Fiscal Federalism, Not Resource Control

In the on-going debate on the need to restructure Nigeria economically and politically, the two terms of resource control and fiscal federalism have featured prominently as solutions. I think it is important to give a brief explanation of the two policy proposals:

Resource control takes its roots in the oil-producing Niger Delta, where they have been advocating that the entire oil revenues should be given to them, and by extension, that each state should retain the revenue from its soil, which is their resource. It seeks to increase the income accruing to them via the derivation principle from 13% to as close to 100% as possible.

Fiscal Federalism, on the other hand, involves changing the tax policy of Nigeria so that states, not the Federal Government, benefits from Value-Added Tax (VAT), which is the tax paid by companies on good and services produced. This is in order to make them economically independent and boost their internal economies via more production.

So what then is the difference? On the surface, they both seem to be achieving the same purpose, which is putting more money into the pockets of states. However, the multiplier effects of each policy are what set them apart.

Resource Control focuses mainly on revenues from oil mining, and does not wean Nigeria of our single-product economy, which should be the main focus of our national economic policy. This is because tying economies strongly to oil production is very risky considering the volatility in global oil prices. What is $100/barrel today could easily be $60 barrels tomorrow, especially with the coming on stream of new producers who are not members of the Organisation of Petroleum Exporting Countries (OPEC), the oil cartel which imposes production limits on its members in order to maintain as high an oil price as possible.

Secondly, an oil industry, though yielding great financial profits, does not employ as many people as expected. This is because the petroleum industry is highly automated. As a matter of fact, according to John Ghazvinian in his 2006 book, Untapped: The Scramble for Africa’s Oil, of the $20bn then spent annually in the entire African oil industry, only $5bn was actually spent in Africa. Even with the present Local Content Act and the proposed Petroleum Industry Bill, it still will not be able to solve our unemployment needs.

Lastly, the conventional rule of governance asks that governments earn their money largely from taxation, which is what an economy focused on an extractive industry does not achieve. All the government has to do to make money is to sink more oil wells and sell new acreages, rather than work to spur more business through the creation of a viable environment. The lack of dependence on tax revenues ends up making governments less responsible to the people, and in fact, makes them more autocratic, according to Thomas Friedman’s First Law of PetroPolitics, which my fellow blogger, Joachim MacEbong applied to the Nigerian context and concluded rightly that every Nigerian should pray for an oil price crash.

In the end, with resource control, nothing really changes apart from the fact that there will be more money in state government’s hands. We cannot even conclude that the level of governance will increase with more money, considering the fact that the states to benefit most from resource control have been receiving the highest federal allocations with little to show for it. This just smartly plays into a geo-political strategy of ‘we oil money’.

Now this is where Fiscal Federalism differs from Resource Control. With Fiscal Federalism, the emphasis is on earning revenues via tax on goods and services produced within the state. This means that the more business activity in the state, the more money they shall earn. When states are largely weaned off federal allocations, they will then be forced to look inwards and develop their economies. Nigeria is a nation that is blessed beyond measure, in natural as well as human resources. This fact has never been in doubt. In my travels around this country, I continue to encounter massive potentials which are not being harnessed, because there is free money coming in and also because there is no incentive to do so, since it is the FG that will earn their VAT money.

I cannot even begin to fathom the economic boom we will have once states are forced to look inwards to raise revenue. There will then be policies directly targeted at making sure industries grow. The illusion that some states will die in such a system because ‘they have no natural resources’ is very wrong. Each state can build its economy according to its comparative advantage: be it agriculture or services or mining. As long as people exist in a location, wealth can be created. All that will matters will be that businesses and jobs are being created and tax revenue is well-earned and well-spent. This means that if Rivers State, an oil-producing state, has its oil taken to Lagos State and refined, it is Lagos that earns money from it through VAT. Such will then make Rivers work to attract refineries to the state. We would have then moved from being merely a primary producer but also added value to the raw material. In such a system, it might not even the oil producing states that will be the richest. For example, in the USA, where fiscal federalism is practiced, Texas despite having the largest oil industry in America is only second to California in terms of GDP.

Beyond that, governments shall then have a true responsibility to their electorate, knowing that a failure in governance would make them easily lose businesses and tax revenue to other states. We can see a clear example in Lagos State, which generates up to 60% of its budget from tax revenues. It has had to make sure that people see results from their paying tax in order to justify the government’s collecting. It is also true that in such an environment, people are more willing to fight corruption rather than just accepting it as a way of life.

Lastly, Fiscal Federalism will force states to compete in order to develop economically. In that situation, emphasis within states and their governments for jobs and school admissions will be on qualifications and merit, not on ethnicity and religion as it is commonplace today. Sentiments cannot survive in the face of true competition. This will then force a true integration of the Nigerian peoples.

It is my candid opinion that Nigeria will never reach its economic heights with the economic structure we operate today. We have to change it so that states can individually develop their economies to the benefit of themselves and all. That can only be achieved by Fiscal Federalism