Critique of the 2007 Paper by Anne Twomey and Glenn Withers
titled Australia's Federal Future: A Report for the Council for the Australian Federation

by Mark Drummond
August 2009

In research commissioned by the State and Territory Premiers and Chief Ministers through the Council for the Australian Federation, Anne Twomey and Glenn Withers (2007: 5, 42, 52-57) carry out a statistical analysis which compares the economic growth rates of seven federal countries and 14 unitary countries since 1950, and on the basis of this analysis claim that Australia could be $86 billion a year (or about 10% of GDP) better off if it adopted "best practice federalism" as displayed by Germany, Canada and Switzerland.

Twomey and Withers refer to this $86 billion figure three times in their report, as follows:

On page 3:
Australia has much to gain from adopting best practice federalism, with the successful delivery of these reforms estimated to generate an annual ‘bonus’ to the nation in excess of $86 billion.

On page 60:
The vehicle for review is undefined in Australia, either constitutionally or by precedent from practice. Certainly, Australia has no automatic mechanisms for such a review. This could be an issue for the proposed constitutional convention. If such a review leads to reform in the right direction it would help to reap the $86 billion reform dividend from better federalism that awaits Australians.205
[Footnote 205 states: This figure reflects the per capita gain from Australia moving to mean OECD practice for federal fiscal decentralisation, as shown in Figure 14, multiplied by total population. A move to better than average performance would produce a higher estimated benefit.]

On page 67:
Both statistically and theoretically, the outcomes reported here seem to hold up well.  Australia’s present federation is estimated to produce a net benefit over the average unitary state of $4,507 per capita, plus an existing fiscal decentralisation benefit of $2,925.  These benefits can be contrasted with the Business Council of Australia/Access Economics cost-only estimate of the disadvantages of federalism of $450 per capita. Further, the move to reform of federal-state relations in the direction of greater fiscal decentralisation could provide a decentralisation reform dividend of up to an additional $86 billion a year. This means that a greater pay-off further fiscal decentralisation could be added to the existing benefits of Australia’s political decentralisation.

The "$4,507 per capita" figure stated on page 67 is also stated on pages 3 and 49, as follows:

On page 3:
In the last 50 years, federations have consistently out-performed unitary states in economic terms. The more decentralised the federation, the better the performance. Research suggests that federalism may have increased Australia’s prosperity by $4,507 per head in 2006 and that this amount could be increased by $4,188 or even more if Australia’s federal system were more decentralised.

Page 49:
The specific advantage achieved by Australia through the federal structure is a sum of $4,507 per capita in 2006 – or $11,402 per average household. This is a major achievement and benefit for Australians and reflects the continuing legacy to Australians today of the nation’s founding fathers.

To further explain footnote 205 on page 60 of the report, note that the $4,507 figure quoted above equals $43,091 less $38,584, where these $43,091 and $38,584 figures are shown in Figure 14 on page 51.  So the $86 billion figure is this $4,507 multiplied by Australia's total population at the time around 2006.

The above quotes include claims that significantly misinterpret (1) work done by the Business Council of Australia and Access Economics, and (2) the intentions of Australia's so-called "founding fathers", but I'll put these concerns to one side to focus on the absurdity of the claims by Twomey and Withers (2007) that:

(1) "in the last 50 years, federations have consistently out-performed unitary states in economic terms" (p. 3);

(2) "Australia has much to gain from adopting best practice federalism, with the successful delivery of these reforms estimated to generate an annual ‘bonus’ to the nation in excess of $86 billion (p. 3)";

(3) "The specific advantage achieved by Australia through the federal structure is a sum of $4,507 per capita in 2006 – or $11,402 per average household" (p. 49);

(4) "Australia benefits a little over 10 per cent by being a federation" (p. 50); and

(5) "the move to reform of federal-state relations in the direction of greater fiscal decentralisation could provide a decentralisation reform dividend of up to an additional $86 billion a year" (p. 67).

The problem with all of these claims by Twomey and Withers about the economic merits of federalism for Australia and generally, and the quantifications of such benefits they derive, is that they're based on a far from valid statistical analysis of the economic growth rates of just seven federal countries and 14 unitary countries.   Specifically, the comparison Twomey and Withers rely upon to establish the $86 billion and $4,507 per capita figures here is a blatant mismatch in which seven wealthy federations (Australia and six of the most locationally advantaged countries in the world: the USA, Canada, Germany, Austria, Belgium and Switzerland) are pitted against 14 diverse unitary countries (Denmark, Finland, France, Greece, Ireland, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Spain, Sweden and the United Kingdom) which include some of the most remotely located and least wealthy OECD countries, such as Portugal, Greece, Finland and New Zealand.

Nowhere in their report do Twomey and Withers even state which specific countries are involved in the comparative analysis which their "estimates of the benefits of federalism" as above are based on.  They merely state on page 48 (and similarly again on page 64) that:

For this report, the entire period since 1950 is covered. This provides a full half century of experience to examine the differences in income growth performance between unitary states and federal states for the 21 OECD countries for which such long-term data reliably exists. These performance data allow a direct estimation to be made of the economic impact of the type of political system chosen.

It was only through email exchanges (and such open disclosure has of course been respected and appreciated) that I and others have been able to confirm the actual countries compared by Twomey and Withers in their analysis that "enabled" them to claim that Australia and other countries economically benefit from having federal systems of government.  And note also that the data Twomey and Withers analyse extends over the period 1950 to 2000 (see pages 48 and 64).

The $86 billion and $4,507 per capita estimates as above would undoubtedly be vastly different if unitary China (with its stunning economic growth in recent decades) and federal Russia (with its mixed and generally poor economic performance), for example, were included in the Twomey-Withers analysis.  But even here, Twomey and Withers are trying to have a bet each way when on page 20 they claim that "even China is now described as a ‘quasi-federation’ or ‘nascent federation’."  And remember Japan - the one time economic growth miracle story!  The whole report is an extraordinarily one-sided appraisal of the truth about federal systems of government in Australia and generally.

The Twomey-Withers analysis simplistically assumes that countries can be neatly divided as if black and white into federal countries and unitary countries, despite the fact that Twomey and Withers themselves acknowledge that this is not nearly the case, as follows for example:

On page 7, Spain is described as a "a de facto federation" - a classification supported by most commentators.

On page 19, Twomey and Withers state that "even China is now described as a ‘quasi-federation’ or ‘nascent federation’, with its provinces and autonomous regions being given substantial economic and political authority", apparently following the line taken by the pro-federalist scholar Daniel Elazar (who is cited three times in the report on pages 9 and 19).

On page 20, Twomey and Withers state that:
Countries with federal systems are not impeded from competing internationally. Many of the largest and most efficient economies belong to federations. Of the G8 nations (the eight largest economies in the world), half are federations (the United States, Canada, Germany and Russia) and the other four (France, Italy, the United Kingdom and Japan) have either proposed or implemented plans to strengthen the powers and increase the functions of their sub-national units in the last decade.

Wikipedia contains articles that classify countries as federal, unitary and regional, in line with the view that the federal-unitary distinction is better described as a continuum with many shades of grey than a black and white dichotomy.  The Wikipedia article titled Unitary state lists 162 unitary states.  The article titled Federation lists 25 federations, but describes other countries not in this list of 25 that are "quasi federal".  The article titled Regional state says that "in political geography, a regional state is a state more centralized than a federation, but less centralized than a unitary state", and lists seven examples of regional states including the United Kingdom, Italy, Portugal, Spain and Belgium which, significantly, represent four of the 14 unitary countries (the UK, Italy, Portugal and Spain) and one of the seven federal countries (Belgium) compared by Twomey and Withers.  So the whole idea of comparing federal and unitary countries as Twomey and Withers have attempted - however valiantly - is extremely suspect in terms of significant classificational difficulties that can never be overcome using the simplistic dichotomy that Twomey and Withers have applied in their analysis.  But even if such a simple comparison were possible, recent GDP growth rate data strongly challenge the Twomey-Withers findings in favour of federal countries.

An Earth Trends Economics and Trade compilation prepared in 2008 by the World Resources Institute, using World Bank data, compares the average annual GDP growth rates of 155 countries (of the 180 or so countries in the world) in continental or regional blocks over the decade from 1995 to 2005, and hence provides a very sound basis for an updated improvement on the Twomey-Withers analysis of the relative economic merits of federal and unitary countries.  This compilation shows as follows, for example, if countries are classified as federal or unitary according to Wikipedia's lists of 25 federations and 162 unitary countries as above:

of the 36 European countries, the seven with 1995-2005 average annual GDP growth rates of 5.0% or greater comprise one of the six European federations in Bosnia and Herzegovina, and six of the 30 unitary countries - Albania, Belarus, Estonia, Ireland, Latvia and Lithuania;

the four European federations among the seven federations and 21 OECD countries overall that were considered in the Twomey-Withers analysis - Austria, Belgium, Germany and Switzerland - all had 1995-2005 average annual GDP growth rates below the 2.4% average for the whole of Europe and 2.9% for the whole world;

of the 28 Asian countries, the four with 1995-2005 average annual GDP growth rates of 8.0% or greater - Armenia, Azerbaijan, Cambodia and China - all have unitary systems of government, but the three federations - India, Malaysia and Pakistan - all had 1995-2005 average annual GDP growth rates which exceeded the 3.0% average for the whole of Asia and 2.9% for the whole world;

the only two North American countries listed are Canada and the United States - both federations - with 1995-2005 average annual GDP growth rates of 3.5% and 3.2% respectively; and

the 1995-2005 average annual GDP growth rates for federal Australia and unitary New Zealand - the only OECD countries in Oceania - were 3.6% and 3.2% respectively.

The above observations (1) align with the common sense assessment that it's never likely to be easy to confirm that federal or unitary countries are economically superior to one another on the basis of federal-unitary status alone, and (2) suggest that robust comparative analyses based on the most recent and relevant data are likely to strongly challenge the Twomey-Withers claims about the relative economic performance of federal and unitary countries, noting that Germany (included in the Twomey-Withers analysis), Russia (omitted from the Twomey-Withers analysis) and other countries were not in their present forms for large fractions of the 1950-2000 time period covered by the Twomey-Withers analysis.

The limitations of simplistic federal-unitary comparisons are further highlighted by the fact that federal countries are made up of unitary sub-national polities: the States and Territories in Australia, the States and Washington DC in the USA, the Provinces and Territories of Canada, the German and Austrian Lander, and the Swiss Cantons, for example.  And some of these unitary polities within federations obviously do better than others economically and generally for reasons that have nothing to do with their unitary status.

In summary, the claim by Twomey and Withers that federal countries have performed better economically than unitary countries over the 50 years to 2007 lacks validity in view of the reasons described above.

Twomey and Withers are clearly on much firmer ground, however, when they argue that decentralisation enhances economic performance.   Decentralisation is a vastly better variable to employ for the purposes of comparing the economic performance of countries than an overly simplistic federalism versus unitary variable, because decentralisation can be meaningfully quantified in ways that federalism obviously can't, as I attempt, for example, in Appendix 6A of my PhD thesis in detail that extends well beyond the decentralisation measure used by Twomey and Withers.  And indeed I'd be happy to cooperate with Anne Twomey, Glenn Withers and others in relation to further work on decentralisation measures and the relationship between economic performance and decentralisation.  Twomey and Withers claim on page 54 that "naturally, federations on average are more decentralised than unitary states, but this is not uniform and some federations are more centralised than some unitary states", and this lines up closely with my analyses in Appendix 6A of my PhD thesis.

I am one of many people who believe Australia would benefit from a decentralised unitary system of government along the lines of the Scandinavian countries, and Twomey and Withers note on page 41 that "the best performing unitary states (the Scandinavian countries) are also typified by a high degree of fiscal decentralisation".  But Twomey and Withers don't provide enough transparent statistical details or data sets in their report to allow the reader to further compare the seven federations they use with a coherent subset of the 14 unitary countries they use such as the Scandinavian decentralised unitary countries (Denmark, Finland, Norway and Sweden), despite the fact that worldwide the number of countries that could be classified as decentralised unitary countries would more or less match the number classified as federal countries, noting the Wikipedia articles as above which listed 162 unitary states and 25 federal states (or federations).

An especially significant point to make about the Twomey-Withers analysis is that the local governments in all six federations employed in their analysis besides Australia (1) account for a vastly greater share of total government expenditure than Australian local governments, and (2) are vastly smaller than Australian local governments in terms of the populations and land areas they serve - see Table 1 on page 20 of the Twomey-Withers report, and in my PhD thesis see:

Appendix 2D - especially Tables 2D-17 and 2D-18 on pages 2D-15 and 2D-16; and

Appendix 6A - especially Tables 6A-14 to 6A-20 on pages 6A-24 to 6A-30.

Note especially that around the year 2000, the local government shares of total government expenditure in the seven federations in the Twomey-Withers analysis, according to Table 2D-17 in Appendix 2D, were:

Australia           6.4%
Austria             16.3%
Belgium           14.6%
Canada           17.7%
Germany          14.6%
Switzerland      21.2%
United States  26.2%

And average populations and land areas served by local governments and the local government shares of these seven federations, again according to Table 2D-17 in Appendix 2D, were:

Australia          population 28,631, land area 11,213 sq km
Austria             population 3,463, land area 36 sq km (based on municipalities)
Belgium           population 17,435, land area 52 sq km (based on communes)
Canada           population 8,404, land area 2,667 sq km (based on municipalities)
Germany         population 5,438, land area 24 sq km (based on municipalities)
Switzerland     population 2,641, land area 15 sq km (based on communes)
United States  population 6,463, land area 261 sq km (based on municipalities and townships)

Just look at these numbers!!  The local government expenditure figures really do shame Australia.  They indicate an extremely weak commitment to democracy, decentralisation, community empowerment, and the subsidiarity principle, and suggest that our democracy is something of a sham in significant respects!  In conjunction with the fuller list shown in Table 2D-17 in Appendix 2D these comparisons show that the outstanding feature of the Australian system of government is the fact that its local governments are (1) financially disempowered to an extraordinary extent, and (2) absolutely huge in terms of the populations they serve and especially the land areas they serve.

With NSW making up about a third of Australia's population and Western Australia making up about a third of its land area, the idea that our mainland States are needed to enhance decentralisation and achieve substantive 'subsidiarity' is completely absurd, but the Twomey-Withers report can provide much firmer ground for constructive reform if its findings are interpreted as a basis for strengthening local government in Australia - financially, constitutionally and generally.  Their findings may also suggest that recent local government amalgamations, especially in Queensland, should be wound back to give local communities local governments that are genuinely close to their people, but right now I for one would settle for constitutional recognition of local government and the doubling of local government's financial strength to lift the 6.4% in the table above to around the 12% to 15% mark.

Twomey and Withers twice in their report refer to "best practice federalism" as displayed by Canada, Germany and Switzerland, as follows:

on page 42:
At present our level of fiscal decentralisation does deliver a benefit of $2,426 per capita, relative to the average
fiscal stance of unitary states. But were Australia to reform its federal fiscal decentralisation arrangements even
to only the average degree of such decentralisation for all OECD federations, Australian average incomes would
be likely to increase by another $2,925 per capita annually. The increase would be $4,188 compared to the
present if we moved to the best federal practice as defined by Canada, Germany, and Switzerland. Figure 14
summarises these calculations.

on page 54:
In Australia’s case our income growth position could be improved upon by 6.79–9.72 per cent, depending
upon whether we moved to average federal practice on decentralisation or best federal practice (Canada,
Germany, Switzerland).

Twomey and Withers define "best practice federalism" as federalism hosting significant fiscal decentralisation in which State (or equivalent) and local governments account for a significant share of total government revenue and expenditure (see especially Figure 10 on page 39), but they don't make it clear what Australia would look like if it followed the examples of Canada, Germany and Switzerland.  On page 55 they note themselves that these federations are very different when they say that the countries included in their study "are quite diverse in characteristics (for example federations range from Switzerland to Canada and unitary states from Japan to France)".  Indeed, the average population of State equivalents in 2009 is over 3 million in Canada, and over 5 million in Germany, but less than 300,000 in Switzerland.  And whereas Canada has a gigantic land area even larger than that of Australia, Germany's land area is less than half that of New South Wales, and Switzerland's is less than two-thirds that of Tasmania.  And if Australia's local government areas were as small as those of Canada, Germany and Switzerland in population, we'd have around 2000 to 5000 or so local governments rather than our current 559.  And the above tables show that in Canada, Germany and Switzerland local governments accounted for between 15% and 21% of total government expenditure around the year 2000, compared to 6% for Australia.  So we again see that if the Twomey-Withers findings are valid they probably provide more of a case for financially strengthened local governments and smaller local governments in terms of population and land area coverage, than a case for improved federalism, but local governments are largely ignored in the Twomey-Withers report.  State and Northern Territory governments have undertaken significant local government amalgamation programs in the past two decades, with varying degrees of community consultation and force, but Twomey and Withers make no mention of these amalgamations despite the fact that such council mergers apparently take Australia even further from the "best practice federalism" of Canada, Germany and Switzerland that they claim we should aim for.

Overall, the Twomey-Withers report possibly provides a sound basis for a significant strengthening of Australian local governments - financially, constitutionally and generally - but provides nothing at all of substance in defence of federalism in Australia and generally.  And returning to the point on history, most of the so-called "Founding Fathers" of Australia's Commonwealth Constitution and Federation were pragmatic nationalists and far too serious to be susceptible to the the superficial ideological appeal of federalism as it relates to the practical workings of government structure, performance and outcomes. Some of the "Fathers of Federation" indeed supported federalist principles, but several quotes included in the brief paper titled
The Dominance of Nationalism in Australia From Federation Till Current Times show that a significant fraction of these "Founding Fathers" (probably about a third of them overall) were unificationists, or "amalgamationists", who clearly supported a unitary system of government for Australia.

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