Fiscal Federalism: Evaluation of Ethiopia's Recent Experience

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Date

2000-06

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A.A.U

Abstract

With the change or government in 1991 Ethiopia made a transition from a highly centralized political and economic system to that or a federal system. Parallel with the administrative restructuring, the liscal system was reformed to fit the federal arrangement. expenditure and revenue powers were assigned to the federal and regional governments and various solutions were designed for the problems in the intergovernmental fiscal relations. As a new experience, this radical shin from centralism has laced many challenges, but equally, has made a lot of progress. The expenditure assignment is highly decentralized. The regions have taken major res responsibilities in agriculture, education and health : and a considerable sharc in the expansion of ot her social and economic infrastructure. Especially the previously neglected peripheral regions are getting more attention by the federal government to improve their backward situation . On the revenue s id e, though the assignment is not far from what economic theory suggests, in practice the center controls the largest share- about 83%, and the regions, only 17%. The regions' own revenue could only cover about 3 I % of their expenditure. As a result a large share of their budget is financed by central government transfers. Hence there is still greater dependence on the center. The main causes lo r the high dependency, besides the assignment problem, is the poor economy of th e country. Most of the regions have low tax capacity most economic activities are concentrated on very few areas. There is wide diversity among the regions in population, natural resource, infrastructure, manpower capacity etc. and some regions are more disadvantaged than others in various criteria . Among the problems in the decentralization process, manpower problel11 has been the major bottleneck for inefficient and low budget utilization . The decentralization process could not go to lower administrative levels as was intended due to manpower constraint especially in some regions. Though there are improvements in the performance of the regions over the years, greater effort is needed to solve the multifaceted problems. Extensive training especially in the previously disadvantaged areas; civil service reform specially in the salary scale: revising the deficiencies in the laws, procedures and directives regarding borrowing, revenue sharing, budge ting process etc.; modifying the revenue assignment in favor of the regions; strengthening joint forums between the regions and the center to discuss and solve problems: improving the political environment of some of the regions; arc some or the issues which need emphasis. thc central government should playa greater role to improve the conditions that would enable the regions to reduce their dependence and increase their autonomy. given Ethiopia's enormous diversity in ethnic and other criteria, and given its history or internal conflicts, we call say that a decentralized administrative structure with federal relations among the regions is the most appropriate form of government. The short comings and ambiguities in the law that deal with the intergovernmental fiscal relations and other arrangements, and the deficiencies that are seen ill the regional government s' fiscal and other performances should not be causes for totally discrediting the system and cases for opting an alternative towards a highly centralist tradition.

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Evaluation of Ethiopia's, Fiscal Federalism

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