Learning the Wrong Lessons of Development (1)

Posted: June 14, 2013 in Uncategorized

By Chukwuma Charles Soludo; 

One of the asymmetries of globalisation is that whereas productive assets (highly skilled labour and capital) are mobile across boundaries, it is still the responsibility of governments in individual countries to secure jobs and prosperity for over 90 per cent of the population trapped within specific geographic boundaries.  Mechanisms and institutions for global coordination of development are very weak. For about 70 years since the end of the Second World War and the setting up of the Bretton Woods Institutions and the United Nations (UN), the world has had tepid attempts at codification and enforcement of `international standards’.  Despite all the rules under the UN Declaration of Human Rights (UNDHR), the World Trade Organisation (WTO), and the World Bank and IMF among others as well as all the `indices’ by the new industry of rating agencies, the global economy is still one governed by the survival of the fittest.

Countries do not just compete but also exploit each other in pursuit of their national interests to secure maximum security and prosperity for their citizens. Genuine cooperation is possible only when all parties win something for their people. In this game of development, there are leaders and there are followers as well as spectators. Leaders in development are those with the capacity to think outside of the box, exploiting (and sometimes even circumventing) the international rules in order to appropriate a disproportionate share of the global development dividends to their citizens. The leaders write the new rules of the game which at the time are often thought to be `impossible’ or `bad practices’ but which turn out to become the orthodoxy when they succeed. The experiences of the South East Asian countries and currently China bear bold testimonies to this.

The followers are those which continually adapt, almost always relying upon yesterday’s rules and practices to run tomorrow’s development race. Spectators in development are simply awed by what is going on and react each day to the circumstances others foist upon them. I am afraid to admit that much of African countries are either followers or spectators in the game of development. Despite all the hype about `Africa rising’, much of its “growth” is still largely a peace dividend and capacity utilisation story rather than a trajectory of productivity and prosperity.  Africa seems to be learning the wrong lessons so far.

Let me state that the major tension or divide in development discourse between those who emphasise the universal nature of a development path and thus the need to follow “international best practices” versus those who argue for local peculiarities and hence for the development of authentic local models, is a false dichotomy. Both paradigms are right and each only partially describes the reality.  As an economist, I understand that people respond to incentives and sanctions everywhere. If you want to change behaviour, alter the incentives and sanctions regime and people will react differently. If prices go up with given incomes, people will, on the average, demand for less of normal goods. So, there are fundamentals of development with universal applicability. However, we also know that initial conditions, history, culture, and institutions differ and matter greatly, and could significantly alter the outcomes from one society to another.

Leaders in development have shown a remarkable knack to adapt international best practices to local conditions, and also exploiting all the potentials which their local endowments could offer – for the benefit of society. Whenever a government gets its acts together and on a prosperity trajectory, the attacks will come. Talk to the leaders of Japan, South Korea, Singapore, Malaysia, Indonesia, and lately China. Chinese leaders understand the development game. The Washington Consensus prescribed export promotion (with competitive exchange rate) as a development strategy. China has grown rich by exploiting that model (with undervalued real effective exchange rate) thus ensuring that imports into China are too expensive with cheap exports thereby creating jobs and accumulating huge foreign reserves. Having beaten everyone to the game, the new mantra is to urge China to revalue its currency so that Western countries can export to them.

It is an interesting game! I recall that the IMF had pressured me as CBN Governor to sell down the external reserves (when we were accumulating huge reserves like China —as Nigeria’s self-insurance) because, according to them, we had `undervalued’ real exchange rate. My response was that I expected a trophy for maintaining a competitive REAL exchange rate in the face of an export boom — which was a world record. Of course, when the global crisis hit Nigeria, the `excess’ foreign reserves we had accumulated became the saviour otherwise the exchange rate would have depreciated to several hundreds of naira per US dollar (that is story for another day).  The lesson is that African leaders should worry whenever excessive compliments or awards start coming from the rest of the world.

An important lesson of development is that countries which made it had bold, innovative thinkers as policymakers — those I describe as entrepreneurial policymakers with high execution capacity. Not administrators who merely maintain the system by tinkering at the margins in the name of `reforms’.  You need policymakers who understand that they are engaged in a global race to procure as much development dividends to their citizens as possible, and more often such quest conflicts with the interests of their “foreign partners”. Such policymakers must understand the extraordinary magnitude and urgency of actions needed to unleash uncommon revolutions in several sectors to leapfrog the stages of development and never be contented with the usual template of gradual reforms. You cannot run at the speed of the crowd and expect to overtake it!

Yes, it is true that the changing dynamics of globalisation, aid dependency and policy conditionality, as well as the WTO rules have somewhat circumscribed the policy space thereby making it more difficult for new comers to deploy the same instruments that earlier developers employed. It is not true however that these have completely wiped out any room for creative discretion and thinking outside of the box. There is still significant room to manoeuver, but only for those with the capacity to see the opportunities and know how to play the game.

It is a wrong lesson of development to believe that other countries would willingly wish to “HELP” your country develop. No! Countries do not do charity; they only pursue their national interests which are the security and prosperity of their citizens. If the pursuit of such benefits others, it is only accidental. Perhaps, the only effective development aid in history was the US Marshall Plan for Europe — designed to rebuild European infrastructure after the Second World War. Europe was America’s major trading partner and ally, and rebuilding Europe was in America’s interest to buoy up its market. Aside from humanitarian purposes, aid is largely a control instrument: many governments don’t care to know the price.

It is not that countries can’t use aid, but it depends on the national consciousness and strategy of the governing elite to play the aid game and win in their national interest.

Otherwise, aid can become opium, with the temporary elixir blinding the governments who think of survival one day at a time to the long term debilitating effects. It is not surprising that much of Africa’s debt is indeed odious. Cash starved African governments sign very bad mining contracts and numerous `concessions’ with multinational corporations which predate and siphon away hundreds of billions of dollars in illicit financial flows. Only a tiny fraction returns as `aid’ and `loans’ and for which the ever grateful governments roll out the red carpets. Here African governments don’t often connect the dots. If an African president were to keep records of the `issues’ which ambassadors of the major `donors’ or aid givers come to discuss with him, I will bet that more than 70% of the time it will be directly or indirectly about securing lucrative businesses for their companies — which is their primary job anyway. These companies pay taxes and create jobs in their home countries, and their governments extend more `favours’ by way of `increased aid’. That is fair game, at least from their point of view.

But do we connect the dots and frame national aid policy accordingly?

Furthermore, it is wrong to think that foreign capital or foreign direct investment (FDI) can lead the way to national development. The lesson of development is that domestic capital leads and foreign capital follows. One is often bemused by the sometimes seeming obsession to “attract foreign investment”. No doubt, every country needs higher levels of productive investment to create and sustain prosperity. Investors have no other objective than to maximize profits, and they will go wherever there is an opportunity to do so. As chief economic adviser to the President, I received tens of `foreign investors’ purportedly with billions of dollars to invest. I found it amusing the way each of them pitched his case: they all claimed to have come to “help Nigeria”—to create jobs, industrialise Nigeria, save foreign exchange for her, etc. I always waited to hear their shopping list of `concessions’. Needless to say that most of them did not come, as we insisted on a level playing field for both local and foreign investors. 

Evidence shows that investment promotion jamborees are a waste of time and resources. Serious foreign investors probably have more information about the country and its underlying fundamentals than the propaganda PowerPoint presentations we make in the wasteful jamborees of `investment promotion’. If domestic investors are rushing to a sector, foreigners usually take a serious look at it. But if they come with a shopping list of preferential treatments and concessions, one must then ask why wouldn’t the same preferences or even better be extended to local entrepreneurs? Indeed, it is my experience that in certain sectors, domestic capital plays more developmental role than the highly risk averse foreign capital. That is why most countries that have developed have at the initial stages crafted national strategies to deliberately build and prosper the nascent domestic investors as a key component of national transformation and security. How we tried to do this when I was chief economic adviser is a subject for another day.

Suffice it to note that even under the WTO, such preferential treatments for local firms are allowed for poor countries, although the European Union is struggling to wipe them off by smuggling the so-called Singapore issues (investment, procurement, etc. matters) into the Economic Partnership Agreement (EPA) with Africa-Caribbean-Pacific countries. But Europe gives such concessions to its poorer European countries which is proof that one lesson of development is that Africa must not deliberately commit development suicide by acceding to EPA without scrutiny. Do African countries have the capacity to negotiate an EPA that is beneficial to them, with some of their advisers and consultants on EPA as Europeans?

Even as EU strives to enforce “free competition” in procurement through EPA, I will be surprised to see a single major contract by the European Commission that is won by a non-European company. Also, I have not seen a European government that buys `official cars’ that are not made in Europe. I can bet that citizens of any western country will feel scandalized to see imported products being used in government offices while there are locally made substitutes. A friend once asked me why there is no national policy to force all governments in Nigeria to buy only made in Nigeria cars (Peugeot and Innoson cars) as well as patronise only made in Nigeria goods to create local jobs. I did not have an answer! In part II, we deal with some specific wrong lessons of development.

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