My evening last Monday was made when a friend, Emmanuel Ado, forwarded me a news report on CNN indicating that the trio of Daron Acemoglu, Simon Johnson and James Robinson had been awarded the Nobel Prize in Economics. The report was titled ‘Nobel Prize in Economics awarded to the trio for explaining why some nations are rich and others poor.’ They won the $1 million prize for their work in proving that “societies with poor rule of law and institutions that exploit the population do not generate growth or change for the better.”
In upholding the work of the economists, the Nobel Committee said “When Europeans colonized large parts of the globe, the institutions in those societies changed.” It also noted that “the laureates have shown that one explanation for differences in countries’ prosperity is the societal institutions that were introduced during colonialism.” The report states that “countries that developed “inclusive institutions” – which uphold the rule of law and property rights – have over the time become prosperous, while those that developed “extractive institutions” – which, in the laureates’ words, “squeeze” resources from the wider population to benefit the elite – have experienced persistently low economic growth”. That must be Nigeria!
Acemoglu and Robinson in their 2012 book “Why Nations Fail,” argued that some nations are wealthier than others because of their political and economic institutions. Such arguments had also been developed by Prof. Jeffrey Sachs in “The End of Poverty,” and Abhijit Banerjee, Esther Duflo in “Poor Economics,” as well as Robert Allen in “Escaping Poverty,” and Paul Collier in “The Bottom Billion.” Prof. Amartya Sen rendered this logic beautifully in his seminal work “Development as Freedom.” In all these, they advocated institutional and policy reforms as the best way to see countries of the world through the poverty index. By advocating institutional reforms, these thinkers look at new policy frameworks that would drive pro-poor decisions, and achieve social protection and inclusive budgeting. These policies would drive towards achieving institutional strengthening through capacity building, transparency and accountability as well as social mobilisation for participatory leadership. I am afraid they were facing Nigeria while developing their thoughts.
But it seems these books, and recommendations, are not available to Nigeria’s leaders. Or, that the logical propositions of Acemoglu, Johnson and Robinson mean nothing to our leaders. Somehow, Nigeria’s leaders refuse to see the connection between the policies they adopt and the downward growth of the economy. If, as the Nobel Committee said, “when Europeans colonized large parts of the globe, the institutions in those societies changed,” it is because the colonialists instituted policies that ensured the functionality of government institutions and guaranteed the operationalisation of the rule of law as a governance norm. The downturn of events and the failure of such institutions afterwards, developed from the tendency of political leaders who came after the colonialists, especially, the present crop, to adopt policies that made government institutions function as emanating from their benevolence, and solely, to serve personal purposes. This is why everyone ought to be worried; because if leaders refuse to see the failure of the economy as the direct outcome of their policies, then, the country is doomed to go down further.
The basic fact is this: government policies can significantly impact an economy through various channels. Examples abound. For instance, through its fiscal policy, the government can create changes in tax rates, and approve tax brackets, or tax incentives to drive investment and achieve economic growth. Through such a policy, the government can drive the interest rate to be low or high and stimulate or stunt investment. But, I am lost as to whether the government realises that with the interest rate at 27.25% (Sept. 24, 2024), investments will be difficult to achieve. The fact, however, is that the Nigerian leadership ought to accept that its policies directly create negative vibes in the economy and drive down growth. This is because such policies have their impact on public expenditure, borrowing, investments and interest rates.
Policy on interest rates influences borrowing costs, impacts money supply and affects money in circulation. Money in circulation affects inflation and economic activities. This impacts the purchasing power of the people and determines their capacity to pay for goods and services. Simply put, government policy impacts investment, consumption, and productivity. They also impact the labour market and job creation initiatives, innovation, social welfare, and economic inclusiveness. The outcome, if properly managed, will most likely be an inclusive economy which drives growth and expansion.
However, what Nigerians now have is a policy regime that has increased inflationary pressures, reduced economic efficiency through a drop in productivity as more workers observe a three-day work week, increased debt, expanded inequality, poverty, and reduced mobility as well as increased social tensions. These, are, to my mind, the direct outcome of government policies that are designed not with the good of the generality of the people in mind, but with certain targeted beneficiaries. This is the reason that whatever the government calls reforms, have delivered more pains than gains from inception more than 18 months ago.
The government still has the opportunity to change the tide and give a human face to its policies. It can do this by borrowing a leaf from the US Tax Cut and Job Act (TCJA) of 2017 which led to significant overhauls of the US tax code and lowered tax rates on wages, investments and business income as well as slashed corporate income tax by about 20 percent which radically made the US economy more competitive and increased investments and job creation opportunities. Nigeria can also borrow ideas from China’s Belt and Road Initiative (BRI), which helped to increase investment in transportation infrastructure, energy and industrial parks, boost exports by opening up new markets for Chinese goods, and also caused an increase in job opportunities through new investments among many others.
For Nigeria to pull through, therefore, it must take more than a cursory look at the recommendations of Acemoglu, Johnson and Robinson in other to see the connection between its policies and wealth creation as well as the connection between the creative emasculation of institutions of government for personal gains and the progress