One of the key features of a successful modern capitalist economy is that the private sector should be the largest generator of jobs and the largest provider of tax income to the state. These taxes are used by the state to create an environment for private enterprise to be even more prosperous, and to take care of those social responsibilities and public goods that raise the quality of life of all its citizens (such as health, policing, and schools).
Instead, Nigeria has come to a place where the state is seen as the main provider of jobs, and between federal bureaucracy, state bureaucracies and various formal and pseudo-formal government agencies, the private sector is ‘taxed’ so much that there is no opportunity for the average business to prosper unless you have connections, or what they used to call ‘leg’ in my day. These ‘taxes’ are in the form of side payments to all those committees, area boys and checkpoints that seem to have miraculously sprung up to ‘supervise’ day-to-day life. Thus, while the official tax burden may be low, once you factor in all the bribes and other impediments to business, the burden that entrepreneurs have to shoulder is considerable.
The fact that young and old eagerly seek government jobs, and there is little increase in employment opportunities in the private sector speaks to Nigeria’s ailment. There are few business start-ups by those without connections. We also see those with entrepreneurial talent or highly prized skills looking abroad for opportunities to sparkle and live their lives to their full potential.
They say that a rising tide lifts all boats. But the policies announced by the president are (once again) aimed at lifting only the boats of a few, select businesses and sectors. Policies that help reduce the cost of doing business should not be in the form of subsidies. Instead, a much cheaper and more sturdy solution is implied to reduce the intervention by the state (and the myriad agencies that have sprung up at every level, many of which dubiously issue permits against questionable payments; other agents of these agencies go around fining people for disputable violations of murky rules). Businesses find it is easier to pay these sorts of ‘taxes’ and get on with life, but every one of these ‘taxes’ sucks the lifeblood out of a potentially successful business. The only boats being lifted belong to those who are well-connected, and often, already wealthy. The rich are getting richer.
If Nigerian entrepreneurs are moving their capital abroad, why should we expect foreign investors to be any different?
The rich can afford to pay such ‘taxes’, it’s true, but the rich also contribute meagrely to the government coffers because they have innovative accountants, and in any case have lots of connections to ease their business activities. The majority of Nigeria’s population who live from hand to mouth cannot pay all these quasi-legal and illegal side payments, for whom these fixed costs, because they are not proportional to the size of your business. Where profit margins are already tight due to the multiple uncertainties from the lack of electricity, to the rising price of commodities, the net result is that even the middle classes not investing – either passively or actively – in Nigeria’s economy. Rather, their money finds its way into foreign bank accounts and helps sponsor their sons and daughters to start businesses in the US, the UK and elsewhere. One need only walk down a street in south London to find the missing entrepreneurs and their money.
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I read in the papers about a woman lamenting that the collapsing exchange rate against sterling would force her to send her children to a Nigerian university. I admit to finding this simultaneously funny and sad. As a proud graduate of a Nigerian university, I have suffered no handicaps in life due to a Nigerian university education. Admittedly this was in the 1980s, when Nigeria’s universities attracted the best academics from around the world, and quality education was almost free to even the poorest Nigerian with the drive and intellect to succeed.
It is sad because the parental lament reflects the poor state of Nigeria’s educational infrastructure, a country which spearheaded a short-lived (but successful) drive towards universal primary education in the 1970s.
The new government’s belief that spreading the formal tax burden to capture more government revenue from the informal sector and from small and medium enterprises is misplaced. It must remove the impediments for all businesses to start up and thrive in the longer run. Before turning to broadly raising tax revenue, it must seek to lift all boats by preventing this petty thievery across the board that makes Nigeria a difficult place to run any kind of business without connections.
This means outlawing all kinds of impediments and making it easier for smaller entrepreneurs to make profits, and reducing the myriad agencies and their ‘permits’ that have proliferated over the last three decades. In the short run, it will have a negative effect on the public finances, but in the long run, these businesses will be profitable, and able to pay legitimate taxes, and the state will be amply rewarded.
The new government and the media continue to lament the absence of foreign investment. Foreign investors also need to show a profit, and the same principles that lead domestic entrepreneurs to thrive apply to foreign entrepreneurs as well. New foreign investment will only come once the domestic environment is investor-friendly. If Nigerian entrepreneurs are moving their capital abroad, why should we expect foreign investors to be any different?
In summary: Reforms to improve the business environment need to be inclusive if a rising tide is to lift all boats.
Narula is a professor of International Business Regulation and Director of the John H. Dunning Chair of International Business Regulation at the Henley Business School, University of Reading, UK.
