-clause powers was changed overnight to an expan-

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sive interpretation, after Franklin Roosevelt threatened to increase the size of the g-member Court so that he could appoint new Justices who would make a majority to affirm federal power. Adapting the old English adage that "a stitch in time saves nine", legal wags have called this sudden conversion the switch in time that saved nine.) • There is no substitute for clarity, both in the constitutional provisions pertaining to the separate competences (and the preemptive powers) of the state and federal sovereigns, and in the legislative provisions that deal with an area where preemption is a possibility. Leaving the outcome of conflicting rules to be decided by the speculations of a court regarding constitutional and statutory intent is - no matter how faithfully and expertly those speculations are conducted - not ideal. NOTES

1 Tyler Pipe Indus., Inc. v. Washington State Dep't of Revenue, 483 u.s. 232, 259-65 (1987) (Scalia, J., concurring in part and dissenting in part). 2 Albert S. Abel, The Commerce Clause in the Constitutional Convention and in Contemporary Comment, 25 Minn. L. Rev. 432, 434 (1941). 3 David P. Currie, igg^.The Constitution In Congress: The Federalist Period, 1789— 1801, 70 n.i 17. 4 Id. at 227 & n.i7g. 5 22 u.s. (9 Wheat.) 1,226-29 (1824) (Johnson,}., concurring). 6 Gibbons, 22 u.s. at 209. 7 David P. Currie, 1985. The Constitution in the Supreme Court: The First Hundred Years, 1789-1888, 222-230. 8 53 u.s. (12 How.) 299 (1852). 9 M a t 319. 10 Case of the State Freight Tax, 82 u.s. (15 Wall.) 232, 279-80 (1873). 11 Lawrence Tribe, 2000. American Constitutional Law, 1048 (3rd ed.). 12 Compare Oklahoma Tax Comm'nv. Jefferson Lines, Inc., 514 U.S. 175, 179—80 (1995) with id., at 200-201 (Scalia, J., concurring in the judgment). 13 Prudential Ins. Co. v. Benjamin, 328 u.s. 408 (1946) (interpreting the McCarranFerguson Act, 15 u.s.c. §1011, et. seq.). 14 Philadelphia v. New Jersey, 437 u.s. 617, 626-27 (1978). But see Maine v. Taylor, 477 u.s. 131, 151-52 (1986). 15 Philadelphia, 437 u.s. at 629. 16 E.g. Oregon Waste Systems, Inc. v. Dep't of Environmental Quality, 511 u.s. 93, 108 (1994)17 E.g. South-Central Timber Development, Inc. v. Wunnicke, 467 u.s. 82 (1984); Toomer v. Witsell, 334 u.s. 385 (1948). 18 C & A Carbone, Inc. v. Clarkstown, 511 u.s. 383 (1994); Dean Milk Co. v. Madison, 340 u.s. 349 (1951). 19 E.g. Philadelphia, 437 U.S., at 623-24.

548 Antonin Scalia 20 E.g. Southern Pacific Co. v. Arizona, 325 u.s. 761, 767 n.2 (1945). 21 Tyler Pipe, 483 U.S., at 265 (Scalia, J., concurring in part and dissenting in part) (citing the Privileges and Immunities Clause, U.S. Const. Art. IV, § 2, cl. i). 22 397 u.s. 137 (1970). 23 Id, at 142. 24 Id. at 145. 25 Bendix Autolite Corp. v. MidwescoEnters., Inc., 486 U.S. 888, 897 (1988) (Scalia, J., concurring in the judgment). 26 Gibbons, 22 u.s. at 211-212. 27 Morales^. Trans World Airlines, Inc., 504 u.s. 374, 383 (1992) ("The question, at bottom, is one of statutory intent..."). 28 Id. at 383. 29 Florida Lime & Avocado Growers, Inc. v. Paul, 373 U.S. 132, 143 (1963). 30 494 u.s. 638 (1990). 31 Hinesv. Davidowitz, 312 u.s. 52, 67 (1941). 32 Geierv. American Honda Motor Co., 529 u.s. 861 (2000). 33 373 u - s - !32 (i9 6 3)34 Id. at 143. 35 Id. at 148 (emphasis added). 36 Id. at 141. 37 Ricev. SantaFeElevator Corp., 331 u.s. 218, 230 (1947). 38 312 u.s. 52 (1941). 39 Pacific Gas & Electric Co. v. State Energy Resources Conservation & Dev. Comm'n, 461 u.s. 190 (1983). 40 Morales, 504 u.s. at 383. 41 See Hisquierdov. Hisquierdo, 439 u.s. 572 (1979). 42 See Rice, 331 u.s. 218. 43 Hillsborough Countyv. Automated Medical Laboratories, Inc., 471 u.s. 707, 715 (1985)-

XOCHITL GALVEZ Head of the Presidential Office for Indigenous People, United Mexican States

Qhi dehua. Good afternoon. This greeting in my native language not only means "good afternoon" but also, "as you leave, God has also left". In my Nhanhii culture, we believe that God dwells in each human being. This leads us to respect each other more. Another belief is that virtually no one goes to Hell. And this is most reassuring: as a result we do not fear Hell. The only people who may end up there are those who accumulate and do not share. Our sense of community involves a very strong notion of solidarity. I wish to thank the Swiss government and the organising committee of this conference for their kind invitation to talk about the Mexican government's public policies on indigenous issues. I wish to begin by saying that 30 years ago (when I still lived in my small Otomi indigenous community in the Mezquital Valley in the State of Hidalgo, where I was born), if had someone asked me whether I thought some day I would be a member of the President's Cabinet, I would have answered that this was virtually impossible. Thirty years ago, I had to carry water every day for more than seven kilometres. In my hometown, there was an elementary school with only one rural teacher. Thirty years ago, I had two things clear in my mind. First, I did not want to live in my village for the rest of my life. I did not accept what would have become my fate according to the uses and habits of my people: namely, my father would have had me married when I was still very young. Second, I did not want to be a politician. I was not interested in politics. Politicians always went to our village to tell us lies. They would promise piped water, electricity, and other services. And they never honoured their promises. So, I did not want to be a politician.

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I was able to fulfil my first objective. I left my village when I was 14 years old thus avoiding a marriage to someone I did not love. There are certain traditions in our indigenous communities in dire need for change. My second objective ... Well, as you can see, I am here as a member of President Vicente Fox's Cabinet. When President Fox invited me to join his team, I thought it through very thoroughly. I had not voted for him and I was somewhat troubled that he wanted me as a member of his team when we do not share the same political ideas. I told him so, so that he knew. To me, the concept of working involves serving. We, the indigenous people, are taught that we are born to serve our fellow men and women. This was exactly what led me to accept his invitation and become involved in this project and leave my career as a business woman (the World Economic Forum at Davos awarded me recognition as one of the i oo Global Leaders in the Future of the World because of my entrepreneurial experience. I do not know whether I have contributed to the future of the world, but in Mexico at least, I know I am indeed doing my best to build a different world). As you know, Mexico has been a federal republic since 1824. You also know that 300 years before that, Mexico was a colony of Spain founded on the social organisations of the native indigenous peoples dismantled by the conquerors. It was the indigenous peoples who mined the gold and silver of Mexico. It was the indigenous peoples who built the beautiful colonial cities. It was the indigenous people who worked the estates and agricultural and cattle farming haciendas. In spite of all this, the 1824 constitution did not consider the indigenous peoples at all. The native people of this land were even referred to as foreign peoples. They were considered as aliens. During the Mexican Revolution, the indigenous people were cannon fodder. And once again, the 1917 constitution, resulting from social conflict, ignored the indigenous peoples. The states of the country were created without considering the indigenous people's cosmogony. The concept of collectivity is a fundamental concept in our daily life. At the beginning of my speech, I mentioned that one of the most serious sins in my culture is to accumulate. If your neighbour needs the goat or cow you own and you do not share it with him, you are committing a very serious sin. Sharing is part of our day-to-day culture. I am a member of an ejido, and therefore have access to community-owned land. However, since I am not living among the people in my community today, someone else is entitled to work that land. He who truly needs the land is the one to occupy it. This is known as collective rights. How can you make the titles of a society that bases its development on individual rights compatible with the collective rights of the indigenous peoples persisting today after 500 years? The indigenous topic re-emerged nationally and internationally on i January 1991, exactly on the day when the North American Free Trade Agreement (NAFTA), signed by Mexico, the United States and Canada, came into

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force. On that day, the National Liberation Zapatista Army (EZLN, in Spanish) raised its arms in Chiapas to vindicate the rights of the indigenous peoples. In February 1996, the Administration of former President Ernesto Zedillo, signed the San Andres Larrainzar Agreements with the EZLN and a draft bill was prepared whereby the autonomy and free determination of peoples to develop their cultures is recognised. Interestingly, a supposedly centrist government such as that ruled by the Institutional Revolutionary Party (PRI), the party ruling the country for over 71 years, was not the one to send this draft bill to be passed by Congress. Perhaps, the PRI felt it would fracture the national state because autonomy and sovereignty are two concepts that are easily confused. The indigenous peoples claim their right to autonomy in exercising their uses and habits in economic, political, and cultural terms within the nation. The indigenous peoples have never proposed to fracture the country. What made me accept President Fox's offer was that he told me he would send this draft bill about the indigenous rights and culture to Congress. And he kept his promise. On 5 December 2000, one of his first actions as president was to withdraw the army from the conflict zone. The EZLN had demanded that three conditions should be met before signing a peace agreement with the Mexican government, namely the removal of seven military bases, the release of 100 Zapatan indigenous prisoners (the so-called political or prisoners or conscientious objectors), and the approval of the draft bill on the indigenous rights and culture, known as the COCOPA Act. Two of these conditions were met. In February 2001, Deputy Commander Marcos headed the Zapatista March from Chiapas to Mexico City to support the passing of this Act. On 14 August 2001, the constitutional amendment on indigenous issues was published by the Official Gazette of the Federation. This amendment, however, does not satisfy all the demands of the indigenous peoples. Perhaps some fears prevailed, preventing the Act from reaching the thorough recognition of these rights. I feel that we, the indigenous people, need to find the technical arguments to be able to convince the rest of society that the autonomy of our peoples does not jeopardise national unity. One of the main issues in this amendment is that it does not provide the mechanisms for achieving this purpose. If we compare it to those in other countries where the state is the legal guardian of the indigenous peoples, the Mexican constitution is very advanced. It does recognise the autonomy and free determination of the indigenous peoples. However, it does not accept the setting of indigenous regions. And the problem is that there are peoples who share the same language and culture but are located in three different federal states. This could be solved by the municipalities, but in some of them the indigenous people are only a minority. At this moment in Mexico, we are waiting for a resolution by the Supreme Court of Justice of Mexico on the controversies submitted by

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some of the indigenous municipalities disagreeing with this constitutional amendment of 14 August 2001. Clearly, this.is evidence that the indigenous peoples are willing to take the legal path as an option for an answer to their demands. Among others, their argument is that the International Labour Organization iGgth Convention was violated because these peoples were not consulted on the constitutional amendment. We hope to hear from the Supreme Court of Justice. The indigenous peoples hope the Supreme Court of Justice will pronounce the sentence in their favour. Why was there an uprising in Chiapas? To begin to understand this event, you need only to look at some indicators of the indigenous peoples. Mexico is the fourth largest country in terms of indigenous diversity. Our cultural richness is huge. More than 60 languages are spoken with some 30 dialect variations, amounting to a total of about 90 languages spoken throughout the country. We are more than 12 million indigenous people. This accounts for 13% of the population, living in 803 municipalities. Of these, indigenous residents in 707 live in high to very high marginality. This speaks for the events in the history of our country; how federalism did not work because states and municipalities were decentralised but indigenous towns continue to be discriminated against inside the municipalities and states. Only three municipalities show a low marginality rate. The indigenous peoples' life expectancy is 69 years, while nationwide, it is 74 years. In the state of Nuevo Leon, the municipality with the highest life expectancy in the nation is Garza Garcia. There is a i g-year difference in life expectancy between a child born in Garza Garcia and a child born in Guachochi in Chihuahua. Child mortality is 58% higher than the national rate. In other words, about 28 of every 1,000 children born alive, die in other regions, while 48 of 1,000 children die in the indigenous regions, and in regions such as the Tarahumara, 100 out of every 1,000 children die. While in the Oaxaca municipality, a municipality with a high percentage of indigenous population, there are 0.07 hospital beds per person, nationwide we have 0.79 hospital beds. Malnutrition is rated at 32% in indigenous communities as opposed to 17% nationwide. Anaemia among pregnant women is also very high in indigenous communities. In terms of infrastructure, the differences are also dismal. Nationwide, 84% of the population has piped water, while it is available to only 55% of indigenous communities. Nationwide, 78% of the population has sewage systems, while only 23% of indigenous communities have them; 95% of the national population has electricity and only 77% of the indigenous communities have it. In telecommunications, only i % of the communities having more than 70% of indigenous people have telephone lines, while 66% of the population in Mexico City has this service available. Obviously, there has been unfair development in my country.

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None the less, to answer the question as to whether the indigenous people are really poor, I would say we are not. We own other kinds of riches. We have 62 different ways of looking at the world and, at a time when other ways to see the world are necessary, it would be interesting to take a closer look at them. The indigenous people have preserved certain very successful organisational and production structures. We have a vast body of knowledge in the field of traditional medicine. We have a biological megadiversity albeit we are subject to piracy, that is why it is so important to regulate intellectual property rights internationally, and to recognise the rights of origin. Seventy percent of the oil reservoirs in the Gulf of Mexico are located in municipalities with a strong indigenous presence. The wealth generated in these communities is unbelievable. In turn, their land has been polluted. Most of the hydroelectric dams are located in indigenous regions, involving the displacement of thousands of indigenous people from their hometowns. And, the funny thing is that their current communities still lack electricity. The government did not plan for any program providing them with some royalties for generating electricity in big cities. The indigenous peoples hold one fifth of the national territory. In their land, the possibilities for generating wealth are huge. The issue is how to negotiate with the rest of the nation, but no longer from the paradigm that the indigenous people are poor. Many foreigners come to Mexico and find these indigenous cultures wonderful. They ask us not to touch them. They claim these cultures are great the way they are. But they come to Chiapas for no more than a month, and then they go back to their comfortable beds at home. The indigenous peoples have to propose a new scheme to get access to all development opportunities available. The indigenous peoples want development. And they want the necessary infrastructures. Incidentally, indigenous coffee growers in Mexico export a great deal of their product, organic coffee, to Switzerland and the rest of Europe. The price of coffee today is unbelievably low, far below its production price. These are some of the things leading to impoverishment of the indigenous communities. We must do something about the free market. We can no longer accept prices that are continually being determined by the invisible hand of the market. The Mexican government is looking for a new relationship between the state and the indigenous peoples. The laws are an issue handled by Congress, and in Mexico the state reform has been discussed at length. I hope this reform will also involve the indigenous issues. We have proposed an inter-cultural dialogue not only in Mexico but with the rest of the world. We are part of a multicultural world. What we need now is inter-cultural dialogue. We need to strengthen our differences. And that is precisely the enormous wealth Mexico has as a nation. The major tourism appeal of

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Mexico is the huge linguistic, ethnic, cultural, and food diversity of our country. It varies even in terms of climates including desert, mountains, and beaches. We need to look for fairness and equal opportunities. We must be included in development programs. We need a transparent management of resources and the right to our diversity, identity and free determination. The choice we have in federalism is the creation of these autonomous indigenous regions within the nation, with a fair access to all its resources.

AMADOU TOUMANI TOURE President of the Republic of Mali

Allow me first of all to sincerely thank the Swiss authorities and the organisers of this conference for the kind invitation extended to me, to share with you some thoughts inspired by the Malian experience in the field of decentralisation and good governance. The choice of St Gallen and Switzerland as host of the International Conference on Federalism 2002 is not fortuitous. Actually, Switzerland is among the most ancient federations in the world, and its cultural and linguistic diversity is universally recognised. Decentralisation, governance, and federalism constitute major issues in this dawning century, because they convey a message of democracy, peaceful coexistence, and stability. They also represent a strategy and an opportunity for conflict management and resolution in our modern states which are unfortunately facing many conflicts with causes more or less linked with issues of governance. Decentralisation, currently implemented with determination in Mali, is part of a process to which all the political authorities of the country since independence have been striving to contribute. And to go back further, before colonisation, we have to renew an administrative practice, which in every respect could be considered as largely decentralised. The Federation of Mali created by Sudan and Senegal (1959-1969) proves this constant will to unity. The early collapse of this entity made Sudan declare its independence on 22 September 1960, under the name of Republic of Mali (in memory of this vast Empire of the twelfth and sixteenth centuries). From independence until the present day, the different constitutions of the Republic of Mali have promoted the concept of decentralisation.

556 Amadou Toumani Toure

This declared will to see populations take their fate into their own hands is inextricably linked with the permanent commitment to work towards the realisation of African unity. The constitution of 25 February 1992, in Chapter XV on the African Union, states in Article 17: "The Republic of Mali may conclude with any African state association of Community agreements, comprising total or partial renunciation to the sovereignty in view of realising the African unity." The signing of the National Pact on 11 April 1992, which put an end to the Arab-Tuareg rebellion in the north of Mali and strengthened our democratic achievement, was a key factor accelerating the process of decentralisation in our country. Mali's choice of decentralisation as a mode of administrative organisation and development strategy is justified by our conviction that development is not the business of the state alone. It should mobilise all the populations in an organisational framework which respects and increases the value of local specialities, and which grants them means to participate in decisions that daily concern them and to control those who implement them. Actually the state, having neither the capacities nor the means to ensure the monopoly of economic and social development of the nation that it took upon itself long ago, is withdrawing to give the space for initiatives to decentralised communities and to private individuals and legal entities. So, we should no longer ask the question: "Why decentralisation?" But rather: "How decentralise?" How do we decentralise to respond to the concerns of the populations? At present, there are 703 Communes of Mali, most of them are rural with an average of 10 to 15 villages governed by elected councils through universal suffrage. They are responsible, under the control of state trusteeship and with its support, for the organisation and management of several services of proximity. This reform is not an end in itself. Its goal is to contribute to the improvement of the living conditions of Malian citizens mainly in rural areas. That is why we directed our first efforts towards essential services such as hygiene, elementary care, basic education, drinkable water supply, and protection of natural resources, all of which are henceforth greatly decentralised in their organisation. These services have a fundamental importance in our country because they are at the heart of our strategy in the fight against poverty. Decentralisation constitutes a first important step, but it is not enough. For us, it simply covers the most important site of more profound and global institutional reforms, which remain a requirement for a sustainable development. What result and what longevity can decentralisation have if it is not accompanied by a reorganisation of state administration and a transfer of resources, which give to local collectivities the appropriate means to offer

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better services to users? What credibility does decentralisation limited to transfer of state power have for local communities without any window of opportunity on what we commonly call civil society? What legitimacy can decentralisation have without a competent local elite to implement transparent management? These are some of the questions raised by the Malian experience which may provide food for thought during the debates. Decentralisation produces an effect only when accompanied by its essential corollary, devolution, which presupposes a significant reallocation of powers between the different levels of state administration. The issue of financial resources has arisen in more difficult terms for our country. In fact, decentralisation is taking place in a context of poor financial resources, which limits the possibilities of state budget transfers to local communities. Indeed, it is a constraint; but we also consider it as a challenge for which decentralisation proves to be an efficient strategy for mobilisation of local resources. To improve the financial capacity of local collectivities, the Malian state established the National Agencies for Investment in Territorial Communities, which is supported by several friendly countries and partners to whom I take this opportunity to express all my gratitude. It is for me the appropriate place to invite each of your countries to examine methods of decentralised cooperation. As regards the case of Mali, the opening towards civil society is necessary and indeed essential. In fact, Mali gets strength from traditional powers and wealth from multiple initiatives as well as from the community and socio-professional organisations that grew out of the democratic advent. Decentralisation requires a better integration and participation for all these actors in the management of local affairs. That is why the division into communes has been the subject of an innovative strategy that has granted a significant role to inter-community concentration in Mali. Without conferring a legal entity on the basic community that comprises the villages, decentralisation in Mali is giving an important place to them in the process of decision making at the local level. They are consulted about the organisation of local economic activities, the establishment and management of equipment, as well as land management. Lastly, the issue of local capacities and good governance is at the heart of decentralisation and permeates the whole field of local governance. With this framework the state is implementing an extensive training program targeting the local representatives. This issue of governance reaches beyond the local communities to the administration and state as a whole. Reforms of such scope are not implemented without difficulties. Among those difficulties I would like to emphasise the support capacity of the

558 Amadou Toumani Toure

federal administration, which has been built through a long process and by poor means. On one hand it hinders the effective realisation of competencies and means transfer, on the other hand it enables the monitoring function of legality which is crucial for the confidence of the citizens in the elected representatives. Moreover, territorial reorganisation has indeed been the occasion for greater mobilisation and concentration. But it has also caused the resurgence of certain local conflicts which if they are not settled by means of dialogue, risk jeopardising development efforts and even local social cohesion. This type of difficulty is inherent in the process of decentralisation which must itself establish settlement mechanisms for conflicts. We are fully aware that it is a long-term process.

VOJISLAV KOSTUNICA President of the Federal Republic of Yugoslavia

The very fact that a large part of mankind, nearly one half of it, lives in federal government systems speaks for itself about the advantages of this system when it comes to compound and diversified state unions, whatever the differences within them might be - social and historic, cultural or ethnic. However, despite a wide variety of approaches, researchers of federalism will agree upon one thing - the value of federalism is relative rather than absolute. In other words, the value of a federal solution is to be discussed on a case-by-case basis. Or, as John Stuart Mill would have it in his work Representative Government: "When the conditions exist for the formation of efficient and durable federal unions, the multiplication of them is always a benefit to the world." Federalism merges in itself and should reconcile, in something Carl Friedrich called a federal spirit, two opposed aspirations an aspiration towards diversity and an aspiration towards unity. It is only when cohabitation, that is mutual permeation of the two aspirations, proves to be possible, that a federal order has a future. Therefore, the purpose of my speech is to identify the effects federalism had on internal relations in the former Yugoslavia and its collapse in the 19905, along with its impact on relations in what's left of the country - the Federal Republic of Yugoslavia, i.e. the Serbian-Montenegrin federation. Even though a federal restructuring was considered as early as before the Second World War, it was only after the war that several different federal models were applied. All of them, however, proved to be inefficient, be they centralised (as in the early stages), or decentralised (implemented later on, in the 19708). Yet another attempt at federal restructuring is underway in Yugoslavia, this time with the support of the European Union (EU). This has given the case of Yugoslavia a European dimension, and

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since I have been led by the notion that we are supposed to learn from each other at this conference, I think this might serve as an interesting case of a very special experience and a federal experiment. After all, some foreign researchers with a profound knowledge of Yugoslavia, such as Susan Woodward, feel that "the new way of solving relations between Serbia and Montenegro could be a model for other countries sharing the similar situation of a 'frozen conflict'" (Cyprus, Moldova, Nagorno Karabakh, Armenia, Azerbaijan, Northern Ireland and the like). At the very beginning, however, I have to make a digression. Some 20 years ago, a British historian of Serb origin, Stevan Pavlowitch, wrote a book with a very attractive title, The Improbable Survivor: Yugoslavia and its Problems ic>i8-i()88. As a historian, Pavlowitch deals with not only the past, but also the possible future of a new state, "a small multiethnic empire" created after the First World War. While the very same century in which it was created was nearing its end, Yugoslavia disappeared in the whirlwind of a civil war. The state that rose from the ashes of one World War and outlived another vanished in a local civil war. The state created after the First World War by the consent of the international community, that is, the Great Powers, which was restored by their consent after the Second World War under new, communist insignia, ceased to exist less than half a century later, by the will of the international community, the European Community (EC) in the first place, but also the United States. The state whose beginnings coincided with the onset of communism dissolved when communism disappeared. As a consolation, not a single communist federation, including the Soviet Union, Czechoslovakia and Yugoslavia, was destined to survive the fall of communism in its original form, not only because these federations were established in communist states, but because communism destroyed their natural and rational elements. The international community, that is, Europe, not only failed to prevent the disappearance of Yugoslavia, but tried to underpin and defend it legally by a famous report by Badinter's Arbitrage Commission. Just to remind you, the Arbitrage Commission was set up in the autumn of 1991, when an internal crisis and armed clashes broke out in the former Yugoslavia. It was composed of the presidents of constitutional courts of five EC countries, and was headed by Robert Badinter, the President of the French Constitutional Council. According to the Arbitrage Commission report of 10 December 1991, if the central organs of a federation are no longer able to function, the state is in dissolution, and as a consequence, each federal unit might legally use its original right of unilateral self-determination, or more precisely, secession. This report and its implementation were not in conformity with the Yugoslavian constitution, the Helsinki principle of inviolability of borders, or conditions for the recognition of new states as stipulated by the 1932 Montevideo Convention.

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In a broader context, the interpretation by the Arbitrage Commission can hardly be brought into accord with the political and legal tradition that describes the right to secession as contradictio in adiecto, a non-right, rather than a right. According to the Arbitrage Commission, every federal state would be a non-state in a sense, that is to say, a potential state in dissolution, whereas its parts would be the states in the true meaning of the word. Implicitly, the commission's interpretation suggests that unlike federal states, the dissolution of unitary states is legally impermissible. The commission built its case on the example of Bosnia and Herzegovina, one of the six Yugoslav federal units in which central organs did not operate, but which was not a state in dissolution after international recognition, because it was nominally not a federal state. Contrary to the report by the Arbitrage Commission, the prevailing opinion in public law tradition and practice is that a unilateral right to secession cannot exist. Such a view was defended in practice by United States President Abraham Lincoln, and has recently been provided with a thorough theoretical rationale in a famous ruling by the Supreme Court of Canada in 1999, on a referendum for the secession of Quebec. The latter determines that the right to secession is feasible only under the principle of selfdetermination of a people within the international law, and only when it concerns colonies or oppressed peoples that are denied participation in power and access to democratic institutions and possibilities of development. In all other cases, the people are expected to exercise self-determination within their own state, while a possible referendum at which they would come out for or against secession must not be unilateral, but rather a matter of agreement, and legally defined in detail. The rules and procedures of a referendum must be crystal clear, a notion implemented most thoroughly and consistently in the Canadian Clarity Act of 2000. This is how things stand when it comes to the dissolution of Yugoslavia. The state that existed for more than 70 years disappeared in less than a year. Yet all this falls in the domain of history and historic responsibility, which is not the subject of my interest at this conference. My intention here is to answer the question of whether federalism was or was not of any help in a bid to preserve Yugoslavia. Also, what are the effects of federalism on the fate of Yugoslavia? And finally, how different modalities of federalism can affect the future of what is left of the former Yugoslavia - the Federal Republic of Yugoslavia (FRY) - the Serbian-Montenegrin federation? Yugoslavia was established in 1918, as a unitary, multiethnic state, the character of which was clearly demonstrated in its name - the Kingdom of Serbs, Croats and Slovenians. It is not often that the name of a state includes the peoples it is composed of, a fact which in this case reflects the need to recognise their identity. Of course, the constituent peoples of the first Yugoslavia, including a confession that was given a partly constituent status - the Muslims - did not territorialize their status. Yugoslavia was a

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predominantly unitary state, which was first divided administratively into a number of smaller units (33), and during the personal regime of King Aleksandar, as of 1929, into nine governorships, the establishment of which annulled the boundaries of the historic areas. This does not mean that there were no advocates of federal restructuring in the first Yugoslavia. On the contrary, they could be found among Serbian politicians and parties and, of course, among their Croatian counterparts. The federalisation, if not confederalisation, of Yugoslavia based on ethnicity began asymmetrically with the creation of one (con)federal unit, the Governorship of Croatia, following a mutual agreement by the Croatian and Serbian ruling parties shortly before the War, in 1939. Unlike its predecessor, the second, communist Yugoslavia was established formally as a federal state, but federalism was present as much as the separation of powers and pluralism could be in an authoritarian, one-party state. The number of constituent peoples or nations doubled in the second Yugoslavia: apart from Serbs, Croats and Slovenians, this status was granted to Macedonians, Montenegrins and, at a later date, Muslims. (Since the Dayton Peace Conference, the Muslims have been called Bosniacs). Consequently, the state was divided into six federal units, with each nation given its own, parent federal unit, except Bosnia and Herzegovina (dubbed "Yugoslavia in miniature"), in which there were three constituent nations - Muslims (Bosniacs), Serbs and Croats. It is important to note that all the peoples, not only the Serbs as the largest ethnic group, were dispersed in other federal units too. Unlike other federal units, Serbia had two provinces - the Serbdominated province of Vojvodina in the north and the Albanian-dominated province of Kosovo in the south. In the 19705, the rights of federal units were broadened considerably. Each of them was dominated by a national communist party under Tito's supervision. Their status gave the two provinces in Serbia certain prerogatives of federal units, but not all of them. The system operated and remained in place during Tito's lifetime, despite the fact that the federal units had the right to veto, which made it possible for them to block the decision-making process. After the death of Yugoslavia's president for life, the system, as one researcher put it, lost "the immovable prime mover", or an unopposed arbiter. A crisis broke out, which intensified the conflict between opposed national political elites, gave rise to calls for secession and eventually led to armed clashes. Once a six-member federation, Yugoslavia was reduced to two federal units in 1992 - Serbia and Montenegro. Prior to this, through referendums and declarations of independence and sovereignty, adopted between December 1990 and November 1991 by the republican parliaments of Slovenia, Croatia, Macedonia and Bosnia and Herzegovina, "the republics expressed their desire for independence", as the report by the Arbitrage Commission read. The referendums in Slovenia and Croatia were held until

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15 January, while a referendum in Bosnia and Herzegovina, held on 29 February and i March 1991, was specific in that the second largest constituent people, the Serbs, did not take part in it. Of the total number of voters, 63.04% participated in the referendum, and mere 62.68% voted in favour of "a sovereign and independent Bosnia and Herzegovina". In other words, only some 40% voted for independence. Yet the commission, on the basis of this and the fact that a few republics did not participate in exercising power in the federation, and that the authority of the federation was not effective, concluded that "the SFRY [Socialist Federal Republic of Yugoslavia] was in dissolution". The propositions of the commission implied that Yugoslavia was dissolved into its six components, six federal units, which could unify mutually. The post-communist ruling parties, led by Slobodan Milosevic in Serbia and Milo Djukanovic and Momir Bulatovic in Montenegro, used this right when, in April 1992, they influenced significantly the drafting and promulgation of the third Yugoslavian constitution. At this point, it is necessary to recall a few important historic facts. Of all the newly created states formed after the collapse of the former Yugoslavia, only Serbia and Montenegro were independent and internationally recognised as far back as the nineteenth century, following the 1878 Berlin Congress. All the others (Slovenia, Croatia, Macedonia, and Bosnia and Herzegovina) did not earn international recognition before the late twentieth century, at the beginning of 1992. Having brought their statehood in Yugoslavia after the First World War, Serbia and Montenegro were longer together in a single state, than independent of each other. What happened next? Five years later, Montenegro's ruling coalition, headed by President Djukanovic, began to contest the Yugoslav federation, arguing that the 1992 referendum in Montenegro was not free, that the federation was ineffective and that Montenegro, as a much smaller federal unit, could not be equal. The defeat of Slobodan Milosevic in the September 2000 election, which was also an end to his regime, did not change the arguments in favour of an independent Montenegro. Quite the contrary, this appeared to step up the independence rhetoric. Furthermore, the advocates of Montenegrin independence claimed that the right the Arbitrage Commission granted to all the republics did not have a one-off and timelimited character, and that, accordingly, it was not consummated either. The position maintained by the ruling coalition in Montenegro, relying on a slim majority in the electorate, was that the FRY effectively did not exist, and that the two republics should seek international recognition first, and then, possibly, form a union of independent states. The Montenegrin authorities put forward this view on the political platforms that emerged in the summer of 1999 and at the end of 2000. Even though the EU had already advocated the survival of the common state under the formula "a democratic Montenegro in a democratic Yugoslavia", it demonstrated an explicit commitment to this tenet in the

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autumn of 2001, when it engaged the EU High Representative for Common Foreign and Security Policy in the search for a solution that would be acceptable for both Serbia and Montenegro. This solution was also supposed to bring to an end the fragmentation of the state territory, instability, and wars in the Balkans, while Serbia and Montenegro would be able to place their internal conflicts and desires in a European context. EU foreign ministers decided in Brussels, on 19 November 2001, to send High Representative Javier Solana to Belgrade and Podgorica in order to encourage a dialogue between the two capitals and reach mutually acceptable constitutional solutions within the Yugoslav federal state. After a few months of talks, the Belgrade Agreement was signed on 14 March this year, by representatives of the Serbian, Montenegrin and Yugoslav authorities and the EU High Representative. Thereby the process of disintegration of states in the Balkans was stopped. I do not say once and for all, but for the time being - yes, it has stopped. The idea of the unfinished dissolution of Yugoslavia was defeated. This has brought a relief to our country, to the politically polarised republic of Montenegro in particular, to the Balkans, to those who care about peace and stability, and to Europe. With myriad difficulties and impediments, work is underway in Belgrade and Podgorica to translate this political agreement into a legal act, a constitutional document, the Constitutional Charter of the state union of Serbia and Montenegro. What are the main characteristics of the Belgrade Agreement? What does it offer? First and foremost, despite all its inconclusiveness, it gives the common state an opportunity to survive and develop seriously. What we were pledged was a federal state that one part of it, Montenegro, did not recognise, but instead acted as an independent state, never missing a chance to underscore that non-recognition and independent activity. In other words, the federal state largely operated as an extension of the other federal unit - Serbia. What's worse, this actually tied the hands of Serbia and the federal state alike. In the end, this was the only compromise that could be reached, a compromise that is a benefit to Serbia, Montenegro, the region, and the EU alike. This is a compromise by which everyone wins, but no one wins it all. Nothing more could be possibly achieved, but with the passage of time, I would like to underline that things could and should be improved. There are states that used to be loose unions at one time, but have since solidified: the United States, for example. After all, time can show that the existing powers of the common state are insufficient, and that they should be broadened. With or without the Belgrade Agreement, it is perfectly clear that there is a minimum of powers that a state must have in order to be a state. Serbia and Montenegro governed their relations differently in the three former Yugoslavias. Now, they have a chance to do so in a completely new fashion, having learned from their delusions and mistakes. What is offered here is not only a constitutional but also historic discontinuity and a new

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beginning. Or more precisely, the opportunity for a new beginning. Hence the new name, Serbia and Montenegro, which is not the sole result of a mere compromise. Thus, Serbia and Montenegro introduced their full names into the state union. This does not mean the disappearance of the state - a superficial, wrong and malevolent interpretation we encounter occasionally. The Belgrade Agreement stipulates that after a three-year period the member states have the right to initiate proceedings for a change of the state status, that is, withdraw from the state union. The agreement is explicit, however, that the member state that decides to use this right will not inherit the international law subjectivity of the state union. In other words, the member states can bring up the issue of a change to their status, i.e. independence, in three years time (both Montenegro, which is more likely, and Serbia, which under the applicable constitution is not entitled to do so), but this issue is not opened automatically, and unilateral secession is out of question. The Belgrade Agreement is explicit that the referendum process of withdrawing from the state union must take into account internationally recognised democratic standards. These standards, on the other hand, are clearly against unilateral secession, as confirmed by the Canadian Clarity Act of 2000 that governs referendums. Serbia and Montenegro have spent more time in a single state than as independent states. They were together in very different governmental systems. In a monarchy and a republic, in unitary, federal and federalconfederal states, under the regimes of parliamentarism, dictatorships and in a communist party state. They share the same roots, while the Montenegrin and Serbian identities are interwoven and sometimes even identical. Furthermore, the number of Montenegrin citizens living in Serbia is far from negligible, while the number of Serbian citizens of Montenegrin origin exceeds today's Montenegrin population by far. When it comes to the state union of Serbia and Montenegro, it does contain confederal elements, but not solely confederal. The state union of Serbia and Montenegro is not based on a contract, but rather a constitutional act (charter), which is why it is not a mere union. The laws to be endorsed by the parliament refer to the citizens, not the member states - so it is not a confederation either. The first sentence of the Belgrade Agreement, reading "the agreement on principles of relations between Serbia and Montenegro within the state union", makes this perfectly clear. This is not a union of independent states (let's recall the Commonwealth of Independent States formed after the breakdown of the Soviet Union). Instead, this is the state union of Serbia and Montenegro. The state union with the international law subjectivity at that. In this context, this common state will abide by the principle on which every federal state rests - every citizen belongs to two communities - the federal unit and the federation. The federation is not composed only of

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the states that make it up, but also represents a new all-inclusive union comprising the citizens of all member states. It is a union of citizens as individuals, and a union of member states - it is a union of unions. On the other hand, the broader union and the narrower unions are separated, and they dispose of their own effective prerogatives of power. The structure of power of the state union includes institutions typical of any state, regardless of its government system (the parliament, the president, who, as in Switzerland, chairs the sessions of the Council of Ministers, the Court that unifies regular and constitutional court functions). The only difference is that the structure and powers of the state union have been reduced, but they are nevertheless original. Using the analogy of the creators of the American federation, the main objective was to create a union in which states' rights would be respected and federal power effective. While the United States constitution makers used the expression "a more perfect Union" for this construction, the term "a minimum but viable federation" was used in the case of Yugoslavia. Critics say that the reasons for unification of states are economic first, and then political, and that the opposite was done in the case in question, which is tantamount to building a house from the roof. They have clearly forgotten that the situation of economic separation was inherited, and that a political, that is, institutional integration is easier to reach than an economic one. What we are trying to do now is to build a house from the foundation, the only one we have left, which, bearing in mind national, historic, cultural and spiritual ties between Serbia and Montenegro, the Serbs and Montenegrins, is still strong enough to bear our new, restructured home. What I also have in mind are the interwoven and substantially linked economic interests of the two republics. Despite all the criticism, what are the advantages of the new constitutional system on the horizon? First, the Belgrade Agreement does not offer any illusions, idealism or unrealistic expectations. It reflects the reality of the situation and balance of power. Second, the dissolution of a state has been stopped. This means that Serbia and Montenegro, in geographical, historic, cultural and geo-political terms, would be a Central European and Mediterranean state at the same time. Third, we managed to buy some time, most precious to us at the moment. If nothing is done, three years may be too much time to waste, but if the process of integration (and harmonisation) within the state and with the EU gets off the ground, these years could be very important. Fourth, the new state is based on a compromise, but it is cheaper than its predecessors, which is a great advantage bearing in mind the poverty we live in. Too many human lives were lost for our previous common states, and we cannot allow ourselves anything like that to happen again. So many opportunities have been missed and so much time wasted that, to all appearances, this is our last chance.

WOLFGANG

SCHUSSEL

Federal Chancellor of the Republic of Austria

1 .

INTRODUCTION

Let me first of all express my appreciation to our Swiss hosts for the excellent organisation of this conference and in particular for the very substantial preparatory work. You have set a standard that will be hard to match for any future conference on this important and complex topic. The Conference Reader alone could serve as a standard text on federalism in all its aspects and it makes abundantly clear why this model of governance has proved so successful. Yet it also underlines why in practice no two cases are the same: any federal structure is the result of an evolutionary process rather than a drawing-board design. As I will try to show, identity is the pre-requisite of any federal model's success: unless each constituent part of a federation has and maintains its particular identity, the model will either implode or - in the worst case - explode like post-Tito Yugoslavia. 2.

WHY A U S T R I A IS A F E D E R A L R E P U B L I C

"Ce qui reste, c'est 1'Autriche" (What remains is Austria). Thus the then Prime Minister of France Georges Clemenceau described the birth of our nation when the map of Europe was redrawn at the end of the First World War. Only somebody with a Frenchman's understanding of nationhood and state could have said anything like that. At the time it would have been much more correct to state "what remains may in time become Austria". Without going into too much detail, a little historical background is necessary. The Habsburg monarchy was a multiethnic empire. Austria was not a nation but another name for the house of Habsburg, based on the original

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duchy of Austria, which basically comprised only two of today's nine Lander. The inability to deal with the development of nationalism in Europe in the nineteenth century - for instance, as some historians have suggested, by giving the empire a truly federal structure - was one, if not the main contributing factor to the end of the monarchy. What remained were parts of the core possessions of the Habsburgs after they had succeeded the Babenbergs as Dukes of Austria, a small slice of Western Hungary and the - until Napoleonic times - Archiepiscopate of Salzburg. In two cases, the final borders had to be decided by referendums. However, in the meantime this new republic had to get back to work and be governed. Provisional structures took over and work on the first Austrian constitution began. Unsurprisingly, given the strong historical identities and the distribution of political powers, the constitution of 1922, substantially amended in 1929 and still in force today, created a federal state with a delicate balance (very much simplified: to counterbalance the sheer demographic weight of the former imperial capital Vienna). In the case of Austria, federalism resulted from strong historical roots and the need to find a political balance. There were no ethnic, religious or linguistic reasons for this choice. The motive was not internal conflict prevention or resolution, but first and foremost the need to give this new state a reason to exist. It took the successive tragedies of civil war in the 19305 and annexation by Nazi Germany for Austria to emerge after the Second World War as a country secure not only in its borders but also in its collective mind. 3.

WHY WE BELIEVE IN F E D E R A L I S M

Any model has to stand the test of time. I am sure that federalism has the better arguments and I would like to outline some of them. As a matter of principle, decisions in democratic systems will be more legitimate the closer the decision-making level is to the citizens concerned. At the same time, a number of issues are better dealt with on a higher level, either because of economies of scale, or the need to establish common standards in a larger area or to pool forces to successfully meet common challenges. Traditionally these issues were security, foreign policy and a common currency. Today, in the face of globalisation, with a dramatically increased number of political players, the situation has become much more complex. Add to that the impact of the media and the increased need for speed in political decision making, and it becomes very clear where the advantages of a federal structure lie. To give you a very practical example. As you may know, Austria, together with neighbouring Germany and the Czech Republic, was recently hit by the worst floods for many decades. Disaster response structures in Austria

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correspond to the size of the event: a local problem will be dealt with on the district level, a bigger one by the governor of the affected Land. The federal government will step in, once two or more Lander are hit. All efforts are coordinated, each level has a precise role to fulfil. As devastating as these floods were, causing damage going into the billions of Euros, this system worked incredibly quickly and efficiently. I seriously doubt that a centralised disaster response system would have even come close to matching this performance. Local knowledge and shorter chains of command certainly play a role, but I believe that it is mainly the naturally higher motivation of people trying to help themselves and their own neighbours that is responsible for this advantage. But I am also very happy to note the quick and positive European response leading to the creation of a disaster relief fund. 4.

LEGITIMACY -

IDENTITY -

DIVERSITY

Apart from this rather technical argument there is, of course, a much more important political one that has proved to be a key to the continued success of the federal model: identity. I do not think that anyone will dispute the importance of continued public acceptance of political institutions in democracies. No matter how effective and efficient their performance, our citizens also have to feel themselves well taken care of, they have to be able to identify themselves with their elected representatives and their work. Even a medium sized European country like Austria with a smaller population than for instance New York City is culturally far from homogenous, and is all the richer for it. Federalism allows for plurality in unity. That is a precious asset even in cases where a federal structure does not have to bridge a huge cultural gap. As we all know, other systems can and do work, particularly if they have become popularly accepted. Trying to force a centrally organised country into devolution could well be completely unacceptable to a vast majority of its citizens. I would only argue that such systems have a much bigger problem in ensuring minority rights and that they are also structurally more likely to take wrong decisions. A federal system provides checks and balances by its very nature. While that may not make life easier for the federal government - as I will be the first to admit - the need to negotiate many issues with the Lander generally leads to decisions taking the interests of the citizens affected much better into account than the most enlightened policy devised at a desk far removed from where it will be implemented. Vice versa, federal powers ensure a certain control over the decision making of the constituent entities. Federalism, like democracy, is not perfect, but it is the best system we know.

570 Wolfgang Schiissel 5.

COSTS

In the political debate in Austria it is sometimes argued that it is a luxury to maintain a multilevel federal system, in particular since we joined the European Union (EU). We have heard proposals to reduce the number of Lander as well as to redistribute legislative powers upwards with a view to saving money. This argument is based on the assumption that Austria as a whole, at least in terms of population, is no bigger than some of the German Lander and neighbouring Bavaria in particular. I believe that we are dealing with structures deeply rooted not only in history but in the hearts of the Austrian people. In a federal structure size does not matter - but efficiency certainly does. Federalism can never be a static model. From time to time we have to take a hard look at the distribution of labour, the respective competences and the sharing of the fiscal burden as a matter of course. This is never an easy process, since the system itself can all too easily be used for trying to pick the raisins from the cake. It is always a political temptation to be the one to present the nice things and to leave less popular measures to others. But this is a fact of political life in general and only becomes more visible in a federal system. The key to making it work properly is to find the right balance of rights and obligations across the whole system. 6.

PLURALITY IN UNITY

I have already mentioned some arguments used in favour of increased centralism in the name of higher efficiency. The chances for proposals of this kind to gain enough political support in Austria are very slim. However, federalism may also come under threat from the side of the regions. This threat is anything but imminent in Austria, but we have heard voices arguing for strengthening the role of our Lander that would definitely upset the current balance to the point where some of the federal government's core competences would in fact be hollowed out. To some extent these ideas mirror the basic approach of some centralists to eliminate one level, in this case the federal one, particularly in the light of developments in the EU. Such an approach betrays the very idea in whose name it is proposed. Plurality in unity can obviously only work if you have both: plurality and unity. The more unity is reduced the higher the risk of fragmentation into definitely non-federal entities. The contradiction is evident. I do not want to be misunderstood: I very much support strong Lander in the federal system, so it can continue to function properly. But I certainly cannot see the finality of our - or any other - federal system in its de facto dissolution.

57i 7.

Part E Plenary Speeches F E D E R A L I S M IN A C H A N G I N G EU

Of course, developments on the European level present a new challenge to federal states on our continent. In particular, the debate on the future of Europe has lifted the rather low-key, more or less academic discourse on federalism straight to the political level. A critical review is needed of what we want to be done on the European level in the light of a dramatically changed political and economic environment. This effort is overdue and necessary, independent of the enlargement process. There is a certain tendency for centralisation in Europe. Where we really need a stronger Europe is in the fields of economy, the common currency and foreign and security policy. But we also need a better balance. 8.

A F E D E R A L EU — A E U R O P E OF R E G I O N S ?

Before closing, allow me to take a look into the future. I usually abstain from getting into the rather academic question of the finality of the European project. From a purist's point of view the European construction is certainly not pretty - but it works, and it works much better than many think. It is also not coincidental, much less misconceived, but the result of our political reality. That reality has been changing, and quite rapidly, over the last decade. Right now, we have to adapt the Union to the new political and economic environment as well as ensure that the larger Union has efficient and effective working structures. No more, no less. We have to take a pragmatic and truly European approach. Still it is tempting in the context of this conference to ask whether Europe might eventually become a true federation. We certainly have all the elements, the practical experience and the proven ability of federal systems to guarantee plurality in unity; what we distinctly lack is the political will and even more importantly - the public support. Unlike our member states, Europe as yet has no historic precedent, no identity and by definition no national fervour that could drive public demand for European statehood. Still that may well change in the decades to come. I am completely certain, however, that such a European state could only be a federal state.

GUY

VERHOFSTADT

Prime Minister of the Kingdom of Belgium

It is quite a paradox that federal states have been in existence for at least 200 years, but that, as far as I know, it is only in the last few years that these federal states have decided to meet each other as federal states in an organisation to promote federalism, and to exchange knowledge and experiences on the subject. So I am more than ever convinced that it was an excellent idea on the part of the Canadian authorities to launch the Forum of Federations four years ago. Let me also congratulate former president Arnold Roller and his team for the way they have organised the International Conference on Federalism this year in this beautiful city of St Gallen. I am in no doubt that the discussions of the last few days between people from such different countries have sharpened-up our opinions on the working of federal systems. Certainly the Swiss experience of federalism, dating back to 1848, remains an essential key to our understanding of the system. I do not think one can exaggerate the importance of meetings like this. It is essential that federal states - some of them very old, like the United States, some rather younger, like my country - should talk to each other about their own experience in making federalism work. Federalism is certainly no simple institutional system, but it is getting more and more popular because it is so flexible and adaptable, and better suited to organising fragmented societies than the old nation state. The nation state is a phenomenon that originated in Europe some 400 years ago. Its first ambition was to try to maintain one faith in one country, after Protestantism had smashed the unity of Christianity. Then, from the seventeenth century onwards, rulers like Colbert in France or Cromwell in England tried to unite their country economically. And two

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centuries later another ambition to create greater unity arose, for the purpose of education and administration. With the benefit of hindsight one could easily qualify this kind of ambition as being slightly pathetic. But let us not forget that it was fuelled by rational thinking, by a logic in which a state administration could not be organised efficiently without a minimum of unity in the country. The more unity, the more efficiency, such was the thinking. But reality was not ready to fit the scheme. People inside a territory are almost never an identical lot. So when, from the nineteenth century onwards, democracy broke through, the ambition to create nation states turned into bloody conflicts. Certainly in Central and Eastern Europe it generated ethnic cleansing in which millions were killed or obliged to emigrate. The great line of European history in the last one and a half centuries is that wherever there was a religious, linguistic or even socio-economic dispute between peoples or territories, different nation states came into existence. In 1870 there were 14 states in Europe; 125 years later the number had risen to 40. Half a century ago, after the Second World War, a reaction set in against the permanent splitting up of the continent. We call it the European Union (EU), which started with six countries in Western Europe in 1950, and which will span almost the whole continent somewhere around the year 2020. For the Swiss this sounds in a certain way like a familiar story. The same thing happened in their country some two centuries ago. Each religious or linguistic conflict, or even a conflict between city and countryside, as in Basel, ended in the creation of different nations. These nations worked together only for defence matters until 1848, when they all became cantons in a new federal state. Switzerland is one of the few European states with more than one official language. The other one in Western Europe is mine. Belgium came into existence in 1830 after a revolt in the Kingdom of the Netherlands, in which the rebels no longer accepted the centralist aspirations of the Dutch king who, for example, wanted to impose Dutch as the only official language. But the rebels of 1830 made the same mistake when they became the masters of the new country, Belgium, in which they wanted French to be the sole language for education and administration, although a slight majority of the people spoke Dutch. Thus started a struggle between French-speaking and Dutch-speaking Belgians, or Flemings and Walloons, as we call them. It lasted throughout the twentieth century. As democracy broke through the Flemings achieved equal rights for their language and culture. Flemings and Walloons now have their own regional authorities, with specific competences, an own parliament, own revenues and even a certain role in foreign policy. Besides this, we have created regional authorities for the small German community of about 70,000 people in the east of the country, and for the capital Brussels, where both Flemings and Walloons live.

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Tensions between Flemings and Walloons, which in the past have run very high, although they never became violent, have in the meantime been reduced to a level were they can be kept politically under control. Federalisation has made it possible to defuse never-ending discussions - for instance about the allocation of money for French and Dutch schools and universities - by the devolution of the competence. Financial efficiency was strengthened in this way. Formerly when one Euro was spent for one community, it was politically unthinkable that the other community would not receive the same amount of money. Nowadays regional authorities have a large degree of financial autonomy to spend their own money as they like. So I think my country has become a good example of how federalism, through its recognition of diversity, can still create more cost-efficient institutions than the old nation state of the nineteenth century. I am well aware of the fact that in my country there are people who point to the existence of something like six parliaments and as many governments to explain how complicated Belgium's institutional system is. They are not completely wrong certainly, but surely the financial benefits of Belgian federalism outweigh the disadvantages of its institutional complexity. So Belgium, like Switzerland before it, but in a totally different evolution, buried the old obsession of uniting the people of a nation state. This is clearly not without relevance, as more and more nations are creating a European Union. This Union originated out of the need to cooperate in socio-economic matters, now that smaller and even slightly bigger European nations have become too small to play alone on the world stage. The risk of course is that the need to cooperate generates a new ambition to create a European nation state. Should fiscal competition between the member states be tied up? Should pig meat be packed exactly the same way in Turkey as in Denmark? And above all, would it not be far easier and more cost-efficient to reduce the number of official languages in the Union to just two or three? These questions make it clear that if a democratic Europe ever wants to become a reality, it will have to be a federal Europe. What should be done together should be done together. What need not to be done together should remain apart. I know that the British especially tend to cultivate the misunderstanding that a federal Europe will automatically turn into a horrible European superstate. In reality Europe will never be a superstate if it becomes genuinely federal. And the Swiss and the Belgian experience can certainly inspire this federal Europe, as can the experiences of other federal states of the continent of course. Federalism will increasingly become the appropriate institutional architecture of the twenty-first century. The idea of unity in diversity, and certainly the far greater flexibility behind this idea, make the system better suited for democratic institutions that have to represent different tenden-

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cies and cultures in the population of a certain territory. It can at the same time be a dam against too much fragmentation, a flexible framework for international and yet not democratic organisations, a key to turning dictatorships into stable democracies, and a system to solve long-running conflicts. Let me explain this with a few examples. Saddam Hussein is an awful dictator. His power is, among other things, built upon the negation of the diversity of at least three cultures in his country: the Kurds, the Shia-Muslims, and the Sunni-Muslims. A similar reasoning can be made for the conflict between Israelis and Palestinians. I do not think that area will come to rest before structures have been created which largely decentralise the issues involved. Probably that process will create two different states, but even these states will have to keep some federal structures, as both will be confronted with minorities on their territory and with the highly complicated and symbolic issue of ruling the city of Jerusalem. Federalism can lower the threshold for democratising international institutions. One of the fears about creating a more democratic EU is that it will again give a free hand to nationalistic rivalries. The only system to cope with that risk is federalism. If the Union is confronted with an issue that threatens to divide it, federalism gives it the opportunity to defuse the question by sending it to decentralised structures. The only pain this will cause to European institutions is that they will have to take their own official aim of subsidiarity seriously. I want to apply the same reasoning to politics on a world scale. I do not think it necessary to repeat again how much more political authority is needed for a world that is rapidly becoming economically united, and in which globalisation produces many beneficial but also some very nasty results. But how do you realise such an authority without creating another kind of enlightened despotism lacking any real legitimacy? The answer again is: through democratic and federal institutions. Organisations on a world scale will only have some legitimacy if they represent more or less both the diversity and the population numbers in the world. I have pleaded many times over the last few years for global political structures based on cooperation within each continent, like the EU or Asean. Such structures could be a first step in weakening the supremacy of the rich countries in the world organisations today. Each of these continental cooperation structures needs of course also to be as democratic and federal as possible. I certainly do not exaggerate when I say that we have, with the Forum of Federations, opened an inexhaustible source of reflection and discussion. We have started a project aimed at the future, a project to organise the EU, a project to help solve conflicts in the world, a project to start the building of a world government. Let me therefore invite you to the next International Conference on Federalism, in Belgium in 2004. You will learn more

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about our own peculiar system of federalism. And it is my wish that the conference will especially address the issue of federalism in international institutions and the way we can build a stronger political authority for world affairs. Let us not be too timid and let us ask ourselves this question bluntly: could world federalism become a reality? In 2004 the Forum of Federations will only be five years old. I am convinced that then we will still only be in the first chapter of a long story. The future of federalism seems only to be beginning.

GIULIANO

AMATO

Vice-President of the European Convention, Italy

Thank you for your kind introduction, which is more than I deserve. And thank you, everyone, for inviting me to take part. I have many friends here, some of whom are accustomed to hearing me speak in another language, like my friend Prime Minister Chretien. But I very much appreciate the fact that you have asked me to speak in Italian - a perfect example of Swiss federalism in action. Before I begin, let me tell you a little story. During one working session of the current European Convention, a Convention member expressed the opinion that Europe could never become a democracy because of the different languages spoken there. A representative of the British parliament then asked permission to speak and said: "Someone had better tell the Swiss, they'll be very disappointed". Switzerland demonstrates that a plurality of languages is no obstacle to democracy; on the contrary, the fact of speaking several languages can enhance democracy. The Convention, and our experience of it, is unusual in a number of ways. It was originally constituted by the European Council for the purpose of reorganising and simplifying the existing treaties. That was its mandate. A few months on and everyone is saying that the task of the Convention is to prepare a European constitution. The mandate has changed, in substance and in terms of people's expectations. To the point where our Chairman (former French president Valery Giscard d'Estaing) defines the future product of the Convention as a traite constitutionnel, or constitutional treaty - a seeming contradiction in terms. But history tends to be made up of such contradictions. The question of a constitution for Europe - and our discussion of the matter - inevitably reminds us of the dual meaning that has always

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attached to the word constitution. Students of constitutional law and its history tell us that there have always been two contrasting notions of what a constitution is. On the one hand, a constitution is the source of legitimacy for the authority required to change the status quo upon the assumption that civil society in its existing form is unable to achieve the ends that need to be achieved. On the other, there is the idea of a constitution as limiting public powers so that they do not interfere unduly with the rights, freedoms and interests expressed by civil society, which alone make for the desired ends. Historians tell us that these two basic notions derive from the thinking of two great men who lived 400 years ago, Jean Bodin and Johannes Althusius (Althaus) respectively. Bodin believed in a legitimised central authority whose duty was to eradicate peripheral authorities; Althaus saw the covenant between communities as the constitutional foundation of their coexistence. This may or may not be so, but the point is that these two concepts have grown up alongside each other, initially in extreme ideological opposition, then managing to rub shoulders in the European constitutions of the twentieth century. On the one hand, such constitutions recognise rights that the public authorities may not infringe; on the other, they call on the same public authorities to eliminate inequalities and discrimination and ensure equal opportunities and security for all. Federal constitutions, though frequently different from each other, are on the whole an eloquent example of the possible conciliation between the two historical concepts of constitution. We may have forced Bodin and Althaus to come to an understanding, but we ourselves are not always willing to do so. And, as we contemplate a European constitution, the problem is again whether we can achieve a balance between these two concepts. There is a compelling need in Europe to guarantee the responsibilities and competencies of national communities - and even more of regional and local ones. But there is also a compelling need to make it possible for Europe to achieve the new objectives which Europeans are demanding: to live in a healthier environment, to enjoy greater security, to reduce poverty in the world, to create a world in which fundamental rights are respected, to ensure that the peace we Europeans have achieved among ourselves is the norm for relations among all nations - as Kant said it should be. We therefore wonder whether, for Europe too, the federal idea may not be the basis from which these two needs can be reconciled. The question is therefore: can Europe be a federation and, as a federation, can it find a balance between the need for guarantees and the need for power to bring about change? The European Union (EU) already incorporates principles characteristic of federal systems, beginning with the principle of loyal cooperation between states and the supremacy of Community law. This is fundamental.

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Daniel Elazar - whom we all regarded as one of the great theorists of federalism of our time - always wrote, and rightly so, that for a federation to function it is essential that its component parts be intent on collaborating with one another and not on working against one another. The purpose of a federation is to work together, recognising common objectives, in the knowledge that no one can achieve these common objectives by acting alone. And in achieving them, the members accept the primacy of the law that expresses them. At the same time, there is one feature of the EU which makes it very different from a typical federation: functions are transferred to the federal level, but not sovereignty. I do not know how a Swiss student of constitutional law would answer the question: is the federation sovereign? I would not complain if he said no - because in the history of European political culture sovereignty means exclusive authority. Typically, the term has been used to indicate an authority which brooks no rivals over one and the same territory and population. Organisations inspired by the thinking of Althaus deny exclusivity as a matter of principle. No one in a pluralistic system is the exclusive holder of public authority. Therefore, the fact that sovereignty in the EU has been gradually evaporating as functions have been transferred from the individual states to the European level distances it from seventeenth-century ideologies of statism, which persisted into the twentieth century on the European continent. And yet there are significant differences between the EU and a federation. For one thing, a federation is referred to as a state, a federal state, and therefore it must possess some sovereign attributes, like the state envisaged by Bodin. And, at this prospect, many Europeans draw back. Secondly, up to now Europe has followed a route quite contrary to the route leading to the establishment of a federation. When a number of states, cantons, Lander or regions decide to set up a federation, they begin by transferring military power, the power to make foreign policy, and the power to issue currency to the federation. Europe has taken 50 years to transfer the power to issue currency to the pan-European level, though its starting point was economic integration. And military power and power over foreign policy have for decades remained as clear markers of the enduring sovereignty of the member states. Now we are beginning to see some changes because the call for Europe to become more of a reality, which is one of the foundations of the European Convention in which I am now involved, has arisen from concerns about international policy and defence policy. There is a very widespread conviction among the citizens of our countries that we - each and every one of us - can only play a role in the world if we play it through Europe. But the conviction is also spreading that, in the international field, the sum of our national sovereignties is becoming the sum of our impotence. And the sum of our prime ministers and foreign ministers who run around, one

580 Giuliano Amato

after die other, visiting the White House, meeting with our friend Jean Chretien, or going to see the Indian prime minister, is a clear sign that none of them counts sufficiendy to give Europe an influential voice. We shall see what can be achieved by changing the way we do things. At the same time, it is clear that in the economic sphere, in which for decades we have been pursuing the process of integration, we can allow ourselves greater diversity than we have done until now. Even in a federation, not all the regulations governing economic matters need to be harmonised. On the contrary, given a common platform, diversity can be useful. In practice, what direction is die Convention taking? We are heading towards the unification of our treaties and a merging of the entities we have created. At present, we have a European Community (EC) and also an EU. Sometimes when we enter into negotiations with other countries, we ask them to conclude two treaties: one with the EC and one with the EU. We owe it to the patience of such countries that they are willing to go dirough with this procedure, which they generally do not understand because the same people are involved. They wonder why, with one hat on, we are the EC and, wearing another hat, we are the EU. So we are unifying the two, creating a single legal entity in international law: the EU . So you see tiiat we are moving gradually towards something that does not resemble a state, but is in some respects similar to a federation. We may be moving toward a separation of powers resulting in the existing model, which is more typical of high authorities created through an alliance of states than of federal organisations. This will be the case if we ascribe legislative authority to die European Parliament and to a single council for legislative affairs representing the member states (or radier their governments), and if we ascribe executive authority primarily to die European Commission, meanwhile leaving authority in foreign affairs and die guidelines ("Richdinien", as tiiey would say in Germany) for the future of the EU to a European Council made up of prime ministers. This arrangement, too, is more in keeping with the rules governing a federation than those of an alliance. And yet there will be somediing about diis Europe which makes it distinct from any federal organisation: on the one hand there is the European pillar expressed in the European Parliament and the European Commission, on the other, the pillar deriving directly from the member states which play a direct role in the European organisation through their prime ministers and other ministers. There is no federal organisation in which the member states have such direct involvement in the federal organs - at least, not to this extent. But a new form could emerge. We do not know. Of course, we have been speculating, with Chairman Giscard, as to when there will be a European government and what its composition will be; which elements will be derived from the competencies currently exercised by the

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European Commission, and which from the competencies of the European Council and the various councils of ministers. Our answer is that we are not yet able to say; it will be determined by the events of the next few years. I tried giving this answer to some of my ardently federalist friends, and they were very disappointed. They are looking forward to a D-day when everything will change - and in the very near future. But this is not the way things work. Those who know the history of the United States know that it decided to adopt a full constitution - and so progress from confederal to federal status - in 1787. But the constitution was not the final step. The transition from the member states being present in the Washington organisation to their electors being represented did not occur until 1913, when it was decided that senators, instead of being elected at one remove by the state legislative assemblies, should be directly elected by the electors of the member states. This was 120 years after the federal constitution was adopted. So, slow as we Europeans are, we still have a long way to go. And the constitution we shall soon be seeing will simply lay new foundations for further development.

GEORGE

FERNANDES

Minister of Defence of the Republic of India

During the last three days I have had the great privilege of meeting and interacting with several Heads of State, Heads of Government, elected representatives, civil servants, academics, private sector and non-governmental organisation (NGO) representatives, and youth leaders from a large number of countries. It has been a unique experience for me and I must say it was highly rewarding. If we are here today at this Plenary at the end of a successful International Conference on Federalism in this beautiful University of St Gallen, it is thanks to the Swiss government's commitment made at Mont-Tremblant in Canada's Quebec Province in October 1999. The Forum of Federations born in that meet has, in its short span of life, come of age, as is evident from the success of this conference. I would like to congratulate the Swiss government for its support and patronage which has made this conference a unique event in the development of the thinking and practice of federalism. I must also congratulate President Arnold Roller, Chairman of the Board of Directors of the International Conference on Federalism 2002, for his painstaking efforts to organise this extraordinary dialogue between the practitioners and thinkers of federalism. Here I must compliment all those who worked hard for the success of this program. I am happy to learn that the Forum of Federations has in the last four years organised several international conferences including one in India. What is indeed remarkable about the Forum of Federations is its emphasis on bringing about tangible improvements to the practice of federal governance. I congratulate the Forum and its office bearers, many of whom are present here, for having conceived this Forum at a time when the world seemed to be moving in contrary directions - disintegration of nation

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states and the formation of supra-national bodies. The Forum has done pioneering work and every country can learn and benefit from your efforts. Federalism is an idea on the move. There are several countries that have adopted federalism as a governing principle; there are many others who have improved the functioning of their federal constitutions. The newly emerging nations too look to federalism as a model to help deal with their complex problems. Federalism is the key to the preservation of the multiplicity and also peculiarity of a diverse society. For federalism to prosper, a climate of tolerance and a political culture of accommodation and consensus is a necessary condition. The post-Cold War world has been a cartographer's delight. In Europe alone until 1989 there were nine states under communist rule. In the same physical space, there are now 27 states. Almost all of them are wrestling with twin challenges. First, the economic crisis from which all are suffering. Second, all are facing a national crisis in which they are struggling to assert their individuality within the shattered framework of a common economic space. The disintegration of the Soviet Union and Yugoslavia led many analysts to predict the collapse of other federations. However, these predictions did not come true because federal democratic structures have the built-in capacity to withstand the stresses and strains arising out of diverse demands often bordering on secessionism. Federalism acts as a glue to hold together a country with diversities. Different nations have their own resilience to survive. The multicultural, decentralised Switzerland goes back 700 years. A country like Australia, which is an island set apart in the middle of an ocean, has its own safety valves. The Americans claim their ideology of Americanism is strong enough to keep them together. India's experience is equally instructive. The Indian constitution says that India is a union of states. The constitution, adopted by the Constituent Assembly on 26 November 1949, envisaged a strong centre. At that time, the overriding concern of the founding fathers of the constitution was the preservation of the unity and integrity of India. Moving the Draft Constitution, B.R. Ambedkar, the architect of the Indian constitution, had said in the Constituent Assembly that the use of the word "Union" was deliberate, because it conveyed something that is indestructible. The Drafting Committee wanted to make it clear that though India was to be a federation, it was not the result of an agreement by the states. India, which functions as a federal polity during normal times, can be transformed into a unitary state during emergencies. In fact, the Indian state has been variously described: a federation without federalism; a polity covered by some form of federalism - cooperative, executive, emergent, responsible, parliamentary, populist, legislative, competitive, fiscal, restructured, reluctant, and so on. It may be recalled here that K.C. Wheare was the first political scientist to describe the Indian constitution as quasi-federal. He said "The

584 George Fernandes

Constitution of the Republic of India is quasi-federal only" and it cannot be discussed as an example of a federal constitution. This was in the 505 of the last century. The major failure of the constitution was that it could not provide an integrated administration which worked under the elected bodies from villages to the centre. E.M.S. Namboodiripad put it succinctly in his note of dissent to the Asoka Mehta Committee report. Namboodiripad says: The constitution itself according to me, failed to envisage an integrated administration in which, apart from the centre and the states, there will be elected bodies which will control the permanent services at the district and lower levels. Democracy at the central and state levels, but bureaucracy at all lower levels - this is the essence of Indian polity as spelt out in the constitution.

Long before the constitution was adopted, Mahatma Gandhi had launched a nationwide campaign for what he termed: "Gram Swaraj" - Village Republics. He wanted decentralisation to reach each and every of the 700,000 villages, each village thus becoming a federal unit. After Gandhi's death his close follower Jayaprakash Narayan continued Gandhi's mission of Gram Swaraj through his campaign for "Sarvodaya"- upliftment of all rural people. It was another of Gandhi's followers, Dr Rammanohar Lohia, who conceptualised the four-pillar state consisting of the village, the district, the state and the Union as the instrument for federalising Indian polity. Today, these ideas have become a reality. As the Indian polity and government began to function as a unitary state, it was realised that only under a federal structure could the unique socio-cultural diversities of the country as a whole, and the states in particular be held together as a nation. Given the manifold dimensions of India's pluralistic society, the federal principle alone could offer a viable basis for the maintenance of a strong and united Indian state. Therefore, the search was on for institutional arrangements to improve the relations between the centre and the states as well as state and the lower echelons. The choice of an appropriate federal system for India was at the top of the agenda of concerned intellectuals, judicial and legal experts, social thinkers and political parties. By the late i g8os it was realised that the extension of the federal idea hinged on decentralisation at the sub-state level. The 73rd and 74th Constitutional Amendments extending participatory democracy and popular base to the villages and municipalities can be reckoned as the turning point since independence, reflecting the social realities of a federal polity. India is therefore an evolving "federal nation". By bringing the village councils and municipalities under Part IX of the constitution, India has moved towards multilevel federalism to accommodate its diversity and give vent to its people's aspirations. Balveer Arora and Nirmal Mukarji have expounded the idea of multilevel federalism for the

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emerging Indian situation. They are of the view that in large federal systems the "rising tide of pressures for participation in the political and developmental processes" and "concurrent pressures of integration and differentiation" result in multiple layering of structures. India had reached a point where it had become inevitable that without taking "cognisance of the layering of socio-political realities" the Union could not have survived. And multilevel arrangement in India is the new and ongoing search for new modes of adaptation to the pressure created by democratic development, designed to make the federal system more responsive. India moving from a two-level federation (union and states) towards multilevel federalism, with local bodies (village councils and municipalities) at the district level and below becoming the third level, has made the nation a cascading federalism; a federation of federations. It may be recalled here that India has vibrant autonomous councils to meet the specific demands of the regions, as per the constitution of India. This multilevel federalism should be seen as the structural means through which self-government goes all the way down to village councils from the centre. Local self-governing units in such a scheme will draw sustenance from grass-roots level political and democratic processes as well as effective people's participation. While the widening of the political base is perhaps the most important step towards federalising the Indian polity, there are several developments which have transformed the Indian federal system. The party system in India has undergone a sea-change from a dominant-party system to a multiparty system. It began in 1977 when the Congress Party was defeated for the first time at the centre, in the elections held during the political emergency. Since 1996, India has been continuously ruled by coalitions. Strong central governments based on robust one-party majorities in parliament have given way to coalitions that must cater to state-level aspirations. The advantages of a coalition in a country like India are there for all to see. Coalition governments have given federal units weight and voice. Coalitions also soften extremism. I must say here that coalitions have their inherent weaknesses as well. As they say "coalition is like a marriage where jealousy is more important than love". Thanks to federalism, India's states are making themselves heard and felt politically and economically more than they ever have in the 55 years since India became independent. It would be wrong to observe that India's central government is fading away. Nor is the United States government, which after the 9-11 tragedy seems to have assumed and exercised far more powers than ever before. Today, the centre is an intervener no more; now it acts as a regulator. We still have a long way to go, but the journey has begun and we have covered quite a distance. As far as India's cultural and linguistic diversities are concerned, we have managed them well by the creation of linguistic states. Besides meeting the aspirations of the people, such a step has also reinforced Indian federalism.

586 George Fernandes

If at times the centre and the states appear to be on collision course, it is the result of a chasm in terms of different projections of the order of priorities, one emphasising assimilations and the other demanding the preservation of regional identities, one thinking in terms of national security and the other nursing fear of the unknown. India's secular paradigm is equally worth emulating. The Indian constitution guarantees right to freedom of religion, and Indians of all religious persuasions - Hindus, Muslims, Christians, Sikhs, Buddhists, Jains, Jews and Zoroastrians - have the freedom to profess, practice and propagate their religion. There are of course conflicts, violence, even serious riots, particularly between Hindus and Muslims, but these are aberrations. The Indian state, the democratic institutions and civil society remain secular. Secularism is India's manifest destiny. McLuhan's concept of a "global village" appeared just a few years ago. India has for centuries practiced a policy of what we call "Vasudhaiva Kutumbakam" (the world is a family). Finally, India's single most important achievement in the last 55 years is the entrenchment of democracy. Bernard Levin, eminent British columnist, said a few years ago, while paying tribute to Indian democracy, that "India has kept the flame of democracy alight despite the darkness in the surrounding world". He further said, "if the democracy of India falls, the end of democracy itself will be in sight". The European Union (EU) is an exceptionally unique experiment in federalism and highly successful so far. The EU is a role model before us, which other regions of the world could emulate. In South Asia we have the South Asian Association for Regional Cooperation (SAARC). However, we are facing several problems in making it effective in meeting the needs of the region. We have many miles to go in South Asia to make the Association of South Asian countries closer to what you have achieved in Europe a federal forum which will focus on cooperation between South Asian countries, on human development devoid of conflicts and tensions. I am optimistic about the future. India is the world's largest democracy. And now on behalf of the world's largest democracy, I invite the International Conference on Federalism to India in 2005.

RUTH METZLER-ARNOLD Federal Councillor, Head of the Federal Department of Justice and Police, Switzerland

On the Road to a Community of Federalist States

Federalism is a living idea! Federalism is a reality! Federalism is in flux! The four days of this conference on federalism have made this very clear. I am delighted to be taking part in this final session with you today. "Learning from Each Other through Dialogue": the subtitle of this conference perfectly sums up what has been achieved in the work sessions over the last three days, and what we have heard from the three work session speakers in the plenary session. "Learning from Each Other through Dialogue": I am convinced that the opportunity to share your own experiences with others will also have deepened your understanding of your own situation, of your own country. In meeting others, in comparing notes with them, in discussing matters with them, we come to sense our own identity more acutely. This conference has been conducted in a spirit of mutual respect, trust and openness. And that framework has made it possible for us to conduct a dialogue that extended far beyond an academic exchange. What does federalism mean to me? I suppose you must all have asked yourselves this question. For me it is also a question of everyday experience. I live federalism in one form or another every single day, because the work done by my department involves a vast number of interfaces with the cantons and requires intensive cooperation between them and the federation. This is why I am especially pleased that Luigi Pedrazzini, President of the Conference of Cantons and in particular a representative of Ticino, is chairing today's panel.

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One example of an interface with the cantons in my department is internal security, where the cantons take precedence in police matters. Another is migration, where functions are shared between the cantons and the federation. We can also see federalism in the composition of the government. In Switzerland we have an all-party government in which the various areas and language regions of the country are represented. I have personal experience at both levels: as a member of the government of the smallest canton, and now in the national government. Every one of you who is or has been active at different levels has cause to know that the opportunities and limitations of federalism can be assessed differently, depending on your point of view. But ultimately the most crucial aspect of federalism is proximity to the people, in other words the closeness of government and administrative bodies to the citizen. This closeness ensures that we govern for the citizen. But we must not allow it to prevent us from acknowledging federal supremacy in complex matters such as foreign policy. Foreign policy must be conducted under federal leadership, but this does not mean that the cantons must be excluded from it. I should like to sum up the findings of the conference in six fundamental maxims. 1.

THE F E D E R A L I S T IDEA HAS A C L E A R N U C L E U S

Combining unity and diversity is clearly the core element of federalism. Diversity is often seen as an obstacle to unity, as something that simply has to be put up with. On the contrary: in the diversity of the world lies enormous wealth, which we must maintain and foster. Federalist states have found their own response to this challenge and to this tense relationship: they have adopted a multilevel structure. 2.

THE FEDERALIST IDEA IS IMPLEMENTED WITH GREAT OPENNESS

This conference has confirmed that federalist states have all found their own ways of combining unity and diversity. There are as many different ways of implementing the federalist idea as there are states. We often hear it said that federalism "differs from country to country", which reminds me of the answer that we Swiss often give when we are asked how we do something or other in Switzerland. The answer is often: "It varies from canton to canton!" This conference has also shown that supra-national organisations like the European Union (EU) incorporate federalist elements. Both supranational organisations and member states (in their relationship to the local level) can be shaped by federalist ideas.

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Part E Plenary Speeches F E D E R A L I S M HAS A F U T U R E

Globalisation on one hand, local and regional autonomy on the other: both these factors have given federalism a strong tailwind in recent years and decades. For a very long time states organised on federal lines - like Switzerland - have been asking themselves whether each of the levels still has sufficient autonomy and freedom of action, and have been trying to revitalise federalism. Various states with a centralist tradition have set off on the road towards federation. States that were born out of political turmoil - like South Africa, for example - have adopted de facto federative structures, and newly emerging - or newly re-emerging - states like East Timor and Somalia are beginning to take an interest in it. Numerous emerging and developing countries that were dominated by centralist ideas during the Cold War are discovering the relevance of federalism, partly under the supportive influence of national and multilateral development organisations. One major reason for the relevance of federalism was highlighted during discussion of the second topic: "Federalism, Decentralisation and Conflict Management in Multicultural Societies". In more and more cases of ethnic conflict, federalist solutions are being sought - as we heard this morning from Dr Nafis Safik. I am convinced that federalist structures are one way of avoiding fragmentation in such cases. Federalism thus has an eminently important role to play in conflict prevention and the preservation of peace, both now and in the future. 4.

F E D E R A L I S M IS NOT A M A G I C F O R M U L A

The accelerating spread of federative states and the growing strength of the federalist idea must not, of course, lead us to see the world through rose-tinted spectacles and sit back and relax. In federative states there is a recurrent danger of centralisation: the more complex the functions of a state, the stronger the tendency towards centralisation. The problem of minorities is a further threat: even federative states with a long history to look back on are familiar with persistent minority problems, some of them actually entailing the threat of secession. At first glance it often appears that greater regional autonomy can actually whet the appetite for independence. In countries where the nation-building process is not yet complete, the question arises as to how the aspiration for autonomy can be meaningfully reconciled with the equally legitimate desire for unity. 5.

FEDERALISM MEANS RESPONSIBILITY AT ALL LEVELS

For many a politician calling for more independence, decentralisation and hence autonomy for his or her region is the be-all and end-all. But that

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step is often merely the starting point. For the member states, responsibility in federalism means that when times are hard they must look to their own obligations, not run to the federation for support at the first sign of a draught. Cooperation and responsibility in federalism mean respecting the system, not blurring responsibilities by constantly playing "pass the parcel". But responsibility also means trusting in the member states to meet their responsibilities in full. Federalism needs responsibility. Without responsibility, federalism is a contradiction in itself. Responsibility for the interests of one's own regional authority is important, but it must not be allowed to dissipate in the blinkered pursuit of one's own interests. If federalism is to succeed, there must be a desire for dialogue and cooperation - both between the central state and the member states and between one member state and another. And there must be a readiness for solidarity: solidarity of the richer member states with the poorer, solidarity of the central state with member states under heavy financial pressure, sometimes even solidarity of the member states with the central state. That is how federalism will continue to gain ground as an organising principle for the global community. Dialogue about experiences, developments and future fields of action will thus become more and more important in the future. 6.

THE R E N E W A L OF F E D E R A L I S M

In the renewal of federalism or the discussion about centralising certain functions, finance is a significant factor - if not the major driving force! Federalism must constantly renew itself, but it must also constantly justify itself. A concept of oneself is not enough on its own to meet new challenges. In our everyday work as politicians we constantly come up against the limits of federalism. As convinced federalists we tend to focus principally on the opportunities and development possibilities that it offers. We could have done just that at this conference. But the important thing is that we know the limits. Exploring these more closely should be one of the challenges faced by subsequent conferences. Finally, on behalf of the sponsors of this conference, the Federal Council and the cantonal governments, thank you for your active participation in this dialogue on the future of federalism. I should like to thank everybody concerned - particularly Arnold Roller, former Federal Councillor and President of the Organising Committee. As a member of the Swiss government I am proud that Arnold Roller - my predecessor in my present office - has given us the benefit of his vast experience, thus contributing decisively to the success of the event.

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My special thanks are due to the students of St Gallen University, whose contribution to the success of this conference has been immense. I fervently hope that the city of St Gallen, and with it the Lake Constance region that borders three federal states, will leave everyone who has taken part in the conference with the happiest of memories. This country sees it as an obligation to continue to pass on its abilities and experience. The Federal Council thus regards closer international cooperation in the field of federalism as most important and will continue to pursue it by every means at its disposal. I am convinced that the International Conference on Federalism 2002 in St Gallen has given further impetus to the idea of partnership among federative states!

JEAN CHRETIEN Prime Minister of Canada

As Prime Minister of Canada, I am honoured to be here in St Gallen. I am pleased to see that the objective I initially set in 1999 at Mont-Tremblant has once again been achieved. Representatives of the world's federations, new and more traditional, have come together to share experiences and insights, and to gain a better understanding of the richness of the theory and the practice of federalism. I would like to share a few thoughts with you today on current Canadian realities in respect of one of your three conference themes: fiscal federalism. As a theory of government, federalism was always the first and best destiny for Canada. Indeed, I cannot imagine Canada as anything but a federation. Geographically large, with two founding languages and distinct regional cultures and economies, home to people from virtually every nation and culture on the planet, Canada needs both a national and provincial governments with balanced and important responsibilities. Only federalism allows us to enjoy the advantages both of unity and diversity. Through good times and bad, in war and in peace, through the vast technological transformation that has characterised globalisation, federalism has given us the flexibility to adapt to changing times and circumstances, permitting us to develop into one of the most open, advanced and prosperous nations in the world, with an exceptional quality of life. Don't get me wrong. Canada is not perfect. As in any democracy we have our tensions. We have made mistakes. We have had our disappointments and failures. But what is remarkable is how, over the long run, federalism has been a Canadian framework for exceptional social and

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economic development and a large measure of political harmony and partnership, in which the federal government plays an important role in leading and shaping major priorities with the provinces and territories. At the time of confederation, Canada was conceived as highly centralised state. Today, Canada is perhaps one of the most decentralised federations in the world. Our constitutional arrangements have afforded us the flexibility for change. Our distribution of powers was slightly amended in 1940, 1951 and 1964. And in 1982, it was my singular honour, as Minister of Justice, to introduce a Charter of Rights and Freedoms that entrenched our most basic freedoms in law, including minority language rights. It also recognised the principle of fiscal equalisation, where our less prosperous provinces are helped, through transfers from the national government, to offer services that compare with the richer provinces. In the 19508 and 19605, the federal government played a leading role in shaping health, welfare and post-secondary education programs in Canada. In the 19905 and into the twenty-first century, we have continued to jointly respond to tremendous challenges. We introduced an innovative new approach to reducing child poverty. In the context of the global knowledge-based economy, the federal and provincial governments have taken a number of complementary measures to strengthen our advanced research infrastructure and broaden access to post-secondary education. And we are working closely on the top priority of Canadians: a renewed and modernised public healthcare system for the twenty-first century. The foundation for all of this creative progress has been the extraordinary work that both the federal government and the provinces have done, with the support of all Canadians, to clean up our balance sheets. Our government has tabled five straight surplus budgets. We have slashed our total public debt as well as the size of our debt relative to our economy. This was not easy. And it did not happen without some federal-provincial friction. But we did it. But it seems to be the case, in Canada at least, that managing a surplus can prove to be as challenging as managing a deficit - perhaps more. The focus and discipline that united all governments as we restored order to our public finances has, to some extent, and in some quarters, been replaced by rising expectations, and a tendency to look to the federal government as a treasure house awash in surpluses that will never end. We are currently having a very lively debate in Canada about the comparative financial resources of the federal and provincial governments. Many of us here are in government. Our experience teaches us that social and economic needs always exceed available government resources. Too often in federations one level of government wishes it had the resources that it perceives the other to have. The reality is that both levels of

594 Jean Chretien government have to be prudent managers of the public finances. But all levels of government have to make choices. Whether to make social and economic investments or to cut taxes. In my view, it is illogical for one level to choose to reduce taxes and then claim that it lacks the fiscal resources needed for new investments. So today I would like to shed a little light on the facts and principles that will guide the Government of Canada as this debate continues to unfold. I will begin with the facts. The Canadian provinces have both die necessary financial resources and the authority to address their social and economic priorities. Indeed, provincial revenues in Canada have long outstripped federal revenues. Federal program spending accounted for half of all government spending in the early 19505. It now accounts for only one third. Recent federal tax cuts totalling $100 billion over five years will reduce federal revenues even further. And the huge deficits that preceded die new era of modest surpluses have saddled the federal government with debt servicing costs that are twice as high as for the provinces. The federal government's share of total own-source government revenues is smaller in Canada than in any other federation but Switzerland. And even in Switzerland, cantons do not have the fiscal weight our provinces do. The provincial share of government revenues is higher in Canada than in other federations because both levels of government, federal and provincial, have access to the four main tax bases: individual income tax, corporate income tax, sales taxes and payroll taxes. Moreover, our provincial governments, alone, have access to natural resource royalties, an important source of revenue in a country rich in natural resources like Canada. In the United States, for example, Washington collects such royalties. The exceptional fiscal weight of Canadian provinces is buttressed by the fact that they have the authority to set their own tax rates. Having stated the facts, I would like to close with some key principles that will continue to guide the Government of Canada in the future. The first principle is prudence. Not long ago Canada was in a deep fiscal hole. We got out of that mess through unswerving discipline and prudence. A prudence founded on an understanding of how swiftly a fiscal balance sheet can change, even in the short term. In the United States, for example, a projected $300 billion surplus has evaporated in a matter of months. Optimistic long-term revenue projections are just that - projections. Acting today on someone's forecast for 20 years from now could prove to be highly irresponsible for any national government. The second, and overriding principle, is partnership. The facts of the fiscal balance in Canada are, in the end, less important than the spirit of

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partnership and common cause that must be the cornerstone of federalprovincial relations in Canada. That is the constructive spirit we have always offered our provincial partners. To meet current and future challenges we must unite our will and our resources to achieve the objective that all governments share: building long-term prosperity and a better quality of life for all of our citizens.

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Authors

Abubakar, Dauda, Associate Professor, University of Maiduguri, Nigeria Afonso, Jose Roberto, Economist, Fiscal and Employment Affairs, Brazilian Bank of Development, Brazil Amato, Giuliano, Vice-President of the European Convention, Italy Aroney, Nicholas, Dr, Senior Lecturer in Law, TC Beirne School of Law, University of Queensland, St Lucia, Australia Basta Fleiner, Lidija R., Professor, Director of the International Research and Consulting Centre, Institute of Federalism, University of Fribourg, Switzerland Bird, Richard, Professor Emeritus of Economics, University of Toronto; Adjunct Professor, Director of the International Tax Program, Joseph L. Rotman School of Management, University of Toronto, Canada Blindenbacher, Raoul, Dr, Executive Director, International Conference on Federalism 2002, Switzerland Chretien, Jean, Prime Minister of Canada Crook, Richard Charles, Dr RC, Fellow in Governance, Institute of Development Studies, University of Sussex, United Kingdom Dafflon, Bernard, Professor, Chair of Public Finance, BENEFRI Centre for Studies in Public Economics, University of Fribourg, Switzerland Deiss, Joseph, Federal Councillor, Head of the Federal Department of Foreign Affairs, Switzerland

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Authors

Diedrichs, Udo, Dr, Senior Research Fellow, Institute of Political Science and European Affairs, University of Cologne, Germany Ehrenzeller, Bernhard, Professor of Public Law, Director of the Institute of Law and Legal Practice, University of St Gallen, Switzerland Feld, Lars P., Professor, Public Finance Group, Philipps University of Marburg, Germany Fernandes, George, Minister of Defence of the Republic of India Ferreira, Sergio Guimardes, Economist, Fiscal and Employment Affairs, Brazilian Bank of Development, Brazil Fkiner, Thomas, Professor of Constitutional and Administrative Law, Director of the Institute of Federalism, University of Fribourg, Switzerland Gdlvez, Xochitl, Head of the Presidential Office for Indigenous People, United Mexican States Habegger, Beat, Researcher, Institute of Political Science, University of St Gallen, Switzerland Haysom, Nicholas R.L., Visiting Professor, University of the Wiwatersrand, Member of the UN Panel of Experts on Conflict Resolution; Former Legal Adviser to the President, South Africa Hopkins, William John, Dr, Lecturer, University of Hull, United Kingdom Hrbek, Rudolf, Professor, Jean Monnet Chair, Institute for Political Science, University of Tubingen; Speaker of the Board of the European Centre for Research on Federalism, Germany Hueglin, Thomas O., Professor of Political Science, Wilfrid Laurier University, Waterloo, Canada Jeanrenaud, Claude, Professor, Institute for Economic and Regional Research, University of Neuchatel, Switzerland Joumard, Isabelk, Head of the Public Finance Unit, Economics Department of the OECD, France Kdlin, Walter, Professor of Public International Law, Institute of Public Law, University of Bern, Switzerland Kelknberger, Jakob, Former State Secretary for Foreign Affairs, Switzerland Kelly, MichaelJ., Deputy Director, Asia-Pacific Centre for Military Law, The University of Melbourne, Australia Khan, Rahmatullah, Visiting Professor, Raoul Wallenberg Institute, Lund, Sweden

5gg Authors Kincaid, John, Professor, Meyner Center, Lafayette College, United States of America Kirchgassner, Gebhard, Professor, Swiss Institute for International Economics and Applied Economic Research, University of St Gallen, Switzerland Koller, Arnold, Former President of the Swiss Confederation; President of the Board of Directors, International Conference on Federalism 2002, Switzerland Kostunica, Vojislav, President of the Federal Republic of Yugoslavia Lejeune, Yves, Professor, Institute for European Studies and Department for Public Law, Catholic University of Louvain, Belgium Linder, Wolf, Professor, Institute for Political Science, University of Bern, Switzerland Malinverni, Giorgio, Professor, Department of Constitutional Law, University of Geneva, Switzerland McCormack, Timothy L.H., Professor of International Humanitarian Law; Associate Dean (Research) and Director of the Asia-Pacific Centre for Military Law, The University of Melbourne, Australia Metzler-Arnold, Ruth, Federal Councillor, Head of the Federal Department of Justice and Police, Switzerland Musonda, Flora, Senior Research Fellow, Economic and Social Research Foundation, Tanzania Nakarada, Radmila, Dr, Senior Scholar, Institute for European Studies, Belgrade, Yugoslavia Oates, Wallace E., Professor of Economics, Department of Economics, University of Maryland, United States of America Polaschek, Martin E, Professor, Faculty of Law, University of Graz, Austria Rae, Bob, The Honourable Chairman of the Forum of Federations, Canada Rau, Johannes, President of the Federal Republic of Germany Roy, Ash Narain, Dr, Coordinator of International Studies, Institute of Social Sciences, New Delhi, India Sadik, Nafis, Dr, Special Adviser to the United Nations Secretary General, Former UNFPA Executive Director, Pakistan Saunders, Cheryl, Professor, Director of the Centre for Comparative Constitutional Studies, The University of Melbourne, Australia

600 Authors Scalia, Antonin, Associate Justice, Supreme Court of the United States of America Schindler, Benjamin, Assistant to the Director, Federal Office of Justice, Switzerland Schmitt, Nicolas, Dr, Research Fellow, Institute of Federalism, University of Fribourg, Switzerland Schiissel, Wolfgang, Federal Chancellor of the Republic of Austria Shah, Anwar, Lead Economist, World Bank, United States of America / Pakistan and Canada Thurer, Daniel, Professor of International, European, Constitutional and Administrative Law, University of Zurich, Switzerland Toure, Amadou Toumani, President of the Republic of Mali Vaillancourt, Francois, Professor, Research Fellow, Department of Economics, University of Montreal, Canada Varsano, Ricardo, Tax Studies Coordinator, Institute for Applied Economic Research, Rio de Janeiro, Brazil Verhofstadt, Guy, Prime Minister of the Kingdom of Belgium Villiger, Kaspar, President of the Swiss Confederation; Head of the Federal Department of Finance, Switzerland von Hagen, Jiirgen, Professor of Economics, Director of the Centre for European Integration Studies, University of Bonn, Germany Watts, Ronald L., Professor Emeritus, Institute of Intergovernmental Relations, Queen's University, Kingston, Canada; Academic Adviser to the Board of Directors, International Conference on Federalism 2002 Wessels, Wolfgang, Professor, Jean Monnet Chair, Institute of Political Science and European Affairs, University of Cologne, Germany