Negative Scale

In economics, scale is implicitly assumed to be a good thing-when economists talk about “economies of scale” they refer to “factors that cause the average cost of producing a commodity to fall as output of the commodity rises” (Dictionary of Economics-The Economist) as the marginal cost of producing additional items falls. They may be talking about “internal economies” which accrue to firms due to technological factors such as large fixed plants and machinery, specialization, research and development or non-technological factors such as market power in procurement, inventory management or distribution; or “external economies”-ancillary services of benefit to all firms in an industry e.g. availability of skilled labour, infrastructure, supply chains, business associations or clusters etc. Scale economies are often presented as the explanation for predominance of large firms in contemporary global economies. However economists have also developed the concept of “diseconomies of scale”-the “increase in long –run average costs which may set in as the scale of production increases” (op cit.) due to differing optimum scale of different processes within a production process; problems of administration and coordination; and logistics and/or other costs which may offset scale economies of production at large production facilities. In short (and this is somewhat counter-intuitive but true), there can be too much of every good thing, even regarding economies of scale! Business and military strategists have similarly traditionally assumed that scale is always a good thing-the expectation being that the bigger firm will prevail in competitive markets or that the bigger army will defeat a smaller army. Both of these assumptions have been proven to be wrong with Clayton Christensen’s theory of disruptive innovation been an implicit acknowledgement of the ability of nimble innovative “disrupters” to change the industry’s power structure and the Vietnam war reminding strategists that a smaller, well-motivated and well-led army may deploy asymmetric strategies and defeat better-equipped and larger armies. The Bible of course records the epochal defeat of the Philistine giant soldier, Goliath by David! This article is however based not strictly on economics, business or strategy, but around my observations about a peculiarly Nigerian phenomenon which I have characterized as “negative scale”! In Nigeria, we do not solve problems or deal with difficult issues until they attain “negative scale”!!! Anyone familiar with the state of telecommunications services in Nigeria before 2001 will understand why telecommunications sector reform was by-and-large uncontroversial. For fifty years or more, we had a telecommunications monopoly that provided at the most 400,000 telephone lines for a country of 100 million people…yet we managed! We paid exorbitant amounts to secure those fixed NITEL lines and the “090” mobile phones of its mobile subsidiary MTEL, yet we adjusted; some of our people even carried Thuraya satellite phones (and felt they had by so doing elevated themselves above the rest of us) …yet we persevered! Then one day the NITEL exchanges started catching fire-Ikeja, Apapa, Lagos…etc. The matter had attained negative scale and we moved to solve the problem. Why did we have to wait until the power sector situation became completely untenable before we wrote the power sector policy in 2001; enacted the Electric Power Sector Reform Act four years later (!); and suspended its implementation till 2010 before President Jonathan launched the Power Sector Roadmap? Of course because the matter had to reach negative scale before a minimum consensus could be agreed on what to do about it! Why have we waited until public education and health services completely collapsed before we thought it was necessary to do something serious about it? Indeed some will argue that we are yet to react to the state of education and healthcare in Nigeria with the kind of emergency responses the situation really calls for-did we not notice when the pass rate in schools certificate exams fell to 70%... 65%... 60%... 55%... 50%... 45%... 40%... 35%... 30%....why did we wait until the situation had become completely equivalent to a failed education sector before we started responding? How come no one noticed when the poverty rate in Nigeria moved up from less than 30 percent to about 70 percent over a three decade period? How come until youth unemployment officially approached 40% did policy makers begin to talk about unemployment? Do we have to have an insurrection before our elite realize that current inequality and social exclusion is probably unsustainable? Why have we generally ignored the failures in infrastructure, security, healthcare, civil service, unemployment, poverty, policing, and other areas of national life until they reached “negative scale”? It is the way we have reacted to “Boko Haram” and “Fulani Herdsmen” that best illustrates the incapacity of the Nigerian political leadership and economic elite to forge consensus and take action on any matter, no matter how grievous until the matter attains catastrophic levels! The Nigerian government did not impose a state of emergency on the North-East epicenter of “Boko Haram” until the terrorists had killed over 4,000 people and crimes against humanity were officially proclaimed by the International Criminal Court. The opposition scarcely commented on “Boko Haram” during the first three years of the terror upsurge except to seek political advantage therefrom and even opposed imposition of emergency rule in the region. Until a few weeks back, the Nigerian government tried its best to ignore the curious and deadly phenomenon of so-called “herdsmen” who carried AK47s, committing ethnic cleansing and genocide as they killed people across the entire central Nigeria and beyond in 50s and 100s! Perhaps Nigeria itself is an example of “diseconomies of scale” or in my peculiar characterization, “negative scale”!!!

Biblical Economics

How consistent or divergent is the Bible with conventional economics? Are there coherent theories around economics and finance in scripture that could be applied to modern society? I suggest that at least ten fundamental principles of “Biblical Economics” can be identified:- God is the source of economic prosperity: The Bible affirms (in Psalms 24: 1 and 1 Corinthians 10: 26) that “The earth is the LORD’s, and the fullness thereof…” and in Deuteronomy 8: 18, “But thou shall remember the LORD thy God: for it is he that giveth thee power to get wealth…” The implication of this is that prosperity is sustained only on God’s conditions-“seek ye first the kingdom of God, and his righteousness; and all these things shall be added unto you” (Mathew 6: 33). What then will we make of the reality that wealth is more likely to be obtained from the evil sources in today’s economy? The Bible implies that while wealth procured from evil means may bring anguish and lack sustainability, “The blessing of the LORD, it maketh rich, and he added no sorrow with it” (Proverbs 10: 22). The Bible counsels against undue materialism-“the love of money is the root of all evil (1 Timothy 6: 9-10) warning that “no one can serve two masters;…You cannot serve God and mammon” (Mathew 6: 24). Abundance not Scarcity: While contemporary economics is founded on the notion that resources are limited and scarce, the Biblical view is that God cannot be limited-he is the sovereign God who created all things, and who can do all things and can give his children all things! When God put Adam and Eve in the Garden of Eden, they lacked nothing and had all things in abundance, until they disobeyed and brought scarcity into the world. With the recompense of Adam’s sin by Jesus Christ, Christian believers could operate under a revived dispensation of abundance since God can add “all” things once his “kingdom” is obtained. Jesus Christ declared “I am come that they might have life, and that they might have it more abundantly” (John 10: 10) and Ephesians 3: 20 proclaims “Now unto him that is able to do exceedingly abundantly above all that we ask or think…” Stewardship of Talents and Resources: If God gives abundance and wealth, rather than our cleverness or dexterity, we are necessarily “trustees” of that wealth for HIS higher purpose. Christ’s parable of the Talents implies that our resources and talents are held as stewards with a concurrent responsibility to manage them to the benefit of the Kingdom. While God could and did give everything, we are “to lay up for yourselves treasures in heaven” i.e. our worldly possessions were less important than our souls and after-life and “from everyone who has been given much shall much be required” (Luke 12: 48). Sowing and Reaping: In Genesis 8: 22, a fundamental economic principle is established-“As long as the earth endures, seedtime and harvest…will never cease”! I have argued that this is the source of economic cycles-boom and bust; growth and recession seasons that recur persistently in human economies. The most popular example comes from the Bible itself-the seven years of plenty and then famine in Joseph’s Egypt. Man stands to profit from understanding economic cycles, macroeconomic principles, and political economy! While the Israelites benefited from the economy of seasons, they suffered for not projecting political scenarios-for then arose in Egypt, a King who knew not Joseph!!! This principle establishes the nexus between actions and consequences-hard work and success, policies and development outcomes, investment and prosperity, and socio-economic behavior and social conditions. Five Causes of Poverty-Laziness, Trial, Punishment, Social Injustice or Affliction: The Bible prescribes diligence and skill as (ant)idotes to poverty (Proverbs 10:5, 12: 11 and 12: 24). There are numerous scriptures in which poverty is the consequence of slothfulness-“He becometh poor that dealeth with a slack hand: but the hand of the diligent maketh rich…” (Proverbs 10: 4-5); “…a little sleep, a little slumber, a little folding of the hands to sleep: So shall thy poverty come…” (Proverbs 6: 10-11); Job’s life is evidence that it could be trial from God; Deuteronomy 28 suggests that a man’s “field”, “basket” and “store” could fail due to God’s sanctions; several scriptures imply poverty could become widespread because the rich and powerful oppress the poor; and people could be poor because of diabolical powers and spiritual wickedness in high (and low) places! Spiritual Blessings, then Physical Wealth: The Biblical perspective is that God first ordains things spiritually before they are manifested physically. King Solomon’s wealth was preceded by a promise from God; same with Abraham, Isaac and Jacob-it is the blessings of the Lord that “maketh rich”. Economics has a rather different sequence though not composition-wealth is a consequence of the correct application of the “factors of production” and wealth then results in human satisfaction. Giving Precedes Receiving (More): Acts 20: 33-35 says “It is more blessed to give than to receive” and 2 Corinthians 9:7 proclaims (to the joy of Church treasurers!!!) “God loves a cheerful giver”! Throughout the Bible, God rewards those who sacrifice their possessions-Abraham and Solomon being prominent examples Save and Invest: The Bible urges Christians to save-“Divide your portion to seven, or even to eight, for you do not know what misfortune may occur on the earth” Ecclesiastes 11: 2 (See also Proverbs 6: 6-8 and 21:20). The essence of the parable of the talents however is that saving is not enough, investment is critical. Christians are counselled to take investment risk-“cast your bread upon the waters…” (Ecclesiastes 11: 1), based on wisdom, knowledge and understanding as well as the grace and leading of God. Our women must invest too-“she considers a field and buys it; from her earnings, she plants a vineyard” (Proverbs 31: 16) Leverage What You Have: The most important question potential entrepreneurs ask is how do they know what business they should go into? My “consultant’s prescription” is same as the Bible’s-“What is that in your hand?” as God asked Moses! I typically urge people to start from what they know, love or are passionate about, their “hobbies” even. The Bible says “whatever your hands find to do, verily do it with all your might” (Ecclesiastes 9:10) Obey God’s Laws and Keep Your Hands Clean: The Bible expresses a causal relationship between obedience (to God’s commandments) and success, and disobedience and failure. There are specific stipulations in the Bible that relate to economics, business and finance including repaying your loans (Psalm 37: 21; not lending to the poor and brethren at punitive or excessive interest rates (Proverbs 28:8); avoiding guaranteeing debts (Proverbs 11: 15 and 22: 26-27); refraining from hoarding and excessive profits (Proverbs 11: 26); not engaging in bribery and corruption (“oppression makes a wise man mad, and a bribe corrupts the heart”-Ecclesiastes 7:7 and Amos 5: 12); paying taxes (Mathew 22: 17-21 and Romans 13: 6-7); paying employees’ wages promptly (Deuteronomy 24: 14-15, Leviticus 19: 13 and 1 Timothy 5: 18) and avoiding false measures and fraud (Proverbs 11: 1 and 20: 10, Leviticus 19: 35).

The Socio-Political Christ

The natural tendency of people is to isolate Jesus Christ as a spiritual phenomenon. However he lived as a human being within a family and society, and in a polity in which there were rulers, governors, judges, the practice of politics and the exercise of political power. Given that Jesus Christ was offered to us as a complete and comprehensive example, there must be socio-political aspects of his life from which we can draw lessons and inspiration even for these contemporary times. Easter offers us an opportunity for reflection on this intricate issue in addition to our celebrations of the death and resurrection of the author of our faith. The first thing that strikes me in the context of this discussion is that the powerful people in his society always tried to destroy Jesus Christ-and this was right from his birth, even before he uttered his first words in ministry! When Herod heard from the three wise men about the birth of someone who was “born King of the Jews”, the Bible records that he was “troubled” and devised a scheme to kill the young messiah and indeed ended up massacring innocent babies in an attempt to truncate the life of Jesus. Why would a King be “troubled” about the birth of a child, except that he immediately understood that the Kingdom foretold would threaten his power base. This opposition from the “powers-that-be” dogged Christ all through his life and indeed led to his crucifixion. What that tells me is that because darkness and light, according to scriptures are irreconcilable, a true Church which is fulfilling its divine mission will always face opposition from the kingdoms of the world. The converse of that may be that any Church which persistently receives the approbation of corrupt kings and powers must ask itself whether it is fulfilling the mission of the father! Another obvious insight from Christ’s life and work was that the focus of his ministry was the “multitude”-or what you may describe in today’s language as the “masses”! He was not unduly focused on the rich and powerful, indeed asserting that it was easier for a camel to go through the eye of the needle than for a rich man to enter the Kingdom of God! He was driven by compassion for the poor, sick, broken-heated, weary, weak and vulnerable-that is why he fed the five thousand; healed the sick; raised the dead; delivered the afflicted; and restored hope to the distraught and helpless. His beatitudes is perhaps his most recognized “mission statement” and it reveals very clearly his “target audience”-“Blessed are the poor in spirit…Blessed are those who mourn…Blessed are the meek…Blessed are those who hunger and thirst for righteousness…Blessed are the merciful…Blessed are the pure in heart…Blessed are the peacemakers…Blessed are those who are persecuted for righteousness’ sake…” If Jesus Christ lived in Nigeria today, there is no doubt who his focus will be-the 60-70 percent of our people living in poverty; the 25 percent of our people who are unemployed; the millions who can’t afford a good education, decent healthcare and the simple pleasures of life. His friends were the under-privileged-fishermen, artisans, women (in that time, women were a marginalized group), children and young people (“let the little children come unto me; for theirs is the Kingdom of heaven”), despised people like tax collectors, sinners, those delivered of witchcraft (!), even the convicted thief obtained Christ’s friendship right on the crucifixion ground! Jesus famously declared that he came not to those who were upright and therefore not in need of salvation, but to the sick who needed healing. Of course the dominant theme of his life’s work was love, charity, fellowship…for him the great commandment of all was to love God with all our heart, soul and mind…and the second was to love our neighbours as ourselves! Jesus Christ would have been saddened by wars, terrorism, murders, ethnic and religious warfare and all other divisions that arise out of the absence or deficit of love. The parable of the Good Samaritan suggests that even though Christ did not necessarily seek to abolish nationalities and peoples, he envisaged the possibility of universal love and brotherhood and the prospect of peace and reconciliation between “Jews and Gentiles”! Yet as much as Jesus espoused peace and reconciliation, he was also a revolutionary and the powerful people in his time considered him a “troublemaker”! He himself declared, “Do not think I came to bring peace on earth. I did not come to bring peace but a sword”! He drove out the traders and thieves from the temple; he railed against the Pharisees and other “principalities and powers” of his time; he had little patience for the hypocrisy and false piety of the religious people and was loud in his condemnation of the social, political and religious establishment. I have no doubt that if Jesus Christ suddenly emerged in Nigeria today, some of our religious elite will not recognize him and would promptly reach an alliance with the politicians to crucify him a second time! Jesus was a strong leader, though he was not a politician. People voluntarily submitted to him-John the Baptist who could have argued that he came earlier; the twelve disciples who had no apparent reason to follow an unknown carpenter; the 70; his followers; the large multitude; and through the ages to this day, the Church. The life of Jesus Christ illustrates the fact that true leadership is not based on power, wealth, or position, but influence. He taught his disciples that “whoever desires to become great among you, let him be your servant” establishing the principle of servant leadership. He also re-inforced the concept of rule of law (“I did not come to destroy the law, but to fulfil it”) and instituted the separation of Church and State-“Render therefore to Caesar the things that are Caesar’s, and to God the things that are God’s”.

Nigeria Vision 26: 2013

Nigeria’s “Vision 2020” goal was to become one of the top twenty global economies by output measured by gross domestic product (GDP) by 2020. For some time now, it hasn’t seemed as if Nigeria would achieve that seemingly audacious objective given that we lost some time to a period of economic inertia under Yar’adua and then entered the 2011 elections cycle before policy settled down a bit under the substantive Jonathan presidency. Well now, the recent GDP rebasing exercise means that by mere statistical adjustments and better measurement of our economic activity, Nigeria has become the 26th largest economy in the world and biggest African economy by 2013, and may now be on course to our Vision 2020 target considering our GDP growth rate post-rebasing averaging 6.4%. GDP rebasing does not imply any increase in national income and productivity. Indeed GDP contrary to lay men perceptions is not a measurement of income, but of economic output and production within an economy. GDP rebasing doesn’t alter our current poor performance in terms of poverty, unemployment and inequality. If a family was poor before the rebasing, it remains poor; the fellow who did not have a job, remains without one; and our wide inequality between the rich (indeed very rich) and the poor persists. In short GDP rebasing doesn’t change the material conditions of individuals, homes and firms within the economy. What the rebasing however does is to give us a more accurate picture of the current state of our economy. It presents a more credible and contemporary report of the state of sectors and overall activity within the economy. Indeed Nigeria’s GDP rebasing clarifies some previously unresolved incongruities in our economy-for instance why the large global telecommunications companies and sector analysts under-estimated the potential depth and size of the sector pre-digital mobile license auction in 2001or why per capita GDP appeared somewhat larger than previously thought. I do not see why Nigeria’s GDP re-basing should attract any controversy. It is a commonsense measure consistent with global best practice that simply updates our assumptions and templates for measuring our level of economic output. Continuing to use a base year of 1990 to quantify output in Nigeria contrary to global convention of rebasing at least every five years would have been irresponsible and incompetent. On the other hand, no one earns any plaudits for merely re-basing GDP just like no one receives commendations for using a time piece that correctly tells the time! I also do not see why anyone should politicize the exercise, positively or negatively. We simply now know the reality about the size of our economy, which is a good thing. Having said that, there are potential benefits from the GDP rebasing generally and in the particular context of Nigeria-we would now have better economic data for policy analysis and planning. The size and global ranking of Nigeria’s GDP means we acquire increased strategic stakes within the context of the global economy, for instance the case for Nigeria being a BRINCS (Brazil, Russia, India, NIGERIA, China, South Africa) economy is probably compelling in the light of us becoming a $510billion economy. The fact that there is more accurate information about sectors and output is good for potential investors, and I mean both international and domestic investors. Financial markets would probably take more interest in the Nigerian economy given our new GDP figures and there are benefits of size (and strategic stakes) in the real politick of global economics, finance and diplomacy. Note however that I said “potential” benefits-GDP rebasing on its own will not deliver these benefits; we will have to position policy and the investment climate to realize these benefits. Investors may take more interest in our economy as a result of GDP rebasing, but they may yet defer investment if the appropriate reforms to improve competitiveness and the investment climate are not implemented. So other factors remain relevant-infrastructure, purchasing power, ports and customs procedures, corruption, labour markets, judicial system, securing title to property and obtaining building approvals, human capital, security etc. Most importantly the skeptical and cynical response to GDP rebasing by ordinary Nigerians sends a powerful signal to policy makers and the economic elite about the dangers of unemployment, poverty and inequality-large segments of our population simply do not consider themselves stakeholders in our economy. I hope their cynicism does not evolve into anger and deep disgruntlement (it probably has already) and mutate into revolutionary fervor! There are substantive insights and implications from the revised GDP figures-the services sector (financial services, ICT, trade, accommodation and food services etc.) now accounts for over 52% of output; with industry contributing 25% and agriculture down to 22%. The new data suggests that the level of manufacturing output was previously under-counted and is now 7% of GDP while we are not surprised that telecommunications is 8.7%. The data suggests a higher level of economic diversification than under the now obsolete GDP series with many more sectors coming into relevance. The figures illustrate how dismal our tax collection is (tax/GDP of 12%) and that our capital markets remain relatively shallow (NSE market capitalization is stated as 15.5% of GDP). On the other hand, debt sustainability ratios have improved significantly. The most important insight from the new GDP figures is that even though our GDP is 26th largest globally, per capita GDP places us No. 121.

Poverty and the Flow of Capital (2)

I have emphasized the critical role of capital as a factor of production, productivity, wealth creation and poverty reduction and stressed drawing on Hernando de Soto’s writings on “dead capital” in “The Mystery of Capital”, the negative implications of sub-optimal deployment and circulation of capital which is endemic in poor and under-developed economies. In particular in the case of Nigeria, I identified four “sectors” and one socio-cultural “force” which militate against the effective flow of capital within our economy and which in my view, are significant contributors to the phenomena of poverty, unemployment and inequality in our society. These “sectors” are government/politics-prevalent corrupt and rent-seeking nature of our polity ensures that public resources are diverted to whoever succeeds in “capturing” power thus marginalizing the poor and powerless; banks/financial system-receive deposits from rich, middle-class, average, and poor customers, but by-and-large lend only to large corporations and the (very) rich thus denying SMEs (not to mention micro enterprises) capital for building their businesses; crony capitalists/oligopolistic and monopolistic firms-charge higher prices than are economically justifiable, offer less-efficient products and services than would obtain in competitive markets and based on their alliance with or incorporation in the first group (government/politics-their initial and often sustaining profits are typically from economic rents transferred from the public sector) are beneficiaries of a prebendal, possibly fascist or even feudal political economy; and large religious organisations-receive voluntary or induced “taxes” from their members (and increasingly from government/politicians as well!) and not being established or structured to act in economically efficient manners, often spend huge resources in ways that erode the productivity of capital for instance by building inordinately large auditoria, buying fleets of expensive cars or acquiring private jets costing millions of dollars, while shirking the critical role they could play redressing social ills. The socio-cultural factor in my hypothesis are destructive aspects of culture and lifestyles that prevent capital accumulation-frittering away resources on marriages (introduction, engagement, “wine-carrying”, “alaga-ijoko”, wedding, reception, thanksgiving etc.!!!), funerals, child naming, chieftaincy, birthday and other celebrations; deploying scarce capital towards death rather than life and enterprise (a professor friend once wondered why in our society, if an unemployed young graduate asked family members to contribute N250,000 towards a business idea, he was unlikely to get any response, but double that amount would surface within days if the young man’s father were to drop dead!); investing huge resources in expensive cars and dormant houses while sometimes failing to pay children’s school fees or maintaining aged parents; our inclination to discourage local production in favour of everything foreign thus exporting not just capital, but jobs…!!! The list of our capital and (domestic) productivity destroying patterns of behavior may be in-exhaustible!!! You will notice that in all these, no one has necessarily set out to do anything sinister or evil to society-everyone is simply acting in their own selfish interest or according to “culture and tradition”. Politicians seek power and privilege; banks lend to the safest and most profitable segments of the market; businesses try to maximize profits; faith institutions seek as much donations as possible, the faithful try to live by the injunctions of their faith; and our people are caught in a culture more suited to traditional pre-metropolitan societies while living in 21st century internet age economies! What we lack are visionary leaders who can transform culture and society like Lee Kuan Yew did to Singaporean society substituting an ethos of excellence and productivity for old Confucian fatalism and docility; and institutions that can moderate behavior in manners defined by an enlightened sense of common good. I have already hinted at what I think the solutions should be. Government should define as its primary responsibility the protection of the poor and helpless rather than the rich and powerful, who in any event are well-placed to protect themselves. We need a fundamental paradigm shift in politics and government that places the welfare of ordinary people at the centre of policy. Economic success would in such a paradigm be measured in terms of human development, poverty reduction, life expectancy, quality of public education and not just growth in gross domestic product and our politics and government must become more egalitarian and less-prebendal! I would advocate a self-regulatory policy by banks and other financial institutions that undertakes to channel as a minimum whatever percentage of their deposits is sourced from MSMEs back into credits to such enterprises while eliminating prohibitive transaction charges against small or retail customers. As I mentioned in the earlier instalment, we need a robust competition and anti-trust law and policy regime to roll-back the emergence of oligopolies and monopolies across economic sectors and ensure that our markets are fair and competitive. Religious institutions will continue to receive funding from adherents. But those responsible for appropriating those resources must become socially sensitive and economically savvy, and this is consistent with their duty to God and man, as they are indeed trustees of societies’ “talents” and must manage them in a manner that makes economic sense and is socially responsible. I will like to see religious organisations setting up microfinance banks, venture capital and private equity funds, technical and skill acquisition centres, industrial parks, technology-incubation centres, universities of science and technology, polytechnics, schools and hospitals such that they become agents of social justice, economic productivity, equality, opportunity and egalitarianism rather than allies of a corrupt, uncaring and oppressive state.