The freedom and prosperity equation: Government interventions in Nigeria

As the body ultimately with the most influence on prosperity, governments must ensure the correct balance of interventions to ensure citizens’ economic, political, and legal freedoms are upheld.

The following essay will explore the nature of the particular balancing act that exists, and which must be maintained, between the economic and legal freedoms currently outlined by the Nigerian federal government, and the arguments that are to be made for either expanding upon or decreasing government intervention with regards to those freedoms so as to ultimately ensure the overall prosperity of the Nigerian public. To this end, this essay will be in two halves: The first, an assessment of the federal government’s approach to economic freedoms, with particular emphasis on the role of subsidies and subsidy reform in poverty reduction. The second half will address the central importance of order and security (the “legal freedoms” as identified by the Atlantic Council’s Freedom and Prosperity Indexes),¹ and the role they play in underpinning societal prosperity more broadly.

At the time of writing (January 2023), a general election is looming large in Nigeria. Exactly a century after the nation’s first general election—albeit to a colonial legislative council—the public will return to the polls in February and March 2023 to elect a new president and national assembly, and state governors and state houses of assembly, respectively. Any election cycle brings with it an intense period of scrutiny and speculation as to how a new administration will seek to address the elusive balance. The issues at stake are significant: the past few years have seen the nation’s security situation deteriorate drastically,² with non-state armed actors and bandits continuously encroaching within the nation’s borders, threatening livelihoods and civil liberties. Economically, a country whose meteoric development once led to it being dubbed a “rising star” in West Africa has stagnated, leaving 80 million in poverty by 2020, up from 68 million just a decade before.³

With broad prosperity amongst the Nigerian people clearly lacking, it would seem the balance between economic and legal freedoms in Nigeria, when viewed through the lens of government involvement and intervention, is in need of alteration. With a focus on the correlation and causality between economic freedom, security, and prosperity, the Nigerian government could engineer a return to past economic successes.

Economic freedom and the state’s intervention

The economic potential of this former “rising star” still exists—after all, Nigeria remains the continent’s largest economy. It is a question, in part, of redressing the elusive balance in order to release said potential. Though there are myriad ways in which this can be approached, from a private sector perspective, the government’s first step should be to reassess its relationship with its economic freedoms—and focus on the level of intervention the state is willing to forgo to create the space for economic growth, and therefore greater prosperity, in the medium to long term.

At present, Nigeria is not alone in its cautious approach to free trade. Protectionist policies have increased on a global scale in recent years, and this trend is anticipated to continue as the war in Ukraine rages on. In Nigeria, the past two decades have seen import bans, tariffs, and foreign exchange restrictions slow the flow of goods into the country,⁴ culminating with the closure of its land borders to goods in 2019—a move that contrasted sharply with the nation’s outward push for wider West African market integration in the shape of the African Continental Free Trade Area (AfCFTA), which Nigeria joined that same year. The government’s rationale for closing the borders was that it was an attempt to mitigate cross-border illicit trade, and to curb the smuggling of goods, the federal government wished to increase production of, particularly rice.⁵ World Bank analysis at the time found that the decision in fact contributed to higher inflation—particularly in relation to food items such as rice, despite the relatively low impact the policy had on agricultural output. By the following year, Nigerians were paying 100 percent more for the same goods basket, resulting in a negative impact on consumption.⁶ Though the reasoning for these protectionist policies may be sound, more often than not they represent a significant missed opportunity, since a more open approach to free trade has been shown to support poverty reduction. As Jonathan Lain and Jakob Engel note in their article on the World Bank’s 2022 report: A Better Future for All Nigerians: Nigeria Poverty Assessment 2022, the ripple effects of open trade in the shape of increased investment, and knowledge and technology transfer (as well as the crucial competition it brings), all serve to boost job creation, raise domestic value added, and finally reduce the price of goods available to the Nigerian public. In short, by removing trade barriers rather than creating new ones, the government would be reducing poverty levels in Nigeria.⁷

Indeed, data aggregated in May 2022 by the World Bank’s Household Impacts of Tariffs (HIT) analysis (which accounts for both the value of what households produce as well as what they consume) indicates that, were trade fully liberalized in Nigeria, household income would increase by an average of 3.8 percent, whilst simultaneously seeing a reduction in the share of people living in poverty by 2.3 percent. More specifically, the HIT data suggests average incomes would be set to increase across all states, with the sole exception of Cross River, whilst poverty was predicted to increase in just four of the thirty-six states—Benue, Cross River, Edo, and Ondo. Liberalization would have a mitigable negative impact on some vulnerable Nigerians in those four states, in part due to the mix of income-generating activities that are prevalent in those regions. Lain and Engel argue that mitigation of these potential risk factors could take a variety of forms: In the short term, it could entail social protection schemes from the government to support those whose well-being is at risk. In the medium to long term, deeper reforms, in part aided by the act of liberalization itself, could include the improvement of infrastructure, which, if coupled with an increase in private investment from abroad, would result in significant and much needed domestic job creation.⁸

Another policy emblematic of the government’s stranglehold on economic freedoms is the enduring presence of a range of subsidies whose existence is widely recognized as inhibitive to overall prosperity. Nowhere is this clearer than in the state’s approach to fuel subsidies. Though the rationale for this historic subsidy is to allow its citizens to benefit from the fact that it is an oil-producing nation, the benefits are widely argued to be hugely outweighed by the drain it places on the federal government’s financial reserves, a drain that only intensifies in times of economic volatility—the likes of which we are currently experiencing due to the on-going war in Ukraine. Furthermore, it is widely acknowledged that these subsidies do little to benefit poorer households due to their already low consumption expenditure. According to World Bank estimates, the nominal cost of the petrol subsidy reached a staggering 1.43 trillion naira in 2021, amounting to approximately 0.8 percent of GDP—double the government’s spending for that year on health and social protections combined.⁹

At present, the government is on course to spend an estimated 3.36 trillion naira until mid-2023, when the subsidy is due to end.¹⁰ Since as long ago as 1982, several governments have attempted—unsuccessfully—to reform subsidies. The repeated failures illustrate the scale and complexity of the challenge of subsidy reform. However, Jun Erik Rentschler of the Oxford Institute for Energy Studies is among those who have argued that, in other countries, past reforms of similar subsidization policies suggest a successful change is possible, if approached adroitly. He suggests that if 100 percent of existing subsidies were removed, and the funds reallocated via direct cash transfers to the poor, there would be an instant and significant reduction in poverty levels.¹¹

Though any sweeping generalizations should be made with caution, the above exercise does make for a compelling argument for subsidy removal and redistribution of revenue for improvement of both short-and long-term prosperity through poverty reduction. Overall, when one considers this in tandem with the possibilities that a broadening of economic freedoms via the liberalization of trade could bring, the opportunities for a tangible improvement to national prosperity (when assessed in terms of household income particularly) are compelling.

Legal freedom and the state’s intervention

Within the Freedom and Prosperity Indexes’ definition of legal freedoms sit two crucial measures: those of order and security, which “evaluate the ability of the state to protect citizens from harm.”¹² An absence of these factors in any society makes for perhaps the most immediate indicator of a lack of prosperity with regards to more tangible short-term factors such as health, education, general rights, or indeed citizen happiness. However, for the purposes of this essay, we will emphasize the correlation between order and security on one hand, and income as a measure of prosperity on the other. Though the previous section argued for an increase in economic freedoms through liberalization of trade, there is an argument to be made for an intensified government approach with regards to security and order. Namely, sparing nothing to engage more decisively with the issues of security and order—and to ensure the legal freedoms of the Nigerian people—are fundamental means to ensure greater economic prosperity.

This is perhaps best illustrated in the case of the Boko Haram insurgency in the north of the country, which has had a marked impact on the region’s agricultural sector for well over a decade. The group has been known to levy taxes on farms and on the sale of agricultural products in the regions it takes over,¹³ and its presence has also been shown to lead to a “sharp decline in agricultural production, as farmers suffer the consequences of a destruction of assets, lost access to farm inputs, and in some cases faced total displacement.” According to a report by the World Bank, between 2010 and 2015 the northeast region suffered an accumulated output loss of US$8.3 billion.¹⁴ As is to be expected, the loss of work and severe reduction in agricultural output due to sustained attacks in the region have a significant impact on the cost of food for average households. This, in turn, leads to inflation and subsequently a reduction in people’s incomes, ultimately leading to a reduction in overall prosperity.

In the longer term, these perennial security challenges and the difficult economic conditions they entail lead to a more pervasive impact on prosperity in the form of the so called “brain drain,” as skilled Nigerians seek to leave the country in search of both security and financial reward. As Adebisi Adenipekun rightly observes in his article on the brain drain phenomenon: “The push factor in Nigeria transcends the challenges with the healthcare system. . . . Healthcare providers and their families are not immune to the impact of inflation, increased rates of banditry, and kidnapping experienced in the country.”¹⁵ With those able to leave doing so in droves (between 2021 and 2022 alone, the United Kingdom received 13,609 healthcare workers from Nigeria¹⁶) and those who choose to stay suffering from a significant impact on their economic well-being, there is little doubt that a redress of the security and order balance in Nigeria is a priority for its government.

However, significant funding gaps have emerged in Nigeria’s security forces over the past two decades, inhibiting any improvements. In 2022, Nigeria’s budget for military defence expenditure was about 1.19 trillion naira ($2.87 billion), amounting to 0.6 percent of GDP.¹⁷ That same year, spending on fuel subsidies across the country amounted to about 4.4 trillion naira ($10 billion), measuring 2.20 percent of GDP.¹⁸ At present, Nigeria has one of the lowest military-to-population ratios in the world, the Nigerian military stands at 223,000 with a military personnel per 1,000 capita of 1.14. In contrast, the United States military stands at 2.13 million with a military personnel per capita of 6.5, China has 4.02 million personnel with 2.9 per capita, Egypt has 1.3 million personnel with 13.21 per capita and Indonesia has 1.1 million personnel with 4.11 per capita.¹⁹ These figures highlight the significant disparity in the availability of the military personnel between Nigeria and these countries in comparison to their population sizes. With increased security threats posed by insurgencies in the northeast, conflict between herders and farming communities in the northwest, and the high levels of recurrent abductions and banditry across the nation, this force requires commensurate funding in order to guarantee order and security for the Nigerian public.

Both the more tangible threats to physical safety, and longer-term issues such as food insecurity and mass migration that are in part a direct result of these threats, lead to the following conclusion: a reevaluation and ultimate strengthening of government’s role in the shaping of the nation’s legal freedoms—with particular reference to order and security—is needed to ensure prosperity in both the immediate and long term. Ultimately, hypotheticals surrounding the liberalization of trade or the removal of subsidies prove aimless if they fail to take into account the fact that they are underpinned by security needs that must also be met.

Conclusion

As a businessperson, one may enjoy the freedom of hypothesizing from the sidelines, and perhaps indulging in a degree of blue-sky thinking, that is not enjoyed by those in government. In exploring these two indicators of prosperity—economic and legal freedoms—in the context of an excess or lack of government intervention, the equation that emerges is one of significant potential surplus with regards to the former, with a marked level of need in the latter. How then would this equation look were government to liberalize trade, remove subsidies, and redirect funding to nurture other freedoms, such as security and order? Could this, perhaps, be a step toward solving the elusive equation of true, sustained prosperity? One thing, however, is left in no doubt: Nigeria boasts immeasurable potential, and with its abundant natural resources and a young, growing population, its star has the potential to rise once again.

Danladi Verheijen is CEO of Verod Capital, a leading West African private equity firm.

Image: Some of the 106 girls who were kidnapped by Boko Haram militants in the Nigerian town of Chibok are seen dancing joyfully during the the send-forth dinner organised for them in Abuja, Nigeria September 13, 2017. REUTERS/Afolabi Sotunde

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