The most fundamental characteristic of federations is the constitutional distribution of powers between two or more levels of government. This requires mechanisms that promote the independence of central and regional government on the one hand (self-rule), and the inter-dependence of the two levels on the other (shared rule). This requires effective institutions and mechanisms for consultation and co-operation among the sub-units and between sub-units and the national government.

One of the most fundamental decisions to be taken when designing a federal system is how to divide the powers and responsibilities of governance between the national and sub-national levels of government.

Certain powers are almost always reserved for the national government. The central government usually retains powers that are necessary for preserving the independence and security of the country, interacting with other countries and international organizations, managing the domestic economy and large natural resources, and maintaining national infrastructure.

National governments in a federal system almost always have powers over:

• Foreign affairs

• Defense

• Citizenship

• Currency

• International trade

Sub-national units usually have powers that are of particular regional interest: local transportation, education, primary healthcare, agriculture, local languages, microcredit, and local taxes. Typical powers for the sub-national units include powers over:

• Primary and secondary education

• Local economy

• Health clinics

• Agriculture

• Irrigation

• Land taxes

• Culture (including libraries)

• Sanitation

• Local roads

Exclusive, Residual and Concurrent Powers in Federal Constitutions

An important issue related to the division of powers in a federal system relates to how these powers are listed in the constitution. In some federal constitutions, there are two lists of exclusive powers: one that lists the powers of the national government, the other to the sub-national units.

Each level of government is limited to those powers that are specific in its list. Any powers that are not included in either of these lists are known as residual powers. Usually, residual powers go to the national government in holding together federations and to the sub-unit governments in coming together federal systems.

Other constitutions contain three lists. In addition to the two lists mentioned above, they also contain a list of areas that both the national and the sub-units work together or in which both have the responsibility for dealing with. These powers are known as concurrent powers. Concurrent powers frequently include issues related to agriculture, education, irrigation, transport, energy, airports, housing, and the environment.

For example, the United States Constitution has only 18 headings for the powers of the federal government; all other powers (residual powers) lie with the states. In contrast, the Indian Constitution has three long lists: the union list has 97 headings, the concurrent list has 47 headings and the state list lists have 66 headings. The Malaysian Constitution also has three lists: the union list has 27 headings, the concurrent list has 18 headings and the state list lists have 20 headings. In India, residual powers lie with the national government, while in Malaysia, residual powers are left to the states.

In the case of a conflict over which branch of government has the responsibility to regulate a concurrent power, constitutions usually favor the national government. However, in cases that remain unclear, the constitution provides for a dispute resolution mechanism (e.g. supreme courts or referenda) to adjudicate these conflicts.