The Dynamics of Oil and Fiscal Federalism: Challenges to Governance and Development in Nigeria
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THE DYNAMICS OF OIL AND FISCAL FEDERALISM: CHALLENGES TO GOVERNANCE AND DEVELOPMENT IN NIGERIA Joshua Olaniyi Alabi Submitted in accordance with the requirements for the degree of Ph.D University of Leeds School of Politics and International Studies (POLIS) February 2010 The candidate confirms that the work submitted is his own and that appropriate credit has been given where reference has been made to the work of others. This copy has been supplied on the understanding that it is copyright material and that no quotation from the thesis may be published without proper acknowledgement. Acknowledgements In the course of my studies and writing of this thesis, there were supports from many people to whom lowe profound gratitude. First of all I am grateful to the Almighty God for His guidance and protection over me right from the beginning till now. My unquantifiable gratitude goes to my dynamic and ever ready to assist supervisors: Professor Raymond Bush and Mr Hugo Radice, I cannot wish to have any better supervisors than both of you. My sincere appreciations also goes to my darling wife Olufunmilola and our son Caleb, for bearing with my absence from home many times in the process of my fieldwork and write up, I love you. To my parents Sir Gabriel Funsho Alabi and Mrs Elizabeth Alabi, thank you for your prayers and support throughout my studies, may long live be your heritage. Amen. I also want to appreciate Pastors David Oladosu and C.N Ekwueme the Resident and Associate Pastors of Winners' Chapel International Manchester and their families, for their support and prayers. Also to Reverend and Mrs Gbenga Owolabi of True Life Church Bermondsey London, I appreciate your support and kindness since the beginning of my studies. My appreciation also goes to the following members of the leadership of Winners' Chapel International Leeds; Deacon Wilson Inije, Dr. Magnus Udo and Dr. Jacob Udo-Udo Jacob. My appreciation also goes to the following member of Staff in POLIS Postgraduate office for their administrative support since I first came to the school for my M.A in Development Studies; Mrs. Maura Crosland (retired), Ms. Helen Philpott, Mrs. Lorraine Sherriff and the School Manager Ms Caroline Wise. Finally, to my fellow PhD students and colleagues in POLIS; Dr. Christiana Abonge, Dr Soji Adeniyi, Dr Jide Okeke, Ms Esther Richards, Ms Helene Dyrhauge, Ms Volha Piotukh, Gabriel Botchwey and Mr Henry Mbawa Jnr. Thank you for your support and contributions throughout this work. May God bless you all. Amen. II Abstract This thesis explores some of the major challenges to governance and development in Nigeria since independence. The focus of the thesis is on the dynamics of oil and fiscal federalism, given that more than 90% of her revenue income accrues from oil, and on the continuing difficulties of securing from these revenues a satisfactory path of economic and social development for Nigeria. It examines more specifically how the productive application of the revenue streams obtained by Nigeria from its oil reserves has been severely undermined by the politics of 'fiscal federalism', i.e. the manner in which taxation and public spending are divided up between the federal, state and local levels of government. It argues that it is in the context of these fragmented and contested processes of oil revenue allocation and management that the origins of predation and corruption are located. The main aim of the research is to discover whether and how reforms in the taxation and expenditure system could reduce predation, and direct the country's oil revenues into productive channels within a development strategy that will benefit the people at large, rather than a small and corrupt elite. The field research for this thesis was conducted at the federal and state levels of government, and assesses the problems associated with the contentious revenue- sharing system between the three tiers of government. It concludes that this dynamics of oil and fiscal federalism poses a major challenge, because it has ignored the productive contributions of the federating units and based revenue allocation on predatory politically-motivated parameters. These have consequently led to instability in the oil producing Niger Delta region, which constitutes a major challenge to the sustainability of oil production in Nigeria. This in tum has over the years resulted in failure to achieve a satisfactory path of economic and social development for Nigeria. III Table of Contents ACKNOWLEDGEMENTS I ABSTRACT II TABLEOFCONTENTS III ACRONYMSAND ABBREVIATIONS X LISTOFTABLE XIV CHAPTER 1 1 OIL, FISCAL FEDERALISM AND GOVERNANCE IN NIGERIA 1 1.0 INTRODUCTION 1 1.1 Petroleum Resources in Nigeria 3 TABLE 1.1: NIGERIA'S OIL PRODUCTION AND REVENUES 1970-2008 .........•.••...............•.......... 3 1.2.1 Fiscal Federalism in Nigeria 4 1.2.2 Fiscal Federalism and Intergovernmental Governance in Nigeria 4 FIGURE 1.1: THE FLOW OF REVENUE AND INTERGOVERNMENTAL FISCAL RELATIONS IN NIGERIA 6 1.3 OIL AND CHALLENGESTO SOCIO-ECONOMICDEVELOPMENTIN NIGERIA 8 1.3.1 The Challenges of Increasing Poverty in Nigeria albeit Huge Oil Revenue 8 FIGURE 1.2: POVERTY RATES IN NIGERIA, 1970-2004 9 TABLE1.2 PERCENTAGE OF THE POPULATION LIVING ON A DOLLAR PER DAY BASED ON PPP BY SECTOR AND GEO-POLITICAL ZONES 10 1.3.2 Attempts by various Governments towards Poverty Mitigation 12 1.4 RESEARCHMETHODS 13 1.4.1 Research locations in Nigeria 15 FIGURE 1.3: MAP OF NIGERIA SHOWING FIELDWORK RESEARCH LOCATIONS: KADUNA, DELTA STATES AND ABUJA FCT AND OTHER 34 STATES OF THE FEDERATION 15 1.4.2 Sampling Method 16 1.4.3 Fieldwork Period (August 2006-June 2007) 17 1.4.4 Reliability and Validity in Qualitative Data Generation and Analysis 21 1.4.5 Other Methods that ensured Reliability and Validity of Data Collected 22 1.4.6 Procedures for data analysis 23 1.5 ACADEMICCONTRIBUTIONSOFTHETHESIS 24 1.6 THESISSTRUCTURE 25 IV CHAPTER 2••••••••••••••••••••••••••••••••••••••••••••••••••••••••••.••••••••••••••••••••••••••••••••••.•••••.••••••••••••••.••••••• 28 OIL AND THE POLITICAL ECONOMY OF DEVELOPMENT; A REVIEW OF THEORY, POLICIES AND ACHIEVEMENTS ••••••••••••••••••••••••••••••••••••••••.••••••••••••••••••••••••.•••••.•.•••••••••••••••••.••••••••••••••.••••••• 28 2.0 INTRODUCTION •••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••• 28 2.1 The Political Economy of Development in Oil and Mineral- Dependent Countries: a Theoretical Review •••.••••••••••........•...•...••.•••••••••.....•....••...•........•..•.••...•.......................... 30 TABLE 2.1: MINERAL DEPENDENCE INDEX OF DEVELOPING ECONOMIES, 1970 ••••••••••••••••••••••33 TABLE 2.2: MINERAL DEPENDENCE INDEX OF DEVELOPING ECONOMIES, 1995 .•••••••••••••••••.•.• 34 TABLE 2.3: MINERAL DEPENDENCE INDEX OF DEVELOPING ECONOMIES, 2006 .•••.••••••••••.••••.• 35 2.2 Varied explanations for Poor Economic Growth in Natural Resource - Dependent Countries •••.•.....•••.....•.•..•••.•..•..•..•...••...•....................................................•...•.....•..•..... 37 2.2.1 EXOGENOUS EXPLANATIONS FOR THE LESS ECONOMIC GROWTH IN RESOURCE-DEPENDENT COUNTRIES • ....................................................................................................................................... 39 2.2.1.1 The Dutch disease 39 2.2.1.2 Revenue Volatility and the Decline in the Terms of Trade for Primary Commodities ................................................................................................................................... 41 TABLE 2.4: OIL REVENUE VOLATILITY IN SELECTEDCOUNTRIES 1997-2000 43 2.2.1.3 The Rate of Extraction and Lack of Renewability- 46 2.2.1.4 Underemployment, Low Economic Intersectoral Linkages and Skill Acquisition 48 TABLE 2.5: OIL AND GAS INDUSTRY SUPPLIERS (ONSHORE AND OFFSHORE) BY COUNTRY OF ORIGIN 50 TABLE 2.6: LOCAL CONTENT POLICY IMPLEMENTATION AND OUTCOME IN SELECTED OIL PRODUCING COUNTRIES 52 2.2.2 INTERNAL OR DOMESTIC EXPLANATIONS FOR THE RESOURCE CURSE 54 2.2.2.1 Excess Oil Revenues and Poor Governance 55 2.2.2.2 Political Instability and Civil War 57 TABLE 2.7: CIVIL WARS, REBELLION AND MILITANCY IN SELECTED OIL AND MINERAL DEPENDENT STATES 58 2.2.2.3 Corruption and Weak Democratic Institutions 60 TABLE 2.8: GOVERNANCE QUALITY INDICATORS IN SELECTEDCOUNTRIES 2008 63 2.2.2.4 Lack of Linkages between Taxation and Governments' Accountability 63 2.3 HUMAN DEVELOPMENT IN NATURAL RESOURCE-DEPENDENT COUNTRIES 64 v TABLE 2.9: MINERAL DEPENDENCY AND HUMAN DEVELOPMENT IN 44 DEVELOPING COUNTRIES, RANKED BY THEIR 2009 HOI 66 TABLE 2.10: SELECTED MAJOR OIL PRODUCING COUNTRIES AND HUMAN DEVELOPMENT RANKINGS, 1995, 2000, 2006/2008 68 2.4 THE RELATIONSHIPBETWEENSECURITYAND DEVELOPMENT 73 2.5 CONCLUSIONS 76 CHAPTER 3 80 THE POLITICAL ECONOMY OF OIL AND SOCIO-ECONOMIC DEVELOPMENT IN NIGERIA 80 3.0 INTRODUCTION 80 3.1 THE MANAGEMENT OFOIL REVENUEIN NIGERIAPRE-2000 82 3.1.1 Development Plans and Achievements 82 3.1.2 The Impact of SAP on Nigeria's Manufacturing Industries in the 1980s and 1990s..85 FIGURE 3.1: AVERAGE CAPACITY UTILIZATION IN MANUFACTURING IN NIGERIA, 1975-2007.87 3.1.3 Oil, Corruption and Mismanagement 85 3.1.4 Oil Revenue and Nigeria's Debt Crisis 92 FIGURE 3.2: NIGERIA EXTERNAL PUBLIC DEBT STOCK, 1977-2008 93 3.2 SOClo-EcONOMIC REFORMPROGRAMMEAND OIL REVENUEMANAGEMENT IN NIGERIA 94 3.2.1 The Oil-Price-based Fiscal Rule (OPFR) and Revenue Management in Nigeria Post- 2000 95 3.2.2 Socio-Economic Reform and Post- 2000 Debt Management 97 3.2.3 The Bureau of Public Procurement