resolving the fiscal federalism challenge in nigeria ... · federations like ethiopia, nepal, etc,...

International Journal of Social Sciences. Vol. 12, No.3, October, 2018 Special

161

Resolving the Fiscal Federalism Challenge in Nigeria:

Lessons from the Federal Democratic Republic of Ethiopia

(FDRE)

by

1Olawari D. J. Egbe

Department of Political Science

Niger Delta University

Wilberforce Island

Bayelsa State

+2348037461293

[email protected]

2Iyabrade Ikporukpo

Department of Political Science

Niger Delta University

Wilberforce Island

Bayelsa State

+2348032462017

[email protected]

Abstract Globally, heterogeneous states are no strangers to near-state breaking challenges like the

practice of a genuine fiscal federalism. However, if a particular challenge becomes seemingly

intractable like the fiscal federalism question in Nigeria, it then becomes heartache to the state in question. Whereas states such as Ethiopia, and Nepal that are equally as highly

heterogeneous as Nigeria have resolved their daunting fiscal challenges, the Nigerian state is still grabbling with the challenge of a genuine fiscal federalism. Thus, this paper, relying on

the Normative Theory of Multinational Federalism as its theoretical handle, interrogates why

the Nigerian state cannot resolve the fiscal federalism question after 58 years of political independence. In attempting this concern, the paper attempts to answer the following

questions: Is the difficulty in practicing a genuine fiscal federalism laid on the altar of ethnicity in Nigeria, excessive dependence on a mono product or the fear of the unknown? The

paper adopted ex post facto research in examining qualitative sources of information. It

discovers that Nigeria’s fiscal federalism question is cancerous and endemic to Nigeria’s unhealthy mono product dependence on crude petroleum; and which is further aggravated by

intra-ethnic fear of the unknown. It is recommended that if a challenge as fiscal federalism

cannot be resolved nationally, i.e. in the context of Nigeria, then lessons should be drawn from fellow African states as Ethiopia, other Third World states as Nepal and even from

matured federal democracies as the United States, etc, that had long resolved their challenges of fiscal federalism.

Keywords: Federalism, Fiscal Federalism, Challenge, Nigeria, Ethiopia.

International

Journal of

Social Sciences

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mailto:[email protected]

mailto:[email protected]

Egbe, O. D. J. and Ikporukpo, I.

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1. Introduction

Without exception, all federations are conterminous to shared challenges arising

from differences in history, politics, and development patterns (Kymlicka & Norman,

2000). Thus, federalism remains the much-welcomed framework for peaceful coexistence

in any heterogeneous state. However, working out a viable economic component of most

federal states remains the principal challenge to achieving nationhood. Scholarship has

identified the act of learning from the experiences of other states as a major way forward.

But why has Nigeria not learnt or reluctant in learning from the experiences of other states

like Ethiopia, Nepal, etc, that have walked on similar trajectories?

In Nigeria, this is even made worse where discourses or agitations by academics,

ethnic groups, etc, on wanting to attain a workable fiscal federalism are cavalierly

dismissed as unpatriotic tribalism. Thus, Adedeji (1979, p.62) rhetorically ask: How have

we come to this sorry state of affairs in the post independence years which seemed at the

beginning to have held so much promise? How did Nigeria come to this enigma? Is it the

Nigeria our nationalist leaders in Dr. Nnamdi Azikiwe, Sir Ahmadu Bello, Alhaji

Abubakar Tafawe Belewa, Chief Obafemi Awolowo, etc, anticipated (Ade-Ajayi, 1982)?

Hitherto, Nigeria had a tract record of these leaders who pledged unalloyed commitment

for federalism. For example, in 1957 Alhaji Abubakar Balewa, was reputed in saying,

"the federal system is, under the present conditions, the only sure basis which Nigeria can

remain united” (Ademolekun, & Kincaid, 1991, p.175). The 1987 Political Bureau report

equally saw hope in federalism by asserting that, “we do not see any other

accommodating and healthier arrangement for Nigeria than the continuation of the system

of federalism” (Ademolekun & Kincaid, 1991, p.175). Furthermore, ex-military President

Ibrahim B. Babangida while assenting to the 1989 Constitution unequivocally affirmed

that “we are firmly and faithfully committed making our nation an example to the world

of how a multi-ethnic and multi-religious society, such as ours, can be effectively

organised in a federal democratic system” (Ademolekun & Kincaid, 1991, p.175).

Obviously, these generation of leaders encouraged and practiced fiscal federalism

where all the then three regions (North, West and East) controlled and exploited resources

at their regions for regional development purposes but remitted specified remittances to

the federal authorities (Etekpe, 2007). Again, the 1963 Republican Constitution in Section

164 even provided that financial arrangements in the country should be reviewed from

time to time (Teriba, 1966; Osemwota, 1984; Ovwasa, 1995).

But why and how did Nigeria deviate from the immediate post-independence

fiscal model? However, rather than avoiding the obvious; the challenge of fiscal

federalism in Nigeria has remained unresolved by reason of ethnicity. There is the fear of

the unknown among ethnic groups in Nigeria. For example, how will a scarcely endowed

natural resource region survive in a genuine fiscal federalism regime in Nigeria? This fear

though remains tangible in Nigeria; however, it is unfounded because all ethnic groups in

Nigeria are endowed in their peculiar ways. In this context, an elementary knowledge of

Economics in comparative advantage teaches us that each region or ethnic group in


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Nigeria is capable of developing in resources in their comparative advantage. It is in such

context that Governor Ezenwo Nyesom Wike of Rivers State, Nigeria asserted that,

We are clamouring for true federalism. When you talk of true federalism, they think you don’t want to be part of the country. We

talk about true federalism as practised in America. We demand a

true presidential system where all the federating units will be allowed to enjoy their resources and contribute to the centre. That

means we believe that there must be a country called Nigeria. All of us will work together for the unity of the country (Onoyume,

2017, p.2).

The governor‟s assertion invariably implied that all regions in Nigeria are

comparatively advantaged in specific resources. Therefore, it is a matter of government

prioritising attention in resource development in terms of exploration and exploitation.

The remainder of this paper is laid out in four sections. The next section after this

introduction (i.e. section 2) understudies theoretical framework and some previous

discussions on federalism and fiscal federalism. The third section focuses on the trajectory

of fiscal federalism in Nigeria‟s political development. The practice of fiscal federalism in

the state of Ethiopia is taken up in section four; while the fifth section concludes the

paper.

2. Aim and Objectives

This paper intends to resolve the daunting and intractable challenge of fiscal

federalism in Nigeria. Specifically, it interrogates why the Nigerian state cannot resolve

the fiscal federalism question after 58 years of political independence. The objectives

include:

a. To examine federalism as a social science concept

b. To examine the prevailing fiscal federal structure/pattern in Nigeria

c. To examine fiscal federalism as it is operational in the state of Ethiopia as a

panacea to Nigeria‟s fiscal federalism debacle.

3. Theoretical framework and Extant Literature

This section undertakes a brief discourse on the „Normative Theory of

Multinational federalism’ as this paper‟s theoretical framework and a literature review of

federalism and its fiscal component.

a. Theoretical framework: Normative Theory of Multinational Federalism

This paper relies on the normative theory of multinational federalism as espoused

by Karmis and Norman (2005). The centrality of this theory is “how do we determine the

just or otherwise appropriate type of and degree of self-determination for national

minorities within a federal state”? The salience of this question lies in the fact that no

federation is devoid of national minorities (Kymlicka & Norman, 2000), even as Laski

(2005, p.193) posited in the case of the United States that “no one can travel the length


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and breadth of United States without the conviction of her inexpugnably variety. East and

West, South and North, its regions are real and different and each has problems real and

different too”.

Like the United States, all geo-political zones in Nigeria have national minorities

who wish to “distinguish themselves from the majority or other minorities by language,

dialect, religion, ethnicity or race...which means they do not think of themselves as

merely as ethnically different, they feel that they constitute a nation or a people with a

right to self-determination” (Karmis & Norman, 2005, p.13). It is therefore never an eye-

opener that there are national minorities in the core Northern Nigeria or national

minorities within the South-South Nigeria, who together claim to be a nation and

therefore need self-determination but are constrained by anthropogenic hiccups and

natural causes including geography in spreading people of identical nations to several

political units or states; as it is the case of Ijaws in Nigeria. However, these clamours for

self-determination by national minorities, it is hoped can be resolved by a federal design

within a united country.

Federalism is expected to determine the powers of the diverse federal sub-

nationalities in order to create a sense of belonging to the federation. Among the several

expectations of by national minorities, the economic component of federations otherwise

referred to as fiscal federalism, feature prominently. The potency of this singular factor in

fostering or stifling federations is in two-fold. First, it is the denominator to “which

aspects of their collective life they will have exclusive control and over which aspects

they will be subject to the control of „outsiders‟ within the federation” (Karmis &

Norman, 2005, p.15). Second, the point must be established that “however impeccable in

its logic, the federal constitution may be and whatever practical guarantees it may supply,

it will not survive if economic factors tend persistently to dissolve it...political right

requires to be buttressed by economic right” (Proudhon, 2005, p.186).

Thus, if it is so established that fiscal federalism is the substructure of any

federation, the state in Nigeria must resolve the fiscal federalism challenge plaguing it

since the post independence era. Indeed, Nigeria ought to do the needful because if other

federations like Ethiopia, Nepal, etc, similarly so challenged have successfully resolved

theirs within constitutional measures.

b. Federalism: Some Previous Discussions

This section offers a theoretical approach on federalism; which allows making a

general analysis of federalism just as Wheare (1963, p.1) advised that “an inquiry into the

working of federal government begins of necessity with some discussion about the

meaning of the term”. It is generally in this sense that, the discourse on federalism here

would be applicable to any political situation and at any time where political units

recognised as states are discussed.

However, in an attempt to undertake a theoretical approach on federalism, a

moderate discourse on federalism will suffice. Thus, attention is focussed on political

(constitutional) analysis of fiscal federalism as originated by the works of Tocqueville


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(1990) and Mill (1910); and therefore, will not undertake an economic analysis of fiscal

federalism. As a word of guide, the political component of federalism referred to here

“can be characterised as a movement away from the study of the operation of federal

states, towards a more comparative and constitutional analysis of federalism which

stresses the process of becoming a federal state and the inherent advantages and

disadvantages of federalism” (Hamlin, 1985, p.187).

Federalism is practiced where two or more hitherto self-governing units occupy a

political space (Karmis & Norman, 2005). According to Rubin & Feeley, 2008, 170)

federalism “refers to a mode of organising a political entity that grants partial autonomy

to geographically defined subdivisions of the polity”. The emphases on geographical

subdivisions tend to signify the salience of co-existing units that of equal importance in

both existential purposes and performance of designated functions. Equality in population

and wealth is vital because “if a republic be small, it is destroyed by a foreign force; if it

be large, it is ruined by an internal imperfection” (Montesquieu, 2005, p.55). Similarly,

Nigeria‟s constitutional lawyer Nwabueze (1983, p.1) defines federalism as,

an arrangement whereby powers of government within a country

are shared between a national (nation-wide) government and a number of regionalised (i.e. territorially localised) governments in

such a way that each exists as a government separately and independently from the others, operating directly on persons and

property within its territorial area, with a will of its own, and its

own apparatus for the conduct of its affairs and with an authority in some matters exclusive of all others.

As clear as these definitions seems to be, defining federalism is not devoid of

controversies. In a note of clarity, Sawer (1969, p.125) proffers that “so long as the

amending procedure of the constitution, the operation of the judicial review and the

pattern of politics...restrict the ability of the centre to abolish a regional structure...the

position of a region is sufficiently secured and so, the polity in question should be called

federal”.

According to Shah (2007, p.4) federalism represents either a “coming together” or

a “holding together” of geographically diverse people in order to “take advantage of the

greatness and smallness of nations in a flat (globalised) world in which many nation-states

are too large to address the small things in life and too small to address large tasks”. In

identifying the utility of „coming together‟ and „holding together‟, Shah (2007, p.4)

asserted that while the „coming together‟ view of federalism is the guiding framework of

mature federations as in the U.S, Canada, the „holding together‟ variation of federalism

implies “an attempt to decentralise responsibilities to state-local orders of government

with a view to overcoming regional and local discontent with central policies”; as it is

prevalent in new federations as Brazil. In Canada, Harper (in Harmes, 2007, p.417) rather

used open federalism to describe

...renewed respect for the division of powers between the federal

and provincial governments...a strong central government that focuses on genuine national priorities like national defence and the


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economic union, while fully respecting the exclusive jurisdiction of

the provinces...that stresses democratic reform and the

accountability of government to the people.

It is in such circumstances that the working of federalism is seen as “promoting choice,

fostering competition, facilitating participation, enabling experimentation, and warding

off a national Leviathan” (Gerken, 2014, p.1891).

Foremost American Political Scientist, Tocqueville (1990, p.163) asserted that

“the federal system was created with the intention of combining the different advantages

which result from the magnitude and the littleness of nations". The advantages here

referred to is that federalism comes with it political and economic advantages derivable

from unity in preserving the sanctity of the centre and the coordinate levels. A number of

political advantages so derivable are that aside ensuring the security of the federating

units in both peace and war times by the centre, there is equally flexibility on the part of

the coordinate units in making to ensure policy makers do the will of the people; which in

essence “results in a closer congruence between public preferences and public policy. It

promotes diversity in public choices. It enhances democratic values and provides the

opportunity for people at the local level to define and debate the problems facing their

area" (Wolman, in Sharma, 2003, p.172).

Federalism in Tocqueville‟ (1990) discourse, also fosters economic advantages.

Among others there are the benefits derivable from operating a common market, the

provision of certain goods and services by the centre at subsidised rates. Furthermore,

Tocqueville analysis brings to focus a number of salient advantages from federalism.

First, federalism promotes what is commonly referred to as unity in diversity as most

suitable for highly heterogeneous states. Second, federalism is simply a trade-off between

autonomy and efficiency (Sharma, 2003, p.172). It is in reference to such trade-offs that

Riker (in Sharma, 2003, p.172) asserted that "federalism is an outcome of rational bargain

among various constituents. The bargain may be for political or economic gains. In the

political bargain, the constituents give up political autonomy for security from external

threat. The economic bargain is to enable a common market and to ensure optimal

provision of public services by reaping economies of scale and catering to diverse

preferences". Third, federalism is both self rule and shared rule (Elazar, in Sharma, 2003,

p.172).

It was in reference to this uniqueness of federalism that Watts (1998, p.133) said

in the context of contemporary global scene, federal political

systems, combining shared rule and self rule do provide a practical way of combining the benefits of unity and diversity

through representative institutions...federal arrangements and the

idea of federalism have shown that they can provide a means for reconciliation in the world. The challenge for scholars is to

contribute, by critical, objective and comparative analysis, to a better understanding of how new federal systems may be

established or existing ones made more effective.


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Not oblivious of the fact that no federation perfectly fulfils every criteria of fiscal

federalism, just as no democratic state ever satisfies the majority rule ideal model as

enunciated by Dahl (1956) in every circumstance, yet federations must aspire to attain the

basic tenets of federalism expected of it from its citizens. The first major requirement of a

federation is the enthronement of peace, instilling a sense of fulfilment in its citizenry.

Scholarship is rich in this respect. According to Montesquieu (2005, p.56) “the spirit of

monarchy is war and enlargement of dominion; peace and moderation are the spirit a

republic”. To Mill (2005, p.169) “the powers of a federal government naturally extend not

only to peace and war and all questions which arise between the country and foreign

governments, but to making any other arrangements which are in the opinion of the states

necessary to their enjoyment of the full benefits of union”. Proudhon (2005, p.173) was

emphatic when he posited that,

...among the many constitutions proposed by philosophy and put

to test by history, one alone reconciles the demands of justice,

order, liberty and stability, without which neither society nor the

individual can live...the one constitution which it will be the

greatest triumph of human reason to have grasped is nothing

other than the federal system. Every form of government which

departs from it must be considered an empirical creation, a

preliminary sketch, more or less useful, under which society finds

shelter for a moment and which, like the Arab’s tent, is folded up

in the morning after it has been erected.

c. Models of Federalism

This section explains different models of federalism and their application to fiscal

federalism as proffered by Super (2005) and Bulman-Pozen & Gerken (2009). Among

others the following models are discussed.

i. The Dual Sovereignty Model

This model of federalism protects the ability of central and the coordinates units

to function fully as being independent from each level. This model debars each level of

government from encroachment on each other. The emphasis on encroachment in dual

federalism therefore focuses attention on actions from either levels of government that

impact adversely on the other level to act (Super, 2005).

This arrangement, however, delimits state functions in Nigeria into exclusive,

concurrent and residual functions with a proviso that in case of conflict of interest in

performing a function enlisted in the concurrent list, the interest or action of the federal

government supersedes the interest of the state to the extent of the inconsistency. Yet in

other instances, the federal level may act in areas of state concern where such federal

action does not impinge on the states‟ ability to function as a legitimate level of

government (Wheare, 1963).

The application of dual federalism in the context of fiscal federalism may be seen

from the context that in as much as states as sacrosanct coordinate levels of government

must be sovereign in performing both regulatory and fiscal powers (i.e. ability to impose


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tax, collect and expend). This entails that a huge federal government must not limit the

ability of states to spend, for to spend is always a concurrent function (Lees, 1961). This

is after all the economic argument for sub-national levels to federate in the first instance.

Arguing in this context Ewa (1976, p.80) posited that,

...the various territories are separate markets and when brought together under one federal government, will constitute an

expanded and free market. A common monetary system develops and permits a free movement of goods and capital within the

enlarged area and there may be regional specialisation of

industries and diversification of exports.

ii. The Comparative Process Model

This model allocates functions to the level of government that most suitably or

likely to render best results. However, determining best result and most suitable level of

government is relative. Despite this constraint, the federal level is often entrusted with key

functions as defence, economy, migration, international relations, civil rights, etc.

In other instances, states are better placed to render good results due to proximity

instead of the remote federal government. It is in this context that political gladiators in

Nigeria clamour for state police in the intention to producing best results on account of

proximity to trouble spots.

iii. The Pluralist Model

This model of federalism simply places emphasis on decentralisation (Sharma,

2005). Pluralist scholarship on decentralisation premises their advocacy on a number of

arguments. First that “decentralisation allows the states to become laboratories of

democracy from which other states can learn about a variety of different responses to

common problems” (Super, 2005, p.2556); Second, to the extent that citizen preferences

vary along geographic dichotomies, states are better placed to deal with local preferences

when indeed states are not restrained by undue federal encumbrances. Third,

representatives are better placed on accountability watch by voters when under state

checkmate vis-à-vis under a federal sphere. Fourth, the intention in delegated legislation

avers that decentralisation places states in good stead in making legislations pristine to

their environment and peculiar circumstances. However, a caveat pluralist was quick to

acknowledge that where issues of national concern are at stake, the federal government

should be the sole reservoir of such discretionary powers (Super, 2005).

iv. The Comparative Efficiency Model

Proponents of this model aver that possible externalities often emanate where a

number of state policies conflict with the policies of adjoining state policies (Super,

2005). Thus, scholars of this model consider the economies and diseconomies of scale of

state actions vis-à-vis other state actions. In Nigeria, arising from state creation exercises,

erstwhile single states do often engage in actions detrimental to the other. For example,

Rivers and Bayelsa States are engaged in series of court cases on account of oil well

disputes. Between these two states there are several instances of reprisal state policies and

actions following an earlier act by either of the two sister states. In other instances,


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citizens in the employment of sister states are summarily dismissed on account of new

state citizenship.

v. The Co-operative Model

Federalism scholarship talks of cooperation between federal and state levels of

government when the interests of both levels of government converge; and in stipulating

procedures for assigning responsibilities between the centre and the coordinate levels of

government when cooperating (Super, 2005). In cooperative federalism states are not seen

as autonomous outsiders but as supportive insiders in serving as servants and allies in

carrying out federal agenda (Bulman-Pozen & Gerken, 2009). In fiscal federalism, centre-

state cooperation depends on one of the following typologies:

a) The Compensatory Model

This model explains the adverse externalities federal policies and actions imposes

undue fiscal constrains upon the state. In Nigeria, a number of federal government

operations adversely impact on the fiscal capacities of states. For example, federal joint

military operations intended to install peace places fiscal burden on such restive or

troubled states in providing logistics to the federal forces. Again, a number of federal

projects like health, education and even a new minimum wage places undue financial

burden on states. As Walter Heller (in Super, 2005, p.2572) noted, “prosperity gives the

national government the affluence and the local governments the effluents”, federal

governments upon this realisation do institute compensatory federal models to

compensate states of these burdens. However, what has been worrisome is that states

demand for compensation has been greeted with mixed success. Nigeria‟s federally

determined new minimum wage has remained a source of pain to resource-stifled states

and oftentimes palliatives are grossly inadequate.

What all of these federal policies entails is the need to limit the burden on states

by the federal government so that the federal government do not to unintentionally

impinge on the legitimate powers of the state governments to carry out their legitimate

roles. However, it is impossible to completely abstain the federal government from

imposing one form of burden or the other on states if at all the federal government wants

to succeed in a wide range of activities that positively impact on the generality of the

entire country (Super, 2005).

b) The Superior Capacity Model

As a variant of the cooperative model, this model is essentially a call on the

federal government to utilise its huge financial wherewithal to undertake projects that are

ordinarily beyond the financial muzzle of the states (Super, 2005). A number of examples

in this context in Nigeria include all of the functions as enshrined in the exclusive list

(defence, migration, currency) and even beyond (federally assisted bail-out funds to

states, challenges of climate change, and its vagaries in flooding, coastal erosion).

However, as good as this model appears to be, it is practically impossible to

implement this model as it will hobble the federal government and unexpectedly


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marginalise states in key policy issues where there is a federal overwhelming dominance

and presence or even an encroachment.

c) The Leadership Model

Federalism scholarship argues that the federal government with an enormous

financial superiority should undertake certain projects it believes are of national interests

(Super, 2005). In performing this leadership role, the federal government has the

discretion on the nature of state involvement in the projects so executed. For example,

arising from the massive lack of development in the Niger Delta region, successive

governments in Nigeria have set-up state intervention agencies such as the Oil Mineral

Areas Development Commission (OMPADEC), the Niger Delta Development

Commission (NDDC). In doing this, the federal government has incorporated the Niger

Delta states and oil Transnational Corporations (TNCs) operating in the region as co-

sponsors in funding development projects.

Federal-state leadership model is unique in that both levels of government are

participants in project execution. However, states contend that to the extent that federally

undertaken projects are in their domains, they have an interest to protect and therefore

would want to make financial contributions towards such projects (Super, 2005).

vi. Uncooperative Federalism

Contrary to the state serving as a servant, insider and ally of the federal

government as a basis of federal-state relations in a cooperative arrangement, the state can

as well become a rival, dissenter, and challenger in resisting the powers of the federal

government. Therefore, an uncooperative federalism subsists,

when states carrying out the Patriot Act refuse to enforce the portions they deem unconstitutional, when states implementing

federal...law use that power to push federal authorities to take a new position or when states relying on federal funds create welfare

programmes that erode the foundations of the very policies they

are being asked to carry out (Bulman-Pozen & Gerken, 2009, p.1258-1259).

The literature on uncooperative federalism shows that states resist, challenge,

tweak, and even dissent from federal directives on concurrent legislative issues such as

education, healthcare, etc. While uncooperative federalism occurs on daily basis, in a

federal arrangement as Nigeria, scholarship is yet to develop an account of what it means,

why states reneges, and the possible far-reaching policy implications, etc, even when

states lack the autonomy to challenge federal mandates.

Advocates of uncooperative federalism contend that where states have the

requisite autonomy to resist federal policies, it so happens on account of reasons. First,

autonomy of the states prevents the federal level from suppressing state opposition.

Second, state autonomy creates areas where states are independent of the federal

government which enable states to experiment policies divergent from federal directives.

Third, autonomy enables states to become outspoken against an excessive arrogant federal

government. Fourth, state autonomy serves as a veritable checkmate to the federal


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government, especially in making federal officials accountable in instances of abuse of

power (Bulman-Pozen & Gerken, 2009). Fifth, against the basic federal ethos that no state

should be so financially buoyant that it can compete with the rest of the units or the entire

union, fiscal superiority of states often emboldens states to renege federal directives (Ewa,

1976).

But what is that embolden states to resist federal policies even where they lack

the requisite autonomy? Bulman-Pozen and Gerken (2009) identify three possible

reasons. First, there is the power of the state derivable from dependence; where the state

has the discretion on how to accomplish given tasks, assignments, responsibilities,

delegated to them by the federal government. Contra-wise, the dependence of the federal

government on the states to implement its policies empowers states to renege. Oftentimes,

the federal government being not oblivious of state discretionary posture concedes to state

demands. The federal government helplessly concedes to state demands because,

Whatever a boss’s formal powers may be, there are always

significant limits on his or her practical authority. Only a very bad manager fails to consider the needs and interests of subordinates

or to consult them before making significant policy changes...the

federal government needs the states as much as the reverse, and this mutual dependency guarantees state officials a voice in the

process (Bulman-Pozen, & Gerken, 2009, p. 1267).

However, while the federal government seems completely locked-in dependence

on states, it would be a misnomer to equate the autonomies of both levels of government,

as the federal government can contract or eliminate state autonomy by removing its

dependence on states.

Second, integration serves as a means of state influence on federal government or

even to renege. A long integration between federal and state governments on specific

issues or projects often create lasting bonds resulting from trusts built over a period of

time (Bulman-Pozen & Gerken, 2009). Scholarship argues that state administration of

federal programmes instils in the federal government a sense of seeing the state as its

integral part, a union federalism scholarship sees as a political safeguard of federalism

(Kramer, 2000).

Third, as federal servants‟, states enjoy the advantage in serving as two masters;

i.e. in implementing federal programmes, where these programmes are within the domain

of the state which makes the state to appear as doing the bidding of the state while serving

as a federal servant. The peculiarity of this two-master advantage is that states are

conveniently able to renege on federal directives (Bulman-Pozen & Gerken, 2009).

d. Fiscal Federalism: What Is It and Variants

Scholarly discourse on fiscal federalism is gargantuan. Oates (1999, pp.1120-

1121) defines fiscal federalism as "understanding which functions and instruments are

best centralised and which are best placed in the sphere of decentralised levels of

government". Sharma (2005, p.44) defines fiscal federalism as “a set of guiding


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principles, a guiding concept that helps in designing financial relations between different

levels of government”. Musgrave (1959, p.179) assert that the purpose of fiscal federalism

“is to permit different groups living in various states to express different preferences for

public services; and this, inevitably, leads to differences in the levels of taxation and

public services”. Fiscal federalism implies shifting power from the coordinate units to the

national government. The implication of this is that the preferences of individuals or

lower levels of government are limited or neglected entirely on account that central

government spending is always determined by the preferences of diverse regions and

citizens.

This otherwise implies fiscal federalism to mean the study of how the

competencies (expenditure side) and fiscal instruments (revenue side) are allocated

among the different levels of government. This is meant to say that the literature on fiscal

federalism focuses on three interrelated subjects. First is the question of who does what-

the constitutional provision in the distribution of expenditure responsibilities among the

different levels of government. The second is the division of revenue raising powers

between the centre and the coordinate units. These two functions are accompanied by “the

study of the causes and impact of fiscal imbalances between the tiers of government in

executing their respective responsibilities...the design and objectives of intergovernmental

transfers towards establishing a meaningful relationship between the tiers of government”

(Negussie, 2016, p.11).

Fiscal federalism while referring to money in form of revenue (resources in form

of taxes, fines, duties, rents, royalties, etc) and expenditure (public salaries, grants,

subsidies, etc) is basically the system of transfer payment wherein a central government

shares revenue with her coordinate levels of government. Fiscal federalism basically

operates on three basic functions for the public sector: macroeconomic stabilisation,

income distribution and resource allocation. Fiscal federalism theory however favours

assigning the macroeconomic stabilisation which is national in nature to the central

authority, a level considered better suited for such assignments vis-à-vis other levels that

the capacity to handle issues of national challenges as unemployment, inflation, etc is

herculean. Income distribution as well is better handled by the central level, especially in

managing taxation issues in redistributing income from the wealthy to the poor and in

readdressing wealth dichotomies among levels of government in a state (Negussie, 2016).

The rationale for the varying functions performed by the central government and

other coordinate levels of government stems from the argument that certain services such

as defence, migration, etc, are better or most efficiently rendered or provided by the

central government and to the fact that these services are consumed by the generality of

the populace. This same argument explains the provision of localised services by the

coordinate levels that are better placed to identify local priorities. It is clear therefore that

public goods are possibly provided by both the central and the coordinate units in a

federation (Negussie, 2016).


173

However, in highlighting the modus operandi for a state to be fiscally federal, it is

worth noting a few happenstances in federations that are contrary to the basic

requirements of fiscal federalism. First, while “fiscal federalism is argued to exist

wherever governmental policy varies from region to region in an attempt to adapt to local

circumstances...and confirms that fiscal federalism is constrained to discuss only the

narrowly economic outcomes of allowing regional variations in policies” (Hamlin, 1985,

p.188); this prescription is wantonly jettisoned in federations as Nigeria; where different

regions in Nigeria are made or dependent on same economic policy prescriptions of the

central authority. Second, in line with Wheare‟s (1941, p.17) prescription that,

If state authorities...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 federation

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.

However, as unique this prescription, Super (2005) cautioned that while Kenneth

Clinton Wheare was appropriate in his prescriptions, the complex workings of modern

governance mandate otherwise. In continuing this line of thought, Super (2005, p.2546)

posits that,

In some programmes, funding seeks to insulate states from

particular fiscal burdens, such as the side effects of federal policies or the abrupt termination of federal responsibility for

particular problems. In other programmes, funding provides an incentive for states to follow federal policy leadership. And in still

others, the federal government assumes financial responsibility

because of its superior fiscal capacity.

In an attempt to settle this disagreement in fiscal federalism Ubi & Inyang (2017,

p.92) and Ikeji (2011, p.124) outlined the following as the guiding principles of fiscal

federalism:

a. “The principle of diversity. This has become necessary in order to accommodate

diverse ethnic groups with diverse public goods and services.

b. The principle of centralised stabilisation. This principle demands that the federal

government be positioned to efficiently use fiscal instruments to achieve both

micro and macro stabilisation.

c. The principle of derivation. This requires that the federating units should exercise

some control over some of their preferences with their resources.

d. The principle of fiscal equalisation. There should be some degree of fiscal

equalisation between the various levels of government in order to ensure the


174

provision of a minimum level of public goods and services. This will assist in

meeting the overall marginal equilibrium.

e. The efficiency principle. This is in two folds, firstly, efficiency in the allocation

of resources without making anybody worse off. Secondly, efficiency in ensuring

that each level of government optimises its internal revenue earning capacity at

minimum tax effort with optional distortions.

f. The principle of minimum provision of essential public goods and services. This

requires that the federal government should ensure that each citizen, no matter

where they reside, be provided with a minimum level of essential public goods

and services such as healthcare, education and other welfare needs”.

g. The Principle of Locational Neutrality: Interregional fiscal differences tend to

influence location choices of individuals and firms. Based on different resource

endowments, differences in tax capacity and effort, some decree of locational

interference seems to be an inevitable cost of intergovernmental fiscal relations.

Therefore, policy should focus on minimising distortions due to some

interference. Hence, differential taxes which create locational distortions should

be avoided as much as practicable (Ikeji, 2011, p.124)

h. The Principle of Centralized Redistribution: This principle states that the

redistribution function of fiscal policy through progressive taxation and

expenditure programmes should be centralized at the federal level. This seems

consistent with the principle of locational mentality. That is, if the redistributive

function is decentralized, it can result in distortions in location decisions (Ikeji,

2011, p.124).

4. Fiscal Federalism in Nigeria

The political history of Nigeria makes an interesting reading to scholarship; for it

has attracted the good and not too pleasant comments. As a country, Nigeria‟s

heterogeneity is interestingly complex to behold. Ethnicity, religion, language, etc, are all

the complexity generating indices that have caused Nigeria‟s chequered history.

However, by adopting the federal design, it was hoped to achieving the much cherished

and bandied unity in diversity mantra. Fifty-eight years after political independence, the

unity in diversity slogan is far from being attained. One peculiar area which has remained

endemic in Nigeria‟s attempts at working out a united and indivisible Nigeria is its

inability in turning out an acceptable fiscal federal arrangement.

Attempts at fiscal federalism in Nigeria dates back to colonial times; a period the

country had to set up numerous revenue allocation commissions to have a sustainable

fiscal arrangement (Teriba, 1966). While this section will not elaborate on the different

revenue allocation commissions dating back to colonial times, it is appropriate just to

mention some. On this note the Phillipsom Commission of 1946, the Hicks-Phillipson

Commission of 1951, the Chicks Commission of 1953, the Raisman Commission of

1958, the Binns Commission of 1964, the Dinna Interim Revenue Allocation


175

Commission of 1968, the Aboyade Technical Committee of 1977, the Dr. Pius Okigbo

Revenue Commission of November 1, 1979, etc, readily comes to mind (Arowolo, 2011,

Elekwa, Matthew & Akume, 2011).

While these revenue allocation commissions have all grabbled with the same

subject, but turned in divergent reports with a wide rejection from the various ethnic

nationalities in Nigeria, yet the immediate post-colonial leaders worked out a fiscal

federal arrangement where,

...every region was run like a semi-autonomous component of a

greater Nigeria. Regions controlled their resources and an agreed

percentage due to the government at the centre was appropriately

remitted. Development was faster because every region understood

that their destiny lies within. We had the era pyramids were built

with groundnut, we were world largest exporter of cocoa and palm

oil, coal was equally exported and so many other minerals. That

was how Awolowo’s government could grant and sustain free

education for western region but today even with our so called

petro-dollar; no state can grant and sustain free education

(Onochie, 2017, p.2).

If Nigeria had worked on such harmonious fiscal arrangement in the First

Republic (1963-1966), curiosity compels this paper in asking these questions. With the

avalanche of the aforementioned revenue commissions, why has Nigeria not achieved a

sustainable fiscal federal arrangement? Why was the fiscal federal design of the First

Republic jettisoned? This paper identifies two principal reasons.

First, the thief in Nigeria‟s economy is ethnicity. This remains the greatest

impediment to Nigeria‟s economic growth. Federalism requires that while it discourages

inequality, there is no sub-national unit that is entirely sterile in resources and so federal

subunits must be partners engaging themselves in economic matters. However, in Nigeria,

due to misplaced priorities, deliberate economic sectors are developed to the detriment of

other sectors. This makes those resources or sectors with priority attention and the

designate region to benefit to the envy of other regions. It is therefore not surprising that

on each occasion where derivation is recommended as the basis for revenue sharing,

regions in Nigeria not so favourably endowed in resources criticise and condemn the

derivation policy in its entirety. Therefore, it is not surprising that in the subsisting

inappropriate fiscal arrangement in Nigeria, “monetary policy has been inadequate, fiscal

policy has rewarded state governments but not brought their spending policies in line with

their own resources and with national economic objectives, and resources have been

consistently misallocate largely because of the principle of federal character”

(Osayimwese & Iyare, 1991, p.89).

Second, military rule in Nigeria. While Generals Murtala Mohammed and

Yakubu Gowon consciously followed the then prevailing fiscal design of the 1963

Republican Constitution, the General Olusanju Obasanjo military junta killed the federal

spirit in Nigeria. It may be recalled that while the 1963 Republican Constitution allowed


176

this fiscal formula: 60% revenue from minerals to the states of origin, 20% to the central

government, and 20% to others, the 1979 Presidential Constitution drafted under the

General Obasanjo Administration legislated revenues accruing from mineral resources

totally to the federal government through the obnoxious Land Use Act. As at today,

federal fiscal arrangement in Nigeria is structured as shown in Table 1:

Table 1: Nigeria – Horizontal allocation of revenue basis

Sharing from Federation Account Sharing VAT Revenue

Criteria Percentage Criteria Percentage

1 Equality 40% Derivation 50%

2 Population 30% Equality 40%

3 Social Development Need 10% Population 10%

4 Land Mass and Terrain 10%

5 Internal Revenue Generation Effort 10%

Source: Negussie, 2016, p.20

However, there is danger in allowing ethnicity to override the practice of

derivation to have such an ugly full sway in Nigeria‟s fiscal federal design (Agbaaeze,

Udeh & Onwuka, 2015). It is worrisome that, if a “particular federal arrangement is not

just to be long and bitter waiting station for minority groups hoping eventually to achieve

full independence, then it will be important for the system to nurture a healthy sense of

identity and loyalty of all citizens to both their subunit and the federal state” (Karmis &

Norman, 2005, p.17).

One basic antidote to this cancerous malady in Nigeria remains in working out an

acceptable fiscal design that is devoid of suspicions or marginalisation from all sub-

national states. And of course, there are a number of merits in practising a fiscal federal

design on the basis of derivation in Nigeria. For example, this will lead to the devolution

of economic, social, political power to sub-national levels which will make the rush for

the centre unattractive, less violent and divisive. Moreover, such trend will prevent the

ongoing „feeding bottle federalism‟ where “our ever roaming and nomadic governors

who have virtually moved their offices to Abuja where each picks up financial hand-outs

monthly like civil servants” (Onochie, 2017, p.3).

5. The Practice of Fiscal Federalism in other States: Lessons for Nigeria

This section understudies the practice of fiscal federalism in the Federal

Democratic Republic of Ethiopia. Ethiopia, though highly heterogeneous, has

successfully moved her peoples forward and what lessons can be translated to practical

realities in Nigeria‟s chequered fiscal federal practice. Specifically, how is fiscal

federalism practiced in Ethiopia?

a. Ethnic Federalism in Ethiopia

Diversity is one word that succinctly describes the Federal Democratic Republic of

Ethiopia. The diversity in Ethiopia is commonplace in language with more than eighty

language groups, dominated by four principal groups: the Oromos (34.5%), the Amhara

(27%), Somali (6.2%), and Tigrayans (6.1%) making up 74% of the entire population


177

(Negussie, 2016). Aside linguistic differences, religious diversity equally stands

conspicuous with 44% of the population being Christians, 34% being Muslims and the

remainder percentage of the population being Protestants, Catholics and African

Traditional Religion (ATR) (Negussie, 2016; Deng, 2016).

Politically, the state of Ethiopia never had rosy political administrations (Young,

1998). Governance was centralised by a unitary form of government patterned after a

monarchical structure. However, Ethiopia‟s then unitary government was contested by

farmers‟ revolts, truncated a civil war and later supplanted by a military regime. These

unpleasant trends in Ethiopia‟s political history came to an end in 1991 with a change in

government from a centralised regime under the Derg to a decentralised government led

by the Tigray People's Liberation Front (TPLF). Ethiopia‟s present federal design which

came to effect in 1995 was consciously structured to cater for the ethno-linguistic

diversity of the country by way of two layers of government: self rule at regional state

level and shared rule by means of representation at the federal level (Moges, 2003). The

Ethiopian ethnic federal constitution‟s uniqueness in serving as a lesson to other federal

states as Nigeria includes the following areas.

First, the constitution of the FDRE specifies in Articles 51 and 52 the powers and

functions of the central government and those of the state/regional functions as indicated

on Table 2.


178

Table 2: Constitutional Division of Powers and Functions in Ethiopia

Federal Powers and

Functions (Article 51)

State/Regional Powers and

Functions (Article 52)

Comment

Foreign affairs, defense,

federal police, public

security

Ensuring Self-government

Overall economic and social

policies and food security

Ensuring democratic order based

on rule of law

Fiscal, monetary and foreign

investment policies,

commerce

Socioeconomic development

policies at the state level

Local planning &

development

Natural Resource

Management

Land conservation and Natural

Resources management based on

federal laws

Air, rail and water transport State police and public security

Regulation and inter-state

trade

Civil service at the state level

National standards and basic

criteria for public health,

education, science and

technology

Implementation of federal

policies, laws and policies, but

needs constitutional clarity in

future

States: secondary

schools, state colleges

Wereda (local):primary

education

Interstate roads, railways and

highways

Intrastate and rural roads

Levy and collect federal

taxes

Levy and collect state taxes

Nationality and immigration

issues

Residual powers Local level: Water,

Sewerage, fire

protection


Second, the power of taxation is an enshrined component of Ethiopia‟s Ethnic

federalism. As indicated on Table 3, the components of taxation which both levels of

government can legislate upon are clearly specified.


179

Table 3: Division of Taxation Powers

The federal Power of

Taxation/Functions

(Article 96)

The State Power of

Taxation/Functions

(Article 97)

The Concurrent Power of

Taxation/Functions

Custom duties, taxes and

other charges on imports

and exports.

Personal income tax

collected from employees of

the state and private

enterprises.

Profit, sales, excise and

personal income taxes

levied on enterprises jointly

established by the federal

and state governments

Personal income tax on

employees of the federal

government and

international organizations.

Rural land use fee and tax on

income of private farmers

and cooperative associations;

Profit, sales and excise

taxes on companies, and tax

on dividend due to

shareholders;

Personal income tax, profit

tax, sales and excise taxes

on enterprises owned by the

federal government

Profit and sales tax on

individual traders; tax on

income from inland water

transportation

Profit tax and royalties on

large-scale mining and all

petroleum and gas

operations

Taxes on income from

national lotteries and other

chance winning games;

taxes on the income of air,

rail and sea transport

services.

Taxes on income derived

from rent of houses and other

properties in the state

individual owned or owned

by state.

Tax on rental of houses and

properties owned by the

federal government.

Personal income tax, profit,

sales and excise taxes on

enterprises owned by the

states.

Federal stamp duties and

tax on monopolies; and

collecting fees and charges

related to licenses issued

and services rendered by the

federal government.

Income tax, royalties and rent

of land levied on small and

medium scale mining

activities;

Royalties for use forest

resources; and charges and

fees on licenses and services

issued by state government.


Third, the constitution‟s adherence and strict compliance to the Principle of

Subsidiarity; which place people as the sources and owners of power in the republic. The

philosophy behind the principle of subsidiarity is that, a government level closer to people

is more responsive to local preferences. It also promotes bottom-up and top-down

accountabilities. The Ethiopian experience shows that inadequate institutional, human,

administrative and fiscal capacities were/are not persuasive arguments not to devolve

power from the centre to the states. Neither these problems are justifications to pass over


180

powers and functions upward (Baraki, 2015, p.171). In strict compliance with this

principle, the federal constitution of Ethiopia clearly designates the functions of all levels

of government by means of the following articles:

a. Article 8: All sovereign power resides in the Nations, Nationalities and People of

Ethiopia.

b. Article 50(4): States shall be established at State and other administrative levels

that they find necessary. Adequate power shall be granted to the lowest units of

government to enable the People to participate directly in the administration of

such unit, and,

c. Article 52(1): All powers not given expressly to the Federal Government alone, or

concurrently to the Federal Government and the States are reserved to the States.

Article 88(1): Guided by democratic principles, Government shall promote and

support the People‟s self rule at all levels (Baraki, 2015, p.171).

Fourth, the July 1991 Transitional Charter gave unreserved recognition to ethic

rights and civil liberties to self-determination. The constitution within this context even

gave consent to secession of any ethnic group upon the compliance with a referendum. It

may be recalled that, it was within this context that Eritrea benefited from the charter‟s

provision in securing its secession from Ethiopia (Praeg, 2006). Furthermore, the charter

unequivocally declares for:

The rights of nations, nationalities, and people to self-determination are affirmed. To this end, each nation, nationality

and people is guaranteed the right to (a) preserve its identity, and

have it respected, promote its culture and history and use and develop its language; (b) administer its own affairs within its

owned defined territory and effectively participate in the central

government on the basis of freedom and fair and proper representation; (c) exercise its right to self-determination of

independence, when the concerned nation/nationality and people is convinced that the above rights are denied, abridged or abrogated

(Kefale, 2003, p.261).

6. Conclusion and Recommendations

It is concluded that, Nigeria‟s fiscal challenge is not a matter of not knowing how

to resolve it but a national question being bedevilled by governance or political leadership

rigmaroles, inconsistencies, suspicions, etc, all of which with ethnic underpinnings

(Adamolekun & Kincaid, 1991, pp.61-67). There are mutual ethnic suspicions among the

intellectual, political, military and traditional elites in Nigeria on how to fashion out a

workable fiscal federal design. No doubt, the ethnic factor instigates the fear of the

unknown; which is how the peoples of the geopolitical zones with sterile natural resources

will cope in Nigeria with a true fiscal federal structure? In this respect, the paper posited

that this fear is unfounded because no geopolitical zone in Nigeria is sterile in resource

endowment, if at all government deliberately diversify the economy of Nigeria from the

ongoing mono-product dependence on crude petroleum to other sectors as agriculture,


181

steel, mines, etc. The obvious lesson for Abuja is that it should borrow a leaf from Addis-

Ababa‟s ethnic fiscal federal model that has received global accolades in solving the

challenge of fiscal federalism in a multi-ethnic state as Ethiopia.

Finally, borrowing a leaf from Ethiopia poses a genuine question, and which is

that will Nigeria undergo similar trajectories in terms of civil wars as secessionist Eritrea

underwent with Ethiopia? War would never be glorified as a solution to Africa‟s political

and economic challenges (Cervenka, 1977; Johnson & Johnson, 1981; Herbst, 1990);

instead this paper avers that Nigeria can overcome this challenge without necessarily

going through war but by means of negotiations using the National Assembly or a

sovereign national conference of all ethnic groups to renegotiate Nigeria‟s terms of

continuing co-existence. This is most important as genuine ethnic specific grievances are

rife among all ethnic nationalities in Nigeria.

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