Economic dimensions of Federalism

There are yet not enough details on the proposed federal form of government that will replace our existing unitary government, so we will just look at the basics of a federal government as practiced in some countries in the world and assess/project the economic and financial impact if the Philippines shifts to a federal form of government. Hopefully, the consultative committee appointed by Duterte, the Congressmen, and Senators involved in the proposal are aware of these economic/financial dimensions and not just the political, that they will draft constitutional amendments with the details that will be acceptable to the people and will achieve the objective of improving people’s lives.

The push for Federalism is an offshoot of the perception and reality that the centralized power in a unitary government concentrated the economic development in Metro Manila and nearby provinces, and the farther provinces have a lesser share in this bounty. There are really other factors that distort development between places, such as natural resource, location in trading route, and even susceptibility to weather disturbance; but access to government resources is also one of them. The passage and the partial implementation of the Local Government Code have addressed and improved this situation, as validated by the recent Social Weather Station surveys, but more decentralization is needed, so the clamor by some sectors for Federalism.

The basic concept of Federalism is the creation of semi-autonomous states with authority and power over almost all domestic affairs, with the central government retaining national defense, foreign relations, the Supreme Court, and national taxation. The states will have its own elective legislature, an administrative bureaucracy, and state judiciary. The immediate impact of this is the financial cost of creating all these institutions and bureaucracy which may not be affordable by the states, even with the devolution of some of the taxes and revenues of the national government. The current budget of the national government at P1.3 trillion plus the P400 billion revenues of the local government will not be enough to build the structures and fund the operations of the state governments. Then the state governments will impose all forms of indirect taxes which may not be acceptable to the people.

Like any business or organization, the overhead expenses, (non-revenue producing expenses) are justifiable only in relation to the size of the market. This is why when designing a factory, a marketing organization, or service center, the potential market size or projected revenue is carefully evaluated. There is the danger that because politicians always want bigger projects and domain, they will create bureaucracies and infrastructures that will not be affordable and sustainable. Right now, there are government buildings that are badly maintained and dirty, some “white elephants,” and many overstaffed government offices. There is a big possibility some of the states will go bankrupt and the national government has to bail them out. This has happened in many federated countries.

Historically, most of the successful federal governments arose from federating already functioning/existing independent states with a desire for a bigger market for their good and services. The European city states in the Middle Ages up to the 19th century are examples, and they became successful federated states. The newer federated states in Asia, while they are surviving, have created powerful dominant political parties and personalities that have been in power for a long time.

While I am not totally against Federalism as it may work, the problem in the current Philippine situation are the proponents. The Congress majority who have dynastic self-interests, devoid of political principles, jumping always to the party in power, are not getting the trust of the people. The problem is “the singers and not the song.”