BEYOND BORDERS

Your Thoughts on Public Policy Are Not Yours!

Ideas ride us into battle like warhorses. We can witness, participate in, and even lead these battles, but their true meaning eludes us. We don’t really know where ideas come from, nor how to control them. - Nadia Eghbal

IDEAS MATTER

The most dominant piece of economic news in the country right now is the border closure. Opinions are divided on whether this latest policy direction by the government is the right approach. The primary costs are borne by different classes of society. Consumers have had to pay higher prices for the affected goods. Producers who rely on imported inputs have also seen their production costs go up. The government’s defense is that this is a necessary measure for the economy to develop - and that the price hikes are a necessary sacrifice in the service of the development of local industries. Like many commentaries have noted, this is not the first time the federal government has pursued this particular policy. In fact, trade protectionism is a staple in the policy menu of successive governing regimes, civilian or military. While we can debate the results of each round at the periphery, what is clear is that it has not produced the boom in domestic industrialization that each government had hoped it would.

It is reasonable to assume that when a method designed to achieve a set goal fails, you should try to design and implement an alternative. Governing a complex system like a society might not be so simple. But absent authoritarian suppression of opinions and expressions of freedoms, we assume that the plural nature of political competition should lead to the triumph of alternate visions in the presence of failure.

But this is rarely observed in practice - particularly in developing countries like Nigeria. Economist Bryan Caplan made the bold assertion that poor economies are stuck in an “idea trap” - and this creates a self-reinforcement that makes it hard for good alternatives to emerge. He observed that poor countries are poor because they consistently perform worse on economic growth. And that “the main reason seems to be that poor countries consistently have bad policies”. Even in democratic regimes where there is the expectation of competition against bad ideas, people almost never elect candidates on the simple basis of having rival ideas that challenge the existing paradigm.

In the governance of a society, elites compete for power and influence over the resources, mechanisms and the functionaries necessary for peaceful governance. In maintaining order and control, elites need to have legitimacy - otherwise, they lose the right to govern and can then only maintain control through force and coercion. This is a costly and unstable way to rule. In his study of authoritarian governments, political scientist Nicholas Cheeseman observed that even dictatorial regimes do not rely solely on the use of force to retain their hold on power. He noted that “while some dictators have tried to keep power solely by terrorizing their citizens, few political systems can survive through repression alone”. Because of the difficulty associated with this model, “more successful authoritarian regimes, therefore, combine coercive tactics with those of persuasion - giving key groups and constituencies reasons to accept the system, rather than just forcing their acquiescence through oppression and cruelty”.

In analyzing elite control of society, we mostly focus on interests. We conclude that politicians and bureaucrats govern according to the explicit interests of their allegiances. Hence, a government that promulgates policies we agree with expresses our interests, while that which governs otherwise is subservient to other - perhaps private - interests. But society is often divided into multiple - and sometimes opposed - interest groups. How do governing elites manage the interests of different groups with minimally tranquil consensus? For example, public workers in Nigeria want an increase in the minimum wage. While a broad section of the population is also worried about inflation. Finding policies that fix both problems is hard, which means that trade-offs will have to be made. So how does a government decide on one direction without alienating other interest groups? Political elites achieve legitimacy, control and tranquil consensus by shaping public opinions. And the primary way this is done is through ideas.

It is ideas, not vested interests, which are dangerous for good or evil. - John Maynard Keynes

IDEAS, IN THE AIR

You may think it’s absurd to claim that political elites and governments control your opinions. After all, you are free, if not indeed, but surely in thoughts. The ideas in your mind right now were not put there by someone else. They may be borrowed, but they are stuff you freely chose to think about. But is this true?

Humans are not isolated beings with empty minds that randomly gather information. We are born with intuitions. We also live and grow through our experiences, histories, and identities. Nigeria, for example, is an arbitrary construct that attained its current identity in 1914. Before that year, being “Nigerian” has no meaning. Many of us were born after that year - and despite the artificial nature of its creation, we have a “meaningful sense” of being Nigerian.

Our ethnic and tribal identities run even deeper. And deeper still our bonds to kin and relatives. Thoughts and ideas in our heads explore this vast neural landscape of history, experience, and identity in our relationship with the world and others around us. I get offended when a “foreigner” says something derisive about “Nigerians”. They may be expressing genuine anger about an unfortunate experience with another Nigerian. But despite no direct connection to the back story, or however abstract being “Nigerian” is - I still automatically take offense. This is because I have lived my whole life as a Nigerian.

Just as everyday events can exploit our human nature and smuggle ideas into our heads, so too can political actors through the deployment of policy memes. I watched in an interview a few years ago, as the then-Minister of Trade and Investment, Olusegun Aganga, remarked that one of the benefits of certain government policies at the time was that more billionaires will be “created”. I am sure he meant well. I can certainly see his point through the lens of wealth creation in society. But I was still offended, and so were several people watching with me. I thought it was an odd metric to use for economic growth. Many people saw it as further evidence that the government was corrupt and only serving moneyed interests.

A few days ago I came across a statement credited to former EFCC chairman Nuhu Ribadu. He approvingly referenced the fact that there have been no new oil billionaires since the current government came to power. I am also sure he meant well. I was still annoyed. I thought it confirms the concern a lot of us have about the government’s lack of commitment to economic growth. Many supporters interpreted it as the government’s commitment to fighting corruption and refusal to serve moneyed interests. It is amusing how the word “billionaire” can trigger divergent, sometimes diametrically opposed, associations. But it further proves how public opinion can be shaped and controlled.

The ideas of the ruling class are in every epoch the ruling ideas, that is, the class which is the ruling material force of society is at the same its ruling intellectual force. - Karl Marx

THE TWO LEVERS

Before you assume I am proposing a bogeyman theory. It is important to note that political elites are prone to the influence of ideas as any of us. No one really doubts whether Hitler’s convictions were true. The atrocities that followed from his convictions do not make sense as mere political theatre. But the mechanism of interest to me is how elites can get a large section of the society to go along with their beliefs. In a very important study, Michael Munger and Jeffrey Grynaviski analyzed how the justification for slavery in the southern United States evolved from a “necessary evil” to a “positive good”. These elites were influenced by personal gains, pressure from abolitionists, and the threat of political competition. The interests at stakes in the slave economy of the south concern cotton farmers that use slave labour. But the ideas and arguments used to justify slavery galvanized a large section of the population enough to plunge the U.S into a bloody civil war.

The most effective way to get people to have beliefs or act against their interests is through ideas. Economists Dani Rodrik and Sharun Mukand provide a useful description of how this works. We can think of political elites as policy entrepreneurs - people in the business of selling policy proposals to the public in exchange for consent and legitimacy. Rodrik and Mukand conclude that proposals that have the biggest influence on us are those that appeal to our “identities” and “worldviews”.

As I have noted, we are not walking blank slates. When confronted with problems, propositions, and solutions about the world, we rely automatically on our intuitive inferences. A good example is trade policy. The primary beneficiaries of import restrictions are usually politically connected and organized groups of domestic producers. They get to enjoy exclusive market access without competition and charge higher prices without the pressure of productivity. But policy memes on trade policy are designed to appeal to our identities and how we think the world works (our worldview). Importers are not self-interested people with rights to seek opportunities, but rather they are portrayed as “unpatriotic” citizens who turn the country to a dumping ground for “foreign” goods. This is designed to offend your sensibilities and identity as a “Nigerian”. “After all we have the capability to make these imported goods ourselves, so why send our money abroad?” Imports restriction is not a response to the accounting hole the central bank had dug itself in through targeted monetary expansion and debts, or customs squeezing importers to make up for fiscal revenue shortfalls. Rather import restriction is how China and India developed - this is “how the world works” and anyone arguing otherwise is a colonial and imperialist sympathizer in the great struggle against “global capital”.

This persuasion game is how political elites get the public to buy into their interests, support their agenda, and generally act in cooperation toward a set goal. Like most mechanisms in a complex society, this can have both positive and negative effects. Acting with a common purpose is of vital sustenance to the sovereignty of nation-states. Ideas bind and they liberate. That is why it is important for us to try and understand the underlying facts, truths, and knowledge about the ideas that influence us before charging towards a course of action.

Ideas are the hooks on which politicians hang their objectives and further their interests. - Kenneth Shepsle

IDEAS APPLIED - THE INTERESTS AT PLAY

The same dynamic I have been describing is at work when applied to the ongoing discourse around the border closure. This controversial unilateral policy enjoys support from both the elite and the public. The primary way it is designed to persuade is to appeal to your identity as a Nigerian and also convince you that the world works this way. Opponents of the border closure are painted as “unpatriotic” and “economic saboteurs” who do not love Nigeria. Proponents of the policy proudly tout it as a conventional way the world works. But if we carefully peak behind the veil of the rhetoric, what you find is that reality is quite different from how it is being described.

Let us start from the various interests at play. First is the government itself. The current administration of President Buhari believes in active government intervention in the economy. This is not new, as previous governments periodically intervene in the economy to promote whatever policy initiative that they believe. This time the government decided to act through the central bank - perhaps due to the political differences with the leadership of the national assembly. So for the past three years, the Central Bank of Nigeria (CBN) has expanded its mandate beyond general management of our monetary system and has engaged in active and targeted economic management. Some commodities ranging from tomato pastes to fertilizer and toothpicks were blacklisted as the CBN made it clear it will not honour the request for foreign exchange to import said commodities.

The CBN doubled down on economic intervention by providing funding to the agricultural sector - this was done both directly through the creation of “intervention funds” (this already became a trend under the Jonathan government) and by exercising control over the banking industry. CBN also became very active in the debt market by becoming the largest buyer of government-issued debts and hereby providing direct funding to the federal government.

There was a drop in the international price of crude oil which dominates our export earnings and 90% of government revenue, and hence a vital source of foreign exchange which is managed by the central bank. The pressure from these measures and the subsequent economic recession put the Naira under downward pressure, to which the central bank has responded by resisting devaluation and prefers to maintain a multiple exchange rate window. This created an almost comical gap between the so-called official exchange rate and the actual market rates. By leveraging its powers in an unprecedented way into daily economic management, and also leveraging its balance sheet to provide fiscal support to some industries and the government - it is plausible that the CBN is clearly motivated to fight vigorously against import competition in the sectors it has intervened.

The federal government feature quite prominently in this calculus as well. With the collapse of oil prices and the government’s major revenue source, the federal budget had become an annual ritualistic fantasy than an actionable document. Capital projects across the country remain unfunded while debt repayment and recurrent expenditure (fuelled by the cost of running the government and the expansion of the civil service) dominate the budget. Facing these pressures, the government actively sought to divest its revenue sources. There are efforts to increase the tax base and the value-added tax was recently hiked. It’s hard to see this plugging the fiscal hole - so it is plausible to conclude that regulatory agencies will seek further means. And the customs probably saw in the informal land border trade, the proverbial billion dollars on the sidewalk.

Further interests can be computed. For example, an influential class of domestic producers has found a willing partner in a government and policy regime that favours interventions on their behalf. Therefore there is an increasing push for more commodities and goods to be restricted in an effort to limit competition from imports and options for the domestic consumer. But policies that entrench the interest of the government’s policy biases, a narrow set of domestic producers, and bailing out the government’s fiscal profligacy are a hard sell at face value. Rather these policies are promoted as being in the interest of the country, and that this is how countries that industrialized did it. The second claim is one we need to critically interrogate. Is it true that China developed by closing its borders for forty years? Even if this is hyperbole, are restrictions on trade really the way to develop an economy?

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. - John Maynard Keynes

HOW TO INDUSTRIALIZE - ISI, E.O, AND NEOLIBERALISM

Since the end of the Second World War and the decolonization of most African countries - the pressing concern has been how to develop the economies of low-income countries. One of the outcomes of the search for this development holy grail is the package of policy strategy dubbed Import Substitution Industrialization (ISI). In a review article of ISI, economist Henry Bruton specified the thinking that produced it as 1) a rejection of market solution. 2) a prominent role for capital formation and 3) replicating the growth of western nations. With a diagnosis in hand, the job began on how to implement solutions. If market mechanisms are rejected, then the question becomes how do we protect the domestic economy? Increasing capital formation for investment means that domestic savings rate will have to increase, and replicating the growth of the West through central planning and not markets will not be an easy fit. For many development policy experts at the time, history was simply too slow to be reliable. Growth will have to come fast.

ISI neatly fits into Nigeria’s current economic development strategy. Markets are widely scorned and spurned in favour of central planning. And the levers of economic control remain the same - usually restrictions on imports through tariffs or bans and exchange rates control. What is truly baffling is that we are repeating a policy that turned out to be a catastrophic failure. There is simply no indication that history won’t repeat itself this time around.

Import Substitution failed through its own rationale. The priority of ISI is domestic consumption - just like many people now tout our huge population as a viably sustainable market, this means that an ISI strategy will perform poorly on exports. In the periods of previous experiments with ISI, manufacturing across Africa dipped and we became dependent on primary goods (raw materials) exports. There was simply no earnings to support further industry investment because domestic firms were not productive and competitive enough to export. Trade barriers hiked prices (as we are witnessing again!) limiting people’s capacity to save, and even, spend - therefore domestic consumption could not be relied upon (so much for capital formation). But if ISI was such a failure what accounts for its persistence in policy circles? Well, that’s because the relative success of the so-called East Asian Tigers has scrambled the thoughts of many policymakers.

Taiwan and South Korea changed the name of the game from Import Substitution to Export Orientation (EO). This model was later repeated in a systemic way by China to astounding but still limited success, and countries like Vietnam are following suit. EO emphasizes the protection of domestic infant industries until they mature and reach a certain level of global competitiveness. This has become the dominant thought in industrial policy advocacy, and policymakers (including economists!) confuses EO with ISI to a general misdirection. As I have noted in these pages, industrial policy of the EO kind is a tricky business and thinking about it can make you dizzy.

EO differs from ISI in two ways. One is that rather than satisfy domestic demand, the focus is on building export industries. Many of our homes were inundated by Asian electronic and electrical devices in the 80s and 90s because that was the explicit strategy of industrialization in East Asia. The second difference with ISI is that the protection of local firms is not indiscriminate and indefinite. Support is reinforced only for firms that succeed (sometimes export targets were set!) while those that failed are allowed to die. And support is withdrawn once firms reach a comfortable level of global competitiveness.

As with any strategy that involves planning a complex system as the economy, executing this strategy is not a child’s play. In a study of Ethiopia’s industrial ambitions, Jostein Hauge summarized the things that East Asia did as “1) support of domestic producers in sophisticated industries beyond initial comparative advantage. 2) export-orientation. 3) the pursuit of fierce competition with strict accountability. 4) well-crafted reciprocal control mechanisms. 5) technology transfer to local firms”. In his monograph on development, John Rapley stated the three ingredients needed for export-orientation development are 1) state capacity - the administrative capabilities of the bureaucracy and a technocratic class. 2) a strong executive with concentrated decision-making. 3) a domestic capitalist class. We can debate whether Nigeria is capable of pulling off this feat. But what is clear is that what we are currently doing is not remotely close to the East Asian model. China did not escape poverty by closing its borders and doling out intervention funds.

In the history of economic policy-making in Nigeria (as with other developing countries), a familiar “villain” regularly surfaces. The approach to economic management dubbed “neoliberalism” lives in perpetual infamy in the popular imagination. Neoliberal policies are regularly associated with imperialism, colonialism and general economic apartheid that is supposedly the agenda of the developed world to keep the “global south” poor and underdeveloped. But as with other ideas that have been used to shape the public’s opinions over the years, the truth is a lot more complex than the popular narrative.

The key propositions of neoliberal policies are observed through the infamous “Structural Adjustment Program” (SAP) recommended and sometimes conditioned by multilateral financial institutions like the World Bank and IMF. Central to these propositions is an emphasis on fiscal austerity and inflation reduction. When the government spends excessively, it is “cashing out” from the economy through taxes and borrowing. It is also driving interest rates up through demands for government debts. This reduces the availability of investment to businesses because investors will prefer to purchase the government’s more “secure” investments. Inflation also reduces investments because they erode profits and make new investments unappealing. When the overall investment in the private sector is low, the economy declines.

Cutting public spending and reining in inflation through tight monetary policy is unpopular with voters - and policymakers conveniently place the blame on World Bank and IMF. In cases where these harsh but necessary reforms are delayed or resisted, government elites, media, and activists frame it as an existential struggle against western imperialism and global capital. But SAP is not the underlying core of neoliberalism. SAP is the scramble for normalcy when a government has lit the house on fire. Neoliberalism is based on the neoclassical model of economic growth.

What is called the neoclassical model is the standard way capitalism is represented and defined. It favours private markets over government ownership. Trade liberalization over protectionism - or at least trade policy that is based on rules (like agreed tariffs) over discretion (border closures and import quotas). The rationale is that too much government dominance will create a system that favours lobbying and interest groups that can influence policies. The role of government in this view is to regulate the excesses of bad actors - other than that, it should stay out of the way of individuals and firms, and let them make their choices.

So what is the best way for a country to industrialize and develop? The economy is a complex system, and you learn more from knowing what you should not do than what to do. Government policy can destroy several years of growth and prosperity through ill-considered measures. And private actors can act under bad incentives and information to wreck an economy. What is important to know is that economic development goes beyond economic factors. The civilizational history of a society matter. The quality of political institutions matters. Crafting policies for development requires a political class who understand the contexts of history, culture, progress and possess the right vision to harness the country’s human capital.  

Ideas can be life-changing. Sometimes all you need to open the door is just one more good idea. - Jim Rohn

CONCLUSION - IDEAS UNTRAPPED

There are no simple answers to most socioeconomic problems - and policymakers, experts, and activists need to shed the illusion of solid knowledge. But more importantly, we need to be aware of how a society’s equilibrium can be stuck in an “idea trap”. There is a positive feedback loop that links good ideas to growth and prosperity. The same loop exists for bad ideas. For every modest gain in economic reforms in Nigeria, there exists an above-average probability for future reversal of fortunes. Every time we try to industrialize, we always fall back on dead ends like ISI and trade restrictions. Ideas about export-orientation do not enter the zeitgeist - and we perpetually demonize free-market policies. The benefit of history and past experience is to learn from mistakes and not repeat them. Nigeria can leverage the history of these rival ideas to find solutions unique to our political and cultural landscape.

The need to explore rival ideas is not a claim to the superiority of certain ideas - but rather encourages us to confront our biases and critically engage the solution we choose. It pushes our efforts on institutional design towards adaptive rather than ideological rigidity. For example, the East Asian EO model can be problematic in practice for a burgeoning democracy like Nigeria. Concentrating decision-making in the executive can lead to abuse of authority. EO seems to work better with a high-level bureaucracy that is isolated from society. In a democracy, an executive can orchestrate electoral fraud that packs the legislature of representatives sympathetic to its ideas and only exist as a “rubber-stamp”. On the other hand, the weakness of the neoclassical model of economic growth is its emphasis on static comparative advantages. Countries will end up doing what they are good at and not shift economic structure. This can have impoverishing effects in countries that only export primary agricultural products. A world where East Asian economies did not develop companies like Haier, Huawei, Hyundai, and Samsung is certainly poorer. We can learn from this critical engagement with other ideas to find solutions that are consistent with what has tested well and tolerant of our unique challenges.

Bryan Caplan thinks you can escape an idea trap only by getting lucky.  This just pushes the question one level further. How do you get lucky? Do we simply submit to cosmic randomness? I think social institution leaves a lot of room for design and deliberate innovation. This is quite different from planning every step. Designing better institutions or moving to a new equilibrium requires the spread of ideas. The competition in the marketplace of ideas can stage a break from an idea trap. You also need good leaders or to use Samo Burja phrase - “great founders”. Founders can nurture the spread of rival ideas in an ecosystem stuck in a bad equilibrium. Great founders are people who are open to learning from new ideas. This seems like a chicken and egg problem. Ideas make great leaders, while a leader can successfully nurture the spread of good ideas. I believe the starting point is for us as citizens to learn as much as we can about the world. Good leaders can only come from among us.