The Paradox of a Nation: A Social-Economic Perspective

Upfront, let me state unequivocally that my opinion, position and paper are personal in every material particular and do not constitute government’s position or represent government policy in any form whatsoever.  The organisers and target audience wanted me to have a latitude of presentation topic while looking forward to solutions on the current economic challenges.


We are all involved, as stakeholders, in Corporate Nigeria.  Our political framework, though nascent and fragile, is getting embedded for the first time and the cost is affordable by us as a nation. Whatever motivations we require to confront the perceived inefficiencies in our polity, the solutions are the same.  All that is needed is positive action.  Therefore, everybody’s feelings and opinions are equally important.

 

My experience spanning banking, finance, consultancy, entrepreneurship and public service makes me appreciate the concern of poverty, prosperity, growth and development as well as social harmony which form the bedrock of my paper.

IMF advisors, Xavier Sala-Martin and Arvind Subramanian, once described Nigeria as “metaphor per excellence for a failed development experience”.   Recently, Ambassador Princeton Lyman asked whether Nigeria is not losing it in terms of economic influence, strategic importance, and global relevance.  That was a wake-up call on how bad our situation has changed within three decades.  But we have some comfort in far-off forecasts by many professors on countries like Japan in 1955, South Korea in 1969 and recently on Malaysia, Singapore and Indonesia.  Despite our challenges, the Nigerian song will still be celebrated if we all, as stakeholders, resolve to make Nigeria the centripetal force of the continent.

 

The waste and degradation of natural resources in developing countries are often traceable directly to government policy failures. These failures cause resource depletion that cannot be justified by whatever societal gains that may be achieved by such depletion.  As forests disappear, petroleum and mineral resources are squandered, land erodes, water systems deteriorate and wildlife becomes scarce, we can almost always find a faulty government policy lurking in the background.  The question is why? The depressing conclusion often reached is that the unsound policies are simply the result of greed, ignorance, selfishness, short-sightedness, corrupt tendencies and incompetence of persons in position of trust.

 

In our case, a common complaint is that our dependence on oil has relegated the country to the primitive economy of digging and hoeing, without prospects of moving up to more profitable economic activities.  Equally worrisome, are postulations that the export of our raw materials expose the country to economic instability and that booms from oil export have caused untold damage to other sectors of our economy.

We all need to recognise that many policy failures are political successes for the officials that commit them. More often, the political successes of these officials are flawed policies that were adopted.  They may have been admired for cleverly strengthening their political positions with these manoeuvres which came at the expense of the soundness of their policies.  Nonetheless, these manoeuvres constituted policy failures. 

The paradox of this nation is hinged on monumental policy failures of the past on a consistent basis.  What should we say when resources are not exploited most beneficially for the nation’s people in order that other laudable goals can be pursued?  The key to resolving this paradox is to understand that in principle, we can pursue several of these programmes without distorting the processes, focusing on optimal benefit to the majority.

 

Today’s Reality

Success of any nation is measured in reference to its history, potentials and opportunities, expectations, and relative performance of its peers. A pointer to the sad reality of today is depicted in the UNDP Human Development Report 2007-2008 that ranks Nigeria worse off in Human Development Index compared to Kenya, Ghana, Morocco, Malaysia and Libya. It shows a country with significant deprivation in the midst of huge potential.

 

How do we move away from deprivation, despondency, hopelessness, desperation and pervasive poverty? Poverty is getting more chronic and endemic without any perceptible reduction through policy.  How do we explain abject poverty amidst plenty? That promise of Nigeria when I was a primary school boy, which seemed almost inevitable in the early 70’s still remains unfulfilled as at today.  How else do you explain a country with per capita GDP of $1,113 in 1970 but lower as at 2009, with poor population measured as subsisting on less than $1 per day increasing from 19 million in 1970 to 80 million in 2006?

 

Prior to the entrenchment of democratic governance in the country, we experienced the concentration of power in a small inner circle of the military hierarchy in contrast to a more collegial governing structure.  This was largely responsible for the long standing institutional deficits, accelerated decline in structures of governance and the flawed provision of public goods.  The peak agencies of economic management, crucial regulatory agencies, the judiciary, the civil service, local governments and the military itself were all
deliberately weakened.

 

Fiscal shortfalls and calculated neglects led to deterioration of education, health services, alongside key elements of infrastructure particularly electricity and transportation.  In all, economic governance steadily deteriorated, policies were inconsistent and there was the presence of endemic corruption with collapsing institutions that virtually choked off non-oil investments and rendered the Nigerian state a pariah in most global markets.

 

Where and How did we get it Wrong?

Political economy apologists tend to explain the reason for our sojourn to prolonged economic stagnation on the historic 1914 amalgamation, 30 month civil war (1967-1970), military incursion and many other easy excuses for failure.

In spite of these easy target explanations, Nigeria’s economic dream should still have been realised more so with the abundant natural resources, enterprising Nigerians, fertile soil and the passion to be giant of Africa.  A more important coincidence to our march to a disastrous economic cu-de sac is the discovery of oil and how it has configured and worsened our standard of living.

 

Following the country’s independence in 1960, our economy witnessed expansion that averaged 5% annually with per capita income being above $600 while we had a negligible inflation rate of about 4.1%.  Although it was a low-income economy at that time, it boasted a range of primary agricultural commodities such as cocoa, palm produce, groundnuts and rubber.  The economy had stable terms of trade alongside solid minerals exports which bolstered export income.  Fifty years down the line from independence, the economy fluctuated drastically with the predominance of oil-wealth creating impressive gains which were eroded by poor management.

 

With population growth virtually unchecked, the per capita income declined.  The lack of a political and institutional centre that should serve as a principal economic change was the bane of our development. The leadership at the time was unable to foster a producer coalition or resolve the central pressures for distribution and the nation succumbed to a social dilemma wherein individuals and groups focused on particular selfish gains at the expense of collective goods and general welfare.

 

The revenue windfall from oil removed many of the perceived constraints on development spending and redistribution and a surge of foreign investment masked many of the liabilities of poor policies and weak administration after the Nigerian civil war.  However, the litany of political succession – six successful military coups, numerous failed revolts, two abortive democratic regimes, three inconclusive democratization programmes – clearly illustrates the essential problems of leadership and institutional development in the country.

 

Oil, Prebendalism and the Resource Curse

From the period that oil became predominantly a deciding factor in the Nigerian economy, the structure, nature, productivity and competitiveness of the country took a different route.  In the last 15 years, so much has been written about the natural resource curse and how to prevent the spell, if any.

 

Clearly, the oil windfall pushed up wages, distorted labour movement leading to drastic drop in domestic output and constrained sustained growth.  A steep rise in public expenditure from foreign exchange earnings led to increase in prices of goods and services, making agricultural production uncompetitive.

 

The way and manner the exchange rate was managed then could not have led to diversified and balanced growth in the economy. That was the beginning of the end of agricultural sector, manufacturing sector and the road to Nigerian economy becoming extremely uncompetitive.  The oil money generated rents and rent-seeking opportunities leading to increased corruption and adverse effects on long-run growth. It exposed Nigeria to external volatility with its consequential impact on growth.  It led to the Dutch disease which is the tendency for the real exchange rate to become overly appreciated in response to positive shocks and thus contraction in tradable sector (manufacturing).

A bigger problem for Nigeria was the waste angle rather than the Dutch angle to explain the Nigeria’s growth performance.  There was rapid accumulation of physical capital from oil money with a substantial proportion of the increase from public capital spending financed by surging oil revenue.  The outcome was seen in the decline in capacity utilization in manufacturing, mostly government owned.  This shows clearly that quality of spending was sacrificed for quantity.  Many economists and analysts have argued that the big difference between Indonesian and Nigerian response to oil windfalls was the ability of the Indonesian government to keep the exchange rate competitive and maintained relevance of its agricultural sector through investments in technology access to inputs.  Professor Peter M. Lewis, a leading American expert on Nigeria at John Hopkins University actually wrote a book on this titled “Growing Apart” in which he compared Nigerian and Indonesian growth processes.

 

For much of the last four decades (except 2003 to date), compared to developing countries of same size, geography and resources like Brazil, Mexico and China, Nigeria achieved minimal growth, inert economic structure, abject poverty and growing marginality in the global economic system, with levels of potential and religious volatility.  This was accentuated by chronic institutional decay, political uncertainty, severe social polarisation, political allotment of economic gains and associated corruptive tendencies. These conditions were antithetical to achieving sufficient, credible and conducive environment for economic transformation.

 

Abundant evidence suggest that economies with high levels of rent seeking and corruptive tendencies as obtained in most parts of developing countries in Africa, Asia and Latin America usually have very unstable economy.  Coupled with abrupt political changes, absence of reliable institutional guarantees and economic shocks, there would, undeniably, be poor private and foreign investments.  Historically, our political elites have been divided by multiple cleavages and this has made the consolidation of a stable coalition among these disparate interests and groups more difficult.  Previous military and civilian governments have pursued erratic and often uncoordinated macroeconomic policies with strong populist and nationalist orientations.  As we have now seen, most of these policies have proven to be anti-development in the long-run.

The Tripod of Challenges: Policy, Institution and Leadership

 

Using Botswana as a beacon of African success story, the tripod of achievement is seated on policy, institution and transformational leadership.  The choice of policy determines the competitive terrain, business environment and regulation.  This policy factor is more worrisome in economies like Nigeria where government is the biggest spender.  How do we formulate appropriate and optimal policies based on macro-economic stability, openness to trade and capital flows as well as provision of necessary social and economic infrastructure? 

 

The Asian miracle of Thailand, South Korea and Taiwan was due to, among other factors, the appropriate blend of policies in areas like the use of technology and cheap labour for export market, encouragement of private domestic investment and rapid growth in human capital.

 

In Nigeria, apart from the tough choice of policy formulation is the adjunct of government officials using their positions to influence business environment for their personal interest.  People substitute the goals of the larger society with personal objectives. This is more so where the institutions are weak.

 

Institutions are the guardians of the will of society in placing limits to acceptable behaviour.  Institutions reinforce the consensus as it brings predictability to actions.  It is a settled fact that institutional weakness is a bane of development.  The crisis of institution in Nigeria, according to Mmadau Dia in a World Bank Study, is “an institutional disconnects between government and civil society, formal and informal private sectors, corporate and social cultures”.  It is the institutional weakness that throws up strongmen in various spectres.  Institutions are underdeveloped when the powerful see them as undermining their power. 

 

Leadership deficit is the root of the paradox.  When you see a poor country, look for poor governance then you will observe leadership challenge.  No Nigerian is desirous of a corrupt society with poor infrastructure that stifles innovation and limits capabilities without ensuring peace and security.  We all desire a system that works. What we desire is transformational leadership with shared purpose and vision not transactional leadership fashioned in the prebendal sharing of excess crude, federation account earnings, rent seeking and crony capitalism.  As long as we keep having followership that demands patronage, handouts and favours, our search for true leadership will be long and winding.

 

A revered former President of Tanzania, Mwalimu Julius Nyerere once posited that the key to any government’s effectiveness and ability to lead the nation lies in a combination of three elements.  First, its degree of closeness to the people, and the extent of its responsiveness to their needs and demands.  In other words, the cultivation and sustenance of democratic values and culture is imperative.  Second, its ability to coordinate and bring into a democratic balance the many functional and often competing sectional institutions, which groups of people have created to serve their particular interests.  Finally, the efficiency of the institutions, both official and unofficial, by means of which decisions are made known and implemented throughout the country.  It then goes without saying that all of these institutions must be rooted in the fundamental laws and appropriated to the society to which they are applied.  As a result, a country should be governed by the principles of the rule of law and the supremacy of its Constitution.

These three conditions aptly capture the essence of the challenges to prosperity of any nation.  However, a few other imperatives are also critical, though derivable from these three fundamental conditions: peace, security, transparency and accountability are further ingredients, required for Nigeria to move forward.

 

Scholars have stressed that political, economic and corporate governance are each to be given considerable importance as preconditions for development.  The main socio-economic issues of good governance are in the areas of the management of public resources, the development and maintenance of a transparent economic and regulatory environment conducive to private sector activity, the ability to generate policies that would outlive administrations, the installation of appropriate legal and judicial institutions and instruments that guarantee right of life, property and privacy.

Indeed, economic governance should have significant current or potential macro-economic impact in the short and medium term on the government’s ability to credibly pursue policies aimed at external viability and sustainable growth.  Economic governance issues include corruption but go beyond this to encompass transparency, efficient rule making, discretion, and the scope for limiting abuse of power.  Apart from undermining confidence in the government and its moral authority, pervasive governance problems have very real economic costs.

 

Empirical evidence suggests that significant governance problems negatively affect economic growth.  Since they act as an unnecessary tax on enterprises, they raise costs and reduce incentives to investment. They are often discriminatory, with all the attendant economic and social ill-effects of discriminatory behaviour.  Where well-publicised governance issues exist, they have discouraged foreign direct investment and sometimes induced investors to pull out.  They reduce domestic savings and investment.

 

Fundamentals of a new Prosperous Nigerian Nation

After so much articulation and exposition of our developmental challenges, we should not mistake analysis for action.  What is required is positive action, superior performance and efficient service delivery.  We need to urgently build a capable state wherein peace, security and private enterprise are guaranteed over a sustained period.  This requires an enabling political and legal environment for economic growth and equitable wealth distribution with sound macro-economic management, institutional reform and overhaul in human capital development.

 

Between 2004 and 2007, Gross Domestic Product grew by an average of 6% per annum. Despite the slow pace of global economic growth, the Nigerian economy grew by 6.9% in 2009.  This growth is in line with the regional growth expectation but much higher than the BB Sovereign rated economies.  The inflation rate is under check and the banking system is being strengthened through enhanced governance, risk management and strategy reforms by the regulatory authorities.

 

The quality of growth with attendant mass poverty, unemployment, high inequality and absence of structural transformation need policy realignment.

The 7-Point Agenda and National Vision 20:2020 was conceptualised to set new priorities, deepen as well as strengthen the earlier reforms leading to lower poverty and reduced inequality. The fundamentals are as follows:

(a)      Critical Physical Infrastructure

To address the key milestone of being a top 20 economy by the year 2020, the current administration outlined a 7-Point Agenda covering improvements in critical infrastructure encompassing power, energy, water, aviation, rail and road transport; security and Niger Delta; food security; human capital development; land reforms and wealth creation.  Government have placed priority on infrastructure which represents a major binding constraint in our quest towards sustainable development.  Even though there are still tremendous challenges in the areas of power and transport infrastructures, significant successes are being achieved.

 

Low investment in the rehabilitation and maintenance of existing infrastructure, inadequate infrastructural spending and poor quality of infrastructural expenditure have resulted in low levels of access, inefficiency of available infrastructure and high costs.  Currently, Nigeria ranks poorly on several indicators of infrastructural access, cost and quality.

 

The installed power generation capacity in Nigeria is 6000mw while the current available energy output is around 4000mw due to non-availability of gas.  Conservatively, it is estimated that the country will need about 12000mw. Transmission and distribution networks are in poor state and need complete overhaul.  From railway infrastructure to port services, the bottomline is the same leading to additional business costs and reducing competitiveness.  The policy direction is clear, government should move away from being an exclusive provider to a facilitator in partnership with the private sector.  There should be a standard and transparent methodology in public private partnership (PPP) to attract bidders, stimulate competition, lower prices and reduce government risks.

 

In order to liberalise the funding of our failing infrastructural facilities, government has recognised that privatisation and public private partnerships are appropriate forms of getting value for money.  Thus, the move away from government-owned and government-run institutions remains vital. PPPs will involve the private se
ctor supply of infrastructure assets and services that have traditionally been provided by the government.  This will lead to an infusion of private capital/management that can ease fiscal constraints on infrastructural investments and increase efficiency.  The attraction of private participation lies in the fact that it brings capital and efficiency that may be difficult to realise through purely public sector financing.

 

The existence of a huge resource gap for government has thrown up the urgent need for alternative funding source for infrastructure.  For instance, it has been estimated that over the next five years, the Federal Government would need to invest over USD$100 billion in key infrastructure areas, namely power (USD$18-20 billion), rail track (USD$8-17 billion), roads (USD$14 billion) and oil and gas (USD$60 billion).  Government strongly believes that public private partnership will deliver real value for money if properly managed under the recently established Infrastructure Concessioning Regulatory Commission (ICRC).

 

(b)      Macroeconomic Stability

46.     Huge fluctuations and unpredictability in the price level, exchange rate, interest rate and tax burden are major deterrents to private investment which is the driver of growth.

 

The oil price based fiscal rule addressed this sufficiently until 2009.  This smoothing rule ensures that if the current world price is $80 but the normal (based on fundamentals) is adjudged to be $50, the supernormal $30 per barrel is saved in excess crude account as the $50 benchmark is budgeted. It has fiscal side, foreign exchange side and long-run savings side to the equation.  Due to the impact of the economic recession and revenue shortfall in 2009, the government augmented via draw-down with over N700 billion and distributed additional $5.5 billion during the same year.

 

There is need for an established framework like a Sovereign Wealth Fund for the management of oil savings currently in excess crude account. This comes with clear rules on investment and withdrawal rather than the current practice of strong lobbying for sharing.  Better fiscal and monetary policy coordination will engender macro-economic stability.  Both should focus on long-term macro-stability for sustainable development.

 

(c)      Rule of Law, Accountability and Transparency

Corruption leads to misallocation and mismanagement of scarce resources, undermines competition, increases costs, deters private investment and eventually engenders loss of trust in institutions and destabilizes government. We need strong oversight by legislative assemblies, vigorous law enforcement, supportive judiciary, independent anti-corruption agencies and transparency in revenue and budgetary system.  The media and civil societies are up to steam in this respect but most importantly, we need the people to blow the whistle.  We cannot continue holding the number 130 position in corruption perception index out of 180 countries when the likes of Ghana and Botswana are 69 and 37 respectively.

 

(d)      Governance Reforms

We need to institutionalise our governance reforms and open access to government policy and performance.  Monitoring and evaluation of projects, spending and development programmes.

 

(e)      Enhance Human Capital Development

Enhanced investment, institutional capacity and access to quality of basic social services will lead to high quality growth.  We need to align resource allocation, expenditure and management in line with pro-poor priorities.  In a knowledge world, we can only sustain economic growth, raise living standards by investing in education, health and nutrition.  When large pool of young children are selling recharge cards and pure water on our roads, rather than being in schools, we should know we have crisis in waiting.  Public spending on basic education, primary healthcare, safe drinking water, sanitation, reproductive health and nutrition should be non-negotiable minimum expectation from state and local government levels.  There should be provision of vocational training centres to equip our youths for self employment linked to market needs.

 

(f)      Rural Focused, Employment-Oriented Development Strategy

There is considerable potential for increasing employment in agriculture through technological change and agrarian reform.  Foster linkages between agricultural and non-agricultural activities through processing, growing domestic demand for farm output.

 

It is imperative to note that 90% of our farmers are small scale farmers, cultivating only 7% of irrigable land.  The long-term agricultural strategy of this Government is to become a major supplier of food products to Africa.  At
present, our focus is on rice, cassava, cotton, livestock and fisheries.  This can be evidenced by the fact that in the last few years, Nigeria has become a major producer and exporter of cassava to the rest of the world.  However, major challenges still remain in the areas of preservation, storage and agro-allied food processing.

 

(g)      Deregulation

Between 2006 and 2008, the nation spent over N1.2 trillion on subsidies for petroleum products.  In 2009 alone, petroleum subsidies accounted for over N600 billion; almost equivalent to the total capital budget of the Federal Government in fiscal year 2009.  This diversion of scarce resources is not sustainable in the long-run.  Therefore, full deregulation of the oil and gas sector remains very imperative.  This will encourage investment in refining and marketing infrastructures.  The legal and regulatory framework for the comprehensive reform of this sector is currently being considered by the National Assembly.

 

Since our exit from the Paris Club, we have continued to maintain a stable debt level.  The outstanding debt obligations are now only to multilateral bodies.  As at September 2009, the domestic debt level was N3,06 trillion while the external debt stood at USD$3.8 billion.  Presently, government policy is not to accept commercial loans.  However, concessionary loans may be considered where necessary, especially in the key areas of upgrading infrastructures, agriculture and health facilities.  We have therefore continued to finance a portion of our deficit from domestic bond issues which is also aiding the development of our local debt market without crowding out private capital.

The matter of restlessness in the Niger Delta has been largely resolved through the present Government’s laudable amnesty programme.  However, certain post-amnesty issues and some level of insecurity in the area remain immediate challenges which government is confronting head-on.  Considerable budgetary allocations are being made to ensure government achieves its objectives in this area.

 

Concluding Remarks

Many analysts have concluded that most resource-rich developing economies are also endowed with poverty as they find it difficult turning their ‘gold’ into prosperity.  The pervasive poverty in Nigeria is connected to oil wealth but not caused by natural resource endowment. The misery or hopelessness index, whether quantified as $1 per day or $2 per day adjusted for purchasing power parity is a cocktail of poor leadership, unimaginable public choices, mis-governance and maddening corruption.

 

The remedies to the maladies confronting our polity cannot be found within the context of the Government alone.  There is the need for all stakeholders in the Nigerian nation to be alive to their responsibilities.

 

Our goal should then be to reorganise and restructure our economic and political institutions, develop national awareness and pride through sound educational values which will lead the people toward a more humane and rewarding life as citizens of Africa’s most populous and progressive nation.

 

As with all economic and social problems facing any country, there is no magic wand when it comes to strengthening the capacity of public sector performance.  Only a long term, carefully thought-out and sustained effort, tailored to solving the problem can succeed.

 

* Remi Babalola, Honourable Minister of State for Finance, presented this paper at the second annual Oba Olashore Lecture at the Obafemi Awolowo University, Ile Ife, on Monday February 15, 2010

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