Economic Sectors – Not Complementary
No agreement today, no agreement tomorrow – Fela Kuti
Capable societies are those that have enforceable institutions of public value, while incapable societies lack them at national and local levels. Such nations are mainly in the Global North. It is easy to identify nations in the Global South as incapable of such enforcement. Public value can be economic or social. Accordingly, incapable societies cannot create public value by themselves. They can only extract it and thus live on dependency. If they have mineral riches, they become rentier states. Otherwise, they stand as highly indebted nations ever seeking technical help. Surviving on begging bowl economics.
Notwithstanding, neoliberal logic assumes all nations are equal before the market (cf. Ha-Joon Chang’s Kicking Away The Ladder). Thus, the economic performance of nations we measure with comparative metrics that say little and encourage further assumptions about nations. We use Nigeria as an example.
Unsurprisingly, an overt consequence of unenforceable institutions in the Global South is a triad of political, economic, and social disaster. Otherwise, local pundits promote an abstract free market as the only solution to the disaster despite decades of failure. The actual picture of Nigeria is much worse. Yet, every institution you find in an advanced country, you will also find in Nigeria unenforced. But to what purpose?
Perhaps the question most people avoid in the development arena is simple. How do societies in the Global South enforce consistent institutions of public value as a core necessity of governance? While post-colonial nations adopt formal institutions in their governance, they also have informal institutions, such as patron-client relationships and special interests. The informal counterparts underlay the formal institutions and compete with them, often dominating. Hence, it is difficult to coordinate an economy whose informal sector is over two-thirds of the total output. Many aspects of the real and formal sectors occur within the informal sector.
Nevertheless, the political economist Claude Ake offers us an insight into the covert outcomes of such institutional distortions and failures. “Economic sectors do not complement each other.” How do you coordinate an economy where the interests of one sector conflicts with or undermine that of another sector? Look at the complexity of manufacturing, for instance. It comprises consistent multisectoral inputs, standards, values, outputs, and coordination. Hence, in incapable societies in the Global South, industrialisation or sustained growth are unlikely to move any further than a good attempt. Most of the time.
Economic sectors complement each other only when their vertical or lateral interconnections increase the level of aggregate productivity and reduces misallocations within the economy. This is not the case in many parts of the Global South.
Nigeria’s fuel problem is its most visible example. Rapacious political patronage is the sole cause of the low productivity of Nigeria’s fuel refineries. The government awards contracts and pays top political entrepreneurs upfront to maintain the refineries. Yet, the entrepreneurs barely ever execute them. One consequence is that Nigeria spends billions of dollars on importing refined fuels it has the installed capacity to produce at a much lower cost. And as expected, political bureaucrats often loot or squander valuable foreign reserves and importation deposits sometimes to the tune of $3 billion.
The government issued eighteen licenses in 2002 for the refining of fuels. In 2007, none of the refineries could get off the ground and the government withdrew the licenses. The political entrepreneurs thought BOT (Build-Operate-Transfer) would be a bequeath for rights of operation from foreign investors. Well, until the complexities of project finance gave them a sober awakening. The “oil curse” encourages political entrepreneurs to treat all businesses requiring foreign partners like crude oil extraction that feeds the high global demand. Such is a misplaced expectation of the rentier class.
For a long time, the government further steals from citizens by manipulating dubious oil subsidies, which results in dramatic fuel price increases at the pump. Furthermore, the subsidy fuel price problem leads to perennial general strikes, which also reduce aggregate productivity. Then, any fuel price hike increases inflation by high single figures. Yet, again, the rise of illegal artisan refining of fossil fuels to meet demand pushes the activity into the informal sector. The source of cruse of is undocumented crude oil from pipelines. Artisan refining increases carbon pollution in rural areas and creates soot cities. The economy and citizens suffer pollution and economic hardship all because the government ever mismanages its refineries.
Other examples abound.
The electric power sector should complement all sectors. Electricity is the juice that gives technology life and powers modern living. Nigeria invested $16 billion in electric power development between 2000 and 2007 only to privatise blackouts to the market. Many political contractors became rich out of the investment. But Nigeria has one of the most derisory power supplies in the world. Businesses small, medium, and large must provide their own standalone electricity supplies to operate without interruption. And at three to six times the cost of national grid electricity, excluding the purchase of generators and maintenance costs.
Astonishingly, the Electric power sector also fails today because local personnel lack skills and the forbidding costs of recruiting expatriate skills. Moreover, the new owners of power assets refuse to invest in the sector, a fact the government was well-warned about in advance. Who did the vetting of the new private owners? Since privatisation, a failure, Nigeria loses up to $100 billion in economic output per annum because of poor electricity supplies.
Now the Academic Staff Union of Universities (ASUU) has been on strike for several months and continuing. It is a perennial problem despite higher education being Nigeria’s major advanced skills trainer/provider. Globalisation encourages fiscal policy discipline by cutting spending on education. The government agrees and intends to starve universities into extinction in favour of private universities. Globalisation has already made sure that primary and secondary education is market activity. With surprise, most schools in that sector are substandard, staffed by unqualified teachers and cutthroat.
Ironically, the approval of the N1.3 trillion naira for investment and work conditions ASUU demands was a decision by Ngozi Okonjo-Iweala. She is Nigeria’s most famous neoliberal icon, but knew the value of an excellent education in development. Notwithstanding, every senior government official and elite, without exception, sends their children to schools in the Global North. Yes, at the minimal cost of N1trillion a year. Hypocrisy? Many striking academics are now seeking jobs overseas. Such worsens the pernicious brain-drain and the skill shortages problem noticeable across all sectors in the country. We deem the government’s under-investment in education as ludicrous.
Finance also should complement all sectors. The interest rates and charges for loans are high, say, a minimum of 12 percent and maximum of 35 percent per annum. This excludes the demand of bribes for loans and delays that favour special market competitors. Such interest rates discourage home-grown manufacturing, infrastructural projects, agriculture, and other long-term businesses. However, it favours import businesses that could make turnovers and repayments in under sixty days. The importation business is a reliable money-spinner, while local production struggles.
Besides technical superiority, multinational concerns gain easy advantage over local firms. Because of their access to cheap credit in their countries of origin with interest rates of less than 4 percent. But they must also repatriate profits and get preferential tax breaks. Most major indigenous tycoons seek foreign technical partners for this reason, rendering them compradors.
The government also does not complement its economic sectors. Its main bad habit is policy inconsistencies and project abandonment. For example, the government, on paper, discourages importation to boost national reserves. But the country produces little to meet its aggregate demand. Nigeria’s political economy is replete with policy inconsistencies that prevent coordination between and within every single sector. If so, how can the state or the economy become capable?
Briefly, the answer to these coordination problems once again is leadership. Nigeria has a long history of venal or mediocre leaders. Each leader creates his own billionaires, improvises his own rules, and leads like a dictator. He leaves the country worse than he met it, with a couple of exceptions. Institution building and enforcement are often the least of his concerns. Without leaders who enforce institutions of public value as a primary condition for their legitimacy, no amount of political vision or policy changes would make the state capable. Nigeria can then reduce mismanagement and increase productivity between its economic sectors. According to the economist Carlota Perez, such is no simple task, but doable. The government has a major role to play.
In February 2023, Nigerian voters will vote for a new president. What will the voters demand from presidential candidates before and after elections? They should remember Nigeria’s economic sectors are not complementary and the consequences of such.