Category Archives: Economy

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.

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.

The high cost of government economic intervention

By Tunde Obadina

In its Economic Development in Africa Report 2012 published recently, the United Nations Conference on Trade and Development (Unctad) focuses on the continent’s dependence on natural resources as drivers of economic growth. The agency noted that though Africa has experienced relatively fast growth since the start of the new millennium, the pace of the expansion is unsustainable. Also the growth has not been matched by poverty reduction. Unctad is right to be concerned at Africa’s current situation of little or no industrialisation, rapid urbanisation and its growing working population. According to the UN body, for African countries to avoid the future consequences of depleted natural resources and economic underdevelopment they must sooner than later undergo a process of structural transformation to create economies that are driven by gains in productivity in manufacturing, services as well as agriculture.

Few people would disagree with the assertion that African nations should move away from reliance on producing primary products and at the same time transform their agricultural sectors to boost their productivity. The question is how this process of economic evolution will occur? Unctad proposes a leading role for the state. It urges African governments to become proactive in promoting structural transformation, including introducing subsidies and regulations to induce producers to adopt productivity enhancing technologies. The problem with this advice is that it ignores the fact that state intervention has largely been to blame for the inability of individuals and companies in resource-dependent countries to diversify and industrialise.

The challenge facing people in Africa is how to produce a much wider variety of goods and services that consumers want and at prices they are prepared to pay. It boils down to supply and demand. What is lacking are modern productive units; i.e., firms that are organised for the sole purpose of creating goods and services for the market. There are tens of millions of subsistence farmers in rural areas and petty traders in cities who exist by scratching out a living, doing all sorts of things. But there are relatively few modern firms. It is they that provide the organisational context for the efficient combination of the factors of production. Firms do this largely through a division of labour, which enable workers to specialise in one or a few functions within the production unit.

Before we can talk of pre-industrialised societies increasing industrial productivity to generate more wealth and better utilise scarce natural resources, there must first exist firms with capacity to maintain modern economic production. When a country has few factories there is little sense in advising it to boost manufacturing productivity. What it needs at the initial stages of economic development are more factories. There must be initial investment in bringing together the ingredients of production in a modern form of production before major gains in productivity are attained. The reality is that most African countries lack an industrial base from which to grow.

A primary reason for this unfortunate situation is that the overall costs of production for most goods and services in most African countries are too high for potential investors to reasonably expect to profit from establishing production units. In other words, entrepreneurs will not deploy money or effort to set-up businesses in an environment that offer investors little or no prospect of worthwhile gain. It is the bleak outlook for making profit that more than anything else explains the shortage of investment in manufacturing in Africa. High production cost is a more important impediment to industrialisation in Africa than is the often cited explanation of lack of financial capital. If the business operating conditions in a society are conducive to making profit we can be sure that capital will flow there.

Many factors contribute to the high operating cost environments in Africa. Most of these stem directly or indirectly from state intervention in the economy. Government policies and the behaviour by state agents that hinder the flow of economic resources, such as trade restriction and corruption at sea port, minimum wage laws, inefficient tax regimes and excessive bureaucratic regulations, have an impact on production costs. State monopolies in energy provision and fixing of energy prices are often largely to blame for shortages of electricity supplies and their high cost. Virtually every economic decision taken by government has cost implications for some or all producers. For example, when the state prohibits the importation of certain goods, ostensibly to protect local industry, the resulting delays and corruption at ports of entry increase the costs of shipment clearance for all importers. Government deficit spending that leads central banks to print money and thereby fuel inflation, push up borrowing costs for producers.

Most African countries have abundant supply of low wage, low-skilled labour but this is not enough for industrialisation in the 21st century, even via labour-intensive activities. Unfortunately, most African countries lack the skilled workers to fuel rapid growth in manufacturing and high-skilled services and too often misguided government policies impede the inflow of human capital from abroad. For example, immigration restrictions make dearer the cost of hiring foreign workers to perform tasks that can raise productivity and for which there is shortage of capability in the local labour market.

Governments do have an important role to play in the structural transformation of underdeveloped economies. This role is to stop impeding the effort of their citizens to create wealth for themselves. As labour costs rise in China, there are increasing opportunities for some African countries to enter export orientated labour intensive manufacturing. To achieve this, African governments must cut private enterprises some slack to enable them to produce at costs and quality levels that are competitive with growth hungry Asian countries outside of China and under-exploited inland areas in the Asian powerhouse.