The practice of fiscal federalism in Ethiopia: a critical assessment 1991-2012: an institutional approach

The practice of fiscal federalism in Ethiopia: a critical assessment 1991-2012: an institutional approach

The long statehood history of Ethiopia is known for its decentralized governance system with many autonomous regions and principals ruled by hereditary regional chiefs under various titles, but accountable to King of Kings at the centre. The autonomous regions were not only paying annual tribute to the king of kings, but also had to cooperate with the centre. Powers of the regional chiefs started to diminish at the turn of the nineteen century and had been completely abolished in the early twentieth century. The century old exclusive, suppressive and highly centralized governance system came to end in 1991 and a multi-ethnic federal arrangement has been adopted.

The Federal Constitution of 1995 guarantees the right of self determination of Nations, Nationalities and People (NNP) up to secession. Considerable political and administrative powers have been devolved to the states. Constitutionally speaking assignment of responsibilities to the states makes Ethiopia one of the most decentralized federations. The states have also access to a range of tax bases, except the custom duties related taxes. They have power to determine tax base, tax rate and administer. They have legislative power to levy and administer jointly over concurrent taxes. The Constitution also guarantees borrowing right of the states. The devolutions of all these powers to the States are political preferences of the ethnic-based political forces for having strong states.

This dissertation examines the constitutional setting of the political decentralization, the devolution of assignment of responsibilities, taxation powers, the vertical intergovernmental transfer system and borrowing autonomy of the States as well as the Wereda (district) level decentralization vis-á-vis the practices at ground. The study finds that (i) the decentralization processes have been guided by specific circumstances of political, economic and historical realities of the country; (ii) The Federal Constitution aims at creating strong states. In practice, however, the political decentralization is not only more visible than the taxation and borrowing powers but also there are gaps between the de jure and de facto; (iii) the states hardly exercise their constitutional taxation powers. The uniformity of ‘choices’ has jeopardized the state’s tax autonomy; (iv) there is little relation between the degree of decentralization and the states’ borrowing autonomy.

Generally speaking, the two decades of fiscal decentralization practices show that the intention of the Federal arrangement to have strong states has less congruence with the de jure.