African Economic Renaissance: The Role of Social Institutions
The months of March, and May, 2014 were particularly exciting for economists, policy makers and development experts in Nigeria. For in these months, three impactful international conferences, one featuring two Nobel Laureates in Economics, were held in the country. The Economist’s Nigeria Summit 2014 took the lead in March, then came the International Conference on African Development Issues in May, and in the same week, The World Economic Forum on Africa commenced activities. What makes these conferences important is underwritten, not so much by the excitement they generated, but by the promise they held for sustained economic growth in the continent. But did they? Could they have helped unlock the mystery of Africa’s perennially chronic economic underperformance in spite of its vast human and natural resources? Or is it the case that the vectors that have persistently subdued economic development in constituent nation-states of the continent are not purely economic after all?
Along with venerable experts on African development – William Easterly, Paul Collier, and Robert Klitgaard – we posit that social institutions matter, and that economic development is path-dependent. The path taken by African states in their quest for sustained development, while different to a large extent from those embarked upon by other resources-rich countries such as Iran, Algeria, Indonesia, and Venezuela, ultimately led in many instances to the same destination: one of missed opportunities, poverty, inadequate infrastructure, marginalized educational systems, a growing pool of unskilled and displaced workers, underdevelopment of crucial sectors, and violent social unrest.
While the path chosen is deliberately purposeful, it is invariably shaped by lived experiences of policy makers, and the political and economic institutions adopted post-independence from colonial rulers. That these institutions matter stems from the fact that they are rules that guide conduct, and sanction what activities maybe engaged to advance society’s welfare in terms of governance, utilization of social resources, property rights, and transaction costs. In almost all resource-endowed countries in Africa that failed to achieve sustained economic development, policy makers relied almost exclusively on oil or other natural resource to drive macroeconomic agenda for growth; and they did so when discovery of natural resources in their territorial competence coincided with periods of nation-building, and experiments with political and economic ideologies. That these countries, in their formative years with rudimentary social institutions, were exposed to, and had to engage foreign companies with superior support from their more economically advanced home economies, played a significant role in shaping political and economic rules adopted by African countries.
The important roles of social institutions and inclusivity
Economic and political institutions are part of the broader social institutions in any society. These institutions are intimately linked, and synergistic, and form the norms and rules that define a polity. Politics, the process by which a society determines the rules that govern it, is a struggle between groups; the group that prevails acquires the privilege to define the nature of political institutions in the country by way of legislation, and constitutional correctives. These political institutions would either be inclusive, in which case they allow broad distribution of power, and encourage pluralistic participation of constituent groups; or non-inclusive and absolutist by limiting power to the elite with little or no constraint to the exercise of usurped powers. In non-inclusive political institutions as practiced in Nigeria, power, is in practice, unconstrained and narrowly distributed to a few of the elites. Once so constituted, the elites, in order to protect their narrow self-interest and preserve acquired political power, structure economic institutions that are also non-inclusive, and complementary to existing political institutions. Thus, in the normal run of things, non-inclusive political institutions beget non-inclusive economic ones. Such dependency in form and structure applies with equal cogency to inclusive political institutions (as practiced in Western Democracies, and in Japan) that encourage inclusive economic institutions, and promote freedom of choice, an efficient and evenly applied justice system, and protection of property rights.
The social institutions adopted by a country (political and economic) are deterministic of economic growth patterns. Non-inclusive institutions tend to impede economic development by limiting broad-based distribution of social wealth, and meaningful participation in growth-sustaining economic activities. Since growth is dependent on technological innovation and change, and thus engenders losers in the old system while rewarding innovators, the elites who monopolize political and economic power stand to lose some (if not most) of acquired privileges, would resist such change. It is in this regard that non-inclusive social institutions are detrimental to economic growth. Acemoglu and Robinson (2011) extend this narrative in their book, Why Nations Fail:
Even though mechanization led to enormous increases in total incomes and ultimately became the foundation of modern industrial society, it was bitterly opposed by many. Not because of ignorance or short-sightedness, but rather out of a coherent logic: economic growth and technological change are accompanied by what the great economist, Joseph Schumpeter, called creative destruction. They replace the old with the new; new firms take away resources from established ones, and make existing technologies and machines obsolete. … Fear of creative destruction is often the at the root of the opposition to inclusive economic and political institutions…Growth thus moves forward only if not blocked by the economic and political losers…
The growth-sustaining qualities of inclusive political and economic institutions are their liberating effects on individuals and capital. By giving the governed free choice to pursue activities compelled by self-interest, investment in human capital through education, and acquisition of skills invariably follow. Capital, free to move into areas of higher than normal returns, helps beget technologies that enable both workers and capital to become more productive. This cycle of improvements in skills and technology are the basis of sustained economic growth that is made possible by inclusivity. Nigeria’s failure to achieve broad economic prosperity is (as in many African countries) in more ways than one, attributable to low levels of education, lack of adaptable skills to modern technologies, the inability to emulate advanced economies, and its current state of terroristic conundrum. That this is the case is readily traceable to restrictive social institutions that, by their very nature, do not create adequate incentive to invest in human, and capital development. In the case of Nigeria, beginning in the early 1980s, there was a deliberate effort by the military dictators to marginalize once thriving and effective educational system that produced in the 1960s and 1970s a highly educated workforce. Their effort and intention succeeded; by the late 1980s, and to the present, while Nigeria has more institutions of higher learning than any period in its history, the quality of education rendered is at best sub-standard, and of little value to skill-intensive industries that drive modern production processes. It is in this sense that social institutions matter in a country’s development, and help contextualize Nigerian realities in the decades following the discovery of oil, and subsequent oil booms
The successes of Botswana and Norway in managing to avoid the “Natural Resource Curse” or more popularly the “Dutch Disease Syndrome”, and instead prospered with proper husbandry of their respective natural resources, are good examples of the beneficence of inclusive social institutions. Norway, already an established democracy and wealthy before it discovered oil in 1962 had well functioning social institutions in place that prevented petrolization of its economy. Its oil wealth was not allowed to displace or marginalize other productive sectors of Norway’s economy; instead, tax revenues generated from oil were used to enhance its overall economic welfare. Botswana, rich in diamonds, also avoided the fate of the Dutch Disease through judicious use of derived revenue. This ‘Botswanan’ feat is at once remarkable, but not surprising; remarkable in the sense that it discovered diamonds while in its formative years as a nation-state, but not surprising because its leaders early on made a conscious decision to adopt inclusive political and economic institutions. As a consequence, Botswana is one of the fastest growing economies in the world, and has enjoyed stable political transitions of power without military intervention.
All is not lost in Africa
The classical orthodoxy of economic growth remains relevant, in the sense that domestic manufactures, adequacy of social infrastructure such as roads, reliable electricity supply, and telecommunication are indispensible to economic development. To this list must be added public healthcare, and access to effective education, and the skill level of the workforce. While the Nigerian economy, for instance, continues to grow as measured by its gross domestic product (it surpassed South Africa’s nominal GDP in 2014), its performance in the above cited determinants of growth, with the exception of telecommunication, is not encouraging. The advances made in the telecommunication industry, propelled by the push up north of the continent by South African mobile phone companies, have conferred direct benefits, and positive externalities. The most immediate benefits can be found in enhanced productivity and efficiency in both public and private sectors; mobile phone technology now makes it possible to accomplish in hours what would have taken weeks less than a decade ago.
The advances in telecommunication, and easy access to mobile phones have dramatically improved Nigeria’s financial sector. Banking services now available to Nigerians rival, and sometimes exceed, those in advanced economies. With the exception of the mortgage sub-sector, which is still rudimentary, financial services now account for much of domestic income. But more work remains in this vital sector of Nigerian’s economy because as of 2013, banking services remain confined almost exclusively to individuals and businesses that operate in the formal economy. The informals or those who operate outside the formal economy (farmers, petty retail traders) represent the vast majority of Nigerians who occupy the agricultural and retail sectors. The financial services sector would remarkably advance the country’s growth potential by extending its services to these groups; a goal and task the federal government can facilitate with policies of inclusivity.
Any serious effort, therefore, to engage development problems in Africa must begin by taking notice of the reality that socio-economic development in the continent may be attained, and sustained only if the processes engaged toward these ends are properly mindful of the cultural and social experiences of Africans. This means looking at things from the point of view of those whose welfare one seeks to improve; for only when the life experiences of the indigenous people are clearly understood would it be possible to work within the context of their cultural and traditional observances to establish accommodative social and economic institutions necessary for sustained development. This approach is what we have termed ‘contextual development’; a process that requires a balanced integration of indigenous cultures, religious beliefs, prevailing social arrangements, and new ideas from developed nations into a unique development strategy that suits a particular nation-state. Contextual development thus requires a good understanding of the needs of the people, and how to design and implement programs that take advantage of the peculiarities of the society, and expectations. It also requires, as an imperative, that one who embarks on development programs in Africa be acquainted with the cultural belief system in the country, the role religion plays, the level of literacy, availability of skilled labor, traditional roles of the sexes, prevailing social arrangements, and most importantly, what development means to the people.
The novelty of this approach to development can be found, not so much in the idea, but in its implementation; for experts in development studies are now very much aware that the old policy of imposing change from without has not produced desired results, but has instead made matters worse despite decades of development assistance to Africa. This strategy necessarily rejects the old development model of one-size-fits-all that assumes social and political institutions as given, and then proceeds to impose pre-packaged solutions that lack relevance to local practices. It is in this very important sense that contextual development strategy is particularly relevant — that there maybe more than one path to economic development; the path taken by Western countries was accommodative of the lived experiences and circumstances in the West, the African path would have to be accommodative of African realities.