Market-preserving federalism

Market-preserving federalism is a special type of federalism that limits the degree to which a country’s political system can encroach upon its markets. ^[1]Weingast notes that there is a fundamental dilemma facing a government attempting to build and protect markets: the government must be strong enough to protect property rights and enforce contracts, but not strong enough to credibly commit the state to honoring such rules. ^[1]

Conditions for market-preserving federalism

Montinola, Qian, and Weingast identify a set of five conditions that represent an ideal type of institutional arrangement for market-preserving federalism (italics in original). ^[2]

(F1) There exists a hierarchy of governments with a delineated scope of authority (for example, between the national and subnational governments) so that each government is autonomous in its own sphere of authority.

(F2) The subnational governments have primary authority over the economy within their jurisdictions.

(F3) The national government has the authority to police the common market and to ensure the mobility of goods and factors across subgovernment jurisdictions.

(F4) Revenue sharing among governments is limited and borrowing by governments is constrained so that all governments face hard budget constraints.

(F5) The allocation of authority and responsibility has an institutionalized degree of durability so that it cannot be altered by the national government either unilaterally or under the pressures from subnational governments.

While condition F1 is the defining feature of federalism, conditions two through five are required to ensure federalism’s market-preserving qualities. ^[2]

References

1. ^ ^{a b} Weingast, Barry (1995), "The Economic Role of Political Institutions: Market-Preserving Federalism and Economic Development", Journal of Law, Economics, & Organization 20 (1): 1–31 .
2. ^ ^{a b} Montinola, Gabriella; Qian, Yingyi; Weingast, Barry (1995), "Federalism, Chinese style: The political basis for economic success in China", World Politics 48 (1)