Capitalism is not just an economic system, in the sense that investment in, and ownership of how we produce, distribute and exchange wealth is vested in the hands of private individuals and companies, and that prices are determined in the marketplace. Capitalism is also an economic philosophy because it is based, at least in its purest form, on individual rights. This economic system and its markets have faced many criticisms, several of them valid. But, it is beyond dispute, and is supported by empirical evidence, that capitalism remains the greatest creator of wealth and progress the world has seen. It has lifted billions out of poverty around the world, including some 600 million people in China, as well in India, Brazil and South Korea.
This is possible only because capitalism is an economic system that largely appeals to basic human instincts such as competitiveness, and thus to the differences in the abilities of individuals. This is why it has been so enduring, roundly defeating communism, which collapsed in the Soviet Union and Eastern Europe under the weight of its own contradictions. Yes, capitalism is imperfect, and we will discuss its imperfections shortly. But it remains, to paraphrase Winston Churchill’s famous quote about democracy as a political system, the worst economic system except for all the others!
The question for Nigeria is whether capitalism can achieve for its 180 million people what it has done in the western world, Asia and parts of Latin America. As we have seen, given that trickle-down, neo-liberal market policies in Nigeria have yet to make any real dent on poverty, we cannot blithely assume that capitalism will create national wealth for Nigeria except our leaders approach it not with hostility, but from a world view standpoint that interrogates the concept and bends it to our unique national objectives.
State capitalism
Nigeria needs to make a clear, conscious choice between four types of capitalism or combinations from among them. These are state capitalism, welfare capitalism, crony capitalism, and entrepreneurial capitalism.
State capitalism, with China as its leading light, is a variant of capitalism in which state spending heavily drives growth, and the private sector creates wealth. It is not just regulated by the state, but rather, it is strategically directed by the government as agents of overarching state strategy. State capitalism presumes a state with high levels of bureaucratic and high-level decision making and execution capacity.
Can Nigeria adopt this system of capitalism? It would not work here, certainly not in the pure Chinese form. Nigeria lacks the internal cohesion, discipline and organisational and technological skills of the Chinese society. However, despite what looks like a level of uniqueness that makes it hard to replicate in Africa, we cannot dismiss the hardiness of state capitalism, elements of which are practiced in softer forms in several countries including some that we would find surprising. It therefore remains a strategic threat, in the countries that have the state capacity to adopt and adapt it, to the liberal capitalism whose legitimacy was dealt a heavy blow by the global financial crisis of 2008.
State owned companies continue to play a surprisingly dominant role in industrialised Western countries, despite the philosophical penchant for privatisation and deregulation that began in the 1980s. The French government has an 85 per cent stake in Electricite de France, the country’s main power company, Japan’s owns 50 per cent of Japan Tobacco, and the German government owns 32 per cent of Deutsche Telekom. According to the news magazine The Economist, state-owned companies in the Organisation for Economic Cooperation and Development (OECD) countries had a combined value of $2 trillion and employed six million people as of 2012.
Some emerging markets have developed sophisticated forms of state capitalism, using the corporate form of organisation in modern corporations to drive their phenomenal growth. They have selectively reduced the direct role of the state in unproductive enterprises while retaining it in businesses with strategic significance. Having learnt lessons from the failures of communism and socialism, state capitalism in some countries takes forms Nigeria would hardly recognise when compared with the direct, heavy (and virtually always unprofitable!) hand of the state in our “government parastatals”. In China, Russia, Malaysia, Thailand, Saudi Arabia and in the Arab Gulf countries, many state-owned enterprises no longer report to government ministries. The government controls them only through significant shareholdings while allowing these firms to be run on a competitive basis as “national champions” that must nevertheless meet merciless efficiency and profit targets.
This is the only manner in which state capitalism could conceivably work in Nigeria. But, that is only if a culture of mediocrity, ethnic irredentism, corruption and political patronage reward systems that progressively killed Nigeria’s public enterprises can possibly be overcome. This analysis is relevant most explicitly to the policy options facing the Nigerian government in the reform of the Nigerian National Petroleum Corporation (NNPC) through the commercialisation or privatisation of its refineries and other operations, as well as the removal of fuel subsidy.
State capitalism certainly brings up the need for a more original approach to economic philosophy and economic reform in Nigeria, utilising our traditional value systems and perspectives on which business and the economy can be run. And, it has implications for the commercial competitiveness of Nigerian companies because the state-owned enterprises of the Asian economies enjoy full advantages of that strategic support while running as commercial enterprises in the core sense of the term. Nigerian companies, on the other hand, make their way in the world without similar strategic state backing, making their road rougher.
Welfare capitalism
Welfare capitalism is an effort to balance the worst tendencies of the free market, which often create monopolies, oligopolies and exclusion as large parts of society fail to benefit from wealth creation. In welfare capitalism, businesses and the state seek to smoothen out the free market’s rough edges by creating minimum entitlements for workers in a capitalist economy. These entitlements may also be negotiated with labour unions. They may include social housing, healthcare, or free education at various levels as was the case in several African countries in the 1950s and the 1960s. In European countries such as Finland and Switzerland, this has meant social security to meet the needs of workers in their retirement years as in the United States (U.S.), or unemployment benefits – “welfare” in the U.S., or “the dole” in Britain.
Social safety nets are necessary for social, economic and political stability in capitalist societies. But, welfare capitalism is expensive, and therefore controversial. There are questions about how effectively it benefits the really poor. It is a huge liability on government resources, and in the Nordic countries of Europe, welfare capitalism is funded in part – and sustained – by very high levels of income taxation. It can be constrained by factors such as uncontrolled population growth and inefficient management of public finances, including the inability to effectively generate public revenue and economic growth because these are what economists call “exhaustive transfers” rather than investment and corruption.
Welfare capitalism has faced difficulties even in Europe and the U.S. These difficulties stem from a wide perception that welfare capitalism reduces competitiveness in today’s world economy by focusing on basic entitlements while the skills and productivity of welfare-state workers decline in the face of competitive innovation that is the real source of wealth in all industrial societies. In the U.S., elements of the welfare state such as healthcare reform and social security have also become a lightning rod for bitter political divisions over the size and role of government versus free enterprise in a capitalist economy.
It is, in fact, shocking to see how welfare-oriented the “free market” U.S. is. America’s budget for 2015 was $3.8 trillion dollars, broken down into three broad segments – mandatory spending (65 per cent), discretionary spending (the part appropriated by the U.S. Congress, including military spending, which is 29 per cent) and interest on debt, which is six per cent of the budget. Of the $2.45 trillion of mandatory spending, $895 billion is for social security for senior citizens, $986 billion is for Medicaid and other healthcare, $366 is for unemployment, while $104 billion is for food assistance. Thus, roughly 50 per cent of America’s budget is spent on social security and healthcare!!
Whatever form of capitalism Nigeria might choose to follow in the years ahead, a restricted element of welfare capitalism is necessary. The real question is the scope, which should be narrow, and the timing, which should be realistic because the structure of the Nigerian economy for now (with a large portion of it an informal, “shadow” one) does not generate the kinds of revenues that make a country such as the U.S. spend so much on welfare. But, any interpretation of capitalism that expunges an appropriate role for the government and relies solely on market forces is doomed to fail as a path to development, for development must be measured in terms of living standards and not just consumerism or economic growth statistics.
Besides, the absence of a social safety net in Nigeria is part of a corresponding absence of a social contract between the state and its citizens, and is a contributing factor to the reluctance to pay taxes as well as to corruption. The challenge for policy-makers is to first restructure the economy and create the right revenue streams, and then find the right balance between social safety nets and creating an undesirable disincentive to national productivity by creating a massive culture of entitlement for able-bodied men and women who are not of retirement age. South Africa made this mistake coming out of the Apartheid era, based on notions of social justice for the black majority. The country’s economy is weighed down as a result.
Oligarchic capitalism
Oligarchic or crony capitalism has been dominant in Nigeria since the return of democratic rule in 1999. It is the Russian model, in which a few men called oligarchs control most of the country’s economy because they obtained ownership of large portions of the wealth of the industries of the former Soviet Union by questionable means as communism went into its death throes. The economic power of the oligarchs is sustained by their connections with governments.Crony capitalism took root in Nigeria not just because of the wave of privatisations that took place in the country over the past three decades, which were broadly necessary because of the failure of state enterprises, but especially because of how several of the privatisations were undertaken. To ensure true market competition, privatisations are not enough. They must be accompanied by deregulation to avoid monopolies, which can, in turn, defeat the presumed intention of creating a more efficient market.
While crony capitalism could conceivably be utilised by a very strategic government in Nigeria to create huge conglomerates that are national champions in interlocking areas of manufacturing and the real economy, it has in fact encouraged political corruption and rent-seeking behaviour by the private sector.
Entrepreneurial capitalism
A final model of capitalism is what has been described as entrepreneurial or small-firm capitalism. Here, many small firms founded by individuals dominate the economic landscape. This is the secret behind the economic success of the U.S. But, entrepreneurial capitalism on its own cannot realise an economy’s full potential. As in the U.S., it must form part of a larger business landscape with numerous large firms. What’s more, to take an economy to its full potential, this model must be predicated on innovation.
This would be a viable model of capitalism for Nigeria’s current stage of development, largely because it is the modern version of what could be termed the subsistence capitalism that was prevalent in pre-colonial Nigerian society, but commercialised innovation is still lacking in the continent. It would be viable because it would build on what we have on the ground at present. Approximately 90 per cent of businesses in Nigeria are small and medium enterprises which, as a result of the weakness of essential economic structures such as taxation and inclusive financial systems, and low literacy levels, mainly remain outside the formal economy and dominate a thriving informal economy.Entrepreneurial capitalism also keys into something that is unique to our society: the historical role of women in our marketplace.
The limits of capitalism
Inequality is inherent in free market societies, and is a core aspect of capitalism. It is also the greatest threat to the legitimacy of market-based economies. While the very nature of free markets means that not everyone will, or can, be equally prosperous, a system that spawns a plutocracy of islands of wealth amidst seas of poverty may be unsustainable because it can lead to a breakdown of social order. This is where the role of public policy and regulations comes in, and this is why inclusive economic growth matters.
This is why the periodic redistribution of wealth has also become a part of the fabric of capitalism, and indeed necessary, if free markets are to be saved and maintained. The Great Depression and the New Deal that followed that period in the U.S.; the recent global financial crisis and the bailouts that sought to prevent social upheaval by saving major global corporations such as General Motors; and the bailout of banking systems in much of the Western world (and in Nigeria!) after extreme greed led many banks to ruin (a classic privatisation of profit and a socialisation of losses) are all pointers to why African countries should give deeper thought to the rise of the free market even as it remains the path to wealth creation in the continent. Understanding and determining the limits of markets is important for Nigeria, and this is a world view and public policy question that we must confront. As former U.S. President Bill Clinton once asked: “How do we change course, to merge social and economic progress?”
Then there is the major matter of a supposed “invisible hand” that, according to the capitalist economic philosopher Adam Smith, regulates markets and imbues them with efficiency. This is a central tenet of laissez-faire capitalism and has been used to demonstrate the appeal and superiority of free markets and to resist regulation. If this were true, periodic cycles of boom and bust, which has been a major feature of capitalism, would not exist. The great Austrian-American economist Joseph Schumpeter called this process “creative destruction”, and predicted that it would lead to capitalism’s demise.
The problem with the invisible hand is that there is, in fact, nothing of the sort. This does not detract from the position that, despite its imperfections, capitalism remains a superior form of economic organisation. As the economist Jagdish Baghwati and other scholars have been quick to observe, all economic systems known to man, rely on morally questionable foundations. Capitalism relies on the instincts of selfishness, greed and vanity; and communism on coercion.The absence of the presumed invisible hand is a problem that is, in fact, part of the very fabric of free markets, and has been demonstrated by various studies and scholars. A study by the U.S. academics Hendrik Van den Berg and Mathew Van den Berg found that the percentage of human economic interactions that take place in truly competitive markets is less than 20 per cent. “The invisible hand”, the study concluded, “is a myth; there are not enough markets”.
All of this is a pointer to the centrality of regulation and the role of the government in managing the free market, determining what type of markets should exist within the domain of its political authority, the purpose for which those markets exist, and setting the limits of acceptable behaviour. This approach is what makes capitalism worthwhile. In other words, markets, whatever the type, must serve societal priorities, and not the reverse. In order to do so, a capitalist system should be able to evolve and adapt to changing conditions.
How capitalism creates wealth
Although we have embraced free markets since the introduction of Structural Adjustment Programme (SAP), this embrace is unlikely to lead to transformative growth if the fundamentals of how capitalism creates wealth are not addressed as a matter of public policy. As the Peruvian scholar Hernando de Soto has noted, these first principles, without which no nation can truly prosper, are innovation, which we have discussed earlier, property rights, and finance and financial markets. None of these fundamental factors is present to any significant extent in Nigeria. Innovation is neither systematised nor commercialised. Property rights are weak, with land ultimately belonging to the state and trapping a key resource that needs to be put to work to create wealth. And capital is still not present in the quantity, and more important, forms and costate which it can foster a truly productive economy. Our world view task as the Nigerian nation is to create the fundamentals that comprise these three elements before we can reap the real benefits of a market economy.
Other fundamental obstacles to the success of Nigeria’s capitalist economy include deficits of infrastructure, a difficult environment for doing business in terms of cumbersome processes and formalities, as well as governance and regulatory reforms. Nigeria has made real progress in regulatory reform since 1999. Effective regulation is vital for a truly functioning free market because, as Raghuram Rajan and Luigi Zingales have argued in their book – Saving Capitalism from the Capitalists, “incumbent industrialists” have historically sought to protect their wealth, power and other advantages by rigging the supposedly “free market”. This challenge remains with us.
Raging corruption is another aspect of weak governance of business environments. Whether a businessman or woman must pay a bribe to obtain a permit or secure a government contract, corruption distorts the business environment by creating unfair advantage and making the business space truly uncompetitive. This is a global phenomenon and so is by no means limited to Nigeria. But, it poses a fundamental problem for our country because corruption has prevented the real take-off, let alone development, of free markets. A major part of the problem is the role of the government as the main source of business. Governments in African countries must combine building strong regulatory capacity with supervising their own exit from several areas of the economy, while creating a level-playing field for private sector players and maximising State’s revenue generation from private sector-led economic activity.
The strategic bottom line
Nigeria needs to undertake careful study and introspection, backed by effective public policy, in order to arrive at models of capitalism that will work for it. Such models must encompass an appropriate role for the State in terms of enabling policy environments, regulation, and a balance between free enterprise and wider societal objectives.
Most importantly, it must ask what the ultimate objectives of economic policy are. Is it double-digit growth, which far has not tackled widespread poverty? Or is to ensure that growth is not pursued merely for its own sake, but rather ought to be based on stronger fundamentals such as job creation? If that is the case, the strategy to be adopted in developing Nigeria’s private sector is the one (or the ones) that ultimately creates jobs and growth that outpace our demographics. In that case, it seems logical that of all the variants of capitalism discussed above, entrepreneurial capitalism would be best for Nigeria. This appears to fit most into the prevailing historical and cultural mode of production and commerce in our country. Since that model will give more people direct opportunity for expansion and inclusion, the logic points in its direction as the one that will create the most jobs and spread the wealth around, assuring longer-term societal stability.
The Nigerian government’s role in what should be a modified developmental state is to create appropriate incentives for transformational economic activity in areas such as manufacturing and entrepreneurship through venture capital, direct engagement of labour for public infrastructure for works and sanitation, all of which create jobs. But, the government cannot, and should not, replace the role of the marketplace.
-THE NATION
