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Nigeria-Political Corruption,Rent Extraction,Capital Flight and Poverty

Lagos Central Business District

Political corruption is used here to describe the practice,where public officials  abuse their power,office or public resources for personal gain.Acts of corruption may come in a variety of  forms: extortion,bribery, embezzlement,cronyism,nepotism and other forms of  malfeasant conduct.According to the organization for economic co-operation and development,OECD,corruption threatens good governance,sustainable development,democratic process and fair business practices.Governance suffers not only because public officials  seek bribes as a condition for doing their jobs,but also because government policies are deliberately made,to provide shakedown opportunities for  corrupt officials.

Corruption impacts negatively on development through the misallocation of resources,as infrastructure and public development projects are determined by public officials’ perception of bribery opportunities.As a result,society suffers as public funds are diverted away from deserving projects,in favour of “white elephant” projects.Political corruption also results in the misallocation of talent as the wrong sort of people seek political office,motivated entirely by the desire to steal public funds.Cronyism and nepotism also ensure the misallocation of talent,as square pegs are put in round holes.While in all these forms,corruption has a devastating effect on society,it is most injurious in the form of rent extraction,especially for this part of the world.

Rent extraction,or rent-seeking,defines the practice, where economic actors seek to earn income by capturing “excess returns” through the manipulation of the economic or political environment.This contrasts with profit-seeking behaviour whereby investors seek to extract value and earn a profit,through economic transactions,by the production of added wealth.When public officials use their legislated powers to manipulate the economic and political environment,in order to extract uncompensated value from economic actors,they are engaged in rent extraction.Uncompensated value represents the difference between the actual market value of a product or service,and the amount paid for that product or service,during the sale or transfer of the product or service.

The uncompensated value represents the loss to the public treasury every time a contract is over-valued or a public asset is under-valued.When a public official awards a contract for a sum that is in excess of it’s real value,the mark-up represents the uncompensated value.The same thing happens when a public property is under-valued,and therefore sold for a song.The mark-down is the uncompensated value.Officials endorse these contracts and sales only because they will get a share of the uncompensated value.This is basically how looting of public funds takes place.And of course these contracts go to companies which are favoured,not for reasons of technical competence or efficiency,but for their relationship to those in power,and willingness to play “ball”,thus promoting nepotism and cronyism.

Any business or economic environment defined by nepotism and cronyism,cannot be friendly to fair business practices.This has far-reaching consequences.As businesses discover that what really matter are political connections and not administrative or technical abilities,they will not be motivated to make the necessary investments in new technologies and techniques,to not only create greater value,but also to reduce negative environmental impact.Instead,businesses will be encouraged to invest in political connections,thus facilitating even more corruption.And of course the greater the resources invested in politics,the lower the investments made in creating real value.This vicious circle leads to a degraded business climate,characterized by low investment,ancient technologies and the distortions of inept regulation.

In a country in the grip of such unremitting corruption as well as an unattractive business environment,the idea will take hold that,the only way to make money,is being in government and not being in business.As the odds against genuine profitable businesses grow,the institutional capacity for absorbing investment will shrink.With a few exceptions,every body in Nigeria is a trader.This low investment capacity fuels capital flight,which continues to keep Africa poor.Public officials know,more than any one else,that the whole set-up is rigged against genuine business,and so they are unlikely to invest in the local economy.This results in billions of dollars,the proceeds of corruption,leaving the continent each year.

Imagine the opportunity cost to the continent.To fight capital flight,we have not only got to fight corruption, we also  need to fight to improve the business environment.We need to make regulations that boost competition and efficiency.We need rules that encourage investment,whether local or foreign.And we need to privatize.We should not be arguing about the theory and practice of privatization.It should be obvious that the best way to create value is through private initiative.The virtue of privatization,in theory,should be clear.What we should do is to focus our energy and time on the practice.If we do this,we can privatize transparently,and profitably,and we would reap the benefits predicted by the theory.

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9 responses to “Nigeria-Political Corruption,Rent Extraction,Capital Flight and Poverty

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  3. PTZ Network camera November 30, 2010 at 9:41 pm

    Beneficial Blog! I had been simply just debating that there are plenty of screwy results at this issue you now purely replaced my personal belief. Thank you an excellent write-up.

  4. codliveroil December 2, 2010 at 10:27 pm

    I agree that privatisation can resuscitate the economy, but there needs to be a transparent supervisory body that can check against it’s abuses. Unbridled privatisation, I do not think is a good thing, the state (government), needs to have a key stake to protect the “national interest”, and what safe guards are there for the protection of the poor? There may not be any safe guards in place now, but does that mean they should be continue to be overlooked?

    When can you envisage this privitisation occurin? No government to date has been willing to seriously pursue this agenda. So what makes this likely to ever occur in Nigeria?

    Should Nigeria be looking to copy root and branch capitalism as defined in other societies, or will people have the sense to adapt it to the local situation, to ensure it’s success? There are many questions to this big and serious topic. Thank you for bringing it up.

    • henryik2009 December 3, 2010 at 12:29 pm

      Hi Codliveroil
      Thanks for your comment.My point is this:if we can agree that privatization is beneficial,especially given how woefully the public sector has failed,then we can concentrate our time,energy and intellect on building an adequate supervisory system.As long as we are still arguing about the merits of privatization,we are unlikely to take any concrete steps,in this direction,to our detriment.

  5. narnia December 11, 2010 at 8:13 am

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