Navigating the Labyrinth of Rent-Seeking

 

Rent-seeking is a phenomenon viewed with apprehension in economic discourse. It has harmed the economic growth of many countries, including Nigeria. At its core, rent-seeking refers to the pursuit of wealth or economic gain not through the creation of new wealth but through the manipulation or extraction of existing resources. In simpler terms, it involves individuals or entities seeking to increase their share of wealth without contributing to the overall productivity of the economy. Hence, despite having the largest GDP in Africa, and birthing some of the continent's wealthiest individuals, Nigeria's GDP per capita (according to Statista) has dropped from over $3000 in 2014 to just over $1700 in 2023, and its annual GDP growth rate has averaged around 2-3% for over a decade. With a population of over 200 million people (and growing at 3% annually), where over 50% live below the poverty line, rent-seeking practices if left unchecked, will continue to decompose the economic fabric of any nation.

This article will explore the intricacies of rent-seeking, highlighting its harmful effects on Nigeria's economy, and advocating for a collective effort to curtail its influence.

Origins of Rent-Seeking

To understand the origins of rent-seeking in Nigeria, it's essential to delve into the pre-colonial history of the region. Before colonial rule, Nigeria was home to various indigenous societies, each with its own socio-political structures and economic systems. While rent-seeking in its modern form may not have existed during this time, certain historical factors laid the groundwork for its emergence in the post-colonial era:

Pre-Colonial:

• Feudalism and Tribute Systems: Pre-colonial Nigerian societies, particularly in the north, had feudalistic systems where a privileged few could extract wealth and resources from the broader population without contributing proportionately to productive activities.

• Control of Strategic Resources: Pre-colonial Nigeria had regions with valuable resources like gold, ivory, and agriculture. Control over these resources gave power and wealth to those in charge, who could exploit it to extract rents from traders and producers or neighbouring communities.
  

• Intermediaries and Middlemen: In pre-colonial Nigeria, trade networks thrived, facilitated by intermediaries who took advantage of their positions to impose tolls, tariffs, or fees on trade transactions. This added inefficiencies and exploitation to the trading system, despite trade being crucial for economic exchange and cultural interaction. 

Colonialism:

• Colonial Economic Exploitation: During colonialism, Nigeria's natural resources were exploited by Europeans for their own economic benefit. This created structures for rent-seeking where certain groups or individuals could monopolize access to resources and extract rents from the population without contributing to productive activities.

• Land Dispossession and Indirect Rule: Colonial powers dispossessed indigenous communities of land, disrupting traditional systems and marginalizing locals. Indirect rule allowed colonial administrators to govern through local authorities, leading to the empowerment of elites who exploited their positions for personal gain.

• Creation of Extractive Institutions: Colonial administrations set up extractive institutions to extract resources and wealth from the colony. These institutions included taxation systems, labour recruitment practices, and trade regulations. Local collaborators could manipulate these systems for personal gain, such as through arbitrary taxation or corrupt practices by tax collectors or administrators.

• Infrastructure Development and Economic Dependency: Colonial powers invested in infrastructure development to facilitate the extraction and export of resources, rather than foster balanced economic growth. This created economic dependency and entrenched rent-seeking, with certain groups benefiting from the colonial system.

• Legacy of Divide and Rule: During colonial rule, Nigeria was governed using the divide-and-rule strategy, which favoured certain ethnic and religious groups while creating artificial divisions between them. This legacy of division created a fertile ground for rent-seeking, where competing factions engaged in manipulative and corrupt practices to gain political power and economic resources.

Forms of Rent Seeking in Nigeria

In Nigeria, rent-seeking manifests itself in various forms, permeating both the public and private sectors. Here are some practical examples:

• Awarding of Oil Licenses: In the oil industry, obtaining licenses for exploration and production is crucial. However, there have been instances of politically connected individuals or groups obtaining these licenses through preferential treatment or bribery, rather than through a transparent and competitive bidding process.

• Subsidy Regime: Nigeria's fuel subsidy regime has long been plagued by corruption and rent-seeking. Subsidies intended to benefit the masses are often siphoned off by a network of middlemen and corrupt officials, leading to massive financial losses for the government and perpetuating inefficiencies in the distribution system.

• Contract Inflation: Government contracts, ranging from infrastructure projects to procurement of goods and services, are often inflated to accommodate kickbacks and bribes for officials involved in the awarding process. This results in substandard work and inflated costs, ultimately harming the quality of public services and infrastructure.

• Ghost Workers: Rent-seeking extends to the public sector through the phenomenon of "ghost workers." These are fictitious employees added to government payrolls to siphon off salaries and benefits. The funds allocated for these non-existent workers end up in the hands of corrupt officials or their associates.

• Banking Sector Collusion: In Nigeria's banking sector, rent-seeking occurs through collusion between bankers and politically connected individuals to obtain favourable loan terms or bypass regulatory requirements. This results in misallocation of credit and undermines the stability of the financial system.

• Forex Manipulation: Rent-seeking is also evident in the manipulation of foreign exchange markets. Well-connected individuals or companies may gain access to scarce foreign currency at official rates, exploiting arbitrage opportunities and depriving legitimate businesses of access to foreign exchange needed for imports and investments.

• Land Grabbing: Rent-seeking in the real estate sector often takes the form of land grabbing, where politically connected individuals or corporations unlawfully acquire land through coercion, bribery, or manipulation of land tenure systems. This deprives rightful owners of their land rights and contributes to social unrest and displacement.

The Toll on Nigeria's Economy

The consequences of unchecked rent-seeking are far-reaching and detrimental to a nation's economic well-being. In Nigeria, this phenomenon has largely contributed to the following:

• Stifled economic growth
• Exacerbated income inequality
• Eroded public trust in institutions
• Reduced foreign direct investment (FDI)

The diversion of resources from productive activities to rent-seeking endeavours impedes economic growth. Businesses face an uphill battle when they must contend with excessive regulations, corruption, and an uneven playing field. Overly complex licensing procedures, burdensome taxes, and arbitrary trade barriers all contribute to a stifling environment that discourages entrepreneurship, productivity, and ultimately hinders economic progress.

Rent-seeking behaviour also exacerbates income inequality. Those with access to power and influence often amass wealth through illicit means, while the majority of the population struggles to make ends meet. This widening gap between the rich and the poor perpetuates social unrest and undermines the stability of the nation.

The pervasiveness of rent-seeking erodes public trust in institutions. When citizens witness widespread corruption and the abuse of power, they lose faith in the ability of governance to serve their best interests. This erosion of trust hinders effective policy implementation and undermines the foundations of democracy.

Furthermore, rent-seeking also hinders foreign direct investment (FDI). Investors are reluctant to engage in a market where competition is distorted, and regulatory environments are subject to manipulation. This reluctance to invest further impedes economic diversification and stifles innovation, hindering Nigeria's ability to compete on the global stage.

The Numbers don't lie

To underscore the impact of rent-seeking on Nigeria's economy, let's delve into some current economic data:

• GDP Growth: Nigeria's GDP growth has been sluggish in recent years, averaging around 2-3% annually. Despite being one of the largest economies in Africa endowed with abundant natural resources, the economy has failed to achieve its full potential due to inefficiencies and rent-seeking practices. Niger (11.1%), Senegal (8.8%), Libya (7.5%), Rwanda (7%), Ivory Coast (6.6%) are doing significantly better despite collectively having less than half the population of Nigeria. 
  

• Unemployment Rate: According to the National Bureau of Statistics, Nigeria's unemployment (before the recent change of methodology) rate stood at over 27%, with youth unemployment even higher at around 40%. Rent-seeking behaviour contributes to this alarming unemployment rate by diverting resources away from job-creating sectors towards rent-seeking activities.

• Corruption Perception Index (CPI): Nigeria consistently ranks poorly on Transparency International's Corruption Perception Index. Corruption, closely linked to rent-seeking, not only undermines public trust in institutions but also deters investment and hampers economic growth.

The Way Forward

Tackling rent-seeking requires a multifaceted approach that addresses both the supply and demand sides of the equation. On the supply side, strengthening institutions, promoting transparency, and enhancing accountability are crucial steps.

On the demand side, reducing the incentives for rent-seeking behaviour is essential. This can be achieved by simplifying regulations, promoting competition, and fostering a culture of entrepreneurship.

Here are some key steps that can be taken:

• Strengthening Institutions: Robust institutions are the bedrock of a healthy economy. Nigeria must invest in strengthening its institutions to ensure transparency, accountability, and the rule of law. This includes fostering an independent judiciary, adequately funding law enforcement, and demanding accountability. This will help create an environment where rent-seeking activities are less likely to thrive.

• Promoting a Culture of Integrity: It is crucial to foster a culture of integrity within both public and private sectors. This involves instilling ethical values, promoting transparency, and penalizing corrupt practices. Public awareness campaigns and educational programs can play a vital role in cultivating a sense of responsibility among citizens.

• Diversifying the Economy: Overdependence on a single sector, such as oil, makes the economy susceptible to rent-seeking practices. Diversifying the economy by investing in sectors like agriculture, technology, and manufacturing can reduce the impact of rent-seeking and create a more resilient economic foundation.

• Encouraging Citizen Participation: An informed and engaged citizenry is a powerful force against rent-seeking. Encouraging civic participation through advocacy, community organizing, and promoting a sense of ownership among citizens can help build a collective commitment to combatting rent-seeking practices. Organizations such as the National Orientation Agency, Public Complaints Commission, and other civic education authorities must be proactive in this endeavour.

Tackling rent-seeking is not merely a task for the government; it is a collective responsibility that requires the active engagement of all stakeholders, from businesses and civil society to ordinary citizens. By raising awareness about the detrimental effects of rent-seeking and promoting a culture of ethical behaviour, we can collectively create an environment conducive to sustainable economic growth and shared prosperity in Nigeria.

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.

Ibrahim Shelleng (MBA, ACIS, ACS) is a highly skilled and experienced business development consultant with a proven track record of helping organizations achieve their strategic goals and overcome complex challenges. He is a graduate of Psychology & Socio-legal Studies and a Master of Business Administration (MBA). He is also an Associate Member of the Chartered Institute for Securities & Investment (CISI) UK and the Chartered Institute of Stockbrokers (CIS) Nigeria.

*Disclaimer*: Views shared in this article are mine and do not reflect any organisation that I am affiliated with.