Nigeria risks repeating the cycle of near-reform success syndrome if it does not reform its political institutions—starting with the Independent National Electoral Commission (INEC).
What drives individuals in any activity are the incentives they hope to gain upon its completion. Research has shown that the growth miracles experienced by the Asian Tigers and the growth disasters witnessed in Sub-Saharan Africa are largely driven by incentives.
Adam Smith, in his seminal work The Wealth of Nations, reinforces this point: incentives create wealth. He argued that “the security which the laws of Great Britain give to every man… is one of the principal causes of the prosperity of that country.” What does this mean? Great Britain prospered collectively because it provided security to its citizens—not just in terms of lives and property, but also through legal, financial, and institutional frameworks that encouraged productivity and innovation.
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Daron Acemoglu and James Robinson, in their award-winning book Why Nations Fail: The Origins of Power, Prosperity, and Poverty, expand on Smith’s argument. They illustrate how institutions shape incentives, which in turn determine economic outcomes. For instance, they compare the banking systems of Mexico and the United States. Both systems were driven by the profit motive, yet their outcomes were radically different due to the institutions that governed them.
In Mexico, the banking system was monopolistic, controlled by political elites who granted privileges to their allies. Loans were distributed based on political connections rather than economic merit, stifling entrepreneurship and limiting access to capital for those outside the ruling class. This system discouraged innovation and productivity, leading to a weak financial sector that could not drive broad-based economic development.
In contrast, the United States had a political and economic structure that prevented the concentration of banking power. Early attempts by American politicians to create banking monopolies were thwarted by democratic institutions and the electorates that had the power to remove them from office through election. The broad distribution of political rights ensured that banks were subjected to competition and prevented from becoming tools of the political elite. This inclusive financial system allowed individuals with ideas, skills, and ambitions to access capital, invest, and contribute to economic growth.
The contrasting experiences of Mexico and the United States highlight a broader principle: institutions shape incentives, and incentives shape economic outcomes. Nations that build inclusive institutions—those that reward productivity, protect property rights, and ensure equal economic opportunities—are far more likely to experience sustained prosperity. This pattern is evident in the growth miracles of East Asia and the growth disasters of Sub-Saharan Africa.
“The contrasting experiences of Mexico and the United States highlight a broader principle: institutions shape incentives, and incentives shape economic outcomes.”
Even in agriculture, Acemoglu and Robinson argue that the low agricultural productivity in many poor countries, particularly in Sub-Saharan Africa, has little to do with soil quality. Instead, it is a consequence of land ownership structures and the incentives created by governments and institutions. In Nigeria, for example, farmers may lack secure land tenure and may be subjected to tussle from families, herders and many more which discourages investment in modern farming techniques and limits productivity.
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What type of incentives does Nigeria provide?
The disparity in incentives is at the heart of Nigeria’s economic struggles. The country’s political and economic systems have historically rewarded rent-seeking behaviour over innovation, connections over competence, and power over productivity. In an environment where the most lucrative opportunities lie in politics rather than industry, commerce, or technological advancement, it is no surprise that innovation remains stifled.
Consider the contrasting fates of two books: Nigeria and its Criminal Justice by Dele Farotimi and A Journey in Service by Ibrahim Babangida, former Nigeria’s head of state. While the former led to the author’s being arrested, the latter has been celebrated by the ruling elite, with donations totalling N17.5 billion.
Public sentiment suggests that Farotimi’s “crime” appears trivial in comparison to Babangida’s role in annulling the 1993 general election, a decision that subverted the will of the people—undermining democracy. Yet, the incentives for political power in Nigeria far outweigh those for intellectual or entrepreneurial contributions.
This misalignment of incentives is why Nigeria lags behind in technological innovation and manufacturing, despite its vast human capital and entrepreneurial talent. The United States became the world’s most innovative economy not because it was the first to industrialise, but because it fostered an environment where the common man could translate ideas into wealth. Patents were granted regardless of social status, and access to financial capital was democratised through a competitive banking system. The incentives favoured wealth creation over wealth extraction.
Take Thomas Edison, for example. Born into an average family with little formal education, he rose to become one of the world’s greatest inventors—not because of inherited privilege but because the American system rewarded ingenuity. Edison was able to patent his inventions, secure financing, and start businesses that propelled industrial progress.
In Nigeria, however, entrepreneurs and inventors face significant barriers: limited access to finance, high cost of borrowing, bureaucratic bottlenecks, weak property rights, and an unpredictable business environment. Rather than being rewarded for their ingenuity, they are often penalised with regulatory harassment and a lack of institutional support. Meanwhile, the political elite enjoy access to state resources, contracts, and privileges that ensure their continued dominance.
Atedo Peterside, former chairman of Stanbic IBTC, once highlighted this problem, arguing that the Nigerian economy favours only those who are combative enough to challenge regulators and political elites. He pointed out that when he and Aliko Dangote were younger, they had the freedom to grow. Today’s youth, however, are being suffocated by policies and institutions that work against them.
The cost of perverse incentives
The smuggling of subsidised fuel out of Nigeria during the subsidy regime is a prime example of how perverse incentives create an economy where corruption thrives. When fuel is sold at N250 per litre in Nigeria but commands about N1,200 just across the border in Cotonou or Cameroon, the profit potential is enormous. “A smuggler operating five fuel stations in a border town like Badagry or Gella in Adamawa can lift ten 60,000-litre trucks per week, smuggle them across, and make N800 per litre on 600,000 litres,” Anonymous said. That’s a staggering N480 million in weekly profit—untaxed, illicit, and powerful enough to corrupt the system at every level.
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These are just a few operations. Hundreds of others exist, from organised fuel smugglers to individuals carrying jerry cans or filling up their tanks multiple times a day to resell. If an estimated 20 million litres of Nigeria’s 65 million daily fuel consumption is smuggled out, that’s N16 billion flowing into the hands of those incentivised by weak enforcement and massive arbitrage opportunities.
The kidnapping industry is another example of how weak security systems create perverse incentives. According to a December 2023 report from the National Bureau of Statistics (NBS) even though this has been debunked, Nigerians paid N2.23 trillion to kidnappers in 12 months. This staggering figure underscores how the lack of security and enforcement has incentivised criminal activities. Experts argue that those involved in kidnapping see little reason to return to legitimate work, as the rewards far outweigh their previous legitimate jobs.
The same principle applies across the economy. Whether in fuel subsidies, trade policies, or access to government contracts, Nigeria’s economic system rewards those who exploit loopholes rather than those who create value. This is why true industrialisation remains elusive, thereby shrinking the nation’s total factor productivity (TFP), and why informal and illicit activities often prove more lucrative than formal entrepreneurship.
What must be done
The lesson from history is clear: economic transformation is not merely about policies or resources; it is about the structures that shape incentives. If Nigeria is to break free from its cycle of stagnation, it must prioritise an institutional framework that rewards enterprise, protects innovators, and ensures that wealth is created through productivity rather than political privilege.
The way forward lies in reforming Nigeria’s political and economic institutions. The Independent National Electoral Commission (INEC) must become truly independent to ensure free and fair elections. Political freedom is a prerequisite for economic freedom. Without the ability to hold leaders accountable through the ballot, economic reforms will remain superficial, and the cycle of near-reform success syndrome will continue. Remember that, when the politicians in the US started to create incentives for themselves and not the people, they were booted out via the ballot.
As Olu Fasan, a respected political economist aptly noted, “Politics determines who gains power, and who gains power shapes the economy. Elect a socialist president, you have a socialist economy; elect a market-oriented president, you have a market-oriented economy; elect a corrupt president, you have a corruption-ridden economy.”
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The time for meaningful reform is now. Nigeria must build an economy where the next Thomas Edison or Aliko Dangote can emerge—not because of who they know, but because of what they create. Only then can the country unlock its full potential and achieve sustained prosperity.
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