Sustainability of Public Finance of Rentier States

Sustainability of Public Finance of Rentier States

Lukman Raimi (American University of Nigeria, Nigeria) and Abdussalam Aljadani (Taibah University, Saudi Arabia)
DOI: 10.4018/978-1-7998-2347-6.ch005

Abstract

Embedding this discourse on rentier state theory (RST), this chapter discusses the quest for sustainability of the public finance system of Nigeria and Saudi Arabia. The inability of these rentier states to meet their economic, social, and political commitments led to the adoption of value-added tax (VAT) and economic diversification as sustainability strategies. The findings from the macroeconomic data indicated that Nigeria and Saudi Arabia have large markets that provide opportunities for the introduction of VAT. These two countries also have huge deposits of natural resources, including oil, which could be developed for accelerating economic diversification. This chapter validates the appropriateness of VAT and post-rentier economic diversification as sound policies for industrial, services, tax, and tourism development. The findings from this chapter need to be strengthened with a more rigorous empirical investigation. The chapter concludes with far-reaching policy suggestions.
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1.0 Introduction

In recent times, sustainability has emerged as an inevitable phenomenon because of the scarcity of economic resources at individual, organizational and national contexts. Consequently, Nigeria and Saudi Arabia, as two important oil-dependent developing countries have formulated sustainability policies to cope with difficult economic, social and political realities caused by dwindling oil revenues, rising populations and growing expectations of the citizens. Both countries are heavily dominated by the public sector in terms of production, distribution and income generation, while the contributions of the private sector marginally complement. Nations with the above socio-economic snapshots are described as rentier states. The rentier political economy that prevailed in the two countries engendered laziness, patronage and culture of entitlement, while the drive towards economic diversification, particularly industrialization and enterprise development is relatively weak and not really significant in spite of the endowed natural resources, rising population and large markets (Hertog, 2010; Aljadani and Raimi, 2018).

In the quest for sustainability, Nigeria introduced VAT in 1994, while Saudi Arabia adopted VAT in 2018 to strengthen their respective Gross National Incomes (GDPs). Furthermore, both countries (as leading oil-dependent developing nations) have consistently advocated the need for economic diversification to reposition their economies. The policymakers of both countries adopted VAT as a non-oil revenue option to augment their budgetary obligations in view of unprecedented growth in their recurrent and capital expenditures (Raimi & Aljadani, 2019). Let us do a brief review of the economic profiles of both counties to gain better insights on the imperative of sustainability strategies.

Nigeria is a populous black African nation with a population of over 180 million. It presently has 36 states and a Federal capital, but Lagos remains the commercial and industrial hub of Nigeria (See Figure 1). It has a nominal GDP of $375.77 billion and per capita income of $5680 (World Development Indicators database, 2018) and a large untapped domestic market for foreign investment (Alkali, 2008; Mahajan, 2009), as well as array of incentives and opportunities for prospective local and foreign investors (Nigerian Investment Promotion Commission, 2013). Economic data indicated that the average return on investment (ROI) in Nigeria stands at 20% per annum, and the micro, small and medium enterprises (MSMEs) sub-sector constitutes over 95% of the nation’s enterprises and proudly accounts for over 50% of formal employment (Alkali, 2008; Raimi, 2015). The country has a very low industrial growth rate because of poor access to finance, the rising cost of electricity/energy, transport, infrastructural neglect, multiple taxes, poor incentives, crime, insecurity, corruption and bad governance (Raimi, 2015; Oyelola et al., 2013).

Figure 1.

Map of the Federal Republic of Nigeria

978-1-7998-2347-6.ch005.f01
Source: European Commission (2010:6)

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