Tuesday, November 20, 2012

Transformational Leadership and National Institutions

By Olu Akanmu

Two days ago, on Sunday the 18th of November, 2012, Dr. Fareed Zakaria was in Nigeria to deliver a lecture at the Airtel Night of Influence titled “African Political Economy: The Challenge of Leadership”. The essence of his lecture was that the challenge of leadership in Africa, if Africa must move forward is that of building strong institutions. I had examined the same theme in a speech I gave at the African Centre for Leadership and Development (Center LSD) in Abuja on the 14th of May 2011.

I reached the same conclusions with Dr Zakaria but further espoused on the problem of “elite institutional capture”, that we must find ways to prevent our institutions from being captured in the self -interest of few elites if we are to build these strong social institutions. How could this be done? I developed further on my Centre LSD speech into a full Op-Ed published in the Nigeria Guardian 24th May 2011.

Please, click on link above or read full Op-Ed Essay below.

While it will always be important to learn leadership theory in classrooms from Kuru to Cass, it should be emphasized that leaders are not made in the classroom. Leaders are made in the real world of action, in the world of life challenges and battles. Leaders are made in the world of conflicts and consensus and of visions and divisions. This is the real world which students of leadership will have to apply their theory to make a difference in society. Leadership is “lifelong learning in action”. It is a discipline that educators call “Action learning” or learning in practice. We however, know that there is no great practice without great theory. Leadership learning, whether formally or informally must involve a strong element of leadership theory or a set of leadership paradigms which a leader applies when called to duty. Aristotle’s theory of leadership since 350BC remains relevant in its timelessness and simplicity. That a good leader must have ethos, integrity and moral character which confers on him the credibility to ask for followership. That a good leader must have pathos or emotional connection with his followers. It will not be wrong for leaders to cry if it is genuine. And when heroes fall and followers mourn, leaders must be seen mourn with them. Good leaders must also have logos- they must be able to give solid, compelling reasons for their actions in relation to the common good, to persuade people to follow them.

A student of leadership must evolve his or her own authentic leadership style, which is a function of her leadership theory, unique personality trait and her personal moral and value system. In our quest to lead, we will, in on our life journey have to discover ourselves. We will have to discover our greater life purpose for which we have been endowed with, our personality traits and unique natural gifts. We will be confronted with making tough leadership choices based on our moral and value system. In Nigeria, the crisis of leadership is exemplified by the absence of sound moral and value system at the individual level of leadership which makes our leaders make wrong leadership choices. We need to return to the old values of “character, honour and common good”. From North to South, East and West, the most enduring periods of progress in our communities have been built on these old values.

We have had a “serial failure of leadership” since independence. We might have had occasional successes, but those successes have been small oasis in an expansive desert of leadership failure. Paraphrasing the late Pa Alfred Rewane, we prayed for a better future for Nigeria at independence; today, getting to that future, we now pray for a better yesterday. We have today, a country so blessed in natural resources that cannot translate its blessings to prosperity for its people. We have a country so blessed in human talents yet cannot educate its children. We have a country that produces oil, yet does not have oil to fuel its cars. We have a country with abundant sunshine that yet remains in darkness. The imperative of national transformation or transformational leadership cannot be over-emphasized.

Leadership in Nigeria in public and private sector has lost public trust. In our polity, the electorate believes that the elected are largely acting for themselves and in their own self interest. Our politicians are not statesmen. In the private sector, we see the betrayal of public trust by business leaders when they cook the books and produce accounting reports that do not reflect the true health of their business, making the gullible public invest in their corporations, only for those shares to become worthless in the shortest possible time. Personal and corporate integrity in leadership is low. Trust in leadership is little. How then can such a leadership that is not trusted galvanize the people and mobilize them to use their entire GOD–given potential for the progress and transformation of their society? Great societies cannot exist without strong institutions that ensure that individual, rational, economic agents have the incentives to do the right thing and act in the right way. In politics for example, a strong electoral institution, free and fair participatory democracy ensures that politicians who have acted only in their self-interest are voted out in the next electoral cycle. The judicial and law enforcement institutions also ensure that those who commit crime or steal public funds gets caught, prosecuted and punished, as an incentive or deterrent against corruption. In the private sector, our regulatory and market institutions would also ensure that our corporations are governed well for the greater good of shareholders who owned the companies and the larger society. This is unlike our recent experience where corporations have been largely governed for the good of corporation managers alone. In Nigeria, one would have to ponder “why is it that our institutions have not worked?” Why have our institutions remained perpetually weak and allow our economic players to consistently do the wrong things and keep acting with impunity? Could it be that our leaders deliberately create or weaken our institutions to allow their continuous impunity?

Leaders deliberately weaken our institutions by compromising or capturing them. They do this through appointment of lackeys who will in-turn foist a wrong value system on the institution as we see in the old INEC. Political parties, for example deliberately cultivate relationships with judges and senior police officers. And in business, as we see in the saga of the Petroleum Industry Bill, companies seek to capture the legislature and their regulators to ensure that rules of engagement do not exist, or that such rules exist only in their favour. To strengthen our institutions, we must address four key issues. These include developing the right value system for our institutions, strengthening internal process and systems to ensure delivery of institutional mandate, developing a binding rule of engagement for internal and external stakeholders; and the strengthening of public transparency and accountability of those institutions. In the case of INEC for example, there must be a purge of the old corrupt guard to ossify the right value system in the institution. While the last elections were better than the previous, they have not been totally free and fair given manifest rigging in some states. INEC staff with proven electoral malpractices must be purged and punished. INEC must also strengthen its internal system and processes to deliver the next election without postponement. INEC must see itself essentially as a project organization similar to construction companies that deliver projects within a specified time frame, at specified cost and quality. Project management competence must be ingrained from top to bottom of INEC. Our electoral laws as our binding rule of electoral engagement must be strengthened to make elections free and fair. President Jonathan might have been magnanimous by not appointing a lackey in Jega. Future Presidents may not be the same. The power to appoint INEC Chairman must be taken from the President and given to an independent National Judicial Commision as recommended by the Uwais panel, to reduce unfair incumbency advantage.

President Jonathan would be a truly transformative leader if he summons courage, despite contrary pressures from his party, to push for the full implementation of the Uwais panel report on electoral reforms. Finally, INEC, and all our public and private institutions must become internally transparent to themselves, particularly its staff and the larger public. Lack of full internal transparency is the umbrella that hides wrong value system, corruption, abuse of power and poor corporate governance. These must be combined with a mandatory accountability of these institutions to the public through the institution of a free press and an ethical strong parliament. As we build different our institutions, from the electoral system, free press, strong parliament, strong crime prosecution and judicial system, their individual strengths will become mutually reinforcing of each other. It therefore beholds that the greatest task for President Jonathan and others in leadership, if they will be truly transformative, will be to leave a legacy of strong institutions.

Olu Akanmu

24th May 2011..

Sunday, October 28, 2012

Social Contradictions in South Africa

By Olu Akanmu

It has been an unprecedented season of labour strikes in South Africa in the last few months. Starting from a sit-in strike in an obscure Marikana platinum mine in which the South African state and its police acted reminiscent of the apartheid period and murdered 34 miners, strikes have spread to whole of the mining sector, the public service and the transport sectors. Strikes have spread in a virtual Mexican wave style, a new wave picking up as another one ends.  No one would have imagined in 1994 when Mandela took over as South Africa’s first democratic President, with a black majority government, that a post -apartheid South African police under a black government, will shoot down 34 black miners under whatever guise. It was like a black South African government murders its own.  The strikes are a big embarrassment to Jacob Zuma and the African National Congress (ANC) who came to power after one hundred years of struggles with a purpose to liberate the black South African majority from economic deprivation and poverty. The ANC was not just a political movement. It was an economic movement, a rallying point for the black working class and their unions such as the National Union of Miners (NUM) and the Congress of South African Trade Unions (COSATU).
An interesting feature of the strike movement especially the Marikana strike was that the workers took actions outside the union structure, setting up rival unions because they no longer trusted that union leaders in the NUM will genuinely support their economic struggle for better working conditions.  South African workers and its people seem to be losing faith in the ANC and the unions that have led them in the apartheid struggle. While would they not? They have grown to see union leaders and the ANC leaders co-opted by the white capitalist establishment as board members and Chairmen of Corporations under the guise of black empowerment.  Many of the old ANC leaders have become billionaires, some with obscene wealth while the living conditions of the larger number of black South Africans have not changed fundamentally from apartheid days. Yes, there has emerged a new black middle class, who have been coopted into management, riding BMWs and Mercedes in Sandton.  Soweto, Alexandria and Gugulethu however remain what they are, townships of black people with a huge youth populations that cannot get jobs. Shanties are still in place, people living in corrugated iron sheet houses as they lived under apartheid despite the fact that black brothers are now running the state house in Pretoria.  Unemployment in South Africa stands at 24 % with more than half of the children of South Africa according to a 2012 UNICEF report living in poverty.  Despite South Africa being classified as a middle income country, more than 50% of the population continue to live below the poverty line.   Eighteen years after apartheid, South Africa has become the country with highest income inequality in the world with gini index of 64% according to a Euromonitor report in June this year. 35% of the population lives below $2.5 per day. With such social misery indices, it is not surprising that South Africa has one of the highest crime and homicides rates in the world.  Nearly twenty years after apartheid, this could not have been the dream of Nelson Mandela.
South African economy must grow faster to create jobs for its people.  The problem however is that its internal social contradictions now manifested in waves of labour strikes, is a major disincentive for investment. It is estimated that the recent strikes have shaved off 8% of projected GDP growth of 2.5% in 2012.  Foreigners have also sold more than $1.3 billion of South African equities since the beginning of the labour strikes. South African labour laws, a gain of the anti-apartheid movement is extremely liberal and progressive, protecting workers right and unionization in the work place. Business however considers it too rigid and inflexible and a disincentive to investment. Given that capital has a choice of where to locate, a country with rigid and inflexible labour laws is unlikely to attract capital and investment needed for economic growth. South Africa has therefore lost out significantly to more competitive Asian economies like Vietnam for manufacturing investment.  South Africa needs to institute an urgent regime of labour market reforms. It however does not have the social consensus needed to do such given its internal social contradictions.
The widening inequality within South Africa has also fuelled calls for nationalization of its biggest corporations especially in the mining sector. Such extreme Hugo Chavez type of economic thought is driven by deep frustrations with South Africa’s social reforms and its slow pace of wealth redistribution. Jacob Zuma and the ANC leadership have outrightly ruled out nationalization of South African mining industry as an economic option. The ANC position is right as such moves will drive away much needed investment while stifling free market and its investment incentives that make business to run profitably. Zimbabwe, just across the border of South Africa has shown that expropriation of private capital and nationalization can only send an emerging economy down in a tailspin of economic abyss. The ANC leadership position is however also driven by self-interest. Many of its key leaders are now co-owners and Chairmen of the big mining corporations.  ANC leaders therefore have a moral issue on their hand even when their economic thoughts may be right given that they now preside over mining businesses whose working conditions are not really different from the same they fought in the apartheid days.
If nationalization is not an option and wealth would have to be redistributed to ease social tension, progressive taxation of the wealthy, their profits and their consumption would have to be squarely on the table.  It is economically and morally justified. Those who have been privileged as legacy white big business owners and their new black empowerment co-owners must give out more to fund investment in education, health and infrastructure that will liberate more South Africans out of poverty.  In addition there should be more social philanthropy especially from black business. Those who were prisoners just twenty years ago, who are now billionaires today because of the privilege of black empowerment have a strong moral duty and obligation to give, to donate to charity, black scholarship and entrepreneurship. The black billionaires must give not because it is compelled by law but that they recognize that they were privileged as a generation to be at the right place, at the right time, to be those who could take advantage of black empowerment opportunities in the early years of post-apartheid South Africa. .
A more fundamental issue however for South Africa in the resolution of its social contradictions is the need to reform its politics. South Africa is like a near one party state with the ANC by its legacy of anti-apartheid struggle virtually dominating its political structures. Yes, other parties exist and are protected by law even among the black population; they however do not command significant following to put the ANC on its toes.  No political party can command the credibility of the ANC among black South Africans.  The ANC is therefore comfortable that it will always win elections at least in the foreseeable future. This credibility legacy of the ANC while being well deserved might have become the greatest problem of South African democracy. ANC leaders seem to be able to get away with anything including the perceived sell-out of its poor black consistency for shares in white capitalist corporations and their use of the instrument of the state, (which they now control) to protect their business interests.  South Africa needs a credible black alternative movement that will compete with the ANC, put pressure on it and force it to reform. There have been allegations of corruption in government typical of sister African states where the people despite a democratic system seem to be unable to vote out governments that do not perform or get their hands soiled in immoral and unethical issues. Without a credible black alternative movement, there are real dangers that a complacent ANC could lead South Africa the way of the rest of Africa’s weak democracies.   
In the interim pending the reform of the ANC and an alternate credible black political party, critical political institutions in South Africa will need to be strengthened to moderate the dominating influence of the ANC. This includes the institution of free press and a strong and independent judiciary. The South African press has done a most credible job to expose corruption in government. It has provided an open space for public discourse outside the political party structures. And interestingly, the unions and organized civil society movement such as the churches will also be important in providing alternate critical and credible voices to the ANC.  South Africa needs a new generation of Desmond Tutus who will put the current ANC leaders on their toes, speaking the truth to power and challenging the moral conscience of ANC leaders.  And if labour strikes are needed to wake up the black political leaders of South Africa, perhaps there should be more until South Africa negotiates a new social consensus that does not leave majority of its people behind.
Olu Akanmu is an executive in the telecommunications industry. He was previously Managing Director/ CEO Retail and Consumer Banking at BankPHB. He publishes blog on Strategy and Public Policy on http://olusfile.blogspot.com

Saturday, August 11, 2012

Barclays, Bob Diamond and Lessons

By Olu Akanmu

Bob Diamond, high profile CEO of Barclays was forced to resign last month over the manipulation by Barclays of the LIBOR. Barclays was fined nearly 300 million pounds by British and American regulators over the corporate sin. LIBOR is the London Interbank Offered Rate. It is fixed each day by an eighteen member selected panel of  banks, members of the British Bankers Association indicating the rate they would have to pay to borrow if they needed money. The top four and the last four estimates are discarded while an average is taken of the rest. The banks are expected to act with trust and transparency recognizing the implicit burden of trust that the public places on their daily estimates because the LIBOR is used as a benchmark for pricing of many financial instruments including savings rate, mortgages, commercial lending and the pricing of financial derivatives. Each bank quote into LIBOR calculation essentially is an estimate of the inherent composite risk of the bank on a daily basis. Given the wide use of LIBOR as a benchmark for the pricing of global financial instruments, it is remarkable that the process is not managed by government or a regulator but privately by the British Bankers Association. Such is the implicit public trust in the process and in the selected bank panel. British regulators uncovered evidences that Barclays traders pushed their money market desk to doctor submissions for LIBOR with the intent of gaming the process and making huge undeserved profits. There were also evidences that they might have colluded with their counterparts in other banks in gaming and manipulating the LIBOR process.
Bob Diamond had arrogantly told the British Parliament January last year, in the heat of the financial derivative crisis where banks acted irresponsibly and ruined the financial assets of investors that the “time for remorse is over”. It was a sad, insensitive comment from a CEO in an industry that the public expected would still be sober given the ruin they brought to many investors and financial system through the casino mortgage financial derivatives. Diamond was forced by the LIBOR scandal to eat his words and resign. The irresponsible behavior of the banks had cost tax payers billions of pounds used in bailing out some of British leading financial institutions. There are important leadership and regulatory lessons to learn from the Barclays LIBOR saga for us in Nigeria.  
CEOs especially those in industries with significant public interest must recognize that they have a responsibility to balance shareholder returns, their quest for huge personal bonus with the larger interest of society. Bob Diamond told the British Parliament that he loved Barclays. He also obviously loved his huge bonuses. He did not however seem to recognize that he also needed to love the society and the public that gave Barclays its charter to trade as Bank. Corporate wealth and prosperity is best sustained when society also prospers as a result of business doing its business. Business must create economic value for society. It should be its “reason for being” and its purpose. Its profit should only be a by-product of doing this. Investment Banking, where Bob Diamond was weaned seemed to have forgotten this over the years as it excessively focused on profits and the bonuses of its managers. Everything else seemed to be worthy of sacrifice to achieve the two. With such poor social ethic with which investment banking has been largely run, it is very easy for its practitioners to move from low social ethic to sheer criminality as the Barclays LIBOR scandal suggests. The Barclays LIBOR saga is another evidence that investment banking needs to be re-invented to have a social conscience. It is however not just investment banking. CEOs and corporate leaders have a responsibility to ensure that their organizations should never lose sight of society and the social purpose of their business even in their quest to create shareholder value. They must be the champion of social ethic within their organizations recognizing that sustainable shareholder wealth creation is only possible when it is balanced with the larger interest of society and its well being. While Bob Diamond may claim, though incredibly, that he is not aware of the manipulation of LIBOR by his traders, he is responsible as CEO for the culture of his organization, its values and the norms of acceptable behavior. By making public statements such as “the time for remorse is over”, Bob Diamond might have signaled to his traders that it is back to impunity, back to “business as usual” as in the old times of irresponsible casino banking.  
The Barclays LIBOR saga also illustrates the limits of self regulation. Unless sufficient safe guards are in place to protect public interest, we should not trust that business will always act responsibly. The process of setting LIBOR should no longer be left to the private British Bankers Association. It has to be taken over by an independent financial service regulator who will balance industry concerns with public interest.  Self-regulation seems to be failing in many spheres. We have seen the limitations of self-regulation in the British media with the abuse of press freedom by the Murdoch’s News of the World. While we will always be uncomfortable with tendency by governments to over-regulate and potentially make markets inefficient, the fact is that we are in an era where business seems to have adopted a maxim of “greed is good”. With increasing industry concentration where few oligopolies control many industries, corporations have emerged far more powerful than their atomized customers and the governments that should protect them. The oligopolies find clever ways to cooperate further increasing their bargaining power relative to their customers which eventually lead to market inefficiencies or even market failure. The case, therefore for strong regulation, for a new era of regulatory activism where industry interests are better balanced with societal interest have never been stronger. Regulation must promote stronger and fair competition. The principle of significant market power must be evoked in public interest industries like financial services, energy and telecommunications to ensure that no player hold so large a share of market as to stifle competition.
The Barclays LIBOR saga also raises the debate whether retail and investment banking should co-exist in the same bank. Investment banking with his inherent high risk, its casino nature where huge profits could be made overnight and the same profits and institutional capital wiped off the next day with trading losses, put retail banking customer deposits and the overall bank capital at risk. Attempts by regulators to prescribe new capital cover for investment banking assets might not have gone far enough. The experience of the last period is that governments using public taxes will still have to bail out the  banks that are “too big to fail” when investment banking fiasco happens in order to protect retail deposits and prevent a disastrous collapse of the financial system. There is therefore an implicit and inherent guarantee of investment banking risk by public taxes that if they go overboard, that governments will step in especially if the banks are too big to fail. It is argued that this in itself tend to make investment banking take excessive risks   as their profits and bonuses can be privatized while their excessive losses could be potentially socialized.  A separation of investment and retail banking will ensure that governments have no reason to intervene if a stand-alone investment bank fails and wipe off its own capital. Public deposits would not have been put at risk. This will significantly moderate excessive casino risk behavior in investment banking and its impact on the financial system. This is a raging debate internationally on the management of the financial system which we also need to have actively in Nigeria. As the Nigeria banking sector gets more consolidated with increasing concentration, and our big retail banks pursue investment banking ambitions, it is critical that our regulators put the right safe guards in place to protect public deposits and the retail business which is a critical backbone of the stability of the financial system.

Olu Akanmu is an executive in the telecommunications industry. He publishes a blog on Strategy and Public Policy on www.olusfile.blogspot.com


Saturday, May 19, 2012

Why did the Nigeria capital market collapse?

By Olu Akanmu

            “…Markets rely on rules and laws, but those rules and laws in turn depend on truth and  trust. Conceal the truth or erode trust and the game becomes so unreliable that no one will want to play. The market will empty and share prices will collapse, as ordinary people find other places to put their money-into their houses, maybe, or under their beds…”
                    - Charles Handy (2002)

If we are not careful, the presentations and discussions at the House of Representative Committee investigating the collapse of the capital market, could degenerate into who had a better cosmetic between the leadership of the Stock Exchange and the Security and Exchange Commission. The newspaper commentaries even by leading opinion leaders give cause for concern. The issues are not that of two women or their fury. The issues are about markets, its fundamentals, the principle or theory that markets on the long run are wise- the efficient market hypothesis. The issues are about shareholders as corporate principals and their directors/ managers as their agents and how to ensure that these agents will act in the best interest of their principal. It is about public trust and expected morality of market players and our market institutions including auditors who report on companies and the trust placed in those auditing information by the ordinary investor who is taking investment decisions. Professor Soludo’s (former Governor of the Central Bank) presentation has hopefully been timely to raise the broader and fundamental issues that the house committee should face. The House Committee if it would do a good job must raise itself about politics of personal vendetta and act like a committee of true statesmen as would obtain in a US Congressional Committee sitting on similar issues. In this essay, we present some of the bigger issues that the House Committee needs to address on the collapse of the capital market.

There must be something fundamentally wrong with an economy or a market that values the service sector like banking more than the real economy where hard tangible goods are produced. How could the valuation of the banking sector have gone up astronomically when the real economy and its tangible product manufacturing companies were barely managing to survive, unable to produce because of power, lack of financing and shrinking consumer demand? What do banks bank? Banks bank the value created in the real sector. If economic value in the real sector was collapsing as we have seen in the last four years, how could the banking sector realistically be creating profit? What tangible real value would be behind those profits and the astronomical valuation of financial institutions at the peak of the stock market? The profits of the banking sector and their valuation should reflect the fundamentals of the businesses they bank and the economy where their customers operate. We had an asset bubble fuelled by margin loans, our collective greed and a weak regulatory framework that allowed market players to game the system and selectively drive up share prices of their firms without recourse to business fundamentals. Would anyone for example say that a price-earning ratio of more than 50 for insurance companies at the peak of the market was real, at least with the benefit of hind-sight? The essence of Professor Soludo’s presentation is that on the long run, a market would be wise and reflect the fundamentals of an economy and its competitiveness. Those who gained from short term market imperfections by clever arbitrage might have assumed that the short-run is the fundamental and expect their unrealistic gain to continue forever. Markets however do not work as such. They correct themselves and punish severely those who are caught when bubbles inevitably burst.

The economic questions for the committee should be how do we minimize potential asset bubbles and their long run consequences on investment and business confidence? How do we make the inevitable cycles of market bulls and bears less volatile, more predictable such that we can contain systemic market risk? How do we strengthen market oversight and co-ordinate regulations across financial markets from the real economy, banking and our asset markets such as the stock exchange and the real estate markets? How do we ensure that the economy rewards truly those who create economic value and not those who create paper profits which inevitably will lead to asset bubbles? How do we strengthen the incentive for real enterprise as against financial market arbitrage? There were many real economy entrepreneurs who took money out of their business where small but gradual economic value was being created to play in the capital markets. These entrepreneurs began to look “not too smart” compared to their peers playing "kalokalo” on the stock market. And many of them lost their investment in the stock market along with their business. The economy however lost more because jobs were lost, employment shrunk along with consumer demand which would have kept our factories running and kept even many more Nigerians employed.

With an open mind, the committee should acknowledge the gains of improved and coordinated regulatory framework in the last two years. Yet, we should also look at whether there could have been less costly ways to detonate the market implosion that we had at the peak of the stock market, situating the actions of our regulators within the weakness of our political, economic and legal institutions. The committee should also address the much over-flogged issue of corporate governance from the perspective of progress in the implementation of the governance framework proposed by the regulatory authorities. What has been the gain in the last two years in the art of governing our public companies? Are there any potential loop-holes emerging even in the context of current governance frame-work which could potentially lead to future crisis? Are corporations devising clever and legal ways around the values and principles that directors and managers must be true agents of their real principal who are their shareholders and represent only their interest? Does current compensation system of managers in the financial institutions encourage excessive short term risk for profit without adequate consideration for crystallizing of long term risk which impacts long term shareholder value? Do managers have adequate incentives to look at the real long term consequence of their managerial decisions if they are paid bonuses only for today when the consequence of their risk decision may crystallize later in the future when they would have moved out of the institution? How could we better tie the compensation of managers of financial institutions to the long term consequence of their decisions on shareholder value?

The committee may also want to invite the accounting profession to share its own learning and lessons with the people of Nigeria. The accounting auditing profession failed the investing public especially the ordinary investor who trusted their financial reports and took investment and risk decisions on their basis. Yes, there were accounting standard issues which will now be corrected with the new IFRS reporting standard. However, even within the context of the old standards, were there things in auditing that could have been done better? The issues of morality and markets, ethics and the value system of market players must also be discussed. At the peak of the capital market and its asset bubble, morals became separated from the market. Our market players had very little appreciation of their privileged public trust and acted largely with impunity, compromising and capturing the institutions that should regulate them.

In conclusion, perhaps the House of Representatives committee may want to reframe the question it seeks to answer. Perhaps the capital market did not really collapse but it corrected itself of its fundamental distortions and its "irrational exuberance". A market with a banking system that makes more money out of short-term financial arbitrage than lending to the real sector will not have sufficient incentive to lend to the real economy. When such banking system is saddled with real bad loans and eroded capital, it becomes a double jeopardy as it will engage itself in desperate profit creation and excessive risk to paper-over its underlying fundamentals. If such banking system now operates within the context of an economy that is increasingly loosing competitiveness due to poor infrastructure, financing, skill shortages , stagnating consumer demand and depleted external reserves, yet its stock market indices were suggesting an otherwise buoyant economy, something soon had to give way. Markets may look foolish in the short term but on the long run, they see through and they tend to be wise.

Olu Akanmu, a company executive publishes a blog on ‘Strategy and Public Policy’ on http://olusfile.blogspot.com   . (For a more detailed discussion on what went wrong with the Nigeria financial system, readers may refer to the essay “Rebuilding Trust in the Financial System” on my blog  http://olusfile.blogspot.com/2010/06/rebuilding-trust.html   . You may use the label "Rebuilding Trust in the Financial System" or click further down on "older posts"

Tuesday, January 24, 2012

Economic Policies and Institutional Context: A Critique of Jeffery Sachs and Paul Collier

By Olu Akanmu

Professor Jeffery Sachs, the progressive and well respected development economist from the Columbia University wrote an Op-ed in the New York Times on January 10th defending the removal of oil subsidy by the Nigeria government. His arguments were the familiar usual, that oil subsidy benefits the rich more than the poor and that the subsidy when removed would be used in targeted investments that serve the poor and more meaningful social investments. For Sachs, the current Nigeria government is one of the best things that could ever happen to the country. According to him, “President Jonathan is giving Nigeria a chance to cast off the instability, poverty and corruption that have long plagued the country”. Professor Sachs visited Abuja, met the Nigeria government and was obviously impressed by the claimed intention for the oil subsidy removal. He must have felt the compelling need to do policy advocacy for Nigeria’s much misunderstood government.

Another well respected development economist, Professor Paul Collier of the Oxford University Center for Study of African Economics writing in the Financial Times few days later on January 15th, virtually lambasted the protesters on the streets of Nigeria. To him, if they have been more economically literate, they should be jubilating and celebrating the Nigeria government. He pushed the same arguments as Professor Sachs on the need to remove oil subsidy. Collier believes that the oil subsidy when removed could be used to give bursaries to poor people to attend school! He cautioned that it is entirely possible that populist rhetoric could be used to seduce people into fighting against their own true interest.

The economic arguments adduced by Sachs and Collier are very sound and are difficult to fault. They however wrongly assume that sound economic policy and intentions automatically translate to sound economic actions. Economics does not exist in the abstract. It exists within the institutional context of politics. The implementation of economic policies cannot be devoid of its institutional context. A better appreciation of Nigeria Political Economy would have made Sachs and Collier to appreciate that this “Jonathan’s oil subsidy removal” is not the first time Nigeria would be having a sound economic policy. Why has previous government’s good policy intentions not translated to sound economic actions? What guarantees that when governments make promises to the people that it will follow through on its commitments? How would or how could people trust that their elected government will do what it claims it would do? These are more than economic questions. They are political questions. They are questions of governance of society, of trust between government and the people. They are questions of whether society has strong institutional mechanisms that help the people to hold their government to their commitments. They are questions of whether society has strong institutions that guarantees that governments will be accountable to the people. And in particular, in a democracy that government will truly rule on behalf of the people and not on behalf of itself. If Sachs and Collier have situated their sound economic policy suggestions within Nigeria’s weak institutional political context, they would have better appreciated the skepticism and the protests of the Nigerian people to oil subsidy removal.

Professor Sachs wrote in his essay “when Nigeria won relief on its external debt in the mid-2000s, the savings on debt service were actually redirected to meaningful social investments in states and local governments...” He opined that we can therefore trust that this would happen again with the oil subsidy removal. As a Nigerian, I wonder where those so called investments from debt reliefs are. I can’t see them and many Nigerians cannot. What we can see is the fact that billions of dollars of Nigeria’s the Excess Crude Account, a future savings for our children, have been depleted with no improvement in infrastructure, school or education to show for it in all tiers of our government. What we can see are expensive governments, expensive legislature in which public cost per legislator in nearly 2 million dollars per annum. Why would this time then be different? Why should we trust government if it has not previously won our trust? Economic history has shown that where there are wide social and income inequality and people do not trust government, people tend to prefer short-term, immediate income redistribution programs even if it will hurt long-term economic growth, since they do not believe that the benefit of economic growth will reach them. Unlike Collier claimed in his essay that the masses are economically illiterate, the masses are actually rational beings! This is the challenge of our fiscal reform and providing a broader context to understand why people were on the streets and will not support what seems like a good economic policy.

The oil subsidy protests are watershed moments for Nigeria. We have had a most rigorous public policy discourse. The gains must be consolidated via the building of strong political and social institutions that will ensure that government will be more accountable and will deliver on their commitments to the people. Civil society must keep up the pressure for a more transparent government. We must strengthen the institution of a free press as an alternate public parliament to debate public policy. Civil society activism should not just be for human right activists. Our town unions, religious, trade and professional associations should become more active in how they are governed at state, local and Federal levels. More civil organizations should use the Freedom of Information Act to demand a higher level of transparency of public expenditure from our governments. States who do not pass their own version of Freedom of Information Act should be publicly shamed. Peaceful protest as a legitimate democratic right of the people must continued to be formally protected.

We must also strengthen our electoral institutions to ensure free and fair elections. When there are no free and fair elections, governments have no incentives to be accountable to the people as they know they cannot be voted out of power. Political parties as the foundation of our electoral process must become more democratic to reflect the true will of their rank and file and offer the electorate real electoral and ideological options. We must also reform electoral campaign financing to limit the influence of money or at least compel political parties and contestants to public declare their size and source of funding. If we can develop the institutional mechanisms that will limit corruption in our elections, we will significantly limit corruption in our governments.

We must also strengthen the rule of law and the institutions of law enforcement. Unless crime can be punished, there will be no incentive to avoid committing it. We should consider separating the office of the Attorney General from the Justice Minister. The office of the Attorney General should be non-political, independent of the executive, with a fixed tenure that ensures it cannot be removed by a sitting President. Such Attorney General working with the Financial Crime Commission would be better able to prosecute high level politicians who have committed economic treason and bring them to justice. Even Collier in his essay implicitly recognized this, adducing reasons why Germany is the best managed economy in Europe. Quoting Collier “Germans are locked into sound decision making by a combination of legal rules, dedicated institutions and a critical mass of ordinary citizens who understood why the rule and institutions mattered and so defended them”. It is those rules and the strong institutions that can enforce them that are missing in Nigeria. That was why the people were on the streets.

Olu Akanmu is an executive in the financial service industry. He publishes a blog on Strategy and Public Policy on http://olusfile.blogspot.com .