Opening Pandora's Box: Preliminary Notes on Fiscal Decentralization in Contemporary Ethiopia

Opening Pandora's Box: Preliminary Notes on Fiscal Decentralization in Contemporary Ethiopia Eshetu Chole Addis Ababa University The Problem The Transitional Government of Ethiopia (TGE) , which subscribes to "the rights of nations, nationalities and peoples to self-determination and to determine their own affairs by themselves" has issued a "Proclamation to Provide for the Establishment of National/Regional SeIfGovernments ."1 Among the "special powers" conferred on such governments , those of directly economic import are the powers:¦ to borrow from domestic lending sources and to levy dues and taxes;¦ to plan direct and supervise social and economic establishments in accordance with the relevant policy of the Central Transitional Government ;¦ to establish, direct and supervise social and economic development establishments or enterprises;¦ to prepare, approve and implement their own budgets. As a follow-up to this law, the TGE subsequently issued Proclamation 33/19922 to define the nature of fiscal relations between the central government and the regions. These are without doubt sweeping powers, and they represent a radical departure from traditional practice in Ethiopia. On the face of it, they seem destined to have profound implications not only for the economy©Northeast African Studies (ISSN 0740-9133) Volume 1 Number 1 (New Series) 1994, pp. 7-307 8 Eshetu Chole but also for the country's political future. The purpose of this paper is to explore the economic implications ofthe proposed measures on the basis of theory as well as practical considerations. For several decades now, the Ethiopian fiscal system has been characterized by a great deal of centralization.3 With respect to revenue, about 80 percent of total revenue was collected by the central government in Addis Ababa and Assab. The major reason for this is that the most important sources of government revenue were inherently outside the purview of the regions. Thus, 30 percent of total revenue, on average, was collected from taxes on foreign trade and 90 percent of revenue from these taxes was collected in Addis Ababa and Assab. Domestic indirect taxes (excises) represent the other major source ofrevenue. Since most of these are levied on manufactured goods and since the country's industrial establishments are concentrated in a few regions, the regions' contributions are quite limited. The revenue sources with any degree of regional significance are the tax on agricultural income, the land use fee, and revenue from charges and fees on licenses. But the total revenue from such sources does not add up to even 10 percent oftotal revenue. Therefore, the revenue collectedby the regions themselves is insignificant. In fact, of the 20 percent that was collected from them, about 12 percent originated from Eritrea, Shoa and Hararge. In other words, the other eleven administrative regions of the country collected only 8 percent of total government revenue. The structure of government expenditure also shows the same degree of centralization. On the average, no more than 20 percent of total government expenditure was spent in the regions. Again this is largely determined by the nature of the major expenditure items. For instance, about half of recurrent expenditure was on defense, an item which falls inherently within the purview of the central government. The same can be said of most of the outlays by the ministries and other government agencies. Such a fiscal system was consistent with the political and administrative setup of the day, since fiscal decentralization is inconceivable in the context of a centralized political system. Now that the new political context is predicated on political decentralization, it is obvious that the fiscal system must also change to reflect the new realities. In other words, the Opening Pandora's Box 9 imperative of economic decentralization is not an economic imperative per se, but one derived from the political agenda of the day. While the necessity of a certain degree of fiscal decentralization may be readily granted, it should be recognized that the nature and extent of decentralization are far from simple matters to agree upon, as the experiences of other countries amply demonstrate. A number of questions, none of which yields simple answers, suggest themselves. For instance, what will be the nature of revenue-sharing between the center and the regions? What system ofgrants-in...