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 .