Decentralization Costs and Benefits: Designing a Federal State
Philip J. Grossman and Priya Rajagopalan
Over the past few months, the Soviet Union has begun the transformation from a highly centralized state to a highly decentralized state. Complete dissolution of the union is a distinct possibility. Many of the 15 republics making up the Soviet Union have declared their independence from the central government. 1 These declarations have, however, been tempered by the recognition that complete independence is not immediately feasible. It is recognized by even the most independently minded republics that economic ties will continue to bind the republics to the Union, at least for the short run.
Given that the Soviet Union will continue to exist as both a political and an economic entity for the foreseeable future, this reformulation of the Soviet federation will require a new power-sharing agreement between the republics and the central government. Clearly, this will involve decentralization of control over taxing and spending powers. This need not, and should not, imply complete emasculation of the central government. The question that must be answered is, which fiscal prerogatives should remain with the central government and which should devolve to the republics?
To shed some light on this issue, this paper considers the costs and benefits of decentralization of government taxing and spending powers. The prescriptions of the conventional theory of federalism are contrasted with those of the "Leviathan" models of government. The paper also reviews the empirical evidence from tests of the Leviathan theory.
Economists have long recognized the economic advantages of a federal system of government (see, for example, Tiebout 1956). Tiebout considers a