Federalism and Business - Essay Example

?Topic: Benefits of Federalism to Businesses XXXXXXXX XXXXXXXX XXXXXXXX XXXXXXXX XXXXXXXX Federalism is ‘the idea of a federal organization of more or less self-governing units’ (Azam, 2005, 4). According to Obinger, H., Stephan, L. & Francis, G. (2005, 14), a majority of stable and economically developed countries use a federal system of government. A federal government mainly differs from a central government due to the closeness of government operations to the public. There are many advantages of a federal government. The following paper looks at the benefits of federalism specifically to businesses. A federal system is favourable than a unitary one because the state territories can be used as laboratories to try out business policy changes such as several fusions of laws, technological adjustments and tax policies. New policies are important to promote competitiveness as time goes by. It is easier for a federal government to perform experiments on policy changes since it can use a selected state as a ‘lab rat’. This experimentation phenomenon has been successfully used severally in the UK in health, education and economic policies (Martin & Sanderson, 1999, 249). If a policy leads to better business performance in the selected state, it can then be used throughout the regions. If disastrous, the federal government can correct or control the effects more economically unlike a central government. Centralized governments employ more of similar policies in the entire area of governance. They are therefore reluctant to try out new policies due to extensive risks likely to affect the entire economy (Rich & William, 2002, 58). State governments have more information on their constituents’ needs than the central government. Presumably, decentralized governments are closer to their constituents and are more likely to have better knowledge of local cost conditions and preferences. If such information is publicized, businesses can be able to take advantage of the market niche that needs to be filled. Even though the central government can theoretically employ local agents, they will probably have less political incentive to put into account their constituents’ needs above those of local government agents. The states will therefore have a relative advantage over the central government in experimentation and creating variation. Federalized governments are better supervisors of business and business related activities. This is as a result of reduction in complexities associated with bureaucracies in centralized governments. Federal governments can therefore be said to be more effective in performing their supervisory duties to the public. According to Lord Bryce in Zavodnyik, 2011 (p65 - 68), the growth in civil order in the United States has been as a result of state governments ability to closely monitor affairs of the citizens than congress was. As per Zavodnyik, this is one of the factors which drove USA to being one of the largest and most organized economies in the world. The US through its states system can better enforce business contracts in the states. It can also perform more effective control in the respective state markets due to ‘closeness’ of the government to the people. This reduces counterfeits and the number of transactions performed in the black market. Fabbrini 2009, in the book ‘Democracy and Federalism in the European Union and the United States: Exploring Post-National Governance’ seconds this pointing the US and UK as the countries with the lowest levels of counterfeit products in their territorial markets. Even though the governments may use the federal government to reduce illegal trades in order to maximize on the amount of taxes it collects, this promotes businesses whose markets are put at risk by counterfeits and illegal transactions which are expensive (European Center for Security Studies, 2010, 103). This creates a conducive breeding ground for businesses since it means less bureaucracy and red tape measures which usually cause unnecessary delays in business registration processes and product standardization. Federal governments offer better prevention of wasteful lobbying. It is easier for groups pursuing special interests to lobby for funds or services in the case of small governments as compared to one large centralized government. This is as a result of reduced bureaucracy associated centralized governments. The business community uses lobby groups to liaise for better conditions for business such as liberalization of markets (Robert, 2002, 101). Lobby groups may also ask for financial assistant from government in times of tough financial conditions affecting specific regions of the entire government (Farole, 1998, 59-60). Federal governments are in a position to better understand concerns of business than central governments. Federalism therefore boosts business development. Stability is a fundamental virtue in any government for business to operate with confidence and make long lasting progress and investments. According to Geoffrey (1999), businesses highly value political stability since they are most likely to suffer in case of unanticipated instabilities such as mass actions and political violence’s. For example, Kenya is currently in transition from a unitary form of governance to devolved governments. This is because of the 2008 post-election violence which reduced economic growth from 7.5% to 1.5% in the same year. Central governance was blamed to cause the instability since transparency in the voting system could not be verified due to complexities of central control of the electoral process (OECD, 2010, 170-173). This reduced the level of investment and business performance in the country. Federalism avoids such disturbances and hence is more preferable for business. Federal governments are more efficient compared to central governments. Like any other institutions, governments will tend to act in a monopolist-like manner if given the chance. This locks out all the benefits associated with free competition models of business. Inefficiency in government can be manifested in high taxes is countries which use a centralized governance. Majority of these countries are in Africa which has the highest levels of tax rates in the world. Economists who have formulate the model of public choice theory of government also associate inefficiency with central governments. The model is founded on the suggestion that government agents just like any other person act from rational motives of self-interest. They therefore have an in built incentive to carry out programs in such a manner that they reduce the portion of a program’s intended budget really received by the proposed beneficiaries, while the surplus remaining is utilized to foster the administrators’ interests (Gerston, 2007, 124). Federalism is therefore important to businesses since they will flourish in an efficient market. Australia’s public universities’ system is a good example of efficiencies associated with a federal system. When the public education system was run by states, its universities were more efficient and had a flattened management profile. Even though the system was not perfect, it proved to be efficient in that one day a week was often enough for a dean to carry out his/her responsibilities. The vice chancellor operated on a part-time basis and also took part in research and teaching. The involvement of the commonwealth only comprised of funding scholarships and capital grants which any student who performed better than the average on the final examinations could obtain. As a result, 70% of students were able to finish their tertiary education without paying any fees at all. This change started when the Commonwealth took over the financial control of universities in 1974 enabling the universities to gain access to the monopoly power that the Commonwealth had over income taxation. The resultant surplus was more and more utilized on expansion of bureaucracy in both the universities and the government. Later on, the Dawkins revolution came in and totally centralized higher education system. This resulted in a huge increase in paperwork demands and non-academic activities. Nearly every student was paying fees and accumulating a large amount of debts through the Higher Education Contribution Scheme system (Geoffrey, 1999). Applying this example to the business sector, a federal government is more likely to afford tax cuts and subsidies. It is therefore able to make transfers to the business sector just like the education sector in Australia. This is because of efficiencies associated with a federal system as opposed to a central governance system. This is good for business it will reduce cost of production and investment. Businesses will therefore be able to increase their revenues by increased production output at low cost just like the Australian education system produced graduates who finished their tertiary education without incurring any education fees. Another advantage of federalism is that it promotes social capital because there are more opportunities for citizens to take part in the public life and the political process. Citizens are better enabled to determine the direction which politics take due to division of power between the national government and the states (Mazzone, 2001, 42-43). With more and more people having their say in the political system, local and small business are empowered to influence running of politics. Such businesses can therefore form groups that will affect state politics involving matters such as security, taxes and infrastructure. This means that common business men can have their interests better represented in a federal system than in a central system that is more autonomous. Federalism hence contributes to crucial individual and collective benefits and this greatly encourages growth of businesses and the establishment of good business environments. In conclusion, a federal government has many advantages to business than the central system of governance. Among the many benefits of federalism include ability of the government to prudently perform experimentation of new economic policies in a state in order to evaluate its effect before changing national policies. Federal governments are also better supervisors of business to ensure they remain legal and maintain quality of products in the market. Business environments are better in federal government due to relatively higher political stability, efficiency in government operations and promotion of social capital. References Azam, J. (2005), Federalism and Good Governance: Issues Across Cultures, New Delhi: South Asia Publications Print. European Center for Security Studies, (2010), Federalism and Decentralization: Perspectives for the Transformation Process in Eastern and Central Europe, Oslo: LIT Vertag, Print. Fabbrini, S. (2009), Democracy and Federalism in the European Union and the United States: Exploring Post-National Governance, New York: Routledge, Print. Farole, J. (1998), Interest Groups and Judicial Federalism: Organizational Litigation in State Judiciaries. Westport, Conn.: Praeger, Print Geoffrey, W. (1999), “Rediscovering the Advantages of Federalism,” Australian Law Journal, 1999 p. 1-25 accessed 24th /5/2012 from http://www.aph.gov.au/About_Parliament/Senate/Research_and_Education/pops/pop35/c 02 Gerston, N. (2007), American Federalism: A Concise Introduction, New York: M.E. Sharp, Print. Martin, S. & Sanderson, I., (1999), ‘Evaluating Public Policy Experiments: Measuri Outcomes, Monitoring Processes or Managing Pilots?’ Evaluation July 1999 5: 245-258, Print. Mazzone, J. (2001), "The Social Capital Argument for Federalism", Southern California Interdisciplinary Law Journal 27: 27-62, Print. Obinger, H., Stephan, L. & Francis, G. (2005), Federalism and the Welfare State: New World and European Experiences, New York: Cambridge UP, Print. Organisation for Economic Co-operation and Development, (2010). African Economic Outlook 2010, Nairobi: OECD Publishing, Print. Rich, F. & William, D., (2002), Health Policy, Federalism, and the American States, Washington, D.C.: UP of America, Print. Robert, F. (2002), The Implosion of American Federalism, Chicago: Oxford University Press, Print. Zavodnyik, P. (2011), The Rise of the Federal Colossus: The Growth of Federal Power from Lincoln to F.D.R., California: ABC-CLIO, Print. Read More