This paper examines one of the most controversial issues in the political economy of Nigeria- Revenue allocation in Nigeria and the dependency on oil revenue: the need for alternative solutions. The paper argues that displacement of agricultural products by oil as the focal point of national revenue, and the attendant relegation of the principle of derivation in revenue allocation, is the root cause of the revenue allocation debacle in Nigeria federalism. The focus on revenue sharing rather than revenue generation is the root cause of political, economic and social decay in the country and has equally led to the proliferation of unviable state and local governments. The excessive government dependence on oil revenues, an institutional unstable revenue allocation system, weak political institutional arrangements, lack of effective agencies of restraints to demand transparency and accountability on the part of political office holders, failure to translate oil wealth to sustainable growth and increased standard of living for a lager majority of Nigerians, and a defective property right structure in relation to mineral resource endowment are the hallmark of Nigeria government. The paper conclude by making suggestions on how to diversify the Nigeria economy which include the investment and development of other sectors like agriculture, industries, solid minerals and human resources.
Keywords: Derivation Principle, Federalism, Oil Dependency, Oil revenue, Revenue Allocation
