BENEFITS AS PUBLIC GOODS

One thing that’s clear to me from talking to Nigerians about their discontent is that they see the subsidized price of petrol, no matter any reasonable submission on its inefficiency, as one of their rightful benefits from a governance system that does not care about them. Any policy that cuts or takes this benefit away is viewed as perfidious at best.

The political payoffs may not be hard to work out, even within a formal-analytical framework. This attitude was actively fostered by successive and chronically corrupt Nigerian governments. With a political and fiscal system that only seeks to centralize power, the only way to peacefully loot the proceeds of crude oil, our “national resource”, is to create an adjunct benefit from the said resource in the form of subsidized petrol. The result is what we currently have where fixed and credible public goods like transport networks, power, and cost-effective policymaking were neglected for decades.

The Jonathan government elevated this tradition to absurd levels with all kinds of “intervention funds” becoming the only policy response. The current government, despite its constant alarm about fiscal delinquency, has not shown any sign it will not continue this trend. What this means is that our economic woes will not abate. This abuse of the social contract is why Dangote could propose to fix a road in exchange for a generous tax waiver despite paying less than he should, and also the oligarchic arrangement where only the rich and government cronies can take advantage of economic opportunities.

PRIVATIZATION IS NOT LIBERALIZATION

This leads me to suspect, as Feyi Fawehinmi pointed out, that the subsidy may not be fully gone after all. One indicator is that the government is not signalling that this is a permanent move, only that it is unaffordable at the moment. Another is that the Minister is very vague on the specifics. But suppose we disregard the mixed signals and believe the government is serious about reforms in this sector, what are the red flags?

The most important reason to be suspicious is pricing. The Minister is promising prices will go down in six months without explaining why this would happen. Some commentators point out that the subsidized price was impractical and that petrol already sells higher in some states and the hinterlands. This is true but misses a crucial point. Production or technological efficiency and competition are what bring prices down. And both forces work best when combined. Suppose NNPC does become efficient through privatization (partial or full) and does become a net exporter by 2019, the chances are that the cartelization that was in place with the marketers/importers will resume in no time. As long as the government retains a unitary pricing system.

Nowhere has this played out more vividly than power supply. Successive governments since 1999 have identified privatization as the magic wand that will banish darkness from our homes forever. There is nothing wrong with privatization, and given its history, the Nigerian government has proven incapable of managing basic services. But what most people happen to miss is that the private power companies would effectively be monopolies. This revived the concern of exposing Nigerians to greedy corporate interests and then as a remedy or a compromise with labour unions, government plugs in a “regulator” to control pricing. What the reform process should have prioritized are progressive rules that will guarantee the safety of investments and free entry for new practitioners. Imagine if Eko Distribution Co. could sell power to people in Ibadan and other distribution companies in the east could do the same in Ondo and all over the country with punitive measures that discourage anti-competitive practices like price collusion, power supply in the country would be in a better shape. And it eliminates the worry about the fleecing of Nigerians because all companies are competing. Some will drop prices to gain market share, others will because their technology can deliver power cheaply and more efficiently, while others in the same market will charge premiums because they think they offer superior services. Everyone will find their own competitive edge. The main function of regulation will be to ensure no one enjoys an unfair advantage. More importantly, Nigerians will have options!

What we currently have is an economy where anti-competitive practices is almost a national culture. Almost every industry and service from barbers to grinding vendors now has powerful associations that exert their influence primarily on prices. So next time you hear “corruption” remember that it’s not just politicians and bureaucrats stealing from you, they are also setting up an economic arrangement designed to fleece you.

Beware, dear reader, of change/transformation agenda, reform plan, and privatization policies that have at the heart of the unitary pricing systems in the form of price ceilings or floors; or any such plans that ultimately seek to limit your options in the form of bans and import controls. They are never in your interest.

The details of this plan are still quite nebulous. For example, the government intends to do a large cash transfer program of $25 a month to each of the one million poorest Nigerians. We also know that the program will be means-tested. Meaning that predefined ‘’criteria’’ of poverty will determine which individuals qualify. But we do not know if it will be preference-based as with such schemes in other poor countries. This will enable qualified individuals to exchange their cash for kinds of stuff of equivalent value that they judge more useful. There are also plans for vocational skills training programs, school-feeding programs for young pupils, and a fund for science and technology students in tertiary institutions.

While it is difficult to predict the impact or question the veracity of some of these schemes, the evidence of their efficacy is decidedly mixed. Cash transfers particularly have become a darling of the development community given its consistent above-average performance in impact-evaluation measurements. Yet I am truly skeptical of its potential as a valuable fiscal policy tool. The true winners of these interventions, in the end, may only be researchers from development organizations like the World Bank and consultants who are already waiting in the wings to assess the impacts of interventions on poverty and design various field experiments from the scheme.

There is a new paradigm in development circles that is rapidly influencing policy. The mantra of this paradigm can accurately be described as ‘’aim for what you can measure’’. The logic is that since most of what developing economies have traditionally spent money on is not easily measurable, it’s only natural for policy to shift towards micro schemes that have empirical credibility due to measurability. We might not be able to adequately determine the impact of modern sewage and waste disposal systems in a community, but we can measure the impact of micro-credits or cash transfer schemes in that same community.

Roads might not seem all that important to farmers, but giving them cell phones to monitor market prices, that’s a big hit. Corruption also provides further credibility to this paradigm. Small or direct intervention schemes appear to be more transparent whereas the budgeting and spending process on large-scale capital projects can be blighted by fraud and ‘’errors’’.

Welfare intervention proponents are right in some of their critiques of some specific spending policies, and also on the broader point of advocating more evidence-based policymaking. But I think it’s a case that can easily be overstated for several reasons. One is that there is a significant limit to how much one can generalize from a field experiment that measures the impact of an X intervention program on an entire population!

While such methodological objections is beyond the scope of my concern here, they are very important. Secondly, such programs are almost always useless in the long term. They appear to be the right prescriptions for the wrong patient. The short-term measurable impact is quite important for aid agencies and donor countries as they are accountable to people who fund such endeavours. But it is a wrong domestic policy priority for any responsible country. They are unsustainable due to cyclic political pressures and risk exposing the beneficiaries to sudden and unexpected shocks. Also, the positive effects of such programs can be eroded overnight as we are currently witnessing with the loony exchange rates policy.

I am not dismissing welfare interventions and policies like short-term transfers as useful tools for poverty reduction. We have a compulsory one-year service scheme for university graduates that could function as an invaluable skills training program if properly reformed. For example, we could let graduates freely choose an industry or firm of choice that will enhance the skills in which they are trained or interested.

Micro-credit schemes have proven popular amongst micro-businesses though they are still handicapped by the inability to scale and high-interest rates. I am sure readers can point to other schemes that can be useful in reducing poverty and suffering in the short term. Sadly, these measures rarely suffice because countries are usually around forever.

Reframing Development

My critique of interventions thus far can be loosely defined as what I will call the ‘’lowballing’’ of development. I have a certain disdain for how development ‘’experts’’ and relevant agencies in their pursuit of objectivity and empiricism inadvertently define the amount of success and progress nations and their citizens can have. No matter what it does to our egos, the fact is that economic growth and development have partitioned the world and sentenced most people in our part of the divide to substandard livelihoods.

There are a lot of reasons for this, and we will exhaust multiple lifetimes exploring them, but we can all agree there is a need for us to ‘’catch-up’’. This is why economists like Robert Barro talk about the importance of catch-up growth while economic historians like Morten Jerven pointlessly obsess over self-sustainability. This is why I hate the World Bank’s poverty index! Assigning a fixed dollar value to someone’s consumption as a measure of poverty might help focus on the problem of poverty and how much needs to be done. However, I believe this notion is outdated and functionally useless. Pronouncing poverty to have ‘’fallen’’ simply because billions of people now fractionally consume more than $1.25 is not only misguided but almost obscene.

I think development needs reframing. No more tweets, headlines, and relevant content reporting that China has grown income by 4500% since 1978. Income in China is still about a third of that of its neighbours South Korea and Singapore. A recent publication highlights my point. Nigeria’s per capita GDP is a little above $5,123(in 2010 dollars), substantially higher than Tanzania at $2,111. But Nigeria has a lower median income (a better measure of hierarchical data like income) than Tanzania and hence, poorer. This is bad. No amount of self-sustainability should make it acceptable. We live in a more globalized world where comparative differences are no longer hidden.

I have made my case for what I can call a rough sketch of what a serious poverty reduction plan should look like. Welfare schemes and transfers are quick and measly fix at their best. The evidence that renders them credible should not reduce people to choosing either the freedom to work as they please in a properly networked, lit, and connected society of peers; or a life of $25 monthly transfers and livestock to work farm fields.

It’s hard not to think about this, partly because of the high incidence of extreme poverty in the country, but also because of recent developments like terrorism that has displaced more than 3 million people — most of whom are poor.

Poverty is higher in rural areas than in urban ones. The poverty gap, which is a mean shortfall from the national poverty line declined only by two percent in rural Nigeria between 2003 and 2009 compared with six percent in urban areas according to the World Bank. The thought of poor displaced Nigerians merely being resettled in places that are arid and still relatively unsafe, to eke out a harsh living should be unsettling to a reasonable mind. Many people, given the choice, want to move to places where they are secure and most of all, where they can earn a decent income to afford a good living.

I picked the example of the displaced people because the resettlement plan by the government would be a disturbing aberration in what is a larger and broader trend.

Urbanization in Africa is exploding, and Nigeria is certainly not exempt. Paul Romer and Brandon Fuller estimate that the urban population in the developing world is likely to grow threefold in the next 100 years from about 2.6 billion people in 2010. This trend is irreversible and there is no amount of crackpot jingle by Sen. Ben Murray-Bruce about “returning to agriculture” that will change it.

Leaving aside the implicit and misguided notion that the path to food security lies, not in industrial farming, but in every Nigerian household cultivating a farmland; what are the factors driving this urban “rush”? One generally agreed reason is that urbanization is strongly correlated with income (GDP per capita) growth. To quote economists Remi Jedwab and Dietrich Vollrath “Economic development both drives and is driven by urbanization”.

But this time, is different. Sub-Saharan Africa, unlike historically, is urbanizing at much lower income. The implication of this urbanization at lower income levels is that urban dwellers in places like Nigeria will not enjoy a rapid rise in living standards.

Cities of Growth: A New Structural Transformation

My preferred explanation for this quagmire is that the structural transformation that comes with urbanization is different for a resource exporter like Nigeria. The “push and pull” effects of productivity-driven excess labour in the rural agricultural/resource sector and the expansion of urban non-tradable service sectors result in poor megacities like Lagos that do not create enough jobs to keep up with population growth.

The fix is simple; we need to build new cities, expand existing built areas, and upgrade decrepit city infrastructures. Cities are appropriately scaled with the requisite economic networks necessary for widespread prosperity. As the population in cities grows, there will be demand for even more jobs, space, and services. Despite the challenges, it is hard for me to imagine this as anything other than an opportunity for growth. With new and better cities, we will have modern transport systems, healthcare services, and IT infrastructures.

I anticipate two critiques of this idea. One is that it seems less targeted and arbitrary. It is not designed to help or provide “intervention” for any particular group. Secondly, it is expensive. Let me concede immediately that I do not have a good answer for the second critique. It just seems to me like this is a better way to spend the bulk of $ 30 billion than conditional cash transfers (more on that in a later post) and the Ajaokuta steel mill. The proceeds from the sale of this relic to an experienced global steel manufacturer can fund better road networks and cargo rails that connect Kogi State to the most important markets in that region. This will create jobs, raise output, and spur competition; all of which will reduce poverty.

I believe I already answered the first critique. The answer lies in scale. Cities are the ideal size for the optimal interplay of the economic forces of integration, specialization, complexity, and increasing returns. For example, one feature of the increasing returns model of trade is that a firm must have a large domestic market to become a net exporter. No one has shown me how micro-credit schemes for small businesses and entrepreneurial lotteries necessarily yield this outcome.

Megaprojects And Rules: The Housing Experience

So, what guarantees of success exist? One can easily point to failed examples like Tinapa and take a pessimistic view of big projects. Bent Flyvbjerg estimated that nine out of ten megaprojects (projects that cost $ 1 billion or more) have cost overruns. Railroad projects go over their costs by 44.7 percent and their demand is overestimated by more than 50 percent. McKinsey says bridges and roads usually have cost overruns of 35 percent and 20 percent respectively. Cost overruns can be blamed on inadequate planning but they are almost unavoidable as there are always blind spots like inflation, exchange rate volatility, or price volatility of commodities essential to the project.

However, deploying this argument against big projects suffers from two flaws. One is that big projects have longer baselines and no researcher or consultant is that patient. The Commissioners’ Plan which oversaw the growth of urban densities in New York by sevenfold over multiple decades was completed in 1811! Secondly, they fail to appreciate the importance of institutions and policies in making big projects work. Policies, or to use Paul Romer’s term, rules, are the essential calibrators that make projects and ultimately, cities work.

Let us consider a basic need as housing. The deficit in Nigeria is estimated at around 17 million. Successive bad housing policies and consequently misguided private investments over the years have done little to lower this deficit. It would, however, be foolish to conclude that these measures have overestimated the demand for housing from their outcomes. According to UN-Habitat, 60 percent of urban migrants in sub-Saharan Africa are likely to settle in slums. What we are seeing in Nigeria’s housing market is the absence of good rules to manage the interaction between the government’s long-term planning of new settlements and “spontaneous” demand by settlers and homeowners. Lagos, for example, is losing its density largely because of misallocation of valuable lands and inadequate supply.

Hence, middle to low-income households are priced out and they move into poorly planned suburbia slums that are sometimes cut off from vital city networks. This is replicated all over the country as 15 percent of the total population now live in urban settlements of more than 1 million people, excluding megacities. So not only do we need City-wide slum upgrading in our megacities and other urban areas, we also need better rules to manage issues like tenure and “spontaneous” demand. It just goes to show that megaprojects are less likely to “fail” with better rules.

My vision for Nigeria is for new and better cities that are municipal economic powerhouses competing for the best human capital we have. I believe this will end the episodic pro-cyclical fiscal crisis we always experience, agitations for derivation and resource control, and maybe the cycle of perpetual dysfunction and violence that is threatening to ensure that the majority of the country remains in poverty in my lifetime.