Fiscal Federalism and socioeconomic development in Plateau State

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CHAPTER ONE

GENERAL INTRODUCTION

1.1 Background of the Study

There are several systems of government all over the world. Few among them include Unitary, Federal systems, etc. In a unitary system of government, the power to carry out both administrative and fiscal roles is solely a function of the central government. However, in a federal system of government, there are 2 or 3 tiers of government having various degrees of autonomy to carry out both administrative and fiscal roles.

Nigeria operates a federal system of government with three tiers of government each having various degrees of autonomy. Simply put, they have different expenditure responsibilities and taxing powers. Presently, there are 36 states, the Federal Capital Territory (FCT), and 774 Local Government Areas in Nigeria.

Wheare N.C. (1994), cited in Olowononi (1999), defines fiscal federalism as “the method of dividing power, so that the general and regional governments are each within a sphere co-ordinate and independent.” Fiscal federalism is essentially about the allocation of government spending and resources to the various tiers of government (Oates, 1972:16-20; Tanzi, 1995:297). 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.

The function of each of the three tiers of government in Nigeria is defined constitutionally in three different lists. The Exclusive List contains the functions reserved for the Federal Government only. The Concurrent List contains functions, which both the Federal and the State governments could perform. However, when there is a conflict, the Federal government always prevails. The functions reserved for the states are found in the Residual List which are functions neither assigned to Local Governments nor contained in the exclusive or concurrent lists. See page 17 for the summary of these functions.

In line with the experiences of virtually all federations the world over, there is hardly any correspondence between the functions and responsibilities assigned to these levels of government and the financial resources available to execute them (Olowononi, 1999). Government intervenes in the economy for five basic reasons, which according to Oates (1972) are: to achieve broad macroeconomic objective of full employment; promotion of economic growth; maintenance of Balance of Payment (BOP) equilibrium; and the promotion of equitable distribution of income and wealth.

The three traditional roles of government are efficient allocation of resources, equitable distribution of income and wealth, and stabilization (maintaining full employment levels of employment and output at stable prices), (Musgrave, 1959). Over fifty years of experience with fiscal in Nigeria, the country is still faced with the challenges of macroeconomic management, poor output growth rate, high inflation rate, exchange rate fluctuation, weak balance of payment position, etc. (Alade, et al., 2003).

Literature in different countries shows the impact of fiscal federalism on macroeconomic performance. In recent years, there has been a growing empirical literature on the effects of federalism on macro-economic performance (see Feld, et la., 2009). Using the Generalized method of moment (GMM), Elliot and Thornton (2006) observed that fiscal decentralization enhances service delivery in China and Russia. The same result has been confirmed in a similar study conducted by Akai and Sakata (2004) across the 50 states of USA. From the experience of these countries mentioned, the gains of fiscal federalism to an economy are positive However, researches in Nigeria on the significance of federalism on macroeconomic performance have mixed outcomes. Aigbokhan (1999) examined the impact of fiscal decentralization on economic growth in Nigeria and observe a negative relationship, while Akpan in 2010 investigated the impact of fiscal decentralization and service delivery and observed a positive relationship.

Against this backdrop, there is the need to re-investigate the relationship between Fiscal Federalism and socioeconomic development with a particular references to Nigeria.

1.2 Statement of the Research Problem

There has been a resurgence of interest in the problems of multi-level government finance (see Oates, 1999; Feltenstein and Iwata, 2005; Aigbokhan, 1999). Recent and ongoing political and economic developments raise questions about the role of nation, sub-national governments in the provision and financing of public sector programmes, (Tanzi, 1995). Problems of fiscal federalism and intergovernmental fiscal relations are particularly of wide-spread concern in developing countries.

Recent experience with fiscal federalism in numerous developing and transition economies has led many observers to question whether fiscal federalism undermines macroeconomic stability, (Feltenstein and Iwata, 2005). In several countries, central government transfers to lower-level governments have increased fiscal deficits at the central level, creating pressures on central banks to monetize additional debt and thus jeopardizing stability. In other countries, central governments attempting to control their deficits have reduced transfers to lower-level governments, creating fiscal distress at lower levels (Oates, 1999). As Oates (1994) puts it, “fiscal federalism has much to offer, but it is a complicated enterprise”. 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. Over fifty years of experience with fiscal federalism in Nigeria, the country is still beset with the challenges of macroeconomic instability, poor output growth rate, high inflation rate, exchange rate fluctuation, weak balance of payment position, etc. (Alade, et al. 2003).

There are conflicting views on the significance of fiscal federalism for economic growth and development. Aigbokhan (1999) examined the impact of fiscal decentralization on economic growth in Nigeria and observe a negative relationship, while Akpan in 2010 investigated the impact of fiscal decentralization and service delivery and observed a positive relationship. Philip (2011) examined the relative effects of fiscal centralization on economic growth in Nigeria and observed that the cost of maintaining it is very huge.

1.3 Research questions

The study focused on three research questions:

  1. What has been the trend of fiscal federalism in Nigeria over the years?
  2. What is the impact of fiscal federalism on real GDP, inflation and exchange rate in Nigeria?
  3. Is there a long run relationship between fiscal federalism, real GDP, inflation and exchange rate in Nigeria?

1.4. Research objectives

The specific objectives of the study are as follows:

  1. To analyze the trend of fiscal federalism in Nigeria over the years.
  2. To measure and analyze the impact of fiscal federalism on real GDP, inflation and exchange rate in Nigeria.
  3. To examine whether there is a long-run relationship between fiscal federalism, real GDP, inflation and exchange rate in Nigeria.

1.5 Scope of study

This work is on Fiscal Federalism and socioeconomic development. It were restricted to  Plateau State only.

1.6. Limitation of the study

The major limitation of this study is time constraint. The time available to complete this study was too short when compared with the content and the geographical spread of the study.

1.7. Research methodology

Purely secondary data (time series annual data) was used for purpose of analysis in this research work. Data from various sources such as Central Bank of Nigeria (CBN) annual statement of accounts/statistical bulletins (various issues), National Bureau of Statistics (NBS), World Development Index (WDI), Global Competitive Index, and other relevant sources was employed. The data used cover period between 1970 and 2010.

1.8. Significance of study

There has been a resurgence of interest, in many parts of the world, in problems of multi-level government finance (Oates, 1999; Feltenstein and Iwata, 2005; Aigbokhan, 1999). Recent and ongoing political and economic developments raise questions about the role of nation, sub-national governments in the provision and financing of public sector programmes (Tanzi, 1995). Problems of fiscal federalism and intergovernmental fiscal relations are of wide-spread concern in developing countries.

There are many contending issues about the effect of federalism on service delivery around the globe. Some studies observed that there is a positive relationship between federalism and the provision of social services. These include, among others, Akpan (2010) Malik et al (2005), Jimoh (2003), Thieben (2003), Yilmaz (1999), Brueckner (2005), etc. Some group of studies observes a negative relationship. These include, Aigbokhan (1999), Davoodi and Zou (1998), Yilmaz et la (2004), Zhang and Zou (1998), etc. In contrast, some studies have identified a two way relationship or have observed ambiguous relationship. These include Bodman (2009), Thornton (2007), etc.

This study is considered very important due to the following reasons. The study establishes a foundation for policy-makers to make reforms that will aid government to make choices that reflects social preferences. This is considered important in Nigeria now because of the ongoing review of the 1999 constitution by the national assembly. Federalism and devolution of powers to sub-national governments are key topical issues of discuss.

1.9 Ethical consideration

A written informed consent was obtained from the participants before administering the questionnaire. The participants were assured of confidentiality of any information given.

  1. Definition of terms

Federalism : Federalism connotes a political system in which two or more levels of government control the same territory and citizens. It is a system of government that allows two or more entities to share control over the same geographic region (Collins, 2016.)

Fiscal Federalism : Wheare N.C. (1994), cited in Olowononi (1999), defines fiscal federalism as “the method of dividing power, so that the general and regional governments are each within a sphere co-ordinate and independent

Economic development:the process whereby simple, low-income national economies are transformed into modern industrial economies

  1. 11. Outline of the study

The thesis has five chapters. Chapter is the general introduction and contains the background of the study, statement of the research problem, objectives of the study, justification of the study, and outline of the thesis chapters. Chapter two contains a review of theoretical and empirical literature. Chapter three presents the methodology of the study. It contains model specification, analytical techniques, and type of data collected their sources. Chapter four contains the presentation of data and analysis of empirical results, while Chapter five presents the summary, conclusion and recommendations of the thesis.

 

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