The role of economic versus political factors in the incidence of intergovernmental transfers in Nigeria

The main element of Nigeria's system of intergovernmental fiscal transfers – known as the "Federal Allocations" – is driven by a set of vertical and horizontal allocations formulae. The vertical sharing formula determines the share of national revenues that is passed on to state and local governments, and it typically receives the greatest political attention. However, the horizontal allocation formula is also of major importance, and determines the allocation of resources among Nigeria's 36 states. In this paper we use a unique data set on Federal Allocations to examine the distribution (or the "incidence") of transfers across the states. Our empirical analysis suggests that the current allocation formula fails to achieve its stated objectives of equalizing expenditure needs and stimulating fiscal effort. Instead, the current incidence of transfers does not channel more resources to states with greater expenditure needs, and does not stimulate fiscal effort. The formula in fact is pro-wealthy, and provides disproportionately greater transfers to less populous states.