“Analysis on Main Advantages and Disadvantages of Devolution and Fiscal Federalism: Is a Hybrid Solution the Cure?”

1242 words 5 pages
“Analysis on main advantages and disadvantages of devolution and fiscal federalism: is a hybrid solution the cure?”

All countries in the world, regardless their degree of development, size, complexity or their form of government, must tackle an important choice when it comes to decide how the power is distributed between the central government and the sub-national entities who exercise governmental functions at local level. The two possibilities at the end of the spectrum, i.e.: complete decentralization of powers to local bodies on the one hand and total centralization of administrative and fiscal powers in the central government on the other hand, are often not feasible since both entail downsides that could hinder the sound
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For instance, if local governments are responsible for redistribution of tax revenues, low-performing SOEs could lose their eligibility to obtain shares of fiscal transfers, thus forcing them to find ways to increase their performances in order to remain in business.
Last but not least, fiscal devolution can also strengthen the transparency of the relationship between tax-payers and government; in fact, the former will now see locally and directly how their taxes are used, therefore reducing some opportunistic behaviors related to avoidance of tax payments.

Federalism naturally also entails disadvantages. In fact, depending on the geographical structure of the country taken into account, such decentralization could also entail an uneven development of sub-national provinces and regions. In fact, if the sub-entities are profoundly different in terms of resources and economic conditions, powers’ devolution potentially poses the risk of even greater discrepancies between them, eventually undermining both the sound functioning of the country as a whole and its economy, leading to national break-up. For instance, based on the latter reasoning, Italy’s government, fearing that decentralization would have left behind the Southern part of the country, which, due to historical reasons,