The protection of property rights is one of those things economists and other social scientists have discovered is fundamental for economic development. Property here meaning anything of value.
The thinking is very simple. If a society is to progress, then people must be productive. If people are to be productive then the incentives that shape how hard they work or how much effort they put in are fundamental.
One of these incentives is to keep the fruits of their labour. If you spend time and effort trying to produce something, then getting and keeping the rewards of that thing, and knowing in advance that you will keep the rewards of that effort is one of the main reasons you put in effort in the first place.On the flip side, if you know that you will not keep the rewards of your effort then why put in effort in the first place? To use our Nigerian lingo, no one wants to be the monkey in a “monkey dey work baboon dey chop” scenario.
There are many examples of what economists mean when we say protection of property rights is important. The most commonly discussed is in relation to foreign investment. If investors put their money in your country, either through stocks or bonds or direct investments, a big factor to their decision to invest is the knowledge that they will be able to get their money back at the end. If they know that their profits will be expropriated by someone before they are able to take the rewards, then they will not make those investments in the first place.
Same applies to domestic investors as well. If a farmer knew that a random local chief would come and seize her crops the day before she is able to harvest them then she is unlikely to bother farming in the first place. Why put in the effort and investment when someone else will just seize the crops? If the spare parts dealer knew that thieves would come and steal all his spare parts before he can sell them then he probably would not bother investing in buying spare parts in the first place.
This kind of dynamic applies to basically all types of economic activity. Societies in general depend on government to deliver this key public service of protecting their property. Protecting crops from thieves, or cattle from rustlers, or pipelines from “bunkerers”, or investor funds from unscrupulous bankers, and so on. But what if the thief is the government? What if the party expropriating your assets is the government itself who is in theory supposed to protect your assets?
It’s a complicated social topic. On the one hand the government can claim it is not theft but taxation, and they would technically be right. Governments frequently have to force citizens to pay taxes and assuming those taxes are not in themselves stolen, deliver public goods in return. There is a thin line between government theft and government taxes but who decides where that line is? Is it the people? Their representatives? A president? In the event that the government crosses that line, what tools do people have to defend themselves and their assets from government?
These are fundamental questions that when left unanswered have led to serious social unrest in many countries. The American revolution with the “no taxation without representation” slogan is the most popular example. The French revolution had similar undertones with a monarchy trying to get out of debt through unpopular taxation schemes. And even here in Nigeria where the Niger Delta has been in and out of crisis over the question of who keeps crude oil revenues.
As the Nigerian government tries to transition from an oil dependent state to a tax dependent state we are bound to come across the question of where the line is. Who really decides what to tax? Where is the line? What protects the people if the government crosses that line? Over the last few years we have seen cases of FIRS unilaterally freezing bank accounts and other regulators imposing fines that look more like theft than enforcement. More recently there are rumours of a housing bill snuck through the national assembly that seeks to confiscate ten percent of all pre-tax profits from basically every business in the formal financial sector, and about 2.5 percent of every income earned by individuals.They will claim its for housing, but it sounds like theft to me.
Unfortunately, our judicial system doesn’t really seem equipped to enable individuals or businesses sue the government and protect their property. For example, you will rarely find cases where a business opts to take a government regulator to court. Even if they manage to get through the court processes, the business becomes prone to abuse of power by the regulator making the whole exercise not worthwhile.
It’s an important challenge for the government to migrate to a tax dependent state but it must remember that people actually have to be productive for there to be any taxes to collect. If the tax drive incentivizes people to work less or scale down their operations then that only results in less taxes actually collected from a smaller economy, and probably poorer people. If justice and fairness are not part of the tax drive, then we will all end up as losers. If there is nothing to protect people from theft by their government then they are likely to start to think about other undesirable methods of protection.
Nonso Obikili
Dr. Nonso Obikili is chief economist at BusinessDay.
