Federal systems emerge in two broad ways both of which have epochal implications for development. First are the coming-together federal systems. Second are the holding-together systems. The first is voluntary and often a response to certain socio-economic or political needs and or challenges facing the component units at a particular historical moment. Some have referred to this type of system as collaborative/cooperative federalism. The United States is often identified as a typical example of this system. Conversely, the holding-together system is one that emerged mainly due to the action of an external power often represented by a colonising nation. This type of system is referred to as competitive federalism. Nigeria and a good number of post-colonial countries that adopted federalism often fall under this system. In this case, the operation of federalism is further stressed by the need for, and challenges of, nation building.
In this paper, I would not do two things. First, I would not repeat the history of fiscal federalism in Nigeria as numerous efforts have been made to trace this from the colonial to the post-colonial era (see for instance Bamgbose, 1998 and Ekpo, 2004 who traced this history in pre-independence, post-independence and democratic experiment period). Among some of the efforts to address the challenge of fiscal federalism in Nigeria includes among others: the Phillipson Commission of 1946, the Hicks-Phillipson Commission of 1950, the Louis-Chick Commission of 1954, the Raisman-Tress Commission of 1958, and the Binns Commission of 1964. Others include the Interim Revenue Allocation Review Committee, Dina Commission, the 1977 Aboyade Technical Committee on Revenue Allocation, the 1979 Okigbo Commission, the 1981 Revenue Act, the Danjuma Commission 1988 and others that have existed till date.
Second, I would deviate from the discussing Nigeria’s fiscal federalism from vertical and horizontal colorations. By vertical colorations, efforts have been made to discuss the core issues facing Nigeria’s fiscal federalism in terms of the conflict between the national government and the state governments or even between state governments and local governments. By horizontal colorations, efforts have been made to highlight the contestations among state governments that make up the federation.
In this context, for instance, analysis is hinged on why State A thinks that a certain revenue formula benefits only State B. Rather, my approach is to identify the underling core issues in Nigeria’s fiscal federalism and development. Ipso facto, it is a fact that fiscal federalism has always remained a controversial issue in Nigeria since its creation. It is even more important to appreciate that this historical and contemporary controversy does not merely exist because of the arrangements in themselves but they exist because of the development implication of adopting any revenue acquisition and/or redistribution principle.
This is the real challenge and not the principles per se and it is based on this understanding that I highlight what I consider the real issues in Nigeria’s fiscal federalism as they affect development. Therefore with respect to the problematic relationship between fiscal federalism and development in Nigeria, I proceed to highlight a few of the major issues.
First is the issue of rent-seeking. Economic rentierism has not only negatively impacted industrialisation of the country but it has most importantly occasioned the politicisation of fiscal federalism. Why did the principle of derivation as a means of revenue sharing among the component units systematically diminished following the discovery of oil and the ascension of oil to the commanding height of the national economy? Why is it that after oil became the chief source of national income, the groundnut pyramid and the cocoa farms diminished?
Today, it is too obvious that majority of the states would not prefer derivation owing to the economic laziness that has crept into states and national life. Second, by implication, is the issue of diversification. Even when it is understood that crude oil is “quick money,” there is no logic that says that other sectors should be neglected, underdeveloped or jettisoned. It is the very lack of this diversification that has led some to refer to oil as a curse: the “oil curse” or “resource curse.”
The discovery of crude oil seems to have deepened Nigeria’s economic laziness as states have been accustomed to going to Abuja to receive their monthly allocation from the federation account. As is that is not enough, Nigeria’s annual budget is determined by the price of barrel of oil which is usually very dynamic to the extent that changes in the price of crude oil in international market have become a crucial source of macro-economic fluctuations in Nigeria. These Catastrophic effects of oil price shocks always negatively impact the national economy and development.
Third is the issue of cost and balancing merit in Nigeria’s federalism. By the way, federalism does not mean disregard for meritocracy. Nigeria’s federalism is one of the most expensive because it remains a result of series of forcefully created units that ordinarily may not have existed otherwise. I would not go into how the balance between the south and the north had been historically patterned and reconfigured under military rule, rather I would stress that a federal system where units existed merely for political or pacifist reasons portends a great burden to fiscal federalism for the very simple reason that the fundamental objective of fiscal federalism is raising and spending of money.
If this is so, why creating a state that cannot generate one-tenth of its own monthly recurrent expenditure how much more capital expenditure? Meanwhile, since some states have been created purely for political expediency (in spite of their lack of economic viability), the spending and sharing of revenue from the federation account will continue to raise critical questions. In addition, some states, using their constitutional powers to borrow money without any viable means of repaying the loans will continue to be neck deep in debts. It is a fact that most of the states in Nigeria today raise money through bonds and obtain loans from financial institutions both nationally and internationally for capital projects, pay staff salaries and cater for several other recurrent expenditures while several of them cannot even generate any revenue internally.
Fourth is the overarching issue of corruption. Even where unviable states exist, the fact that monies meant for the development of states are stolen by political representatives and a few collaborators in the bureaucracy further reduces the impact of the allocated revenues. Just as individuals at the national level have been arrested, prosecuted and jailed for corruption, so have governors been interrogated by the Economic and Financial crimes Commission ( EFCC) on issues bothering on financial impropriety and breach of trust.
Fifth is the dangerous but emerging use of violence to engender redistribution. The nature and history of the Nigerian state seem to suggest that government is exclusive rather than inclusive. This has in a way led some state actors to embrace violence as a means to ensure wealth redistribution. For instance, for several years, Niger-Delta militants held the country to ransom. Example of this is the Niger-Delta militants who for several years held the country to ransom until the federal government initiated an amnesty program for them that saw many of them attending training programs in the US, UK and several other western countries which will see many of them become ICT professionals, Under-water Welders, Pilots, Boat Builders, Seafarers, Marine Engineers etc. This was further demonstrated in 2014 budget where the Niger-Delta militants were allocated a whopping sum of N54 billion Naira under the Presidential Amnesty Program while the Nigerian Armed Forces and Police got N46bn in capital allocations for the same year.
In conclusion, the problems associated with the fiscal arrangements of the Nigerian federation are fundamentally attributable to the nature, content and character of the country’s fiscal regime as well as the institutional and socio-political factors that shaped the country’s economic policy including limited revenue base as discussed above. However, no single paper can fully address the challenges of Nigeria’s fiscal federalism but I would make some suggestions on how to enhance the performance index of both the federal and state governments despite their limited revenue base.
First, government must engage in systematic diversification from oil and be proactive in the development projects in terms of infrastructure, education and health. This means that not only must federating states and the federal government understand the need for development but they must also show that they know how to bring it to the grass-root in order to achieve maximum results.
Second, anti-corruption institutions and the fight against corruption must be enhanced. It is unbelievable the amount of funds that is lost to corruption. And third, the people must continue to hold their representatives accountable. It is only through this that governments can live up to their expenditure responsibilities by providing public goods and services for the benefits of all Nigerians.