Much ado about free markets, economic growth and poverty reduction

Since this column began, a number of people have spoken to me about my fervent belief in free markets in the context of a developing economy like ours. The frequent answer I give is that “relatively” free markets are the best way I know of to reduce poverty. The reasoning goes like this – freer markets lead to improved economic growth which in turn leads to increased poverty reduction. Given that the rate of people in extreme poverty has dropped by over half over the last few years driven by strong growth in the emerging markets that have embraced versions of free markets – particularly Asia and Latin America – one can see why this is attractive to me.

A common criticism of the above belief is that all the fast-growing countries have widely different structures. There is no debating this fact. However, it is also clear that on average, the countries were more likely than not to allow competition and market forces to drive the price of a good or service, and they were more likely than not to create the regulatory and business environment that encouraged private competition.

Another common criticism is that even in these countries, economic growth doesn’t lift all boats equally, and can even create unrest in the target countries – even in countries that have seen the greatest gains from poverty reduction.

This is an inarguable truth. Even though the poor do gain from economic growth, the more well off gain disproportionately. As William Gibson, one of the greatest science fiction writers of the twentieth century, said – the future is already here, it’s just not evenly distributed. He was talking about technology, but the same can be said of economic growth.

It is easy to illustrate this with Lagos as a state compared to Nigeria as a country. In 2014, Lagos was estimated to have a GDP of $90 billion. That means that with 5% of the land mass and roughly 10% of the population, Lagos accounted for about 20% of Nigeria’s GDP – giving Lagos a per capita income twice as high as Nigeria’s average.

It is clear to most people that Lagos has benefitted disproportionately from Nigeria’s economic growth over the last decade and a half. The tendency is to dismiss Lagos as an aberration, and as an accident of geography and history. However, I believe Lagos should be seen as an inspiration. Look at it this way, if everywhere in Nigeria had the same per capita income as Lagos, Nigeria would be a very different place.

A little math will show just how different. For Nigeria as a country to have the same GDP per capital as Lagos, the economy of the country would effectively have to double in size. If Nigeria grew at 10% real GDP per year, it would take just over 7 years for this to happen. If we grew at 5% it would take roughly 14 years and if we grew at 2% it would take 35 years.

This power of compounding is why economic growth is a core focus of governments the world over. As the example above shows, economies on different growth rate trajectories can look very different in a few decades. Hence all the comparisons between Nigeria and Asian countries like South Korea. We got on the wrong growth curve and paid for it in the long run.

Starting in the early noughties, and fueled by concurrent oil and gas, financial services and telecoms booms, Nigeria embraced free markets and hoped on the 5% growth train. The various governments of the day spoke about their desire to push us to 7% to 10% growth enjoyed by India and China respectively, however, we were never able to overcome our main challenges (inadequate electricity power and a challenging regulatory environment) to do so.

To complicate matters, the 5% percent growth rate is not enough for Nigeria to accelerate poverty reduction. As most people know, Nigeria has an estimated yearly population growth of 2% to 3% per annum. Which means that on a per capital basis, a 5% income growth rate translates to a per capita growth rate of 2% to 3% per year. So even when the country is growing at a pace to double in 14 years, the per capita income is growing at a pace that would double in 25 to 35 years. This intersection of demographics and economic growth is one of the main reasons why the growth of the noughties and early teens was not felt across the board and why places like Lagos disproportionately benefitted from the growth.

In an unfortunate turn of events, those halcyon days when we were disappointed by 5% growth are gone. We currently expect to have at least 4 consecutive quarters of negative growth and are hoping to return to a 2% positive annual growth rate by 2017. However we cannot stay there. Given our discussion of population growth, a 2% growth trend would be devastating for our quest to change the nation and bring people out of poverty. We need to find ways to kick-start our growth and to reduce poverty. As a result, Nigeria needs to get back to 5% growth at the minimum and devise strategies to push up to 7% growth if we are to truly change the country and make a difference in the lives of citizens.

To bring it back to the point about free markets, and why I think the way I do about government policy. I view government policy through the following lens – will this policy if implemented create the opportunity for the country to return to a high growth phase? To my mind there are four strands of policies governments in Nigeria pursue to drive economic growth – 1) investment in infrastructure 2) increased local consumption 3) increased exports 4) increased ease of doing business.

There is evidence that almost every government since the 70s has pushed variations of this strategy. Unfortunately, the outcomes have been mixed with negatives. The reason is obvious – no matter how good a policy statement is, only execution matters. Sadly, our various governments have been very bad at execution.

There are many reasons for that, however, I think that our fundamental problem with execution is driven by what is known as ideology-based policy making. For example, there’s a common belief that Nigeria is import dependent and that all policies to wean us off our import dependence and “save” foreign exchange are good policies. However, it may not always be the best policy steps to wean the country of importation of a particular good or service.

The corollary to ideology based decision making is evidence-based decision making. This is where a policymaker looks at the policy being proposed to see if it fits within the set aims, but more importantly the policy maker will change or scrap the policy if it is not meeting the stated objectives.

There are many examples of policies meant to drive change that do not do what they are supposed to but hang around because their stated aims are laudable – the automotive policy, the textile policy, the rice policy – the list goes on and on.
Policy makers do not have crystal balls, and as such they may get initiatives and policies wrong but they must have the humility to accept the evidence and seek to change their policies to reflect the reality on ground.

You would find that most evidence-based policies have their roots to some degree, in free-market-based policies. This is because the market is the primary mechanism to know whether a policy succeeds or fails. Of course there are market failures especially in things like medicine and defense – however, it is always better to compensate for market failure than to abandon markets all together.

Evidenced based policy is not a panacea – it does not automatically mean that the government will be successful in moving us to the 7% or to 10% economic growth bracket. However, it has a better chance of succeeding than any other method. As Winston Churchill said about democracy – “Democracy is the worst form of government, except for the others.” The same could be said of evidence-based policy making.
Nigeria is a country that has seen some progress in poverty reduction over the last few years, however, there is a large swathe of this nation that is yet to benefit. We need to embrace the kinds of policies that allows them to experience the future that they and their children deserve.