Unconditional Federal Transfers and State Government Spending: An Investigation of the Flypaper Effect in Nigeria and South Africa

Abstract

The “flypaper effect” is undoubtedly one of the most interesting concepts associated with the spending behaviors of subnational governments. Yet, empirical evidence on it in the Sub-Saharan Africa (SSA) is scarce. The current study is the first attempt at providing empirical evidence on the existence of the flypaper effect in the two largest economies in SSA. Employing the two-step system GMM estimator, our findings suggest that the provincial governments in South Africa are more responsive to positive changes in unconditional federal transfers than the state authorities in Nigeria, in terms of providing a higher volume of public goods and services. It is, thus, our submission that public sensitization on the amounts of unconditional federal transfers received by the state governments and their disbursements needs to be adequately enhanced in order to reduce the illusion level or information asymmetry surrounding the use of unconditional federal transfers if the public at the state level is to immensely benefit from the continued flow of unconditional federal transfers from the central to the state governments.