Law, institutions and the prosperity of nations

I consider it a privilege to address such an august body of learned lawyers. As a development economist, I have always been interested in the role of law in the development process. Law is the key instrumentality in the regulation of economic life – in setting as well as enforcing the rules for the conduct of economic business. I have always believed that a free market economy without adequate rules is like playing Hamlet without the Prince of Denmark.

Some of you may have read the World Bank’s World Development Report for 2017 whose focus is on the theme of “Governance and the Law”. Its key message is that governance and law are central to economic growth and development. Law is the moral backbone of economic order; a mechanism by which to promote growth, social justice and collective welfare. In the words of the World Bank report: “Law is a powerful instrument for reshaping the policy arena…a device that provides a particular language, structure, and formality for ordering things, and this characteristic gives it the potential to become a force independent of the initial powers and intentions behind it”.

The story of the success and failures of economic reform in Nigeria is familiar, at least in large part, to the literate public in our country. The Nigerian economy enjoyed a decade of sustained growth during the years 2004-2014. This was followed by a major recession, from which we are only beginning to recover. In spite of the fact that the Nigerian economy has enjoyed a period of sustained growth in the past, poor governance, chaos and disorder have truncated that growth and limited the prospects of long-term sustainable development.

The insurgency in the North-East has been particularly devastating as has been the activities of militants in the Niger Delta and the current atrocities by rampaging herdsmen in the Middle Belt. We may not be quite the failed state that many have described, but it is evident that we suffer from some of its symptoms, the most important being the phenomenon that the Harvard political scientist Samuel Huntington described as ‘political decay’. This situation arises when national institutions lack the capacity to maintain political order; when government lacks legitimacy and when the avenues for political participation are closed while poverty and chaos take over.

Those among you who are students of economic history will know that the nineteenth century witnessed the era of classical international liberal order. Britain, as you all know, was the pioneer industrial nation — the factory of the world. British naval and imperial supremacy guaranteed international order. Capital, goods, services and even people moved freely across borders.

Indeed, the great economist John Maynard Keynes could write that, as late as 1900: “The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, in such quantity as he might see fit, and reasonably expect their early delivery upon his doorstep; he could at the same moment and by the same means adventure his wealth in the natural resources and new enterprises of any quarter of the world, and share, without exertion or even trouble, in their prospective fruits and advantages; or he could decide to couple the security of his fortunes with the good faith of the townspeople of any substantial municipality in any continent that fancy or information might recommend. He could secure forthwith, if he wished it, cheap and comfortable means of transit to any country or climate without passport or other formality…”

During this period the German sociologist Max Weber pointed to the Protestant Ethic together with the prevalence of law and legal rationality as the principal factor in the economic prosperity of nations. Whereas the Protestant Ethic provided the discipline that enabled capitalists to accumulate wealth and invest in long-term projects that generated wealth, the application of legal-rational principles provided for the sanctity of contracts, respect for property rights and a general framework that made for predictability and a more rational ordering of business transactions between economic actors.

World War I (1914-1918) was the first imperialist war, as the Russian revolutionary leader V. I. Lenin described it. The breakdown of the international liberal order owed in much part to the failure of the balance of power politics that had managed to keep the peace for much of the nineteenth century. The Versailles Treaty 1919 and its harshly punitive sanctions against Germany sowed the seeds of bitterness were eventually to lead to worse catastrophe. A young Cambridge economist by the name of John Maynard Keynes who was an adviser to the British delegation in Paris resigned in disgust. He later wrote The Economic Consequences of the Peace that made him an instant international celebrity.

Beginning from the infamous Wall Street Crash of 1929 and the ensuing global depression, the world changed. Speculative mania, greed and fear combined to plunge global markets into a spin that led to a secular downward spiral. Beggar-thy-neighbour trade policies did not help. Britain, the main anchor for the liberal international order, had been in steep imperial decline. The young American republic, with its decidedly insular temper, was in no position to take up the reins of global leadership. This unlucky conjuncture of events led to hyper-inflation in Germany and economic decline in Europe and the United States. Economic crisis led to political crisis, as Adolf Hitler and the Nazis seized power in Germany. World War II, the second imperialist war lasting from 1939 to 1945, was even more destructive than the first.

The unfolding of these tragic events was crucial to the new thinking that emerged with the seminal work by the economic historian Michael Polanyi. His book, The Great Transformation, argued that the global capitalist system was inherently unstable by its very nature. There was therefore need to invent both domestic and international institutions that regulate the system and ensure a new global equilibrium.

The famous 1944 international conference at Bretton Woods, led by Britain and America, was central to the construction of the post-war international economic order. The new institutions that emerged were principally the International Monetary Fund (IMF), whose mandate is to ensure are stable global financial and monetary system; and the International Bank for Reconstruction and Development (IBRD), popularly known as the World Bank. The role of the World Bank is provision of capital and financial resources for economic development and reconstruction of the war-torn countries. The negotiations on the emergence of an International Trade Organisation (ITO) were less successful, principally because the American Congress repudiated a treaty that they believed would hamstring America’s role in global trade. They settled for a less ambitious arrangement by way of the General Agreement on Tariffs and Trade (GATT).

Keynesianism was the reigning paradigm of the post-war years. Keynes advocated state intervention in the macroeconomy to ensure stabilisation as well as provision of welfare for the most impoverished groups in society. By the late seventies, the advanced industrial countries were experiencing stagflation – a combination of high inflation and unemployment. Keynesianism was blamed for these predicaments. Ronald Reagan and the republican conservatives in the United States famously declared that government was not the solution, but, in fact, the problem. Margaret Thatcher became the champion of the new thinking in Britain and the rest of Europe.

It was Keynes who also famously declared that, “Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back”. .The great economic thinker behind these new ideas was the Chicago economist and Nobel laureate Milton Friedman. Friedman argued that the solution to the problem of stagflation is to cut back heavily on government spending and to reduce the role of government in the economy as a whole.
The new gospel of liberalisation and deregulation was taken up by the Bretton Woods Institutions. The structural adjustment programmes that were imposed on the debt-ridden nations of Africa and the rest of the developing world were anchored on privatisation, deregulation and liberalisation. The results were disastrous. Instead of owning up in humility that they had been deceived by the devil, they began to look for excuses as to why the medicine did not work. The main culprit was the quality and adequacy of institutions. They also blamed poor leadership, corruption and governance – all of which is true.
Today, there is broad consensus that governance and institutions do matter. The debate today is not on whether institutions are needed; it is about what type of institutions and how they are to be built. The lazy man’s approach is to import them hook, line and sinker. A more effective approach is to study the unique circumstances and economic trajectory of a country and to design institutions that fit with those needs, circumstances and trajectories. There is also what is termed today as a “Global Standard”. The elements of the “Global Standard” include such things as an independent central bank; respect for intellectual property; protection for international investments; property rights and so on.

The task of institutional reform in our day must be anchored on a firm understanding of the deontology of the state in our twenty-first century. The principal task of the state is to secure the lives, properties and liberties of all its citizens. It also requires effective governance, strong leadership, an effective machinery of civil administration, provision of public goods such as infrastructures, education, welfare and public health. From the viewpoint of emerging economies such as ours, it also entails the existence of a developmental-entrepreneurial state, with a leadership committed to ensuring accelerated growth, economic development and prosperity for all. At the heart of it is strong leadership that upholds global standards, the rule of law, democracy, social justice and equity.

For a country with the size, resources and innate potentials of Nigeria, progress can only come about through the forging of a new consensus among the ruling elites from across the country’s key constituencies. Many economists do not realise that this was a major factor in the emergence of the so-called ‘Asian Tigers’ in the seventies and eighties. This would be a herculean task, given that we are a tragically divided people. What is crucial, in my view, is commitment to the creation of a developmental state that would accelerate the process of economic growth and wealth-creation. In contemporary development economics discourse, when scholars use the term ‘the developmental state’, they are generally referring to a country where the government has assumed the driver’s seat in propelling the course of economic growth and social transformation. According to the American scholar Peter Lewis, developmental states are those that have “successfully provided the collective goods for high growth and competitiveness”.

The Great Recession that was triggered by the subprime crisis in Wall Street in 2008 has exposed the fallacies of the free-market prescriptions that were forced down our throats not too long ago. To be sure, markets will continue to be paramount. But they would have to be complimented by intervention by ‘smart states’ in those critical areas that would help rejuvenate growth and ensure long-term structural transformation. Free markets and the price mechanism are central to economic progress, but these must be accompanied by policies that enhance national competitiveness in an institutional ecosystem anchored on good governance, strong leadership and progressive reforms.

The accumulated wisdom of the last hundred years of world development, from Karl Polanyi and Friedrich Hayek and Joseph Stiglitz, makes it clear that leadership and institutions matter; and that a stable environment with effective economic management is the prime determinant of economic success and the prosperity of nations.

Being the Text of a Lecture Delivered at Business Law Session of the Nigerian Bar Association Conference, International Conference Centre, Abuja, Wednesday 29 August, 2018.

Obadiah Mailafia