The 24th Nigerian Economic Summit starts this week with the theme “Poverty to prosperity: making governance and institutions work”. This is an appropriate topic, especially given the dire Nigerian situation. Good governance and effective institutions are key drivers of economic and social performance, and thus of prosperity and poverty-reduction. But Nigeria is stuck in the poor governance and weak institutions trap and, inevitably, in the poverty trap. Even worse, Nigeria is a perverse outlier. While prosperity is rising globally, poverty is deepening in Nigeria.
As everyone now knows, Nigeria has acquired the sobriquet “poverty capital of the world”. According to Brookings Institutions, it has overtaken India as the country with the largest number of people living in extreme poverty, having 87m people in extreme poverty compared with India’s 73m. For Nigeria, with a population of 190m, to have 87m people, nearly half its population, in extreme poverty, while India, with a whopping population of 1.3bn, has a miniscule proportion, 73m, in extreme poverty is beyond belief. What’s more, the report says that “extreme poverty in Nigeria is growing by six people every minute”. Put simply, the poverty situation will get even worse.
This is not a new phenomenon, of course. Even when global poverty fell dramatically from over 1.3bn in 2005 to under 800m in 2011, in line with the Millennium Development Goal poverty-reduction target, Nigeria was a laggard. In its 2014 “Nigeria Economic Report”, the World Bank said there was “little evidence of recent progress in poverty reduction”, adding that this “is at odds with the general international trend of poverty reduction”. Although the economy was growing at an annual rate of 6 or 7%, it was a jobless growth, contributing virtually nothing to poverty reduction. The World Bank described this as “the poverty/growth puzzle” and posed the inevitable question: “How could the economy the size and wealth of Nigeria have such high poverty rates?”.
But while Nigeria is still stuck in the poverty trap and struggling with the rudimentary and primitive challenge of dealing with extreme poverty, the trend all over the world is about people not merely escaping poverty, but actually enjoying real prosperity. Globally, countries are creating and expanding the middle classes, the aspirant people, who provide the stable consumer base that drives productive investment and, thus, economic growth.
In a recent report, the World Data Lab, a think-tank, shows that more than half the world’s population is now middle class. Specifically, 3.6bn people now qualify as middle class, i.e. those living on up to $110 a day. According to the analysis, people are classified as middle class if they have discretionary income to spend on large consumers items, such as refrigerators, washing machines or motorcycles, if they can pay to go to the cinema or for other forms of entertainment and if they can afford to go on family holidays. Such people would have accrued enough resources to be reasonably confident that they can withstand an economic shock, such as illness or a period of unemployment, without slipping into financial insecurity.
Interestingly, the ranks of the middle classes are being swelled by rising incomes in Asia, with 9 in ten of the new entrants into middle classes coming from China, India and south and east Asia. Even more striking, while one person escapes extreme poverty every second, according to the analysis, five people are entering the middle classes every second, with a projection that, by 2030, the middle classes will have expanded by 1.7bn to 5.3bn people.
But where is the middle class in Nigeria? How many Nigerians fall into this category? Well, according to a recent World Bank data, 92.1% of Nigerians live at below $5.5 a day. If the middle are people who live on up to $110 a day, then probably just about 6% of Nigerians are middle class, with the remaining 1 or 2% qualifying as rich, including the millionaires and billionaires! But this has huge implications for economic growth and prosperity.The Nigeria Industrial Revolution Plan, published in 2014, identifies weak purchasing power as an obstacle to industrialisation in Nigeria. Indeed, industrialisation is sustained by a consumer society. But Nigeria doesn’t have a sufficient pool of the middle class, with the discretionary income to spend on goods made by Nigerian manufacturers.
Yet, not only is Nigeria bereft of a robust middle class, it has an acute human development challenge of tackling extreme poverty, with six Nigerians falling into extreme poverty every minute, a situation that would be made worse by a rising population, which has grown by 72% over the past 20 years, and a stagnant economy, currently growing at just 1.5%.
But why is Nigeria failing to tackle poverty? Well, the obvious answer is the failure of ideas, policies and institutions. Ideas matter, policies matter, and institutions matter. Put simply, governance matters. The fact that China and India, which once had extreme levels of poverty, have escaped the poverty trap shows that poverty can respond to the right solution. China reduced the proportion of its people living in extreme poverty from 60% in 1990 to 12% in 2010. In 2012, the World Bank launched a knowledge hub to spread knowledge of China’s successes in reducing poverty.
Everything starts with the right ideas and knowledge. It’s not surprising that one of this year’s winners of the Nobel Prize in Economics, Paul Romer, a professor at the University of Chicago, won the prestigious prize for his endogenous growth theory, which emphasises the role of ideas and knowledge in decision-making and as drivers of economic growth. Policies and their successful implementation are the real drivers of change, but policies can only yield the right outcomes if they are based on the right ideas.
And the overarching idea that everyone must understand is that economic growth is the key antidote to poverty. Growth is the rising tide that lifts all boats. Economic expansion creates jobs and, when matched with higher productivity, increases people’s incomes and living standards. Unfortunately, Nigeria’s economy has stopped growing and, as a recent data shows, the average productivity of a Nigerian worker is $3.24/hr, compared with $19.68/hr in South Africa. Surely, with an abysmal growth rate of 1.5% and such a ridiculously low productivity level, Nigeria can never escape the poverty trap.
But another anti-poverty idea, sadly ignored in Nigeria, is that growth and productivity are functions of economic openness. It is not a mere coincidence that poverty began to fall significantly in China and India when they started opening up and liberalising their economies by lowering barriers to foreign investment and trade. In a joint report by the World Bank and the WTO, titled “The role of trade in ending poverty”, they argued that “trade can drive poverty reduction by boosting growth” and through higher incomes that result from greater choice and value for goods.
Of course, government must ensure that growth really trickles down and must support it complementary policies. For instance, China introduced universal social development programmes, such as free medical system and a minimum living allowance, that increased the disposable income of the poor, as well as targeted programmes that assist poor households and increase their ability to generate more income themselves. China spent $70bn on such programmes between 1980 and 2016, and now has the target of ending extreme poverty by 2020. Remarkably, something that’s very rare in Nigeria, Chinese billionaires and conglomerates are piling into the anti-poverty push, with the tech giant, Alibaba, pledging to spend Rmb 10bn in rural areas towards the anti-poverty programme.
Sadly, in Nigeria, the government’s anti-poverty policies are merely cosmetic and palliative, without increasing disposable income or improving productive capacities. Nigeria’s anti-poverty initiatives are government-driven, with hardly any private sector or philanthropical involvements. Yet, the government lacks the coherent strategy, the ideas, even the resources to tackle poverty the way China and India have done.
But Nigeria does not only have governance challenges, in terms of ideas and policies, it has huge institutional challenges as well. The absence of the rule of law and the poor quality of state institutions, coupled with the pervasiveness of corruption, are all obstacles to effective anti-poverty policies. A country with less corruption and more effective institutions will tackle poverty more successfully than one ridden with corruption and inefficient public institutions.The 2017 World Development Report on Governance and the Law highlights three institutional functions that are essential for policy effectiveness, namely, making credible commitments, inducing cooperation and coordinating actions. The truth is that huge commitment, cooperation and coordination problems undermine policy effectiveness in Nigeria, as we have with the incoherent, uncoordinated and sometimes gimmickry nature of the Buhari government’s social intervention programmes.
Finally, you cannot tackle poverty through overcentralised governance. In her book, How China escaped the poverty trap, Yuen Yeun Ang, emphasised the role of decentralised governance, with decision-making devolved to sub-national governments, which have significant degree of autonomy to choose their strategies. But Nigeria is over-centralised, and the government’s anti-poverty programme is too driven from Abuja. Surely, Nigeria must be restructured, with power and resources devolved to sub-national governments.
Of course, governance and institutions are critical to a successful transition from poverty to prosperity. But Nigeria lacks effective governance and institutions, which is why poverty is deepening in the country while prosperity is spreading globally.