How Weak Distribution Affects Development in Nigeria

Nigeria's system of government is supposed to create a partnership among the three levels of government for growth and national progress. But this partnership does not happen automatically. In public policy, as in life, not much happens by chance. A lasting system is built on relationships of cause and effect: authority and responsibility, action and consequence, effort and reward, incentives and ongoing commitment.

Development Needs Effort

Communities invest with the hope of getting returns. Businesses find new ideas because rewards encourage hard work. Individuals learn new skills because opportunities exist to improve their lives. Governments make reforms when rules encourage good performance and hold them accountable for results. In every area, incentives guide actions, and actions determine results.

The same idea applies to federations. A federal system is not just about sharing powers; it is also about incentives. It decides who makes decisions, who is responsible, who enjoys success, and who faces failure. When these connections are strong, the different parts compete, innovate, and grow. When they are weak, dependence replaces initiative, and political competition overshadows economic competition.

So, we need to see Nigeria's fiscal federalism as a history of changing development incentives, not just a story of how revenue is shared.

Pre-Independence Fiscal Policy

Before independence, Nigeria's fiscal policy was based on the idea of financial responsibility. The regions gained a lot from what they produced and were expected to manage their resources wisely, creating a direct link between production and financial strength. This idea influenced how taxes and revenues were assigned. Profits from agricultural exports, mining, royalties, import duties, and various excise duties linked directly to producing regions through the derivation principle. This principle is recognized in historical studies of Nigeria's fiscal system, including those by the International Monetary Fund.

The derivation principle was more than a financial setup; it was a tool for development. By linking revenue to production, it encouraged regions to boost their productivity, focus on their strengths, build specific skills, and look for external markets. Fiscal policy aimed not just to distribute wealth but to inspire its creation.

Regional Investments

This system explains why regions invested heavily in productive sectors. The Western Region grew its cocoa industry, funding significant projects like free primary education and industrial estates from these revenues. The Northern Region developed its groundnut and cotton sectors along with agricultural marketing systems that aided rural productivity. The Eastern Region improved palm produce exports and businesses, using the money to enhance public services and infrastructure. Competition among the regions was not just political; it was mainly about development because any boost in productive capacity strengthened fiscal capacity.

As independence drew closer, a new goal emerged. Building a unified federation needed to balance regional productivity with national unity. The creation of the Distributable Pool Account showed this change. Fiscal needs, continuous government services, and balanced development became more important in deciding revenue allocation. While derivation remained vital, it no longer held the top spot.

Shift in Focus

This change was neither irrational nor wrong. Nigeria was a new federation aiming for political stability, national unity, and fair development across its regions. Redistribution thus became an important addition to derivation. The idea of fiscal federalism shifted from one that mainly rewarded production to one that balanced production with redistribution.

Still, regions had a good amount of freedom, and healthy competition continued to shape development outcomes. It was the centralization of fiscal authority after 1966 under military rule that changed the federation's incentive structure. As more revenue sources were centralized and local governments relied more on federal distributions, the direct link between productive effort and financial reward weakened. Nigeria did not just alter its revenue allocation; it changed the developmental incentives that underpinned that system.

Consequences of Centralization

When governments depend less on the productive capacity of their economies, the motivation to invest in long-term development also fades. This applies to both local and federal governments. As the link between production and public finance weakens, governments focus on managing and distributing available funds rather than expanding the productive base that generates sustainable revenue.

The effects are widespread. Education shifts from being an investment in future productivity to just a recurring expense. Healthcare becomes reactive instead of proactive. Agricultural services decline or vanish. Industrial policy loses focus, while public infrastructure relies more on federally distributed funds rather than on local economic activity.

Over time, the whole government machinery risks focusing more on distributing existing wealth than creating new wealth. Yet no federation can sustainably share prosperity it has not produced.

Current Discussions on VAT

This issue is clear in today's discussions around Value Added Tax. The legal and constitutional debates often overshadow a more crucial issue. The real debate is about incentives, not just distribution.

States that grow their commercial activities naturally want a stronger link between the wealth generated in their areas and the revenues available for further development. On the other hand, when financial rewards are loosely tied to local production, governments have less motivation to invest in growing their economies. The VAT discussion is thus less about tax and more about the incentive structure of Nigerian federalism: an incentive to invest in productive capabilities.

Broader Implications

The same reasoning applies to many current policy discussions. Take the growing support for state police. Strengthening local policing might improve security and bring law enforcement closer to communities. It's a needed reform. But insecurity often stems from deeper developmental issues. Poor education systems, declining agricultural productivity, limited job opportunities, bad local infrastructure, and weak institutions create conditions where insecurity flourishes.

State police might be a vital reform, but it cannot alone restore the developmental incentives that have weakened over decades. It tackles a critical symptom without fixing the underlying problems.

This point extends beyond security. The decline in educational quality, weakening healthcare systems, poor rural infrastructure, and rising reliance on federal allocations are not separate policy failures. They are linked outcomes of an incentive structure that has weakened the ties between productive effort, financial reward, and government responsibility.

Reconsidering Fiscal Federalism

This is not an argument against national unity or redistribution. Every federation must balance fairness with efficiency and cohesion. Nor is it a claim that Nigeria's Constitution explains every developmental issue. Rather, it is a call to rethink the purpose of fiscal federalism itself.

Fiscal federalism should not be seen mainly as a way to allocate revenue; its deeper purpose is to create incentives for development.

The question Nigeria faces now is not just who should get public funds, but whether the way revenue is generated, kept, and shared encourages governments to grow productive capacity, invest in their people, and compete to create wealth.

Successful federations know a simple fact: incentives shape actions; actions shape investments; investments build capabilities; and capabilities drive development. Governments invest where incentives reward those investments. They innovate where new ideas improve their financial futures. They build capabilities because those capabilities grow their own prosperity. This principle applies to all areas of productivity.

The Path Forward

If Nigeria wants different development results, it must pay more attention to the incentives within its federal structure. The next government must not just review revenue-sharing methods or expand intervention programs; it needs to rebuild a federation where authority, responsibility, and financial reward once again support each other. This will give all levels of government a solid reason to pursue development actively.

In the end, sustainable development is not just handed out; it is created. And governments, like individuals, work best when the incentives encourage them to produce.