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One Thing Spain Can Teach Us

How not to spread the wealth in your country

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March 5, 2014

This articlie originally appeared in The Guardian on March 4, 2014.

By Teresa Garcia-Mila and Therese McGuire

Spain has learned the hard way that designing a federal system of government to accomplish equity goals is exceedingly difficult. And countries wrestling with how to fund various levels of governance – which is to say most of them – should take heed.

Only 35 years ago, Spain emerged from one of the 20th century's most enduring dictatorships and created a strong democracy. Today, Spain is on the brink of breaking apart – with Catalonia dominating the news because of its strong push for independence.

The Spanish federal system – once viewed as a model for countries around the world – was designed to ensure that poorer regions had enough resources to fund publicly provided goods and services.

But regional governments in Spain, particularly Catalonia, are chafing under a federal system that has devolved spending responsibility without giving the communities commensurate revenue-raising authority. While it has significant control over spending, the central government is still in charge of levying and collecting most taxes, which it then redistributes to the autonomous communities with the aim of producing "fiscal equalization".

Many in Catalonia, one of the largest tax contributors in Spain, view the federal system as blatantly unfair. Catalonians argue that the semi-autonomous region of more than 7.5 million could have done much better in providing for its residents and riding out the crippling economic crisis if tax revenue transfers to other parts of the country had adhered to a judicious and transparent implementation of equity, or solidarity, principles.

It didn't have to be that way. If Spain had implemented what we call a guaranteed minimum system, the central government would have ensured that enough resources were available to each region, whether rich or poor, to provide residents with a nationally agreed-upon level of publicly provided goods and services that determine life chances, such as education and health care. Beyond the guaranteed funding, autonomous communities would have had independent fiscal authority to fund any additional goods and services desired by their local constituents.

Two countries, the United States and Canada, show that a guaranteed minimum system can be implemented successfully.

In the US, a vast majority of the 50 states (like Illinois) provide state aid to local elementary and secondary school districts through a program that guarantees a given level of per-pupil spending. In Canada, the federal government provides a per capita grant to each of the provinces to support regionally provided health care.

In both cases, the recipient government has the authority to raise revenues if it wants to spend more than is guaranteed by the higher-level government.

Such an arrangement could have made a difference in Spain. With certainty and clarity about central government support and with responsibility for raising additional revenue, Spain's autonomous communities would likely have made more responsible spending decisions and been more cautious in issuing debt. They would have been in a better position to meet the demands of their constituents.

But Spain's devolution process has proved to be fundamentally flawed and subject to the whims of whichever party is in power in the central government. It involves several transfer programs, with different, and sometimes conflicting, goals. In addition, each time the process is revised – every five years – the central government has increased overall resources so that no region is worse off than under the previous plan. This grandfathering in of regions' previous positions makes for a very complicated and opaque process that is also becoming increasingly unaffordable.

Therein lie especially important lessons for emerging federal systems, such as the one in Kenya. A federal system is difficult to reform once in place because of vested interests and fears about what might replace it.

But there are also lessons for industrial countries such as Germany, whose policy of grants from regions in the west to those in the east was adopted as a solidarity measure after the fall of the Berlin Wall. Many today consider that policy to be too generous, too ambitious, and ineffective at creating strong local economies. A guaranteed minimum system could achieve their solidarity goals while avoiding such problems.

A guaranteed minimum system gets incentives right, avoiding excessive spending and borrowing at the sub-national level. Citizens across the country get the locally provided goods and services to which they are entitled. And regional governments are able to address local demand for publicly provided services.

Such a system is superior to virtually all others in use today. The beauty of a guaranteed minimum system lies in combining the best of centralization with the best of decentralization while eschewing the downsides of each.

- Therese McGuire is a profoessor of management and strategy at Northwestern University. Teresa Garcia-Mila is a professor of economics at Universitat Pompeu Fabra.

Topics: Opinion