Crony Capitalism

 

Capitalism, as an economic system, has undoubtedly contributed to economic growth and development in Nigeria and around the world. However, as discussions on economic systems continue to be debated, amidst a range of socioeconomic issues faced by a significant portion of the population, this article seeks to explore why capitalism has not been as effective in tackling the various developmental and socioeconomic challenges faced in the country.

Capitalism as an economic system is characterized by private ownership of the means of production and the pursuit of profit through market exchanges. In a capitalist system, resources, such as land, labor, and capital, are primarily owned and controlled by private individuals or entities rather than the state or government. The driving force behind capitalism is the market, where goods and services are bought and sold based on supply and demand. Whilst capitalism is not a perfect system by any means, it provides the potential to enable upward economic and social mobility. Through entrepreneurship and hard work, individuals can start their own businesses and pursue economic opportunities. It allows individuals to accumulate wealth and improve their socioeconomic status over time.

Capitalism - The Crony version

Crony Capital index

Nigeria, often referred to as the "Giant of Africa," is a country with a diverse economy and a population of over 200 million people. Over the past few decades, Nigeria has experienced significant economic transformations, largely driven by the adoption of capitalist principles. Capitalism has played a crucial role in stimulating Nigeria's GDP growth, increasing private sector participation and deregulation, fostering competition and innovation.

Although capitalism has the potential to reduce poverty and foster wealth creation, Nigeria continues to grapple with high levels of income inequality with the unenviable title of "poverty capital of the world". The concentration of wealth in the hands of a few individuals, coupled with limited access to economic opportunities for marginalized groups, has widened the income gap. Why? Because, Nigeria practices a type of "crony capitalism".

Crony capitalism refers to a system in which close relationships or networks between business elites and government officials enable the privileged few to obtain significant economic advantages. In such a system, political connections, personal relationships, and nepotism play a crucial role in securing business opportunities, contracts, subsidies, regulatory benefits, and other forms of preferential treatment.

In its latest 2023 crony-capitalism index, the Economist (a weekly global magazine) ranked Nigeria 17th out of 43 countries.

What is the issue?

If privileged enough to benefit from the crony capitalist system, it would obviously be difficult to see the problems it may create. After all, human beings are supposedly inherently selfish and according to capitalist principles, as long as the individual is able to take the risk and make a profit, then it should not really matter how it was earned. However, by understanding the implications of crony capitalism, we can gain insights into the challenges faced by the country's economy and the need for systemic reforms.

There are several knock on effects of this type of economic system that undoubtedly has led to the country's current economic situation. Crony capitalism has an impact on economic growth, investment climate, wealth distribution, corruption, and social welfare amongst others.

• Economic Growth: Crony capitalism has hindered Nigeria's economic growth potential. The concentration of economic power and wealth among a small group of politically connected individuals or businesses has limited competition and innovation. Crony networks have often colluded with political elites, securing favorable policies, regulatory capture, and preferential treatment, leading to market distortions and inefficiencies. As a result, sustainable economic growth has been hampered, hindering opportunities for job creation, diversification, and overall economic development.
• Investment Climate: Crony capitalism negatively affects the investment climate in Nigeria. The dominance of politically connected firms discourages fair competition and inhibits new entrants. Crony networks often enjoy preferential access to resources, licenses, and contracts, creating barriers for potential investors and stifling entrepreneurship. This climate undermines investor confidence, both domestic and foreign, limiting the inflow of capital, technology transfer, and productivity-enhancing investments that are crucial for sustainable economic development.
• Wealth Distribution: Crony capitalism exacerbates wealth inequality in Nigeria. The collusion between political and economic elites allows a select few to accumulate vast wealth and influence, while the majority of the population struggles with poverty and limited economic opportunities. Crony networks control key sectors, such as oil, telecommunications, and banking, leading to an uneven distribution of wealth and perpetuating a cycle of economic exclusion for marginalized communities. The resulting income disparities contribute to social unrest and hinder inclusive development.
• Corruption: Crony capitalism in Nigeria has fueled rampant corruption. The nexus between political power and economic interests has facilitated embezzlement, bribery, and rent-seeking behavior. Crony networks use their connections to manipulate public policies, gain unfair advantages, and siphon public funds for personal gain. Corruption diverts resources away from critical sectors such as education, healthcare, and infrastructure, impeding socio-economic progress and reinforcing a culture of impunity.
• Social Welfare: Crony capitalism has a detrimental impact on social welfare in Nigeria. The diversion of public funds, coupled with limited accountability and weak governance, undermines the provision of essential public services. Health and education systems suffer from chronic underfunding, affecting the quality and accessibility of services for the majority of the population. Social safety nets and poverty alleviation programs often fall short due to corruption and mismanagement, exacerbating poverty and social inequality.

So, what is the way forward?

Whilst crony capitalism is not peculiar to Nigeria alone, its impact on Nigeria's economy has been profound, hindering economic growth, and leading to worsening poverty in the country. To combat this issue, it is essential to implement practical strategies that promote transparency, accountability, and fair competition. Nigeria can adopt strategies based on practical examples from around the world.

• Strengthening Institutions and Rule of Law: Nigeria should enhance the independence and effectiveness of regulatory bodies, judiciary, and anti-corruption agencies. Strengthening these institutions can limit the influence of political and economic elites and ensure fair enforcement of regulations. A practical example is establishing specialized anti-corruption courts, as seen in countries like Brazil and South Korea, to expedite corruption cases and hold individuals accountable. This has already been suggested by the current Chief of Staff to the President, Prof. Ibrahim Gambari during a keynote speech at the 44th Annual Conference of the Nigerian Society of International Law (NSIL), which held in Abuja earlier this year.
• Promoting Transparency and Disclosure: Transparency is a key tool in combating this economic system. Nigeria should enforce robust disclosure requirements for political and business activities. Implementing public procurement systems that ensure transparency and competitive bidding processes can reduce opportunities for crony networks. Examples such as the Open Contracting Data Standard (OCDS) implemented in Ukraine and Mexico have improved transparency in public procurement.
• Encouraging Competitive Markets: Nigeria should establish and enforce anti-monopoly laws to prevent the concentration of economic power. Encouraging market entry for new players through streamlined business registration processes and reduced bureaucratic hurdles can foster competition. For instance, Malaysia's Competition Commission (MyCC) actively investigates anti-competitive practices and promotes fair market conditions.
• Empowering Civil Society and Media: Civil society and media play a vital role in exposing corruption and holding power to account. Nigeria should ensure an enabling environment for civil society organizations (CSOs) to operate independently and advocate for transparency and accountability. Protecting freedom of the press and promoting investigative journalism can help uncover cases of crony capitalism. The Panama Papers leak, which exposed global corruption networks, is a testament to the power of media in uncovering crony practices.
• Enhancing Public Participation and Whistleblower Protection: Engaging citizens in decision-making processes and protecting whistleblowers can help uncover corrupt practices. In 2016, the federal government of Nigeria launched a whistleblowing policy, domiciled in the federal ministry of finance, in an effort to tackle corruption. This had limited success but in 2017, the Economic and Financial Crimes Commission (EFCC) said it discovered $43 million, £27,000 and N23 million stashed away at a flat in Ikoyi after a tip-off from a whistleblower. The Dodd-Frank Act in the United States is an example of legislation that provides financial rewards and protection to whistleblowers.
• Embracing Technology and Digital Solutions: Harnessing technology can enhance transparency and reduce opportunities for cronyism. Nigeria should invest in digital solutions for public service delivery, such as e-procurement systems and online platforms for citizen feedback. Blockchain technology, as demonstrated in Estonia, can help secure transactions, prevent fraud, and enhance transparency in areas like land ownership and public procurement.

The way forward

Despite all these practical examples, it ultimately requires the political will by those in the corridors of power to understand the multiplier effects of adopting this type of economic system and actively seeking ways to reduce its effects. Crony capitalism provides short term gains to a few but creates long term problems for the the country as a whole. It is a travesty that despite an abundance of resources (both human and natural), Nigeria has progressively failed to harness its potential. There is still hope. However, hope alone is not a strategy.

Thanks for taking time out to read this article. Please feel free to send me a message or comment on the article. I am always happy to discuss other perspectives and explore different philosophies.