Political Decentralization and Natural Resource Governance in Nigeria
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Political Decentralization and Natural Resource Governance in Nigeria December 2012 by Vanessa Ushie Table of Contents Page Background and Rationale 1 Fiscal Federalism and Resource Revenue Management in Nigeria 7 Subnational Resource Revenue Management: 15 Evidence from the Niger Delta Conclusion and Policy Suggestions 37 References 44 Abstract Nigeria has been described as a typical example of the so-called ‘resource curse’ – as a country rich in natural resources but struggling with poverty and weak institutions. The system of federalism in Nigeria has also thrown up an intriguing paradox of political decentralization with low subnational transparency; while states have fiscal autonomy, and states’ spending constitutes around half of consolidated public spending, not much is known about how they manage natural resource revenues. The project conducts a case-study of resource revenue management for two subnational governments in the oil-rich, but restive Niger Delta. The case-study reveals that the two subnational governments are highly dependent on volatile federal (oil) revenue allocations, poverty remains high as public expenditure is not adequately directed at the pro-poor social sectors, there is low budget transparency, and actual budget implementation is poor. Furthermore, there are no effective mechanisms for ensuring subnational fiscal discipline and political accountability. The paper sets out appropriate policy actions that can improve the subnational management of natural resource revenues. In sum, the findings of the study indicate that political decentralization within federal political systems may not necessarily result in improved natural resource governance. Local context – the nature of socio-political institutions, technical capacity in managing public finances, and the degree of political accountability, is important in determining how subnational governments manage natural resource revenues. Background and Rationale Natural resource abundance has been linked to slower economic growth and weak institutions, demonstrated in economic models of the ‘Dutch disease’ and ‘resource curse’.1 Nigeria is often held up as a classic example of the paradox of plenty. It is Africa’s highest oil exporter, and the world’s tenth highest oil producer. Nigeria’s economy is structurally dependent on natural resources: oil and gas constitute 96% of total exports, 80% of government revenues and around 40% of GDP.2 In spite of the economic potentials in Nigeria, it has been dogged by poverty. In 2011, Nigeria was ranked 157th out of 187 countries by the United Nations Human Development Index. Furthermore, the World Bank estimates that by 2010, 68% of Nigerians survived on less than US$1.25 a day.3 Likewise, a report produced by the Nigerian government noted that the country was unlikely to meet any of the UN Millennium Development Goal (MDG) targets by 2015.4 When placed alongside its resource endowments - as OPEC’s largest producer of the highly prized ‘sweet’ crude oil, holder of Africa’s largest natural gas reserves of 186 billion cubic feet, and highest proven oil reserves of 37 billion barrels,5 the contrast between natural resource wealth and poverty is startling. In the scholarship on the resource curse in Nigeria, the causal channels are threefold. Firstly through resource-related volatility: as a resource dependent country with majority of its public revenues arising from oil and gas, Nigeria has been vulnerable to oil-related macroeconomic volatility arising from unstable global energy markets (see Figure 1 below), reflected in pro-cyclical fiscal policy, inflation and debt overhang.6 Second, Nigeria has grappled with the Dutch Disease – the overvaluation of the real exchange rate due to oil booms and the contraction of the non-booming tradable sector. 1 There is extensive literature on the paradox of plenty; notably, the influential studies by Humphreys, Sachs and Stiglitz (2007), Richard Auty who first coined the term ‘resource curse’ in 1993, and by Sachs and Warner (1995, 2001), which show from cross-country growth regressions, that resource-poor countries have performed better than their resource-rich counterparts. Collier and Hoeffler (2004) argue that the struggle for control over natural resource rents drives violent conflict. While the ‘Dutch disease’ and ‘resource curse’ are often used interchangeably, the ‘Dutch Disease’ is in a nutshell, the negative relationship between natural resource booms and the decline in non-booming economic sectors. Formal models of the Dutch disease were first developed by Corden and Neary (1982), van Wijnbergen (1984), Neary and van Wijnbergen (1986). Empirical studies on the existence of the Dutch disease in oil-producing developing countries include those by Gelb (1986, 1988), and Auty (1993, 1994). 2 Central Bank of Nigeria, Annual Report and Statement of Accounts (2011). GDP at current basic prices. 3 See World Bank data on poverty headcount and income distribution at http://data.worldbank.org/indicator/SI.POV.DDAY/countries 4 Government of the Federal Republic of Nigeria (2010) Nigeria Millennium Development Goals Report. In reflection of the role of subnational governments in creating opportunities for growth and development, the report states that ‘Nigeria's 2015 MDG targets cannot be achieved unless state and local governments take on their development responsibilities in a proactive, coordinated, effective and sustained way’. 5 Data from BP Statistical Review of World Energy (2012). 6 Budina and van Wijnbergen (2007), Sala-i-Martin and Subramanian (2003), Ushie et. al. (2012). 1 The long term decline of agriculture and manufacturing following the first oil boom in 1973 has been pronounced.7 Finally, resource-driven conflict and weak institutions: Nigeria’s dependence on oil rents is seen to be partly responsible for the emergence of predatory political structures, unproductive capital accumulation and the persistence of conflict and insurgency in the oil-rich Niger Delta.8 Figure 1 Nigeria: Oil Prices, Public Revenue and Expenditure (1970-2011) 50 120 Rev andExp percentin of GDP 100 40 World Oil Prices (US$) 80 30 60 20 40 10 20 0 0 Total revenue (in % of GDP) Total expenditure (in % of GDP) World crude oil prices (current US$) Sources: World Development Indicators Database 2011, CBN Annual Statistical Bulletin 2011, BP Statistical Bulletin of World Energy 2012. Nigeria’s political economy is vibrant and complex. After almost thirty years of military rule, the return to democracy in 1999 hastened personal and religious freedom and an explosion of extreme politicking, that has been outpaced by the expansion of opportunities for state patronage, and power struggles between factions of the political elite. Against the backdrop of extreme poverty and enormous oil rents, these power struggles have manifested in zero-sum politics, emergence of ‘Godfather’ political magnates, ethno-religious tensions, and the subsequent decay of state institutions. The current regime of President Goodluck Jonathan is faced with the daunting challenge of fighting poverty and corruption, strengthening weak public institutions and prudently managing oil revenues. Nigeria’s federal structure has thrown up an intriguing paradox of political decentralization with low sub-national transparency; while states have fiscal autonomy, and states’ spending constitutes around half of consolidated government spending, little is known about how subnational governments use oil revenues. 7 Bienen (1983), Gelb (1988) and Illorah (2000) describe the experiences with the long-term management of oil windfalls in Nigeria, and the impact on the agricultural sector. 8 See generally, Lewis (2007) and Peel (2011). 2 The premise of this study is that given the political and fiscal clout of subnational governments in resource-rich federal countries such as Nigeria, addressing weaknesses in the subnational governance of resource revenues is vital to fighting the determinism of the resource curse. Furthermore, that the specific context for the practice of political decentralization in resource-rich federations is a principal factor in determining how natural resource wealth is managed. Federations are comprised of multi-layered political institutions of governance – at the national and subnational (regional/provincial, local/municipal) level. Political decentralization refers to the ability of subnational or regional governments to take independent decisions that are constitutionally recognized by the national government.9 Given the multi-tiered political institutions in a federal system, political decentralization is intrinsic to the practice of federalism, although the powers granted to subnational governments vary across countries. Over the past 20 years, there has been a growing emphasis on the decentralization of political and administrative authority in developing countries, as a strategy for inclusive, participatory governance, since local governments are perceived to be closer to local communities. It is argued that the devolution of authority from national to subnational governments can facilitate ‘good governance’, efficiency and accountability in the pursuit of development, 10 and decentralization can empower local governments to be more effective in delivering public services. However, the empirical evidence from countries that have embraced various forms of decentralization (political, administrative or fiscal) questions this view. In Indonesia, over 20 years of administrative and fiscal decentralization