Dr Ko Ko Gyi

The US strategy also aims to advance “fiscal federalism and territorial demarcation” that will create opportunities to access the country’s “bountiful rare earth resources and combat scam centres,” the document states.

It adds that expanding diplomatic efforts “will advance Administration priorities to counter China’s influence and promote a free and open Indo-Pacific”.(US seeks deeper Myanmar ties, access to ‘bountiful’ rare earths @ US seeks deeper Myanmar ties, access to ‘bountiful’ rare earths (Bloomberg)

Fiscal federalism is the economic and political framework that divides financial responsibilities, spending duties, and taxation powers among different levels of government—typically federal (central), state (regional), and local. First introduced as a formal theory by economist Richard Musgrave in 1959, it examines how to design tax systems and intergovernmental transfers to maximize economic efficiency and public welfare.

Core Components of Fiscal Federalism

• Expenditure Assignment: Different levels of government manage services best suited to their scale.
  • Federal/Central: Focuses on national defense, macroeconomic stabilization, and income redistribution.
  • State/Regional: Handles major regional infrastructure and economies of scale.
  • Local: Manages localized public goods, municipal services, fire protection, and K–12 education.
• Tax Assignment: Governments generally tax what they can best reach without causing economic distortion.
  • Central Government: Usually levies mobile tax bases, corporate income taxes, and broad-based tariffs or national sales taxes.
  • Subnational/Local Governments: Typically rely on immobile tax bases, such as property taxes, local consumption taxes, or localized fees.
• Intergovernmental Grants and Transfers: Because lower-level governments often raise less revenue than they spend (a “vertical fiscal imbalance”), central governments use financial transfers to bridge the gap.
  • Conditional / Categorical Grants: Funds given with strict rules on how the money must be spent (e.g., specific health or education programs).
  • Unconditional / Block Grants: Broader funds given with fewer restrictions, allowing local leaders more discretion.

Key Advantages and Disadvantages

From Wikipedia

As a subfield of public economics, fiscal federalism is concerned with “understanding which functions and instruments are best centralized and which are best placed in the sphere of decentralized levels of government” (Oates, 1999). In other words, it is the study of how competencies (expenditure side) and fiscal instruments (revenue side) are allocated across different (vertical) layers of the administration. An important part of its subject matter is the system of transfer payments or grants by which a central government shares its revenues with lower levels of government.

Federal governments use this power to enforce national rules and standards. There are two primary types of transfers, conditional and unconditional. A conditional transfer from a federal body to a province, or other territory, involves a certain set of conditions. If the lower level of government is to receive this type of transfer, it must agree to the spending instructions of the federal government. An example of this would be the Canada Health Transfer. An unconditional grant is usually a cash or tax point transfer, with no spending instructions. An example of this would be a federal equalization transfer.

In 2017, Governor of Rivers State of Nigeria, Ezenwo Nyesom Wike said that he believes true fiscal federalism will “strengthen the economy of his country as all sections will develop based on their comparative advantages”.These questions arise: (a) how are federal and non-federal countries different with respect to ‘fiscal federalism’ or ‘fiscal decentralization’, and (b) how are fiscal federalism and fiscal decentralization related (similar or different)?

Main concepts

The concepts of fiscal federalism are related to vertical and horizontal fiscal relations. The notions related to horizontal fiscal relations are related to regional imbalances and horizontal competition. Similarly the notions related to fiscal relations are related to vertical fiscal asymmetry (VFA) between the two senior levels of government, that is the centre and the states/provinces. While the concept of horizontal fiscal imbalance is relatively non controversial (as explained above), there is a lively debate around the concepts of vertical fiscal imbalance and vertical fiscal gap (see Boadway 2002 Bird 2003).

Many public policy experts prefer the notion of “vertical fiscal asymmetry” —coined and conceptualised by Sharma (2011)—over its alternative “vertical fiscal imbalance” because the former is relatively neutral and highlights the unfeasibility of a balance or symmetry purporting to eliminate any kind of vertical fiscal asymmetry. VFA acknowledges the inherent challenges in achieving a perfect balance or symmetry in fiscal relations between different levels of government. This concept recognizes that a certain degree of asymmetry is an unavoidable and realistic aspect of fiscal federalism.

The term VFI often carries a negative connotation. It suggests a deviation from an ideal state of fiscal balance, which might not be practically achievable or even desirable in a federal system. The use of VFA, therefore, avoids these implications and focuses more on the pragmatic aspects of fiscal federalism. Moreover, the terminology of VFA is thought to implicitly support the devolution of funds to subnational governments. On the other hand, the term VFI is sometimes interpreted as opposing intergovernmental transfers. Therefore, the concept of VFA offers a more nuanced framework for understanding the dynamics of fiscal federalism.