After Nigeria’s GDP is rebased it will give a sharper picture of the economy. The good news, and bragging rights for some, is that it will push Nigeria’s economy past that of South Africa. The grim news is that it will reveal a familiar paradox: poverty amid plenty in Nigeria.
The rebased GDP is expected to boost the size of Nigeria’s economy by as much as 60 percent to about $384 billion and $424 billion. Nevertheless inequality, high and rising in Nigeria, is lower than in South Africa, based on the Gini coefficient, an index that measures income distribution within a country.
Even so, the absolute number of Nigerians living in poverty surpasses that of South Africa. Mind you, Nigeria’s 54 million youth between the ages of 18 and 35 years is larger than the total population of South Africa. In addition, the impact of a rebased GDP on growth rates is uncertain. Nigeria needs to grow at about 9 to 10 percent a year with growth coming from job generating sectors.
Ngozi Okonjo-Iweala, Minister of Finance and Coordinating Minister for the Economy, lately identified agriculture, housing, creative arts and services as the job-generating sectors. Together they make will account for about 80 percent of Nigeria’s GDP. Most of the goods and services that will make a bigger cake will come from these sectors.
Interestingly, these sectors are all tied to property rights. Farmers, aspiring house owners, Nollywood film producers, technology start-ups and other innovators need laws to secure and protect their rights to physical and intellectual assets.
Institutions, like a judiciary which respects the rule of law and the sanctity of contracts, are essential for attracting human and financial capital. Nigeria needs a new economic model that respects people and their legitimate rights. Laws that protect these rights ignite entrepreneurialism.
In Nigeria, the genius, energy and entrepreneurial interests are not in short supply. You could argue that Nigeria, based on the rate of newly registered limited liability companies is overflowing with entrepreneurs.
The number of newly registered companies registered in Nigeria increased to 65,089 in 2009 from 23,457 in 2004, according to data compiled by the World Bank. During the same period number of companies per 1,000 working age people i.e. those between 15 and 64 years, increased to 0.79 from 0.32.
Experts, however, argue that the number of newly registered companies is a poor index of entrepreneurship. Instead institutions and their quality are what matter. Where institutions are distrusted, inefficient and corrupt the informal sector dominates. To avoid the radar of, say, tax officials businesses prefer to remain in the informal sector. As a result few if any of the small and medium enterprises grow into job-generating high growth companies.
A look at Nigeria’s tax revenue-to-GDP ratio gives an idea how informal the economy is. At 7 percent it is low when compared to other middle-income African countries or emerging economies. In comparable African countries tax-to-GDP ratio is about 22 percent and 20 percent in emerging economies.
According to a diagnostic study for the Ministry of Finance by McKinsey, a consultancy, 75 percent of SMES are not currently in the tax system and 30 percent of the companies operating under the Pioneer Status incentive abuse their tax exempt.
South Africa’s economy is highly formal because the equivalent of the Corporate Affairs Commission (CAC) sends details of newly registered companies to the tax authorities to ensure its records must always be up-to-date. In other registered companies pay taxes, are audited etc.
Tax reforms alone won’t do. A poor investment climate, perception of corruption and insecurity are hamper further commitment by local and foreign investors. Yet investors see Nigeria as a top investment destination.
Nigeria needs a “Bulldozer Initiative” to identify and remove roadblocks to entrepreneurship. Not just physical infrastructure like roads connecting the farm, factory and the city but laws that protect entrepreneurs that introduce news goods and services, new methods of production.
Other than property rights, there are other ways people can be compensated for their effort: first-mover advantage, employment and awards. However, securing property rights can spur economic prosperity. It will breathe life into land, “dead capital” according to Hernando de Soto.
The informal economy of Lagos is valued at $50 billion, according to a preliminary study by Hernando de Soto’s Institute for Liberty and Democracy (ILD). Imagine the number of bright young Nigerians that will lured into farming if they owned their land. Picture the creative ideas, inventions and discoveries that will attract finance if entrepreneurs’ know their efforts will be rewarded.
One exceptional factor that has made US a magnet for talent, innovation and entrepreneurs is the respect for property rights. The right to enjoy the fruit of one’s labour is enshrined in the US Constitution. Abraham Lincoln, 16th president of the United States, considered the patent-and-copyright clause of the US as “one of the six greatest contributions to liberty in the history of the world”. Michael Novak, an American philosopher, says respect for property rights is “critical to liberating human beings everywhere from misery and tyranny.”
At the end of his 1858 lecture “Inventions and Discoveries” Abraham Lincoln noted that by protecting inventors’ property rights the patent system “secured to the inventor, for a limited time, the exclusive use of his invention; and thereby added the fuel of interest to the fire of genius, in the discovery and production of new and useful things.”
Tayo Fagbule
