The missing oil money saga

I doubt that Sanusi Lamido Sanusi, the former governor of the Central Bank of Nigeria (CBN), will apologise to Nigerians for apparently mistakenly alleging that the Nigerian National Petroleum Corporation (NNPC) failed to remit colossal amounts oil revenue to the treasury between January 2012 and July 2013. But it is the case that a forensic audit of the NNPC conducted by the global accountancy company PriceWaterhouseCoopers released in April found that the corporation did not withhold money but actually overpaid the state.

Mr Sanusi said in a letter to President Goodluck Jonathan in September 2013 that over the 19 month period state-owned NNPC lifted US$65bn worth of crude oil on behalf of the government but remitted only US$15.2bn revenue, leaving US$49.8bn unaccounted for and outstanding. Media reports of the then CBN governor’s astonishing assertion fuelled speculation that almost US$50bn of public money had gone missing, no doubt pocketed by corrupt politicians, government officials and NNPC administrators. After the NNPC disputed the allegation, Mr Sanusi in December lowered his estimate of the shortfall to US$12bn. Later in February 2014 he told the Senate it was US$20bn that the NNPC needed to account for.

This saga of the missing oil money raises a number of questions. How and why did Mr Sanusi, an international award winning central banker, get his revenue figures so wrong? Why was he able to maintain his credibility even though he revised his allegation at least twice? Why was the public so ready to believe that the national oil company stole such a huge sum of money?

From the start it should have been clear that the claim that US$49.8bn was missing from the state coffers was improbable. This would have amounted to a loss of US$2.62bn a month or US$31.45bn for the whole of 2012. Nigeria’s entire gross federation revenue in 2012 was about US$65bn, including both oil and non-oil incomes. It was far fetched to think that almost half of the state’s total income could go missing from a single source of leakage. If it were true, how much money would have been available to pay for the running of the bureaucracy, fund capital projects, service debts, maintain subsidy payments and other real government expenditures, when account is also made of revenue losses through other leakages, such as numerous embezzlements by non-oil related federal and state officials?

The fact that the PriceWaterhouseCoopers audit exonerated the NNPC of the specific charge of not remitting oil money does not mean the state corporation is fit for purpose – it is not. Indeed, the report criticised the way the NNPC operates and recommended an urgent restructuring. It also stated that the corporation should refund to government US$1.48bn due from unsubstantiated costs, duplicate subsidy claims and computation errors made in its upstream operations.

The missing oil money saga showed that the management of Nigeria’s finances is so lacking in transparency that major agencies of the state have very different information on public revenue flows. This opaqueness has led to publications of various reports in recent years that allege grand scale corruption in Africa’s largest economy. These headline grabbing allegations have not served to make the public more aware of the operation of corruption in the oil business but have made people more accustomed to the notion that their country is losing staggering sums of revenue from the nefarious activities of those in power.

It seems that people are reconciled to the existence of grand graft. How else can we explain why an allegation by the central bank, believed by many to be true, that nearly half or a quarter of state revenue had disappeared did not trigger street protests but mainly fatalistic resignation. In most other countries such a controversy would not been limited to the pages of newspapers. Trade unions and other civil society organisations would have been up in arms demanding accountability and for heads to roll.

The current state of public consciousness in Nigeria with regards to corruption does not act as a deterrent against routine abuse of power in the country. On the contrary, it encourages complacency with regard to relatively smaller levels of theft and misappropriation of public resources that is the real problem facing the country. With frequent headlines of billions of petrodollars being misappropriated, the siphoning of millions by many different officials and theft of a few thousand barrels of crude may seem unremarkable and go almost unnoticed. But the reality is that corruption is the daily theft of money from many different sources which individually amount to thousands or millions of dollars and when aggregated add up to a colossal loss of potential resources for development.

Spurious allegations of super scale thefts of oil revenue also encourage the belief among ordinary people that the government is loaded with money and the failure of the country to achieve rapid development is simply due to the mismanagement of oil windfalls. The thinking is, if the loss of a quarter to a half of federation revenues to corruption between 2012 and 2013 did not result in the collapse of the state system, this surely indicates that Nigeria is buttressed by huge financial reserves. Of course, this is not the case. The problem is not that governments have plenty of money which they poorly manage; rather it is that they mismanage very scarce resources.

Poverty doesn’t turn people into terrorists

By Tunde Obadina

Many political commentators and non-governmental welfare organisations have advised Nigeria’s incoming administration to deal with the insecurity fuelled by the Boko Haram Islamist insurgency in northern Nigeria by addressing the issues that drive young people to join the rebellion. They suggest that poverty and ignorance are the main underlying factors in the growth of the Islamist sect that has killed thousands of people over the past six years.

The idea that government should introduce programmes to eradicate poverty and boost education in northern Nigeria as a strategy for defeating violent extremism is supported by many people. However, although reducing poverty and improving education are undoubtedly worthy causes, there are two basic problems about linking poverty and ignorance with the threat posed by Boko Haram and other criminally violent groups.

Firstly, the assumption that poverty and poor schooling are major recruitment conditions for extremist groups is probably wrong. Given that the vast majority of inhabitants in northeast Nigeria, where Boko Haram thrives, live in abject poverty it is unsurprising that many of the group’s fighters and followers are poor and uneducated. But this does not necessarily mean that impoverishment and shortage of schools has driven ordinary people to pick up guns to terrorise their neighbours.

As far as I know there has not been detailed study of the composition of Boko Haram or any other jihadist group conducted in Nigeria, but it is probably fair to surmise that the Islamist movement is made up of people from varied socio-economic backgrounds. There are the disillusioned souls who come from relatively wealthy families. There are many who are relatively well-educated, including university graduates. Indeed, for a person to arrive at the conclusion that society should be purged and forced to operate according to a particular Islamist ideology presupposes above average intellectual endeavour and at least enough literacy to read the Koran. Indeed, it is because religious fundamentalists tend to be thinking people who are less concerned about material wealth, that make the job of defeating them with offers of money more difficult than was the case with Niger Delta militants, many of whose leaders were easily softened by the state with offers of cash and lucrative contracts.

Boko Haram also comprises of mercenaries who fight not for the establishment of a caliphate but for the loot they can obtain from plundering. There also individuals who have been coerced into fighting, such as those who were kidnapped, given a gun and placed in a firing line where they must chose either to kill government troops and innocent civilians or be killed. For the mercenaries, zealots and the captive warriors, increasing government welfare spending in terrorism-plagued areas is unlikely to dent the militants’ recruitment capacity.

The second problem with the advice that government tackle the unrest by investing in poverty eradication and schooling is that the proponents fail to explain how such massive welfare programmes will be funded. The tendency is to assume that with better resource management, primarily through elimination of corruption, adequate amounts of money could be available to government to substantially reduce poverty and make education freely available to all. This view stems from an utterly unrealistic assessment of the fiscal positions of both the federal administration and the state governments in the insurgency affected areas.

In 2014 total federally collectable income in Nigeria was about US$60 billion, which after deductions was shared roughly 50-50 between the centre and sub-national governments. This means the nation’s 36 states received on average less than US$1 billion each. Furthermore, Lagos is the only state that internally generates substantial amounts of revenue. Most other states are almost totally reliant on federation funding, especially those in the north. For example, income generated by Borno state, home of Boko Haram, amounted to a paltry US$14 million in 2013. Kano, the richest northern state, internally generated around US$110 million, less than 5% of the amount yielded by Lagos state.

The combined overall annual revenue of all tiers of government in Nigeria amounts to around US$390 per person. This is just over a US$1 per day. The actual sum available to spend on economic and social projects is substantially less than this due to deductions for items like reinvestment in oil production and debt servicing as well as the fact that the bulk of public revenue is spent on running government.

The reality is that the scale of resources available to northern states is simply insufficient to achieve any major government-led welfare transformation, even if official corruption was somehow completely removed. Similarly, the federal government is too poor to be able to pump substantially more money into northern states without risking a dire backlash in the south where people are also struggling with poverty and inadequate education.

There is a connection between poverty and insecurity. It is not that low income renders individuals prone to engaging in murderous rebellion, but that poverty makes communities susceptible to attack because they lack the wealth to pay for effective protection. Boko Haram has been able to kidnap hundreds of schoolchildren, maim and kill thousands of poor people not because its combatants are destitute or unlearned but because their victims have had little protection from violence.

The prime purpose of the state is to protect us from each other and outsiders.  This duty should take precedence over all other considerations, including building infrastructure, alleviating poverty and expanding education. The fundamental problem in Nigeria is that states are too weak to adequately protect their citizens. This is largely because they lack the necessary resources due to low economic production by society and the fact that the small amounts of tax revenues available are spread too thinly across a wide range of expenditure. The consequence is a loss of focus on the prime purpose of the state; security of its citizens.

The myth of Africa’s abundant natural wealth

It is often said that African nations are endowed with abundant natural wealth because they possess exceptional amounts of valuable minerals and other resources provided by nature. This notion of resource-richness is often contrasted with Africa’s high incidence of poverty to make the case that the continent is a paradox of want in the midst of plenty. It is a construction used to support claims of endemic incompetence amongst African leaders.

The portrayal of Africa as resource-rich has also led many Africans to believe that extreme poverty in the community could easily be eliminated if only their leaders shared nature’s endowment more equally. This understanding has fuelled a culture of entitlement – a belief that ordinary citizens are being denied birth-right benefits bequeathed by God.

There are two major problems with the idea that Africa has plentiful supply of natural resources. Firstly, the claim is without foundation. There is no evidence to support the notion of Africa’s super-abundance in natural resources. The opposite is closer to reality.  The World Bank 2011 report, The Changing Wealth of Nations, shows that low-income nations possess much less natural resource wealth than high-income countries, although poorer nations are more dependent on natural resources.  While countries like Norway, with natural capital valued at US$110,162 per capita or Australia with US$39,979 per capita worth, maybe described as resource-rich, the same cannot be said of Nigeria with natural capital worth US$6,042 per capita or South Africa with US$5,723 or Angola with US$13,307. Leaving aside Gabon, with an estimated US$42,065 per capita in natural capital, the resources endowments of African countries are actually quite modest.

Nigeria is frequently depicted as oil-rich, usually by commentators underlining government corruption and mismanagement of public resources. The image is of a country with ample petrodollars which, with better management, could meet the material needs of its people. This construction stems from massive exaggeration of the scale of Nigeria’s oil assets and income, relative to its population. It makes sense to describe countries like Saudi Arabia, Kuwait, Qatar and the United Arab Emirates as oil rich as they produce lots of the stuff and have small populations. But saying Nigeria is oil rich when in 2014 its oil output per capita was about US$530 is absurd. The United States, rarely described as oil-rich, produced an estimated 2,054 litres of crude oil per capita in 2012, more than twice Nigeria’s 860 litres. The assumption that Abuja is awash with petroleum money is clearly preposterous considering that in 2014 Nigeria’s oil revenue amounted to US$32.2 billion – a mere US$190 per person.

The second problem with depicting Africa as resource-rich is that it encourages a belief among some Africans that such endowment is wealth, provided free by nature and readily available for consumption. The belief that these are low hanging fruits to be plucked with little or no effort.  This assumption of natural wealth can be misleading. In reality almost all wealth is created by people. For instance, the crude oil and other minerals underground become capital goods only after extraction, which is an endeavour requiring significant amounts of effort and ingenuity. Underground mineral deposits can be of value to prospectors willing to buy exploitation rights, but even here, awareness of the existence of the resource requires human knowledge and the application of technology.

Modern-day crop production is not the result of harvesting naturally available products. Cocoa trees are planted and nurtured before they yield beans and mass produced chickens are the result of battery farming. Land is fertile because the soil has been appropriately treated. While rain and rivers are natural sources of water, the gathering and processing of water for delivery to end-users is created wealth.

It is important to make the point that natural resources are not endowments that are realisable without costs. Too often we hear resource nationalists contend that minerals mined in their areas are birthright entitlements of local peoples which outsiders unjustly extract for their own profit. The sense of grievance stems from an understanding that the resource, which the community had no part in harnessing, is a gift of nature to the people.

One of the reasons that the value of natural resources in low income countries is generally lower than those found in high-income nations is that there has been less human exploration and development of nature’s attributes in underdeveloped economies. This is partly due to the treatment in poor countries of natural resources as national resources that must be tightly managed by the state. Reform to make the acquisition of land much easier and to extend private property rights to subsoil resources would go a long way to creating the conditions for the effective development of these assets.

Nigerian governments have for decades voiced interest in the exploitation of the country’s supposedly vast solid mineral deposits but little progress has been made because the state maintains tight control of these resources. The development of the oil and gas sector has stalled for decades largely because of inept state involvement in the ownership and operation of the industry. Officials have said around 60% of Nigeria’s arable land is uncultivated. Imagine the impact that a open market in land transactions would have on the development of the untapped or underutilised land resources. Also imagine the tax revenues government could collect from resource-related industries, such as petrochemicals, freed from the dead hand of state mismanagement.

The challenge facing Nigeria’s incoming administration

By Tunde Obadina

I suspect that having won the 2015 presidential election following three consecutive failed attempts, former military leader Muhammadu Buhari is at least a little anxious about returning to power. The millions of Nigerians who voted for him are expecting that the change of leadership after 16 years of rule by the People’s Democratic Party will herald a new dawn in a country that has hitherto failed to live up to its potential.  People expect that Mr Buhari, with his reputation for honesty, will lead an administration that will thrust Nigeria forward to attain its potential, rightful, place in the world.

Unfortunately, those hoping that the incoming government will eliminate the major problems ailing the country, such as corruption, underemployment and mass poverty, are liable to be disappointed. Even if the new government behaves exemplarily and the economy shifts gear from fast to super-fast growth the likelihood is that in four or eight years time most Nigerians will still be living on less than US$2 a day. There is no realistic scenario in which the country can emerge from underdevelopment in the near- to medium term. Indeed, industrialising is liable to be more difficult in the next decade than it was in previous decades when East Asian nations rose from poverty to wealth. Opportunities for building the type of export-orientated, low-skilled, employment generating manufacturing that enabled these nations to swiftly escape poverty are now scarce. Furthermore, China, already a global manufacturing hub, still has substantial scope for industrial expansion because of its vast untapped hinterland provinces.

This is not to suggest that Nigeria under a new administration cannot achieve faster growth and more rapid reduction in poverty and underemployment. It certainly can. But government will have to be more serious in implementing policies that remove existing obstacles to private wealth creation. It must discount the notion that government can successfully micro-manage the economy to create wealth and jobs. The experiences of economies that have emerged from poverty show that it is the endeavour of individuals acting in markets that produces economic prosperity.

We do not need to look far for evidence of the importance of market reforms in unleashing human creativity and economic growth. We can see how the limited reforms that have taken place in Nigeria over the past decade have spurred growth in the affected sectors. The liberalisation of the telecommunications and financial sectors are obvious examples. Reform of tertiary education produced a mushrooming of private universities in the country. The Buhari administration does not need to formulate a new development strategy but needs to deepen and extend market reforms begun at the start of the new millennium but stalled by politicians lacking the imagination and resolve to tackle politically difficult deregulation reforms.

It would be great if the new administration shows greater courage and determination in pursuing already tabled reforms of the oil sector, including the restructuring of the national oil company to make the management of oil resources more transparent and subject to market forces. It would be great if the new government shows toughness by facing down forces that have blocked the liberalisation of the downstream oil sector, including scrapping the highly corrosive petrol subsidy, to enable private investment in the building of oil refineries and other oil-related industries. Mr Buhari could also boost the economy by implementing land reforms that make it easier for investors to acquire land for commercial agricultural production and construction projects. Far more progress can be achieved in the energy sector if the government liberalises electricity pricing and deregulates domestic gas pricing, thereby giving oil companies appropriate incentives to invest in gas production for domestic usage. The economy would benefit if existing trade barriers were dismantled, including scrapping import prohibitions and punitive tariffs.

The incoming administration does not need to come up with a brand new strategy for economic growth and development. Indeed, it would be a tragedy if it tries to reverse Nigeria’s general movement towards becoming a market economy. What is required from government is much greater steadfastness in implementing stalled reforms to loosen the stranglehold the state maintains on the economy.

The poverty of protectionism

By Tunde Obadina

Many western supporters of poor nations advocate nationalist economic policies for these countries while rejecting the same for their own economies. Left-leaning development organisations condemn the racist agendas of right-wing groups like the UK Independent Party (UKIP) and France’s Nationalist Front, yet they encourage developing countries to embrace similar programmes. Anti-immigration and trade restriction regulations castigated as regressive for one part of the world are applauded as progressive when applied in another part.

This inconsistency stems partly from moral relativism. Bigotry on the part of the rich and powerful is regarded as wrong but xenophobia among the poor and powerless is excused as warranted. This duality partly stems from a view that rich and poor economies are different in nature. Behaviour that is detrimental to an industrialised system is assumed to be enhancing for an industrialising one.

This is a dangerous fallacy. Rich and poor economies are different to the extent that one has lots more produced assets than the other. The natural laws of economics, as relating to such matters as the division of labour, the relations between demand and supply, pricing, investment etc., apply equally to all economies. In many ways the distinction between developed and developing societies is superfluous. All economies, regardless of GDP size, are dynamic and constantly evolving. The UK is not the same today as it was in 1960. It has undergone numerous economic changes, which have been as transformative for its inhabitants as have the changes experienced by people in Nigeria or India during the same period.

Nationalism is detrimental to economic development, wherever it occurs. Policies that seek to exclude outsiders from the economy are often rationalised as advancing the national interest. But national interest is a bogus concept stemming from a flawed understanding of what constitutes an economy. A national economy is an aggregation of the markets existing within a given geo-political space, while markets are aggregates of all transactions between individuals in specific spheres of activity, such as banking, shoes production, healthcare etc. So basically, a national economy comprises of all the transactions that take place within a country.

Neither a nation nor an economy has a single interest or set of interests. They are not entities capable of experiencing gain or loss. Only individuals have such interests, as only they can benefit or incur loss. So when government legislates against importation of certain foreign goods, its dictate will benefit some in society and hurt others. Clearly, the owners and workers at local companies that produce goods similar to the banned items may gain from the curtailment of competition. They can sell to captive consumers who otherwise may have side-stepped their products. State-protected sellers can charge prices well above what would have been possible in an open market. It is also clear that consumers who are coerced into buying from local producers at often higher prices incur loses, both financially and in infringement of their property rights. The trade barrier is definitely not in their interest.

The extra money consumers spend on buying goods from protected producers is money they could have used for other products or saved. For example, the extra $10 a household is compelled to outlay on clothes because of trade restriction is money it can no longer spend on furniture or on visits to the cinema. This means that as local garment makers are profiting from government intervention local carpenters and entertainment providers are losing sales opportunities. The government is serving the interest of one industry at the expense of others.

When the state erects trade restrictions it invariably creates incentive for smuggling. Legitimate importers are driven out of business, replaced by traders who are more willing to assume the risk of flouting the law. Protectionism robs one group of traders of their livelihood while creating opportunity for another.

Similar considerations come into play when the state prevents entry to foreigner workers. Some local workers are able to maintain jobs they would not have in a free market. However, employers will incur higher costs as a result of being forced to engage workers who not most cost-effect. It also entails consumer losing the extra value which employment of the prohibited foreign workers could have provided. For example, if a immigrant worker would have created net value of $1,000 a year, while the local substitute creates $800, the $200 foregone value will mostly be borne by consumers in higher than necessary prices.

Proponents of protectionism sometimes present statistics to show the gains of state intervention. These might, for instance, show that import bans on rice or wheat created or sustained so many jobs. But protectionists rarely, if ever, present figures showing the number of job opportunities lost as a result of trade restrictions. And even if the gains can be shown to outweigh the losses, it remains the case that the individuals who benefit are mostly not the same individuals who lose.

Policymakers almost always present protectionist policies as pro-poor. This is nonsense – a disingenuous rationalisation of policies that disproportionately benefit the wealthy and often at the expense of the poor. The general effect of protectionism, whether its import bans or punitive tariffs, is to raise prices of consumer goods. Most of the goods affected are items consumed by people of all income groups, such as textiles, medication, wheat and rice. It goes without saying that higher prices hurt low-income earners more than the rich. Pushing up bread prices by restricting wheat imports may enable local bakers to profit and secure the wages of a few thousand bakery workers, but dearer bread means millions of poor people must either go hungry or spend more of their meagre income to stay nourished.

Protectionism also drives the poor to black markets to meet their needs, making them vulnerable to rogue traders. For example, in Nigeria import of some widely used pharmaceuticals, such as paracetamol and aspirin, is prohibited. The bans have contributed the growth in black markets in medication products, a large proportion of which are fake and dangerous. Low income earners are much more likely to use black market medicine than are the rich, who can afford the premium for genuine items. So while protecting the local pharmaceutical industry the state is puts at risk the health of millions of poor consumers.

Poverty reduction results from either an increase in real income or/and a fall in living costs. By driving up prices protectionism renders low income people poorer. Whereas, in pushing down prices international trade enriches the poor by enabling them to obtain greater value from their meagre wealth. Much of the reduction in global poverty over the past five centuries has been due to international trade lowering the cost of a widening range of goods and services – giving poorer people to access markets which were previously beyond their reach.

Nigeria’s under-funded war

By Tunde Obadina

In its 2015 budget proposal Nigeria’s federal government earmarked N985.9 billion (US$6 billion) for defence and security spending this year. This amount, covering all the armed forces and the police, is not much different from the amount budgeted last year. This figure tell us a lot about why the government has been struggling to contain jihadist insurgents trying to carve out an Islamic state in north-eastern Nigeria and threatening to destabilise Africa’s most populous nation.

Unfortunately, much of the criticism of the government’s inability to defeat Boko Haram has been based on issues of corruption and the presumed lack of commitment of Nigerian leaders to ending the crisis. However, though corruption and lack of incentive may be factors in the apparent weakness of the Nigerian state, the main issue is that the financial cost of defeating Boko Haram and other insurgents has risen over the past five years to a war footing and a point that is now requiring substantially more resources than are being invested. Without doubt, more money needs to be spent. Those who contend that the Nigerian armed forces cannot be trusted with higher budget allocations miss the point that wars always cost money.

Unfortunately, people tend to view the conflict in the north-east as some form of social unrest short of war. Wikipedia defines war as “an organized and often prolonged conflict that is carried out by states or non-state actors. It is generally characterised by extreme violence, social disruption and an attempt at economic destruction.” Given that the Boko Haram insurgency has resulted in an average of more than 1,000 deaths a year since 2009, caused the displacement of nearly one million people and destroyed large amounts of property and agricultural production, the scale of the insurrection clearly warrants being treated as an internal war. Furthermore, the fact that Boko Haram has captured territory in the north-east, even if only temporarily, tells us this is more than the usual sporadic communal or ethnic clashes that have dotted Nigeria’s recent history.

Wars always cost large sums of money to fight and win. Yet Nigeria’s military spending is substantially less than those of comparable developing countries such as Pakistan, Algeria, South Africa and India. It is low whether viewed as a percentage of government spending or per capita outlay or as a share of GDP. In its latest Trends in World Military Expenditure report the Stockholm International Peace Research Institute stated that Africa had the largest relative rise in military spending in 2013 of any region, but showed that military spending by Nigeria fell by 5.1%.

Even if every naira allocated for security in 2015 was to be honestly spent, the total allocation would remain inadequate for maintaining regular national security, let alone defeating an insurgency movement that is growing in sophistication and largely operates in a vast, remote and difficult to police land expanse. According to the website, Yourbudget.com, 90% of Nigeria’s 2014 security vote was for recurrent expenditure, leaving a paltry 10% (US$589.2 million) for capital spending. Incredibly, only US$4.36 million was provisioned for procurement of ammunition by the army. The Department of Homeland Security, just one of several internal security agencies in the U.S., alone spent US$19.2 million on ammunition in 2013.

Two important factors determine the ability of the security forces to defeat insurrectionists and other organised criminals. These are possession of intelligence about the enemy and providing the state with overwhelming fire-power superiority. Both cost money, lots of it.

Many politicians and human rights activists have contended that the underlying causes of the Boko Haram uprising are political alienation and poverty and thereby call for more to be spent on education, health and other social services in the affected areas. This perspective is flawed. Boko Haram is not a populist movement trying to endear itself with the poor masses. Most of the many thousands of people it has killed and maimed over the past five years in the besieged north-east have been poor civilians who do not require schooling or higher incomes to judge whether Boko Haram militants are a threat to their lives, property and freedom. Besides, it is a fallacy that individuals become terrorists because they are unschooled or materially poor – violent extremists come from all social classes and many are very well-educated..

In the final analysis, the containment of violent extremist groups is mainly the job of the state’s security services. And, whether we like it or not they must be adequately funded to succeed in this endeavour. It is folly to ignore the complaints of Nigerian soldiers and police officers that they are grossly under-equipped and under-armed to defeat this determined foe.

The question that government and the public needs to address is not whether, but how to raise the extra money required to at least minimise the impact of terrorism and restore law and order in  the country. This invariably involves re-prioritising public spending – cuts will have to be made in some areas of state activity. In this respect, there are some obvious candidates for slimming down. For example, it is incredible that in last year’s budget more money was earmarked for the National Assembly than was budgeted for the Nigerian army. Also the allocation for the federal legislature was about half what was provisioned for the entire national police force. It is odd that Nigeria has one of the best paid legislatures in the world while its security forces are amongst the least funded. There are other areas of government spending, including various subsidies that benefit some at the expense of others, that can be slashed or scrapped with no damage to the economy.

It may be that some important governmental activities have to be reduced to free resources to strengthen the capacity of the state to fulfil its prime purpose, which is the defence of human life and property. as well as upholding the rule of law. Antisocial behaviour such as theft, murder, kidnapping and rape, inflict both human and economic costs on society. The human costs are obvious and include the bereavement, pain and fear. The economic costs can be viewed in two ways. There are the actual losses of value such as in the destruction of physical property and theft of money. There are also the “opportunity costs” of dealing with violence. Such costs are the alternative uses that resources deployed to protect against anti-social behaviour could have otherwise been used for. For example, money spent on protecting society from criminals and militants could have been invested in building roads, bridges, seaports, dams, power plants and other infrastructure that facilitates economic growth and prosperity. The payrolls of members of the armed forces and police could have gone to employ teachers, health workers and other productive workers. But this wish list cannot be realised when violence and armed conflict destroy and cancel out every social welfare investment made.

Society has to deploy resources to protect lives and property not because it prefers to do so but because it is compelled to by the behaviour of people who mean to harm its citizens. In a utopian world, there would be no need for security forces because society exists in perfect harmony. Unfortunately, Nigerians do not live in utopia.

Whose money is it anyway?

By Tunde Obadina

In its endeavour to shore up the naira currency the Central Bank of Nigeria (CBN) has in recent months taken steps to curb domestic use of foreign currencies in Nigeria. It  barred authorised money dealers from importing foreign currency banknotes without prior approval and stipulated that beneficiaries of international money transfers must be paid in naira only. The regulator has also tightened restrictions on the operation of bureaux de change to limit demand for hard currencies.

According to monetary officials Nigeria has become one of the world’s largest importers of US dollar notes. Restricting domestic use of foreign currencies, they believe, is necessary to combat money-laundering, especially by corrupt politicians and Islamist insurgents. The CBN also wants to counter what it says is the dollarisation of Africa’s largest economy. Its aim of checking money laundering is undoubtedly commendable; but corruption is not the only driver in the growth in local usage of foreign currencies.

There are many legitimate reasons why people may choose to hold dollars or other currencies in preference to the local currency. Lack of confidence in the national monetary system is an obvious reason. Individuals and businesses may believe their interests are better served storing their wealth in assets that are more stable and less prone to losing value in the foreseeable future.

Money is in some ways similar to debt. Unlike barter, where people exchange commodities that both parties can immediately ascertain their respective value, a monetary transaction involves the seller receiving an item that has no inherent worth. The real value of money is determined at the time of its application as a means of exchange. For example, when customer A gives one dollar to shopkeeper B for a bar of chocolate, A receives a product which has instantly realisable utility. For B the actual worth of the dollar note will only be known to him when he deploys it in a future transaction. At that later time its purchasing power may provide more or less chocolate as at the time he accepted the note, depending on whether the currency has meanwhile appreciated or depreciated. When the seller exchanged his chocolate for money he acquired a note that contained a promise of future entitlement. He took a risk in doing so. He entered the transaction because he believed that the asset he receives will retain a value that is at least close to its present worth. His faith could prove to be misplaced, if when he comes to spend the money it buys much less in value than the chocolate customer A had long digested.

Given the volatility of money, the choice of people living in economies with high inflation and weakening local currencies to hold some of their wealth in sturdier foreign currencies is rational. It is a way to protect against risks of devaluation. Needless to say, governments and central banks throughout the world intensely dislike their citizens using foreign currencies. This is because the practice undermines their control over the financial system and the economy. The effectiveness of monetary policy is limited if members of the public can choose to ditch government-issued money in favour of other mediums of exchange and wealth storage.

Control over money supply is arguably the most wide-reaching and effective means the state has to affect the lives of individuals within its domain. People can ignore or circumvent most government regulations, such import bans and licensing laws, but holders of the national currency cannot easily escape the effects of state monetary actions. For example, when governments print large amounts of money, thereby fuel inflation, their action invariably devalues the money in the pockets and bank accounts of all who possess the currency. Citizens can evade paying direct taxes, but they cannot easily avoid the taxation effect of money printing. The state does not need to know of your existence or location to take your money.

Currency shifting by individuals and businesses to protect their wealth against the effects of poor state financial management is not peculiar to developing countries.It is world-wide. It is one of the reasons that the export of dollar notes is a big U.S. export. The relative stability and strength of America’s financial system is also a reason why individuals, businesses and governments across the world deposit most of their external reserves in the U.S.

In a free society individuals may hold their wealth in any form that does not violate the property rights of others. Individuals alone assume the risks involved in their investment decisions, including any limitations on the number of people willing to accept the currencies they possess. Some readers may think that this libertarian perspective only benefits rich people with money. This is not so. Poverty does not mean being penniless, it is having very little amounts of money. This is why the opportunity to choose currencies that are least susceptible to depreciation is important for the poor. A subsistence farmer who saves 5,000 naira in an economy with 10% annual inflation rate will find that after a year his nest egg is worth only 4,500 naira in real terms. Had he changed his money into a more stable currency, the value of his meagre savings would have been better preserved.

Currency shifting is not necessarily an act of national betrayal. It is the case that rich people in developing nations keep much of their wealth in foreign assets, including overseas bank deposits.

Wealth inequality is unjust when caused by plunder

By Tunde Obadina

As elsewhere in the world, wealth and income inequality has grown in Nigeria during the past six decades. The country’s richest tycoon, Aliko Dangote, is worth more than $20 billion while the poorest villager has close to zero in assets. More broadly, the counts of dollar millionaires and billionaires have soared, especially over the past two decades.

No reliable wealth data exists for Nigeria, but it safe to say that the average income of the richest 0.01% families has risen much faster than those of the poorest 0.01% or bottom 99.99%. A recent Wealth X and UBS report estimates that in 2013 there were 600 ultra high net wealth individuals (UHNWI) living in Nigeria (those with assets totalling at least $30 million), up from 455 in 2012. A New World Wealth report reckoned that in the same year 15,700 Nigerians possessed net worth of at least $1 million and projected that the number would rise to 23,000 by 2017. Although Africa is the region of the world with least number of super-rich, most global wealth management consultants believe that the late developing continent is likely to see the biggest increase in UHNWIs over the next decade, with Nigeria leading the increase.

Many factors can drive wealth inequality. The two most important are wealth creation and plunder. The latter entails the use of force or fraud to seize wealth that belongs to others, whereas wealth creation involves the use of resources in free exchange to produce goods and services for gain.

I have no objection to individuals becoming super-rich through enterprise and free exchange. What is objectionable is inequality that stems from plunder. By plunder I mean more than illegal theft of public property as in bribery and embezzlement. Politicians and their cronies dipping their hands into the public coffers is only a part of the everyday plundering that fuels income inequality.

Arguably the main driver of modern-day wealth inequality is legal plunder. This is when power is abused within the confines of the law to ascribe benefits to some people at the expense of others. French 19th century economist Frederic Bastiat wrote that to identify this form of plunder: “See if the law takes from some persons what belongs to them, and gives it to other persons to whom it does not belong. See if the law benefits one citizen at the expense of another by doing what the citizen himself cannot do without committing a crime.”

Legal plunder occurs in many ways, enabling the powerful and well-connected to make money they did not worked for. Here are a few examples: Awards of lucrative oil concessions at favourable terms Waivers, subsidies and tariff restrictions that enable privileged businesses to trade at lower cost than their competitors. Government bailouts that provide relief for defaulting wealthy borrowers. Foreign exchange round-tripping – buying hard currencies at lower official rates to sell at higher rates in the free market. Banks taking government deposits, then lend the money back to the state at profit.

Financial gains from legal and illegal plunder enable the powerful to acquire capital that boost their stake in the economy. Capital is any asset that can be owned and can generate income, such as rent, interest, dividend, royalty and profit. Unlike labour income, which is derived from work, capital income is a return for ownership of an asset, requiring no work input.

Wealth inequality is largely due to uneven possession of capital. The richest 0.01% of populations in virtually every country in the world owe most of their wealth and income to ownership of capital. Some built their stock of capital through self endeavour, but sadly a large segment of the hyper-rich accumulated capital mostly through legal and illegal theft, often by their ancestors. Gains from plundering enabled today’s powerful and well-connected to accumulate capital assets, such as land, factories, privatised state-owned utilities, oil and gas concessions and financial institutions. They built fortunes through what is for them a virtuous cycle whereby ill-gotten gains go to buy legitimate assets that then act as collateral to obtain big bank loans to purchase more revenue generating assets. It is a form of money laundering – dirty money is cleansed by being invested in legitimate assets.

It is difficult, if not impossible, to determine how much of the wealth of crony capitalists is owed to dishonesty and patronage and how much to genuine enterprise. How do we determine how much of the profit made by tycoon owners of cement companies that have been bolstered by state subsidies and tariff restrictions stemmed from their entrepreneurship and how much from legal plunder?

In an evolving economy like Nigeria, income and wealth inequalities are inevitable. Individuals differ in their luck and entrepreneurial abilities, while the politically powerful will invariably use their strength to grab for themselves as much wealth as they can get away with. This is why it is important that the state, as much as practically possible, is stripped of powers that can be exploited by its agents to plunder. While some levels of inequality are unavoidable and happens everywhere, it is possible to change the rules to move to a more even playing field.

Growth in private education in Africa

The remarkable growth of private schools in Africa in recent decades is a good example of how when people are left to their own devices they can solve problems of scarcity. As an article, Budget private schools: solution to Africa’s education woes?, published in the Financial Times shows private education in developing economies is not only for members of the middle and upper classes. The article states:

“There are an estimated 18,000 private schools in Lagos, which has a population of 21m. Around 1.5m children attend private primary and junior secondary schools, accounting for about two thirds of enrolment, according to the UK Department for International Development (Dfid). By contrast, Lagos has just over 1,600 government schools, though their average student populations are bigger.

The fastest-growing private schools are those which originate in slums and other low-income areas, are owned by local entrepreneurs and cater to a clientele living on $2 a day or less.”

Some believe it is inappropriate for profit-seeking companies to own and operate schools. Education, they argue, is a precious institution that should be solely or mainly the responsibility of government. The FT wrote:

“The role of the private sector in providing education for the poor remains contentious, however, with the United Nations special rapporteur on the right to education recently warning that private providers were in danger of supplanting, rather than complementing, the public sector

“Governments must make every effort to strengthen their public education systems, rather than allowing or supporting private providers,” he told the UN General Assembly in October. “For-profit education should not be allowed in order to safeguard the noble cause of education.”

The notion that education is a noble cause that is devalued by the involvement of for-profit providers is part of a moralistic thinking that threatens economic development and poverty reduction in countries struggling with low levels of human capital. There are many opinions on what is the prime purpose of education. Just a few obtained from the internet includes to prepare students to live; teach to think intensively and critically; bring people to the realisation of what it is to be human; and develop the learner for living morally, creatively and productively in a democratic society. Without meaning to question the subjective idealism contained in some the definitions, it is safe to say that most parents invest in their offspring’s schooling because they expect the institution to teach their kids useful skills and enable them to obtain qualifications that should improve their prospects in the job market. Poor people see education as a way out of poverty.

Whether viewed as a vehicle for enlightenment or a means of human capital enhancement, schooling is a service that can be effectively provided in the market. Indeed, it is because education is a major contributing factor in the preparation of children for interacting in the world that its provision should not be left to the state. As the Financial Times article explains, it is the failures of public schools that has driven parents from all social classes to look to the private sector.

Reasons to be positive about economic growth in Nigeria

By Tunde Obadina

The familiar story of Nigeria is that of a nation that has made little or no economic progress since the British left the country in 1960. Africa’s most populous nation is seen as an incompetent giant, mired by corruption, ethnic strife and unrelenting poverty. The country is more often listed with ‘frontier’ economies than placed among emerging economies. This view of Nigeria as a big disappointment is, however, not supported by facts.

Between 1980 and 2013 Nigeria’s annual real GDP growth averaged 6.04%, according to the International Monetary Fund data. This was slower than the super-fast 9.86% clocked by China but only slightly slower than India’s 6.13% and faster than 5.21% attained by Indonesia – countries that Nigeria is often unfavourably compared with. The West African country’s per capita GDP, based on purchasing power parity, rose from US$889 in 1980 to US$5,720 in 2013, while over the same period India’s per capita income increased from US$571 to US$5,450, which suggests that Nigeria is now slightly richer than India.

Nigeria has not lagged behind in relation to other economies in the world. Its share of total global output doubled from 0.48% in 1980 to 0.95% in 2013. Though still much less than its 2.5% share of total world population, its growing contribution to world output is narrowing the wealth gap with developed economies. In 1980 the U.S. economy was 47 times larger than Nigeria’s while its GDP per capita 14 times bigger. In 2014 the corresponding differences was 16 and 9 times respectively.

There are some who acknowledge that substantial growth has occurred in Nigeria but diminish the achievement by arguing that virtually all the gains have gone to the rich, leaving the poor masses stuck in absolute poverty. This is another unwarranted claim. Notwithstanding that living conditions of tens of millions of Nigerians remain dreadfully low, there has nevertheless been clear evidence of improvements in the standard of living of increasing numbers of people since independence. The proportions of Nigerians suffering hunger and malnutrition have fallen over the decades; more people have access to modern healthcare, clothing and shelter than did in 1960 and 1980. Access to primary education is no longer limited to a minority of children and attendance of secondary schools and higher education institutions have risen substantially. Indeed, the phenomenal increase in populations of Nigeria, as with other African countries, over the past sixty years has in part been due to the improvements in social conditions.

Markets have evolved in Nigeria, as elsewhere in Africa. When the lifestyles of today’s generation of Africans are compared with those in the early 1960s, it is evident that a greater portion of people have many more choices now than they did at the end of colonial rule or at any other time in history. Many of the products and services we now regard as essentials today were either unavailable or affordable only to a tiny minority in the 1960s. For example, many of the pharmaceuticals purchased by ordinary folks today had not been developed in the mid-20th century. Few people wore manufactured shoes, used modern kitchen utensils, commuted in motorised transport systems, owned radios, drank treated water, etc.

Traditional rulers and political leaders who reigned six decades ago may have been socially and politically supreme, but their material standards of living were in many ways inferior to those of today’s middle-class and even segments of the poor.

A mistake made by those who contend that there has been little meaningful economic development in Nigeria is to base their assessment mainly on the performance of the state. They equate enduring official corruption and mismanagement as well as slow growth in government social spending with lack of progress. But economic growth and poverty reduction have not stemmed mainly from public sector programmes, but from the activities of private individuals and companies operating in evolving markets. The part played by governments has been to implement liberalisation reforms which have to some extent loosened the state’s crippling grip on the economy.

People have not been waiting helplessly for governments or charity organisations to rescue them from poverty as some international aid organisations would like us to believe. They have, to the best of their knowledge and abilities, engaged in production and trade. They have also benefited from the expansion of international markets, especially the rise of China as a global workhouse for the production of cheap manufactured goods.

Acknowledging progress in Nigeria and other African countries is not to deny that too many people in these places still live in poverty or to suggest that economic growth and poverty reduction could not have been faster. The point is that the notion that Africa is caught in a never-ending poverty and underdevelopment trap is absolute nonsense.