The Dis­in­cen­tive to Pro­duc­tiv­ity at the State Level

The de­cline of Nigeria's agri­cul­tural ex­ports can be traced to a pro­gres­sion of self-de­feat­ing leg­is­la­tions/de­crees that re­moved most, if not all, of the in­cen­tives from our sub-na­tional units to be pro­duc­tive.

Financial Nigeria Magazine - - Market & Policy -

Re­cently, Ade­ola Adenikinju, a Pro­fes­sor at the Univer­sity of Ibadan's Cen­tre for Econo­met­ric and Al­lied Re­search (CEAR), gave his in­au­gu­ral lec­ture, which brought to the fore one of the struc­tural prob­lems of Nigeria. In the lec­ture, en­ti­tled “En­ergy and Nigeria's Eco­nomic De­vel­op­ment: A Trou­bled But In­dis­pens­able Mar­riage,” Prof. Adenikinju talked about how the coun­try's fis­cal de­pen­dence on oil rev­enues has come at great cost.

He said be­tween 1993 and 2015, a pe­riod span­ning 22 years, the fed­eral, state and lo­cal gov­ern­ments, shared a to­tal of ₦105.1 tril­lion. At the av­er­age ex­change rate of the naira against the US dol­lar over the time pe­riod (₦120 to $1, as per Tradinge­co­nomics.com), that means suc­ces­sive gov­ern­ments shared $846 bil­lion in that pe­riod. And we have not much to show for the huge rev­enue.

This brings up a num­ber of ques­tions and sub­sidiary ques­tions. Within this long con­tin­uum of ques­tions is the one about why the fed­er­at­ing units are not be­ing pro­duc­tive. And this is the as­pect that is of in­ter­est to me in this ar­ti­cle. The an­swer to this ques­tion has both his­tor­i­cal and con­tem­po­rary com­po­nents. The his­tor­i­cal com­po­nent deals with the 'when things fell apart,' and the con­tem­po­rary has to do with 'what should hap­pen now.'

The ground­nut pyra­mids

To­day, Nigeria hardly ex­ports shelled ground­nuts. But as of in­de­pen­dence in 1960, the coun­try was the world's largest ex­porter of shelled ground­nuts, with 40% global mar­ket share. As a mat­ter of fact, be­tween 1956 and 1967, ground­nuts were among Nigeria's most valu­able ex­port crops; the other be­ing palm oil. Nigeria was fa­mous for Kano's ground­nut pyra­mids – an out­moded econ­omy, far re­moved from the mem­ory of three gen­er­a­tions of Kano residents.

As per the for­mer Min­is­ter of Agri­cul­ture and Ru­ral De­vel­op­ment, Ak­in­wumi Adesina, now Pres­i­dent of African De­vel­op­ment Bank, Nigeria's ground­nut ex­ports fell from 502,000 tonnes in 1961 to 291,000 tonnes in 1970. By 1980, ground­nut (or peanut) ex­ports fell to zero. Some of the rea­sons for this de­vel­op­ment were droughts, and the preva­lence of a crop dis­ease known as the ground­nut rosette virus (GRV), as well as con­tam­i­na­tion by afla­toxin in the 1970s. Afla­tox­ins are a fam­ily of tox­ins pro­duced by cer­tain fungi, in­clud­ing Aspergillus flavus and Aspergillus par­a­siti­cus found on some agri­cul­tural crops. Ac­cord­ing to the United States govern­ment's Na­tional Cancer In­sti­tute, these tox­ins are as­so­ci­ated with an in­creased risk of liver cancer. (It is also im­por­tant to note that oil palm pro­duc­tion was not af­fected by these fac­tors, yet we stopped pro­duc­ing it to ex­port vol­umes.)

So, what hap­pened that by 1980, twenty years af­ter we were the global leader in ex­port­ing these two crops, we dropped from those top po­si­tions? Why did the ground­nut pyra­mids dis­ap­pear from Nigeria? Why did we vir­tu­ally stop pro­duc­ing the oil palm?

Ret­ro­gres­sive de­crees

The de­cline of Nigeria's agri­cul­tural ex­ports can be traced to a pro­gres­sion of self­de­feat­ing leg­is­la­tions/de­crees that re­moved most, if not all, of the in­cen­tives from our sub-na­tional units to be pro­duc­tive. The rise of the ex­trac­tive in­dus­tries, es­pe­cially crude oil, led to the de­cline of agri­cul­tural pro­duc­tion as the fed­eral govern­ment grad­u­ally took over the rev­enue dis­tri­bu­tion frame­work.

As at 1953, when An­thony Ena­horo pushed the mo­tion in par­lia­ment for Nigeria's political in­de­pen­dence, rev­enues from sell­ing min­ing rights went to the fed­er­at­ing units in their to­tal­ity. How­ever, when it came to ex­port­ing the prod­ucts of min­ing, the fed­eral govern­ment, and the host re­gions shared the pro­ceeds from the as­so­ci­ated ex­port du­ties equally. This rev­enue shar­ing for­mula was ap­proved by the 1953 Chick's Com­mis­sion. But it all changed three years later, fol­low­ing the dis­cov­ery of oil at Oloibiri. By the time the Rais­man Com­mis­sion sat in 1958, a new con­cept, namely deriva­tion, was in­tro­duced.

With the out­break of afla­toxin in 1978, the Kano State govern­ment had no in­cen­tive to fight the im­pact of the con­tam­i­na­tion on ground­nut crops since the ground­nut mer­chants in Kano were now pay­ing all their in­come taxes to the fed­eral govern­ment.

So, the new shar­ing for­mula pre­scribed 50% of min­ing rights pro­ceeds to go to the host re­gions (at this time, min­ing still in­cluded oil since they were all ex­trac­tive ac­tiv­i­ties). As for the pro­ceeds of ex­port du­ties from min­ing, the host re­gions now re­ceived all of it.

The 1964 Binns Com­mis­sion rat­i­fied the new or­der put for­ward in the 1963 Con­sti­tu­tion, which al­lo­cated rev­enue from min­ing rights as: 67.4% for the oil pro­duc­ing re­gions, 12.6% for non-oil pro­duc­ing re­gions, and 20% for the fed­eral govern­ment. Ex­port du­ties still be­longed solely to the host re­gions. By the time the Dina Com­mis­sion sat in 1966, Nigeria was on war foot­ing, and the Petroleum Act pro­mul­gated as De­cree No. 51 of 1969 ba­si­cally gave the fed­eral govern­ment con­trol of what would be­come our most sig­nif­i­cant eco­nomic re­source – which is oil. Al­though, it must be pointed out that it was a wartime de­cree, thus it was un­der­stand­able.

The prob­lem is that af­ter the war, De­cree 51, 1969 was not re­scinded; it still op­er­ates till this day. And fol­low­ing the oil boom of the early 1970s, the Aboy­ade Com­mit­tee sat in 1977 and en­shrined fed­eral con­trol over all nat­u­ral re­sources in Nigeria. The Land Use Act, 1978, made all of this a fait ac­com­pli.

What did the Aboy­ade Com­mit­tee do? It cre­ated the Fed­er­a­tion Ac­count Al­lo­ca­tion Com­mit­tee, abol­ished deriva­tion as a prin­ci­ple of de­ter­min­ing re­source con­trol and man­age­ment, and re­moved all rights to oil re­sources from the oil pro­duc­ing states. From that mo­ment, the Fed­eral Govern­ment of Nigeria got 100% of the rev­enue from oil pro­duc­tion, and be­gan shar­ing the rev­enue to what was then nine­teen states.

In thir­teen years, be­tween 1964 and 1977, Nigeria had moved from hav­ing its states or sub-na­tional gov­ern­ments get 67% of pro­ceeds from the min­er­als de­rived from their com­mu­ni­ties, to 0%. This af­fected ev­ery­thing, in­clud­ing the coun­try's first love, agri­cul­ture. As a re­sult, the in­cen­tives for states to en­cour­age agri­cul­ture, or any other ex­port ori­ented eco­nomic ac­tiv­ity for that mat­ter, was re­moved. Why should they en­cour­age some­thing that they would make no profit, or de­rive any sig­nif­i­cant ben­e­fit, from?

For in­stance, with the out­break of afla­toxin in 1978, the Kano State govern­ment had no in­cen­tive to fight the im­pact of the con­tam­i­na­tion on ground­nut crops since the ground­nut mer­chants in Kano were now pay­ing all their in­come taxes to the fed­eral govern­ment, and the farm­ers and every­one else along the value chain were pay­ing ex­port du­ties to La­gos (at the time the na­tional cap­i­tal). In short, the state govern­ment had no demon­stra­ble say in what eco­nomic value to re­tain for it­self and its peo­ple.

The way for­ward

We now have a sit­u­a­tion where taxes on na­tional eco­nomic ac­tiv­ity – com­pany in­come tax, value added tax and other charges – are sucked up by Abuja, and only dis­trib­uted among the states and lo­cal gov­ern­ments es­sen­tially at the plea­sure of the fed­eral govern­ment. I would love to talk about the lack of eq­uity in the orig­i­nal shar­ing regime, which even­tu­ally led to the rein­tro­duc­tion of "deriva­tion" (the 13% deriva­tion fund that the oil pro­duc­ing states rou­tinely tout as an ac­com­plish­ment), but that is out­side the scope of this piece.

The point is that Nigeria, as it is cur­rently set up, is not de­signed to en­cour­age sub­na­tional units to be pro­duc­tive. Rather, it dis­cour­ages in­no­va­tion, lead­ing the states to sim­ply wait un­til money comes at the end of each month. Civil ser­vice work­ers in the states go through the mo­tions while wait­ing for the dopamine-boost­ing pay-cheques from the cen­tral govern­ment on the 22nd of ev­ery cal­en­dar month. And, like we all know, salar­ied work­ers tend to be mo­ti­vated to do, at best, a lit­tle above the barest min­i­mum.

Any se­ri­ous con­ver­sa­tion about govern­ment re­form, the war against cor­rup­tion, fight­ing poverty, deal­ing with the mul­ti­ple se­cu­rity threats cur­rently af­flict­ing the coun­try and cre­at­ing wealth and pros­per­ity for Nigeria's 180-odd mil­lion peo­ple log­i­cally should start with re­view­ing the cur­rent rev­enue shar­ing for­mula.

The coun­try must re­turn to an in­cen­tive­based sys­tem that places pri­mary re­spon­si­bil­ity on the states to drive eco­nomic ac­tiv­i­ties in their ju­ris­dic­tions. Un­til we do this, ex­pect­ing any other re­sults from the fed­er­at­ing units is an ex­er­cise in fu­til­ity – an ex­er­cise we have been on but has clearly not worked since 1969. Cheta Nwanze is Head of Re­search at SBM In­tel­li­gence.

Nige­ria’s Prime Min­is­ter Tafawa Balew is shown round an oil ship in 1960. Pix cour­tesy Baba Shet­tima

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