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This essay discusses the distribution of power between different levels of government (central, state, local), the consequences of fiscal centralisation and the possible strategies for and consequences of decentralisation. To set the scene, the author discusses the fundamental rationale for government in the context of global factor mobility and competition for mobile capital, know-how and enterprise. Thereafter, he tries to establish what it takes to give substance to the "Competitive Federalist Principle": namely, that a devolution of powers of governance to subsidiary levels of government often serves to protect the citizen from the opportunism and arbitrariness of rulers, and to strengthen the entire country’s competitiveness in the era of globalisation. Finally, given the political temptations to compete with subsidies, the author makes a case against discriminatory regional policies, with states entering into "bidding wars" by offering investment subsidies to mobile investments.