OUTSIDE THE BOX BY ALEX OTTI
“If individuals can take from a common pot, regardless of how much they put in it, each person has an incentive to be a free rider, to do as little as possible and take as much as possible because what one fails to take, will be taken by someone else” – John Stossel
In 1998, Dr. Spencer Johnson published a book with the title “Who moved My Cheese?” Many Nigerians would agree that in terms of context, fufu may well pass as our local parallel of the English cheese. This book, which became an instant bestseller, aptly describes a situation of change which humans face daily. He created four characters Sniff, Scurry, Hem and Haw who go into a maze, which represents our world or our country, in search of food which the cheese represents. The first two characters were mice and the last two were what he called ‘little people”. Every day, they go into the maze and gorge on their cheese to their satisfaction and all seemed okay. One day, they come to their usual place for their favourite cheese and to their surprise, there was none available. They all are naturally frustrated, but then two of the mice quickly adjust and begin to search for new cheese in the maze.
The little people, Hem and Haw are confused and refuse to understand what could have happened to their cheese. They whine and complain but one of them, Ham quickly adjusts to the new reality and goes out in search of new cheese, while Hem remains there brooding. As Haw continues his search, he writes the lessons he was learning on the wall, hoping that Hem would leave their original position and as he was coming after them, would read and quicken his pace in his own search. Haw was trying to help his colleague and stop him from sticking to outdated and fruitless habits. But he was mistaken as Hem was still stuck at the same place, agonizing over his cheese that had been moved. Soon after, Haw discovers new cheese and much to his chagrin, the other characters, Sniff and Scurry, were already landlords in the new place with new cheese. He nevertheless, quickly joins them to enjoy the new cheese hoard.
Spencer’s book correctly describes our situation in Nigeria today. Just about a week ago, the Financial Times of London reported that the World Bank has warned that the Nigerian economy runs the risk of unraveling if it did not implement some difficult, and maybe unpopular, reforms. In fact, the World Bank fears that personal incomes in Nigeria will go down below where they were in the last forty years or more. This is because of the effect of the pandemic on economic growth which is expected to hover around -4% at the end of the year. Accordingly, the World Bank suggested reforms which included, moving closer to a market-driven exchange rate regime, reopening of land borders, easing foreign exchange restrictions on business, reforming the tax system, fixing the power sector and extending direct cash transfers to the vulnerable and poor. While these reforms may help in tackling the country’s economic challenges, it is our sincere belief that the major problem is productivity. Not only are the current levels and rate of production very low, the productive base of the economy is too weak to sustain the burgeoning population. That is the central debate we want to start today. It is important that we state here that in the realm of Economics as a social science, there is no absolute truth. Everything is predicated on the interplay of numerous social forces and phenomena that are ever dynamic. What we do here is to stimulate healthy debates and discussion and in that wise hope to proffer suggestions on how to deal with the country’s numerous and ever-growing challenges.
Since the discovery of oil in Nigeria, the product has moved from being a component in the basket of goods that we export to being virtually the only product we export. Over 80% of our foreign export earnings is accounted for by oil. About 65% of federal revenues also comes from oil. As you can surmise, the saddest part of the story is that Nigeria exports oil in its crudest form. There is little or no value added. So, Nigeria adds nothing to the product that mostly multinationals with foreign technology extract from the ground. We therefore lose the opportunity to add value to the crude and also the opportunity to benefit from the employment that goes with value addition. We import the refined product with some of our foreign exchange earnings, burn off the products and go to sleep. But these activities continue to look normal on the face of it. This same oil accounts for a large chunk of money that governments spend. The federal, state and local governments, gather every month at Abuja, under the supervision of the Minister of Finance to share money on the platform of the Federal Account Allocation Committee (FAAC).
Here, the commissioners of Finance of the nation’s 36 states, gather every month to distribute the funds at a meeting before their accounts are credited by the Central Bank Of Nigeria. I am told that virtually all activities in the ministries, both at the states and the centre, practically come to a halt, when FAAC is in session. Our concern today is not about the inefficiency and hazard of putting such a number of people (as I’m told the commissioners are normally accompanied by a retinue of government officials as if to stop them from disappearing with the money) on the road every month for what could be done electronically or virtually. We are more concerned about the whole concept of “sharing money” monthly. The concept presupposes that beneficiaries have worked jointly, and the proceeds of their efforts are to be distributed between the people that worked. But we also know that this is not the case. On the contrary, people who have little or nothing to do with the generation of resources gather in a heady room in Abuja and distribute those resources, according to a formula already enshrined in the constitution.
It is this whole concept that has gotten the whole country lazy and our governments unconcerned about creating the enabling environment for wealth creation in their different domains. After all, whether they do anything or nothing at all, at the end of the month, there is money to be shared in Abuja. There are a few sub national governments that have made efforts to make their environments business friendly to attract investments to them and therefore generate appreciable revenue to run government from internal sources. Unfortunately, most of them have done the opposite. The contradiction, however, is that other than Lagos State, most of the states that do well in internally generated revenue are also the same states that get the largest proportion of federal allocation. The simple explanation is that the internally generated revenue comes largely from oil and oil-related activities.
The practice of sharing our revenue is a constitutional arrangement and no one is in doubt that it cannot be changed without amending the constitution. With respect to FAAC, the federal government is constitutionally allocated 52.68% of the total funds while the States and local governments share 26.72% and 20.60% respectively. On account of the fact that the constitution makes the local governments an appendage of the States, an account called the Joint Allocation Accounts (JAAC) is maintained by each state. Unwittingly, this gives State governors huge control of, and unencumbered access to local government allocation. Expectedly, many State Governors take undue advantage of this arrangement to manipulate and impoverish the local governments. This is the reason for the strident clamour for local government autonomy.
It is also for this reason that some state governors refuse to conduct local government elections, preferring to run the local governments with the despicable transition councils that have been conveniently structured to be a permanent arrangement. For Value Added Taxes (VAT), the federal government keeps 15%, the states and local governments are required to share 50% and 35% respectively. In distributing federal allocation at the state level, states and local governments with larger population and local governments get more than their counterparts with fewer people and local governments. These have remained contentious issues as both parameters suffer from transparency deficit.
Those who have been following developments in the economy would agree that revenue from oil, the major source of our federal revenue has been an endangered species for a while now. Oil prices have been a subject of uncertainty more so with the Pandemic. While we saw oil prices of over $130 in the early part of the decade, we have also witnessed sub $30 oil and even now, it hovers around $50 with a negative outlook for the future. This situation is made worse by the resolve of the developed world to phase out fossil fuel within the next decade to two, in favour of renewable energy sources. Even if we assume that the two scenarios were not going to happen, one certainty is that oil is a depleting resource and one day, the reserves would dry up or become irrelevant in the global energy equation. All these pose major headwinds for the Nigerian economy and more so, for states that depend on federal allocation for survival.
Herein lies the import of the lessons of the book, “Who moved My Cheese?” For the Nigerian, the question could well be, ‘Who moved my Fufu”? Being that the Fufu is sure going to move, is it not a good time to start thinking of replacement revenue sources for oil? We had made the argument that ours is one of the few countries where government expenditure is run on the back of revenue allocation. Some other countries which are equally blessed with oil, have built up massive savings and established sovereign wealth funds with huge balances from their own proceeds. Nigeria’s have been simply blown with little or nothing to show for it. Nigeria managed to set up a Sovereign Investment Authority (Sovereign Wealth Fund), through sheer insistence of a few dogged bureaucrats but it was poorly funded. The funds would have yielded much greater returns to the country today given the impressive returns that the NSIA has been reporting, thanks to its brilliant leadership and professional management. If our country didn’t have oil would it shut down? How about many other African countries that do not have oil? Why is Nigeria’s tax to GDP ratio a meager 6% while the average for the rest of Africa is over 15%?
To the Federal government, we had made extensive recommendations about cutting down on the cost of governance. Those recommendations need not be overemphasised. Our focus today is on the state governments. Several reports have indicated that more than one third of the states are unviable today, meaning that those states cannot generate enough revenues internally, to run their affairs. Frankly speaking, such states should be merged immediately with others so that they can save on the cost of administration. Those reports have also indicated that less than one third of the states have the capacity for fiscal self-sufficiency. The rest can manage, albeit with some help. It is our considered opinion that, given the right incentives, many of these states can be viable. However, the incentive that they have is to be dependent and give up their ability to think.
Given the incentive to think and survive, states should evaluate the resources that are available in their domain first. There is no state that does not have a comparative advantage for some agricultural produce in the country. There is also no state that does not have at least one mineral resource that it can exploit for the benefit of its economy. This is the time to pay attention to such opportunities. Our recommendation is not necessarily for the governments to invest directly in these ventures but to create the enabling environment for the private sector to invest in them. To achieve these objectives, governments must invest in infrastructure, namely roads, railways, electricity, drainages and water.
They must invest in security and also, human capital development including health, education, and skills acquisition. They must create the right incentive packages needed to attract foreign and local capital. In addition, they must run a transparent and open government, free of corruption and underhand deals. There must be opportunity for all willing and capable entrepreneurs to participate objectively and competitively in access to the resources and incentive packages that the states have to offer. They must pay attention to the critical issue of ease of doing business and must see themselves as being in competition with other states and even neighbouring countries in attracting investments. States should know that all these are important to investors, donor agencies and development partners alike.
We continue to argue that capital has no loyalty. It simply flows to those locations and economies that have organised themselves to receive it. These are just the foundations for creating enduring financially independent governments. With the proper foundation being laid, technological inventions and innovations can be led by such states which will further consolidate their financial independence. Our Fufu has moved and we must have the courage and strength to find where it has relocated to. We must be the new landlords of the new location if we must thrive in the emerging new future.
My dear readers, permit me to use this opportunity to wish you all Merry Christmas and a fantastic 2021.