AN EMPIRICAL ANALYSIS OF THE EFFECTS OF FISCAL CENTRALISATION ON ECONOMIC GROWTH IN NIGERIA (1980 – 2008)
AN EMPIRICAL ANALYSIS OF THE EFFECTS OF FISCAL CENTRALISATION ON ECONOMIC GROWTH IN NIGERIA (1980 – 2008)
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Date
2011-07
Authors
ABACHI, Terhemen Philip
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Abstract
Fiscal centralization in Nigeria has generated regional, vertical and horizontal contestations over
resource control issues. These contestations have led to militancy and open rebellion that have
resulted in oil production shut- in, rising costs of operations in the oil industry, risks and
uncertainties for investments and a rise in the costs of maintaining security in Nigeria. The
literature on fiscal centralization has been dominated by the measurements of the impact of fiscal
centralization on economic growth and the results have been mixed. This study however,
measures the economic cost of fiscal centralization and assesses its sustainability in the light of
the consequences of the militancy and rebellion that have been associated with it. Impacts such
as production shut-in, rise in operational costs and uncertainties as well as growth in cost of
maintaining security have led to some economic effects that need to be measured and analyzed.
The study develops a framework to measure the costs of fiscal centralization and a macro econometrics
model was built to analyze the impact and sustainability of fiscal centralization in
Nigeria. The macro-econometric model comprises of five sectors, namely, aggregate demand,
aggregate production, Nigeria’s fiscal system, financial sector and external sector. The model
was estimated using Two Stages Least Squares techniques and solved to derive baseline
equilibrium values of the endogenous variables. The model was found to effectively track the
key turning points of the endogenous variables and was then used to conduct simulation
experiments under three scenarios. (a) The impact of the loss of oil revenue by oil related cost as
a result of militancy; (b) the impact of excess expenditure on defence and internal security if
invested in the agricultural sector; and (c) a one percent increase in gross fixed capita formation.
Findings from the study revealed that the oil related cost, expenditure allocation cost and
social/human cost of maintaining fiscal centralization in the country are very high and rising.
From the macro-econometrics model, it was found that fiscal centralization impact negatively on
aggregate demand by reducing private consumption expenditure, government consumption
expenditure as well as investment by 9.5%, 6.2% and 1.5% respectively. Again, while money
supply reduced by 5.4%, the outputs from agriculture and manufacturing sub-sectors declined,
by 2.5% and 2.1% respectively. It is clear that while the oil related cost is reducing the oil
revenue component of federally collected revenue, the deterioration in the real sector is reducing
the non-oil revenue component. Based on these results and the forecast values of oil related cost
and expenditure allocation cost, it was established that the present fiscal centralization is not
sustainable. We therefore recommend a negotiated decentralization or economic and political
actions that will reduce militancy and its associated economic costs.
Description
A DISSERTATION SUBMITTED TO THE DEPARTMENT OF ECONOMICS,
AHMADU BELLO UNIVERSITY ZARIA, AS PART OF THE REQUIREMENT FOR THE
AWARD OF DOCTOR OF PHILOSOPHY (PHD) DEGREE IN ECONOMICS
JULY, 2011
Keywords
EMPIRICAL ANALYSIS,, EFFECTS OF FISCAL CENTRALISATION,, ECONOMIC GROWTH,, NIGERIA (1980 – 2008)