1.1 Background to the Study
Fiscal federalism is essentially about multilevel government structure, rather than within a level structure of government, for the performance of government functions and service delivery to the people. Each level of government can be viewed as an institution with definite functions to perform (Rivlin, 1991). The conventional wisdom in economics is that all functions allocated to government should be those that the market is not able to perform in the efficient allocation of resources, equitable distribution of income, and economic stability and growth (Varian, 1990; Layard and Walters, 1978).
Fiscal federalism in Nigeria dates back to 1954 when the country, which had until then been governed as a unitary state by the British, adopted a federal constitution. However, despite over fifty years of experience with fiscal federalism, the country is still beset with the challenges of economic management, poor output growth rate, high inflation rate, and weak balance of payment position. The absence of good economic governance has also raised the problematic issue of credibility in public policy. Relevant question central to this thesis is could fiscal federalism challenges be responsible for poor economic performance in Nigeria? Another question is: What are the current issues or challenges inhibiting the principles and practice of fiscal federalism in Nigeria? In Nigeria, fiscal federalism has generated intense debate and controversy in recent years. Debates about fiscal management within federal system are not peculiar to Nigeria. From independence in 1960 till date (2011) Nigeria’s fiscal management system has neither been efficient nor equitable (Ike, 2012). Indeed it manifested a wide spectrum of vulnerability, ethnicity, language, region and religion interactively forming Nigeria’s matrix of cultural pluralism (Ike, 2012). The Federal Government has, for more than four decades assumed certain responsibilities which rightly belonged to the lower tiers of government and, in the process, had compromised efficiency in public expenditure management, resulting in high levels of unsustainable overall deficits, high inflation, slow economic growth and poor external sector balance (Ike, 2012; Anyanwu, 1995; Aigbokhan 1999; Chete, 1998).
The important question that remains to be answered is whether lower-level governments’ spending increases, for example, fiscal deficits at the central level and put economic stability into jeopardy. This is of particular importance in the performance of the stabilization function, usually assigned to the central government, especially with respect to the issue and management of the national currency, on the basis of its spatial incidence which covers the entire country. Thus, it can be seen that issues of fiscal federalism affect national development and economic stability.
1.2 Statement of Research Problem.
The overall objective of this study is to examine the issue of fiscal federalism and its effects on economic performance in Nigeria with emphasis on Bayelsa State. Fiscal federalism is the product of the reciprocal and dynamic interaction between different tiers of government, and therefore poses questions as to how the nature and conditions of the financial relations in any federal system affect the production and distribution of the wealth of a nation. In particular it influences how political decisions and interests influence the location of economic activities and the distribution of the costs and benefits of these activities.
Many of the empirical literature on Nigeria have been concerned with explaining the pattern of intergovernmental relations (Mbanefo, 1993; Sarah et al, 2003) or providing an impressionistic view within the context of political economy of possible consequences of such relationships (Ekpo, 1994). In an attempt to fill this void, this...