The politics and cost of regulation in Nigeria 1

As part of my contribution to BusinessDay’s “The face of recession series”, I am republishing a three part series about the politics and cost of regulation in Nigeria, which I believe, is at the root of the current economic crisis in Nigeria.

With hindsight, we now know that most of the African elite that participated in the struggle for independence did so not for the often repeated altruistic reason of emancipation of their peoples and societies, but more out of the desire to inherit the powers and privileges of the departing colonial rulers. Once they replaced the colonialists, their major preoccupation shifted to consolidation of their positions and hold on power. To do this effectively, they had to weaken or even destroy all oppositions to their rule. Consequently, most of them proceeded to abolish well-established institutions of restraints, imprisoned or completely eliminated opposition figures and banned party competition altogether.

But these measures alone were not sufficient to guarantee the new authoritarian rulers’ hold on power. They had to find ways to control the economy, to determine who gets what, when and how; who deserves to be helped to flourish and who must be smothered and crushed. Thus began the policies of economic controls or what some scholars refer to as the ‘control regimes.’ These basically include state control and regulation of trade, state distorting and manipulation of interest and exchange rates and state industrial regulation through creation of monopolies or oligopolies. These policies do not only reduce the rate at which economies could grow and distort key prices in the macro economy, but they are also economically very costly and could lead – and indeed led – to many state collapse in Africa.

However, despite succeeding regimes knowing of the disastrous consequences of these ‘control regimes’, quite a number of them still choose to retain them for, as Robert H. Bates, a Harvard renowned political economist argues, the policies generate huge political benefits for African authoritarian regimes, provide elites with sources of income and furnished means for transforming even declining economies into political organisations, enabling politicians to recruit political dependents, willing to fight – if necessary – to keep them in power.

In Nigeria, this control regime, as against the popular belief that discovery of oil and the oil boom, was responsible for the gradual decline of the agricultural sector and the stoppage of cash crop exports. This can be seen from a careful study of the management and collapse of the commodity marketing boards. The board was set up during the periods of the great depression and the World War II to be the sole buyers of agricultural produces – cocoa, palm produce, groundnut and cotton – with the aims of stabilizing prices of products and using the bulk of the surplus funds accumulated for the benefit of the farming community (according to the establishment laws, 70% of the trading surplus were to be used for price stabilization while 7.5% was to be used for the development of the agricultural industry. Surpluses were generated when the marketing boards used their marketing powers to keep the prices paid to farmers well below the prices set by the world market. Of course, since agriculture was the mainstay of the economy and generates the greatest volume of foreign exchange, these marketing boards became the richest single unit in the economies of the countries where they were operating. Following World War II and the commodity boom that followed in the 1950s, these boards’ financial resources grew to exceed those of West African governments.

Nationalist leaders – who had by this time gained control of their regional governments but found it difficult to raise taxes to fulfil their campaign promises – naturally began to see in the marketing boards the solution to their financial problems. For instance, Chief Awolowo, Premier of the Western region describes the regionalization of the marketing boards as ‘a miracle’. Hear him:

…when as a result of the alliance between the Action Groups and the NCNC (its principal opposition) the Commodity Marketing Boards which were controlled by the Federal Government were regionalized, and allocation of revenue was made mainly in accordance with the principle of derivation. By means of the former, an accumulated reserve of over £34 million was transferred to the Western Region, and as a result of the latter our revenue rose from £6.39 in 1953 – 1954 to £13.20 million in 1954 – 1955…since the introduction of these financial resources, our revenue has been on a steady increase.

The moment the marketing boards were regionalized, the goals for which they were established – price stabilization and development of the agricultural sector – were abandoned and the finances of the marketing boards effectively became ‘trade taxes’. Through various draconian measures devoid of probity and accountability, the funds were diverted into public coffers by the various regional governments to execute their state-led development programmes such that even when the prices of commodity products fell drastically in succeeding years, the independent governments of Nigeria and Ghana for instance, instead of stabilizing producer prices from the huge surpluses earlier generated, passed on the full burden of the drop in price to the producers. Initially, it began as loans, but as the appetite of the local political elite expanded, the laws establishing the marketing boards were altered altogether to effectively turn them into fiscal arms of the governments.

This, however, did not stop with independence. As Billy Dudley noted, between 1957 and 1962, Nigeria, for instance, consistently recorded balance of payment deficits one year after another ranging from £35 million to £72 million. These were made up by a systematic whittling down of the reserves accumulated in the past by the Central Produce Marketing Board. This was the trend in most African states and it explains why most African economies and public finances collapsed with the collapse of commodity prices in the world market beginning from the 1960s.

Of course, when commodity prices collapsed, the marketing boards could not stabilize the prices for the farmers. Farmers were obliged to produce and sell below production costs. It did not take long before the farmers also abandoned the farms. Although, crude oil came to the rescue of Nigeria, for the majority of Africa states, the economic and fiscal collapse was immediate and world-record breaking. They had no option than to go begging the International Financial Institutions (IMF and World Bank) for help. It started as a trickle, but later became a flood.

Christopher Akor