Poverty and the Flow of Capital

My recent three-part series, “Why Nigerians are Poor” was an attempt to distill my thoughts on poverty, unemployment and inequality over the past several years for the benefit of policy makers and the general public. I continue today with a focus on another aspect of Nigerian poverty-our sub-optimal deployment of capital and how it perpetuates endemic poverty in our society. Hernando de Soto in his seminal book, “The Mystery of Capital” emphasized the central role that capital plays in economic productivity and development noting that “great classical economists such as Adam Smith and Karl Marx believed that capital was the engine that powered the market economy…the principal part of the economic whole” quoting Smith to the effect that “capital was to be the magic that would enhance productivity and create surplus value”. He argued that “the lifeblood of capitalism is not the internet or fast-food franchises. It is capital. Only capital provides the means to support specialization and the production and exchange of assets in the expanded markets. It is capital that is the source of increasing productivity and therefore the wealth of nations”. De Soto worried about “dead capital”-“assets that cannot be used to their fullest” i.e. capital that is not optimally active and productive and estimated that about $9.3trillion (as at 2000) dead capital lay in real estate held but not backed by legal title owned by the poor in third world (Nigeria included) and former communist economies. Other manifestations of dead capital cited by him include agricultural crops not backed by deeds and businesses not supported by incorporation and limited liability. As I reflected on de Soto’s concerns over the years, I have recognized that Nigeria has a worse problem with capital than he conceived in his book! We have four socio-economic “sectors” which capture capital and prevent its optimum deployment to generate economic productivity, create wealth and alleviate poverty. These are government and politics; banks and the financial system; crony capitalists/monopolies and oligopolies; and religious institutions. There is a fifth “force” which destroys capital and that is our culture and lifestyle. I will examine each of these in turn. Government in Nigeria is not primarily a system of offering social services to the citizenry, especially the poor. It does not by-and-large provide security for the common man; and it fails to prevent breach of its laws, especially by the rich, strong and powerful. In short, Nigeria’s governments do not perform, at least not successfully, the critical functions for which governments and thus politics were established. Instead politics is essentially a vehicle for seeking capture of state resources which are obtained primarily from extractive resources. It is not a co-incidence that the richest Nigerians are present, past or “present-continuous” office holders and their friends, agents and associates. Nigeria’s corruption is offensive not just because it denies the public services and infrastructure, but because it subverts the flow of capital, putting enormous resources in the hands of a few, who then hide those resources in physical, monetary or other assets within or outside the country, turning resources which should have generated wealth for all into essentially “dead capital”!!! The Banks lend money of course and in theory circulate capital-the problem is who or what they lend to! They lend to government in form of treasury bills to fund government operations (recall what happens to government resources discussed above); and to big corporations, multi-millionaires and billionaires, shutting out small and medium enterprises from the asset side of the financial sector even though their deposits are a significant component of the liability side. With this cycle of exclusion, it is not at all a mystery that Nigeria has created billionaires in units and poverty in hundreds of millions!!! This defective structure of capital (mis)allocation is compounded by our practice of crony capitalism! Our most successful businesses are in reality an extension of the phenomenon of state capture earlier highlighted. Crony capitalism (which tends to result in the creation of monopolies and oligopolies) is not based on economic competitiveness, but transfers of economic rents from government to its cronies in the private sector. The poor then suffer a “double-whammy”-publicly-owned resources are cornered by a few entrenching their poverty; and the emerging uncompetitive market structures mean they pay more for goods and services! The solution is to enact a robust competition law and policy regime!!! Finally much as I am reluctant to say this, the economic reality is that big religious institutions secure huge financial and other assets (in effect taxes on their members) which are often deployed in ways that erode economic productivity and therefore entrench poverty and deprivation. I understand of course that people must fulfil the financial obligations of their faith, but it is important that religious leaders are socially sensitive in deploying such accumulated capital. What is wrong for instance if such groups request their chapters to set up universities, polytechnics, secondary and primary schools, hospitals, hospices, technical and skills acquisition schools etc. in large numbers such that the social value of their activities offsets the economic cost of sequestered capital! Then we have destructive aspects of culture that destroy capital formation-excessive amounts spent on weddings, funerals and other celebrations, even by the poor; the tendency to consume foreign-made items whether food, football clubs, holidays, clothes, education, medical treatment, furniture, wine and spirits, and shoes! A huge amount of capital would be released for wealth creation and economic productivity if we reform many aspects of our lifestyles!!!