An Economic Analysis of Fiscal Federalism in Ethiopia

Fiscal federalism is a process of redistribution of fiscal decision-making power in an effort to improve the performance of the public sector in resource mobilization, efficient resource allocation and in the process enabling the economy achieve fast and sustainable economic growth. This paper addresses the economic rationale, implications and concerns of pursuing fiscal federalism in a poor country and in a political environment of ethnic federalism. The main findings suggest that when fiscal decentralization is exercised with high horizontal and vertical imbalances, it fails to diversify public output in line with the preferences and priorities of local population and to internalize the decisions of regional governments within their own jurisdictions. This in turn encourages the prevalence of big and yet weak government that extracts resources and fails to allocate for the purpose of sustainable and shared economic growth