Fiscal Decentralisation in a Divided State: Bougainville in Papua New Guinea

Published date01 December 2018
Date01 December 2018
Satish Chand*
Is fiscal decentralisation in a polity divided by languages, cultures, tribes, and
geography a means to nation-building or a route to secession? I consider the case of
Bougainville in Papua New Guinea to provide nuanced information on the above
question. This case study reveals that fiscal decentralisation, agreed to as part of a peace
agreement signed in 2001 following a decade-long civil war in Bougainville, provided
the opportunity for national consolidation. However, tensions surrounding the
implementation of arrangements for budgetary support of Bougainville are forcing
further fracturing. A definitive answer to the question of whether fiscal decentralisation
helped or hindered nation-building will be provided by the referendum, due by mid-
2020, when the people of Bougainville will have the option to vote for independence
from Papua New Guinea.
Fiscal decentralisation has historically been a central feature of federal structures where
powers are devolved to subnational governments in a uniform fashion. Autonomous
arrangements build on the above by allowing asymmetrical (often territorially-based)
devolution where some subnational governments are granted exclusive powers and
functions (ie, privileges) vis-à-vis the rest of the nation.1 Autonomies may be granted to
allow the subnational units to choose their political future, including the option to
secede; however, the units may instead choose to remain within the federation, given its
fiscal benefits. Incentives for unilateral secession rest on the level of transfers received.
Consequently, fiscal arrangements can serve as the glue holding a federation together.2
The success or otherwise of nation-building using fiscal transfers from the centre is

Professor of Finance in the School of Business at the University of New South Wales, based
at the Australian Defence Force Academy, Canberra. I am grateful to Christine Bell, Usman
Chohan, Ron Levy, Anthony Regan, Thomas Webster, and an anonymous reviewer for
helpful comments on an earlier draft of this paper. Views expressed and remaining errors are
those of the author alone, however.
Anthony Regan, ‘Comparative Perspectives on Institutional Framework for Autonomy’ in
Yash Ghai and Sophia Woodman (eds), Practicing Self-Government: A Comparative Study of
Autonomous Regions (Cambridge University Press, 2013).
Alberto Alesina, Spolaore Enrico and Romain Wacziarg, ‘Economic Integration and Political
Disintegration’ (2000) 90 American Economic Review 1276.

Federal Law Review
Volume 46
investigated in this paper using the case of the Autonomous Region of Bougainville
(henceforth Bougainville), which is due to hold a referendum before mid-2020 in which
independence from Papua New Guinea will be offered as an option.
Decentralisation creates joint responsibilities between national and subnational
governments. The division of responsibility between levels of governments is based on
the principle of subsidiarity, which provides that the formation and implementation of
public policy must be assigned to the lowest level of government with the capacity to
achieve the intended objectives.3 The principle of subsidiarity allows individuals and
local communities to make decisions on issues affecting them rather than leaving these
decisions to the larger group of which they may be a part. It is the precursor to the basic
principle of fiscal decentralisation wherein ‘local matters [are best left] in local hands’.4
The objectives of decentralisation are to improve democratic accountability and the
quality of services delivered.
Decentralisation takes three broad forms: political, administrative and fiscal. Political
decentralisation entails the transfer of decision-making authority to elected local-level
governments under an agreed legislative framework. Administrative decentralisation, in
contrast, allows for delegation of responsibility for delivery of public services to local
officials through reforms to the public service. Meanwhile, fiscal decentralisation entails
the transfer of resources to subnational governments relating to the powers to raise
revenues and to spend public money. These powers may also include raising debt, from
local and foreign sources, and the divestment of public property. Autonomous
arrangements entail both political and fiscal decentralisation.
The principles of subsidiarity that provide the basis for fiscal decentralisation may
be rationalised on the grounds of economic efficiency.5 The revenues required to fund
public provisions may be raised, via tax, jointly by the central and subnational
governments. Differences across subnational governments in their capacity to raise
revenues and the need for funds to provide public services create room for ‘gap-filling’
grants from the central government. Such grants target fiscal equalisation while also
allowing the nation to enjoy the benefits of economies of scale in collecting taxes and
providing sovereign services (eg, national defence). Fiscal arrangements, moreover, may
evolve as the revenue-raising capacity of each subnational government and that of the
central government change over time.
Subsidiarity’s locally funded public services may also be critical to building the
legitimacy of leaders, which explains the recent interest in fiscal decentralisation in
developing countries.6 Decentralisation, it has been pointed out, brings decision makers,
who may include both bureaucrats and their political masters, closer to the population
being served. This is expected to increase community participation in decision making

Robert P Inman and Daniel L Rubinfeld, ‘Subsidiarity and the European Union’ (Working
Paper No 6556, National Bureau of Economic Research, May 1998).
Wallace E Oates, ‘An Essay on Fiscal Federalism’ (1999) 37 Journal of Economic Literature 1120,
Ibid 1122: ‘in the absence of cost-savings from the centralised provision of a good and of
interjurisdictional externalities, the level of welfare will always be at least as high if Pareto-
efficient levels of consumption are provided in each jurisdiction than if any single, uniform
level of consumption is maintained across all jurisdictions’.
Pranab Bardhan and Dilip Mookherjee, ‘Decentralisation and Accountability in
Infrastructure Delivery in Developing Countries’ (2006) 116 Economic Journal 101.

Fiscal Decentralisation in a Divided State: Bougainville in Papua New Guinea
at the local level, thereby addressing local needs that may not be obvious to a distant
decision maker. When local officials are elected on a regular basis, their responsiveness
to local needs can improve their prospects for re-election—which then closes the
feedback loop between taxpayers and their government. Furthermore, the very process
of taxation to fund delivery of services at the local level stimulates ownership of
programs whilst improving both transparency in the use of public resources and
accountability of those delivering the service to the local population.7
Not all services may be decentralised on the grounds of cost-effectiveness alone,
however. While there are centrifugal forces for decentralisation of some public services,
there are other services for which centripetal forces work towards centralised delivery.
Examples of the latter include sovereign services such as national defence, international
relations, border control, and currency which enjoy economies of scale in that the per
capita costs of supplying these services fall with the size of the population of a nation.
Besides, the effects of macroeconomic stabilisation and social welfare get transmitted
across the whole nation and thus warrant national provision. Consequently,
decentralisation may provide the economic incentives for the consolidation of a nation-
Nevertheless, fiscal decentralisation can be a force for the consolidation of a nation-
state as much as a step towards fragmentation. The cases of Quebec in Canada and
Catalonia in Spain illustrate the desirability of fiscal autonomy as a force for nation-
building as much as a reason for secession. In both these cases, vibrant subnational
identities have been developed through strong local and federal taxes used to fund social
programs. This has occurred within contexts where contested political identities are
undergirded by linguistic and regional cleavages, and by uneven spatial economic
development across the federation. Federal programs for income-support, education,
and healthcare in Canada have played ‘an integrative role in a country otherwise shaped
by powerful centrifugal forces’.8 Meanwhile political decentralisation in Spain has been
pursued to try to correct ‘a protracted conflict between central and peripheral
nationalism’, and to increase national integration.9
The literature on the ‘paradox of federalism’ asks whether self-rule helps to
accommodate or exacerbate ethnic divisions, suggesting that answering this question—
which to a significant extent remains open—depends on the context.10 The literature has
been particularly...

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