The Theory of Diversity Accommodation

The accommodation of diversity is one of the greatest challenges that modern societies must face. In addition, today, many federal systems encounter a loss of solidarity and an upsurge of interregional disparities. These have exacerbated dormant tensions and intergovernmental conflicts that, in certain cases, could even give rise to secessionist movements. Multilevel government (either in federal or regional form) plays a key role in managing diversity and reducing the risk of secession. This has led to decentralization being presented by some scholars as the antidote for secessionist/nationalist movements (Kymlicka, 1998). However, contrasting views also spice up the debate (Sorens, 2015). Moreover, history has not proven any one of these theories.

Although conflicts and secessionism arise from multiple factors, traditionally, the literature on diversity accommodation has predominantly focused on differences from ethnonational, cultural, linguistic, or religious diversity (Gagnon & Iacovino, 2007) and not on the economic driver for autonomy or national recognition. The study of fiscal instruments and financial relations (i.e., fiscal federalism) has, for the most part, been left aside, even though the latter has a critical role in this respect (Sorens, 2015). Although the financial dimension is a vital component of any system of shared government, as the lack of resources to finance constitutionally assigned competences would render these inoperable, reducing autonomy to an empty vessel, the nexus between diversity accommodation and fiscal federalism remains to a large extent understudied (Weingast, 2014). In addition, the financial dimension almost never being mentioned in the literature on diversity accommodation. Along the same line, fiscal federalism has been analyzed from other angles, paying attention to matters such as the allocation of financial resources and the powers thereof (Anderson, 2010), as well as the functioning of financial relations among different levels of government (Boadway & Shah, 2009; Schnabel, 2020), but without drawing much interest from the literature on nationalism and minority accommodation and to the contribution the first could give to the latter (and vice versa) in terms of research advancements.

The Many Facets of Diversity and the Relevance of Fiscal Federalism

Starting from a flexible and broad definition, diversity can be understood as the condition or fact of being different or varied. The sources of this diversity can be multiple, as Hansjörg Blöchliger and Andoni Montes-Nebreda explain in Chapter 2. Diversity and federalism have traditionally gone hand in hand since the need to integrate these differences, to achieve unity in diversity, has been the raison d'être of the federal model since its inception. In fact, federalism can be conceived as a bridge between diversity and unity, as an instrument to accommodate differences within a common state.

Diversity has many facets, different determinants, and dimensions that may fuel intergovernmental conflicts if they are not properly addressed and/or accommodated. These differences go beyond the paradigm of traditional federations that aimed at integrating diversity in ethnocultural terms, mainly focused on language and religion. Modern federations, especially in the global south, as Palermo notes in the preface of this book, have shown that diversity is a much broader and complex phenomenon to which new dimensions are added. History, for example, is another factor that can lead to diversity. The legacy of former regimes, particularly those derived from European colonization, has shaped the territorial and societal structures of certain countries. Thus, beyond the traditional differences in language, religion, ethnicity, or culture, it is possible to identify other characteristics such as variations in the size of land and population, the existence of minority groups (like indigenous populations), or socioeconomic and geographical inequalities, at times derived from the concentration of natural resources in a given territory, from whose heterogeneity different facets of diversity are further derived. Diversity, therefore, presents a challenge for multilevel systems as it requires specific treatment. In other words, different factual situations must be given different treatment, which, in legal terms, usually takes the form of asymmetries (Sahadžić, 2020). Such asymmetries, as illustrated by Blöchliger and Montes-Nebreda, can also extend to the fiscal domain, with fiscal instruments and institutions playing an important role in accommodating diversity.

Given the above, this book explores the link between diversity and fiscal federalism from two different but complementary angles. This is because it does not only focus on how much diversity has affected intergovernmental fiscal relations but also inquires on to what extent fiscal federalism has had an impact in accommodating diversity. Both questions are addressed by experts from different disciplines in a selection of multilevel states with the ultimate goal of presenting a comparative outlook on how intergovernmental financial relations have contributed to integrating diversity.

The Rationale for Case Selection

Defining federalism and identifying the number of federal countries is no easy task. In fact, there is no universal agreement on what federalism means, nor on the number of federal countries, with scholars dissenting on different classifications (Gamper, 2005). Similarly to the approach followed by the concept of diversity, this book adopts a broad understanding of federalism, focusing on its practical meaning (Palermo & Kössler, 2017). In a nutshell, a federal system implies the existence of at least two tiers of government that act in an independent and coordinated manner (Wheare, 1963), combining self-rule and shared rule (Elazar, 1987). Adopting this open definition of a federal system allows us to have great variety in our case selection, going beyond the traditional federations and including different multilevel states from all geographical areas of the world,Footnote 1 portraying, at the same time, as many diversities as possible.

The same applies to fiscal federalism, with the book aiming at integrating the discussion on the role of fiscal constitutions as a determinant, among other factors, not only of financial relations but also of the inherent dynamics of a federal system (Palermo & Kössler, 2017). In this regard, fiscal constitutions are understood in a broad sense, including not only rules “formally incorporated in some legally binding and explicitly constitutional document,” but also unwritten rules like “customary, traditional, and widely accepted precepts” (Buchanan & Wagner, 1977, p. 24). This approach entails three key consequences for the book. First, it stresses the importance of “[contemplating] the Constitution as a whole, considering provisions not specifically directed [at] fiscal matters and taking into account the federal structure created by the Constitution” (Dam, 1977, p. 272). Second, it justifies the inclusion of all sources of law which govern the subject matter but do not have formal constitutional status. In this case, substance prevails over form, as these rules deserve to be thought of as quasi-constitutional in nature. Third, it gives weight to economic rules and, most importantly, to political facts that impact the interpretation and implementation of the rules and determine how a system functions and evolves. The starting point is that the degree of fiscal decentralization and the existence and eventually the increase of interregional disparities might play a key role in exacerbating conflicts. To be investigated is, however, if and to what extent these elements are also determinants in sparking or accommodating secessionist/nationalist claims. This is done by putting financial relations into the broader context of the federal structure of a certain system. In order to do this, the book explores the rationale and management of intergovernmental conflicts on finances within a selection of countries, integrating in the analysis the internal dynamics that result from them. This is done on the assumption that a process designed to accommodate a subnational entity could have negative repercussions on other subunits, creating a sentiment of alienation and hindering future processes of ratification or implementation in legal or constitutional form. Thus, the book endeavors to shed light on the role that fiscal federalism plays in diversity accommodation in multilevel states by exploring and assessing the role of fiscal arrangements as a tool of territorial integration (versus disintegration), with special emphasis on determining if and to what extent different types of arrangements can be conceived as an instrument to reduce (or enhance) territorial tensions and accommodate diversity.

These elements are addressed from a comparative perspective, including the greatest possible number of diversities. Following this rationale, the book features several representative case studies (Australia, Brazil, Canada, India, Italy, South Africa, Spain, and the United Kingdom), focusing on the different aspects and components fiscal constitutions are built on. The ultimate aim is to investigate how different manifestations of fiscal federalism can contribute to the accommodation of diversity. This book aims at providing the reader with a diverse and comprehensive set of case studies, exploring both traditional (Australia, Brazil, Canada, and India) and contemporary federations (South Africa and Spain), including regionalized (Italy) or devolved states (the United Kingdom) in order to enrich the understanding of these phenomena by identifying common trends while evaluating different solutions to similar dilemmas. At the same time, this case selection has the added value of featuring a wide range of diversities, which are thoughtfully addressed in the different chapters of the book. Each chapter delves into specific dimensions of diversity, examining, among others, various cultural backgrounds, socioeconomic statuses and perspectives, providing a comprehensive exploration of the multifaceted nature of diversity.

For instance, differences in the size of the various jurisdictions that make up a federal state can pose a challenge when distributing fiscal resources. Will Sanders explores in chapter 3 how Australian fiscal equalization, one of the strongest models among federations worldwide, has managed the diverse sizes of the subnational jurisdictions, primarily in population, but also in economy and land area. The incorporation of the Commonwealth territories into the equalization program in the 1980s increased the diversity of size among constituent units and led to methodological developments in assessing comparative fiscal capacities. The challenge posed by this is explored in two divergent cases: the Northern Territory, with just 1% of the national population—over a quarter of its population being Indigenous—but spread across 17.5% of the national land area, which has raised questions for Australian federal finances that have not loomed in other states, and Western Australia, once regarded as “small” but has become financially “big” and has used this new status to challenge the established system of full fiscal equalization between subnational jurisdictions, toward a system of reasonable equalization.

Another source of diversity are territorial socioeconomic inequalities. These have been one of the main drivers behind the design of the transfer system in Brazil. As Gabriel Junqueira and Gabriella Alcaraz argue in Chapter 4, this has crystallized into a system that accommodates diverse fiscal capacities by significantly reducing inequalities arising from own revenues. However, a part of the transfers end up not exerting a redistributive function but rather increasing inequalities. Also, the distribution of the equalization funds presents inefficiencies that favor small states and municipalities regardless of their socioeconomic development level. Despite that, changes seem unlikely in the near future due to the difficulty of channeling territorial interests in broad political coalitions to approve redistributive fiscal reforms.

Diversity, in a more traditional sense, also covers the existence of different national communities within a state. This is precisely the case in Canada, where the English-speaking majority coexists with other national communities, such as the French-speaking community in Quebec or the various Indigenous Peoples spread throughout the federation. Against this background, Jennifer Wallner, in Chapter 5, attempts to identify the concrete elements of fiscal federalism that may contribute to—or detract from—the empowerment of internal minority national communities. Wallner explores features such as the representation and participation in the management of fiscal arrangements; the independence of the revenue base that is available to internal communities; and the conditions and time horizons that are associated with the arrangements, exposing how fiscal federalism has contributed to the achievement of self-rule for some internal minority communities while continuing to disempower others.

Diversity in India is a tapestry woven from its vast geographical variations, historical influences, and a multitude of ethnic, linguistic, and cultural groups. This has resulted in conflicts that sometimes embedded a secessionist component. Chapter 6 by Chanchal Kumar Sharma delves into the role of fiscal equalization, showing that its absence fosters anxiety in low-income states, while excessive equalization demoralizes high-income states. In contexts of economic injustice, marginalized minorities often become politically engaged, seeking institutional avenues to express their grievances. When the state fails to provide such channels, these minorities may resort to violence. Initially, the Union government attempted negotiations and concessions, but as military confrontation escalated, it inadvertently reinforced the forces it aimed to suppress, creating a cycle of reinforcement in secessionist crises.

Although Italy is often perceived as a homogeneous country, it has a significant diversity in terms of language, geography, and, especially, socioeconomics. Its late regionalization process, with the delay in the implementation of the ordinary regions, means there is still some way to go in accommodating the country’s diversity and, especially, the growing demands for greater differentiation. In fact, today’s Italian legal and political landscape is witnessing a renewed debate on the relationship between differentiation, autonomy, equality, and solidarity. The emergence of these claims for change could trigger intergovernmental conflicts. In Chapter 7, Antonia Baraggia and Benedetta Vimercati intend to reflect, from a diachronic perspective, on the development of fiscal federalism in Italy. For this purpose, their focus is not only on the provisions in the Constitution, but also on the case-law and all the external or non-institutional factors that have contributed to shaping Italian fiscal federalism. Their final aim is to explain how the Italian legal system has sought to build its own fiscal federalism by reconciling naturally dynamic and contrasting principles such as those of decentralization and unity, autonomy, and equality.

South Africa showcases significant diversity in terms of “racial”, ethnic, economic, social, cultural, political, linguistic, geographic, and administrative aspects. As Tania Ajam illustrates in chapter 8, the country faces pockets of concentrated wealth alongside extensive regions plagued by severe poverty, inequality, and unemployment. The territorial structure of the country reflects the historical transition to democracy, wherein the creation of nine South African provincial governments was a concession to the white minority. However, these provinces were granted limited exclusive functions and had minimal revenue-raising capabilities. Over the past two decades, there has been a trend toward centralization, further diminishing the already limited powers of the provinces and increasing their dependence on intergovernmental grants from the national government.

The creation of the Spanish State of Autonomies was driven by the need to accommodate the existing diversities in terms of language and culture. In Chapter 9, Violeta Ruiz Almendral explores the transformation of the constitutional framework concerning tax and finance power decentralization, juxtaposing Spanish fiscal federalism within the broader context of the European Union. Ruiz Almendral focuses on the central role played by the Constitutional Court in mediating conflicts, a role that has become particularly relevant due to the limited effectiveness of intergovernmental dispute resolution mechanisms. Finally, the analysis concludes by looking forward, speculating on the potential future trajectories of Spanish fiscal federalism, and identifying room for further cooperation between the central government and the Autonomous Communities.

Traditionally a unitary country, the United Kingdom has progressively regionalized since the enactment of devolution in 1999, allowing for greater autonomy in its constituent nations, reflecting its internal diversity. In Chapter 10, Francisco Javier Romero Caro explores, from a legal perspective, the internal architecture of the United Kingdom’s territorial funding arrangement, the Barnett formula, to investigate its integrative and disintegrative effects concerning Scotland. The chapter aims to evaluate if and to what extent the Barnett formula can be conceived as an instrument of nation-building that contributes to reducing territorial tensions and accommodating diversity, in the end reversing disintegrative trends. This is done by evaluating the integrative and disintegrative potentials of each element of the internal architecture of equalization mechanisms.

Overall, the book delves into the intricate relationship between diversity and intergovernmental fiscal relations, aiming to shed light on the mutual relationship between fiscal federalism and diversity accommodation and to understand the impact of the former on the latter, and vice versa. The preliminary assumption for this investigation is the recognition that fiscal federalism possesses both integrative and disintegrative potential, and the extent to which it achieves integration or disintegration hinges on its ability to effectively accommodate diversity or, alternatively, exacerbate dormant tensions. As such, comprising a compilation of chapters authored by recognized experts in the field, the book not only examines the central theme of intergovernmental fiscal relations through diverse case studies, but also lays the foundations for the establishment of a robust theoretical framework that shall enable to foster a comprehensive exploration of this phenomenon from various perspectives. With contributions from disciplines such as law, economics, and political science, it presents a multifaceted analysis of fiscal federalism, thereby highlighting its intricate interplay with the accommodation of “diversities” and, consequently, paving the way for a comparative discussion on the role of fiscal arrangements in multilevel systems, particularly with regard to their capacity to ease diversity accommodation.