CASADE

Creation of More States in Nigeria is A Bad Idea; Just Ask The Unemployed Millions

John O. Ifediora.

Nigeria, like its oil-exporting counterparts such as Venezuela, Iran, Algeria, and to a lesser extent, Indonesia, exhibits all the symptoms of a petrolized state ---the near exclusive dependence on petrodollars to finance its fiscal expenditure, and private-sector consumption. But its development path, while yielding generally similar results to those of similarly situated oil-producing states, is decidedly different. As is true with its peer oil-exporting states, Nigeria’s development trajectory was determined by unique colonial experiences, and post-independence policy choices. In this regard, its decision to decentralize and diffuse political and economic power within the country is pre-eminent in engendering the experience of diminished state capacity, and atrophied non-oil sectors that have come to define petroleum-led development. Nigeria’s creation of thirty-six states and a Federal Capital Territory in a very short time span sapped and misdirected needed revenue for development projects, and placed its economy on a downward trajectory through compromised social institutions, and a debased industrial capacity. That this is the case in Nigeria is facilitated by rent-seeking behavior, and misguided public policies initiatives.

It should be noted at the outset that the initial impetus to create more states derived from the political necessity to accommodate the fear of social and economic marginalization harbored by the country's multitude of ethnic groups. By the 1970s, the drive for more states could no longer be justified by concerns of political and economic subjugation; oil had become a major source of revenue, and the political elites needed more avenues to access its benefits, thus the drive for more states. The discovery of oil in commercial quantity energized this impetus on the mistaken assumption that further sub-division of the country on ethno-linguistic lines would enable the country to efficiently allocate its resources in different regions of the country, taking advantage of each region’s natural and technical endowments to propel robust and comprehensive economic growth in the entire country. This assumption was predicated on the belief that each ethnic group, by advancing its own social and economic interest, would use resources derived from the central government more efficiently. Moreover, creating and giving more autonomy to individual states would serve the beneficent goal of de-centralization of political and economic power; thus shifting power, as it were, from the federal government to individual states that know how best to serve the needs of its citizenry.

The problem with this model of development is that it failed to recognize the real possibility of dependency on the center for continuous fiscal support. That this is the current reality is no surprise, for the states, realizing that the federal government is a reliable and guaranteed source of financial aid, did not see the need to be self-sufficient. But worse, individual states allowed existing industries in their respective regions before the sub-division to fall into disuse, and ultimately ceased to exist. Northern states, known for their proficiency in the production of groundnuts, hides and skins simply abandoned the sector; southern states, where palm oil, palm nuts, and rubber were formally produced in abundance, and sustained subsistence and commercial productivity, found it unprofitable to expend idle resources in these endeavors ... it was less stressful to simply collect needed revenue from the federal government. Oil revenue thus effectively displaced almost all other sources of national income. Essential agricultural and primary commodities that once sustained the newly independent country became subjects of imports; the economy was not fully petrolized.

The damaging consequence of this chosen path to development was the disincentive for self-reliance. The policy of state creation did not, as a pre-condition for statehood, require proof of economic viability. As a result almost thirty of the thirty-six states cannot support important state functions without financial support from the federal government; but more importantly, the limited revenue from oil is used to duplicate state functions, i.e. to pay for the services of more governors, and their administrative staff, more commissioners and associated agencies. At the end, these duplicative services dissipate the limited revenue from oil, and fail to meet the stated objectives of targeted investment and development; they also provide more avenues for bureaucratic corruption, and outright theft of state resources.

The Early Years of Consolidation And Sub-Divisions

The geopolitical concern that is today known as Nigeria began its existence almost a 100 years ago through the efforts of British imperialist, Lord Frederick Luggard, who injudiciously (from the native’s perspective) amalgamated two ethnically, linguistically, and culturally distinct protectorates into a single entity. In the early 1900s, the British, in its quest to extend its colonial empire and secure extensive markets for its growing industrial capacity, gained control of three separate but contiguous regions that were malleable to administrative ease: its protectorates in the south and north, and the colony of Lagos. By merging the Lagos colony with its southern protectorate, it became a matter of convenience and administrative facility to merge the southern and northern protectorates into a nation-state christened Nigeria. The disturbing fact that the newly minted country comprised more than 250 ethnic groups, of which the Ibos, the Yorubas, and the Hausa-Fulanis constitute the major ones, was beside the goal of creating a ‘governable’ geopolitical entity that came into effect in 1914. The religious affiliations of the various groups, Islam, Animists, and Christianity gave the country a remarkable diversity that would later be a source of its discontent.

The creation of a nation-state from the consolidation of two regions made up of peoples with disparate, and in distinct respects, incompatible cultural and religious observances, was borne out of political and economic expediency. The northern region, mostly organized under a feudal economic regime had to be sustained economically by revenues derived, in large measures, from the southern region; and, with the exception of essential social infrastructure that were jointly held and necessary for governance (rail transportation, departments of education, and justice), both regions had very minimal contacts. Thus by 1946 the country was, in effect, two separate going concerns with obvious schisms and fault lines defined by tradition, self-identity, and national orientation but constrained by common geographical boundaries. The Richardson’s constitution of 1946 allowed the creation of another region from the original two, and further dispersed any semblance of a unitary nation, for it enabled the Ibos to claim ownership of the newly created Eastern region. Nigeria, through this constitution, was thus sub-divided into three regions, Eastern, Western and Northern regions, each dominated by one of the major ethnic groups; the Ibos in the east, the Yorubas in the west, and the Hausa-Fulanis in the north, and in between, a disgruntled multitude of smaller ethnic minorities now determined to prevent both political and economic subjugation.

Post-political independence

In 1960 when Nigeria finally gained political independence from Britain, it inherited the three regions created in 1946. As was the case in many African countries that were created by colonial rulers, Nigerian statehood preceded and undermined the crucial goal of nation-building, and as such the country became a country inhabited by many ‘nations’, each striving to maintain its unique cultural heritage, linguistic identity, and self-preservation as a distinct people. But by achieving each of these group-preserving goals, the nation-state of Nigeria was further removed from the ‘official’ aspiration of national integration that could, with time and diligence, bring into existence a nation with a defined sense of collective identity. This goal, however, has remained elusive because all ethnic groups in the country, by temperament condition by tradition, have continued to prefer the sub-national arena as their loci for political and social identification.

In order to achieve the goal of national integration, and thus move Nigeria away from destabilizing ethno-centric politics, successive governments embarked on further divisions of the regions to create more states with the expectation that, as more groups were given the right to semi-self governance through a state they could claim as theirs, a loosely governed federation would facilitate the establishment of an enduring nation, and economic prosperity for individual states and their citizenry. Moreover, the quest for self-governance by some of the major ethnic groups soon after independence added the needed impetus for the creation of more states, and by 1963 one more region was added to the federation. In 1967, the four regions evolved into twelve states; seven more were created in 1976, and by 1987 a total of twenty-one states had been created. Between 1991 and 1996 fifteen additional states were added to the lot, and today Nigeria is formally comprised of thirty-six states and the Federal Capital Territory, Abuja.

In 1970, for example, the military government changed the formula by which oil revenue was shared amongst the states. The new one set aside 50% of oil revenue in a Distribution Pool Account and allocated the funds equally to the states, and another 50% was proportionally distributed on the basis of the state’s population. This new formula meant that ethnic groups that remained intact were disadvantaged; more states from these groups were needed to off-set the obvious disadvantage. Thus as more states were created from a former region or ethnic group, more oil revenue accrued to that part of the country. The Ibos wanted more states in the Eastern region, and so did the Hausa-Fulanis in the Northern region, and the Yorubas in the Western region. The politics of asset sharing effectively became the driving force for state creation, and further sub-division of the country.

As of 2015, presumed benefits from the multiplicity of states are yet to materialize – the country exhibits many of the worst social and economic indicators in the world. More than seventy-five million of its citizens live below the poverty line; twelve million children are not engaged in formal education; one in five children die before the age of five in a country with an average life expectancy of forty-seven years (World Bank, 2011). It is such upside-down federalism that has allowed state governments and their respective governors to live on hand-outs from the federal government without accountability to the governed, and has transferred to the governors disproportionate powers that approximate those of former African traditional rulers or chiefs, but with one exception … they cultivate and rely on the same patron-client relationship but lack the consequent obligations. In practice, therefore, Nigeria’s ‘democracy at the national level is superimposed on a network of 36 states….the creation of more states  provided extra opportunities for contracts for the few, corruption, and patronage’ (London Financial Times, 2004). The result so far, as supported by data and empirical observations, is a country in various stages of economic and social stress … plagued by environmental decay, decrepit infrastructure, unsustainable debt-load, poorly educated work-force, a failing educational system, and a healthcare sector that is all but non-existent. Given these outcome, is it wise to have more states? Perhaps not.

by CASADE

To Bribe Or Not To Bribe? That Should No Longer Be The Question In Nigeria

A Two-Step Recommendation To The In-Coming Buhari Administration For Curbing Bureaucratic Corruption.

Editorial Commentary.

At the outset, it must be understood that corruption is a universal phenomenon, and not an exclusive preserve of Nigeria. However, its domestic manifestation is invariably conditioned by a wide range of unique cultural, social, religious and political realities extant in the territorial competence of a country, and thus shape its meaning and policy implications. Reducing the incidence of corruption is vital to a nation’s economic and social well-being for it sends the correct signal to its citizens and the outside world that the domestic climate is conducive to investment and economic growth, and together mediate the process towards political stability. Since bureaucratic corruption is a manifestation of human foibles, it is not possible to completely eliminate its occurrence, nor is it wise for public policy to pursue such objective. It is, nonetheless, possible to reduce its incidence to levels where it cannot have serious dislocative effects on resource allocation, and at worst, constitutes a ‘harmless nuisance’ to the social objective of good governance.

It is usually the case that governments are ‘forced’ into action to curb corruption by a state of crisis (Hong Kong, Mexico, U.S), or required to implement anti-corruption measures by donor nations (developing countries). In Nigeria, as was the case in Hong Kong, the impetus for change stems from a national crises that require immediate attention; but unlike Hong Kong this special crises require two sets of policy actions: one to address the short-term need to curb bureaucratic corruption in the interim period of 12 months, the other for a longer-term, approximately three years hence; the former to stabilize, the latter to ensure sustainability.

A twelve-month plan of Action:

In the normal run of things, a policy recommendation would be informed by a thorough understanding of the relevant social institutions that have meaning to the citizens of the state, i.e. political, religious, cultural, legal and economic institutions. In Nigeria the Council will assume that these relevant institutions are minimally functional for the simple reason that anti-corruption measures, especially ones that involve specialized units, are only effective in countries that have in place essential legal and political institutions necessary for effective governance. Thus, in poor countries where such minimal standards are lacking, and where the political elites have thoroughly debased existing economic infrastructure, anti-corruption agencies are usually ineffective. Anti-corruption measures in the next 12 months will mimic actions taken by a physician in a medical emergency --- first stabilize the patient, and then apply palliative medical procedure. In this case the Council would recommend a centralized anti-corruption agency that is immune from the body politics with broad powers to investigate, prosecute, and inform the citizenry of the harmful effects of corruption, but most importantly, reports directly to President-elect Buhari. The existing anti-corruption agencies now operational in the country are clearly compromised and should be decommissioned.

The new anti-corruption agency would be similar in scope and depth to Hong Kong’s Independent Commission Against Corruption (ICAC), or Singapore’s Corrupt Practices Investigation Bureau (CPIB), the two anti-corruption agencies widely recognized as role models for modern-day best practices in the fight against corruption. For expositional simplicity, the Council would identify such agency as The Nigerian Bureau of Investigations (NBI), and it would contain three divisions with well-defined duties:

1. Division of enforcement and prosecution: This unit will be responsible for enforcing established laws promulgated by NBI, and prosecuting public officials who contravene such laws. It would have sweeping powers to investigate all areas of government activities, and private enterprises that receive contracts from all levels of government. If the country’s existing budget permits, prosecution should be held in a special court that hears only corruption cases.

2. The Enlightenment/Education Division: The goal of this unit would be to educate the masses of the laws against corrupt practices, and to inform them of the harmful effects of corruption on the collective welfare of citizens. Individuals should be encouraged to report activities that violate such laws, and given the assurance that their safety would not be compromised, and that their complaints would be taken seriously. A monthly report on the progress against corruption should be issued to the public, and its reaction and assessment of the agency’s effectiveness recorded for evaluative purposes.

3. Policy Enhancement Division: This unit would be responsible for policies that reduce institutional opportunities for corruption. The objective is to minimize the means by which public and private employees engage in corrupt practices, and may involve issuance of transparency rules in public employment, procurement procedures, and how public contracts are awarded and executed. The rules of transparency should also extend to the financial sector to monitor the receipt and transfer of foreign exchange instruments.

If well implemented, the NBI should have an immediate effect on curbing corruption through swift prosecution and stiff penalties, and making it clear to the citizenry that the new administration would not tolerate ‘business as usual’ from civil servants; and since it takes at least two participants to effect corruption, both the ‘giver’ and the ‘givee’ would be equally held accountable and punished if found culpable. The perception of corruption (the folklore effect) and actual incidence of corruption are both damaging to the country’s image and ability to attract investors, thus the NBI should devote significant resources to its Enlightenment/Education Division to enable effective propagation of NBI’s successful and high profile prosecutions. This is a useful strategy to change public opinion on the prevalence of corrupt practices, restore investor confidence, and provide social and political stability, albeit in the short-run.

Because bureaucratic corruption is essentially a rent-seeking activity, the use of a single-agency approach, such as the NBI, may only be effective as a short-term measure. And even then, it has the potential for a serious short-coming if relevant social and legal institutions that provide needed checks and balances are lacking. Specifically, the NBI has the potential to become the mechanism by which agency officials perpetuate the very acts of corruption they are employed to curtail. This is a common outcome in many developing countries in Africa, e.g. Nigeria. Therefore, the Council would recommend that the NBI remain under constant scrutiny by the press, the public, and the legal establishment.

The longer –term Approach (three years hence)

Once the Nigerian economy is stabilized by effective deployment of the NBI, the administration should immediately begin to put in place long-term anti-corruption measures that would complement the efforts of the NBI. These measures must be robust enough to reflect and accommodate the complexities of corruption, and must, at the minimum, engage the following steps:

1. Embark on Sustainable Economic Development: A review of the literature on bureaucratic corruption would readily point to the fact that countries, at their infancy, and thus economically underdeveloped, are prone to high incidence of corruption primarily because essential social and political institutions are either nonexistent or too weak to provide effective deterrence. But with economic development, these countries are better positioned to provide funding for these institutions, educate their citizens, and pay competitive wages to civil servants. The long-run effect of economic development is a systematic reduction of petty bribery, and may even dampen grand corruption.

2. Freedom of the Press: A powerful tool in the fight against bureaucratic corruption is a free press that serves as the ‘eyes’ and ‘ears’ of the citizenry. The ability of the press to report all forms of corruption serves as a check against would-be participants, and ‘shames’ public officials that are caught in corrupt practices. But for the press to have such effect on public officials, it must be the case that existing cultural sensibilities are unsympathetic to corrupt practices, otherwise a free press may achieve the opposite effect by pointing out to the public who to go to in order to effect their ‘corrupt activities.’ Lawrence Rosen (2010) points out this possibility:

“In the Arab world corruption is viewed as a failure to share any largess you have received with those with whom you have formed ties of dependence. Theirs is a world in which the defining feature of a man is that he has formed a web of indebtedness, a network of obligations that prove his capacity to maneuver in a world of relentless uncertainty. It is a world in which the separation of impersonal institutions from personal attachments is very scarce. Failure to service such attachments is thus regarded as not only stupid but corrupt.”

In other words, culture matters in the fight against bureaucratic corruption.

3. Paying Civil Servants a Living-Wage: A well-paid government official, everything thing else being equal, is less likely to engage in petty bribery. In many instances in the developing world, the incidence of bribery is a direct consequence of inadequate compensation for civil servants. By instituting a policy of fair wage for all public employees, the government effectively removes the rationalization for accepting extortionary ‘gifts’ from the public in return for services the official is duty bound to provide. Furthermore, paying fair wages to public employees conduces to professional pride, which serves as a disincentive to engage in the demeaning act of accepting bribes. Again, Rosen (2010):

“It may be that professional pride is the key to reform. The rise in professional associations in the West coincided with the civil service reforms of the early 20^th century, and those forums, which were not agencies of the state and were not configured as nongovernmental organizations in order to avoid government control, built on the self-respect and pride their participants craved. Nor is pride limited to the technical professions or the craftmen’s guild or labor unions….. Archibald Macleish was right when he said that there are two kinds of people in the world – the pure and the responsible. Pride can go either way in the dichotomy, but being indispensible to both, it cannot be ignored in either.”

These three policy instruments would be the Council’s recommendation for controlling and minimizing corruption in the long-term.

by CASADE

South Africa’s Shame

Bukola Bolarinwa.

In April 2015 another wave of xenophobic violence swept over South Africa. Starting in Durban, the attacks on foreigners spread to suburbs in Johannesburg and to Cala in the eastern Cape. At least six people have been killed and scores injured as they sought refuge in make shift camps and police stations. The authorities have arrested more than 300 people so far, forcing thousands of foreigners to flee the affected towns.

This isn’t the first time Africa’s rainbow nation has had attacks of this nature, targeting mostly its African neighbours and their businesses. Between 2000 and March 2008, at least 67 people died in what were identified as xenophobic attacks. The first such attack on a large scale happened over the course of two weeks in May 2008 when 62 people were killed. The African Centre for Migration Studies, an entity that has been tracking xenophobic attacks in the continent, estimates that about 357 foreigners have been killed over the past seven years with at least one attack a month.

These xenophobic attacks in South Africa are an ugly stain on the continent, a stain that would linger in our collective conscience for considerable length of time. Images of machete wielding citizens looting foreign owned shops, and maiming innocent retailers have shocked, and continue to shock the world. Horrific images captured by a Sunday Times photographer show four locals beat and stab a street vendor from Mozambique as he lay in a gutter begging for his life. The murderers did not attempt to hide their face, and videos of looting show them stealing goods in broad day light, often with journalists and the police not far away.

This bout of violence was incited by the Zulu king Goodwill Zwelithini who reportedly said at a recent gathering that foreigners "should pack their bags and go" because they are taking jobs from South African citizens. The king denied that his statement was a call for violence, and it would be hard to imagine that even he envisaged such a violent reaction.

The term xenophobia has often been used to describe these bouts of violence against foreigners in South Africa. Xenophobia in its common apprehension is “the fear and hatred of strangers or foreigners or of anything that is strange or foreign”. This word alone cannot convey the complex and multi-faceted problem plaguing the country. The South African version of xenophobia is a by-product of a deadly mix of deeply rooted social issues and economic hardships facing the country’s long unemployed citizens, and the poor. Poverty levels now exceed those experienced under apartheid. Officially, unemployment runs at 24%, though the real figure is much higher, with more than half of under-25-year-olds out of work. This high level of social inequality amongst black South Africans cannot be ignored, and has divided the country in the same way colour did. South Africa’s Institute for Race Relations, a liberal think-tank, points to the “absolute failure” of government policy to deal with unemployment and with failures in the education system. It warns that xenophobic attacks may well increase as the economy weakens. In the interim, both legal and illegal immigrants bear the brunt of the country’s failed public policies.

South Africa has very progressive asylum laws, which were promulgated after apartheid. According to Open Security, ‘the state cannot deny any migrant the claim and temporary status of an asylum-seeker, which includes the right to work’. This liberal approach was fully supported by the ANC elite who benefited immensely when their organisation was banned by the apartheid regime, and they fled as political refugees into countries like Zambia, Zimbabwe, Tanzania and Mozambique. The United Nations Population Division lists 2.4m migrants in South Africa in its 2013 global dataset. But this does not include undocumented migrants estimated at 5m-8m. Some 1.5m-2m migrants are believed to have come from Zimbabwe alone.

In the two decades since the end of apartheid, South Africa has absorbed largely peaceful migrants comprising more than 10% of its 50m population; this, in comparison, is a lot more than the recent influx of African migrants seeking refugee status in European countries, and thus begs the question of why this positive model of immigration seems to be collapsing. Toughening immigration and asylum laws is definitely not the answer as this will simply encourage illegal trafficking that does incredible harm to individuals and society at large.

President Zuma has condemned the attacks but has not provided any real solutions. Meanwhile Edward Zuma, his eldest son and incidentally born in Swaziland, told News24, a South African television station, that he agreed foreigners should leave. He warned that “we are sitting on a ticking time bomb of them taking over the country.” Such comments found a receptive audience in the country.

The underlying belief that other Africans “take” jobs away from South Africans reveals a disturbing reality in the country, which is that many South Africans are poorly educated and ill-equipped to transition into a modern economy that demands a certain level of marketable skills. No group of people can take the jobs of citizens; they are given to foreigners because the citizens are inexperienced, feel entitled, and often unmotivated to advanced their economic lot through investment in human capital. The jobs in question in South Africa are usually menial, and labour intensive; immigrants who are often illegal cannot get jobs in the corporate sector and often create jobs for themselves by trading and selling their specialized skills.

The cleaners, drivers, security men, traders, shop owners and nannies from neighbouring countries come to South Africa because they have a budding middle class that can pay better wages. A number of the unemployed South Africans are themselves internal migrants from the rural former homelands into the cities. With millions of unemployed South Africans living in dire conditions, it is clear that their want of marketable skills, and bad public policies are the primary source of their unemployment problems, not foreigners.

In other countries with such vast economic inequality, rebellion by the extremely poor is usually directed at the government or the wealthy. This is why the attacks on fellow Africans in South Africa remain puzzling to other Africans, for it seems that the attackers have misdirected their frustrations which should have been directed at President Zuma, and his ruling elites. President Zuma, at the least, should have been asked to give account of the reported lavish expenditure of tax revenues on his private residence.

These attacks also highlight the level of impunity and opportunism that are rife in the townships where public violence is highly permissible. A study by the South African Human Rights Commission found that 597 court cases were opened after the 2008 clashes. Yet a year and a half later only 16% had resulted in a guilty verdict—nearly all of these for theft and assault, and with the option to pay a fine rather than face jail time. This low level of prosecution reinforces the lack of fear in the perpetrators while simultaneously encouraging migrants’ distrust of the justice system, which leads to low levels of reporting of xenophobic crime. With about 300 people under arrest since these attacks began, it is crucial for the South African government to make a strong statement against such criminality by prosecuting them to the full extent of the laws currently in good use.

by CASADE

Nigeria's National Security Fallacy

Nnamdi Awa-Kalu.

On December 10, 1974, then United States Secretary of State and National Security Advisor, Henry Kissinger- a revered figure in global discussions of foreign policy- directed the completion of a paper entitled 'National Security Study Memorandum 200: Implications of Worldwide Population Growth for U.S. Security and Overseas Interests (NSSM200).' This document articulated what was later adopted as official US policy by President Gerald Ford. A significant portion of the paper asserted that the United States should consider population control in some 13 countries of ‘paramount importance’ as a matter of national security. The peoples of these countries, it seemed, could mount a ‘destabilising opposition’ against the strategic interests of the United States if allowed to flourish and, of course, the leading democracy in the world could not let that happen. The memorandum was declassified in the early 1990s and researchers revealed that of the threatening thirteen, India, Pakistan, Mexico and Brazil were on Kissinger’s List. Disconcertingly, so was Nigeria.

There is a bias in coverage of national security matters in Nigerian news media which slants toward military might and police power, that is, the rhetoric concentrates on the expression of force both in its state-sanctioned expression and its state-defying version. The continuing spate of violent crime across the country as perpetrated by fundamentalist Boko Haram fighters has been the primary focus in the years following the group’s emergence into the national conversation in 2009. Prior to that, an equally self-righteous militancy had plagued (and by some accounts, continues to be a factor in) the creeks of the Niger Delta where armed activists, claiming the dispossessions and destruction of arable land and fishing waters as cause for battle, courted publicity with guerrilla warfare. In Lagos and other metropolitan cities, violent abductions for a fee turned into the latest cottage industry. Young men in Aba were often reported to be kidnapping the unsuspecting for returns as little as recharge cards for their phones. Armed robbery remained a terror for people across the different states of Nigeria. Inevitably, national security has become a term that describes a means to combat these forces with superior aggression and to maintain sufficient protection from them by force. Any discussion about national security begins and ends with armed conflict and the victory of Nigeria over its enemies.

In fact, there are several factions who have attributed the success of General Muhammadu Buhari-the President-Elect of the Federal Republic of Nigeria following the general elections on March 28, 2015- to his campaign against insecurity and corruption. The International Business Times hailed the former military head of state as a symbol that would spearhead greater resistance to the jihad in the country’s arid north. Other foreign news outlets towed this line. At home, in informal discussions in beer parlours and mama put joints where people feel freer to talk than they do when faced with a rolling camera and a microphone, much has been made of the stern-faced septuagenarian’s battle-worn credentials. On nairaland, a social media website which is a simulacrum for public opinion, discussions have swirled on about the personal involvement of Buhari in the effort to contain a Chadian insurrection in North East Nigeria while he was General Officer Commanding of Jos Military Command in the early eighties. The word on the street is that Buhari is the finest champion for national security in these beleaguered times. There lies the rub.

The website for Mi5, the British Secret Service, acknowledges that national security refers to the ‘security and well being of the United Kingdom as a whole’ and points out that the government of that state is careful not to define the phrase to permit flexibility in its protection. This means that the prevalent concept of national security as the exclusive preserve of the military and militarised forces is not expansive enough. Adopting this viewpoint, Robert McNamara, a former US Defence Secretary and President of the World Bank (thus well-placed to judge the characteristics of systems of security and of the preservation of well-being) intoned in The Essence of Security: Reflections In Office “We have come to identify security with exclusively military phenomena and particularly with military hardware. It just isn’t so.” By this impression, any attempt to corral national security into the specific context of military might or police power is reductive. The ‘well-being’ pillar of the national security debate means that any champion who volunteers to battle the evil that lurks in wait must be prepared to construct the shield of defence of Nigerian sovereignty out of economic, social and political policies which tackle the many threads to the broken body of public life in the country.

The Harvard professor Charles Maier advances a theory of national security in which a state has the “capacity to control those domestic and foreign conditions that the public opinion of a given community believes necessary to enjoy its own self-determination or autonomy, prosperity and wellbeing.” Again, this mantra of wellbeing. His theory hints at economic security which is a matrix of food security, water security, energy security and adequate response to environmental change. The well-being of the Nigerian peoples, if national security is indeed to be the watchword of the Buhari regime, will be protected only when these virtues are upheld. At present, the lack of access to clean water, a healthy diet and electric power are defining features of the Nigerian condition. Massed millions do not enjoy the benefits that accord wellbeing and guarantee continuing welfare. On top of these ills, high illiteracy levels and the degeneration of the education system mean that the Nigerian people are largely unable to better their lot in a way that can prevent the root causes of extremism and fanatic pursuit of sectarian ideology. The Boko Haram philosophy, which decries Western education, has taken hold in parts of the country were there was severe under-exposure to modern formal education anyway. In other parts of the country where people have taken up arms and crime, the allegation levelled against the state is that severe maladministration of societal welfare has driven them to the mattresses.

Now, the question is whether Buhari has the savoir-faire to manoeuvre Nigeria away from this dangerous insecurity paradigm through vital policy decisions that can transfigure the handicaps into national well-being. In his previous incarnation as military head of state, it is said that he ran a brutal campaign against press freedoms and cracked the whip against dissent. The quest for order was approached with no attempt to install measures that protect the people’s right to self-determination and autonomy as propounded by Maier. Rather, the wilfulness and exuberance of Nigerians, so often said to be the reason for thriving enterprise and productivity, was ruthlessly subjugated to manifestations of the jackboot of justice. Granted, all this was perfectly legitimate under a military government. And, as described by ThisDay Newspaper, Buhari has had his Damascene moment following the fall of the Berlin Wall and of the dictatorial, communist governments of the East from which he drew inspiration. His has been a reversal of mentality such as to sustain him through three losing tilts at the office of President, culminating in good luck at the fourth roll of the dice. The President-Elect is a man tempered and toughened by the ballot box, a thing impervious to the strong individual will, yet conveyor of the collective autonomy of the populace. A fitting paradox.

When Kissinger unveiled his policy of population restriction and contraception and identified the mineral resources of Nigeria as potential US national interests that must be secured, he made clear that the US sees national security as an all-encompassing political and socio-economic imperative. The Buhari regime must do the same, diverting the talk amongst Nigerians from the manic chatter about killing and rescue and heroism-although the last of those is a great thing to aspire to. It is in the finer points of national security, in restoring the Nigerian people to the dignity that comes with true well-being that he will have fulfilled his national security mandate.

by CASADE

Sovereign Wealth Funds As Means to Effective Development Strategy For Resource-Rich African Countries

John O. Ifediora.

Botswana has Sovereign Wealth Funds, and has used them admirably to develop its economy, reduce poverty, and continues to invest heavily in human capital through higher education. Nigeria has sovereign wealth funds, but they have been depleted and misallocated. At a time when the country needs the benefits of a functional sovereign funds the most – declining oil prices, erratic and undependable power generation, and an obscene unemployment rate, its Sovereign Wealth Funds exist in name only. This has left citizens and economists both within and without the country scratching their heads and each other's head for plausible answers. While the country’s experience with its sovereign wealth funds is a sad commentary on the moral and work ethics of its extant political leadership, it must not discourage future governments, and other African countries rich in natural resources from implementing and using such funds for national development agenda. They have been shown to be extremely serviceable in Saudi Arabia, Kuwait, New Zealand, and South Africa.

In an excellent work by Alen Gelb, Silvana Tordo, Havard Halland, Noora Arfaa, and Gregory Smith on this subject entitled, “Sovereign Wealth Funds and Long-Term Development Finance: Risks and Opportunities,” the authors provide a guided tour of the risks and benefits of this useful development instrument:

Introduction

Sovereign Wealth Funds (SWF) represent a large and growing pool of savings. Many are owned by natural resource exporting countries and have long-term objectives, including inter- generational wealth transfer. Traditionally these funds have invested in external assets, especially securities traded in major markets for a number of reasons including sterilization and lack of domestic investment opportunities.

Over time, and in part reflecting low returns in developed countries after the financial crisis, their investment holdings have broadened to include real property and investments in developing economies. Potentially competitive returns in developing economies and the sharp reductions in traditional sources of long-term financing after the financial crisis have contributed to fuel a growing interest among national authorities in permitting, and even encouraging, the national SWF to invest domestically, in particular to finance long-term infrastructure investments. Such pressure is inevitable, considering the fact that many countries with substantial savings, several of them recent resource-exporters, also have urgent needs. A number of existing SWFs now invest a portion of their portfolios domestically and more are being created to play this role.

Is it appropriate to use SWFs to finance long-term development needs? Does it matter whether these investments are domestic or foreign? This paper considers these issues, in particular the controversial question of using SWFs to finance domestic projects motivated, in part, by their perceived importance for development. In particular, the paper focuses on commercial or quasi-commercial domestic market investments by SWFs in resource-driven countries and explores the conditions that affect their ability to be an efficient and prudent investor while fostering local economic diversification and the mobilization of private capital.

At first sight the fit between the long-term goals of the SWF and the long-term investment needs of developing countries appear to align. As a specialized investor, a high-capacity SWF might also be able to bring appraisal skills to the table to help improve the efficiency of the investment program. However, domestic investment by a SWF pose potential risks to the domestic economy: (1) de-stabilize macroeconomic management and (2) undermine both the quality of public investments and the wealth objectives of the fund. The source of these risks is essentially that the SWF is owned by the same entity – the government – that seeks to promote the domestic public investments. These risks may be mitigated but not eliminated.

Naturally, no investment approach is risk-free. For example, the level of fiscal spending can be benchmarked by fiscal rules that emphasize sustainability, but may not be contained; spending may also be of low quality, especially if dependence on rents weakens the incentives for taxpayers to scrutinize expenditure. Building up large external savings funds runs the risk of their being raided by future governments, either directly (funds are used for purposes other than those originally intended or planned contributions are not paid) or indirectly (through unsustainable accumulation of public debt). On the other hand, in some views the risks of using SWFs to finance domestic public investments are so serious as to recommend that SWF portfolios should be confined to foreign assets with all public investment funding being appropriated through the budget.

The first priority is to ensure that domestic investments made by the SWF are considered in the context of the public investment plan and phased to ensure a sustainable flow of investment spending rather than destructive and costly boom-bust macroeconomic cycles. The second priority is to create a clear separation between the government as promoter of investments and as owner of the SWF: domestic investment by the SWF should not be used to finance public expenditure bypassing budgetary controls. At the same time it is necessary to build capacity for the SWF to operate as an expert, professional investor that can contribute positively to the quality of the public investment program. Possible approaches include: (a) screening investments for commercial or near-commercial financial return; (b) investor partnerships, including possibly other SWFs and development lenders as well as private investors, to diversify risk, and increase implementation capacity; (c) institutional design of the governance of the SWF to credibly insulate it from political pressure, strengthen accountability, ensure oversight, and bring technical skills to bear on investment decisions; and (d) full transparency, in particular on individual domestic investments and their financial performance. Some of these elements are already included in good-practice principles for SWFs, in particular the Santiago Principles although these principles were not formulated with a particular focus on domestic investments and may need to be strengthened in that regard. Some countries may be able to mitigate the risks through such mechanisms. Others, with weaker governance, will find it an uphill struggle. Especially for such countries, the risks of using SWFs to finance development spending may outweigh the potential benefits.

Diversification of SWF Investments

Rich natural resource reserves, primarily hydrocarbons and minerals, offer great development opportunity but they also expose producing countries to difficult policy questions. How much to save for the long term and how to invest the savings? How much to set aside in precautionary reserves to cushion the potentially damaging impact of volatile resource markets? How to phase in large investment programs to avoid hasty and wasteful spending in the face of absorptive constraints? SWFs can be set up to play a number of roles but it is important to stress that they are only a mechanism to help address such issues, and their establishment is no substitute for strengthening fiscal management or improving governance (Dixon and Monk 2011). Unfortunately many countries have created funds only to undermine them or to render them irrelevant through poor or inconsistent policy.

Multiple objectives could be achieved through appropriate strategic asset allocation within one fund, or the assets could be separated into separate funds with distinct characteristics. For example, if the long-term portfolio has adequate liquidity a savings fund can do double- duty as a precautionary fund (van den Bremer and van der Ploeg 2012). The objectives of the fund impact its investment objectives and strategic asset allocation. The focus of a fund’s investment policy should not be on the performance of individual asset classes but on the performance of the portfolio as a whole comprising a balanced mix of various asset classes.

Sovereign Funds in Emerging Markets

For a number of years SWFs have been looking to investments in emerging markets to diversify their portfolios and boost returns. Examples cited by Santiso (2008) include Temasek’s holdings in India’s ICICI Bank and Tata Sky, the Kuwait Investment Authority’s profitable investments in China’s ICBC, the Abu Dhabi Investment Authority’s holdings in Egypt’s EFG Hermes and Malaysian land projects, and the Dubai Investment Corporation’s stakes in North African companies like Tunisia Telecom. Funds from the Gulf were estimated to hold 22 percent of their assets in Asia, North Africa and the Middle East. OECD’s sovereign funds were also looking to boost their exposure in emerging and frontier markets, including Africa and Latin America.

There appears to be a trend towards including domestic investment as part of the mandate of SWFs. Recent examples include the Nigerian Sovereign Investment Authority, and the Fundo Soberano de Angola; they are also being established by, or under discussion in, Colombia, Morocco, Tanzania, Uganda, Mozambique and Sierra Leone. Many have been created by governments of resource-exporting countries. In some cases their domestic investment role has emerged out of a broadening of the mandate of an existing SWF, but the emergence of public funds as active players in the development strategies of resource-rich countries, in particular to support strategic investments, represents a shift in thinking on the appropriate use of resource revenues.

Domestic Investments in Resource Exporting Countries

Countries dependent on natural resources face several policy questions on the use of their revenues. How much should be saved and invested to ensure long-term fiscal and economic sustainability rather than consumed when realized? Should part of the windfall be transferred to citizens rather than spent entirely by the state? In addition to holding shorter-run precautionary balances to help cushion volatile resource price movements, what types of longer-term investments are most appropriate?

Long-term fiscal sustainability for resource-rich countries is sometimes benchmarked against some version of Permanent Income (PI). In earlier formulations, this was used as a benchmark for the primary fiscal deficit excluding resource revenues, comparing it with the permanent income flow expected from the resource sector. This formulation has been called into question. To the extent that a part of fiscal spending is for productive investment, this should be counted as part of savings rather than as consumption. That opens up greater fiscal space for domestic investment spending, but only if the investment is effective in building up national wealth.

Following on from this argument, it has been shown that not every country will find it optimal to build up a SWF savings fund that invests abroad. If the domestic risk adjusted rate of return on investment is higher than that on foreign assets, the optimal strategy might involve boosting domestic investment rather than accumulating long-term foreign assets (Berg et al., 2012; Collier et al., 2009; van der Ploeg and Venables 2010). In principle, and for countries that are capable of effectively using funds for productive purposes, well chosen, planned and executed domestic investments, including some naturally within the scope of the public sector, can help the economy to grow and diversify away from risky dependence on a dominant resource.

In practice, even if these conditions are satisfied macroeconomic and institutional absorptive capacity constraints will require that a portion of the revenue is invested in liquid financial assets outside of the domestic economy, possibly for a number of years. There would also still be a need to hold precautionary reserves, sometimes for quite extended periods because of the nature of commodity cycles. If the sole objective of accumulating funds in a SWF is stabilization then no domestic investment within that fund is advisable.

However, the link between investment and growth is neither automatic nor guaranteed. Public investment poses significant management and governance challenges, including low capacity, weak governance and regulatory frameworks and lack of coordination among public entities. Furthermore multiple institutions can have overlapping investment mandates, leading to fragmented programs and inefficient use of public funds. Careful coordination is necessary when multiple entities carry out public investment programs.

Many resource-exporting countries have launched massive investment programs to little effect (Gelb 1988). On average, countries tend to be relatively stronger in the early stages of strategic guidance and appraisal, and weaker in the later stages of project implementation and especially in project audit and evaluation. An index of the quality of public investment management shows this to be markedly weaker in resource-exporting developing countries than in other countries (Dabla Norris et al. 2011). However, some resource-dependent countries, like Chile, offer good-practice examples (World Bank 2006).

Effective Public Investment Management

High-quality public investment is essential to growth (Gupta et al., 2011) but poor investment management may result in wasted resources and corruption. The risk is increased if investment is scaled up rapidly in the face of macroeconomic and institutional absorption constraints (Berg et al., 2012). Efficient public investment management can be divided into four consecutive phases, each with several individual components (Rajaram et al., 2010) and Dabla-Norris et al., 2011):

Strategic Guidance and Project Appraisal. Strategic guidance ensures that investment projects are selected based on synergy and growth outlook, and reflect development objectives and priorities. Projects that pass this first screening must then undergo scrutiny of financial and economic feasibility and sustainability. This requires several steps – financial and economic cost- benefit analyses, pre-feasibility and feasibility studies, environmental and social impact assessments -- all undertaken by staff trained in project evaluation skills. Furthermore, creating potential project lists strengthen accountability.

Project Selection and Budgeting. Vetting proposed projects requires a politically independent gate- keeping function. The participation of international experts, together with national technical experts, can enhance the quality and robustness of the review. Linking the process of selecting and appraising projects to the budget cycle is necessary to take account of recurrent costs and to ensure appropriate oversight and consistency with long-term fiscal and debt management objectives. This requires a medium-term fiscal framework that translates investment objectives into a multi-year forecast for fund and budget aggregates.

Project Implementation. This covers a wide range of aspects, including efficient procurement, timely budget execution, and sound internal budgetary monitoring and control. Clear organizational arrangements, sufficient managerial capacity and regular reporting and monitoring are essential to avoid under-execution of budgets, rent-seeking and corruption. Procurement needs to be competitive and transparent, including a complaints mechanism to provide checks and balances and a credible internal audit function.

Project Audit and Evaluation. Ex-post evaluation is in many developing countries a missing feature of public investment management systems, as are adequate asset registers. Registers are necessary to maintain and account for physical property, and should be subject to regular external audits.

*Sources: Berg, Portillo, Yang and Zanna (2012) and Dabla-Norris, Brumby, Kyobe, Mills and Papageorgiu (2011).

The variable performance of countries in managing their public investment programs points to the fact that not all have strong central management of the level and quality of public spending, properly integrated into the budget and subject to oversight by parliament. Off- budget flows are often substantial. Sub-national governments or line ministries may have considerable scope for independent action, with little effective oversight. In many countries state-owned enterprises, including powerful national resource companies, may take on fragmented responsibility for a wide range of development activities, again often with little effective oversight, either from the market or from the state.

In addition, few resource exporters have managed to sustain countercyclical fiscal policy in the face of large swings in resource markets. This leaves their economies vulnerable to destructive “boom-bust” cycles, which have a direct impact on investment quality and returns. On the upside of the cycle, spending outruns management capacity, raising the prospect of poor-quality spending as well as creating bottle-necks that raise costs for all investors. On the downside, sharp fiscal consolidation leaves partly-completed projects in limbo and may also cut the utilization of completed investments by constraining operational spending. Chile, again offers a good-practice example, of the use of fiscal rules to sustain countercyclical fiscal policy (De Gregorio and Labbe 2011).

Opening up a separate window for domestic investment by the country’s SWF has the potential to exacerbate these risks. It can further fragment the public investment program, and may even provide an avenue to bypass parliamentary scrutiny of spending. With its resources provided from resource rents and not from the capital market the SWF is not subject to oversight by market actors and institutions. Furthermore, even if the fund is restricted to commercial investments or investments with near-commercial returns, it could exacerbate macroeconomic and asset-price cycles by investing heavily when resource prices are booming. Therefore, it can only offer potential benefits relative to alternative approaches if, as a high-capacity expert investor, it operates in coordination with the government’s macro-fiscal policy.

Investment Rules and Institutional Models to Mitigate Risk

While it is not possible to eliminate all of the risks of a SWF investing in the domestic economy, it may be possible to mitigate some of them and at the same time ensure that the SWF’s engagement plays a constructive role in strengthening the quality of public investments by acting as a high-quality, commercially driven investor. This would require: (i) ensuring that its investments are not destabilizing to the macro-economy, (ii) limiting the scope of domestic SWF investments to those appropriate for a wealth fund; (iii) investing through partnerships with entities that bring credible standards for project quality and governance; (iv) establishing credible governance arrangements to ensure that the SWF operates with independence and professionalism, and clear accountability mechanisms; and (v) mandating full transparency, particularly on each domestic investment and its performance.

As a wealth fund, the SWF should not invest in projects that are justified primarily by their economic or social externalities. Such investments should be funded through the normal budget process, which should also make provision for the future recurrent costs necessary for operations and maintenance. By preserving the value of its assets over time through commercial or quasi commercial investments the SWF would perform an inter-generational wealth transfer function, compatible with the modified PI approach. Moreover, SWF investment not warranted on commercial grounds would greatly complicate the accountability of the fund as its management could no longer be benchmarked on financial returns. The fund may also not be accountable for the wider social and economic impacts of investments that may depend on factors outside its control. For example, a sectoral ministry may choose not to provide the recurrent inputs to operate the assets (such as schools) built by the fund. This dilution of accountability leaves the fund vulnerable to political manipulation.

Investing to Bring Down Power Costs

SWFs can use a variety of instruments to support domestic investment, including equity (ordinary or preference shares), debt (including subordinated or syndicated loans) and guarantees (commercial or political risk). Projects can also be implemented through Public- Private Partnerships (PPPs), contracts between public and private parties in which the latter provides a public service and assumes substantial financial, technical and operational risk. The SWF might co-invest on purely commercial terms, or it could modify the terms of its engagement to reflect clearly identified economic or social benefits. For example, the national market could be unable to support a market price for power that is high enough to justify the construction of a generation plant on commercial terms. A SWF could co-finance the project with a private company, accepting a positive but below-market return and a long investment horizon to enable an acceptable return for the private partner with lower power tariffs. A similar approach has been used in Mauritania, as well as other countries. PPPs can be attractive vehicles for SWFs that seek to promote developmental objectives while still generating reasonable financial returns. But experience shows that proposals need expert assessment to ensure that they will deliver their social and development objectives and that the balance between risk and profitability is not heavily tilted in favor of the private partners.

Nigeria Infrastructure Fund

The Nigeria Infrastructure Fund (NIF) is one of three pools of the recently established Nigeria Investment Authority (NSIA), and the only one that will invest domestically. The NIF holds a 32.5 percent share of the NSIA’s US$1 billion seed capital, the other shares being held by the future generations fund and the stabilization fund. The NSIA’s stated objectives are to “build a savings base for the Nigerian people, enhance the development of Nigerian infrastructure, and provide stabilization support in times of economic stress”. The NSIA, which commenced operations in October 2012 and made its first investment in September 2013, relies heavily on international partnerships, and this maiden investment consisted of a transfer of $200m to UBS, Credit Suisse and Goldman Sachs, for external management of a fixed income portfolio.

International partnerships are also a key part of the NSIA’s domestic investment policy. The Nigeria Infrastructure Fund will invest in sectors including power, transport, agriculture and health care, and has signed memorandums of understanding with the Africa Finance Corporation and the International Finance Corporation to work together on transactions. For power sector investment, there is an agreement with General Electric, and another one being discussed with Power China. At least, these were the publicly stated activities and goals.

*Sources: Financial Times, September 16th, 2013 and NSIA website

 External governance relates to the relationship between the SWF and the state as its owner. Ownership provides certain rights and obligations, including voting on matters defined by law and by the SWF’s statutes; electing, appointing, and removing board members; and obtaining information on the performance of the SWF, its board and its management. For SWFs, the Minister of Finance usually acts as owner on behalf of the state. However, dual responsibility is possible, for example where the fund is given public policy objectives in specific sectors or spending is earmarked for specific uses. This is the case for the Nation Building Funds in Australia – a group tasked with enhancing the Commonwealth’s ability to make payments in relations to public investment in transport, communication, energy, education, health and hospitals. Particularly where several representatives act as owner, competing interests may dilute accountability and weaken the incentives for performance of the board. Therefore, clarity of roles and responsibility, transparency, as well as separation between ownership and regulatory/supervisory functions are important to prevent conflict of interests, and to ensure accountability and operational independence in the management of the SWF. Having an explicit ownership policy can reinforce the authority and responsibility of the owner and provide guidance to the board (OECD, 2006). The ownership policy defines the overall objectives of state ownership, the state’s role in corporate governance and the manner in which the policy will be implemented, including the extent of government participation (priority or strategic sectors, controlling or non-controlling share), and the policy with regard to the exercise of voting rights in equity investments (active or silent owner.

Examples of ownership arrangements

The objectives and mandate of the SWF provide the framework for the definition of investment strategies by the fund’s management, and the measurement of performance of the fund. It is therefore important that objectives and mandate be clear.7 Translating objectives into performance targets is among the tasks of the shareholder representative. These should include overall financial performance targets, and operational targets to guide business practice and monitor efficiency, and clear public policy targets to measure the fund’s contribution to local economic development whenever a home bias exits. Targets should be clear and a methodology for measuring them should be made explicit in the shareholder compact or similar agreement between the owner and the board of the fund. Since policy priorities and market conditions change over time, it should be possible to review and update these targets periodically. Benchmarking with targets and results of similar institutions can facilitate performance assessment and help to define realistic targets.

Institutional Arrangements and Independence of the Board: Lessons from New Zealand

The New Zealand Superannuation Fund is governed by a separate Crown entity called the Guardians of New Zealand Superannuation with a Board of at least five and at most seven members. Each Board member is appointed for a term of up to five years and is eligible to be reappointed. Board members are appointed by the Governor General on the recommendation of the Minister of Finance. The Minister's recommendation follows nominations from an independent nominating committee. On receiving those nominations the Minister must consult with representatives of other political parties in Parliament before recommending the Governor General appoint a person to the Board. Board members are chosen for their experience, training, and expertise in the management of financial investments. The Guardians are responsible for establishing investment policies, standards and procedures for the Fund, including determining the proportion of money allocated to various types of investments and appoint external investment managers to manage different parts of the Fund. The Fund is authorized investment in a full range of asset classes, including domestic asset, and is required to invest on a prudent, commercial basis.

While accountable to Government, the Guardians operate at arm's length from Government. Under the law, the Minister of Finance may give directions to the Guardians regarding the Government's expectations as to the Fund's performance (overall risk and return), but must not give any direction that is inconsistent with the duty to invest the Fund on a prudent, commercial basis. The Guardians must have regard to any direction from the Minister. But they are free to enter into investment arrangements that best suit the Fund’s purpose with minimum agency risk. Any direction given by the Minister must be tabled in Parliament. In addition to reviews by the Office of the Auditor General, an independent review of how effectively and efficiently the Guardians are performing their function is carried out every five years. This independence was tested in 2009 when the Ministry of Finance sent a request to the Fund to increase the Fund’s domestic investments citing national interests. The request stated the Government’s expectations that the Fund should increase domestic investments to 40 percent of the total portfolio. The Government’s objective was to increase investment in New Zealand’s productive sector, and further the development in domestic capital markets. This was to be done consistently with the Fund’s duty to invest “on a prudent, commercial basis”, in accordance with the relevant legislation.

The Guardians, however, considered the request at odds with the Fund’s mandate to maximize return over a long-term horizon without undue risk and consistent with best practice portfolio management. If allocation to New Zealand assets were to substantially increase beyond the then-current 18 percent share of the total portfolio, the Fund would run the “risks associated with asset concentration, the relative illiquidity of New Zealand assets, and other relevant idiosyncratic risks associated with investing in any single location.” Consequently the Guardians did not offer “an assurance as to how much, if at all, the Fund’s New Zealand assets will increase” based on “the unpredictable nature of future commercial, prudent, investment opportunities”. It was noted that in order “to guarantee an increase to a prescribed percentage would require a modification to the Fund’s commercial objectives” in the relevant legislation. The Guardians concluded that “while local investment activities may produce positive benefits (externalities) in assisting developing New Zealand’s capital markets, we cannot take these externalities directly into account when making an investment decision under our current Act”.3 Specialized committees are often used to improve performance of the board. These include the audit committee, the remuneration committee, the risk management committee, the corporate governance committee, and the ethics committee. While most SWFs have established audit and executive committees, remuneration, risk management, and corporate governance committees are a relatively new trend.

Conclusion

Though not entirely novel, SWFs that are permitted or mandated to invest domestically are emerging on a wider scale. They have not been systematically surveyed so that much remains to be understood about their processes and activities. The emergence of SWFs with domestic investment mandates represents a shift of emphasis on the role of natural resource rents in development towards domestic investments. About 20 sovereign funds now have at least some specific mandate in this area, including some that traditionally have invested abroad. As resource markets stay strong and more countries make discoveries, more domestic investment mandates are being established.

While information on the policies and performance of domestic portfolios is incomplete, experience indicates that a SWF that is permitted or mandated to invest domestically, like a development bank, risks being influenced by the political economy of the country. The downside risks are large, and in some views prohibitive. Many resource-rich countries flush with funds have invested but seen little payoff. Sometimes this has been due to accelerating investment beyond the limits of macroeconomic or management capacity. Investment programs have also often been politically captured, used to distribute patronage and undermined by corruption. Unlike development banks that need to obtain market-based funding, SWFs are endowed by budget transfers or by direct payments from resource sectors. They are not subject to similar market discipline, increasing the downside risks. Only if a SWF is allowed to operate as a professional expert investor can it strengthen the management of the public investment program and contribute to building national wealth.

The experience of similar institutions suggests a number of considerations that a country contemplating allowing a SWF to invest domestically might consider. The overall objective is to create a system of checks and balances to help ensure that the SWF does not undermine macroeconomic management or become a vehicle for politically driven “investments” that add nothing to national wealth. The difficult environments in which some SWFs are being established suggest that these will often be major concerns. The main priorities concern the criteria for selecting investments, partnerships, external and internal governance clearly separating responsibilities for the choice of investment between the SDF and its owner. This is particularly important for a SDF that is mandated to invest in rescuing ailing SOEs, particularly when private capital is not involved in the transaction.

by CASADE

Exodus Of Homo Sapiens From Africa And Genetic Diversity May Explain Economic Growth Divergence Across Continents

Quamrul Ashraf, and Oded Galor.

Abstract.

This paper argues that deep-rooted factors, determined tens of thousands of years ago, had a significant effect on the course of economic development from the dawn of human civilization to the contemporary era. It advances and empirically establishes the hypothesis that, in the course of the exodus of Homo sapiens out of Africa, variation in migratory distance from the cradle of humankind to various settlements across the globe affected genetic diversity, and has had a long-lasting effect on the pattern of comparative economic development that is not captured by geographical, institutional, and cultural factors.

The level of genetic diversity within a society is found to have a hump-shaped effect on development outcomes in the pre-colonial era, reflecting the trade-off between the beneficial and the detrimental effects of diversity on productivity. Moreover, the level of genetic diversity in each country today (as determined by the genetic diversities and genetic distances amongst its ancestral populations), has a non-monotonic effect on income per capita in the modern world. While the intermediate level of genetic diversity prevalent among Asian and European populations has been conducive for development, the high degree of diversity among African populations and the low degree of diversity among Native American populations have been a detrimental force in the development of these regions.

Introduction

Existing theories of comparative development highlight a variety of proximate and ultimate factors underlying some of the vast inequities in living standards across the globe. The importance of geographical, cultural and institutional factors, human capital formation, ethnic, linguistic, and religious fractionalization, colonialism and globalization has been at the center of a debate regarding the origins of the differential timing of transitions from stagnation to growth and the remarkable transformation of the world income distribution in the last two centuries. While theoretical and empirical research has typically focused on the effects of such factors in giving rise to and sustaining the Great Divergence in income per capita in the pre-industrial era, attention has recently been drawn towards some deep-rooted factors that have been argued to affect the course of comparative economic development.

This paper thus highlights one of the deepest channels in comparative development, pertaining not to factors associated with the dawn of complex agricultural societies as in Diamond’s (1997) influential hypothesis, but to conditions innately related to the very dawn of mankind itself. The hypothesis rests upon two fundamental building blocks. First, migratory distance from the cradle of humankind in East Africa had an adverse effect on the degree of genetic diversity within ancient indigenous settlements across the globe. Following the prevailing hypothesis, commonly known as the serial-founder effect, it is postulated that in the course of human expansion over planet Earth, as subgroups of the populations of parental colonies left to establish new settlements further away, they carried with them only a subset of the overall genetic diversity of their parental colonies. Indeed, migratory distance from East Africa has an adverse effect on genetic diversity in the 53 ethnic groups across the globe that constitute the Human Genome Diversity Cell Line Panel.

Second, there exists an optimal level of diversity for economic development, reflecting the interplay between the conflicting effects of diversity on the development process. The adverse effect pertains to the detrimental impact of diversity on the efficiency of the aggregate production process of an economy. Heterogeneity increases the likelihood of mis-coordination and distrust, reducing cooperation and disrupting the socioeconomic order. Greater population diversity is therefore associated with the social cost of a lower total factor productivity, which inhibits the ability of society to operate efficiently with respect to its production possibility frontier.

The beneficial effect of diversity, on the other hand, concerns the positive role of diversity in the expansion of society’s production possibility frontier. A wider spectrum of traits is more likely to be complementary to the development and successful implementation of advanced technological paradigms. Greater heterogeneity therefore fosters the ability of a society to incorporate more sophisticated and efficient modes of production, expanding the economy’s production possibility frontier and conferring the benefits of increased total factor productivity.

Higher diversity in a society’s population can therefore have conflicting effects on the level of its total factor productivity. Aggregate productivity is enhanced on the one hand by an increased capacity for technological advancement, while simultaneously diminished on the other by reduced cooperation and efficiency. However, if the beneficial effects of population diversity dominate at lower levels of diversity and the detrimental effects dominate at higher levels (i.e., if there are diminishing marginal returns to both diversity and homogeneity), the theory would predict an inverted-U relationship between genetic diversity and development outcomes over the course of the development process.

In estimating the impact on economic development of migratory distance from East Africa via its effect on genetic diversity, this research overcomes limitations and potential concerns that are presented by the existing data on genetic diversity across the globe (i.e., measurement error, data limitations, and potential endogeneity). Population geneticists typically measure the extent of diversity in genetic material across individuals within a given population (such as an ethnic group) using an index called expected heterozygosity. Like most other measures of diversity, this index may be interpreted simply as the probability that two individuals, selected at random from the relevant population, are genetically different from one another. Specifically, the expected heterozygosity measure for a given population is constructed by geneticists using sample data on allelic frequencies, i.e., the frequency with which a “gene variant” or allele (e.g., the brown vs. blue variant for the eye color gene) occurs in the population sample. Given allelic frequencies for a particular gene or DNA locus, it is possible to compute a gene-specific heterozygosity statistic (i.e., the probability that two randomly selected individuals differ with respect to the gene in question), which when averaged over multiple genes or DNA loci yields the overall expected heterozygosity for the relevant population.

The most reliable and consistent data for genetic diversity among indigenous populations across the globe consists, however, of only 53 ethnic groups from the Human Genome Diversity Cell Line Panel. According to anthropologists, these groups are not only historically native to their current geographical location but have also been isolated from genetic flows from other ethnic groups. Empirical evidence provided by population geneticists (e.g., Ramachandran et al., 2005) for these 53 ethnic groups suggest that, indeed, migratory distance from East Africa has an adverse linear effect on genetic diversity. Migratory distance from East Africa for each of the 53 ethnic groups was computed using the great circle (or geodesic) distances from Addis Ababa (Ethiopia) to the contemporary geographic coordinates of these ethnic groups, subject to obligatory intermediate waypoints (i.e., Cairo (Egypt), Istanbul (Turkey), Phnom Penh (Cambodia), Anadyr (Russia) and Prince Rupert (Canada)), that capture paleontological and genetic evidence on prehistorical human migration patterns.

Nonetheless, while the existing data on genetic diversity pertain only to ethnic groups, data for examining comparative development are typically available at the country level. Moreover, many national populations today are composed of multiple ethnicities, some of which may not be indigenous to their current geographical locations. This raises two complex tasks. First, one needs to construct a measure of genetic diversity for national populations, based on genetic diversity data at the ethnic group level, accounting for diversity not only within each component group but for diversity due to differences between ethnic groups as well. Second, it is necessary to account for the potential inducement for members of distinct ethnic groups to relocate to relatively more lucrative geographical locations.

To tackle these difficulties, this study adopts two distinct strategies. The first restricts attention to development outcomes in the pre-colonial era when, arguably, regional populations were indigenous to their current geographical location and largely homogenous in terms of their ethnic compositions, with the presence of multiple indigenous ethnicities in a given region having a negligible effect on the diversity of the regional population. The second, more complex strategy involves the construction ofan index of genetic diversity for contemporary national populations that accounts for the expected heterozygosity within each sub-national group as well as the additional component of diversity at the country level that arises from the genetic distances between its pre-colonial ancestral populations. The examination of comparative development under this second strategy would have to additionally account for the potential inducement for members of distinct ethnic groups to relocate to relatively more lucrative geographical locations.

The examination of comparative development in the pre-colonial era, when societies were in their agricultural stage of development, requires the interpretation of outcomes from a Malthusian equilibrium point of view. Improvements in the technological environment during the Malthusian epoch generated only temporary gains in income per capita, eventually leading to a larger, but not richer, population (Ashraf and Galor, 2010). Thus the relevant variable gauging comparative economic development during this era is population density as opposed to income per capita. In light of this argument, this study employs cross-country historical data on population density as the outcome variable of interest in the historical analysis and examines the hypothesized effect of human genetic diversity within societies on their population densities in the year 1500 CE.

Using data on genetic diversity observed at the ethnic group level, the historical analysis reveals, consistently with the proposed hypothesis, a highly significant hump-shaped effect of genetic diversity on log population density in the year 1500 CE. In particular, accounting for the influence of the timing of the Neolithic Revolution, the natural productivity of land for agriculture, as well as other geographical characteristics that may affect population density in the pre-industrial era, the estimated linear and quadratic coefficients associated with genetic diversity imply that a 1 percentage point increase in diversity for the least diverse society in the regression sample would raise its population density by 58%, whereas a 1 percentage point decrease in diversity for the most diverse society would raise its population density by 23%. Despite the statistical significance and robustness of these effects, however, the analysis is subsequently expanded upon to lend further credence to these findings by alleviating concerns regarding sample size limitations and potential endogeneity bias.

The issue of data limitations encountered by the analysis stems from the fact that diversity data at the ethnic group level currently spans only a modest subset of the sample of countries for which historical population estimates are available. The potential endogeneity issue, on the other hand, arises from the possibility that genetic diversity within populations could partly reflect historical processes such as interregional migrations that were, in turn, determined by historical patterns of comparative development. Furthermore, the direction of the potential endogeneity bias is a priori ambiguous. For example, while historically better developed regions may have been attractive destinations to potential migrants, serving to increase genetic diversity in relatively wealthier societies, the more advanced technologies in these societies may also have conferred the necessary military prowess to prevent or minimize foreign invasions, thereby reducing the likelihood of greater genetic diversity in their populations.

In surmounting the aforementioned data limitations and potential endogeneity issues, this research appeals to the “out of Africa” theory regarding the origins of Homo sapiens. According to this well-established hypothesis, the human species, having evolved to its modern form in East Africa some 150,000 years ago, thereafter embarked on populating the entire globe in a stepwise migration process beginning about 70,000–90,000 BP. Using archeological data combined with mitochondrial and Y-chromosomal DNA analysis to identify the most recent common ancestors of contemporary human populations, geneticists are able to not only offer evidence supporting the origin of humans in East Africa but also trace the prehistorical migration routes of the subsequent human expansion into the rest of the world. In addition, population geneticists studying human genetic diversity have argued that the contemporary distribution of diversity across populations should reflect a serial- founder effect originating in East Africa. Accordingly, since the populating of the world occurred in a series of stages where subgroups left initial colonies to create new colonies further away, carrying with them only a portion of the overall genetic diversity of their parental colonies, contemporary genetic diversity in human populations should be expected to decrease with increasing distance along prehistorical migratory paths from East Africa. Indeed, several studies in population genetics (e.g., Prugnolle et al., 2005; Ramachandran et al., 2005; Wang et al., 2007) have found strong empirical evidence in support of this prediction.

The present study exploits the explanatory power of migratory distance from East Africa for genetic diversity within ethnic groups in order to overcome the data limitations and potential endogeneity issues encountered by the initial analysis discussed above. In particular, the strong ability of prehistorical migratory distance from East Africa in explaining observed genetic diversity permits the analysis to generate predicted values of genetic diversity using migratory distance for countries for which diversity data are currently unavailable. This enables a subsequent analysis to estimate the e¤ects of genetic diversity, as predicted by migratory distance from East Africa, in a much larger sample of countries. Moreover, given the obvious exogeneity of migratory distance from East Africa with respect to development outcomes in the Common Era, the use of migratory distance to project genetic diversity alleviates concerns regarding the potential endogeneity between observed genetic diversity and economic development.

The main results from the historical analysis, employing predicted genetic diversity in the extended sample of countries, indicate that, controlling for the influence of land productivity, the timing of the Neolithic Revolution, and continental fixed effects, a 1 percentage point increase in diversity for the most homogenous society in the sample would raise its population density in 1500 CE by 36%, whereas a 1 percentage point decrease in diversity for the most diverse society would raise its population density by 29%. Further, a 1 percentage point change in diversity in either direction at the predicted optimum of 0.683 would lower population density by 1.5%.7

Moving to the contemporary period, the analysis, as discussed earlier, constructs an index of genetic diversity at the country level that not only incorporates the expected heterozygosities of the pre-Columbian ancestral populations of contemporary sub-national groups, as predicted by the migratory distances of the ancestral populations from East Africa, but also incorporates the pairwise genetic distances between these ancestral populations, as predicted by their pairwise migratory distances. Indeed, the serial-founder effect studied by population geneticists not only predicts that expected heterozygosity declines with increasing distance along migratory paths from East Africa, but also that the genetic distance between any two populations will be larger the greater the migratory distance between them.

The baseline results from the contemporary analysis indicate that the genetic diversity of contemporary national populations has an economically and statistically significant hump-shaped effect on income per capita. This hump-shaped impact of diversity on income per capita is robust to continental fixed effects, and to controls for ethnic fractionalization and various measures of institutional quality, including social infrastructure, an index gauging the extent of democracy, constraints on the power of chief executives, legal origins, major religion shares, and the share of the population of European descent, as well as to controls for years of schooling, disease environments, and other geographical factors that have received attention in the literature on cross-country comparative development.

The direct effect of genetic diversity on contemporary income per capita, once institutional, cultural, and geographical factors are accounted for, indicates that: (i) increasing the diversity of the most homogenous country in the sample (Bolivia) by 1 percentage point would raise its income per capita in the year 2000 CE by 39%, (ii) decreasing the diversity of the most diverse country in the sample (Ethiopia) by 1 percentage point would raise its income per capita by 21%, (iii) a 1 percentage point change in genetic diversity (in either direction) at the optimum level of 0.721 (that most closely resembles the diversity level of the U.S.) would lower income per capita by 1.9%, (iv) increasing Bolivia’s diversity to the optimum level prevalent in the U.S. would increase Bolivia’s per capita income by a factor of 4.7, closing the income gap between the U.S. and Bolivia from 12:1 to 2.5:1, and (v) decreasing Ethiopia’s diversity to the optimum level of the U.S. would increase Ethiopia’s per capita income by a factor of 1.7 and, thus, close the income gap between the U.S. and Ethiopia from 47:1 to 27:1.

Reassuringly, the highly significant and stable hump-shaped effect of genetic diversity on income per capita in the year 2000 CE is not an artifact of post-colonial migrations towards prosperous countries and the concomitant increase in ethnic diversity in these economies. The hump-shaped effect of genetic diversity remains highly significant and the optimal diversity estimate remains virtually intact if the regression sample is restricted to (a) non-OECD economies (i.e., economies that were less attractive to migrants), (b) non Neo-European countries (i.e., excluding the U.S., Canada, New Zealand and Australia), (c) non-Latin American countries, (d) non Sub-Saharan African countries, and perhaps most importantly (e) to countries whose indigenous population is larger than 97% of the entire population (i.e., under conditions that virtually eliminate the role of migration in the creation of diversity).

Related Literature

The existing literature on comparative development has emphasized a variety of factors underlying some of the vast differences in living standards across the globe. The influence of geography, for instance, has been stressed from a historical perspective by Jones (1981), Diamond (1997), and Pomeranz (2000), and is highlighted empirically by Gallup et al. (1999) and Olsson and Hibbs (2005), amongst others. Institutions, on the other hand, are given historical precedence by North and Thomas (1973), Mokyr (1990), and Greif (1993), and are emphasized empirically by Hall and Jones (1999), La Porta et al. (1999), Rodrik et al. (2004), and Acemoglu et al. (2005). In related strands of the literature on institutions, Engerman and Sokolof (2000) and Acemoglu et al. (2005) have stressed the role of colonialism, while the e¤ects of ethno-linguistic fractionalization are examined by Easterly and Levine (1997), Alesina et al. (2003), and others. Meanwhile, the historical impact of sociocultural factors has been highlighted by Weber (1905) and Landes (1998), with empirical support coming from Barro and McCleary (2003), Tabellini (2008), as well as Guiso et al. (2009). Finally, the importance of human capital formation has been underlined in unified growth theory (e.g., Galor, 2010), and has been demonstrated empirically by Glaeser et al. (2004).

This research is the first to argue that the variation in prehistorical migratory distance from the cradle of humankind to various settlements across the globe has had a persistent effect on the process of development and on the contemporary variation in income per capita across the globe. The paper is also unique in its attempt to establish the role of genetic (rather than ethnic) diversity within a nation.

The employment of data and empirical results from the field of population genetics places this research in the neighborhood of a recent insightful paper in the economic literature by Spolaore and Wacziarg (2009) who have appealed to data on genetic distance between human populations to proxy for the effect of sociocultural differences between societies on the diffusion of economic development. Specifically, the authors argue that genetic distance between populations, which captures their divergence in biological and cultural characteristics over time, has been a barrier to the horizontal diffusion of technological innovations across populations. They show that Fst genetic distance, a measure that reflects the time elapsed since two populations shared a common ancestor, confers a statistically significant positive effect on both historical and contemporary pairwise income differences. In contrast, the genetic diversity metric within populations exploited by this paper facilitates the analysis of the effect of the variation in traits across individuals within a society on its development process.

Unlike Spolaore and Wacziarg (2009) where genetic distance between populations diminishes the rate of technological diffusion and reduces productivity, the hypothesis advanced and tested in this paper suggests that genetic diversity within a population confers both social costs, in the form of lower social capital arising from differences amongst individual members, and social benefits in the form of diversity-driven knowledge accumulation. Hence, the overall effect of genetic diversity on developmental outcomes would be hump-shaped, rather than monotonically negative. The results of the empirical analysis conducted in this study suggest that the previously unexamined beneficial effect of genetic differences is indeed a significant factor in the overall influence of the genetic channel on comparative development.

The examination of the effects of genetic diversity along with the influence of the timing of agricultural transitions also places this paper in an emerging strand of the literature that has focused on empirically testing Diamond’s (1997) assertion regarding the long-standing impact of the Neolithic Revolution.10 Diamond (1997) has stressed the role of biogeographical factors in determining the timing of the Neolithic Revolution, which conferred a developmental head-start to societies that experienced an earlier transition from primitive hunting and gathering techniques to the more technologically advanced agricultural mode of production. According to this hypothesis, the luck of being dealt a favorable hand thousands of years ago with respect to biogeographic endowments, particularly exogenous factors contributing to the emergence of agriculture and facili- tating the subsequent diffusion of agricultural techniques, is the single most important driving force behind the divergent development paths of societies throughout history that ultimately led to the contemporary global differences in standards of living. Specifically, an earlier transition to agriculture due to favorable environmental conditions gave some societies an early advantage by conferring the benefits of a production technology that generated resource surpluses and enabled the rise of a non-food-producing class whose members were crucial for the development of written language and science, and for the formation of cities, technology-based military powers and nation states. The early technological dominance of these societies subsequently persisted throughout history, being further sustained by the subjugation of less-developed societies through exploitative geopolitical and historical processes such as colonization.

While the long-standing influence of the Neolithic Revolution on comparative development remains a compelling argument, this research demonstrates that, contrary to Diamond’s (1997) uni- causal hypothesis, the composition of human populations with respect to their genetic diversity has been a significant and persistent factor that affected the course of economic development from the dawn of human civilization to the present. In estimating the economic impact of human genetic diversity while controlling for the channel emphasized by Diamond (1997), the current research additionally establishes the historical significance of the timing of agricultural transitions for pre- colonial population density, which, as already argued, is the relevant variable capturing comparative economic development during the Malthusian epoch of stagnation in income per capita.

The focus of the historical analysis on economic development in the pre-colonial Malthusian era also necessitates controls for the natural productivity of land for agriculture. Given that in a Malthusian environment resource surpluses are primarily channeled into population growth with per capita incomes largely remaining at or near subsistence, regions characterized by natural factors generating higher agricultural crop yields should, ceteris paribus, also exhibit higher population densities (Ashraf and Galor, 2010). If diversity in a society influences its development through total factor productivity (comprised of both social capital and technological know-how), then controlling for the natural productivity of land would constitute a more accurate test of the effect of diversity on the Malthusian development outcome – i.e., population density.

Concluding Remarks

This paper argues that deep-rooted factors, determined tens of thousands of years ago, had a significant effect on the course of economic development from the dawn of human civilization to the contemporary era. It advances and empirically establishes the hypothesis that, in the course of the exodus of Homo sapiens out of Africa, variation in migratory distance from the cradle of humankind to various settlements across the globe affected genetic diversity, and has had a long-lasting effect on the pattern of comparative economic development that is not captured by geographical, institutional, and cultural factors.

The level of genetic diversity within a society is found to have a hump-shaped effect on development outcomes in the pre-colonial era, reflecting the trade-off between the beneficial and the detrimental effects of diversity on productivity. Moreover, the level of genetic diversity in each country today (as determined by the genetic diversities and genetic distances amongst its ancestral populations), has a non-monotonic effect on income per capita in the modern world. While the intermediate level of genetic diversity prevalent among Asian and European populations has been conducive for development, the high degree of diversity among African populations and the low degree of diversity among Native American populations have been a detrimental force in the development of these regions.

**This paper is part of a broader research by Quamrul Ashraf Oded Galo entitled "THE "OUT OF AFRICA" HYPOTHESIS, HUMAN GENETIC DIVERSITY, AND COMPARATIVE ECONOMIC DEVELOPMENT."

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by CASADE