It’s the Economic Incentives, Stupid

An op-ed by Okwu Nwachinaemelu.

Let us talk about milk in Nigeria. Yes, milk. We consume
about 1.1 billion litres of milk every year. Out of that
amount, about 400 million litres are produced locally. We
import between 700 – 750 million litres of milk annually,
spending a lot of scarce foreign exchange in the process.

We have cows, and cows produce milk, but our cows are
not very productive. Our cows produce 0.6 – 1.5 litres of
milk per day. This pales in comparison with imported high
performance cows who can do about 30 litres of milk per
day. Our cows cannot simply compete with their cows, so
you can do the maths, we end up importing.

But that should not be the end of the story; we could do
artificial insemination, cross breed our low-performance
cows with high performance cows – through a process of
trial and error, gradually improve the output from 1.5 litres
per day to 4 litres per day. Eventually we could get to 15
litres per day (or thereabouts). If we had been consistent
about doing this since the 1970s, we would have gotten to
that point and probably exceeded it.
So why have we failed to do stuff like this? There are no
incentives to do so.

This lack of incentives lies at the heart of Nigeria’s
economic dysfunction. Nigeria is one nation where it can
be said that “the whole is less than the sum of its
component parts”. We made a decision during the 1970s to
build a “federal structure” based on allocation of crude
rents to the so-called “federating units”. It is not working,
it does not create incentives to do anything else except;
Demand more crude rents.

Dambisa Moyo wrote “Dead Aid” about how Western aid
had denied African governments’ of their agency. Her
argument was that aid is like welfare, welfare does not
create incentives for economic productivity. Having said
that, Nigeria has something worse than “Dead Aid”. I will
explain.

Nigerian state governors depend on crude oil rents from
the federation allocation account (FAAC). They are
guaranteed FAAC allocations every month (except in very
rare occasions when they get into trouble with the sitting
president – e.g. Lagos vs Abuja).

The point is that unlike
Western aid that comes with some conditions, the “federal
dole” from the FAAC account is (like we say in Nigeria),
“awoof”. If Western aid makes African leaders “lazy”, then
the “federal dole” makes Nigerian state governors twice as
lazy and twice as unimaginative about building their local
economies.

Now let’s go back to milk. Several states have competitive
advantage in dairy production. Unfortunately, the way the
present system is configured, a governor can get by
without understanding anything about the local economy of
his state, let alone seeking ways to improve it. I am told
that one of the governors of the states in question is
“demanding 13% derivation” (just like the Niger Delta
states).

In a system that creates incentives for state governors to
be managers of their state economies, not merely “cost
centre managers”, the driving force for dairy production
would have come from the states. The operating principle
would have been “produce or die”. That system existed in
the 1960s; that is why we had groundnut pyramids and
cocoa and oil palm plantations. Regional premiers did not
have assured inflows from crude oil rents to fall back on,
the success of their regions depended on the success of
the local regional economy. They did not depend on the
price of a barrel of crude, as obtains today.

What is likely to happen today is a “Federal Government
initiative for dairy production”. Money from crude oil rents
is devoted to some dairy development scheme. State
governors who should drive the development of the dairy
sector end up being spectators. The program ends up
being unrealistic and poorly implemented. Nothing
changes. We continue importing vast quantities of milk.

This has happened so many times in the past, and will
continue to happen until we realise this fundamental truth;
The current internal political architecture and the Nigerian
Constitution do not create the right incentives for
economic productivity at the state level.

It is extremely difficult to explain to the average educated
Nigerian that not all Nigeria’s problems are due to
“corruption”. That the solution to all of our problems does
not lie in the hands of a mythical messianic disciplinarian.

Some problems are structural. Our constitution is a
problem; no sane intelligent person genuinely believes our
constitution with its emphasis on oil, oil money and sharing
oil money is the best guide for managing a nation of
almost 200 million people.

The solution to some of our structural problems is a
federal system which creates incentives for economic
productivity. A true federal system, fit for purpose.