INTRODUCTION
Background to the Study Fiscal federalism is essentially about multilevel government structure, rather than within a level structure of government, for the performance of government functions and service delivery to the people. Each level of government can be viewed as an institution with definite functions to perform (Rivlin, 1991).
The conventional wisdom in economics is that all functions allocated to government should be those that the market is not able to perform in the efficient allocation of resources, equitable distribution of income, and economic stability and growth (Varian, 1990; Layard and Walters, 1978). Fiscal federalism in Nigeria dates back to 1954 when the country, which had until then been governed as a unitary state by the British, adopted a federal constitution.
However, despite over fifty years of experience
...with fiscal federalism, the country is still beset with the challenges of economic management, poor output growth rate, high inflation rate, and weak balance of payment position. The absence of good economic governance has also raised the problematic issue of credibility in public policy. Relevant question central to this thesis is could fiscal federalism challenges be responsible for poor economic performance in Nigeria? Another question is: What are the current issues or challenges inhibiting the principles and practice of fiscal federalism in Nigeria?
In Nigeria, fiscal federalism has generated intense debate and controversy in recent years. Debates about fiscal management within federal system are not peculiar to Nigeria. From independence in 1960 till date (2011) Nigeria’s fiscal management system has neither been efficient nor equitable (Ike, 2012). Indeed it manifested a wide spectrum of vulnerability, ethnicity, language, region and religion
interactively forming Nigeria’s matrix of cultural pluralism (Ike, 2012).
The Federal Government has, for more than four decades assumed certain responsibilities which rightly belonged to the lower tiers of government and, in the process, had compromised efficiency in public expenditure management, resulting in high levels of unsustainable overall deficits, high inflation, slow economic growth and poor external sector balance (Ike, 2012; Anyanwu, 1995; Aigbokhan 1999; Chete, 1998). The important question that remains to be answered is whether lower-level governments’ spending increases, for example, fiscal deficits at the central level and put economic stability into jeopardy.
This is of particular importance in the performance of the stabilization function, usually assigned to the central government, especially with respect to the issue and management of the national currency, on the basis of its spatial incidence which covers the entire country. Thus, it can be seen that issues of fiscal federalism affect national development and economic stability. The overall objective of this study is to examine the issue of fiscal federalism and its effects on economic performance in Nigeria with emphasis on Bayelsa State.
Fiscal federalism is the product of the reciprocal and dynamic interaction between different tiers of government, and therefore poses questions as to how the nature and conditions of the financial relations in any federal system affect the production and distribution of the wealth of a nation. In particular it influences how political decisions and interests influence the location of economic activities and the distribution of the costs and benefits of these activities.
Many of the empirical literature on Nigeria have been concerned with explaining the pattern of intergovernmental relations (Mbanefo, 1993;
Sarah et al, 2003) or providing an impressionistic view within the context of political economy of possible consequences of such relationships (Ekpo, 1994). In an attempt to fill this void, this study is therefore an extension of previous studies that are based on one economic variable. There is the problem of how to allocate revenue vertically to the different tiers of government in relation to the constitutionally assigned functions.
The discordance between fiscal capacity of the various levels of government and their expenditure responsibilities, and the non-correspondence problem, is a striking feature of the Nigeria federal finance. There is also the problem of how revenue should be shared horizontally among the states and among the local councils. All these put together have far-reaching implications for the harmonious co-existence of the component units and hence of the system as a geo-political entity (Elaigwu, 1994).
The success of a federal system depends on an acceptable distribution of resources and functions among the different tiers of government so that efficiency in the use of scarce resources is encouraged towards achieving economic stability. All these are the issues of concern in this study.
Research Questions Given the sensitivity and dynamics of the issues involved in this study; the study seeks to provide answers to the following research questions:
- To what extent is fiscal federalism a good measure to evaluate economic performance in Bayelsa State?
- To what extent does government need fiscal federalism to achieve the desired economic results in Bayelsa State?
- What are problems of fiscal federalism in Bayelsa State / Nigeria?
Objectives of the Study The overall objective
of this study is to investigate the relationship between fiscal federalism and economic performance in Nigeria with specific emphasis in Bayelsa State. The specific objectives are to: 1 Examine the extent to which fiscal federalism is a good measure to evaluate economic performance in Bayelsa State. Ascertain extent to which government needs fiscal federalism to achieve the desired economic results in Bayelsa State. Identify are the problems of fiscal federalism in Bayelsa State / Nigeria 4. 5 Significance of Study This study is therefore, important for a number of reasons. First, though the literature on fiscal federalism has blossomed over the years, yet these studies have focused more on developed countries. Secondly, the study establishes a foundation for policy-makers for sequencing reforms of government in developing countries.
Finally the formalized theory provides applied economists with a meaningful specification for estimating the impact of fiscal federalism on economic performance. 1. 6 Scope and Limitation of the Study The study examines the relationship between fiscal federalism and economic performance in Nigeria and employs data covering a period of eighteen years (1990-2007). The choice of this period is explained by the availability of data. Also 2007 is taken as the cut off year as it marked the end of the first eight year dispensation in the third republic.
This period is also crucial given the years of military rule and the relative centralization within a federal framework, leading to a greater homogenization or uniformity than it is federally desirable. Focusing on Nigeria and specifically, Bayelsa State, provides an in-depth analysis of the determinants of a stable fiscal federalism in a plural society and how fiscal federalism
can transform an organic union into a flourishing, strong and virile economy, and becoming one of the top twenty economies in the world.
The study also reviewed fiscal federalism in developed countries, LDCs and transition economies, (Austin, 2006). A major problem that is often associated with studies like this is the accuracy of data available on economic variables. Another is the issue of secondary data being filled with estimation errors. In addition, there are often discrepancies in the data presented by various organizations such as the Central Bank of Nigeria (CBN), National Bureau of Statistics (NBS), International Financial Statistics (IFS), International Monetary Fund (IMF), and the World Bank.
Another major limitation was the inability of the researcher to acquire and master in time relevant econometric software and other related manuals for data analysis which hampered the timely completion of this study. 1. 7 Background Information on Bayelsa State One of the newest states in Nigeria, Bayelsa State has much to offer to investors, from its rich natural resources to its magnificent environmental beauty.
With a thriving petroleum sector, an extensive fishing industry, a growing private sector and a nascent tourism industry, the state is building on its natural advantages to take its place among the economic success stories of Nigeria. Created in 1996 after the split of Rivers State, Bayelsa has a population of around 2 million people. Its capital is at Yenagoa, the traditional centre of the Ijaw people, Nigeria’s fourth largest ethnic group after Hausa, Yoruba and Igbo; while Ijaw dialects are spoken by most Bayelsan’ people, English is the state’s official language.
The state has an area of
around 21’000 square km, and about three-quarters of its total area lies under water. The mangrove forests and swamps in the south of the country are home to rich vegetation and spectacular scenery, while the thick forest in the north has arable lands used for agriculture. Situated in the heart of the Niger Delta, Bayelsa is the source of 30-40% of Nigeria’s oil and gas production – in fact, the first oil struck in quantities sufficient for commercial production in Nigeria was found in 1956 in an area that was to become part of Bayelsa State. . 9 Operational Definition of Terms Fiscal Federalism: Fiscal federalism also known as fiscal decentralization refers to the scope and structure of the tiers of governmental responsibilities and functions, and the allocation of resources among the tiers of government to cope with respective functions. Economic Performance: Those issues dealing with the amount and value of money, wealth, debt, and investment of a state or country. References for Chapter One Aigbokhan, B. E. (1999), Fiscal Federalism and Economic Growth in Nigeria.
LITERATURE REVIEW
This is the primary motive behind decentralization. The institutions of fiscal federalism vary widely across the world, because each country’s fiscal institutions are dependent on local circumstances, political and economic factors. It is therefore necessary to undertake a comparison of the divergent experiences of different countries. Also the theoretical, methodological, and empirical literature on the subject of fiscal federalism is quite vast and extensive. This chapter attempts to provide insightful and copious review of the concepts, methodology, and empirical issues on fiscal federalism . 2 The Concept of Federalism. The concept of federalism implies that
each tier of government is coordinate and independent in its delimited sphere of authority and should also have appropriate taxing powers to exploit its independent sources of revenue (Vincent, 2001). Wheare (1963:33) believed that each level of government should have adequate resources to perform its function without appealing to the other level of government for financial assistance. He emphatically argued that:
If state authorities, for example, find that the services allotted them are too expensive for them to perform, and if they call upon the federal authority for grants and subsidies to assist them, they are no longer coordinate with the federal government but subordinate to it. Financial subordination makes an end of federalism in fact, no matter how carefully the legal forms may be preserved. It follows therefore that both state and federal authorities in a federalism must be given the power in the constitution each to have access to and to control, its own sufficient financial resources.
Each must have a power to tax and to borrow for the financing of its own services by itself. In reality, however, the economic facts demonstrate that a country in international economic and political relations is regarded as one unit. Within the country itself, the functions of each tier and the means of fulfilling them are interrelated and interdependent. In view of this fact, whilst the coordinate and independent stance would continue to be maintained legally and politically, the enormous advance in technology would indicate that these independent taxing powers should be regarded as agency functions.
The revenues concerned belong to the community and the taxing-cum-collecting agency is acting on behalf of the
community (Vincent, 2001). The rights of both the federal government and the constituent state governments in a federal structure are enshrined in the constitution. Modern federal countries have sub-levels of government each distinguished by the scope of the geographical areas over which their respective jurisdictions extend. The jurisdiction of the federal (central) government covers the entire country in some subject-matters.
For any federalism to be sustained there must be fiscal decentralization and financial autonomy. Fiscal decentralization means delegating decision-making to lower levels of government instead of concentrating it at the centre. Each level of government, therefore, should be free to take decisions and allocate resources according to its own priorities in its own area of jurisdiction. In addition, the federating units should be able to act independently on matters within their own jurisdiction. Fiscal federalism refers to the allocation of tax powers and expenditure responsibilities between the levels of government.
Thus under fiscal federalism, any one individual is subject to the influence of the fiscal operations of different tiers of government. This is akin to what Boadway (1979) referred to as economics of multilevel or federal systems of government when he opined that the public sector is stratified into more than one level of government, each having a different set of expenditure responsibilities and taxing powers. The term “fiscal federalism” itself is rooted in a political arrangement called federalism.
Wheare (1963) describes federalism as “the method of dividing powers so that general and regional governments are each, within a sphere, coordinate and independent. The fiscal relationships between and among the constituents of the federalism is explained in terms of three main theories,
namely, the theory of fiscal relation which concerns the functions expected to be performed by each level of government in the fiscal allocation; the theory of inter jurisdictional cooperation which refers to areas of shared responsibility by the national, state and local governments, and the theory of multijurisdictional community.
In this case, each jurisdiction (state, region or zone) will provide services whose benefits will accrue to people within its boundaries, and so, should use only such sources of finance as will internalize the costs. Nigeria’s fiscal federalism is anchored on economic, political, constitutional, social and cultural developments. As the country progressed from a unitary government to a federal one and governance became more decentralized, there were also changes in fiscal arrangements.
The process towards a federal structure was not that smooth. Before the amalgamation of the Northern and Southern Protectorate in 1914, the component units- the Protectorate of Northern Nigeria, the Protectorate of Southern Nigeria and the Colony of Lagos- each enjoyed complete fiscal independence. Also, before the amalgamation, a unified fiscal system had already been in place while a centralized budgeting system was introduced in 1926. However, with the adoption of regionalism in 1946, a decentralized fiscal structure was evolved.
The first revenue commission, called the Phillipson Commission, was set up in 1946. By 1951 a quasi-federal structure was introduced, followed by self-government in the regions in 1954. During the colonial period, four revenue commissions were established, including the Hicks-Phillipson Commission of 1951 and the Chicks Commission of 1954. The Phillipson Commission recommended three principles of sharing revenues among the regions, namely, derivation, even development and continuity of government services.
justify;">The Hicks-Phillipson Commission, in turn, recommended derivation, need and national interest as the main principles of revenue sharing. The principles, criteria and allocation formulas recommended by the commissions are well documented in the literature (Ekpo, 1994; Ike, 2012). Following the attainment of independence in 1960, the Mid-Western Region was created, bringing the number of regions to four.
The principles, criteria and allocation formulas recommended by these commissions have been extensively discussed in the literature (Ehwarieme, 1999; Akpan, 1999; Anyanwu, 1999; Ekpo, 1999). However, it needs be pointed out that none of the commissions’ recommendations were completely accepted by government. Before military rule became entrenched, the following fiscal arrangements were already in place: the regions were assigned the proceeds from export and excise taxes derived from their regions; marketing boards were regionalized and the respective regions retained their operational surpluses; regions were empowered to fix producer rices and also impose sales tax on the produce of the marketing boards; regions were assigned the full retention of mining rents and royalties with a federal tax of 30 per cent payable to distributable pool account (DPA). This was later adjusted to 35 per cent in 1957; regions were allowed to administer and retain income tax on incomes not above 700. 00 pounds per annum; the federal government collected import duties and corporate income tax; and the regional governments determined the relationship between the regions and the provinces. The implications of these measures were an increase in regional revenue and a decrease in the share of the federal government between 1945/49 to 1966/67 (Vincent 2001).
DATA PRESENTATION AND ANALYSIS
This chapter is devoted to highlight and
make critical assessment through the presentation of the data generated from the respondents, analyzing them and making discussions there from. A sample of 125 staff from the public sector represented by 5 ministries in Bayelsa state was drawn for the study, for which the sample elements consisted of 5 cadres of staff (management, accounting, supervisory, lower cadre and general staff)..
For the ministry of Health staff, 21 copies retrieved, while only 20 copies (representing 80% response rate) were found useful for the study. Also, 24 copies of questionnaire were collected from the ministry of Finance staff and after going through them all the 24 copies of questionnaire (i. e. 96% response rate) were found useful in this segment For the ministry of Commerce and industry staff, 20 copies of questionnaire were retrieve from them, and 18 copies (representing 72% response rate) were found useful for the study. In all, the study administered 125 copies of questionnaire on the respondents, while 112 copies of questionnaire were actually retrieved from the respondents. However, after editing the copies of questionnaire only 106 copies representing (84. 0% response rate) were found useful for the data analysis.
It is revealed from the study that fiscal federalism: Encourages service re-engineering; provides definite objectives; improves desired result; improves Economic performance performance; helps to evaluate costs and benefits of projects; helps in planning and encourages prudent state government of resources in Bayelsa State. The study has revealed that in the Nigerian Economic performance today, there is a lack of performance oriented fiscal federalism, which deemphasizes target setting as well as proper performance evaluation. Besides, there is a poor data and accounting
culture, which allows for system leakage and corruption. This situation necessitates the need to develop models for effective control and performance evaluation criteria. Control and performance evaluation potential can be better understood by recognizing the importance of good governance and a sound economic performance in the national economy.
As Central Bank of Nigeria (2010:4) said: No economic performance can afford to overlook the importance of clearly defining its objectives and priorities, assessing performance against well-defined benchmarks, and changing the bureaucratic culture into one that stresses client service and achievement of results... rather than an imposed requirement of donor agencies, evaluation now becomes a key instrument of good governance and institutional development within the country. We all have responsibility to make sure this function is nurtured and supported. An assessment of the fiscal federalism process in Bayelsa State leaves much to be desired.
The practice today is that a certain percentage is added to previous period's fiscal allocation to arrive at current fiscal allocation figures without reference to the environmental inhibitions being encountered or the realities of present day situation. The fiscal allocations are centrally prepared and the result passed down the line for all and sundry to implement without questions. ( B ) Extent to Which Government Needs Fiscal Federalism to Achieve the Desired Results in Bayelsa State Fiscal federalism well implemented can facilitate important state government activities, including, strategic planning, quality improvement, and managed care contracting. The cost reduction captured through effective fiscal federalism can be used to develop an overall government projects and programmes.
A practiced fiscal federalism allows the state government to: Set estimated, or expected, costs for each
cost centre and plan for each cost centre to meet those estimated figures for the citizenry; Measure whether the estimates were met at the end of the fiscal period and provide the necessary tools and information to investigate and explain variances of state government economic performances; Monitor the overall economic performance of the cost centre of the state government; and Control expenditures and identify cost-cutting opportunities for the development of the state. These positions have been substantially corroborated by the works of Babangida, (1994) and World Bank, ( 2009). They submit that a fiscal federalism allows for optimum performance of each federating unit.
State governments use effective fiscal federalism through fiscal allocations to aid in planning and controlling their companies. A fiscal allocation is a formal written expression of the plans for a specific future period stated in financial terms. Tools for government Decision Making lists the following benefits of fiscal federalism in fiscal federalism: Combines the ideas of all the levels of state government Coordinates all the activities of the ministry Shows state government where actions are needed Plans and controls incomes Ensures that sufficient working capital is available Acts as a guide to state government decisions Channels expenditures in the most appropriate ventures / targets. Decentralizes responsibility to each state government officer and finalizes control. It requires all levels of state government to plan ahead and formalize goals on a repetitive basis. It creates an early warning system for potential problems so that state government can make changes before things get out of hand.
It facilitates the coordination of activities within the state by correlating segment/division goals with overall state goals.
It results in greater state government awareness of the administration's overall operations including the impact of external factors such as economic trends. Problems of Fiscal Federalism in Bayelsa State Nigeria The following problems hampering fiscal federalism in Nigeria were identified in the study: Long fiscal dominance by the federal government Economic instability in Nigeria Non reform in fiscal federalism in Nigeria to address the constitutional issue of fiscal powers among the three tiers of government Problem of Corruption in federal and state governments Inefficient allocation of resources Changing government policies Poor debt management and optimal use of limited resources government Lack of political will on the part of federal government Lack of Fiscal indiscipline Economic / administrative problems and Non diversification of the economy.
SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS
This chapter gives details of the findings based on the research questions earlier deposed in this study as well as conclusion and recommendations. The study has sought to examine fiscal federalism and economic performance of Nigeria with emphasis on Bayelsa State. A sample of 125 staff from Bayelsa State represented by 5 ministries in Bayelsa state was drawn for the study, for which the sample elements consisted of 5 cadres of staff (state government, accounting, supervisory, lower cadre and general staff).. Accordingly, 125 copies of questionnaire were administered on the staff of the 5 ministries (Agriculture, Education, Health, Finance and Commerce & Industry.
Out of the 125 copies of questionnaire administered, 112 copies were retrieved and after going through them 106 copies of questionnaire were found useful for data analysis. Summary of Findings The summary of the findings, are as follows: The
study has seen that to a very large extent fiscal federalism aids Bayelsa State to maintain efficiency and effectiveness their operations. The study reveals that fiscal federalism improves Bayelsa State’ performance and in all it helps Bayelsa State to be highly productive. To a very large extent this is true because fiscal federalism encourages efficiency and effectiveness through quantitative planning and implementation in work operations.
Equally the study has revealed that customers/publics are served quickly and satisfactorily with staff being experienced in effective fiscal federalism applications than with inexperience in the area To a large extent this is so because effective fiscal federalism staff in Bayelsa State operations help to process clients/customers accounts and documents speedily with efficiency; and cobweb of network state government is in place The study further reveals that fiscal federalism: encourages service re-engineering; provides definite objectives; improves desired result; improves Economic performance; helps to evaluate costs and benefits of projects; helps in planning; encourages prudent state government of resources. The study further found that: Nigeria progressed from a unitary government to a federal one accompanied by federalism of governance, limited fiscal federalism, and changes in fiscal arrangements. This finding suggests that though Nigeria had been operating a federal constitution since 1946 till date Nigeria has not operated as a true federation as responsibilities have been concentrated at the federal level.
The principles and practice of fiscal federalism in Nigeria has been inhibited by a number of factors which include the dominance of the federal government in the sharing of national financial resources from the Federation Account, the imposition of the command structure of the military on fiscal federalism, the
pattern of assignment of responsibilities by the constitution among the federating units, and over-reliance on the revenue from the Federation Account over the study period. By implication this finding suggests that the principles and practice of fiscal federalism in Nigeria should of necessity be guided by the theory of fiscal federalism, and the theory of public goods.
There is limited degree of fiscal federalism in Nigeria as fiscal responsibility and taxing powers still remain considerably centralized over the study period. By implication the federal government has for more than five decades assumed certain responsibilities which rightly belonged to the lower tiers of government, and in the process had compromised efficiency in expenditure management. Fiscal federalism has a significant positive impact on economic growth in Nigeria over the study period. Two of the indicators of fiscal federalism-sub national fiscal autonomy (revenue measure) and sub national spending share (expenditure share) reveal a positive correlation between fiscal federalism, and economic growth.
By implication this validates the mainstream theoretical insight behind fiscal federalism; increase in the efficiency of service delivery, in allocative efficiency, and in accountability and expenditure management is expected to promote growth. Curiously, state and local dependency (simultaneity measure) is negatively correlated with growth. By implication, this finding suggests that this could occur when tax instruments that are best used by the central government are assigned to state and local governments, thereby reducing the efficiency of such instruments.
Conclusion
State and local governments need to be given access to adequate resources to effectively do the job with which they are entrusted. At the same time they must also be accountable for what they
do with the resources. To achieve the relevant policy objectives that relate to ensuring a stable fiscal federalism, questions on how to organize intergovernmental fiscal systems should be pragmatically addressed. These objectives include efficient allocation of resources, income distribution and economic stabilization. The attainment of these objectives will ensure economic stability. Finally, all policy changes proposed to address the challenges of fiscal federalism must be vigorously pursued so that economic stability is not jeopardized in the short and long run.
Our leaders should draw lessons from the breakup of Czechoslovakia, Yugoslavia, and the dissolution of the Soviet Union, which represent cases where fiscal decentralization has occurred in an extreme form, that is, through the demise of the central government. Recommendations Fiscal federalism has been an important subject in the policy equation of many developed, LDCs and transition countries. Over the years governments in developing and transition countries have introduced a number of policy measures to decentralize fiscal operations in order to maximize provision of public sector services as well as promote economic stability. Given this understanding and on the basis of findings in this study, the following recommendations have been made; i.
The need to reverse the age long fiscal dominance by the federal government in order to re-establish a true federal system is strongly recommended. To this end all the stakeholders in the Nigerian project must work together to ensure that each tier of government is coordinate and independent in the delimited sphere of authority in line with the practice in true federations. ii. The need for an efficient formula between the centre and other tiers of government is recommended. This formula
should also satisfy the broad objectives of inter-regional equity and balanced national development. To this end the present vertical revenue allocation formula should be reviewed by the ederal government to increase the percentage to lower governments in Nigeria to strengthen their fiscal capacity and enable them play strong role in nation building. iii. Strengthening democratic governance in Nigeria in order to build a political culture that will make military rule impossible is strongly recommended. The lessons of the immediate past should be sufficient to guide the country as it progresses in the current democratic arrangement iv. Urgent reform in fiscal federalism in Nigeria to address the constitutional issue of fiscal powers among the three tiers of government to redress the prevailing fiscal mismatch at state and local levels of government is strongly recommended.
This policy in line with the principles of fiscal federalism should as a matter of urgency increase tax assignment to lower tiers of governments to enhance their access to buoyant revenue sources, and this should be accompanied with matching expenditure responsibilities. The concurrent legislative list that has turned out to be a scheme for usurping local functions by the federal government should be scrapped as this is the basis used to justify federal control of the buoyant revenue sources, and frequent intergovernmental transfers. v. The need to diversify and strengthen the fiscal base of state and local governments is recommended. To this end, local tax administration should be improved, unproductive local taxes eliminated, and untapped tax potentials identified.
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