Does capital investment promote sustainable economic growth?

The other day some Nigerian newspapers had a news item captioned, “Five Ministers in London” in which it was revealed that the five Nigerian ministers were in London on foreign investment drive. So, some of the pertinent questions that come to mind are: Do mere capital investments promote sustainable economic growth and industrialisation (SEGI); do mere Foreign Direct Investments (FDIs) promote SEGI? To many Nigerians and other Africans, these are not questions, because the answers are obvious.

The issue at stake here however is, SEGI, not the unsustainable (trivial) type of growth which economists measure as change in GDP. SEGI builds-up the competences of individuals and nations and eventually transforms a nation from a poverty-prevalent agricultural status into an industrialised one. Does mere capital investment build-up the competences of individuals and nations and lead to industrialisation? This is the issue discussed in this article.

In the 2009 Federal Government budget, $5.3billion (N780billion) was set aside for contracts for importing turbines and other components for erecting power-generating plants so that Nigeria can enjoy the uninterrupted supply of electricity. Another almost N300 billion was set aside for road construction and maintenance and erection of houses.

Thus, over N1.1trillion was budgeted for erecting structures. Less than N40 billion was budgeted for education that year. That has been the trend for decades. In this article, we also examined whether the desire of Nigerians to build a happy and prosperous nation can be achieved by merely erecting structures and organising investment fora in all the capital cities of the world to attract foreign investments into Nigeria?

History is important because it helps wise young nations to avoid the mistakes of older ones and focus on things that promote rapid growth and development. Consequently, let us review our experience and those of older societies. The Nigerian government and Shell Petroleum Development Company assessed 50 years of the Nigerian OGI in 2006, after investing over $10 billion every year, and concluded that there was nothing to show for it. Every living Nigerian knows the state of the Nigerian economy and its infrastructure. Does Nigeria have control over the OGI today after FDIs have flowed into it for over 50 year?

Does our experience support Nigeria’s belief that mere capital investment promotes SEGI? No.

The World Bank (1998), in its World Development Report, stated that technological knowledge means know-how; those countries which possess less of it are caught in the poverty bracket. Poor countries, the bank continued, and indeed poor people are not able to compete in the global system not because they do not have capital, or other material resources, but because they have less knowledge. I agree with the bank that the difference between the artisan/agricultural-economies in Africa on the one hand and the technologically advanced economies in Europe, America and Asia on the other hand, is a matter of the difference in level of knowledge and skills. The pertinent questions here, therefore are: What did Europeans, Americans and Asians do to possess the knowledge that is the basis of their highly competitive positions today? Was it through mere capital investments?

Europeans, Americans and Asians, our curiosity-driven research revealed had artisan/agricultural economies for thousands of years. The area occupied by the modern Western Europe was harnessed into the Roman Empire in 55B.C. The western portion of the empire was smashed by the Germanic tribe called the Vandals, in 406 A.D.(Carrington and Jackson, 1954). In the absence of the central authority provided by the empire, the islands of England were invaded by many tribes. The islands later metamorphosed into the United Kingdom of England early in the 10th century, and England and Scotland formed the Union of Great Britain in 1625 (Brooke, 1968). During the period of almost 2000 (two thousand) years, the productivity of the people in Britain was characterised by primitive tools like hoe, axe and draught oxen (Davies, 1969).

The productivity was very low and seemed unchanging for many centuries. Britain achieved the first modern Industrial Revolution (IR) in the period of 1770-1850 (Gregg, 1971). Adam Smith (1776), in his book, The Nature and Sources of Wealth of Nations, had described England as a nation of shop-keepers, because virtually everyone sold one thing or the other but no one produced. England by 1776 remained a nation of farmers and petty traders. The population of England was seven million in 1700, government revenue was £7million a year, and London was then the only city in Great Britain to which all goods were shipped (Trevelyan, 1948).

By 1900, England had become industrialised and most people worked for weekly wages. Population had become 36 million, about 80 per cent of the population lived in towns – 20 per cent lived in rural areas – the reverse of the situation in 1700. Government revenue had risen to £770 million by 1931.

What is the explanation for the stagnation of the English people for almost 2000 years? England was the most progressive nation in Europe before the industrial age. Other European nations achieved industrialisation after England did. Industrialisation took Asian nations about 3000 years. This means that it took both the capitalistic nations of the West and the non-capitalistic nations of Asia 2000-3000 years to achieve industrialisation, suggesting that capital is not the primary factor in industrialisation.

The research works of Charles Cobb (a mathematician) and Paul Douglas (economist) in 1928, Douglas (1948), Abramowitz (1956) and Solow (1957) showed that capital contributes very little to achieving SEGI. Gerschenkron (1966), examined the Western industrialisation experience and concluded that capital investment was not a prerequisite to it. Ogbimi (2003), using equations and graphs also showed that mere capital investment does not promote SEGI. SEGI is achieved through education and training. Nigerians will stagnate as long as the nation continues to erect structures and neglect education and training.

• Ogbimi is a professor at the OAU Ile-Ife, Nigeria.