Fiscal Federalism: Lucrative Liberalism

 

Happy Workers’ Day. I congratulate Federal public servants for the approved increase in their salary structures announced by President Bola Ahmed Tinubu-led administration yesterday 30^th April, 2024. However, I am inclined to wish that the subnational units of government have similar and respective financial capacities to raise the earnings of State public servants. I’m talking about a sincere & intentional structural review of the constitutional empowerments (or not) of State governments (or not) to earn revenues to meet their obligations to residents. Just before we criticize many States for not paying any minimum wage negotiated by the national office of the Nigeria Labour Congress (NLC) and its allies with the Federal government, let’s be dispassionate to consider an age-long phrase - Fiscal Federalism, or a synonym of it - Lucrative Liberalism, which I coined few years back as I reflected on a better way to communicate this cogent subject in a country with a dysfunctional governance architecture. My book, “DIAL 811: DEFT OR DAFT?” becomes a handy reference at this juncture.  

Experts define Fiscal Federalism

Synonyms of fiscal
Financial	Commercial
Economic	Lucrative
Monetary	Pecuniary

Table 5.1 – Synonyms of fiscal

Is it possible to dictate the tune without paying the piper? Very impossible wish! An English axiom had long countered this illogical suggestion when it said; “He who pays the piper calls the tune!” According to the Collins dictionary, it means that “the person who provides the money for something decides what will be done, or has right to decide what will be done.” The money is the fiscal tool we are here to examine. We should reconcile our expectations of Federalism as a saving concept of governance, with the reality of this instrument (economic paraphernalia of a functional structure).

Federalism without fiscal factor is like a heart without blood. Can a human heart, responsible for pumping blood to all parts of the body including itself, survive and perform its central role without blood? The importance of discussing fiscal Federalism is to draw attention to the imperative role of money in governance. Global specialists (organizations & persons) in the economic field and development arena have defined the concept of fiscal Federalism and it would be necessary to share their harmonized thoughts.

a. The Organization for Economic Cooperation and Development (OECD, 2020)

OECD defines fiscal Federalism as “the distribution of taxation and spending powers across levels of Government.” Four points are lucidly highlighted by OECD’s definition;

i. Distribution - Beforehand, Federalism was described in this book as the distribution of powers between the Central Government and sub-national authorities.

ii. Fiscal Federalism is Federalism - OECD’s definition implies that fiscal Federalism is yet Federalism because it’s about distribution of powers. It means that if Federalism is about decentralization, fiscal Federalism is safely regarded as fiscal decentralization and there shouldn’t be any disorientation therefore, in the understanding of Federalism and/or fiscal Federalism.

iii. Financial powers - OECD suggests that in as much as the concept of Federalism is not different from fiscal Federalism, the fiscal qualification of it is to underscore the superlative place of financial (economic, monetary etc.) powers in the discussion of Federalism. The economic paraphernalia (previously discussed) of a governance structure in a federating system (decentralization of powers from Central to Sub-national Governments) therefore holds a prime place among the other powers.

iv. Revenue and expenditure authorities – The financial powers so devolved to the Sub-national Governments must include both the revenue-generating and expenditure authorities.

The limitation of OECD’s definition is that it emphasizes taxation as though it is the major revenue source of all Governments including those in the developing countries. Although some challenges of fiscal Federalism deduced from the study of about fifteen countries were also stated in an economic policy paper titled “Synthesizing good practices in Fiscal Federalism”, OECD also drew attention to the strategic usefulness of fiscal Federalism in the publication; “Through decentralisation, Governments can bring public services closer to households and firms, allowing better adaptation to local preferences.”

b. Covenant University, Ota, Ogun State

A Nigerian scholar, Mr Olabanji Olukayode Ewetan, of the Department of Economics and Development Studies, College of Development Studies (CDS), Covenant University situated in Ogun State, Nigeria, published a paper titled “Fiscal Federalism in Nigeria: Theory and Practice”.  The researcher noted that fiscal Federalism “is essentially about the allocation of Government resources and spending to the various tiers of Government.” Some expressions seen in the above definition align the latter with OECD’s and they are;

i. Terminologies such as allocation mean distribution or sharing. 

ii. Spending depicts expenditure. 

iii. Tiers of Government suggest that fiscal Federalism is not about the Federal Government in isolation but the distribution of powers between it and the Sub-national tiers of Government.

Although subsequent explanations in the published academic work revealed the need to also decentralize revenue-generating powers to the States and LGAs, Ewetan’s definition doesn’t clearly state so. The research paper, published in the International Journal of Development and Sustainability in 2012 resolved that in Nigeria, “fiscal responsibility and taxing powers still remain considerably centralized.”  Taxing powers suggest revenue-generating abilities and the wish of the author that Nigeria devolves such powers to the Sub-central Governments.

c. Encyclopaedia of English language, Britannica 2021

According to Britannica, the term Fiscal Federalism “deals with the division of Governmental functions and financial relations among levels of Government (and) was introduced by the German-born American economist Richard Musgrave in 1959.” Britannica’s two-part definition can be analysed and broken into the following;

i. Like Federalism, division of Governmental functions among (the three) levels of Government as stated in this globally acknowledged manual of general knowledge makes fiscal Federalism a synonym of Federalism.

ii. The phrase “financial relations among levels of Government” signifies the fiscal component of Federalism. I particularly enjoy the objective review of fiscal Federalism in Britannica which indicates that like every concept studied, recommended and applied to better govern all aspects of the human race, fiscal Federalism is one that is not without its shortcomings.

OECD’s recommendations to enhance the fiscal part of Federalism

OECD’s recommendations from fifteen years of country surveys as contained in its economic policy paper titled “Synthesizing good practices in Fiscal Federalism” and prepared by Kass Forman, Sean Dougherty and Hansjörg Blöchliger on behalf of OECD in April 2020, had three key groups of recommendations on fiscal Federalism.

	Type I. “Fiscal capacity” recommendations: strengthen sub-national taxation and spending powers to allow Governments to respond better to local needs and regional variations.
	i. Better align own-source revenues with sub-central spending; ii. Raise sub-central tax autonomy to ensure sufficient capacity; iii. Strengthen fiscal equalisation systems;
	Type II. “Delineation” recommendations: clearly delineate responsibilities both horizontally and vertically to improve efficiency and equity.
	iv. Delineate functions and responsibilities across levels of Government clearly;
	Type III. “Co-ordination” recommendations: minimize barriers to internal trade and enhance inter-Governmental co-ordination.
	v. Improve transparency, data collection and performance monitoring to enhance co-ordination.

Table 5.2 – OECD’s five recommendations for fiscal Federalism. Source: OECD, 2020

My recommendation to strengthen the grasp of these three recommendations is that taxation should be replaced with revenue because taxes are not the main and ‘potential’ sources of revenue for sub-national Governments in Nigeria. That done, OECD’s three classes of recommendations for fiscal Federalism can be adapted thus;

a. Through the constitution (for legitimacy and sustainability), Government should strengthen the powers of States and LGAs to generate revenues and spend same (fiscal capacity). OECD draws this recommendation from the fifteen years of survey conducted across different countries and the organization has evidence-based conviction that these increased powers would allow the Sub-national Governments to respond to the peculiar needs and variations in each locality in a context such as Nigeria’s that is a beehive of wide cultural disparities (250 ethnic groups).

b. Through the constitution, Government should outline the roles of the Federal Government (across all its Ministries, Department & Agencies), the State Government and local authorities to improve efficiency of governance architecture as well as ensure allocation of resources based on needs. OECD categorises these as delineation recommendations.

c. Through the constitution and subsequent policies formulated based on the global evidence and local peculiarities, Government should provide a performance monitoring framework with five clear types of indicators (input, process, output, outcome and impact) in all sectors and MDAs at the sub-national level. This is to strengthen coordination across the country. For example, the establishment of reliable and timely data collection mechanisms across the 36 States, FCT and 774 LGAs that can be connected to a central database for national analysis and data use is an essential inter-Governmental coordination structure. Accountability frameworks such as strong, unbiased & non-partisan anti-corruption institutions, civil society organizations & community pressure groups for local accountability etc. should be put in place early in the day. There is also the need to minimize barriers to intra-State and intra-LGA trade to promote a decentralization concept I term Lucrative Liberalism.

Lucrative Liberalism

In centralized structures of Government or unitary systems like Nigeria’s, there is a dominant culture that is legally backed to stifle the economic powers of the Sub-national Governments in the midst of enormous and potentially wealth-creating resources, thereby creating a financially over-bearing centre. These systems are usually characterised by extremes of social inequalities, large-scale corruption at the central level and stiff competition for basic amenities and rights of majority of the country’s inhabitants who mostly live and work at the Sub-national level. One major solution to this kind of ineffective governance system is to provoke economic emancipation by broadening the powers of the sub-central components to create wealth.

Therefore, what is lucrative liberalism? It is a concept of lessening the barriers to economic freedom which the Central Government had hitherto, through the constitution and Government policies, deliberately or unintentionally, craftily or frankly, put in the way of Sub-national Governments. Achieving lucrative liberalism also requires requisite constitutional and policy support. It’s a concept of damage-control to attempt to reverse the huge economic loss and its sundry social & other consequences on Sub-national Governments whose growth and development have been subdued by the Central Government for a long time.

The powers (provided by constitution and policies) to be infused in the new sub-national units must include those to make wealth (revenue-generation) from all renewable & non-renewable resources within its geographical space and also to expend the revenues (with clear budgetary provisions legislated by the respective Houses of Assembly or LGA parliaments).

Figure 5.3 – Illustrative summary of the concept of Lucrative Liberalism

A pertinent headline screeched in the news on the 20^th of April, 2021 and read “Allow States develop their minerals, Wike tells FG”. It was a Punch newspaper story credited to Mr. Nyesom Wike, a lawyer and (then) Governor of Rivers State in the Southern part of Nigeria. Part of it read; “The Federal Government is carrying so much load that they are not supposed to carry. Allow States to develop these minerals and pay royalty to the Federal Government; that is the way it’s supposed to be.” The Governor’s open canvass, during a courtesy call on him at the Government House in Port Harcourt, by Mr Uchechukwu Ogah, the Minister of State for Mines and Steel, was a demand for lucrative liberalism.  As the Governor suggested, the Central Government will not be left to just wallow in indolence while its sub-national units make wealth from their resources. These units can be made to commit to an agreement to remit a non-choking percentage of their earnings to the Central Government’s coffers on a routine basis.

In conclusion, I wish our dear President, Asiwaju Bola Ahmed Tinubu, GCFR, the courage and wisdom to initiate a constitutional overhaul, through the National Assembly, to institute Lucrative Liberalism by decentralizing powers (legal, geographical, administrative, political and “economic”) to the subnational units as done in truly Federal nations like the United States of America, Canada and others. That is when more State governments will have sufficient capacities to implement salary structures that are similar to (or even better than) that of the Federal employers and not what the national body of NLC negotiates ‘on their behalf” with the Federal government in Abuja.

Dr. Adetolu Ademujimi, a Medical Doctor, Author, Reformer, Coach, Public Policy expert and Social entrepreneur, culled and adapted this write-up from pages 105 - 112 in chapter five of his latest book - “DIAL 811: DEFT OR DAFT?”, (Foreword by Chief Wole Olanipekun, SAN, OFR, CFR and Official endorsement by the late Governor of Ondo State, Arakunrin Oluwarotimi Akeredolu, SAN, CON. Note that DIAL 811 is an acronym coined by the author for “Decentralization Is A Lifeline for 811 Federating Units” (811 = 36 States + 1 Federal Capital Territory + 774 Local Government Areas) that are recognized by the 1999 constitution of the Federal Republic of Nigeria (as amended). You can visit the website  www.adetoluademujimi.com to buy a copy of the book for more details.