The indefensibility of crony capitalism

Three Saturdays ago, on 14 July, I received a copy of the Financial Times (FT) at home as I do every morning except on Sunday when the FT is not published. On the front page was the smiley face of Alhaji Aliko Dangote, with the blurb: “Aliko Dangote, Africa’s richest man, has Lunch with the FT”. The “Lunch with the FT”is a popular interview section in the paper’s Weekend edition. The interview was largely grating. Why? Well, Aliko Dangote, the 100th richest person in the world, according to Forbes, is, by his own admission, a product of crony capitalism and protectionism, and has no qualms about defending those practices.
To be sure, Dangote was born into wealth; he’s also a hardworking businessman who has “a hankering to make things”. This is how the FT put it: “Dangote has made his money from more prosaic things: salt, sugar, flour and, above all, cement. An awful lot of cement”. He is, indeed, known as “King of Cement”, the main source of his stupendous wealth. But how exactly did he hit the jackpot? Well, Dangote “makes no secret of how he got his break”; how he was transformed from just a wealthy man into someonestratospherically rich!
Let’s hear how the FT, paraphrasing Dangote, tells the story. “It happened one day not long after the election in 1999 of Olusegun Obasanjo”. Dangote had contributed to Obasanjo’s campaign in that election. Then, one day Obasanjo called Dangote in the morning, and asked him, “Can we meet today?” Dangote went to meet the president, who asked him why Nigeria couldn’t produce cement and had to import it. Well, Dangote told Obasanjo that only if imports of cement were banned would it be worthwhile to produce it in Nigeria. Pronto, Obasanjo banned the imports of cement. Dangote, as the FT put it, “has never looked back”. Businesspeople usually contribute to presidential campaigns, but in the US, they get political or ambassadorial appointments if their candidate wins, not a monopoly licence on the economy. But, for buying political influence with his campaign contribution, Dangote effectively got a franchised monopoly over a key economic sector.
But at what price to the economy and to the Nigerian consumers? According to the Nigerian Industrial Revolution Plan (NIRP), the government’s industrial policy, published in 2014, “The Nigerian cement industry is heavily concentrated,with a few large firms”, adding that “strong regulation is needed to ensure the industry adequately promotes competition”. The NIRP also stated that “Nigerian cement prices are among the highest globally” in spite of the products being of “low finished standards for exports”. In other words, Nigerians are buying cement products that are not of international standards yet paying prices that are among the highest globally. Surely, when Obasanjo was enriching one man or a few people by creating a closed market for the cement sector, he never thought about ordinary Nigerians in a country where there is an estimated housing shortfall of 17 million units and high cost of building materials, particularly cement, is regarded as one of the major causes.
Truth be told, Obasanjo abused his power as president of this country. He abused it politically, and, more damagingly, economically. Politically, he tried to play God by deciding who became president and who became governors and removing governors and leaders of the federal legislature at will. Economically, he introduced crony capitalism at an industrial scale, awarding oil blocks to those from whom he derived political and personal benefits and using protectionism to enrich favoured business people. The ethos of capitalism, passed on centuries ago by Adam Smith, is that the invisible hand of the market, rather than the visible hand of the government, should allocate resources.But Obasanjo usurped the role of the market by intervening directly to allocate state resources to select individuals and businesses.
I urge anyone who hasn’t read “Reforming the Unreformable”, written by former finance minister Ngozi Okonjo-Iweala, to do so. The book lays bare the extent of Obasanjo’s abuse of power in the economic management of this country. In one bizarre example, a businessman who manufactured glass bottles went to Obasanjo at 6.30 am. Yes, 6.30am! Have many business people have that kind of access to the president? Well, this businessman did. He told Obasanjo that some manufacturers were importing bottles into Nigeria, thereby ruining his business, and wanted Obasanjo to ban the imports of bottles. Obasanjo agreed. According to Okonjo-Iweala, “I tried to interject, but the president ruled me out of order, and importing bottles of all kinds was banned”. It didn’t matter that the ban had damaging effects on manufacturers of pharmaceuticals and cosmetics, who needed special types of bottle. Obasanjo did the same with the bans on textiles and other products, favouring politically-connected businesspeople, regardless of the knock-on effects on the economy and the wider society.
Then, there was the granting of waivers of import tariffs, another practice Obasanjo used to create crony billionaires.Think of it, if the tariff on, say, rice is 50% and zero-tariff is granted for some people to import large shipments, who then sell the rice at high prevailing domestic prices, they could become billionaires overnight. Indeed, as Okonjo-Iweala puts it in her book, those receiving tariff waivers to import large shipments of rice, “could, by my calculation, easily make more than US$1 billion equivalent in Nigeria’s consumer market”. She said it was her refusal to support duty waivers for importation of rice and other products “for certain influential businesspeople and their political patrons” that contributed to her removal as finance minister by Obasanjo!
Whatever motivated Obasanjo’s crony capitalism and protectionism, it was not in the national interest. Those who cite the Chaebol-centred industrialisation in South Korea to justify crony capitalism ignore the fact that cronyism was widely blamed for the subsequent collapse of the South Korean economy. The truth is that crony capitalism doesn’t drive economic prosperity; rather it creates economic distortions and inefficiency. Furthermore, it fuels political corruption, as money, politics and influence converge.
What’s more, crony capitalism is a major obstacle to social justice. Whatever the trickle-down effect of crony capitalism, and it is minimal, it pales into insignificance beside the huge inequality it creates. And nothing entrenches inequality more than the concentration of wealth in the hands of the politically connected. Little wonder that the Nigerian Constitution stipulates,in section 16(2)(c), that the State “shall direct” its policy towards ensuring that the economic system is “not operated in such a manner as to permit the concentration of wealth … in the hands of few individuals or of a group”.But Obasanjo conveniently ignored this in his imperiouseagerness to create crony billionaires.
In his Principles of Political Economy and Taxation, David Ricardo demonstrates how the concentration of wealth in a small social group, such as landowners and industrial capitalists, can upset the social equilibrium. Through excessive prices caused by scarcity, in this case, artificial scarcity resulting from import bans and monopolistic practices, crony capitalists claim a disproportionate share of national income. And they entrench their position through infinite capital accumulation, as Dangote is doing. The distributional or social justice question, raised by the concentration of wealth in fewer hands, was also the subject of Thomas Piketty’s seminal book, Capital in the 21st Century.
Now, this is not a criticism of wealth or wealthy people. Far from it. But as an economic liberal, I believe that it is markets, not government, that should createwealthy people.The only role that the government has in the emergence ofmillionaires, billionairesor trillionaires is to create a conducive environment and a competitivelevel-playingfield that allowsuch people to emerge, not by making few people rich through crony capitalism and protectionism.
Without a doubt, Alhaji Dangote is a great Nigerian, a great African. But, truth be told, he is a beneficiary of economic practices that distort competition. Sadly, as the FT put it, he is “defending the thinking that has made him rich”. For instance, he said the “the government needs to bring out a draconian policy” to stop people importing food items “just like they did with cement”. Well, that would make people like Dangote richer and deepen poverty and inequality in Nigeria. The government must indeed bring out a draconian policy, yes, but it must be to stop anti-competitive practices, including cronyism. They are indefensible!

Olu Fasan