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20 Fiscal federalism and national unity Richard M. Bird and Robert D. Ebel Introduction Belgium, Bosnia–Herzegovina, Canada, the People’s Republic of China, Germany, India, Indonesia, Iraq, the Philippines, Russia, Spain, Sudan, Switzerland – what can this diverse set of countries possibly have in common? One important answer is that each contains within its boundaries a significant territorially-based group of people who are, or who consider themselves to be, distinct and different in ethnicity, in language, in religion, or just in history (ancient or recent) from the majority of the population. Indeed, contrary to the common view – one might say mythology – that the most ‘natural’ nation state is a unified and homogeneous entity, such ‘fragmented’ countries (Bird and Stauffer 2001)1 – are found throughout the world. Homogeneous nations are more the exception than the rule. Indeed, heterogeneity, whether ethnic or economic, is a more common feature of most countries than homogeneity.2 A second important characteristic of many countries is that they exhibit, to greater or lesser degrees, some ‘asymmetry’ in the way in which different regions are treated by their intergovernmental fiscal systems. While such asymmetry is often most obvious in formal federal countries, it comes up, sometimes in surprising ways, in almost every instance. This chapter explores the varied extent and manner in which asymmetrical treatment helps (or hinders) the maintenance of an effective nation state. ‘Effectiveness’ in this context may be understood in two ways. The first relates to the normal focus of economic analysis of public sector activities:...
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