Watching part of the Vice-Presidential debate weeks ago, you would be left with the impression that ‘the economy’ and ‘governance’ and ‘politics’ were separate and distinct aspects of Nigeria (without any real connection to each other). This impression would mislead you to think that those who govern (and those who are governed) have to choose which of these aspects of the country to prioritize: the economy or politics or governance. I was amused at the Twitter highlights afterwards from supporters of each candidate. Some quoted Obi saying “you cannot close your shop and run after criminals”, and some emphasized Osinbanjo’s reply “if you keep criminals in your shop you will end up with no shop in the end.”
Beyond the play on words in the title of this write up is the message that the economics of a country is deeply embedded in its politics. Actually, ‘economics’ as a discipline of study was originally founded as ‘political economy’ out of moral philosophy by Adam Smith in the 18th century. The discipline was made more rigorous and methodical by David Ricardo and Karl Marx in the 19th century. It was in the early 20th century that the term ‘economics’ replaced ‘political economy’ when the discipline became more mathematical with aspirations to become ‘scientific’. But, economics works and is realized in a political context. In the words of Harvard University professor Danielle Allen: “Politics trumps economics, in other words, or at least sets the terms according to which the economic game is played.”Politics is defined in this article to mean power relationships and decision making.
A political economy approach is most appropriate for analyzing Nigeria’s oil sector. The oil sector has underperformed in recent years. Many analysts would label this sector as dysfunctional. To focus on the ‘economics’ of the sector alone will not provide enough illumination. There has been a steady decline of the oil sector’s share of Nigeria’s gross domestic product (GDP): The Oil sector’s GDP contribution grew at an average of 1.3 % from 1999to 2009 and contracted at an average of -4.5% between 2010-2015. From a peak of 49% of Nigeria’s GDP in 1999, the oil sector’s contribution was reduced to only 6.4% of GDP in 2015. Despite this, the oil sector’s contribution to Nigeria’s export earnings has been over 90% for all those years. The oil sector has also constituted about 70 % of the Federal Government’s revenue over those years.
Zainab Usman, now at the World Bank, used the ‘political settlements framework’ to analyze Nigeria’s oil sector. Her analysis, done as a doctoral student at Oxford University, is the best I have encountered for many years. Usman reveals three political constraints on Nigeria’s oil sector that must be taken into consideration. First, the horizontal elite constraint, second is the vertical societal constraint and third is the external constraint. These are three constraints on successive ruling elites which “generate suboptimal policy choices for the oil sector.” These three political constraints on the sector generate “competitive, distributional, and fiscal pressures from key stakeholders on Nigeria’s ruling elite towards suboptimal policy choices.” The horizontal elite constraint according to Usman, is determined by “the extent to which the ruling coalition is cohesive or fragmented”. The vertical non-elite constraint is defined by the interests of societal groups concerning welfare or economic redistribution. The external constraint has to do with the boom-and-bust cycle of the global oil industry which constraints the ruling elites. A political settlement is the distribution of power within institutions, political elites and other important or contending groups in a society. This approach to economic analysis highlights how the balance of power determines how economic resources are allocated for either productive or predatory uses for the survival of the ruling elite. There is always a delicate balance of power between political elites, government bureaucrats and the business class.Identifying these actors in the game, their resources, their interests and their scope of influence is absolutely crucial.
So, the problems plaguing the Nigerian oil sector could be understood as resulting from bad policy choices by ruling elites. These policy choices were constrained at the three levels: horizontal, vertical and external. The constraints combine in different ways to exert pressure and determine the kind of policies being put forward for the oil sector by the ruling elites. Despiteits declining relevance to GDP, the oil sector is still Nigeria’s top foreign exchange provider (from exports) and this makes the sector crucial to horizontal-elite competition, vertical-societal redistribution demands and vulnerable to external shocks. Eventuallythe outcome of all this for Nigeria would be “growth-enhancing or extractive-predatory economic restructuring, economic redistribution among elites for political pacification of and among wider societal groups or rising inequalities.”
But there is hope. According to Usman, the Petroleum Industry Bill (PIB) has broken up into what appears to be distinct legislation targeted at the three constraints elaborated by the political settlements analysis. The Petroleum Industry Governance Bill addresses the horizontal elite constraint. The Host Community Bill addresses an important aspect of the vertical societal constraint. The Petroleum Industry Fiscal Bill address fiscal regimes important to international oil companies which form a critical aspect of the external constraint.
Uyiosa Omoregie
Dr Omoregie is a petroleum economist
