Charles C Soludo: Law, institutions and Nigeria's quest to join the First World
economy
Lecture by Professor Charles C Soludo, Governor of the Central Bank of Nigeria, in honour of the
retired Justice of the Supreme Court, Justice Kayode Eso, at the Obafemi Awolowo University, Ile-Ife,
25 July 2006.
* * *
I Introduction
The invitation to deliver the third annual lecture in honour of the revered Justice Eso (following the
earlier two by Professors Soyinka and Nwabueze) is indeed a great honour for me, and I must thank
the Vice Chancellor, the Dean, Faculty of Law and the Law Students Association. I never had the
privilege of meeting or interacting with Justice Eso but I am one of the millions of Nigerians who
admire and hold him with awe. Many would agree with me that Justice Eso has lived a very successful
life and had a most distinguished career. He is the sort of Nigerian that we all should be celebrating,
and I am particularly happy that we are celebrating him while he is still alive. Although retired from the
Supreme Court, I believe he is not yet tired and this gesture will encourage him to further advance the
life of service to our fatherland. Furthermore, I am excited to be back in Ife since I left after my one
year national youth service at the Department of Economics in 1984/85. I was invited to deliver the
Faculty of the Social Sciences lecture here last year and I regret that my schedule did not allow me to
make it: maybe I will make up for the lost opportunity one day or am I killing two birds with one stone
today?
The topic assigned to me for this lecture is: "From Third World To First World Economy". This is
exactly the title of the 729 paged book on the Singapore story by Lee Kuan Yew. The topic seemed
too obtuse for us to effectively discuss in a couple of minutes. Forgive me therefore for taking the
liberty to modify the topic. In doing so, I have been guided by two principles: first, is to focus on a topic
that falls largely within the scope of experience and career of the celebrant, and which also would be
of interest to the audience here - mostly students and practitioners of law. The second principle is a
selfish one and derived from the first, that is: I have chosen a topic in which I am not an expert but
eager to learn something about, and hence I want to take advantage of this lecture to provoke the
experts here to teach me a few lessons. I understand that my topic falls within the ambit of
jurisprudence - which I know little about. If, therefore, I amuse you by the crass ignorance I exhibit in
the course of my presentation, I excuse you to laugh quietly.
Disclaimer: Let me therefore start with a disclaimer. The views that I express in this lecture are my
personal views as a citizen and do not necessarily represent the views of, nor should they be
attributed to, the Central Bank of Nigeria or the Federal Government of Nigeria. Second, this lecture
has been hurriedly written in the last one and half days, and you should please excuse the
incoherence and errors.
My approach to the lecture is to be provocative: raise more questions than provide answers. I do not
get into deep conceptual and definitional issues- as many are obvious to the audience here. The rest
of the lecture is structured as follows: In the next section II, I briefly summarize the current challenges
of rapid economic transformation in Nigeria as a background; Section III evaluates the role of law and
institutions in overcoming the lingering challenges; in Section IV we attempt to provoke debate around
some unfinished business pertaining to the legal and institutional infrastructure and also conclude the
lecture.
II Nigeria and the challenges of economic transformation
As we all know, Nigeria has been a country of paradoxes. It is a country abundantly blessed with
natural and human resources but in the first four decades of its independence, the potentials remained
largely untapped and even mismanaged.
With a population estimated at about 140 million, Nigeria is the largest country in Africa and one-sixth
of the black population in the world. Nigeria is the 8th largest oil producer and has the 6th largest
deposit of natural gas in the world. Currently, barely 40 percent of the arable land is under cultivation.
With over 100 tertiary institutions producing more than 200,000 graduates per annum, the basic
human capital for progress is there. There are abundant solid mineral deposits that remain largely
untapped. It is estimated that over 5 million Nigerians live outside of Nigeria, with tens of thousands as
world class medical doctors and other professionals. In the midst of these resources, Nigeria (on the
average) stagnated over the period up to 1999. The poverty situation worsened consistently such that
by 1999, the incidence of poverty was estimated at 70 percent.
A classic example to underscore the scope of our misfortune is to compare Nigeria with Indonesia and
even Malaysia. By 1972 before Nigeria and Indonesia had the first oil boom, both countries were
comparable in almost all counts: agrarian societies; multi-ethnic and religious societies; with
comparable size of GDP; etc. Both experienced oil boom in 1973 and thereafter, but took different
policy choices. The outcomes of the differences in policy regimes are such that today, while
manufactures exports as percentage of total exports is about 40 percent in Indonesia, it is less than
one percent in Nigeria- where we were in the 1970s. We hear of how Malaysia got their first palm
seedlings from Nigeria in the early 1960s when oil palm produce was already a major export of
Nigeria. In the 1990s, it was estimated that Malaysia's export of palm oil produce earned it more than
Nigeria earned from oil exports, and Nigeria had become a net importer of palm produce. What a
tragedy! In contrast, two brand names emerged in the international community to define Nigeria: 419
scams, and corruption as Transparency International consistently ranked Nigeria either number one or
two most corrupt country. In international relations, Nigeria was literally a pariah state. In economic
terms, the decade of the 1990s witnessed an average GDP growth rate of 2.8 percent- just about the
rate of growth of the population (2.83). This means that on a per capita basis, growth was zero during
the decade of the 1990s and no wonder poverty incidence worsened to 70%. All basic infrastructure
was in a state of crisis, with barely 1700MW of electricity being generated for a country that needed at
least 40,000. Needless to recount the dilapidated transportation infrastructure and the nascent, albeit
fragile financial system that was ill suited to the demands of socio-economic transformation.
Unemployment and poverty were the twin faces of the economy. Real wages were declining
precipitously since the 1970s until the wage increases in 2000 that began to reverse the trend but not
yet recovered to the mid 1970s levels in real terms. The educational system was down and out as the
University system was characterized more by the days of strikes rather than days in classrooms.
Lawlessness prevailed at all levels, and a culture of impunity occasioned by decades of militarization
of all aspects of governance and society dominated our psyche. It was indeed an environment of
'anything goes'. The people became atrophied by cynicism and mistrust for government and people in
government- a result of several years of seeing government systematically lying to its people. As the
late Pius Okigbo once argued, the socio-economic environment was one beckoning for a social
revolution rather than ready for an industrial revolution. This was our past, and it is important in any
analysis of the future, to keep a perspective on where we are coming from. Justice Eso in the first T.
O. Elias annual lecture entitled, "The Place of Law in a Democracy", quoted Soren Kierkegaad as
saying that: "Life can only be understood backwards; But it must be lived forwards".
Since the new democratic dispensation in 1999, and more fundamentally since 2003, efforts have
been at top gear (at the Federal Government level) to reverse the trend and lay the foundation for
Nigeria to realize its potentials and join the first world economy. My sense is that not many people in
Nigeria, including those in government fully appreciated the extent of system collapse. In many
instances, it has been akin to rebuilding a society from the scratch. Make no mistake about it: in the
old order, some people (especially rent-seekers) made a lot of money and profited from the disorder.
To make progress, this class either has to be uprooted, displaced or compensated to give way. Either
way, they are not going to give up without a fight. Currently, there is a persisting clash of the old and
new order, with the entrenched 'business as usual' school fighting with two hands to overturn the
ongoing reforms. The unfortunate thing about the struggle is that there is almost a whole generation of
the elite that knows little about enterprise and hardwork but has made wealth through rents from the
state. For such people, "there is too much suffering in the land" as avenues for easy money have dried
up. Nigeria is not peculiar: every society at a similar place in history has faced similar challenges.
In a nascent democracy such as ours, especially one bereft of clear ideological orientations,
individuals make a lot of difference. The quality and characteristics of the leadership that emerges
define the trajectory of society. Over time however, it is institutions that would sustain the changes.
The person, beliefs, and commitment of President Obasanjo to the Nigerian project have been critical
in defining a leadership path, and leading a successful war in laying the foundation for Nigeria's
socioeconomic transformation.
The national crusade for a new economy is embodied in Obasanjo's socioeconomic transformation
agenda entitled "National Economic Empowerment and Development Strategy" (NEEDS) with a focus
on four key objectives- poverty reduction, employment generation, wealth creation and value
reorientation. The Federal Government has also assisted the States to develop the State Economic
Empowerment and Development Strategy, SEEDS and every state in Nigeria has its own reform
programme. The difference in outcomes so far between the Federal programmes and some of the
states lies in effective implementation. The experience under NEEDS demonstrates that where you
have a robust programme and implementation is effective, you have the desired outcomes.
Space and time would not permit me to exhaustively discuss the progress made so far which is laying
a solid foundation for the continuing transformation. First, several of the key institutions of the state are
being re-built. The army is once more being transformed (to rid it of politicians) and to focus on its key
mandate. Several corrupt judges have lost their jobs and the judiciary is gradually undergoing reforms.
The establishment of the Economic and Financial Crimes Commission (EFCC), Independent Corrupt
Practices Commission (ICPC) and their activities have sent a sharp signal that it is not business as
usual. The National Assembly has enacted some landmark legislations that are fundamentally
changing the course of our economic history- Energy Reform bill; Anti-money laundering Act;
Publicprivate partnership in infrastructure provision; Pension reform Act; Debt management Office Act;
Privatization Act; etc, and there are several important legislations pending at the Assembly, eg the
Procurement Bill; CBN/BOFIA Acts; mining reform Bill; Fiscal Responsibility Bill; etc. The federal
public service is undergoing reforms, and the introduction and enforcement of the 'Due Process' in
public procurement has saved government over N120 billion. There is an ongoing effort aimed at
National Law reforms as most of the legal-institutional infrastructure need reforms. The ports and
customs are undergoing reforms, and the maritime sector has been strengthened.
Several landmark successes that have fundamentally changed the dynamics of the economy include:
the banking sector and telecommunication revolutions; the debt relief (which wiped off $30 billion of
Nigeria's external debt), the sound macroeconomic environment; the privatization programme;
deregulation of the down stream oil sector; fundamental sectoral reforms in agriculture and health;
stable exchange rate regime and increasing external reserves (from $4.9 b in 1999 to about $37 b
today, after paying $12.4 b to the Paris Club of creditors). Nigeria has been de-listed from the FATF
list and even the rating on corruption has significantly improved despite the long lags in perception.
End period inflation has remained at around 10% for three years and the goal is to reduce to single
digit. Contrary to the growth rate of the 1990s (at 2.8%), the average growth rate since 2003 has been
7.4%, and the target is to raise and sustain it at 10% or more. The latest household survey by the
National Bureau of Statistics indicates that the incidence of poverty has significantly dropped from
70% in 1999 to 54% as at 2004. As at 1998, FDI in the non-oil sector was negative as foreigners
divested from Nigeria. Today, such FDI runs into billions of dollars per annum. In 2005 alone, about
$650 million flowed into the banking sector alone. The message is that Nigerian economy is changing
in fundamental ways and the rest of the world is taking notice. From a perception of Nigeria as a
hopeless case, the growing view now is that Nigeria is the preferred destination.
Massive investment in infrastructure has begun to show modest results. For the first time in over
twenty years, there is now a huge and sustained investment in power (with national generation more
than doubling relative to the level in 1999). Private investors are also participating in building power
plants as well as state governments. There is a plan for rehabilitation of the rail system and the roads
are not spared.
The rapid successes and solid foundation already laid in the past few years have led many analysts
(including Goldman Sachs) to predict that Nigeria is likely to be among the 20 largest economies in a
few decades. President Obasanjo has articulated a vision that in 2020 Nigeria should be among the
20 largest economies in the world. This is remarkable: that in a few years, the pessimism about
Nigeria is giving way to optimism about joining the league of emerging and industrial countries.
Nigerians share the optimism, if only the current programme of reforms can be sustained.
But the challenges ahead are huge. Overcoming the decay of four decades and joining the elite club
of advanced economies will task the energies of all Nigerians and our development partners. We still
have huge infrastructure deficiencies to fix; insecurity of lives and property to be solved; deal with
huge urban unemployment emanating from the demographic structure and failure of development at
the lower levels of government; provide housing and mortgage system; address the educational crisis
and scale up rapidly on science and technology; continue to upgrade our capacity in agriculture;
promote trade and integration with the rest of the world; drastically reduce the cost of doing business
and build competitive advantages. More fundamentally, we need to build a socio-economic and
political system that guarantees equal opportunity and voice to all- a competitive and equitable system
where each individual has every chance of success in life. We still have challenges of ethnicity and
religion to deal with, as well as agitations of ethnic militia groups. These challenges cannot be dealt
with in one day: it will take concerted efforts for a few decades to build that African superpower.
But the challenges are not insurmountable. Several countries have done it before. An instructive
example is Singapore. According to the leader that laid the foundation for the modern Singapore, the
key success factors for Singapore can be summarized as follows:
A united and determined group of leaders, backed by a practical and hardworking people
who trusted them, made it possible. Did I expect an independent Singapore, with a GDP of
S$3 billion in 1965, to grow 15 times to S$46 billion in 1997 at 1965 dollars and to have the
8th highest per capita GNP in the world in 1997 according to the World Bank? I have often
been asked this question. The answer is 'no'. How could I have foreseen that science and
technology, especially breakthroughs in transportation, telecommunications, and production
methods, would shrink the world? The story of Singapore's progress is a reflection of the
advances of the industrial countries- their inventions, technology, enterprise, and drive.....
With each technological advance, Singapore advanced- containers, air travel and air freight,
satellite communications, intercontinental fiberoptic cables. Information technology,
computers, and communications and their manifold uses, the revolution in microbiology,
gene therapy, cloning, and organ reproduction will transform people's lives. Singaporeans
will have to be nimble in adopting and adapting these new discoveries to play a role in
disseminating their benefits.... The future is as full of promise as it is fraught with uncertainty.
The industrial society is giving way to one based on knowledge. The new divide in the world
will be between those with the knowledge and those without. We must learn to be part of the
knowledgebased world. That we have succeeded in the last three decades does not ensure
our doing so in the future. However, we stand a better chance of not failing if we abide by the
basic principles that have helped us progress: social cohesion through sharing the benefits
of progress, equal opportunities for all, and meritocracy, with the best man or woman for the
job, especially as leaders in government (Lee Kuan Yew, 2000: 689- 91)
From the experience of Singapore and Nigeria since 1999, there are few lessons:
•
The first lesson is that basic economic theory works well in all climes. Demand curve does
not slope upwards and supply curve downwards in any country. Economic agents in Nigeria
also respond to incentives and sanctions - where enforcement is effective.
• The secret of success lies in being focused on selected major ideas; do them right and keep
doing them right for a sustained period of time. In the book entitled Can Africa Claim the 21st
Century?, those few right things for Africa to claim the 21st century include: improving
governance and resolving conflict; investing in people; increasing competitiveness and
diversifying economies; and reducing aid dependence and debt and strengthening
partnerships.
•
No failure is final, and no success is permanent: empires and nation states also have cycles
of boom and burst. Those that have endured have got a few fundamentals right and kept
them right. Slippages or reversals are costly. Indeed, according to the new President of Togo
in a recent public lecture in Benin City, every one year of bad leadership retards the progress
of a country by ten years.
•
There is no need to reinvent the wheel in several aspects of what is required to move the
society forward: it only requires careful adoption and adaptation. Singapore plugged into the
inventions and technology of the West and created institutions that ensured sustained
prosperity.
•
Institutions - the way the society is organized, including its rules, laws and enforcement
processes - matter greatly.
•
What has also emerged is the new 'Can Do' spirit of Nigerians. There is nothing inherently
inadequate about Nigerians. The Nigerian spirit is one that is determined to excel in all
circumstances. The challenge is to channel that spirit into positive directions.
III Law and institutions in the national transformation
You may be wondering what law and institutions have got to do with the discourse on economic
transformation. As I stated above, individuals make a difference in national leadership and
transformation, but for sustained progress, institutions and organizations make all the difference. The
founders of America deliberately set out to craft a system based on rule of law rather than rule of men.
The story of any successful transformation of society is incomplete without an understanding of the
legal and institutional infrastructure that undergird it. For Nigeria, it will amount to naiveté to envision
sustained prosperity without thinking through the kind of legalinstitutional framework to underpin it.
Douglas North as one of the leading lights of the new institutional economics has the following to say
on the centrality of institutions:
The fundamental issue can be stated succinctly. Successful development policy entails an
understanding of the dynamics of economic change if the policies pursued are to have the
desired consequences. And a dynamic model of economic change entails as an integral part
of that model analysis of the polity since it is the polity that specifies and enforces the formal
rules.... Development economists have typically treated the state as either exogenous or as
a benign actor in the development process. Neoclassical economists have implicitly
assumed that institutions (economic as well as political) don't matter and that the static
analysis embodied in allocative efficiency models should be the guide to policy; that is,
'getting the prices right' by eliminating exchange and price controls. In fact the state can
never be treated as an exogenous actor in development policy and getting the prices right
only has the desired consequences when you already have in place a set of property rights
and enforcement that will then produce the competitive market conditions. (North, DC: 1993:
5).
North goes ahead to define institutions as the rules of the game of a society or more formally as the
humanly-devised constraints that structure human interaction.
They include formal rules (statute law, common law, regulations), informal constraints (conventions,
norms of behaviour, and self imposed codes of conduct), and the enforcement characteristics of both.
Organizations, on the other hand, are the players - groups of individuals bound by a common purpose
to achieve objectives and include political bodies (political parties, the legislature, city council, a
regulatory agency); economic bodies (firms, trade unions, cooperatives); social bodies (churches and
religious organizations, social clubs, etc); and educational bodies (schools, colleges, universities,
vocational training centres).
In this lecture, we focus on institutions, enforcement mechanisms and organizations that support
market transactions and allocative efficiency of the state. At the outset, we make it clear that a market
economy framework, where competition and private sector drive the process of economic
development is the best framework to achieve rapid transformation of the economy, create wealth and
reduce poverty. We are therefore concerned about the institutions and organizations that should
underpin the process in Nigeria. But institutions and organizations interact in powerful ways:
•
The continuous interaction of institutions and organizations in the economic setting of
scarcity and hence competition is the key to institutional change;
•
Competition forces organizations to continually invest in skills and knowledge to survive. The
kinds of skills and knowledge individuals and their organizations acquire will shape evolving
perceptions about opportunities and hence choices that will incrementally alter institutions.
•
The institutional framework dictates the kinds of skills and knowledge perceived to have the
maximum pay-off.
•
Perceptions are derived from the mental constructs of the players.
•
The economies of scope, complementarities, and network externalities of an institutional
matrix make institutional change overwhelmingly incremental and path dependent.
Given the interactive nature of both institutions and organizations, we focus more narrowly in this
lecture on
institutions - as formal rules, legal infrastructure, informal constraints, and
enforcement mechanisms that constrain or shape behaviour in the process of market-based
Such institutions help to transmit information to economic agents, enforce
economic transformation.
property rights and contracts, manage competition in all markets and shape the allocative efficiency of
the state.
A market economy framework requires a different legal-institutional system than a non-market
economy. From a legal-institutional perspective, the supreme institution of a country is the
Constitution, which is supplemented by the other enactments of the legislature and pronouncements
of the courts. The Constitution among other things spells out the allocative powers in terms of who
allocates economic resources in a society - the state or the market. It should also spell out the
economic relations embodied in property rights and rule of law. As the supreme institution, the
Constitution in many cases prescribes the procedural aspects in terms of how law is promulgated and
enforced and includes the functioning of the necessary legal and administrative institutions. The
content and context of these institutional provisions and their enforcement make a fundamental
difference in the speed and character of transformation of an economy. The system evolved by the
framers of the American constitution based upon 'rule of law rather than rule of men' and unlocking
human potentials by fashioning a society based on individual freedoms, competition, and private
enterprise helped to unleash the progress of that society. On the contrary, the system of maximum
controls by men over others as practiced in the communist countries showed in an experimental
manner what the outcomes could be depending on the different systems of laws. With the experiments
under communism and capitalism at the global scale, or even the systems of feudalism and
republicanism in different parts of Nigeria and the outcomes for poverty and wealth creation, one can
hypothesize that institutional arrangements make all the difference. Institutions drive human progress,
and while some unleash, others inhibit human progress. As a layman, it is evident from all over the
world that wherever the rule of law prevails and property rights and contract enforcements are more
effective, progress has been faster than otherwise.
In Nigeria, examples abound as to how alternative legal-institutional infrastructure emasculated
development. The constant changes or suspension of aspects of the Constitution during military rule
created uncertainties. There was also unpredictability in the laws governing the society as specific
laws could be enacted overnight and with retroactive effects. Such uncertainties were inimical to
investment and property rights, and hence retarded growth. One is not sure whether the Indigenization
Decrees did not retard the process of industrialization and private enterprise in Nigeria. It is possible
that the action could have created uncertainties regarding foreign ownership of production in Nigeria
and hence retarded FDI which we are later to seek after. A legal system that conferred powers of
monopolies to the state over telecommunications, power, and some infrastructure obviously retarded
private investment in these areas. An institutional framework (a legal system a la the Constitution)
which has proliferated states and assured them of unconditional access to 'statutory allocation of
revenues from the centre' destroys the known basis of human progress - competition. A constitutional
provision that allocates such resources to states with powers to spend without any strong oversight
institution has created a rentier system and perpetuated a culture of 'cake sharing' without any
attention to 'cake baking' especially at some of the lower tiers of government. It has also destroyed the
fundamental umbilical cord between the state and business. The relationship between state and
business is a strategic and mutually beneficial one: states depend on businesses to create jobs and to
pay taxes to the state; in turn states provide the enabling environment to help businesses thrive. The
dependence on 'statutory allocation' has destroyed that relationship in most cases to the extent that
many states hardly pay attention to enterprise development. If they can get all the money they need
from 'allocation', why care about businesses whose taxes amount to pittance? Today, not many states
care about creating an environment conducive for enterprises to locate in their states or aggressively
marketing their states for investment. This Constitutional provision in Nigeria is one example of how a
legal-institutional framework can create perverse incentive system and hence retard the process of
economic transformation.
On the other hand, there are several new laws and institutions which have unleashed the momentum
for progress. A few examples suffice:
•
A programme of economic liberalization and deregulation which has enlarged the domain of
businesses that private sector can get into, and see how it has unleashed progress in the
airline industry, banking and finance, telecommunications sector, private universities, etc.
• Energy Reform Act and now private sector investment in building power plants
•
The 'Due Process' in procurement system which has promoted competition and
transparency in public procurement, and saved the federal government over N120 billion in
money that would have been wasted or frittered away into private pockets
•
The new Pension Act with potentials for shoring up Nigeria's capital market, and offering new
incentive structure for workers
• The monetization programme and asset distribution programme thereby empowering
workers and minimizing waste by government
•
The privatization programme helping hitherto dead public enterprises to resurrect and
survive under competition and also significantly altering the incentive system for politics as
much of the expected 'cake' to be shared in the public sector will now reside with the private
sector.
This anecdotal evidence from Nigeria corroborates evidence from the rest of the world that institutional
quality and character significantly impact on economic development. Empirically, countries that have
better institutional quality (however defined) grow much faster and enjoy better standards of living than
countries with weaker institutions. Even the political and legal institutions define the incentive system
under which policymakers operate, and determine whether government facilitates or inhibits economic
development.
Empirically, the issue is no longer whether institutions matter; to a large extent also, it is not even
about which institutions matter (at least the most critical ones that promote property rights, foster
competition, enforce contracts, and make markets and allocation of resources more efficient and
equitable can be identified). There is one fundamental question that needs serious analytical attention
namely; how to design and introduce effective and efficient institutions.
Law circumscribes behaviour: it regulates and also creates new behavioural relationships. The
dynamics is also important: do laws and institutions follow developments in the economy or can they
be supplied ahead of demand for them? Do you merely transplant the institutions from one society to
another (revolutionary or radical change), or is there path dependence (where initial conditions in
society's evolution play a dominant role), and hence the process of institution creation is adaptive and
evolutionary. This is a question for our eminent legal luminaries and institutional economists to
address, and the jury is still out on these questions. Often, one hears Nigerians swing to either of the
pendulums depending on the convenience. In one case, people will argue that it took the first world
economies hundreds of years to evolve the institutions and legal infrastructure that have propelled
them to their present state. The conclusion from this line of thinking is that Nigeria is trying to run too
fast and we should adopt laws and institutions that 'suit our culture or environment' - whatever that
means. For these people, culture and environment are constant, and one needs only to search for
appropriate laws and institutions to fit. On the other hand, people try to compare Nigeria with America,
Japan, Malaysia, etc and wonder why our leaders cannot give us a society like those. Put differently, it
is akin to the debate about the nature of leadership and society: some argue that a society gets the
leadership it dese