Author Archives: Tunde Obadina

Myth of rising poverty in Africa

By Tunde Obadina

President Goodluck Jonathan’s chief economic adviser, Nwanze Okidegbe, late last year refuted a claim credited to the World Bank Country Director in Nigeria that 100 million Nigerians lived in extreme poverty. Okidegbe rightly described the proposition and its implication that impoverishment is deepening in Africa’s most populous nation as spurious and astonishing.

What was interesting in Okidegbe’s response was his argument that 100m Nigerians could not be living on less than US$1.25 per day (roughly 200 naira) as this level of income is barely enough to enable an individual buy a loaf of bread in many parts of Nigeria. Furthermore, he noted, the fact that about 112 million Nigerians are active mobile phone subscribers suggest that this is not home to 100 million destitute people. To buttress this point, a recent survey by Abuja-based NOI Polls reported that about 80% of Nigerians spend at least $1 a day on food. All this indicates that the depressingly high poverty figures that the World Bank and other international development agencies publish for Nigeria do not tally with prevailing conditions in the country.

The World Bank appears to have realised the error in its presentations of poverty in Nigeria. In its Nigeria Economic Report for July 2014 the bank submitted that poverty levels in Nigeria have probably been over-estimated, and this has been mainly due to faulty data produced by the National Bureau of Statistics (NBS), a Nigerian government agency. The report explained that the latest NBS poverty estimates were based on a 2009/2010 national household survey that probably underestimated consumption levels in the country. Using data from two subsequent surveys, conducted in 2010/2011 and 2012/2013, the bank calculated that the poverty rate in Nigeria fell from 35.2% in 2010-2011 to 33.1% in 2012-2013. This is significantly less than the 62% poverty rate derived from the unreliable 2009/2010 household survey. The World Bank report concluded that 58 million people in Nigeria live in extremely poverty – not 100 million as earlier claimed by the head of its mission in the country.

Nonetheless, international organisations such as the United National Development Programme, continue to publish data claiming that about 100 million people in Nigeria are acutely poor. Even the World Bank in its Global Monitoring Report 2014/2015 published in early October 2014 stated that 10% of the estimated 1.01 billion people in the world living on less than US$1.25 a day are to be found in Nigeria. Some readers may think that it does not matter much whether the number of extremely poor in Nigeria is 100 million or 58 million or whether the rate is 62% or 35% – clearly poverty remains a major problem in the country, regardless.

It certainly matters whether the poverty level is closer to 100 million or nearer 58 million The 42 million difference is greater than the combined population of at least nine countries in West Africa. Overstating poverty in Africa’s most populous nation by such a large amount clearly has implications for the accuracy of poverty figures published for the continent. Deduct 48 million from the 415.4 million people that the World Bank reckons were extremely poor in sub-Saharan Africa in 2011, we are left with 367.4 million, which suggest that the region did not have the highest number of acutely poor in the world, as claimed in the bank. In South Asia 399 million people lived on less than US$1.25 per day.

The fact that penury is actually falling in Nigeria does not mean that poverty is not a major issue in the country. It obviously is. If we use a global US$10 per day per person at purchasing power parity as the income/expenditure threshold to enter the middle class, at least 95% of Nigerians exist at some level of poverty. But as high as this is, poverty has been falling. Judged by today’s living standard the poverty rate in Nigeria half a century ago was probably over 99% and vast majority of the population were extremely poor.

Finance – The magic app Africa needs to develop

By Tunde Obadina

In his book, Civilisation: The West and the Rest, economic historian Niall Ferguson contended that Western Europe was able to out-develop other regions of the world because it developed what he described as six killer applications that others lacked. These were competition, consumerism, democracy, medicine, science and work ethic.

There is no doubt that in the period leading to the industrial revolution European countries exceeded in these areas, at least five of them. It is debatable whether Europeans were harder workers or believed in the goodness of labour more than peoples elsewhere in the world did. Nonetheless, Ferguson’s thesis has merit over the works of many other analysts who have explained Europe’s material advancement in terms of geography, climate, culture or politics, though it is unlikely to be the last prognosis on the fundamental drivers of Europe’s economic advance. It is debateable whether the six apps identified by Ferguson were root causes or the consequences of Europe’s wealth creation. It may be that European countries had more competition and consumerism and better education and medicine because they were wealthier than other nations.

People in other regions knew science and medicine in the pre-industrial age, but Europe was able to push ahead in these fields because it had the material resources to invest in their development. Competition, consumerism and the work ethic are also the consequences of increased economic activity and wealth. As for democracy, it is debatable how much of it existed in mid-eighteenth century Britain. In any case modern day China and some other non-democratic Asian countries have achieved rapid economic growth without this app.

There is one crucial element missing in Ferguson’s growth enhancing apps list. It is financial innovation. This is the creative use of money/capital to enable production and trade and thereby create wealth. Although all regions of the world used money in one form or the other in pre-industrialisation eras, it was in Europe that financial innovation developed and became integral to economic development.

We cannot comprehend the occurrence of the industrial revolution without understanding the role of financial institutions in its emergence and evolution. The rise of manufacturing could not have happened without the operation of financial institutions such as banking, insurance, joint stock and debt. It was the fuller understanding that money and capital can be used to create wealth that gave Europeans a considerable advantage over others. Financial innovation enabled people and companies to share risks, share ownership, mobilise resources for production, generate future wealth, and dare I say, spend beyond their immediate earnings.

In a modern economy, virtually every aspect of production, distribution and consumption is underpinned by finance. A subsistence farmer may, without need for money, use his hands to plough his land and gather his crops. But if he is to increase output, he is likely to require money to obtain inputs such as fertilizer, seeds, ploughs etc. Beyond a certain level of pure labour productivity it is capital and the knowledge of how to use it that creates additional wealth. A commercial farm owner uses money to buy labour, equipment and services needed to produce at a profitable level. Of course, he could exchange some produce for the work of labourers, but it is not feasible to use barter to acquire a tractor or the fuel to run it. Financial debt allows the farm to pay labourers for work and to pay suppliers for other inputs needed to create wealth. Financial instruments allow individuals and companies to pay for the production of goods and services before the items reach the market and generate revenue.

This is not to say that all economic production issues can be simply solved with money. A subsistence farmer cultivating a tiny plot of land with potential to generate a maximum of $1,000 in annual revenue is unlikely to be given a commercial bank loan of $10,000 at 10% interest rate to buy a tractor or other input. This is not because bankers do not appreciate the importance of food, but the fact that the farmer is unlikely to be unable to service the loan. Even here, money used as a measure of value helps us to assess the present and future commercial viability of any given business endeavour.

Finance is one of the most vital elements in the allocation of scarce resources in a market economy where decisions on production and consumption are based on assessments of value. We should be careful in the current social climate of distrust of bankers and other financial services practitioners that we in Africa do not undervalue the importance of finance in economic growth and development. African countries need to develop systems for financial risk sharing, savings and debt management to enable economic collaboration between individuals across ethnic, national and regional boundaries.  A modern financial system enables people with excess funds in one part of the world to invest and share risks with strangers in another of the planet. This could involve all sorts of activities – the building of factories, construction of railways, planting of new species of crops or setting up of novel services.

Fighting terrorism cost money

By Tunde Obadina

The failure of the Nigerian security forces to recover the more than 200 schoolgirls abducted in April by the Islamist insurgency group, Boko Haram, has generated much public anger at home and abroad. President Goodluck Jonathan has been derided by all sorts of groups amazed by the inability of his administration to find and rescue the girls. As understandable as this outrage is from a moral perspective, much of the criticisms have side stepped the real dilemma facing Nigeria in dealing with the Boko Haram insurgency.

It is obvious that Nigeria’s military and police forces lack the competence to adequately protect citizens against the onslaught of Boko Haram, a ruthless group that has over the past five years grown in military and operational capabilities. But the common suggestion that the inadequacy of the security forces is mainly due to corruption and indifference is plainly over-simplistic. Also dubious is the idea that poverty is the underlying cause of the unrest in parts of the north, leading to the conclusion that the solution to the crisis is more development spending in the affected areas. Without meaning to diminish the importance of reducing poverty in any part of Nigeria, the linking of organised violence with poverty stems from false assumptions. Boko Haram militants do not bomb or kidnap civilians because they are by poor – the movement is comprised mainly of religious fanatics who want to topple secular government to impose their version of Islamic dictatorship.

To defeat Boko Haram and other terrorist groups the Nigerian state must devote much more resources to developing its capacity to protect the lives and property of citizens. The view that government already spends large sums of money on security is simply baseless. The fact is that government expenditure on security as a ratio of GDP in Nigeria is one of the lowest in the world. Federal budget allocation to the security sector, which includes the military, police and the state security service, rose from US$3.3 billion in 2009 to US$6 in 2013. Despite the doubling in allocation, the current level amounts to only 1.17% of the country’s GDP, which is very low. Much is said about the incompetence of the Nigerian military, presumably compared with armed forces in more developed parts of the world, but few critics consider that annual budgetary allocation for defence in Nigeria is about US$2.3 billion, equivalent to just 0.5% of GDP. This compares with the United States which spends about US$680 billion (2.5% of GDP), Britain US$61 billion (2.5% of GDP) and South Africa US$4.6 billion (1.3% of GDP). It is hardly surprising that U.S. counter-terrorism capabilities are far superior to Nigeria’s considering that spending on homeland security in America rose from about US$17 billion in 2001, before the 9/11 attack, to nearly US$70 billion in 2013. Similarly, it is not amazing that the British police force is a more capable fighter of crimes than the Nigerian police, considering that UK taxpayers pay about US$20 billion a year for police services compared with US$2 billion spent in Nigeria.

Some readers will retort that is misleading to compare government expenditures in poor and rich nations and make the valid point that Nigeria can only spends what it can afford. But the cost of an effective security service does not depend on the wealth of the nation or client but on the cost of the factors needed to achieve the desired level of safety. The fact that the security forces in Nigeria lack basic equipments required to operate effectively is not made less consequential because the country is poor. The minimum amounts of human and physical capital needed to establish an effective intelligence and surveillance networks is not lessen by consideration of financial constraints.

The bottom line is that the Nigerian security forces lack the capabilities to adequately deal with Boko Haram largely because they are poorly trained and poorly equipped for the job. They are lacking in all kinds of essential instruments, including facilities for transportation, surveillance, communications, data gathering and analysis, combat and combatant safety. The reality is that modern day soldiering and policing are more capital intensive activities than they were in previous eras. Strength depends on expensive hardware as well as costly human capital, including stocks of knowledge and cognitive skills.

No matter what opinions critics have about the competence of the Nigerian government, the fact is that the current level of financing of the security forces is grossly inadequate for dealing with the many different conflicts raging in the country. The issue that should be debated is how to radically reprioritise state spending. Indeed, the situation calls for redefining the nature of the state. Government, already facing mounting domestic and foreign debts, may have to drastically cut or totally eliminate its involvement in some non-security spheres of activity to free up resources to improve its ability to protect the lives and property of the citizenry, which is the prime purpose of the state. How to achieve this restructuring is the real dilemma in the fight against Boko Haram.

Needless to say, increasing financial provisions for the security services will not invariably improve their ability to better protect civilians. Not much would be gained if any extra funding is mismanaged or diverted into the pockets of officials. However, the potential for corruption cannot be a reason to leave the state weak in its ability to maintain law and order.