GOVERNANCE - 08 OCT 2015

Fiscal Federalism: The States

Fiscal Federalism: The States
Ifeanyi Okowa, Abiola Ajimobi, Akinwumni Ambode, Nasir El-Rufai, Rochas Okorochas, Ibrahim Dankwambo

This article is Part II of a Series. Read Part I here.

Imagine a Nigeria with multi-level policing, with regional or state police forces. Under such proposals, each state would control its own local police, while the current Nigerian police force would work on a nationwide level across all states. It is a replica of the United States model, and touches on a fundamental issue for Nigeria – increased state autonomy.

 

From Three Regions

In 1963, Nigeria had three regional governments; Eastern Region, Western Region and Northern region. By 1976, the regions had morphed into 12 states, then 19, 21, and finally into the 36 states and the Federal Capital Territory. Despite the origin of these states, each has a different economic capacity, due to distinct mineral resources, geography or population. For this reason, questions have been raised about non-viable states. These are states which are unable to sustain their expenditures with internal revenue without the help of the Federal government. 

Some commentators have suggested that those non-viable states with economic features preventing self sufficiency should collapse into the bigger ones, to allow for greater economic security. But in Nigeria, it is well known that state creation and dissolution is a political issue, far removed from the realities of economic sustainability. This irony is made clearer by the mind boggling report of the 2014 National Conference, which suggested the creation of 18 more states.

 

Fiscal imbalances

Jane Jacobs, an unorthodox economic thinker has argued in her book ‘Cities and the Wealth of Nations’ that traditional economic analysis has focused on nation-states, whereas ‘the natural unit of macroeconomic analysis is not a nation-state at all, it is the city and its surrounding regions’. For example, Lagos, Taraba and Enugu all form part of the political union known as Nigeria, but economically, they are quite different. Their revenues flow from different streams, their trade is conditioned by different cultural attitudes, and their markets have distinct fundamentals. This suggests that the state, and even further, sub-units of the states like towns and local governments, should be the focus of economic analysis.

The international community has long accepted Lagos, which generates almost one-fifth of Nigeria’s Gross Domestic Product (GDP) to be the de-facto commercial capital of the country, ahead of Abuja, a salient reminder of our state differences. In 2014, the Internallly Generated Revenue (IGR) of Lagos was ₦276 billion, the closest rivals being Rivers with ₦89 billion, and Delta with ₦42 billion. This is while Zamfara, Ekiti and Kebbi generated an estimated ₦3 billion in revenue over the same period. Regions such as the North East, tormented by the scourge of terrorism, are likely to suffer more regional imbalances over the next few years, a situation that may leave Borno, Adamawa and Yobe forever behind in national growth. The reality is the high level of horizontal fiscal imbalance between our states, a trend that may continue to exist in spite of federal reallocation. All fingers are not equal.

Already, state governments are experiencing the burden of dependency. The oil panacea that has long been the mainstay of our economy has proved unreliable. Looking back into our history, the Yakubu Gowon era began redistributive development on the basis that oil would keep the nation buoyant, and regions equal. At independence, 50% of oil revenue was accrued to the producing state government, but it reduced to 45% between 1969 and 1971, 20% between 1975 and 1979, then fell to a low of 1.5% before rising to the current 13% in 1999. The invisible burden of this reliance has been the failure of states to look inwards to stimulate development.

 

Non-viable states

Aare Dr Kunle Olajide has argued that there are too many states that are not viable. He advocated a regional system whereby states are grouped into regions, not just politically, but administratively. These suggested regions would act as aggregates of states, and become federating units which can decide whether or not to create more states, how to devolve power, how to rotate power, zoning, and other political arrangements. For the minority ethnic groups, he recommended a regional constitution which is developed in conjunction with them, in order to stifle an oppressive majority.

Although laudable, particularly on the federal to state relationship, the political challenges of minority groups and the endowment effect of non oil-producing states benefitting from oil receipts may make his suggestion impossible. 

But what if states had to lose out on the federal allocation and grow from within?

Many will face the realities of their non-viability, but in return, it may encourage them to streamline state management. Healthy competition between states for economic resources will only raise the standards of development. For example, Governor Nyesom Wike of Rivers has set an agenda to close the economic gap between Rivers and Lagos, and this sort of competition fosters growth. Between 2010 and 2014, the Lagos IGR grew from ₦149 billion to ₦276 billion, Ogun’s grew from ₦7 billion to ₦17 billion and Rivers’ from ₦49 billion to ₦89 billion. But Gombe’s grew from ₦2.9 billion to ₦3.8 billion, and Zamfara’s from ₦2 billion to ₦3 billion. There is a competitive edge to be leveraged amongst states, in order to keep them growing at a productive pace.

At the same time, state development goes beyond mere economic indicators. The Niger Delta is well positioned to reap the fruits of its mineral resources, but the security challenges of the last decade have created tension. Bayelsa, Delta and Rivers, while being potential hubs for business activity, are reputed for militancy and youth violence. The environment is largely polluted, and business projects in fishing or other maritime activities prove hard to scale up due to oil spillages. The result is the absence of a sustainable environment for entrepreneurship. Meanwhile, Nigerians flock in droves to the Lagos metropolis, in search of greater business opportunities; to a state that has opened itself up to business and self sufficiency. The gauntlet has been thrown down to the other states.

Nigeria can turn its differences into competition, its diversity into strength. But in doing so, strucutural change and incentive realignment must come from the centre. There is no doubt that the nation can take advantage of its vast opportunities outside the oil & gas industry, but the focus can be channeled more acutely: national growth is no longer enough, each part of the whole must now grow, each state must bring value to the centre. 

This article is Part II of a Series. Read Part I here.

 

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Timeyin Preston Ideh

Timeyin Preston Ideh

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