On Inequality and Growth Strategies

Can we privatize our way to growth?

When you think of a country with inequality Nigeria typically does not come to mind. At least not in the same light in which we see inequality in South Africa or Brazil. According to the latest living standards survey by the NBS the country as a whole has a GINI coefficient of 35.1 which all things being equal is not bad. At least it is lower than the 40 to 50 range it was estimated at in the 90s. I know you can argue about hidden wealth and proper estimation, and all that. Certainly if you look at the gap between the bourgousie (that word always sounds so fancy) in Ikoyi and those eeking out a subsitence lifestyle on the farm then it certainly seems very unequal. That “real-life” observation that is seemingly at odds with the data is what I want to focus on today.

If you look at the dissagregated data on inequality by state and compare that to national inequality then it becomes easier to marry the idea that Nigeria has both high inequality and not so high inequality at the same time.

Essentially the data suggests that inequality in Nigeria is driven primarily by inequality accross places, not within them. The GINI for Nigeria as a whole is higher than that of 34 of the 36 states. In some cases much higehr. When it comes to inequality it appears the first question is where you are, not who you are.

This spatial inequality has all sort of implications. An obvious one is the idea that states have equal opportunity to increase internally generated revenue, which is definitely not true. It is obviously easier to increase IGR if you are at the richer end of the inequality distribution compared to if you are the poorer end. The underlying factor of course being an also unequal distribution of economic activity which is ultimately where IGR comes from.

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On of the more interesting articles on the Nigerian economy I have read this year is this one. There is a lot of good analysis in the there but in the context of this piece the interesting bit is that argument for a new set of growth drivers: privatization and liberalization of transportation and logistics, privately financed infrastructure, and a food-centric industrial and trade policy. This to me reads as an argument for the liberalization of more of the still government-controlled sections of the economy and the deployment of capital to drive growth in those sectors, with obvious spill over effects on the rest of the economy.

To be perfectly clear I am for less government participation in many of these sectors, especially in logistics which is fundamental for any properly functioning economy, and I also think that as much as is possible infrastructure should be financed by the private sector especially given the current fiscal situation the government finds itself in.

Yet is is difficult to square that growth strategy with the reality of current inequality in Nigeria. By definition, a capital driven growth strategy benfits those with …. you guessed it…capital. And as the data suggests, most of the country does not have capital. Capital, like income, is concentrated in certain spaces. The implication is that a private capital driven growth strategy will exacerbate those inequalities and will probably replicate the type of growth we saw in the between 2000 and 2015. Good on paper but poor in quality and jobs.

The map above is the distribution of average growth between 1999 and 2012 from one of my papers. If you overlay that with estimated population distribution then you get an even clearer picture about why, despite the two high growth decades, we still somehow managed to find ourselves with little to show for it. Yes, the North East had negative growth on average over that period and prior to the emergency of Boko Haram. A second capital driven growth boom alone is likely to have similar outcomes and maybe worse.

Even infrastructure driven growth is no longer as people and jobs centric as it used to be. Excerpts from a recent paper on infrastrucure and economics:

"Today, infrastructure is far more capital intensive and far more likely to use skilled laborers who would be employed in any case. If infrastructure requires machines, more than less skilled people, then the scope for infrastructure policy to exert short-run effects on employment will be limited."

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If a capital and infrastructure driven growth strategy is unlikely to deliver broad people centric growth then what is? Two things to say here.

I should also point out that I am not a believer in “equal” growth everywhere. I like to use the example of trying to engineer growth in the middle of the Sahara desert. It is unlikely and even if it were possible it would probably not be worth it. I do however think that equal opportunity is achievable and is a better strategy. The idea that, even if you happen to be born in the middle of the Sahara desert, you can aim to have just as good a quality of life elsewhere as anyone else. And in my opinion that is all about education. Not just going to school, but learning in general.

In the Nigerian context the spatial inequality problem rears its ugly head again. Education, especially basic education, is legally (not naturally or God-sent) a state and local government issue. And the hands are not equal. I took a look at the IGR per capita of some states, and there are a couple of states that collect as little as $5 per person per year. Fair to say those states, even with FAAC money, are unlikely to have the capacity to finance public education anytime soon.

Private individuals of course recognize the importance of education and per the living standards survey, it is one of the items high on the household expenditure list. In many states just below transport and health in non-food expenditure. But remember that 40 percent of Nigerians are in poverty and many others not far from it. If you dissagregate by state then the numbers look even worse with quite a few states topping 80% poverty rates. So, if the governments in many states do not have the means to finance education, and the individuals also do not have the means then Houston you have a problem. If education is one of the most important drivers of sustainable growth and large chunks of the country are not investing in education then there is only so far a capital/infrastructure driven growth strategy can go.

Secondly, given the current make up of Nigeria’s economy, any growth strategy has to be deliberate about engineering growth in unskilled-labour intensive growth. Education is all well and good but that takes time. For the here and now you need labour intensive growth. And given Nigeria’s structural challenges and scale, I believe that growth has to be driven by exports. This is also where I kind of disagree with a food-centric industrial policy. It is a lot more difficult to export food products compared to others. Even besides tariffs, the non-tariff barriers to food exports are much more challenging. To put it simply, people care a lot more about what they put in their bodies than what they put on them and the rules on food products trade is alot more challenging.

Also, food products and derivatives tend to be a lot more sensitive to infrastucture challenges. Your agbada will be perfectly fine even if delayed at the port for 30 days but your cocoa beans or yams and their derivatives might not do so well.

Nothing wrong in promoting food industry but I think if the target is exports, which I think it should be, then a better bet would be something more resilient to infrastructure challenges. If I was holding the darts I would aim squarely at the garments (not textiles) dartboard. We have the people and creativity to match. Although this is likely to be different depending on where in the country you are standing.

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To cut all this long story short, I do not think a capital and infrasturcture driven strategy is likely to deliver the kind of growth we want. I see it as a necessary but not sufficient strategy as we economists like to say. A more credible and sustainable growth strategy would be deliberate about targetting some non-oil non-food export growth and importantly, capturing some of that growth and channelling it into broad nationwide investment in education (and health) for everybody regardless of which corner of the country you happen to be born in. For all that you need some notion of an effective government. Capturing and re-directing value is all about the public good and government. You, or we, need to somehow make our government work better to deliver that investment. We can’t privatize or entrepreneur our way around that one.