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,, 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.

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.

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.

The Money Illusion

By Tunde Obadina

African politicians and policymakers have probably been watching with a sense of schadenfreude the unfolding drama of the public debt dilemma facing governments in the West. Not too long ago western commentators were poking fun at African nations crippled by high debt burdens, while multilateral agencies were advising African leaders on the wisdom of financial prudence.

Yet today government debt levels of most western nations are higher than those of many African countries when they were derided for their indebtedness. America’s public debt to GDP ratio is now around 106%, compared with Nigeria’s 60% before Abuja negotiated a debt buyback/cancellation deal with western creditors. As some economists have pointed out, US government debt is actually several times more than the official figure when the state’s commitments to future spending on welfare schemes are factored in. Today, Nigerian government debt to GDP is less 20%, below the level of debt of all developed nations, except Estonia. Perhaps a better way to view the debt burden of governments is to use the ratio of debt-to-government revenue. The IMF considered impoverished African countries with debt-to-government revenue ratio exceeding 280% as Heavily Indebted Poor Countries (HIPC) in need of debt relief. Today, the US federal debt is more than US$15 trillion and federal government revenue for this year is projected at US$2.6 trillion. I leave you to do the maths.

Before we get too carried away with the comparison between African and western debt levels, it is worth bearing in mind a major difference in debt management in the two areas. Unlike Nigeria before its debt restructuring, the US regularly services its debts. As long as it continues to meet its obligations, its debt burden is not an immediate threat to its economy. Debt becomes a problem when the borrower is unable or unwilling to service its loans, or when creditors fear it is going to default and as a result stop providing more credit.

Debt is not intrinsically a bad thing. It has been crucial source of financing for the establishment and operation of industries and infrastructure that have generated material prosperity in modern economies. Without debt it would have been difficult if not impossible to build railway systems, electricity power stations and manufacturing factories that require large amounts of capital. When loans are invested in projects that generate sufficient revenue to service the debt, indebtedness is not an unmanageable or unsavoury burden. All parties to the transaction – the borrower, the lender and the consumer – benefit.

Where debt is a problem and arguably immoral is when money is borrowed to pay for consumption, without prospect of revenue to service and repay the loan. Debt is particularly bad when the borrower acts in the expectation that somebody else will be lumbered with the repayment obligation. Here, not everyone benefits from the transaction. A striking feature of government debts today – both in the west and elsewhere – is that they largely comprise of this unwholesome type of debt. Basically, governments have and are incurring debts which are claims on future generations. Debt is being used as a means of enabling some of today’s generation to live off the earnings of future generations. This is what happens when government borrows to provide welfare benefits to people today or to finance military campaigns or to fund other non-revenue generating projects.

Although Nigeria’s debt to GDP ratio fell to 11.8% in 2006 as a result of the Paris Club deal, it has since risen to 18.3%, according to IMF data. The debt, mostly domestic borrowing, is liable to continue climbing as governments continue the habit of spending more than they earn. Most of the existing debt related to consumption expenditures, including payment of fuel subsidies and funding of unproductive state agencies. Even where government has spent on potentially revenue generating projects, such as power generation and distribution, the expenditure has been used for consumption. The billions of dollars spent by successive Nigerian government on the power sector over the past decade produced little extra electricity, only lumbered the present and future generations with debt.

The inequality resulting from government debt does not only affect the relationship between different generations but also that between different classes of people in the here and now. Besides borrowing from creditors, government also simply create money to fund their activities and even to repay their debts. One of the consequences of printing money is inflation – too much money chasing too few goods and services – which affects different groups in different ways.

Inflation may not be a problem for people who can offset the rise in prices by increasing their earnings. But individuals unable to do boost their incomes, inflation means a decline in living standards. One section of society so affected is the poor with limited or no earning capacity. So in printing money that fuels inflation government in effect robs the poor to enrich the better off. This has been the story in Nigeria and other parts of Africa where inflation rates have been high for decades.

The challenge facing people in both developed and developing nations is how to stop governments from running budget deficits, accumulating debt and printing money.It is essentially a political problem with economic consequences. Governments make claims on future generations and print money whenever they feel like it because they have power to do so. Today’s children and the unborn are powerless to prevent plundering adults from incurring debts whose repayment obligations await them in the future. While the poor, whose meagre earnings are eroded by inflation, may not be even aware that they are being robbed by elites who spend phantom money in the cities.