Kamila Kolodziejczyk is a student at the University of Ottawa, completing a double major in Political Science and Public Administration. Her research interests include international relations, immigration, indigenous politics, social movements, and human rights. Kamila recently completed a Directed Research course with the Forum, where she conducted a literature review on the relationship between federalism and corruption.
We live in a world in which acts of corruption and abuse of power by individuals who actively leverage positions of official authority and influence for personal benefit challenge the ability of governments to effectively meet the needs of people. Despite the near-universal condemnation of corruption by citizens, media, politicians and international organizations, abuses continue to plague governance systems worldwide. An insidious phenomenon which contributes to the erosion of democracy, corruption damages trust in government among citizens and inhibits the public good that can be done in a state. As scandals continue to emerge at municipal, national and international levels – and to disproportionately affect vulnerable populations, undermine the rule of law, and inhibit economic and social development – it is imperative that this complex issue be better understood to enable governments and the international community to more effectively combat corruption. With greater knowledge of how corruption manifests and how it can be prevented, we can create better public services in countries around the world, support governance underpinned by rule of law, and maximize the impact of development efforts.
Corruption is a universal phenomenon. Corrupt practices and abuses of power are found in countries all over the world, and federations are no exception. Indeed, some of the most notorious corruption scandals in recent history occurred in federal countries: the Siemens bribery case in Germany and the 1MDB scandal in Malaysia being two of the most brazen examples. The relationship between federalism and corruption is complex; federalism and corruption are both multifaceted and dynamic. The difficulties related to researching these topics makes it inherently difficult to come to conclusions regarding the nexus between the two. In the current literature analyzing the relationship between corruption and federalism, the research is divided into two main schools of thought. Some scholars argue that the decentralization of governance increases the possibility for corruption to blossom because of the absence of central oversight. Others suggest there is less corruption because there is more accountability when governance is closer to the people. Although there are many inconsistencies in the current literature on corruption and federalism, one of the common recurring themes is that in federal countries corruption tends to manifest locally/regionally. It is possible (and indeed likely) that there is also corruption within the central government within federations. However, much of the existing scholarship on the subject focuses on the corruption at the regional and municipal levels of government. There are several common themes identifiable in the current evidence base that appear to support the contention that corruption tends to manifest itself locally: the influence of funding mechanisms at the regional levels; the lack of effective anti-corruption measures locally; and the influence of political alignment.
Influence of Revenue Sharing
The first common theme identifiable is the influence of revenue sharing mechanisms at the local/regional levels. A case study of Mexico provided particularly insightful information on the dynamics of corruption and revenue sharing mechanisms. This research showed that subnational governments that are not fully responsible for financial consequences of their decisions (states that rely heavily on central government funding), are more likely to engage in corruption. States that rely heavily on government funding often cede their policy and fiscal autonomy to the central government, which influences corruption as the subnational governments do not have the incentive to provide public goods that improve the economy. On the other hand, if subnational governments receive a revenue transfer from the central government and also raise a portion of their own revenue through taxes on the local economy, decision-making and resource allocation tend to favour the public good and corruption is more limited. The research found the greater the revenue independence, the less corruption, and the more spending on public good incentives. It offers a promising framework to study corruption related to funding mechanisms.
Other case studies from federal countries suggests there is indeed a correlation between corruption and the ability of regions to generate own source revenue versus the amount of capital transfers they receive from central government. For example, in Russia and the Latin American federations (Venezuela, Argentina and Brazil), where central government holds majority of taxation power, there is little incentive or capacity for subnational governments to implement measures to generate their own income. This limits the amounts of autonomous fiscal resources available to states and prevents them from being fully independent in their policymaking, as they are reliant on transfers and the central government strings attached which often accompany them. Researchers highlight that fiscal revenue transfers have also undermined local accountability as politicians do not pay for consequences of their actions if they overspend, or do not spend the money ethically. This had led to deterioration of public goods in general, increased corruption and economic instability. In other case studies that focus on Malaysia and Ethiopia, researchers agree the region’s lack of ability to raise sufficient own-source revenue is a problem that can have many negative effects on the regions. There is little evidence however, on how revenue sharing specifically affects corruption.
In federal countries where multi-level funding is the standard practice, such as Canada, Germany, and Spain, there tends to be less corruption. Although in these countries the central government raises general tax and the regions do receive federal transfers, subnational governments also have significant tax autonomy, and the ability to generate their own revenue. According to Transparency International, these countries are ranked high (Germany: 9th, Canada: 14th, Spain: 35th) on the Corruption Perception Index (CPI) compared to countries where regions rely mainly on federal transfers (for example Brazil: 94th, Argentina: 94th, Ethiopia: 94th Russia: 137th). The data, according to the CPI ranking, implies that federal countries with multiple revenue sharing systems where subnational units have multiple methods of generating income are ranked higher and tend to be less corrupt compared to countries that are reliant on federal transfers.
Literature that analyzes the influence of multiple revenue sharing systems on corruption in these federal countries is scare. As such, so there is no clear research that explores whether multi-level funding influences corruption. However, it is possible that there is a correlation between revenue sharing and corruption levels. To achieve a more sophisticated understanding of the dynamics of corruption in federal systems, further investigation of whether funding systems within federations states have a significant impact on corruption or if other factors influence these outcomes would be beneficial.
Evidence also suggests there are issues with implementing, maintaining, and funding anti-corruption measures in certain federal countries, particularly at the local levels, which consequently limits the detection and prevention of corruption. Research from case studies in Spain shows that three of the largest corruption cases in recent history all have in common a lack of oversight of public officials at the local and regional levels. While in 2013 the Spanish government launched a plan to promote better oversight as part of its Democratic Regeneration Plan, a November 2019 report by the European Council’s Group of States Against Corruption (GRECO) highlighted that most of the initiatives were piecemeal and lacked overall cohesion. In Argentina and Brazil, local legal institutions are tasked with enforcing anti-corruption measures, but they have limited resources, expertise, and independence which makes it difficult for them to investigate and punish local corrupt activities. A lack of funds at the municipal level and the absence of an integrated, multilevel anti-corruption strategy mean that corruption has manifested more locally. Researchers also consider “that local institutions are too intimidated to challenge members of the political elite.” Because of these weaknesses, political elites can engage in corruption without a fear of being held legally accountable.
There are numerous studies on a variety of local level anti-corruption initiatives in federal countries: measures that have either been implemented or which are planned to be implemented. Although the literature highlights there are issues with implementing, maintaining, and funding anti-corruption measures at the local level in some federal countries, there is little evidence to suggest that there is a direct correlation between anti-corruption measures and federal countries – meaning that there is no empirical base to suggest that anti-corruption measures were effective (or ineffective) as a consequence of the federal structure in place. More research is needed on the effectiveness of the anti-corruption measures. If they are not effective, it is important to identify if this is due to variables related to the federal structure, or due to other factors such as a culture of corruption, level of development, lack of resources, etc.
Finally, political alignment is another aspect that could explain the relationship between corruption and federalism. The available literature supports the idea that political alignment between two levels of government increases the number of transfers between the central government and regional/local governments. A case study in Spain analyzed municipal/local governments where elites were part of the same party as regional governments. The findings showed that these local governments benefited from more favourable budgetary decisions taken at the higher level of government, had better connections for public contracts, and experienced less rigorous monitoring from higher level governments (which led to a tendency to miss or ignore corruption).
There is also some evidence that political alignment influences intergovernmental politics and resource allocation in Brazil, India and the United States. In all three instances, there is evidence that political partisanship among federal governments influences capital transfers to state/provincial governments to varying degrees. In Brazil, researchers have found evidence that following elections unaligned municipalities received a sizeable cut in their federal transfers while aligned municipalities received larger transfers. In the United States, findings indicate that states with high vote share for the incumbent administration tend to be rewarded with higher federal transfers, while states that tend to vote for the opposition party, change political affiliation or are “swing states” do not receive more money. In India, researchers have found clear evidence that the regional ruling party spends more funds annually in its own party constituencies compared to constituencies controlled by opposition parties. The increases of capital transfers to aligned states/municipalities rewards politicians aligned with the central government and punishes those who are part of the opposition. This increases the re-election rate of politically aligned levels of government. Although there is some research on the topic, scholars broadly agree that testing this hypothesis is challenging as it is difficult to find credible sources and to determine whether correlation between alignment and transfers is completely driven by political/electoral gain or local socio-economic issues.
These studies on the United States, Brazil and India do not, however, directly mention the influence of political alignment on corruption. To develop a better understanding of how corruption manifests in federations, it would be beneficial to further investigate political alignment between local, regional, and federal governments federal countries in the global north and south.
To conclude, the current evidence base presents some common themes and recurring concepts concerning corruption and decentralization—particularly how corruption tends to manifest itself locally/regionally in federal countries. There is some crosscutting evidence that corruption manifests itself locally in federal countries with common features including the influence of funding mechanisms at the regional levels, the lack of effective anti-corruption measures locally, and the influence of political alignment. However, there remains a general lack of evidence on causality related to federalism and corruption. This is an area with a great deal of potential for further research that can prospectively support a better understanding how to prevent corruption in federal countries more effectively, as well as improve decentralization processes in countries seeking to undertake governance reform in the future. Corruption will remain a threat to prosperity, development and the strength of democracy for the foreseeable future. But the better we know the enemy, the better the chances of creating and sustaining good governance in federal countries, to the benefit of all.
The author would like to thank Liam Whittington and Diana Chebenova for their support and edits on this piece.
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