Federalism, National Competition Policy and the Way Forward

By Nahan, Mike | Review - Institute of Public Affairs, June 2005 | Go to article overview

Federalism, National Competition Policy and the Way Forward


Nahan, Mike, Review - Institute of Public Affairs


Federalism is an inherently messy system. Indeed it is designed to be so.

By design, it disperses the powers of government across multiple jurisdictions. The USA has over 11,000 separate jurisdictions including city, schools board, county, state, territory and federal government jurisdictions. Australia has over 675 jurisdictions.

This necessarily results in a multiplicity of programmes, policies, taxes, regulations bureaucracies, legislatures and lobbyists. In short, federalism is necessarily more messy and costly than unitary systems.

But federalism has potentially countervailing benefits. First and most importantly, it has the ability to limit the power of government. Dispersed power is limited power. Federalism offers the possibility of refuges from exploitation. For example, in the 1990s Queensland provided sanctuary for thousands of people fleeing Kirner's Victoria.

Federalism also has the ability to inject competition into government. It gives people a choice about where they live or which jurisdiction's laws they operate under. This provides people with the ability to choose who governs them. The act of choice, whether it is manifested by the movement of people or simply by the threat thereof, puts pressure on governments to respond in a competitive manner to the desires of their electorates/customers. For example, the low-tax, low-debt, pro-business, pro-growth policies of successive Queensland Governments during the 1980s and 1990s proved attractive to thousands of people and investors and, in so doing, forced other States to pursue similar policies.

Federalism has the potential to induce experimentation and risk-taking in policy and programmes and to tailor them to the particular needs and endowments of local communities. The Kennett Government put in place a raft of reforms that were politically impossible at the federal level or in other States at the time. Many of Kennett's reforms, such as the privatization of urban transport, were risky and leading edge. Other States and the Commonwealth watched, learnt and adopted.

Naturally, federalism is not the system of choice of the political elite, as it is designed to limit their power. On the other hand, citizens are rather fond of the system, not only because it limits the power of the elite, but also because it works for them.

It should be noted, however, that the benefits of federalism are not preordained. Federal systems can seriously malfunction and produce excessive costs, reduced accountability, greater power to vested interests, less competition or competition of the wrong type and to the wrong end, and fewer options for individuals.

While the Australian federal system has worked moderately well to date, it is badly in need of an overhaul in terms of its structure, functioning and philosophy. Indeed, if its flaws are not addressed and it is simply left to muddle on, the flaws will deepen and the need for centralization of powers and function will increase.

COMPETITION INJECTION

While a federal system's ability to inject competition into government is one of its main attributes, in truth it does not often work well. First, the act of moving from one jurisdiction-whether it be from Victoria to Queensland, or from the WA industrial relations system to the federal system-is costly, complex, disruptive and for most people and firms, not really an option. second, the complexity, fragmentation and reduced scrutiny that often comes with the system can work to restrict competition amongst market players. That is, instead of providing a refuge from exploitation, it provides a refuge for monopolists and special interests often wrapped up in the rhetoric of States' rights or federal responsibility.

This has been a common characteristic of the Australian federal system. Governments have historically used their powers of ownership, taxation and regulation to protect a host of businesses, professions and groups from competition, including electricity generators, rail operators, ports, airports, gas companies, lawyers, newsagents, pharmacies, and so on.

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