The purpose of this paper is to investigate the impact of federal transfers to state and local governments on regional disparities in Nigeria. The study also assesses the economic and political reforms enacted by the new democratic government to reduce interregional conflict. We will first provide background information on Nigerian federalism, followed by a discussion of regional disparities and a comparative study between a state from the Northern agricultural region (Kano), a state from the Eastern oil producing region (Delta) and a state from the Southern agricultural region (Ondo). The comparison helps illustrate the impact of revenue allocation on key economic and social indicators. We argue that discretionary transfer systems left inequality between the North and other regions uncorrected while generating the marginalization of the oil producing states.
Our study contributes to the debate over the impact of federalism on the persistence of regional disparities. While the classic literature focuses on the importance of policies to create a common internal market, we argue that the impact of federalism on reducing regional disparities also hinges on underlying institutional structures for raising local accountability. The transfer system, developed to redistribute oil revenues in Nigeria, has been a key impediment to regional convergence, as its design has promulgated regional government dependence on central transfers. The transfer mechanism’s discretionary nature has also impeded policymaking and reform within the regions by causing revenue instability.