Ukraine should Decentralize, Not Federalize

GlobalPost

PROVIDENCE, Rhode Island — Putin’s annexation of Crimea and the massing of Russian troops on Ukraine’s eastern border have pushed a divided society into armed conflict. The big question now is what, if anything, can be done to prevent a full-fledged civil war.

At a minimum, Petro Poroshenko’s new government will have to exercise exceptional political and military leadership if Kiev is to reassert control without destroying all possibilities for rapprochement with the country’s Russian-speaking minority.

Putin still holds most, if not all, of the trump cards. He has also made it clear that Moscow’s preferred “solution” to Ukraine’s problems lies in federalization. Early in the crisis, Secretary of State Kerry seemed to concur, though recently Washington has stopped using the term.

Nonetheless, there is no shortage of Western politicians, pundits and scholars who see federalism as the only way for Ukraine to accommodate its linguistic, religious and regional differences.

This embrace of “Ukrainian Federalism” by Western observers is troubling, given the evidence that Putin is interested in a weak and divided Ukraine and not a just and functional one.

But leaving aside the opportunities for mischief that federalization would afford Moscow, Washington should stay off the federal bandwagon for at least two reasons: Federalism will complicate Ukraine’s already daunting economic challenges, and political power can be decentralized to sub-national governments within a unitary state — as Ukraine’s most successful neighbor, Poland, has demonstrated.

Federalism requires giving democratically elected regional legislatures at least some constitutionally protected responsibilities and powers. These powers and responsibilities can be parsed in many different ways. But the basic principle is that the more responsibilities regional governments are assigned, the larger their tax and borrowing powers should be.

In Ukraine, the political logic of using federalism to accommodate the country’s differences suggests that regional governments should be responsible for costly public services like health and education, as well as for improving the public infrastructure necessary for economic growth. The same logic implies that they should also have significant tax and borrowing powers.

This Ukraine cannot afford to do. The country is already bankrupt. To restructure public services and meet its obligations, the national government will need uncontested control over the high-yield taxes upon which modern states are built: the Value Added Tax, the Personal Income Tax, and the Corporate Income Tax.

Giving regional governments full or partial authority over these revenues will complicate a deeply corrupt tax system that desperately needs simplification to be enforced. It can also create competition between levels of government over who gets to exploit which tax base, as well as competition between regions to attract investment by lower taxes.

Indeed, it is easy to imagine new regional governments turning to debt instead of taxation to solve their problems, and then leaving the national government to pick up the bill. In short, decentralizing tax and borrowing powers to regional legislatures will make macro-economic policy in Ukraine more of a nightmare than it already is.

Still, public power can be radically decentralized to regional governments. Poland has put a third of all public spending in the hands of sub-national government and is now one of the most decentralized countries in Europe.

It has done this not by giving tax powers to subnational governments, but by developing fair and transparent grant systems and by sharing taxes with them. Poland now has democratically elected municipalities, counties and regions, which collectively maintain all local infrastructures and run virtually all day-to-day public services, including the nation’s schools.

The national government gives each level of these government a disposable grant that has two components, one for education and one for fiscal equalization.

The size and allocation formulas governing these grants are the subject of institutionalized negotiation. Local governments also get substantial shares of the national taxes originating in their jurisdictions. For example, the country’s 66 largest cities get 50 percent of personal Income taxes generated in their jurisdictions, while regions get 14 percent of corporate income taxes.

This gives them direct incentives to promote economic growth, but prevents tax competition with the national government or between one another. Municipalities also control the property tax and derive about 30 percent from own sources; they are not completely dependent on transfers. They can borrow, but only for investment and subject to state regulation.

Poland’s experience shows that even unitary states can give democratically elected sub-national governments large amounts of money and power. Kiev knows this and the new Poroshenko government is clearly looking to Poland as a model for political reform.

Whether this project will succeed is another question. But given both the macro-economic complications and the endless opportunities for external mischief that federalism in Ukraine will invite, this is the line that Washington should support, despite our constitutional predisposition for federalist solutions.

Anthony Levitas is senior fellow in international studies at the Watson Institute for International Studies at Brown University.

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