Fiscal Equalization and Conflicts in Federations. a New Theoretical Framework Based on Regional Actors

Fiscal equalization (FEQ) institutions have an important role in federal systems, as they are linked to issues of economic heterogeneity (EH) within federations. EH can lead to violent conflicts and serious disturbances and undermine the federal contract. FEQ institutions are meant to create a level playing field among the regional actors of a federation usually through either vertical asymmetrical transfers or horizontal transfers from more affluent to poorer constituent units. There is, however, no theoretical framework of such fiscal equalization structures and their effects yet. FEQ institutions were mostly analyzed by a predominantly Economics literature that was mainly interested in fiscal efficiency and allocation considerations. FEQ was in the Comparative Politics literature only marginally treated and never in a wider comparative perspective. This article presents on the one hand a new theoretical framework that links EH, FEQ and the emergence of conflicts based on regions as actors in a dynamic way. While the link between EH and conflicts has been explored in the literature, an intermediating effect of the FEQ is a new consideration – particularly in a dynamic adaptive way. The proposed model understands regions as rational-choice actors pursuing their interest of being re-elected. In order to react to pressure arising from an unfavorable EH situation, the regions must push for reforms of FEQ institutions to appease their electorate. On the other hand, it presents the analysis of three case studies that empirically test this underlying framework.