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.

Keywords: Federalism, Finance, South Sudan, Somalia, Ethiopia