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Summary: Nigeria’s federalism has played a significant role in the country’s current state of systemic collapse. Because the regional government relied on the federal government for entitlements, the federal government has been forced to depend on volatile commodities including crude oil and other natural resources to meet demand. This has forced Nigeria’s economic growth to drop significantly. Therefore, the urgency of diversification cannot be overstated.
Some 230 years ago, Thomas Jefferson argued that “the two enemies of the people are criminals and government, so let us tie the second down with the chains of the constitution so the second will not become the legalised version of the first”. In this part two of the series, we argue that the starting point to rescuing Nigeria’s systemic collapse is a new constitution that weans the country of the oil and natural resource curse. The current constitution, which entrenches a centralised, top-down, unitary-federalism, or what a commentator has aptly described as ‘feeding bottle federalism’ is for a system Nigeria does not need.
Tragically, the discourse on constitutional ‘amendments’ merely tinker at the margin and aim to preserve the status quo which is a dead end. My view is that the most important ‘transformation’ the current crop of leadership at the executive and legislative arms will bequeath to Nigeria is to fundamentally re-engineer the meta-level governance architecture of Nigeria to unleash its competitive potentials for long-term prosperity.
Let us get serious. We need to understand how previously natural resource dependent economies have been able to break out and diversify their economies. As I read Nigeria’s constitution especially aspects pertaining to economic governance, what comes to mind constantly is the late Osita Osadebe’s refrain in his famous ‘Peoples Club of Nigeria’ song: “let us enjoy fully now, and worry about tomorrow later”. Unfortunately, tomorrow is not too far away! Oil and much of our mineral resources cannot last more than 40 years from now: what happens thereafter? Should we wait until oil and natural resources finish before we redesign the federation for productivity?
We posit that the principles that should guide the new deal for productive economic governance include: the need for competitive federalism; the acceptance of subsidiarity and multi-speed Nigeria; and fiscal responsibility. What we do here is not to provide answers but to raise issues for debate.
For a start, I suggest that the Ike Ekweremadu’s Committee on constitutional amendment should seriously study the UAE, US, and Brazilian federations especially in respect of fiscal federalism and mineral rights, as well as fiscal equalisation and conditional transfers. Therein lie the incentive structure for competitive federalism that drive innovation and productivity, and hence the emergence of a ‘new economy’. We can learn some useful lessons. Ultimately, we should create our own federal structure, based on our initial conditions, historical experiences, and aspirations for the future. But we must agree that the current one does not work.
Our peculiar federalism with its indolent culture of entitlements creates a consumption loop that guarantees perpetual dependence on volatile primary commodities. One objective of the new constitution should be to remove the feeding bottle, and jack up the federating units to mature into self-fending adults. Necessity, they say, is the mother of invention. The umbilical cord between government and business is that government relies on business to create jobs and provide revenues. In turn, governments do everything for businesses to thrive. Free money from Abuja has broken this. To restore the umbilical cord and incentive for states to create wealth and hence for entrepreneurial policymakers to emerge, we must wean the system of helpless dependence on the Abuja feeding bottle.
The first step is to recognise that Section 162 of the constitution is a fundamental drag on Nigerian development. It states that “The Federation shall maintain a special account to be called ‘the Federation Account’ into which shall be paid all revenues collected by the Government of the Federation… Any amount standing to the credit of the Federation Account shall be distributed among the Federal and State Governments and the local government councils in each State on such terms and in such manner as may be prescribed by the National Assembly”. This is the formalisation of the command and control structure foisted by the military. Some analysts argue that Nigeria’s development was halted since the first military coup. The constitution was suspended, and a quasi-unitary system imposed. Since then, Nigeria has not found its bearing again. Competitive federalism was replaced by a system of centralised command in which everyone went cap in hand for handouts from the centre. By this provision, everyone received unconditional free money from the centre and with statutory powers to spend as it wishes, without monitoring or accountability. Even the local governments which were also ‘created’ by the centre directly received their own ‘shares’ from Abuja and could do whatever they wish with the money.
The tax system was also largely centralised. Today, if State X labours hard to attract companies to its state or even builds industries, the corporate tax revenues would be paid into the Federation Account and shared to everyone. Similarly, if a state promotes tourism, all the VAT collected (including from alcohol and cigarettes) would be paid into the Federation Account and shared to all—including states where alcohol and cigarettes are banned. Where is the incentive to work hard or promote industry? Little wonder then that on all economic and social indicators, the average Nigerian was better-off in 1966 under the regions than in 2012. We need to retrace our steps, for the sake of our children and grandchildren!
Nigeria’s Vision 2020 document (page 25) agrees that Section 162 is the problem. According to it, “Amongst a host of debilitating impediments to Nigeria’s growth and competitiveness, one issue rests at the very root: a resource exploitation, allocation and consumption pattern that is unsustainable… To achieve Vision 20: 2020 aspirations, Nigeria will reverse the above situation. A mode of fiscal decentralization that rewards economic performance at the sub-national level will be diligently pursued, and a form of development that ensures the economic viability and prosperity of each geo-political region of Nigeria will be underpinning the thrusts of Vision 20: 2020”. It is instructive that Vision 2020 does not refer to states as the unit of analysis and political action but instead refers to ‘sub-national level’ and ‘each geo-political region’.
Furthermore, on page 27, Nigeria’s Vision 2020 argues that “the emergence of a merit-driven culture is, therefore, a key outcome of Vision 20:2020 and an area of immediate policy focus. To this end, a comprehensive review of ethnic balancing measures and diversity management related laws (e.g. federal character) will be undertaken with a view to ensuring greater promotion of merit…” Wow! This is from Vision 2020, claimed to be a product of ‘national consensus’! Well, although the document does not show how these problems will be addressed, its diagnosis shows that ‘officially’, there is a ‘national consensus’ on what the problem is.
Philosophers, they say, have interpreted the world: the problem is to change it. The first idea to consider is to possibly go back to the part of the 1963 Republican Constitution that deals with fiscal federalism. If it is not broken, why mend it? It served us well, and created a competitive federal structure. Section 140 of the 1963 Constitution provided something that looks more like a federal structure than the current structure. In part, it states: “There shall be paid by the Federation to each region a sum equal to fifty per cent of the proceeds of any royalty received by the Federation in respect of any minerals extracted in that Region; and any mining rents derived by the Federation from within that Region”. An alternative idea worth debating is why not grant rights over mineral resources to the respective ‘regions’ or states and let them pay taxes to the Federal Government?
A key principle is to ensure a true federal structure and a new fiscal federalism that is developmental, with each of the federating units being fiscally viable as to be able to fund its recurrent expenditures, and provide some basic infrastructure on its own without recourse to the centre. Currently, oil and other revenues from the centre are treated as unconditional grants (entitlements) to all tiers of government. This is wrong and creates the wrong incentives towards work and competition. Global experience is that such kind of aid (like a welfare system without individual responsibility) has left most of its beneficiaries helplessly dependent and the society worse-off.
We need to redefine the use of oil and other natural resource rents. As we have argued since 2008, the nation needs to agree that rents from such exhaustible natural resources (which belong to present and future generations) cannot be used for consumption by the present generation. Perhaps, they should only be used to build capacity and bridge to the future in terms of human and physical capital. Thus every government must be constrained to meet all its recurrent expenditure from its internally generated non-natural resource revenue, including the Federal Government.
Certainly, we need to debate the devolution of revenue powers to the regions/states. What is the business of the Federal Government with VAT? Why can’t states vary corporate tax rates to attract industries to their domains while the Federal Government only sets the upper limit? We need to review the derivation principle in the treatment of revenues to provide incentive for states/regions with natural resource endowments to exploit them. Just as an example, we could agree that derivation should not be less than 40%. Another 25% should accrue to the Federal Government, while the remaining 35% should go to a new pool called “Distributable Capital Account (DCA)” to signal that the fund is for ‘capital’ acquisition—physical and human capital. We need to debate how a far leaner and more effective Federal Government should be funded on a sustainable basis, and the kinds of transfers to distressed states/regions. We must make the Federal Government far less attractive!
Nigeria should abolish the entitlement culture and move from unconditional to conditional matching grants scheme in the sharing of the Federation Account, thereby infusing the principle of competition among the federating units. Each one would have to compete for the distributable pool account as matching grants to augment specific investments that the state/region is already undertaking. Programmes and projects that benefit from the Federation Account should therefore be monitorable. The grants should be competed and accounted for.
Fiscal responsibility should be enshrined in the constitution—with binding benchmarks. For example, the Brazilian model pegs salaries and wages to a percentage of total budget. We need fiscal decentralisation with coordination mechanisms enshrined in the constitution. For example, it may be agreed that a region must be spending no more than 60 per cent of its own revenue on recurrent expenditure to qualify to receive grants from the Federation Account. The logic is that such grant should be ‘additional’, and not substitute for the internal revenue effort. Any government without a credible programme for business development cannot therefore hope to generate internal revenue or collect grants from the Federation Account.
This competition driven framework, as in other viable federations, will kick-start a revolution for productivity as states/regions compete to create or promote industries/businesses as the only way to survive. In Part Three, we continue with the series.
• To address this problem first, we need to understand how economies that were previously dependent on natural resources have been able to break free and diversify their economies.
• The country needs to further rethink how revenues generated from oil and other natural resources are spent.
• Lastly, Nigeria needs to diversify the economy and further build a competition-driven framework to spur productivity at the state level while considering weaning states of some federal entitlements.
About The Author: Dr. Charles Chukwuma Soludo, CFR is an Economics Professor and a former Governor and chairman of the board of directors of the Central Bank of Nigeria (CBN). Dr. Soludo had cumulative four years of post-doctoral training in some of the world’s most prestigious institutions, including: The Brookings Institution, Washington, DC; University of Cambridge, UK, as Smuts Research Fellow and Fellow of the Wolfson College; the UN Economic Commission for Africa as a Post-Doctoral Fellow; University of Warwick as a Visiting scholar and Visiting Research Scholar at Center for African Economies, University of Oxford.
Keywords: Reconstructing, Fiscal Responsibility, Constitutional Amendment, Economy