In praise of economic history

I congratulate my gentle readers on the occasion of the 58th anniversary of our independence which was celebrated last Monday. My condolences to the family of Squadron Leader Bello Mohamed Baba-Ari who died when two NAF F-7Ni aircrafts collided in air during rehearsals in Abuja on Friday 28 September.

Last Wednesday I appeared on the flagship NTA programme Good Morning Nigeria to review the economic history of our country since 1960. It set me thinking. It is sad that our universities hardly teach economic history anymore. Once students are introduced to the basic methodology of econometrics à la Anna Koutstoyiannis, they go on a rampage subjecting anything and everything to Dynamic Stochastic General Equilibrium (DSGE) modelling. And they do it with total disregard to economic history. Things have been so bad that when the subprime crisis blew up in Wall Street in the summer of 2008 many traders were totally lost. Many had no idea that there had been such similar crashes before, going back to 1929. If they had had such knowledge they would have had some basic notions of how financial actors and markets are likely to react under such conditions and they would have factored these into their risk mitigations. Unfortunately, they behaved like ships that were lost at sea.

The study of economic history is extremely important, in my view. There is an entire new sub-field known as evolutionary economics, borrowed from the science of evolutionary biology. It posits that economic systems and institutions tend to evolve according to their prevailing path-dependencies and that understanding those path-dependencies is crucial to understanding how the economy works.

In this country, two of the greatest economic historians we have produced have been Olufemi Ekundare and Joseph Inikori. Professor Ekundare’s book, An Economic History of Nigeria 1860-1960 (Methuen 1973), remains the standard text to this day. Nothing better has been added to the literature since he wrote that classic some 45 years ago.

Joseph Inikori was one of our most respected professors during my undergraduate days at Ahmadu Bello University, Zaria. He later immigrated to the United States where he is currently based at the University of Rochester, New York. Inikori is one of the leading authorities in the world on the economic history of the Atlantic slave trade, for which he has received several prestigious awards and fellowships.

During a visit to the London School of Economics and Political Science (LSE) in November 2008, Queen Elizabeth II was briefed by academics on the nature and roots of the financial crisis that seemed to have taken the economics profession by surprise. Her Majesty, who personally lost an estimated UK£25 million of her UK£320 million fortune, asked a simple question to which no one could proffer a credible answer: “Why did nobody notice it?”

One of the leading LSE economists, Luis Garicano, later confessed: “She was asking me if these things were so large how come everyone missed it”. Garicano tried to explain to the Queen in the best possible way he could: “At every stage, someone was relying on somebody else and everyone thought they were doing the right thing”.

Well, as a matter of fact, there were a few contrarians who warned that things were not what they seemed. A young Indian economist at Chicago, Raghuram Rajan, had warned during a 2005 festschrift for outgoing Reserve Bank Chairman Alan Greenspan that things were about to unravel. In a paper titled, “Has Financial Development Made the World Riskier?” Rajan predicted that disaster loomed ahead if care was not taken. He endured an infamous put-down by former Treasury Secretary and ex-Harvard President Lawrence Summers who dismissed his warnings as “misguided”. For all his pains, Rajan later became a highly successful Governor of the Reserve Bank of India during 2013-2016.

Yet another economist who saw it coming was Nouriel Roubini of New York University’s Stern School of Business. Uncannily enough, it was in the same 2005 that he predicted that home prices were riding on a wave of speculative bubble that would send them crashing disastrously. And in a September 2006 IMF position paper he elaborated on how the housing bubble would push the American economy into “one-in-a-lifetime housing bust…and ultimately, a deep recession”.

Yes, some people did see it coming, but they were regarded as mere bleating lambs on the margins of the economics discipline. The mainstream regarded them as mere alarmists. I believe that if economic science were better steeped in history and knowledge of evolutionary forces, more people would have seen it coming and taken the necessary policy actions.

German economics seems well ahead on this score. From Friedrich List to Werner Sombart, Hans Tietmeyer and Axel Weber, German economics has been anchored on historical-institutional analytics. For them, history profoundly matters, as do institutions and their evolutionary dynamics. This partly explains why Germany has been such a stable and prosperous economy since 1945. Much the same could be said of the Japanese paradigmatic tradition.

We would never advocate throwing away the baby with the bathwater. The rigours of mathematics remain of paramount importance in economics pedagogy and research. But it must be complimented with understanding of historical, institutional-evolutionary dynamics.

The great economist John Maynard Keynes defined the qualities of the professional economist as being, “conspicuously historian and mathematician, a dealer in the particular and the general… as aloof and incorruptible as an artist, yet sometimes as near the earth as a politician”.

In concluding this piece, let’s consider the key milestones in our economic evolution since independence.

In 1960 Nigeria emerged as one of the most hopeful countries in the Commonwealth of Nations, with a population of 56 million and a GDP of US$4.196 billion. We had only one university and less than 100 secondary schools. The late American economist Wolfgang Stolper was one of the technical advisers on the team that designed our First National Development Plan 1958-1962. Stolper was impressed with qualities of the Nigerians he met, describing our civil service as one of the best in the Commonwealth — ahead of India, Malaysia and Singapore.

Agriculture was the mainstay of the national economy – palm produce, cotton, groundnuts, coco and the likes. In the West and Eastern regions, sophisticated agricultural settlements were established to promote “integrated rural development”. There was a healthy competition amongst the three regions to out-do each other in terms of economic development. Public finances were prudently managed. Grand corruption was yet to rear its ugly head as a national pastime.

The crises years 1966-1970 were to exert a heavy toll on the economy. The praetorian intervention of the military exacerbated a political crisis that led to a tragic civil war that consumed an estimated 2 million souls. But the war economy was well managed by the Gowon administration and his de facto second in command and finance minister Obafemi Awolowo.

One of the lowest points was in 1968 when GDP fell to -4 percent. Even then, we did not borrow from the international financial markets. The entire post-bellum reconstruction was also miraculously undertaken without external borrowing. Contrast this to the humongous loans we have incurred to fight the insurgency in the North East.

During those years economic planning was a central pillar of public management. The Second National Development Plan 1970-1974 was anchored on the 3Rs of Reconciliation, Rehabilitation and Reconstruction. The results were outstanding. That was also the period when oil replaced agriculture as the mainstay of the economy. The Dutch Disease Syndrome expressed itself in high exchange rates that discouraged agriculture and manufacturing. Ours became a chronically import-dependent petrodollar economy. The Naira was at par with the US dollar. Our legal tender currency was even accepted as a medium of exchange in London, Frankfurt, Paris, Mecca and Medina and indeed throughout West Africa. But it was all built on sinking sands.

The Gowon administration made two ghastly mistakes. The first centred on the Udoji salary increases that served to fuel inflation while creating a new entitlement mentality among the general populace. The second had to do with the cement importation scandals that clogged our ports and made us the laughing stock of the world.

Gowon was overthrown in 1975 whilst attending a Commonwealth Summit in Kampala. His successor General Murtala Mohammed came in with a mission to clean the Aegean stables of corruption and inefficiency across the public sector. His mass public purges had the unfortunate impact of destroying the civil service. It also, paradoxically, reinforced corruption: if I have no tenure as a civil servant then I’d better make hay while the sun shines.

Murtala was assassinated in February 1976 and his second-in-command Olusegun Obasanjo took over. Obasanjo introduced such schemes as Operation Feed the Nation (OFN) to bolster food production and promote agrarian transformation. This period also coincided with the ambitious Third National Development Plan 1975-1980 which aimed to triple public expenditures on infrastructures, agriculture and manufacturing. One of the mistakes made by the administration centred on the nationalisation of British Petroleum and Barclays Bank, all with the aim of punishing our former British colonial masters for supporting Apartheid South Africa.

Nationalisation led to massive capital flight from which our economy has never quite recovered. We sent the wrong message that foreign capital was not welcome. The so-called Indigenisation Decrees aimed at securing “the commanding heights of the economy” further reinforced that unfortunate message.

The 1980s were to be a watershed. The short-lived Second Republic 1979-1983 coincided with the period of the Fourth and last National Development 1981-1985. The Shehu Shagari administration was marred by both incompetence and corruption and was overthrown by the military in December 1983. The so-called Buhari/Idiagbon administration came with a mission to restore discipline and fight corruption, with very marginal success. Muhammadu Buhari was soon replaced by a smiling tooth-gapped general by the name of Ibrahim Badamasi Babangida in the summer of 1985.

The Babangida years coincided with an ambitious plan to restructure the economy anchored on a home-grown structural adjustment programme. The impact was, at best, questionable. The social gains that had been made over decades were wiped off, even as the manufacturing sector was overtaken by de-industrialisation.

The replacement of Babangida by the interim administration of Ernest Shonekan, a technocrat, in the summer of 1983, provided only a brief interlude. The real power behind the throne was the defence minister General Sani Abacha. Abacha ruled with ferocious brutality until his demise in June 1998. But Abacha was also a sounder manager of the economy. The naira got stronger and public financial management actually improved. Abacha had zero tolerance for corruption except that which emanated solely from him. His successor General Abdulsalam Abubakar ensured a successful transition to the Third Republic in 1999.

Chief Olusegun served as pioneer president under the Third Republic from 1999 to 2007. He restored Nigeria’s credibility in the comity of nations. His National Economic Empowerment and Development Strategy (NEEDS) spurred spectacular growth averaging an annual 7 percent for the better part of a decade. The administration negotiated the country out of the Paris Club of creditors. The banking sector was reformed and key sectors were opened up to foreign investors. It was a great boon for growth. Subsequent administrations from Umaru Yar’Adua to Goodluck Jonathan only built on these achievements. The economy grew to a peak of US$510 billion during the 2014 rebasing, overtaking South Africa and Egypt as numero uno in Africa.

The Buhari administration came to power in 2015 when global oil prices had collapsed. The regime had no plan. They were only prepared for war and were startled when Goodluck Jonathan surrendered precipitately. Our country is now on the brink of self-immolation. We have become more divided than ever before. Rural banditry and lawlessness have driven investors away in droves and destroyed the vital social capital necessary to drive economic transformation. Nigerians are full of gloom and despair; the youth robbed of any hope about the future.

Obadiah Mailafia