On Wednesday 30th March, the Frontline Club in London, UK hosted the “How to fix Nigeria” series. This event series was conceived by Funmi Iyanda in collaboration with the Royal African Society (RAS). The aim of the event was to discuss how Nigeria can solve its current economic crises-fallen crude oil prices, lack of foreign exchange and an diversified economy.The panelists included Professor Charles Soludo, Feyi Fawehinmi and Natznet Tesfay. If you are interested in the entire discussion  you  can watch the full video below but I have decided to focus on one major contribution made by Professor Soludo.

One of the discussion points that really stood out for me was the economic viability of the federal structure. For a while, I have always wondered why Nigerian states were simply not doing enough to build up their local economies but preferred going to Abuja every month to collect federal allocation.

Professor Charles Soludo, former Governor of the Central Bank of Nigeria (CBN)

Apart from the obvious fact that a lot of these Governors simply lack the genius and level of creativity to do this, Soludo pointed out that the fundamental problem is that of incentive. The incentive here generated by the current set-up of the federal system and I shall try to explain it briefly.

First, when Nigeria operated the regional system- Eastern, Western, Northern. Each region was in charge of their own economies and had to pay taxes to the central government. This was the period before the oil era and we had highly developed regional economies- groundnut pyramids in the North, Cocoa farms in the West and Palm oil plantations in the East. So I think it’s pretty clear to see how the incentive mechanisms operated here and encouraged regions to develop as they had ownership over their own industries, revenues and profits and  only had to remit taxes to the federal government. The system here encouraged healthy competition among  regions as they sought to attract industries and build their economies . It benefited the country at large because the larger the revenues generated by the regions were, the higher the taxes remitted to the central government. Hence, everyone contributed to the growth of the “national cake”.

Now compare it to the oil era and the current system of Federal government. In this case, companies are expected to remit taxes to the federal government and not the state.. and the federal government in turn shares its revenue among the states and local government. The problem here is that there is no incentive for states to generate revenue because the federal governments collect the corporate taxes and at the end of the day everybody gets to share the total money regardless of whether you contribute to it or not. Even states that may have the potential to generate revenue may be reluctant to do so because at the end of the day, the unproductive state might even get a higher proportion of the federal allocation.Talk about a classic free rider problem..lol!Thus the current incentive system is perverse and inimical to economic growth.

I think this is a serious problem that we need to discuss and find a workable means to solve it.Because as it it we have a “sharing” system where all the states simply collect from the “national cake” but no one is contributing to increase the size of the cake. I mean many states have failed to pay salaries since we started experiencing this fall in oil prices while  some have already collected federal government bail out. This system is clearly unsustainable and needs to be reworked, else we will remain stuck in this perpetual unproductive cycle.

So the million dollar question now is where do we go from here? Do we revert to the system of regional governments? Is there a way we can incorporate rational incentives for states into the current set-up? Or better still, how are countries with federal systems like Nigeria that have vibrant state economies been able to achieve this?

I am really curious about this and would love to hear your thoughts, please keep them coming 🙂