Abstract
This study empirically examines the impact of revenue allocation on economic development in Nigeria. Specifically, the study looks at how the various revenue allocations to the three tiers of government affect real gross domestic product (RGDP) in Nigeria using time series data for the period 1993 to 2012. Error correction model (ECM) and Pairwise Granger Causality test are used in analyzing the data. The study carries out test of stationarity of the variables using Augmented Dickey–Fuller unit root test and test of long-run relationship among the variables using Johansen Cointegration test. The study’s findings show that revenue allocations have significant causal relationship with economic development in Nigeria, with only revenue allocation to states having significant negative relationship. Unidirectional causality runs from revenue allocations to real GDP in Nigeria. All variables of the study are cointegrated and have a long-run relationship that 87.62% of the short-run disequilibrium is corrected yearly. The study recommends among others that more financial control and value for money audit should be carried out to minimize wastages and corruption in the states of the federation, so as to change the direction of influence of states’ revenue allocation on economic development.
Highlights
Every government pursues economic development by trying to achieve macroeconomic objectives in a particular system of government
The unit root test reveals that all the variables are stationary at different stages, that is, LRGDP is of order 1(2), LREVALFGN is of order 1(1), LREVALSTATES is of 1(1), and LREVALLG is of order 1(2); it is necessary to carry out the cointegration test to ascertain whether the variables have a long-run relationship
This study concludes that revenue allocations to federal government, states, and local governments have a causal relationship with economic development in Nigeria with only revenue allocation to states having a negative significant relationship
Summary
Every government pursues economic development by trying to achieve macroeconomic objectives in a particular system of government. The federation of Nigeria achieves her macroeconomic objectives by performing the functions of resource allocation, income distribution/redistribution, and economic stabilization within the central government, that is, federal government and its units (states and local governments). This system of performing government functions in different tiers of government is called fiscal federalism (Buhari, 2001; Likita, 1999). Fiscal federalism emphasizes on how revenues are raised and allocated to different levels of government for development
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