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

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Fiscal Decentralisation in a Divided State: Bougainville in Papua New Guinea FISCAL DECENTRALISATION IN A DIVIDED STATE: BOUGAINVILLE IN PAPUA NEW GUINEA Satish Chand* ABSTRACT 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. I INTRODUCTION 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. 1 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). 2 Alberto Alesina, Spolaore Enrico and Romain Wacziarg, ‘Economic Integration and Political Disintegration’ (2000) 90 American Economic Review 1276. 2 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 3 Robert P Inman and Daniel L Rubinfeld, ‘Subsidiarity and the European Union’ (Working Paper No 6556, National Bureau of Economic Research, May 1998). 4 Wallace E Oates, ‘An Essay on Fiscal Federalism’ (1999) 37 Journal of Economic Literature 1120, 1137. 5 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’. 6 Pranab Bardhan and Dilip Mookherjee, ‘Decentralisation and Accountability in Infrastructure Delivery in Developing Countries’ (2006) 116 Economic Journal 101. 2018 Fiscal Decentralisation in a Divided State: Bougainville in Papua New Guinea 3 _____________________________________________________________________________________ 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- state. Nevertheless, fiscal decentralisation can both 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 silent on the efficacy of fiscal decentralisation in keeping divided communities united. I address this void by considering the case of fiscal decentralisation put in place as part of a peace agreement signed on 30 August 2001 between the leaders of
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