Nigeria lacks the legal infrastructure for a strong market economy
Last week, I wrote that Nigeria could not justifiably call itself a civilised nation because it had not fully embraced the legal pillars of civilisation, particularly the rule of law. The same day, on 24 July, David Pilling, the Africa editor of the Financial Times, wrote in his column that Emmanuel Macron, the new French president, had talked about Africa’s “civilisational challenge” at the recent G20 meeting in Germany.
Macron was not talking derogatorily about a “dark continent” or a primitive people, but rather about Africa’s poor human and institutional development. Specifically, he said that Africa faced three challenges: failing states, democratic shortfalls and population explosion. And, of course, he was right.
The synonyms for “civilisation” are enlightenment, advancement and progress. Every global league table – human development index, governance index, misery index, etc – shows that Africa lags behind the other continents, and truly faces a civilisational challenge. A critical aspect of this challenge, as I argued last week, is the extent to which a country has embraced the legal pillars of civilisation – the rule of law, an independent judiciary, due process, natural justice, etc. Without such legal foundations, no nation can lay even a basic claim to civilisation.
My focus this week is the legal underpinnings of free markets, of wealth creation, again, using Nigerian as an empirical anchor. Wealth creation is the highest form of human progress. Adam Smith, the father of capitalism, described the four stages of human society. These are: societies of hunters and fishermen, societies of shepherds, societies of agriculturalists and commercial societies, that is, societies of wealth creators.
Most African countries are at best societies of agriculturalists or, in the case of Nigeria, a society of crude or raw material producers. But as Adam Smith said in The Wealth of Nations, “No nation is ever rich by the exploitation of the crude produce of the soil but the exportation of manufactures and services”. Put differently, a nation can only create wealth, and thus advance, when it can produce quality goods and services and exchange them locally and internationally. In other words, progress or civilisation comes when a country becomes a viable commercial society, a strong market economy.
But a strong market economy comes with two sets of pre-conditions. The first is an enabling macroeconomic environment. If the macroeconomic fundamentals are not conducive to fostering business profitability, savings growth and investor confidence, there won’t be sufficiently high aggregate demand and aggregate supply to build and sustain a strong market economy.
This was why Nigeria rapidly haemorrhaged foreign capital when the government’s intervention in the forex market created massive disincentive to market operators. Investors simply deserted the country. The first thing a government that wants to create a commercial society or a strong market economy must do, therefore, is to pay attention to the state of the macroeconomy. The Buhari government has largely been inept at doing this due to its interventionist mind-set.
Now, after macroeconomics, the second pre-condition for a strong market economy is a legal, regulatory and institutional infrastructure that ensures the market operates in an efficient, fair and stable manner. The point here is that even if the macroeconomic fundamentals are right, you still won’t have a strong market economy, a viable commercial society, unless it is underpinned by strong institutional, regulatory and legal frameworks.
For instance, a market economy needs an institutional infrastructure, such as market actors and service providers, who provide the operational basis for the market. A market economy also needs a regulatory infrastructure, with the power and responsibilities to supervise the market. This includes the government regulatory bodies, such as the Securities and Exchange Commission and the Central Bank, as well as self-regulatory bodies, such as the professional bodies.
In a market economy, which is based on parties competing freely through voluntary exchange, the regulatory infrastructure must be robust and promote the predictability and transparency of market operations. But it must also have a neutral impact on market behaviour. But, in Nigeria, government regulatory bodies, such as the CBN, often try to pick winners and losers. Multiple exchange rates and selectivity in the allocation of foreign exchange to market operators, such as listing 41 items as ineligible for forex through the official window, are examples of the CBN’s regulatory interventions that undermine the operation of a competitive economy in Nigeria. Adam Smith would say that this diminishes Nigeria’s status as a commercial society, a market economy!
But of all the components of market infrastructure, the most important is the legal framework. The legal infrastructure provides the underpinning of the operational and regulatory infrastructure. The legal foundations of a market economy are so pivotal because many of the drivers of economic prosperity are dependent on law: rule of law, questions of rights, justice and fairness. A commercial society, a wealth-creating society, is not possible without property rights, contractual rights or voluntary exchange, and competition. And the role of laws and legal institutions is both to facilitate efficient market transactions and to disincentive behaviours that could undermine the efficient operation of the market.
What all this means, essentially, is that in order to build a strong market economy, a country must have the right business or commercial law regime, consisting of laws protecting property rights, including intellectual property rights, laws guaranteeing the sanctity of commercial relationships, a robust competition law regime and, of course, strong and effective enforcement and adjudicative regimes.
But, unfortunately, just as Nigeria has not fully embraced the legal pillars of civilisation, as I argued last week, it is also deficient in the legal foundations of a market economy. The substantive laws in Nigeria are either outmoded or add to the inefficiency of the economy. And when it comes to enforcement and adjudication, Nigeria’s legal and judicial processes are less business-friendly than those of most African countries.
Take the substantive laws. Nigeria’s business- and investment-related laws are obsolete, some predating the country’s independence. Last year, a highly publicised study sponsored by the UK Department of International Development (DfID) highlighted the extent of the problem when it said that “54 Nigerian laws are obsolete”. Nigeria is one of the few countries in the developing world without a competition law regime.
Furthermore, most of Nigeria’s intellectual property laws date back to the 1990s, with very weak penalty and enforcement regimes. A Nigerian delegation to a meeting of the World Intellectual Property Organisation (WIPO) once criticised the repeated calls for strong IP protection in Nigeria, saying it would only benefit foreign owners of IPRs. Yet, a country that doesn’t have robust IPR and competition law and enforcement regimes can never be a strong commercial society or market economy.
Of course, it is also common knowledge that Nigeria still languishes on the World Bank’s Ease of Doing Business index, ranked at 169 out of 190 countries in last year’s edition. But when you break this down to the specific components, you find that Nigeria is ranked 182 in the category of registering property, with 13 procedures required, compared to the average of 6 in Sub-Saharan Africa. Trading across borders is more burdensome in Nigeria than in most African countries, and enforcing contracts still lacks speed and efficiency, with Nigeria scoring 8 out of 18 on the quality of judicial process, 1 out of 6 in terms of case management, and 0 out of 4 on court automation! Surely, no country with such abysmal performances can develop a strong market economy and generate economic prosperity to lift its people out of poverty.
To be sure, the Buhari government has launched several initiatives to improve the business environment. But these are all administrative measures rather than legislative ones. Yet, if Nigeria wants to become a commercial society, it must transform its laws and legal institutions to drive a strong market economy. Unfortunately, despite technical support from international organisations, such as WTO, WIPO and WCO, Nigeria has not shown the political will to pass critical laws to create the legal infrastructure for a strong market economy. That, I repeat, diminishes Nigeria’s claim to civilisation!
Olu Fasan