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Copyright (c) Virginia Law Review Association 1997.Virginia Law Review

October, 1997

83 Va. L. Rev. 1593

LENGTH: 11618 words

SYMPOSIUM: THE ALLOCATION OF GOVERNMENT AUTHORITY: RESPONSE: A COMPARATIVETHEORY OF FEDERALISM: INDIA

NAME: Sunita Parikh * and Barry R. Weingast **

BIO:

* Assistant Professor of Political Science, Washington University, St. Louis.

** Senior Fellow, Hoover Institution, and Ward C. Krebs Family Professor and Chair, Department of Political Science, StanfordUniversity. The authors wish to thank Lisa McIntosh-Sundstrom for editorial assistance.

SUMMARY:... Others, such as India and Mexico, are very poor and are mired in slow or negative growth. ... In this federalsystem, the lion's share of state revenue comes from the national government. ... Various types of federal systems allowthis behavior: if the central government holds regulatory authority over the economy (violating F2); if it provides lowergovernments with revenue (violating F4); or if the federal system remains at the central government's discretion,allowing it the unilateral authority to alter or remove the authority of the lower governments (violating F5). ... If thisoccurs in combination with national government control over lower government revenue, lower governments tend tobecome administrative arms of the national government. ... Turning to the economy, India's central government simplyhas too much power over the states to be characterized as market-preserving federalism. ... What would happen if Indiamoved toward greater state autonomy, as required by market-preserving federalism? Rodden/Rose-Ackerman argue thatthe result would be far more corruption. ...

TEXT:[*1593]

I.

Introduction

Why do federal states differ so widely in their economic and political performance? Some federal states, such as theUnited States, are among the richest and least corrupt in the world. Others, such as India and Mexico, are very poor andare mired in slow or negative growth. Mexico has also been plagued by considerable corruption. China, another de factofederal system, is very poor but is one of the fastest growing economies in the world. To address this question, wedevelop a comparative theory of federal performance and apply it to India.

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The performance of federal systems differs in part because federalism is not the only relevant variable influencinga country's economic and political success. Nonetheless, we argue that differential performance does reflect systematicdifferences among federal systems. Federalism is not a single type of system, but a family of disparate systems.Although all such systems have a hierarchy of governments, differences in federal architecture help to account fordifferential federal performance.

To understand how differences in federal structure affect federal performance, we begin with the traditionalarguments favoring federalism. These fall into two categories: economic benefits and non-economic benefits. Theclassic economic arguments about the benefits of federalism are threefold. First, Friedrich Hayek argues that the centralgovernment can never possess enough information to tailor policies to specific circumstances. n1 Because lowergovernments have better information about projects, policies, and citizen preferences, they will make better decisionsabout policies with a local impact. n2 Hayek's argument implies that, except for truly national public goods such asdefense, a national, one-size-fits-all policy is not optimal. [*1594]

Second, following Charles Tiebout, n3 economists have built an impressive body of theory emphasizing tworelated benefits of federalism. n4 The first argues that the induced competition among jurisdictions forces politicalofficials to attend to the economic and political consequences of their decisions. n5 Second, to the extent that citizenpreferences differ, competition among jurisdictions leads to an optimal mix of policies across jurisdictions. n6 In thisway, citizens and firms are matched with desirable policies of particular jurisdictions.

Third, the literature on fiscal federalism focuses on the optimal assignment of policies and taxes across levels ofgovernment. n7 One principle emerging from this literature is that the provision of public goods should be assigned tothe lowest jurisdiction compatible with producing that good. n8

These theories have met with considerable debate and criticism. Truman Bewley shows that Tiebout's conclusionsmay not always hold. n9 Susan Rose-Ackerman raises a problem ignored by most economists: local governmentcorruption. n10 James Buchanan raises serious questions about the economists' typical assumption of benevolentgovernment. n11 Finally, Robert Inman and Daniel Rubinfeld build a new theory on the political economy offederalism, showing how economic efficiency and democratic rights and virtues exist in tension in a confederaterepublic. n12

Political scientists, in contrast, emphasize the political benefits that flow from federalism. Many argue, forexample, that federalism helps avoid conflict in societies that are polarized geographically and provides for theprotection of minorities in divided societies. n13 In this view, federalism's decentralization of power helps to preventdifferent ethnic or religious groups from fighting over [*1595] the policies about which they profoundly disagree. Inthese societies, majority rule in a centralized system could be disastrous as groups fight for power to promote theirconflicting goals. This approach suggests that federalism and other forms of decentralization can sometimes preventsuch fights.

Both the economists' and political scientists' approaches to federalism suffer from a significant problem, however:They ignore the critical issue of how the rules of federalism are maintained. Consider the problem of assignment ofpolitical authority. This issue does not merely concern technical details of economic efficiency, as economists suggest.It is about the allocation of political power to political units of jurisdiction. Jurisdictions and interests fight for power tobe assigned where they have some influence; and once allocated, jurisdictions and interests fight to preserve andenhance their power.

Most federal systems diverge considerably from the economists' prescription for the optimal assignment of powersover public goods and taxes. In contrast, the first 150 years of the United States remarkably paralleled the economists'prescription. Consider the Constitution's Commerce Clause. n14 The power of the federal government to regulatecommerce is second nature today; so much so that, for the past sixty years, the Commerce Clause has imposed fewrestrictions on federal power. It is therefore remarkable that the federal government did not exercise this power during

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its first hundred years, until passage of the Interstate Commerce Act n15 in 1887 regulating the railroads. It is hard toimagine the federal government's activity so constrained in the modern United States - or anywhere in today'sdeveloping world. These observations raise the question, why do public officials so rarely abide by federalism's rules?

For federalism to survive, political officials must have incentives to abide by federalism's rules. n16 In otherwords, the rules and constraints of federalism must be self-enforcing: Political officials must find it in their interests toabide by a series of rules and to respect a series of citizen rights. For example, officials in the national government mustrefrain from invading the policy domains [*1596] of the lower jurisdictions. n17 Correspondingly, officials in lowergovernments must refrain from encroaching on the common market.

The issue of self-enforcing federalism reflects a more general problem of how political officials respect the rules ofgovernment and the rights of citizens. Implementing critical features of an ideal government and society will alwaysinvolve this problem. Democracy, for example, requires that political officials respect citizen rights and obey a range ofrules, such as holding periodic elections according to agreed-upon procedures and allowing citizens' votes to determineelectoral outcomes. Also central to democracy is a respect for civil and personal rights, such as freedoms of speech andassembly, a requirement that punishment be commensurate with the crime, and a requirement that citizens must becharged in order to be jailed. Political officials in most countries today adhere only incompletely, if at all, to theserights. Finally, for markets to thrive political officials must maintain a range of private rights, notably, a complex seriesof private property rights, the enforcement of contract and commercial law, and a stable tax and macroeconomic regime.

The rarity with which political officials adhere to a comprehensive system of the rules and rights - such as thoserequired to sustain democracy, federalism, or private markets - implies that when they do, it is a remarkablephenomenon requiring an explanation. The answer cannot be the country's constitution alone, for this begs the deeperquestion of why anyone obeys a constitution. Because political officials in most countries do, at times, ignorefundamental aspects of their constitutions, a special set of circumstances must have to hold for political officials to obeya constitution. Scholars have paid too little attention to the problem of how the rules and rights associated withconstitutions, democracy, markets, and federalism are enforced.

A group of scholars, whom Gibbons and Rutten call the "equilibrium institutionalists," n18 have recently begun tostudy this problem. These works suggest two related observations. First, a series of political institutions is typicallynecessary to solve particular social dilemmas and thus to ensure social [*1597] cooperation. One such dilemma is thatrepeated play is often insufficient to enforce cooperation: for example, play is too infrequent, citizens do not havesufficient information, or they fail to coordinate their actions. Institutions can help resolve these dilemmas and sustaincooperation. Second, to succeed, these institutions must be self-enforcing because they are themselves objects of choice.If citizens do not have mutual incentives to maintain them, these institutions will ultimately collapse.

Using the notion of self-enforcing, limited government, we show below that the form of federalism studied byeconomists requires a set of implicit political assumptions called "market-preserving federalism." n19 Part II discussesthe five axioms of market-preserving federalism. In brief, these are: 1) a hierarchy of governments and division ofauthority exists; 2) subgovernments have primary political authority over the regulatory and police powers concerningthe economy; 3) the national government has authority to police the lower governments (in particular, to assure thecommon market); 4) governments face a hard budget constraint; and 5) some form of institution provides a crediblecommitment to the entire structure (that is, federalism must provide for self-enforcing government). n20

An important benefit of the axiomatic approach to market-preserving federalism is that it provides the basis for acomparative theory of federalism. The approach allows us to predict the economic and political performance of federalsystems with different characteristics. Federalisms without a common market, for example, will exhibit far lessinter-jurisdictional competition and thus far less experimentation and adaptation of policies to the economy. Thesegovernments will also exhibit more corruption. A central government that violates the fifth condition is not reallyfederal at all. In such states, the national government typically attempts to control or interfere with the subgovernments,precluding the main benefits of market-preserving federalism. In Mexico, for example, because states receive the lion's

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share of their revenue from the national government, they adhere to the national government's policies. n21 A [*1598]similar conclusion holds in federal systems designed to protect minority rights: The absence of the fifth conditionthreatens federalism's purpose.

In Part III, we apply our approach to India. In brief, we show that India fails to conform to the ideal ofmarket-preserving federalism by failing to satisfy several of its axioms. In violation of the second and fifth provisions,the national government has the authority to impose presidential rule, by which it may take over the government of aparticular state, clearly compromising state independence. Similarly, India's central planning system lodges too muchcontrol over the economy with the central government, precluding the benefits of inter-jurisdictional competition. Insum, India's federalism compromises all the benefits that should accrue from state sovereignty under market-preservingfederalism.

This approach to studying Indian federalism yields different conclusions from those reached in Does FederalismPreserve Markets? n22 by Jonathan Rodden and Susan Rose-Ackerman ("Rodden/Rose-Ackerman").Rodden/Rose-Ackerman study India as a means for exploring the implications of market-preserving federalism.Although they admit that India does not conform to market-preserving federalism, they seem to argue that becauseIndia is federal and because India has failed to foster economic growth, market-preserving federalism fails to fostermarkets. In the absence of a comparative theory of federalism, they appear to have trouble distinguishing amongdifferent federal systems. Our comparative theory of federalism shows why federal systems systematically differ and, inparticular, why some have poorly performing economies. This approach suggests that India's systematic departure frommarket-preserving federalism helps explain its poor economic performance.

Our comparative approach to federalism demonstrates that there is no logical connection between federalism, perse, and governmental promotion or preservation of markets. We identify one type of federalism that promotes markets,labeling it market-preserving federalism. But as various of the conditions characterizing market-preserving federalismare removed, a federal system's incentives to promote markets are weakened or eliminated. The theory makes clear thatassessing a particular federal system's ability to promote markets requires assessing which conditions it satisfies.

II.

A Comparative Theory of Federalism

All federal systems involve decentralized political authority, though not all forms of decentralization constitute federalsystems. To understand federalism, we must identify its principal characteristics. The first condition is a definingcharacteristic of any federal system: [*1599]

F1: A hierarchy of governments with a delineated scope of authority (for example, between the national andsubnational governments) exists so that each government is autonomous within its own sphere of authority. n23

Beyond this condition, federal systems differ enormously in their political and economic performance. To build atheory of how their political and economic characteristics differ, we begin with a special type of federalism calledmarket-preserving federalism. n24 Formalized decentralization alone is insufficient to preserve markets; rather, asystem must possess further conditions concerning the allocation of authorities and responsibilities among differentlevels of government. These conditions also prove useful for predicting the differential performance of particular typesof federal systems.

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F2: The subnational governments have primary authority over the economy within their jurisdictions.

F3: The national government has the authority to police the common market [from encroachments by the states] and toensure the mobility of goods and factors across subgovernment jurisdictions.

F4: Revenue sharing among governments is limited and borrowing by governments is constrained so that allgovernments face hard budget constraints.

F5: The allocation of authority and responsibility has an institutionalized degree of durability so that it cannot bealtered by the national government either unilaterally or under the pressures from subnational governments. n25

These conditions represent an ideal type of institutional arrangement of market-preserving federalism. From theperspective of preserving market incentives, the authority of the national government over markets is limited to policingsubgovernmental shirking (here represented as F3: subgovernment encroachment on the common market) and providingnational public goods, such as defense and a stable macroeconomic regime.

The institutional arrangements of federalism recognize a critical difference between the national government andthe subnational governments: There is only one of the former, but there are many of the latter. Competition amongjurisdictions induces limits on the discretionary authority of the subnational governments. A necessary condition for thiscompetition to be beneficial is the absence of trade barriers, so that the entire nation becomes a common market asrequired by F3. Without F3, each subnational government would [*1600] become something of a de facto nationalgovernment in its jurisdiction, short-circuiting federalism's limits on lower governments. Condition F2 enhances theeffects of Condition F3: If decentralization remained at the discretion of the national government, the latter couldintervene in the economy by using its discretion (in the absence of F2) first to compromise the system of federalism andthen to intervene.

Condition F4 applies to both the national and subnational governments and has two parts: fiscal transfers betweenlevels of governments and government borrowing. n26 Although Condition F4 does not preclude revenue sharingamong levels of government, the hard budget constraint limits the ways in which revenue can be shared or equalized. Inparticular, it prevents lower governments that perform increasingly poorly from getting increasingly larger subsidiesfrom higher levels of government. The hard budget constraint restricts open-ended access to capital markets, especiallyborrowing from the central bank. For lower governments this is necessary to tie local revenue to local economicprosperity: A local government's financial problems remain its own. This condition provides important incentives forlocal officials, as their government's fiscal health is directly related to local economic prosperity. If, in contrast, localgovernments were readily bailed out of their financial problems, they would not need to worry about the consequencesof their choices. The hard budget constraint on the national government is necessary to prevent monetary discretion andinflation as attempts to get around the constraints on its authority mandated under F2.

Condition F5 provides for credible commitment to the federal system. This condition requires that, beyond simpledecentralization, the federal structure must not be under the discretionary control of the national government. ConditionF5 concerns the enforcement problem and is critically important. Due to different histories and unique social, political,and economic situations, each country is likely to resolve this condition in a unique way.

For many large countries with diverse economies, market-preserving federalism's balance of power between thenational and subnational governments is superior to either a centralized unitary government or complete

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decentralization with each region as an independent state. In the latter two cases, the national government's authority isnot limited through internal institutional arrangements; hence, the danger exists for the discretionary authority toencroach on markets. [*1601]

Before turning to the economic implications of market-preserving federalism, we pause for a few observationsabout the relationship between the market-preserving federalism model and various systems of federalism throughoutthe world. Our approach shows that whether a nation describes its political system as federal is irrelevant. n27 Whatmatters for federal performance is the combination of conditions that hold. Many de jure federalisms are nothing likemarket-preserving federalism. For example, in Mexico, Conditions F2, F4, and F5 fail. In this federal system, the lion'sshare of state revenue comes from the national government. n28 This raises several problems. First, it breaks the linkbetween local economic prosperity and fiscal health. Second and perhaps more importantly, along with the revenuecome restrictions, rules, and regulations from the center. Money from the central government carries the implicit threat,made explicit in Mexico, n29 of withdrawing funds if the lower government chooses to disobey. Local governments inthese systems have neither the incentive nor the ability to differentiate themselves from their neighbors. More broadly,the failure of F2 and F5 implies that the political discretion and authority retained by the central government greatlycompromise its market-preserving qualities.

In sum, though many forms of political decentralization exist, market-preserving federalism characterizes only anarrow subset. n30

A.

The Economic Effects of Market-Preserving Federalism

A critical feature of market-preserving federalism is that it limits the exercise of arbitrary authority by all levels ofgovernment. Federalism limits the central government directly by placing particular realms of public policy beyond thatgovernment's reach. For lower governments, constraints are imposed in two ways. First, under Condition F3, the centralgovernment polices state abuses of the hierarchy, such as encroachments on the common market [*1602] F3. Second,the induced competition among lower jurisdictions places self-enforcing limits on these governments' ability to actarbitrarily. n31

These limits have a number of salutary effects. First, no government has a monopoly of regulatory authority overthe entire economy. The national government's absence of regulatory authority prevents it from creating monopolies andother forms of inefficient economic intervention that plague developing countries. Competition limits the ability ofsubnational governments to create monopolies and other policies that cripple markets, because doing so would placefirms in its jurisdiction at a considerable disadvantage. When a particular jurisdiction imposes an onerous restriction onits firms, the firms face a competitive disadvantage relative to competing firms from less restrictive jurisdictions.

A further beneficial effect of market-preserving federalism is that competition among jurisdictions extends tofactors of production, such as capital and labor. This induces jurisdictions to provide a hospitable environment forfactors, typically through the provision of local public goods such as secure rights of factor owners, provision ofinfrastructure, utilities, and access to markets. Those jurisdictions which fail to provide these goods find that factorsgenerally move to other jurisdictions. Although old firms may not move old plant and equipment to new jurisdictions,they will locate new investments there. In less competitive jurisdictions, local economic activity and tax revenuetherefore decline. For example, the economic rise of the American South since the 1960s reflects in part firms movingto jurisdictions with fewer regulatory and labor restrictions. n32

Third, the hard budget constraint (F4) implies that local governments can go bankrupt. This provides lowergovernments with incentives for proper fiscal management. Local enterprises, politicians, and citizens hardly want theirgovernment to spend more money than is prudent, as bankruptcy would greatly hinder the ability of local governmentsto finance necessary public goods, such as those needed to attract foreign capital and lower business costs.

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Finally, market-preserving federalism provides a secure political foundation for markets. n33 By resting theregulatory authority over markets with lower governments, market-preserving federalism induces them to foster localeconomic prosperity. In addition, by limiting national authority over the economy, it also prevents the nationalgovernment from causing the massive [*1603] political distortion of markets typical of developing countries. Oncemarket-preserving federalism is established, markets are harder for governments to plunder: National political forces aredeflected from such tendencies, and, at the local level, it is hard for any one interest group to capture the lion's share ofthe local government. That, in turn, implies that at least some governments are always likely to retain their pro-marketfocus. Market-preserving federalism therefore diminishes the prevalence of rent-seeking and patronage systems. Thelatter can survive only in areas with political protection from market forces, a phenomenon that market-preservingfederalism is designed to eliminate.

Market-preserving federalism therefore holds considerable promise for developing countries. The limits enforcedby this type of federalism prevent much harmful and often crippling intervention by governments in the economy.

B.

Predictions Following the Inception of Market-Preserving Federalism

Following the inception of a system of federalism, we should observe a diversity of policy choices and experiments bylocal governments. People in different jurisdictions are likely to have markedly different interests, expectations, andcapabilities. In making their decisions, jurisdictions may also consider markedly different theories and ideologies. Weshould therefore observe that, after the inception of market-preserving federalism, lower governments choose a range ofpolicies to promote their goals.

As the results of the new policies and experiments become known, citizens and policymakers around the countrywill update their expectations about the effects of various policies. Decentralization under market-preserving federalismtherefore results in an important degree of feedback that would not be present under a unitary system that imposes asingle national experiment over all regions.

The competitive process among jurisdictions induces those that initially chose poor strategies to adopt variants ofthe strategies that succeed elsewhere. To the extent that some jurisdictions are better at promoting markets, generatingwealth, and caring for the needs of their citizens, their policies are likely to be imitated by others that have been lesssuccessful. Still, we do not expect the appearance of uniformity for several reasons. First, citizens and firms will sortthemselves into jurisdictions. For example, to the extent that different industries require different types of public goods,they may locate in different areas, which in turn provide different types of services. Second, differing resources andaccess to markets among jurisdictions imply that a variety of economic and political strategies will survive. n34 Finally,[*1604] citizens are likely to vary in their tastes for public goods, as well as their ability to pay for them.

C.

Predictions When Market-Preserving Federalism Remains Incomplete

The set of axioms used to define market-preserving federalism also forms the basis for a comparative theory offederalism. The economic and political performance of federal systems varies systematically with the combinations ofthe conditions they satisfy. In this Section, we go beyond market-preserving federalism to discuss implications of threeother types of federal systems, characterized here by the particular combination of axioms they satisfy.

The first type of federalism satisfies all but the common market axiom (F3), therefore allowing lower jurisdictionsto erect trade barriers. The common market is highly unlikely to be sustained without explicit protection from thecentral authorities. n35 This implies that some areas, particularly those not likely to perform well under competition

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with other jurisdictions, are likely to erect trade barriers against firms and products from other areas. A federalism ofthis sort (one which is only incompletely market-preserving) will produce seemingly contradictory results. Some areaswill be observed to promote markets while others will closely control their economy, especially to prevent influencefrom outside the jurisdiction. The absence of a common market also implies far less pressure against politicalcorruption, so corruption is likely to be higher in those jurisdictions that raise high trade barriers.

We also expect this variance in performance across lower jurisdictions to be more pronounced just after a systemof federalism is imposed than in a more mature system. Thus, for an economy like China's, with only limited experiencewith markets, economic performance across provinces in the late 1980s differed enormously. n36 As it has becomeclear that those provinces fostering markets have gotten rich, the variance among provinces has diminished as othersattempted to imitate those that have succeeded. n37 Nonetheless, [*1605] many interior provinces remain "dukedom"economies insulated from the world, without free markets, and highly corrupt. n38

Limited exposure to markets naturally generates suspicion of them and of their potential for generating dependenceon outsiders. The feedback provided by multiple jurisdictions that conduct independent experiments is thereforeimportant to address these concerns. As market growth occurs in some areas, the incentives for other jurisdictions topursue protectionism will diminish. The experience with markets will reveal new information about how they allowlocal governments to provide for the needs of citizens. Even in the presence of strong trade barriers, fiscal pressures willpush insulated areas to substitute market mechanisms for those activities in which the market has proven elsewhere tobe a superior provider of particular goods and services.

A second type of federal system satisfies all the axioms except Condition F4: It lacks centralized control over themonetary system. For example, to the extent that the authority over credit is decentralized, so that it remains at least inpart at the discretion of lower governments, several problems are likely to emerge. The most obvious is inflation, aseach government overgrazes the commons, causing too much growth in the money supply. The second problem is aconsequence of the first. Decentralized access to credit under these circumstances also softens the hard budgetconstraint, as governments that increase their exposure can always borrow more in the short run. This induces moralhazard problems; for example, a jurisdiction may borrow too much to finance too many investments, many of whichwould not be financed were it not for access to credit in this manner. Decentralized access to credit also allows lowerjurisdictions to bail out ailing enterprises, compromising economic incentives imposed by market discipline.

A final type of federalism consists of a center that can impose its will on the lower governments. Various types offederal systems allow this behavior: if the central government holds regulatory authority over the economy (violatingF2); if it provides lower governments with revenue (violating F4); or if the federal system remains at the centralgovernment's discretion, allowing it the unilateral authority to alter or remove the authority of the lower governments(violating F5). Because each of these federal systems compromises lower jurisdiction autonomy, all of them behavemore like centralized nations than nations characterized by market-preserving federalism. These nations typicallyprevent lower governments from deviating from national policies. With respect to the economy, lower governments inthese federal systems constitute administrative units of the central government, not autonomous or sovereigngovernments. If the national government does not want [*1606] a market economy, it has the power to prevent lowergovernments from fostering markets.

D.

Does Federalism Preserve Markets?

We end this Part with the question asked by Rodden/Rose-Ackerman in the title to their article: Does federalismpreserve markets? Although their title is a clever twist on the phrase "market-preserving federalism," it reflects afundamental alteration in the nature of the issue. The theory sketched in this Part suggests that federal systems differ tooconsiderably to have a uniform effect on markets. Indeed, the discussion above implies that many federal systems are

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very poor at preserving markets. The answer to Rodden/Rose-Ackerman's question must therefore be "no."

Our approach suggests further that the analysis cannot stop here. The point of the theory of market-preservingfederalism is to provide an approach that explains which types of federalism protect markets. Federal systems that differfrom this ideal in predictable ways will have economies that differ from an ideal market's society in predictable ways.Thus, federal systems that violate a common market assumption will lose all benefits from competition amongjurisdictions. Lower governments will erect trade barriers and substantial interventions in their economies. Forms offederalism which violate Conditions F2 and F5 will have too powerful a center, also compromising federalism'smarket-preserving qualities.

III.

Federalism in India

In their critique, Rodden/Rose-Ackerman use India as a case study for exploring the conditions of market-preservingfederalism. They acknowledge that in India the central government is too powerful to meet market-preservingfederalism criteria, but they point out that the state-level governments have had important responsibilities sinceindependence and that recent economic reforms now encourage competition among the states. n39

Rodden/Rose-Ackerman attempt to make two important points with the Indian case: First, they use it to cast doubt onthe viability of market-preserving federalism, n40 and second, they draw on Indian examples to argue that corruptionwill not necessarily decrease as power is decentralized. n41

Rodden/Rose-Ackerman are correct in observing that India has an authentic federal system and that some choicesare being devolved to the states under economic liberalization. But rather than providing an experiment for how a[*1607] developing country might function under market-preserving federalism, India instead demonstrates preciselywhy it is important to differentiate market-preserving federalism from other types of federalism. The comparativetheory of federalism sketched in Part II allows us to suggest how different center-state relations affect economicperformance. In this Part, we consider how India measures up to the criteria for market-preserving federalism.

India meets Condition F1, that of minimal federalism. Its federal structure is not in dispute; it is regularly cited asan exemplar of the type. n42 The third criterion (Condition F3), that of a common market, is also essentially met. ButIndia fails to meet the second, fourth, and fifth criteria. The central government retains enormous control over theeconomy, setting most economic laws and regulations; state governments have little discretion in revenue raising andspending. n43 States do not face a hard budget constraint. And finally, the center has important unilateral powers withrespect to state powers. n44 The framers of the Indian Constitution created a strong center that could, many Indiansbelieved, direct economic growth, protect minority rights, and defuse the political and economic tensions that mightarise in such a heterogeneous nation. n45

The Indian revenue collection system places states at the mercy of the central government. The central governmentraises the bulk of its revenue through taxes and distributes that revenue to the states according to the recommendationsof several central agencies. n46 States may raise revenue in only a few areas on their own, chiefly sales, liquor excise,and various fees. n47 States therefore have been dependent on the various commissions and ministries.

Two primary central bodies hold authority over revenue disbursement: the Planning Commission and the FinanceCommission. The Planning Commission was set up to implement the Five Year Plans, and it has been the cornerstoneof India's economic development strategy from independence to the recent economic reforms. Although thecommission's powers have ebbed and flowed, reaching their high-water mark in the 1960s, it still controls substantial[*1608] portions of the total revenue transfers from the center to the states. n48 These expenditures include thosestipulated by central development plans, state-level plans, and centrally sponsored schemes. This last program hasbecome increasingly important both as a patronage tool and as a way for the center to dominate investment and

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distribution decisions. n49

While the Planning Commission controls Plan expenditures, the Finance Commission has authority over allnon-Plan disbursements. The commission's main job is to address the gap between committed expenditures and thestate's expected revenues. n50 It does not rank or evaluate different types of expenditures, however, and its main goal isto avoid deficits in non-Plan areas. n51

The lack of coordination between the two commissions creates a soft budget constraint for the states. Because theFinance Commission tends to provide funds to make up shortfalls, states have an incentive to commit to expendituresregardless of funds. This behavior by states emerged soon after independence. In the 1960s, for example, an astuteobserver remarked that "states indulge in competitive importuning, putting up scheme after scheme to attract funds, andthen happily run up big deficits by failing to collect their own share...." n52

In the 1950s and 1960s the two commissions controlled almost all revenue transfer decisions. n53 But in the lasttwo decades, other central government agencies have acquired considerable influence over economic policies. Since allforeign projects must be routed through ministries or central financial institutions, n54 the recent introduction ofeconomic reforms does not necessarily mean greater decentralization to the states. Moreover, the bulk of industrialpolicy, especially through regulation and licensing, is controlled by centrally appointed boards and agencies. Thissystem, known in India as License Raj, means that the center retains control over the distribution of permits andlicenses for new areas of economic development through the relevant central ministry. n55 Although recent centralgovernments have pledged to loosen the grip of License Raj, n56 the center still reserves the right to decide whichchanges will be made.

Apart from the distribution of revenue and returns from investments, states can potentially increase their totalrevenue by borrowing. But the states' [*1609] ability to borrow is limited. The Constitution mandates that, as long as astate owes outstanding loans to the center, it cannot raise loans without the center's consent. n57 Although this rule isnot always followed, states do borrow much more from the center than from the market. n58 This has two results: First,the states have racked up enormous debt to the center, with an increasing share of their resource transfers to the centertaken up by debt service charges. n59 Second, this makes states further reliant on center decisions.

Why would provincial leaders agree to such an asymmetric division of economic control in a heterogeneous,federal country? A number of explanations emerge from the debates that took place during the drafting of the newIndian Constitution. It should be emphasized that the Constituent Assembly distinguished between economic andpolitical decentralization. While political decentralization was seen as inevitable, economic decentralization was neverseriously contemplated given the differences in language, ethnicity, and previous forms of government (e.g., betweenthe British colonial provinces and the princely states).

Nehru and the socialist wing sought to implement central economic planning because they believed it would morequickly create a strong industrial base. n60 Leaders more receptive to capitalist theories went along because they wereafraid that open markets, especially those that were permeable by international investments, would wipe out nascentlocal industries that had already been damaged by centuries of colonial domination. n61 They accepted centralgovernment control as the lesser of the possible evils that could befall Indian capitalism.

In addition, many feared that without central control, the disparities between rich and poor states would increase.Both types of states were well represented in the Constituent Assembly, and their divergent interests were apparent fromthe outset. At one point the governments of the rich states of West Bengal and Bombay suggested that they receive taxshares that reflected their contributions. n62 Their proposal would have given these states, which represent a mereseventeen percent of the total population, sixty-two percent of all income tax revenues. n63 Although these suggestionswere never adopted, they revealed the potential problems that could arise if states were given greater economic powers.Central dominance was thus considered to be a way to avoid destructive interstate disputes and increase equality across[*1610] disparate regions. These deliberations did result in a system in which the national government makes all the

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important economic decisions. But it is far from clear that centralization led to greater equality.

The data reveal important differences in the resources transferred to rich and poor states; these differences are thegreatest in those areas in which the central government has the greatest discretion. Between 1956 and 1981, indiscretionary transfers made by central ministries, per capita transfers to low income states were only seventy-sevenpercent of those to high income states; middle income states did somewhat better at eighty-six percent. n64

Non-discretionary expenditure decisions were slightly more equitable but revealed the same type of disparity: Statutorytransfers were twenty percent higher for middle income than low income states, and plan transfers were ten percenthigher. n65

The distribution of revenue surpluses reveals similar disparities. Because of the division of responsibilities betweenthe Financial and Planning Commissions, a few states, primarily those with higher per capita income, have regularlybeen left with substantial revenue surpluses. n66 For example, in the 1980s, poor Bihar's non-Plan surplus was only tenpercent of that of rich Punjab. These surpluses are important because they can they be plowed back into furtherdevelopment schemes, creating even wider disparities in the future.

Finally, in violation of Condition F5, the Indian Constitution enhances the central government's economic controlover the states still further. n67 Specifically, the central government has unilateral control over federal provisions inseveral important ways. For example, state boundaries can be redrawn by a simple majority in Parliament. n68 Evenmore importantly, the Indian Constitution provides that the President of India may dissolve state governments in threecircumstances: threats to national security by external aggressors, a breakdown of a state's constitution, and financialcrisis. n69 This power was envisaged for use in infrequent and extreme cases, and it was never invoked between 1950and 1960. n70 Since 1962, however, its usage has increased, and it has become highly politicized. Although thefinancial crisis provision is rarely invoked (the most common is the second case, breakdown of the Constitution), n71

greater economic autonomy for states could change this pattern. [*1611] If economic strategies in a state ran counter tothe interests of the parties in power at the center, the financial crisis provision could become as politicized as thebreakdown provision.

Despite Rodden/Rose-Ackerman's contention that India provides a good case with which to assessmarket-preserving federalism, India's failure to meet the approach's criteria makes it an inappropriate test for thetheory. The Indian case far better illustrates what occurs in the absence of market-preserving federalism. The ways inwhich India has failed to develop are consistent with the predictions of our theory about federal performance when thevarious conditions of market-preserving federalism are not present. To summarize, India's federalism departsconsiderably from market-preserving federalism, failing to meet criteria F2, F4, and F5. Violating F2 grants the centralgovernment sufficient power over the economy to prevent competition among the states, which results in an absence ofstate policy experimentation and innovation. It also prohibits the natural matching of policies to local conditions, whichin turn inhibits specialization and exchange. The absence of F4 means that states have no financial incentive to beconcerned about the effects of their policies. Finally, India's violation of F5 provides the national government withadditional leverage over the states. In short, India's federalism retains the hierarchy of federalism but eliminates themain mechanisms that sustain strong markets. States are not free to set their own economic policies. Nor can theycapture the gains from policies that foster economic growth.

Although Rodden/Rose-Ackerman overstate the extent to which India can be considered a fair current or futureexample of market-preserving federalism, they are correct to point out that a certain amount of economicdecentralization and state innovation is taking place there. n72 From this evidence they conclude that market-preservingfederalism cannot succeed in India. Although we believe that it remains too early to tell, considerable evidenceindicates otherwise. For example, Gujarat and Karnataka are two states that have taken greatest advantage of economicliberalization. As market-preserving federalism predicts, the provision of local public goods, such as infrastructure andutilities, has increased in these states, n73 and it can be argued that their advantages over other states, such as aneducated labor force and a history of indigenous capital, have helped them attract foreign investment.

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Rodden/Rose-Ackerman emphasize the importance of political corruption in distorting prospects for economicgrowth. They argue that, contrary to the predictions of market-protecting federalism, corruption is likely to increase in[*1612] developing democracies if economic decentralization occurs, and they use evidence on civil service transfers tosupport their claim. n74 Unfortunately for their argument, the evidence runs counter to their position: Despite highlevels of civil service transfers in Gujarat, economic growth is increasing there. n75

In order to attribute properly the effect of corruption on economic growth, it is necessary to have a theory ofcorruption and its effects. Although some forms of corruption, such as pervasive and widespread rent-seeking, clearlyinhibit investment and growth, others become accepted as another cost of doing business. In successful Indian statessuch as Gujarat and Karnataka, corruption exists, but it is routinized and predictable, and it is not sufficiently high todeter capital that desires to locate in India.

In conclusion, although the rhetoric of decentralization in India has increased, it remains to be seen whether stateautonomy will increase in practice. In the 1997 budget announcement, the Finance Minister recommended that centralgovernment resources be consolidated into a single fund and twenty-nine percent be set aside for the states. n76

Although this would increase their current share, it is still far from parity. In addition, the central government is clearlymoving toward market reform and away from socialist planning. Nonetheless, it is far from apparent that the centralgovernment will yield primacy to the states.

IV.

Conclusions

Rodden/Rose-Ackerman ask a critical question: Does federalism preserve markets? Our answer is that nothing inherentin federalism either promotes or preserves markets. Federal systems differ too widely to have a uniform effect on theeconomy. To address this thesis, we sketched a comparative theory of federalism and then applied it to India. In Part II,we showed how a particular kind of federalism, called market-preserving federalism, protects and husbands markets.Those federal systems that diverge from market-preserving federalism are unlikely to foster thriving markets. Further,we argued [*1613] that the theory's predictions conform to reality. Those federalisms roughly characterized bymarket-preserving federalism's conditions, such as the United States or contemporary China, have thriving markets.Those that fundamentally diverge from market-preserving federalism tend to be developing states mired in poor growth,such as Argentina, Mexico, and India. In each of the latter systems, the central government has too much power overthe economy and the lower governments to allow these systems to exhibit market-preserving federalism.

Sustaining federalism requires that political officials obey a series of rules concerning the allocation of politicalpower. This issue raises a larger question. Many of the principal values associated with good government and society -including democracy, the rule of law, and thriving markets - require that political officials respect a range of citizenrights. Because there are no external authorities to enforce this respect, these rights must be self-enforcing in the sensethat political officials have sufficient incentives to abide by them. That political officials in most countries today fail todo so suggests that this is a profound problem, which economists and political scientists studying federalism haveneglected. Given this dilemma, we know too little about how federalism is sustained.

Our focus on market-preserving federalism suggests some of the political prerequisites necessary for federalism tosustain markets. To do so, it must meet more than the minimal condition of federalism, a hierarchy of governments.Beyond a hierarchy of government, the economic benefits of federalism require that: the national government's powersover the economy be limited (F2); there must be a common market (F3); all governments must face a hard budgetconstraint (F4); and institutions must credibly commit political officials at all levels to these restrictions (F5).

These conditions provide the political foundations underlying the economists' approach to federalism, thougheconomists rarely specify or discuss them. The theory makes explicit the allocation of political powers among thedifferent levels of government. In particular, federalism requires that the national government must, somehow, be

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restricted in its powers to providing truly national public goods, considerations of equity, and policing the federalsystem. Market-preserving federalism's hard budget constraint and its induced competition among jurisdictions limit theexercise of powers by lower jurisdictions.

Federal systems can fail to be market-preserving in a variety of ways. In the absence of Condition F3, lowergovernments have the power to erect trade barriers, thereby insulating their economies from competition. This powerobviates many of the benefits of federalism by allowing corruption, interest groups influence, and rent-seeking. WhenCondition F2 fails, the national government has too much power over the economy. If this occurs in combination withnational government control over lower government revenue, [*1614] lower governments tend to becomeadministrative arms of the national government. Federal systems of this sort remain only nominally federal, sacrificingmany of the economic benefits of lower government independence and failing to exhibit the economic benefits ofmarket-preserving federalism.

We applied our perspective to India, in part responding to Rodden/Rose-Ackerman's claims about Indianfederalism. India's federalism has never conformed to the conditions of market-preserving federalism, nor was itdesigned to do so. Part of the purpose of federalism in India concerns the problem of maintaining harmony amongdifferent ethnic and religious groups.

Turning to the economy, India's central government simply has too much power over the states to be characterizedas market-preserving federalism. n77 The dominant role of the central government in economic planning, regulation,taxation, and redistribution implies that Condition F2 fails. The ability of the national government to redraw stateboundaries and to take over state governments by declaring presidential rule implies that Condition F5 fails. The centralgovernment's powers thus allow it to overwhelm the states, and in doing so, to allow the interventionist national policiesthat cripple the Indian economy.

Nonetheless, we agree with Rodden/Rose-Ackerman that India is unlikely to adopt anything comparable tomarket-preserving federalism. n78 The requisite restrictions on government would harm a large range of interests thatbenefit from the current system and would oppose restrictions that limit these benefits.

What would happen if India moved toward greater state autonomy, as required by market-preserving federalism?Rodden/Rose-Ackerman argue that the result would be far more corruption. We responded by suggesting that thisprediction is only partially correct. Even if corruption initially increased in most states, this is not likely to be universal.This is so because there are some states and areas that we argue are greatly harmed by the current set of restrictions,such as Maharashtra, Gujarat, and Karnataka. These states would be likely to use new freedoms to foster markets and toattempt to become rich in just the way that Guangdong has done under China's decentralization. Further, just as inChina, the success of a few states in India is likely to change politics in other states. After observing what can happenelsewhere, citizens in other states will pressure their political officials, asking why their state has remained mired incorruption while others have been getting rich. An essential feature of the current pattern of corruption is that the centralgovernment prevents state officials from pursuing independent policies. More [*1615] local state freedom in Indiamight initially result in more corruption in many states, but we predict that this would not be the final politicalequilibrium.

We therefore disagree with Rodden/Rose-Ackerman's claim that India provides an excellent opportunity toexplore the validity of market-preserving federalism's predictions. Yes, India has performed poorly on manydimensions. But, along the economic dimension, this is in part because India systematically diverges frommarket-preserving federalism, not because the theory of market-preserving federalism fails.

Legal Topics:

For related research and practice materials, see the following legal topics:Business & Corporate LawForeign BusinessesQualificationsGovernmentsLocal GovernmentsFinanceTransportation

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LawInterstate CommerceFederal Powers

FOOTNOTES:

n1. Friedrich A. Hayek, The Economic Conditions of Interstate Federalism, in Individualism and Economic Order 255, 268-69 (1948).

n2. See id. at 268.

n3. Charles M. Tiebout, A Pure Theory of Local Expenditures, 64 J. Pol. Econ. 416, 416-24 (1956).

n4. See, e.g., Daniel L. Rubinfeld, The Economics of the Local Public Sector, in II Handbook of Public Economics 571 (Alan J. Auerbach& Martin Feldstein eds., 1987).

n5. See Tiebout, supra note 3, at 419-20.

n6. See id.

n7. Wallace E. Oates, Fiscal Federalism (1972), provides the classic statement.

n8. See, e.g., id. at 31-53.

n9. Truman F. Bewley, A Critique of Tiebout's Theory of Local Public Expenditures, 49 Econometrica 713 (1981). Several models showhow intergovernmental competition limits but may not eliminate inefficiency. See, e.g., Paul N. Courant & Daniel L. Rubinfeld, On theWelfare Effects of Tax Limitation, 16 J. Pub. Econ. 289 (1981); Dennis Epple & Alan Zelenitz, The Implications of Competition AmongJurisdictions: Does Tiebout Need Politics?, 89 J. Pol. Econ. 1197 (1981).

n10. See Susan Rose-Ackerman, Corruption: A Study in Political Economy (1978).

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n11. See, e.g., Geoffrey Brennan & James M. Buchanan, The Power to Tax (1980); James M. Buchanan, Federalism As an Ideal PoliticalOrder and an Objective for Constitutional Reform, Publius, Spring 1995, at 2.

n12. See Robert P. Inman & Daniel L. Rubinfeld, The Political Economy of Federalism, in Perspectives on Public Choice 73 (Dennis C.Mueller ed., 1997).

n13. See, e.g., Donald L. Horowitz, Ethnic Groups in Conflict 646-48 (1985).

n14. U.S. Const. art. I, 8, cl. 3.

n15. Ch. 104, 24 Stat. 379 (1887).

n16. What follows draws on an emerging literature on federalism. See, e.g., Gabriella Montinola, Yingyi Qian & Barry R. Weingast,Federalism, Chinese Style: The Political Basis for Economic Success in China, 48 World Pol. 50 (1995); Barry R. Weingast, The EconomicRole of Political Institutions: Market-Preserving Federalism and Economic Development, 11 J.L. Econ. & Org. 1 (1995); Jenna Bednar,Federalisms: Unstable by Design (Apr. 15, 1997) (unpublished manuscript, on file with the Virginia Law Review Association); JennaBednar, William N. Eskridge, Jr. & John Ferejohn, A Political Theory of Federalism (Apr. 1996) (unpublished manuscript, on file with theVirginia Law Review Association); Rui J. de Figueiredo, Jr. & Barry R. Weingast, Self-Enforcing Federalism: Solving the TwoFundamental Dilemmas (Apr. 1997) (unpublished manuscript, on file with the Virginia Law Review Association).

n17. See William H. Riker, Federalism: Origin, Operation, Significance (1964); Weingast, supra note 16, at 4; Bednar, Eskridge &Ferejohn, supra note 16, at 5.

n18. See Robert Gibbons & Andrew Rutten, Hierarchical Dilemmas: Social Contracts with Self-Interested Rulers 6 (Oct. 8, 1996)(unpublished manuscript, on file with the Virginia Law Review Association). Other works in this tradition include Bednar, supra note 16;Randall L. Calvert, Rational Actors, Equilibrium, and Social Institutions, in Explaining Social Institutions 57 (Jack Knight & Itai Sened eds.,1995); Avner Greif, Paul Milgrom & Barry R. Weingast, Coordination, Commitment, and Enforcement: The Case of the Merchant Guild,102 J. Pol. Econ. 745 (1994); Paul R. Milgrom, Douglass C. North & Barry R. Weingast, The Role of Institutions in the Revival of Trade:The Law Merchant, Private Judges, and the Champagne Fairs, 2 Econ. & Pol. 1 (1990); Barry R. Weingast, American Democratic Stabilityand the Civil War: Institutions, Commitment, and Political Behavior (Dec. 1996) (unpublished manuscript, on file with the Virginia LawReview Association).

n19. See Ronald I. McKinnon, The Logic of Market-Preserving Federalism, 83 Va. L. Rev. 1573 (1997) [hereinafter McKinnon,

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Commentary]; Ronald I. McKinnon, Market-Preserving Fiscal Federalism in the American Monetary Union, Spectrum, Summer 1995, at 36[hereinafter McKinnon, Market-Preserving Fiscal Federalism]; Montinola, Qian, & Weingast, supra note 16; Weingast, supra note 16.

n20. Montinola, Qian & Weingast, supra note 16, at 55.

n21. Anwar Shah, an economist with the World Bank, reports that "Mexican states in 1990 derived 60% of their revenues from the federalgovernments as revenue sharing or transfers." Email from Anwar Shah, The World Bank, to Barry Weingast (Sept. 30, 1997) (on file withthe Virginia Law Review Association). In violation of the spirit of market-preserving federalism, Mexico's "central government exercisesoverwhelming control over state and local governments." John Bailey, Fiscal Centralism and Pragmatic Accommodation in Nuevo Leon, inOpposition Government in Mexico 173, 173 (Victoria E. Rodriguez & Peter M. Ward eds, 1995).

n22. Jonathan Rodden & Susan Rose-Ackerman, Does Federalism Preserve Markets?, 83 Va. L. Rev. 1521 (1997).

n23. Montinola, Qian & Weingast, supra note 16, at 55.

n24. See McKinnon, Market-Preserving Fiscal Federalism, supra note 19, at 37; Montinola, Qian & Weingast, supra note 16, at 55;Weingast, supra note 16, at 4.

n25. Montinola, Qian & Weingast, supra note 16, at 4. See also Weingast, supra note 16, at 4 (discussing the same conditions).

n26. See McKinnon, Market-Preserving Fiscal Federalism, supra note 19, at 37-38; see also David E. Wildasin, Externalities and Bailouts:Hard and Soft Budget Constraints in Intergovernmental Fiscal Relations (May 1997) (unpublished manuscript, on file with the Virginia LawReview Association) (discussing soft and hard budget constraints in relation to the size of localities).

n27. See Oliver E. Williamson, The Institutions and Governance of Economic Development and Reform, in The Mechanisms ofGovernance 322, 333-35 (1996).

n28. Bailey, supra note 21, at 173.

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n29. For example, when local governments elect opposition parties to power, the national government cuts off many of their discretionaryfunds. See Victoria E. Rodriguez & Peter M. Ward, Conclusion: Regents From the Opposition, in Opposition Government in Mexico, supranote 21, at 223, 227. ("But both PRD and PAN municipal governments have suffered insofar as discretionary lines of funding for moreelaborate special projects and programs (dams, highways, housing projects, and so forth) are concerned.").

n30. Notably, unlike de jure federalisms such as Mexico, 18th century England was characterized by market-preserving federalism,although the English did not call their system federal. See Weingast, supra note 16, at 15-17.

n31. This Section summarizes an extensive literature in economics, including the classic work of Tiebout and Oates. See Oates, supra note7; Tiebout, supra note 3. For a review of this literature see Rubinfeld, supra note 4.

n32. See, e.g., Ronald I. McKinnon, Market-Preserving Fiscal Federalism in the American Monetary Union, in Macroeconomic Dimensionsof Public Finance: Essays in Honour of Vito Tanzi 73, 89 (Mario I. Blejer & Teresa Ter-Minassian eds., 1997).

n33. See Weingast, supra note 16.

n34. See, e.g., Paul Krugman, Geography and Trade (1991).

n35. For example, the common market in the early 19th century United States could not have been sustained without the ever-vigilantpolicing of the Supreme Court. See, e.g., Gibbons v. Ogden, 22 U.S. (9 Wheat.) 1 (1824) (striking down New York State's grant of anexclusive right to operate steamboats). Policing the market against encroachments by state governments proved a major use of itsconstitutional powers. These cases reveal the remarkable diversity and cleverness of the states in their efforts to erect such barriers. SeeBarry R. Weingast, The Political Foundations of Antebellum American Growth 20 (Sept. 1, 1993) (unpublished manuscript, on file with theVirginia Law Review Association). Similarly, such barriers are a major reason underlying the movement for economic and political union inEurope. See Geoffrey Garrett, International Cooperation and Institutional Choice: The European Community's Internal Market, 46 Int'l Org.533 (1992).

n36. See Montinola, Qian & Weingast, supra note 16, at 73-79.

n37. See id. at 77-78.

n38. Id. at 65-66.

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n39. Rodden & Rose-Ackerman, supra note 22, at 1524-25.

n40. See id. at 1537-43, 1546-66.

n41. Id. at 1537-40.

n42. Arend Lijphart, Democracy in Plural Societies 181 (1977); Riker, supra note 17, at 120-22.

n43. See B.S. Grewal, Fiscal Federalism in India 15-18 (1974).

N44. See Asok Chanda, Federalism in India: A Study of Union-State Relations 68-72 (1965) (discussing the historical background of thecenter's authority over the states).

n45. See, e.g., Granville Austin, The Indian Constitution: Cornerstone of a Nation 189-91 (1966).

n46. See Grewal, supra note 43, at 15-32.

n47. See K.S. Krishnaswamy, I.S. Gulati & A. Vaidyanathan, Economic Aspects of Federalism in India, in Federalism in India: Originsand Development 180, 188 (Nirmal Mukerji & Balveer Arora eds., 1992) (suggesting that, "Though States were given the exclusive right toagricultural taxation, political conditions made its exploitation extremely difficult, if not virtually impossible.").

n48. See id. at 193-95.

n49. See id. at 203-04.

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n50. Chanda, supra note 44, at 188-225.

n51. See Krishnaswamy, Gulati & Vaidyanthan, supra note 47, at 189-90.

n52. W.H. Morris-Jones, The Government and Politics of India 144 (1964).

n53. See Chanda, supra note 44, at 188-225, 260-94; Grewal, supra note 43, at 25-32.

n54. Jagdish N. Bhagwati, India in Transition: Freeing the Economy 49-50 (1993).

n55. See id. at 50-51

n56. Id. at 86-87.

n57. India Const. pt. XII, ch. II, art. 293.

n58. See Grewal, supra note 43, at 18-19.

n59. Krishnaswamy, Gulati & Vaidyanathan, supra note 47, at 196.

n60. Austin, supra note 45, at 45.

n61. See id. at 60-61.

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n62. Id. at 222-23.

n63. Id.

n64. Krishnaswamy, Gulati & Vaidyanathan, supra note 47, at 195-96.

n65. Id. at 195.

n66. Id.

n67. For a discussion of the Indian federalist system in comparison with those of other countries, see Durga Das Basu, Introduction to theConstitution of India 49-63 (9th ed. 1982).

n68. India Const. pt. I, art. 3.

n69. See India Const. pt. XVIII, arts. 352, 356, 360.

n70. Austin, supra note 45, at 216.

n71. Basu, supra note 67, at 302-16 (discussing emergency powers generally).

n72. Rodden & Rose-Ackerman, supra note 22, at 1524-25.

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n73. See Charan D. Wadhva, Economic Reforms in India and the Market Economy 127-29 (1994); Energy: Need for a ComprehensivePolicy, DATA india, Sept. 24, 1995, at 764, 765; Lukewarm Response to Telecom Tenders, DATA india, July 9, 1995, at 556, 557.

n74. Rodden & Rose-Ackerman, supra note 22, at 1538.

n75. Wadhva, supra note 73, at 127-28. In addition, Rodden/Rose-Ackerman do not distinguish between preexisting corruption and theincreased corruption they hypothesize would occur with economic decontrol. Corruption is widespread in Indian politics and administration,Paul R. Brass, The Politics of India Since Independence 53 (1990), and there may well be a correlation between the central government'sdecision to initiate investment and a state's level of corruption. But the mere existence of high levels of civil service transfers cannot be usedto conclude that corruption is increasing or is presenting a threat to economic development and social welfare. The politicization of civilservice transfers is not in question; what remains to be determined is the extent to which these postings systematically inhibit economic andsocial welfare across diverse states.

n76. Finance Minister P. Chidambaram, 1997-1998 Union Budget Speech before the Lok Sabha (March 1997), available in India onInternet, Budget '97 (visited Sept. 18, 1997) .

n77. Joachim Ahrens, The Political Institutions of Economic Development: Experiences, Failure and Prospects in East and South Asia, in88 Diskussionsbeitrge aus dem Volkswirtschaftlichen Seminar der Universitt Gttingen 25-26 (June 1996).

n78. Rodden & Rose-Ackerman, supra note 22, at 1525.

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