How Federalism Can Boost Nigeria's Growth

In my last two articles, I said Nigeria's development problems are more about how we organize incentives than a lack of ideas. The first article showed that many issues in governance come from a bigger problem with how authority, incentives, and capability align. The second looked at how Nigeria's fiscal federalism has changed over time, showing that the shift from rewarding production to focusing on distribution has hurt the motivation for governments to grow their productive capabilities.

This third article is in two parts. The first part continues discussing the incentive issue and lays out what is needed for productive competition among states. The second part will define productive federalism and how we can create it in Nigeria.

Is Nigeria's Incentive Structure Working?
This brings up another question: if Nigeria's incentive structure has changed, where should we start reform?
For many people, the answer is to restructure the federation, rewrite the Constitution, or renegotiate how revenue is shared. These are valid debates. But I see it differently. Nigeria's challenge isn't just about changing the Constitution. It is about governance. Specifically, we need to align authority, incentives, and institutional capability so that every level of government focuses on building productive capacities instead of just competing for shareable revenues.

This doesn't mean the 1999 Constitution, as amended, is perfect. No Constitution is perfect. It also doesn't mean we can't make amendments when necessary. The point is that Nigeria shouldn't wait for a perfect Constitution before we start building a more productive federation. In fact, whether Nigeria can be seen as a productive federation is debatable. The size of our gross domestic product doesn't tell us much about how productive we really are. A closer look at the economy's structure gives us better insight.

Back to the main point. A lot of development work can actually start within our current structure if we connect the authority already spread across the federation with responsibility, the right incentives, and the capability to get things done.

The Constitution offers a more balanced approach to fiscal matters than many political discussions often show. Section 162 outlines principles for revenue allocation, including population, equality of states, land size, terrain, population density, internal revenue generation, and derivation. These principles aim to balance two important goals: keeping the nation united through redistribution while encouraging economic productivity.

One aspect of the Constitution that doesn't get much attention is its clear mention of internal revenue generation as a principle for revenue allocation. This needs more clarity, especially about its connection to the derivation principle. While it acknowledges internal revenue generation, it doesn't define it or explain how it should influence the allocation formula. This gap has led to a focus on derivation, with less emphasis on the productive incentives that internal revenue generation should promote.

The Derivation Dilemma and the Overlooked Incentive
The 13 percent derivation provision is a minimum, not a maximum, for any approved formula for sharing revenue from natural resources in the Federation Account. More importantly, we should not separate derivation from internal revenue generation. Together, they show that the Constitution does not force Nigeria to choose between production and distribution. It recognizes the need for both.

This raises a key governance question: has the federation found the right balance between redistribution and production? Do the incentives in place encourage states to grow their productive capabilities?
Much of the national discussion has focused on whether the 13 percent derivation is enough, if producing states should keep more of the resource revenues, or if the allocation formula should change. These are important political questions. But they can distract from a more fundamental development issue that has been overlooked for years. As Nigerians, we need to dig deeper into the system instead of just addressing its symptoms.

Global examples show that even the best revenue-sharing formulas cannot drive development if governments lack the motivation and capability to grow their economies. A state can receive more money without becoming more productive. It can spend more without building lasting capabilities. It can create visible projects without improving the conditions for businesses, workers, and communities to be more productive. This is the reality for many state governments in Nigeria.

On the flip side, even within the existing Constitution, a state that invests in power, transportation, education, investment support, agriculture, industrial infrastructure, and strong public institutions can transform its economy. The key issue is not just how much revenue a government gets but how the fiscal and political systems shape actions after receiving that revenue. This is how states build competitive advantages; not passively inherited but actively developed through consistent public and private investments.

Development doesn't start with money only. It begins with how we distribute authority and responsibility. Authority provides the space for action. Incentives influence the behavior of those in power. Continued and purposeful action builds capabilities. Those capabilities increase productivity, broaden the revenue base, and create the wealth necessary for redistribution. When this chain is broken, distribution can drift away from production, weakening the foundation of the federation. Recent changes in the electricity sector show that where authority is given, it must be matched with capability and incentives to achieve development. More authority has been given to states, opening new opportunities to shape their productive environments. Whether these chances lead to development depends on how states organize the authority, incentives, and capabilities available to them.

The experiences of other federations back this up, though none provide a model for Nigeria to copy directly. Germany and India show that states under the same Constitution can have very different development results. In both countries, success has depended more on consistent investment in industrial capability, infrastructure, skilled labor, and effective public institutions than on constitutional advantages.

Australia and Canada add another point. Both have systems that promote national unity, yet their states and provinces are active economic players competing for investment, innovation, skills, and business. Redistribution exists alongside productive responsibilities instead of replacing them.

These experiences teach us a common lesson: successful federations do not use revenue distribution as a replacement for development. They align authority, accountability, and incentives to motivate subnational governments to build long-term productive capabilities.

What Would Productive Competition Look Like in Nigeria?
It would mean states competing not just for the biggest federal share but for the best environment for businesses. It would involve competition over the quality of technical schools, the reliability of industrial infrastructure, the speed of investment approvals, and the effectiveness of agricultural support systems. States would aim to stand out through logistics, power supply, digital connectivity, skilled workers, security, research partnerships, and the quality of public institutions.

This kind of competition wouldn't require every state to focus on the same industries. States will naturally follow different paths to development. One might build competitive agricultural industries around local crops, while another specializes in mining, logistics, or energy services. Others may focus on healthcare, education, financial services, or digital industries.

While states may start by leveraging their existing resources and economic activities, more ambitious ones can create new advantages through targeted investments, skills training, and partnerships with businesses and development bodies, thereby opening up entirely new areas of competitiveness. To be continued.