–US President Barack Obama
in Accra on his maiden visit to Africa as President
There is a monstrous relationship between the government and the citizen whereby the government is more powerful than the citizen…
– Rev. Fr. Anthony Adewale
Prof. of Philosophy and Theology Dominican Institute in the Guardian of Sep 9, 2012.
In many ways the foregoing quotes capture the trouble with our efforts to build a nation that resembles the potential of our country. They capture one dilemma that has in some ways defined what I have tried to do as citizen, as academic and as one anxious to see the spirit of enterprise ignited in many so that the wealth we all create will push back the advance of poverty and the anarchy that can be attended on that.
The point of these two quotes is to show that in the absence of institutions strong men dominate and the effect of their dominance is weakened rule of law and elevated uncertainty levels.
Institutions have and follow rules, strong men have friends and follow whims. The outcome from one is calculable probability of outcomes; from the other uncertainty. Uncertainty makes decision making problematic and often results in either the avoidance of economic engagement or the high cost of hedging against undesired outcomes. These high transaction costs translate to uncompetitiveness for the economy.
Even more troubling high uncertainty which results in poor economic performance can create a class of people who are so left out they feel they have nothing to lose. With no stake in the social order they turned to conduct that more or less usher in anarchy, what Robert Kaplan quotes a Sierra Leonean Minister in The coming anarchy as dubbling ‘the revenge of the poor’.
My primary concern today recognizes that institutions matter and concentrates on more problematic matter of how societies found strong institutions. Bearing in mind that many of the institutions the British bequeathed to India continue to survive but many of those left to Nigeria have floundered, what must concern us is how enduring institution emerge.
HOW AND WHY IS NIGERIA OF TODAY DIFFERENT FROM THAT OF THE 1960s? From the judiciary to Universities and the Public Service.
Permit me to begin with a word of thanksgiving for the gift of being here and commendation of the Institute of Chartered Accountants of Nigeria for its choice of topic.
In many ways, since I have been reading about, writing on, and researching the place of institutions in economic performance, and Nation building in general, it is easy to assume that all agree on or understand its primacy of place in quest for human progress. I believe though that scholars and thinkers are moving towards consensus on the importance of institutions for human advance. In recent years there have been several good books reinforcing the point of how important institutions are for progress. They include Daron Acemogliu and James Robinson’s Why Nations Fail; Neil Ferguson’s Civilization – the West and the Rest; Raghuram Rajan and Luigi Zingales’ Saving Capitalism from the Capitalists; Hernando De soto’s The Mystery of Capital; and the ground breaking book by the Nobel Laureate Douglas North; Institutions, Institutional change and Economic Performance. These books generally argue as my 1998 book Managing Uncertainty does for the context of firm or micro performance as my 2006 book Why Nations Are Poor at the macro level, the state of institutions.
I have, of course, generally tried to avoid the trap of uncausal analysis by offering a Growth Drivers Framework consisting of six interdependent variables – Policy choices; institutions; human capital, entrepreneurship, culture (value system) and leadership. I have often tried to bring institutions and culture which is shaped by leadership, into a more central location in my analysis, differing here with De Soto who focuses on institutions and thinks less of values as a factor in making economic progress happen.
What really are institutions and how come Neil Ferguson turns to them to explain how China which was more advanced than Europe 350 years ago suddenly stagnated for 300 years? Essentially institutions are rules, boundaries to conduct, which make it easier to anticipate behavior. Over time they become settled habits of a community, as the old institutional economics school point out. When costs are placed on conduct outside agreed range of behavior and the rule of law ensure that they are followed, it is easier to anticipate transaction engagement. Where boundaries and consequences for conduct outside those boundaries are unclear, for example in the country of the big man, might tends to be right rather than the rules. Outcomes are more difficult to predict. So how do these very important institutions come about?
The example of the evolution of the foreign exchange market in Nigeria illustrates well this process of the pursuit of narrow self interest being ultimately ordered by this unseen hand, reason. Many young people may find this strange because they do not know of the import license and FX allocation era; but until 1980s I served both on the council of the Manufacturers Association of Nigeria and the Lagos Chamber of Commerce.
The two – tier foreign exchange market tried to find a market mechanism to reduce the allocation method fraught with much corruption. But the Abacha take over resulted in new push for legitimacy and the 1994 budget review. Abacha rejected Fx liberalization and promised priority allocation to Main Manufacturers who were over the moon with excitements. Soon allocations went not to the intended manufacturers but to middlemen, long before year end. Manufacturers went from joy to crying foul. There was eventually a return o a level playing ground in market mechanisms. The evolution of a foreign exchange market as institution for ensuring more transparent access based on price thus brought us to the more stable market of today. Manufacturers, traders all go to this market and are pleased.
Douglass North indeed argues that institutions are not decreed into existence, they evolve. Many of our so called institutions have been decreed into being. They are thus disconnected from the contest and context of conduct and so end up not achieving the goals of moderating conduct. So we announce priority allocation but in reality it does not happen and we talk about weak institutions.
In the book, Managing Uncertainty I suggest that Business Associations and Professional bodies in working to sequester the predatory conduct of public officials, the point Fr. Adewale notes, it plays a critical role in the emergence of institutions. This is particularly why it is most pleasing to me that it is a professional body like ICAN that has requested this lecture subject.
FINANCIAL SECTOR INSTITUTION BUILDING EXPERIENCE
Few sectors continue to challenge the potential of progress in Nigeria as the financial services sector. Entrepreneurs depend much on this sector’s intermediation to creatively destroy today’s valuable, advancing society northwards on the value vectors. Absences of representational systems that make assets fungible leave assets of the poor as dead capital, denying them the opportunity to finance ideas, as De Soto notes.
Already burdened by the failure to crack the mystery of capital the entrepreneur then comes up against a financial system in which he is perpetually a victim, unless he was a ‘big man’ . He borrows, does business say with a government agency that refuses to pay him because one big man does not care, or because the person who decided on the project he was working on had left office. With no moral hazard on his part, his inability to manage the obligation gets him criminalized and humiliated. If he survives the process, he would probably never dare to do business again no matter what John Maxwell says about failing forward. Therein lies the reality of why new ventures are few.
In the remarkable discussion Saving Capitalism from the Capitalists, Rajan and Zingales show how the United States is a pre – eminent economy because the rules allow the small guy access enough for his idea which would never see financing even in Europe to overthrow today’s dominant player. Rajan Zingales give credit for this to judgments by US Supreme Court judge. Charles Brandeis. I am also fascinated to see American companies go into chapter eleven bankruptcy and exit quickly, to see Donald Trump who has lost everything compare himself with the beggar on the streets of New York where he once commanded a fortune and then to return to billionaires alley in a few years. These things are unlikely in our environment except to those with power as their patrons. It then all adds up to poverty and failure to realize potential of the country. Before I conclude with what I think should be an imperative for professional bodies to accelerate institution building I would like to offer a personal testimony on this challenge for nation building.
PLAYING BUSINESS ANGEL
About twenty years ago I encountered Stephen R. Covey and was much influenced by his writing. As a result I sat to reflect on self and to write a personal mission statement. I conclude then that personal financial fortune was not a major interest but that spreading the spirit of enterprise by finding and supporting young entrepreneurial talent would advance the cause a more affluent and just society. I have since spent a good part of the last two decades teaching entrepreneurship, mentoring young entrepreneurs and playing Business Angel. A book from a few years ago ‘Business Angel as a Missionary’ documents my role in startups from companies like Linkserve and Business Day to encouraging old school mate engineers to run road maintenance outfits. A second volume focuses more on the ones that were spectacular failures and lessons from them.
A distinguished former member of this body, the late Oba Olashore encouraged me years ago to ensure my mission did not become too risky for those dependent on me by investing in something that would provide assured income every year. As he was about to found a bank I decide it was the right anchor. I became pioneer shareholder of Lead Merchant Bank. A few years’ later mergers were decreed. In the politics of the rush to merge, Lead bank failed to make the wedding. All I had invested to assure school fees for life just vanished. Complaining to one Deputy Governor of CBN I was told why worry you are also in one group that made the marriage ceremony. Another couple of years later it was nationalized and again everything was supposed to be over even where you question the decisions. Meanwhile in a venture supporting another entrepreneur I had borrowed from friends at home and abroad for most of the nearly one hundred million that was going into constructing an outlet for the venture. Here comes a new Governor whose state agency is lessor of the land. He halts all activity, even with nothing wrong legally. After many calls, he assures me all would be sorted in two weeks. Nearly one year later all is still stalled. The point of all of this is I have seen again and again how the citizen is victim and how altogether the obtuse power asymmetry between citizen and state kills the spirit of enterprise and keeps the economy recursive and underperforming potential. Who will bell the cat?
I have noted earlier the point about Rajan Zingales that the US strength was largely the product of rulings by Justice Charles Brandeis. How can we find activist judges responding to civil society pressures so that institutions may emerge that will make tomorrow better? As a persistent litigant Chief Gani Fawehinmi contributed much to institution building. I believe that bodies like ICAN and the Nigerian Bar Association should both litigate issues until institutions that protect citizens and open the space for healthy growth in society emerge.
As we search for the Justice Brandeis of the Nigerian Judiciary who will build hope for future generations to thrive in venturing because of strong institutions it is pertinent to make the point about how institutional weaknesses in the finance sector has kept Nigeria in the recursive mode and can be directly linked top the current state of high unemployment in the country.
Just to make the point about how long I have been making this point and how it is neither about me nor any particular strong man in authority today, visiting the system with whims that assures we will lose one decade of progress, let me point to an Oped piece I wrote in the Guardian in 1984 titled “Chasing Shadows at Chase”. It was about Government and Chase Merchant Bank. With time my views were fully vindicated, it was found to be a wild goose chase but lives had been damaged, careers broken and foreign investors shaken enough to say as Richard Branson is said to have said recently: Never again in Nigeria. It is the duty I feel about seeing it happen again and again that has made me prepared to take the current disruption of the financial system into a state of a war of attrition. This really is what you as professional bodies should be up to if we are to build institutions to raise the quality of life of Nigerians.
I still recall not so long ago when the ideas of former British Chancellor of the Exchequer Norman Lamont led the Confederation of British Industry (CBI) calling for his resignation. The cry was Norman Lamont must go. By June 1991 British PM John Major fired Lamont. But here we hear NBA call for people in Central Bank to go. But nothing happens and the next generation prepares for a future in which people are afraid to lend or borrow or to invest because without moral hazard they are criminalized and their investments arbitrarily usurped.
I have and will repeat a call for international consulting firms to be hired to review decisions of our recent bank reforms for logic of the choices made. Even though National Assembly probes have already showed they were pervasion of justice.
To illustrate the point further, staying with financial services sector as example. In the mid 1970’s lack of rigor in decision making resulted in misunderstanding of a piece of policy advice offered the then cabinet minister on bank board structure and resulted in the nationalization of the banking sector. Even though no one can argue against the fact that one of its consequences was the growth of Nigerian human capital in banking it no doubt resulted in much deterioration of values in the system that privatization would be required later to rescue the system. Since government, which means no one, owned the banks the games played to be appointed to executive positions and the instability so created were so debiletiveof development goals, a case of the tragedy of the commons writ large, that you would believe no one would ever do that again. Strong institutions, with institutional memory, what the Germans call Weltaschanung, would not. Strong men have strong whims and whims generate uncertainty and high transaction costs.
Henro Boyo in a well presented discussion of the CBN and inflation in the Guardian of October 4, 2012 makes this point of the long term damage introduced by a CBN run on whims. What is even more bothersome Is that those who have come to manage banks as caretakers with no long term commitment of ownership and whose agency function are not superintended by owners, use the positions to abuse and to abuse on behalf of those who sent them.
As they service their friends and those who sent them and fight the perceived enemies of those for whom they serve as surrogates they further fracture the system and set up the environment for the next systemic crisis.
Ironically, they themselves are often the victims on the next round. But theirs is a mindset of momentary advantage which dulls effort at building institutions to make the playing field level and removed from what I called the ‘predatory acts of public officials’ in my 1998 book “managing Uncertainty”. I was therefore not surprised when about this time last year at the Wharton Africa conference a leading Goldman Sachs Executive noted that a strange outcome of banking reforms in Nigeria was that the banks were at about half what their value should be using known methods of analysis.
If we are to save ourselves these rounds of despair then interested parties, as Douglas North argues in that seminal book, Institutions, institutional change and economic performance, should engage in contestations that will ultimately result in institutions that set boundaries to the conduct of all. It is as such I had suggested during the systemic failings of the banking industry in the 1990s when I was not associated with the industry that bankers should get together and take a clear strong position. But that those not in detention then, saw it as not their problem. A few of them would later be victims in the last four years. It is as such that I have urged people in banks forcibly seized in this round to establish locus standi by refusing to accept claims from usurping managers and contest everything, no matter the inconvenience, in a state which father Adewale points out so well, intimidates and oppresses the one that should have power over it , the citizen. If we continue to roll over and play dead the authority figures will continue to act in ways that heighten uncertainty and sabotage economic progress.
In my view, if we are to build institutions, business associations, and citizens should become freedom fighters without guns for issues that will produce better context for human engagement. In some ways my views on a pattern of resistance is reinforced by what I hear every time I meet the great statesman, First Republic Minister, Maitama Sule Dam masani Kano. He usually says” Pat whenever I think of you, I think of Ghandi and of Mou. You must never give up. Nigeria needs you” I will then joke that I would rather Ghandis’ painful self sacrifice and resistance than Mou’s “I have blood to waste”.
I wish to reiterate that these things matter because the consequence linkages are self evident. Where people feel they are victims of injustice, it is hard to find peace. Where there is no peace, progress is improbable. A just society is desirable and made likely by institutions that met out consequences in a manner blind to who is involved. Where this injustice involves property rights, they make the likelihood of investments and economic intercourse, in general,low. If it is so obvious why do enough of us not care enough to sacrifice to change current conditions. One clear way to go is to create conditions to give you as individuals or associations the locus standi to cause review of rules which frame new boundaries .This is particularly important as the Nigerian Judiciary has often hidden behind the locus standi doctrine.
To conclude, let me make the point that poor institutions have hampered progress in much more than the financial sector. An example or two from the very important infrastructure area will suffice.
I was in Kualar Lumpur, Malaysia, the day the city’s metroline of a similar design as that which Gov. Lateef Jakande had contracted for Lagos was commissioned. That of Lagos was aborted by the Buhari administration at enormous costs both in actual payments of penalties and the opportunity cost of not having that facility in place. But more painful for me was that the Kualar Lumpur one was built by Taylor Woodrow a company that nearly went bankrupt because of failure to pay bills as due in Nigeria. The problem of notoriety in meeting our obligations in this sector is such that one of the biggest infrastructure firms in the world PB is reluctant to touch Nigeria because of unpaid bills from work with NEPA of old. In another big firm in the US a Nigerian rising star lost his job because a top executive bitter from experience in Nigeria from decades earlier found he had interested colleagues in looking at opportunities in Nigeria. How can we make progress with such a track record?
If China stagnated after much progress under the Ming dynasty 300 or so years ago., and Argentina dropped from being at par with the United states in the 1990s because of failure of its institutions to continue to evolve, the kind of failings that have given us this recursive economy after wise policy changes, weak institutions, must be combated for the love of the next generation. One outcome forms already is the factor of a generation that left town. We lost our best in a crucial building era in brain drain because of weak institutions that allow the state to despoil the citizen. We cannot go on like this. Those who fear to fight back must realize that history will hold to account and that in the sense of the Franz fanon rebuke, every generation must discover its mission and either fulfill it or betray. To fail to build institutions that support growth and stability is to betray the mission of this generation.
Mr. chairman, ladies and gentlemen, if institutions are to evolve to aid nation building business Associations, acting strongly are imperatives of now.
Among the critical areas for institutions to be built or invigorated are in Education, Law and Order, Financial Markets, Communication and Land Reform. I do hope that this will be rallying call that can save our country and thank you for your kind attention.
Patrick Okedinachi Utomi presented this lecture at the 42nd ICAN Annual Accountants’ Conference