On Institutionalizing Dynamic Federalism and Effective Democracy in Developing Countries How to get developing countries’ governments right: The power of dynamic federalism and democracy A NEW PROPOSAL FOR FEDERALISM AND DEMOCRACY IN DEVELOPING COUNTRIES

Typical developing countries are chara cterized by the problem of ‘over-government’. Economic growth is hampered by excessive government interventions. The state tends to interfere in almost all activities and endeavours to regulate them minutely. The government sector which is often very large, employs a high proportion of the population outside agriculture. The administration tends to be more bureaucratic than in industrial countries. In addition, rent-seeking distortions are rampant (e.g., public officials often receive much higher incomes relative to other occupations) and waste is pervasive. Many public employees do not really work in a productive sense, and some rarely show up for work. This combination of interventionism and bureaucracy stifles investment and innovation in the private sector (see e.g. Ostrom 1990, Krueger 1992).