Fiscal Decentralization, Economic Growth and HR Development in Nigeria

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Thursday, June 11, 2015 6.13/CBN

1.0 Introduction
Over the past few decades, decentralization of social and development responsibilities has become an important feature of political and economic reforms in many countries. Decentralization has been defined as the process by which a central government formally cedes powers to actors and institutions at lower levels in a political-administrative and territorial hierarchy (Mawhood, 1983; Smith, 1985). It refers to a politico-administrative arrangement in which the authority to plan, make decisions and manage public functions, are transferred from the central government to subordinate organisations, agencies or units of governments either geographically or structurally (Anyanwu, 1999). It has thus translated into a growing role for sub-national governments, not only financially but administratively and politically as well, in the national efforts to hasten progress towards economic and human development.

There are three functional areas of decentralization from central to subnational governments: i) fiscal powers; ii) policy responsibilities and iii) service delivery roles. These functions correspond to Musgrave’s framework of three core government functions of: stabilization, distribution and allocation (Musgrave, 1964; Musgrave and Musgrave, 1989). First, stabilization involves using tax, spending and monetary policies to influence economic activity.

Second, distribution involves policies on redistribution of national income and wealth for equitable development. Lastly, allocation involves assignment and use of public resources (spending) to produce public goods and services for the well-being of the masses (Eboh, 2009).

Specifically, fiscal decentralization is defined as the devolution of policy responsibilities from the central government towards sub-national governments with regards to spending and revenue collection (Neyapti, 2004, 2010). The increased interest in fiscal decentralization is based on the following: i) the widespread belief that fiscal decentralization is an effective tool for increasing the efficiency of public expenditures, even though it may carry some risks vis-a-vis other desirable objectives of government policy, such as horizontal fiscal imbalances across sub-national governments and macroeconomic stability;4 ii) fiscal decentralization is expected to boost accountability and transparency in the provision of public goods (de Mello, 2000); iii) tax-payers are expected to better cooperate with local governments that are accountable than with large centralized bureaucracies (Wasylenko, 2001). Moreover, local jurisdictions are able to exploit their physical and functional closeness to the people in getting better understanding and perception of local needs for public services (Ekpo and Englama, 2008).

The motivation for this study emanates from the overview of the empirical literature on the benefits of fiscal decentralization. Most recent empirical works have focused on the direct impact of fiscal decentralization on economic growth.5 Fiscal decentralization enhances economic growth directly by increasing efficiency of public expenditures (Samuelson, 1954; Barro, 1990) and indirectly by enhancing economic efficiency, creating horizontal fiscal equality and by maintaining macroeconomic stability (Martinez- Vazquez and McNab, 2006, Iqbal and Nawaz, 2010). However, over the years, economists have become more concerned with the nature of economic growth. This is borne out of the observation, especially among developing countries in Africa, who, despite high growth rates of the GDP, have continued to suffer severe human deprivation and poverty. In this regard, Agu and Onodugo (2009) examine infrastructure decentralization in Nigerian states and their impact on poverty reduction. They argue that while immense social benefits may accrue from infrastructure decentralization in developing countries, practical experience shows that the service delivery challenge at the sub-national level may thwart the economic efficiency of such decentralization.



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