Enugu State University Of Science And Technology (ESUT)
Erne Okechukwu & Okeke Martin Ifeanyi Department of Public Administration & Local Government Studies University of Nigeria, Nsukka E-mail: okechukwunncnt(a)yahoo.com E-mail: martinokckcifcanyieuyahoo.com
It is axiomatic to posit that the severity of Nigeria's socio-economic and political crisis dictates that all available human and material resources be effectively mobilized to reverse the trend in the afore-mentioned sectors. In recent times, local governments in Nigeria have been assigned specific responsibilities by constitution (see the 1979 constitution). But this should not be taken to suggest that in the past local governments did not contribute to socio-economic development of Nigeria. For example, between 1955 and 1965, local governments were responsible for an average of 12 percent of total public expenditure in the polity.
In a federal polity like Nigeria, local government has been recognized as one significant instrument for rural transformation and for the
del ivery of social services. This is because; they are closer to the people and hence could effectively alter socio-economic and political conditions within their jurisdiction. Apart from providing and maintaining basic infrastructures, local governments can complement the economic activities ~ of other tiers of government (Federal and state governments). In the sphere
of the economy, the establishment of governmental organs such as the then Directorate offor Food and Rural Infrastructure (DFFRI), Peoples Bank of • Nigeria (PBN) and Community Banks (CB), Better Life Programmes and Women Commission and the coordinating of their activities of the consultation with local government has helped in opening up rural areas for
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dcvclopmcnr. Local governments then had departments for Better life which mobilized rural women in matters pertaining to politics and economy with a view to making them well informed, productive and self-reliant. The peoples Banks of Nigeria and the Community Banks become very much handy in helping and promoting rural economic activities and grassroots developments. These agencies, therefore, became significant platforms of socio-economic and political transformation, thus strengthening the objectives of which local government was meant to attain.
Fiscal operations at the local government level become significant if macroeconomic stability is necessary in the wider economy. If fiscal imbalance appears rampant at the local level, it could pose problems for macroeconomics management of the economy. The scenario is even more complex when local governments depend on transfers from the center. In this era of economic crisis, local government in Nigeria face more challenges in terms pf struggling to be less dependent on the higher tiers of government (federal and state) for financial resources. Though the revenue allocation system mandates that a certain amount of the federation account be ~lIocated to local governments, these funds are never enough to meet expenditure requirements. This is because the size of the account is related to revenue from oil, which is subject to fluctuation, litigations and deductions, and expectations of local councils far exceed the available resources. In a system characterized by ethnic jingoism, federal pnd state governments have attempted for political reasons to frustrate the existence of effectiveness of local government by defaulting on their statutory allocations to local governments, rendering Iqcal councils financially and politically impotent.
Guidelines for local Government Reform (1976: 1) notes:
Local governments have over the years suffered from the continued whittling down of Ihfir powers, and state government I/(Id continued to encroach upoh what would normally have been the exclusive preserve oflocal governments and consequently there has been a divorce between the people and governments at their most basic levels.
Unfortunately, the picture is now not different in spite offunctions of local governments; sources Qf revenues and other responsibilities now have constitutional backing. Ekpo and Ndebbio, (1991), Eme (1998) and Eme and Edeh (2006) not onlYi traced the evolution of fiscal federalism within the Nigerian economy b~t also concentrated on fiscal relationships ·etween the federal and state ~overnments. There also exist economic relationships between state and Ircal governments. An examination oflocal government fiscal operations l\ecomes very significant for a complete
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understanding of intergovernmental fiscal relations.
The objective of this paper i's to descri e and analyze fiscal relations and operations between the federal and local governments in •• Nigeria using the Obasanjo administration (1999-2007) as a case study. The extent of self-financing, the fiscal gap and its volatility at the level will be, examined. It is anticipated that a study of this nature will contribute the. ex isting literature on fiscal federalism in deve~~ping nations. '
What Is Intergovernmental Fiscal Relations?
An intergovernmental relation refers to the vertical and Iiorizontal interactions between and among different levels of govern~ent in a polity. There are various ways to describe the relationship between a larger comprehensive unit J of government and its constituent parts. A confederation, for example is a system in which the constituent units grant powers to the national government, but do not ~llow it! to act independently. A unitary system is one in which all powers reside with the central government, and various units derive their powers from the unit, France and Sweden, for instance are characterized by unitary systems, as is the relationship between States and localities in the United States; localities
hold those powers specified by the state.
The 'relationship between Nigerian central government and the States and local governments, however is federal in that it involves a decentralization (or division of power) between and among the various levels of government. Some powers are granted specifically to the national government to conduct foreign relations, to regulate inter State commerce and banking, some are reserved by the states to conduct' el~ctions, to establish local government among others and some are shared 'or held by
, , )
both levels, such as to tax, to borrow money ana to make laws among thers.
This system of governance is also referred to as "federalism": .
The term "intergovernmental relations" is often used to encompass or capture all the complex and interdependent relationships among those various levels of government as they seek to develop and implement public programmes. Indeed, it is tHrough this mechanism of intergovernmental rc lat ions that the federation functions and jobs get done. Intergovernmental
fiscal relations had to do with fiscal federalism. I
Fiscal federalism or intergovernmental fiscal transfer or relations •• describes the division of fiscal resources and responsibilities among ~ various tiers of government. It deals with problems arising from the situation of divided political-juridical jurisdictions within an economically .•. integrated polity. It equally covers efforts to define the appropriate functions and finances of the various tiers of government as efficiently and complimentarily as possible to maximize welfare of the political
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community. Intergovernmental fiscal relations cover such issues as models. for the assignment of responsibilities and tax powers, discussions of" intergovernmental spill over and intergovernmental grants, fiscal mobility and migration, vertical fiscal imbalance and dependence, macroeconomic inanagement and fiscal decentralization. According to Egwaikhade
- (2004: 1) ?everal pertinent issues are discernable from the literature. These are,
First, is the problem of how to allocate revenue ,\ among the three tiers of government, such that each tier can carry out its constitutional assigned functions. There is
vertical revenue imbalance with the federal government
appropriating more than its fair share from the federation accounts. The. revenue expenditure divergence is reinforced through increased jiscal centralization. Intergovernmental fiscal conjlict is the resultant direct effect of the concen tration process in Nigeria.
Second there is horizontal imbalance unequal fiscal capacity among states. Derivation principle, which dominated the horizontal revenue allocation scheme· between the late I940s and mid I 960s, exacerbated the horizontal imbalance (E. Mbanefoh and Egwaikhide, 1988). It was advocated that this criteria should be de- emphasized or discarded since it promoted uneven development. Since I970s when oil revenue started to 'account for a sizeable proportion of Nigeria's total revenue, the use of derivation diminished to a negligible
The thiri i~sue has to do with the oil p;oquction externalities in the oil-producing states, which has climaxed to the demand for resource control by the southern governors and leaders.
Put differently, fiscal federalism in Nigeria has its legal basis laid in the constitution. For example, the 1999 constitution, contains various clauses in the second and fourth schedules on the tax powers of the federal, state and local governments and also on the system of revenue sharing and management of public funds, Details of these are contained in sections (i) 162-168, items 59 (part 1 ), Item A la, band 2 part (II) D 7-10 in the second schedule, item 32 a-c in the third schedule and item: 1 b, section 7 of the Forth schedulerespectively.
Fiscal federalism according to Anyanwu (1997: 159) " ... implies the co-existence of both national and sub national governments which perform the economic functions required by the society or an association of
J' \ )
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two or more levels tiers of government within a country". He goes on t!) argue "the method oftaking collective decisions is predetermined and that it is relatively efficient".
What is Intergovernmental Fiscal Relations'!
Intergovernmental relations refer to the interactions between levels of government in a state system. Intergovernmental relations are particularly important in a federation because its condition reflects the health of a eountry's federal structure. Indeed. it is through the mechanisms of intergovernmental relations that the federation functions and jobs get done. Intergovernmental fiscal relations have to do with Fiscal federalism.
Fiscal federalism describes the division of fiscal resources and responsibilities among levels of government. It deals with problems arising from the situation of divided political jurisdictions within an economically integrated state-system. It covers efforts to define the appropriate functions and finances of the various tiers of government as efficiently and complimentarily as possible to maximize welfare of the political community. Intergovernmental fiscal relations cover such issues as models for the assignment of responsibilities and .. tax powers. discussions of intergovernmental spillovers and intergovernmental grants. fiscal mobility and migration. vertical fiscal imbalance and dependence. macroeconomic
management and fiscal deeentralization. ~
Theoretical and Scientific Debates on I nteruovernmental fiscal relations
There is an age long debate about the benefits offederalism and the attendant challenges it throws up on intergovernmental relations. Kincaid (200 I). for instance
believes that modern federalism emerged at about the same time as the concept ofthe market economy and that one vet:.v important reason/or thefonnation ofthefederal union was the need to create a common market that would facilitate the movement of goods. Among the advantages of democratic federations identified hy Kincaid (200/ :88) are (I) more efficient provision oj" public services: (2) better alignment ofthe costs and benefits ofgovernment of a diverse citizenry and, thereby. more equity in so far as citizens get what they payfor and payfor what they get (3) beuer fix between public goods and their spatial characteristics, especially the variable economies ofscale of different kinds of public goods, (4) increases competition, experimentation, and innovation in
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government sector. (5) greater responsiveness to community and capacity to respond to their preferences, (0) more transparent and close to the citizen accountability in policy/making. (7) more sensitivity to sub/national regional concerns, including the power of constituent governments to provide for their own needs. These advantages have largely been teased outfrom the works of Hayek (/945) and Tiebot (/956). Hayeks point is that local governments enjoy the advantages of better access to information about local conditions, and are therefore in a better position to make decision than national governments in providing local public goods. Tiebouts idea of laboratory federalism emphasizes the experimentation front which other regions may learn and imitate that which is successful. Such local experimentation reduces the costs of failure under centralization, where such experimentation would have to be done on a larger scale. Thus, federalism ensures macroeconomic stability, promotes experimentations and innovativeness while securing a huge market so necessaryfor the achievement of economyof scale. (Aiyede 2008: I)
Aiyede, (2008) goes on to posit that the political business cycle literature looks at the advantage offederalism in terms ofthe way federalism creates checks and balances among the levels of government. Such checks and balances commit central policy-makers policy to spending restraints, 'thus preventing them from reneging on their macroeconomic commitments. Absent such checks and balances, politicians at the central level have a tendency to expand the economy during election campaigns in an attempt to woo myopic voters, although the long term results are sub-optimal. Such action might provoke inflation when it is financed by deficit budgeting. With federalism state governments can police the inflationary and deficit bias of these central officials Lohmann (1998), Qian and Roland (1999). Similarly, Lohmann (1997: 17) argues that federations are more likely than unitary countries to develop politically independent, inflation-averse central banks that refuse to provide accommodating monetary policy. Besides, competition among sub-national units for tax revenue and investment constrains the size of the public sector and ensures efficient delivery of public services consistent with the diverse demands of disparate, decentralized constituencies.
These claims have however not been consistently proven by decentral ization experience everywhere. Indeed, some scholars have argued that federalism often aggravate problems associated with collective action
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in the formulation and implementation of economic policy, especially macroeconomic management and market reforms (Prud'hornme 1995, Triesman 1999). In a sample of developing countries, Wibbels (2000) finds higher and more volatile deficits and inflation rates among federations than among unitary systems. Using a higher sample, Treisman (2000) finds that federations do not demonstrate higher inflation rates than unitary systems, but if inflation problems develop federations are less likely to resolve them. According to the Wallis Hypothesis, decentralisation increases sub-national government size. Also, the collusion hypothesis is that sub-national governments try to circumvent the competition brought about by decentralization. There are a series of collective action problems that are peculiar to federal systems that account for this state of things. For instance, Gandhi (1995) opines that the establishment of an efficient and modem tax system could be difficult if important taxes essentially belong to lower lcvc I governments. When borrowing is not strictly controlled by the national government, free spending sub-national governments may build 1I1) unsustainable deficits and then call upon the central government to prm Ilic- special bailout transfers or otherwise assume their liabilities. Indeed. muli \ tier governments face the possibilities that sub-national govemmcnt- \\ .' try to over fish the common pool by shifting their costs onto others. I hi' opportunistic behaviour on the part of sub-national governments described as the soft budget constraint, may undermine macroeconomic stability. Thus, it will be difficult to achieve optimal and macro economically sound public debt policy, if lower sub-national governments have complete authority to borrow from whatever sources they may wish. There are severn I empirical studies to demonstrate that this possibility of over fishing the POl) I may make decentralisation dangerous if it allows subnational governments to expand their expenditures while externalising the cost to others (Rodden
2002, Vigneault 2005). '
Ahmad, Hewittt and Ruggiero (1997) have observed .that the reliance on transfers and grants from central government to finance sub- national government expenditure' 'creates an incentive for sub-national governments to inflate expenditure and-engage in perennial negotiations with the central government to attract more grants and transfers.
Such competition among sub-national governments to secure larger portions of distributable central funds may lead to free riding, because sub-national governments have an incentive to inflate their budgets for fear oflosing sharable revenues to competing jurisdictions (de Mello 1999, Fukasaku and de Mello 1998). This type of behaviour may
entrench free riding in a context wherecentral funds are derived from the. exploitation of natural resources or foreign aid. The situation is worse where such centralized funds are derived from natural resources that are
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located in sub-national territories of minority groups, as we shall see in the Njgerian case. Free riding may completely overtake competition for inve tment, replacing it with opportunistic competition for federation
To deal with these problems a wide range of options have been adopted worldwide. Ter-Minasian and Craig (1997) identify numerical debt ceiling, restrictions on the use of debt, outright prohibitions of borrowing, limits on foreign debt, and . balanced budget requirements are strategies adopted.
However, beyond the effort to remedy the difficulties of federal fiscal relations, others have argued in favour of more centralised systems. In some situations where decentralisation has thrown up issues of coordination and control, there has been a reverse wave of recentralisation, like in Latin America where recentralisation drives have come to dominate the broader policy and political agenda in several countries (Eaton and Dickovick 2004). It has been argued that the central government needs to control the main taxes and borrowing instruments to ensure effective macroeconomic management. Besides, central government needs to control investment capital in order to maximize returns and to ensure that a coherent growth policy is put in place for the purposes of privati sat ion and building public and industrial infrastructure. As a corollary, centralisation enables the central government to "allocate fiscal resources to goods and services with national benefits. If local autonomy is too broadly defined, it will create a situation where aggregate expenditure will be greater on these services that have more local benefits. Fiscal centralisation is also considered essential to achieve even development. That is, to reduce disparities in income and wealth between rural and urban areas and across geographical regions and ethnic groups. This is the case because centralisation allows the central government more discretion in shaping regional differences in levels of public services and taxation. The central government can use the tax policy and subsidies to shape spatial economic development. This indeed may be an important strategy of keeping a divided country together but it might also be a source oftension when the consequence of equalisation includes central government deficits. Russia has faced the difficult decision of choosing among equalisation, central government solvency and appeasing the potential break away provinces (Bahl 1994:3-4, 1995). This is really the dilemma for countries in the developing world with divided societies like Nigeria, Aiyede (2008) concludes.