Why is Lagos State richer than Abia State
First, let’s be clear, what is rich? For this post, I am using income generated by the State to be specific
- VAT, tax on consumption
- IGR, made up mainly of PAYE
Clearly, by a considerable margin, Lagos State generates more Value Added taxes than Abia State.
Keep in mind, that VAT is a tax on consumption, what about IGR?
On Internally Generated Revenues, we can see that Lagos share of generated revenues as of 2020 is 38%, Abia is 1.10%
Again, by a wide margin, Lagos generates far more revenues than Abia and based on our adopted definitions, Lagos is richer than Abia.
The question is, why?
The common answer is Lagos has more infrastructure than Abia; thus, because there are more roads in Lagos, Lagos is richer
This is half of the story. The infrastructure in Abuja is superior to Lagos, yet looking at both VAT and IGR, Lagos also beats Abuja
The answer has to do with how long wealth stays in Lagos
According to the University of Georgia Selig Center for Economic Growth, money circulates 0 to 1 times within the black community, compared to more than 9 times in the Asian & unlimited times within the white community.
“A community’s health directly correlates to how many times money circulates or recycles within that community.”
Jim Wyatt chairman of the Texas Association of American Chambers of Commerce
Let us assume a civil servant in Abia and Lagos want to buy a TV.
That TV is cheaper in Lagos than in Abia because it is cleared into Nigeria via Lagos. The bank that funds the TV import has a head office in Lagos. The diesel to transport is imported and stored in Lagos.
In other words, the opportunities for commerce are more in Lagos State than in Abia State thus cash flows from the importer to his bank to the diesel retailer to the landlord to the government, faster, and in greater volume in Lagos than in Abia
Infrastructure is just an enabler; it does not create wealth; commerce & spending by government and SMEs, is what creates wealth.
If citizens can’t consume, then wealth goes to the tax location where there is consumption.
(Think: ExxonMobil in Akwa Ibom with HQ in Lagos)
Some smart states have understood this, That was the intent of Tinapa, “trap” Abuja and Lagos spending in Cross River.
Dubai built infrastructure, but Dubai is richer than Nigeria because it “traps” consumption in Dubai. Nigerians take $ from Lagos and consume it in Dubai.
Back to our civil servants, with TVs, they both buy DSTV cable; DSTV is HQ in Lagos. Both buy LG surge protectors; LG Nigeria is HQ in Lagos. Both pay for DSTV via Zenith Bank; Zenith HQ is in Lagos.
Thus whilst the Abia guy spends in Abia, he is really spending in Lagos State.
Let me drive home the point.
The richest LGA by individual millionaires is in Nnewi in Anambra, see Forbes article. Yet Nnewi does not receive the highest allocation in Anambra.
Nnewi has a policy of localizing all global activities back to Nnewi, they “trap” wealth in Nnewi
Again with Dubai.
- Build a port: infrastructure
- Establish a free trade zone: create commerce
- Build luxury homes and hotels nearby: “TRAP”
Infrastructure is just an enabler, it does not create wealth by itself.
What is Lagos doing today?
- Build a port: LADOL Deep Sea
- Establish free trade: Lekki free trade zone
- Build luxury homes and hotels: Folks like Landmark
They are “trapping” commerce
For Abia to get richer than Lagos, she must build an economy that attracts “DSTV” “LG” and “Zenith Bank” to site their HQ in Abia and pay taxes in Abia.
It must “trap” spending in Abia… a tall order.
So what should the ‘abias” of this world do to compete with Lagos
Lobby to change the laws
The current fiscal arrangement favours Lagos; she can charge 5% PAYE, the same as Abia. So why should Amazon go to Abia?
if the laws were changed to make State tax rates the prerogative of States, then Abia can charge 1% PAYE and attract Amazon.
Like VAT, change the laws and give VAT back to the States based on Derivation.
Thus States are rewarded for building infrastructure that “traps” commerce.
Currently, a state like Zamfara has no incentive to build infrastructure. Instead Oyo is punished for growing VAT.
The way to make States rich is to incentivise them to get rich.
Rich means they generate wealth within their borders. This can be achieved by allowing State fiscal autonomy and sharing VAT on derivation.
Only then can Abia seek to pass policies to build infra to “trap”.
For those that may not understand me.
Abia does not mean Abia State alone but all States outside the territory of Lagos.