Federal Finance: What can South Sudan and Somalia Learn from their Neighbor Ethiopia?

Abstract

The paper examines the Ethiopian experience with fiscal federalism which can
be used as a lesson by South Sudan and Somalia, the two countries which are
struggling to have a stable and viable nation. Ethiopia adopted federal system in
1995 which creates nine states based on ethnic grounds. Of the nine states, six
of them have single ethnic group representing more than 80 percent of state’s
population while remaining three are multi-ethnic states. The fiscal relationships
between the federal and state governments are provided in the Constitution
addressing the four major components of federal finance. The expenditure
assignments among tiers of government appears to be in line with the general
principles while taxing power is over concentrated in the hands of federal
government which resulted in high level of vertical fiscal imbalance. To correct
this imbalance the federal government makes transfers to state governments in
the form of formula-based budget subsidy which covers much of their budget.
While political forces known to influence division of powers in federal structure,
the existing federal finance arrangement in Ethiopia does not face serious
challenges. The country, both at federal and state levels, has been ruled by the
same political party since the adoption of the federal constitution. The existing
fiscal arrangement may face challenge if another political party takes power in
some states or the federal government.