Poor Institutions feed into Poor Macroeconomics Performance in Nigeria

Photo by Zenith Wogwugwu on Unsplash

By

Chimere Iheonu

Date Published

January 8, 2024

Category

Political Economy

Introduction

Nigeria faces several challenges. The country has about 133 million people living in multidimensional poverty. The inflation numbers have also been creeping and persistent, with the last count placed at 28.2% for November 2023. This figure is likely to increase in December due to the festive season and its associated rise in aggregate demand levels. The underlying effect is an increase in hand-to-mouth consumers and a deteriorating quality of life.

While the government has implemented several economic policies to improve macroeconomic outcomes, these policies have proven not to be effective in addressing the challenges of the average Nigerian. On the one hand, the Central Bank of Nigeria (CBN) has employed both conventional and unconventional monetary policy instruments to boost economic activities, but to no avail. On the other hand, the federal government, through its ministries and agencies, has also implemented social intervention programmes with very minimal effect.

Theoretically, some of these policies are sound and can foster economic growth and development, but they all seem to fail in Nigeria. An example is the infamous naira redesign policy, which intended to improve financial inclusion and enhance the effectiveness of monetary policy. This policy, before its abrupt end, only led to a decline in productivity as a result of its associated negative effects on the economy.

Also, the CBN has disbursed about ₦1.1 trillion in loans under the Anchor Borrowers Programme (ABP), with the key aim of boosting agricultural productivity; however, data from the World Bank shows a steady decline in the agricultural growth rate for Nigeria since 2019. Additionally, various conditional cash transfer programmes do not seem to have any significant effect on the poor. In Egypt, such programmes have been shown to significantly improve educational outcomes and livelihoods for the poor.

This prompts the question: What accounts for the limited effectiveness of economic policies in Nigeria? To address this question, I turn to a political economy theory that sheds light on this issue. The North's theory of institutional quality offers insights into why economic policies frequently fall short of driving improvements within the Nigerian economy.

In this article, I offer a brief overview of the North's theory concerning institutional quality, an overview of Nigeria’s institutional quality indexes, and measures that Nigeria can employ to improve the quality of institutions.

North’s Theory of Institutional Quality

The theory of institutional quality developed by Douglas North reveals that the quality of institutions in a society is a strong determinant of its economic performance and the effectiveness of economic policies. Institutional quality includes the norms and rules within society. It also includes the legal system, property rights, governance structures, and regulatory bodies.

According to North, strong institutions are essential for economic growth and development. They provide a stable and conducive environment for economic activities by offering clear property rights, minimising corruption, ensuring political stability, and ensuring accountability. It also captures the quality of policy formulation and implementation and even the credibility of the government’s commitment to improving or maintaining government policies.

North’s theory underscores the essential role of institutions in shaping economic outcomes and highlights the need to improve the quality of institutions as a means to enhance economic performance. In his words, institutions are humanly devised constraints that shape human interaction and influence policies and economic performance.

Accordingly, countries with strong institutions tend to have better economic performance, more efficient markets, and higher levels of investment and innovation than those with poor institutions. This is because of its role in influencing economic relations and economic policies.

Nigeria’s institutional quality is low

I argue that one of the key reasons why economic policies rarely work is because of the poor quality of institutions in Nigeria. A look at the data from the World Bank reveals that Nigeria has very weak institutions. Using the World Governance Indicator (WGI) measures of institutions, which have a range of -2.5 (weak institutions) and 2.5 (strong institutions), it is revealed that Nigeria ranks very poorly in controlling corruption1, in the quality of public and civil service, as well as in policy formulation and implementation2. Nigeria also ranks very poorly in its ability to formulate and implement sound policies and regulations that permit and promote the private sector3.

Figure 1: Nigeria’s Institutional Quality Index, 2022

Source: World Bank

On its own, poor quality of institutions can significantly dampen economic growth and development. Moreover, poor institutions lead to the ineffectiveness of economic and development policies. This phenomenon underscores the direct and indirect nexus between the quality of institutions and a country's economic progress and is arguably one of the key reasons why Nigeria has failed to develop at a faster pace.

A Way Forward?

For Nigeria, one of the only ways to improve economic growth and development is by improving the quality of institutions. This requires comprehensive reforms across various levels of governance and can be achieved through a combination of multiple strategies. First, the government must implement robust anti-corruption measures and enforce laws that promote transparency and accountability in governance.

Secondly, the government, in collaboration with various stakeholders, must work together to encourage and promote transparency in governance by promoting access to information and engaging citizens in the decision-making process. Regular reporting of government spending and performance could be a starting point across all levels of government administration. This does not only aid in improving accountability but also limits corruption.

Also, there is a need to streamline bureaucratic processes to reduce red tape and further simplify procedures for businesses. The digitization and automation of government services can also improve efficiency and reduce corruption risks.

Intentional reforms within the public sector are imperative to enhance service delivery, eradicate inefficiencies, and bolster professionalism. 

Nonetheless, while these measures cannot wholesomely solve the institutional challenges in Nigeria, they could be a starting point for addressing the poor quality of institutions in the country.

1  Control of corruption captures perceptions of the extent to which public power is exercised for private gain, including both petty and grand forms of corruption, as well as "capture" of the state by elites and private interests.

2 Government effectiveness captures perceptions of the quality of public services, the quality of the civil service and the degree of its independence from political pressures, the quality of policy formulation and implementation, and the credibility of the government's commitment to such policies.

3 Regulatory quality captures perceptions of the ability of the government to formulate and implement sound policies and regulations that permit and promote private sector development.

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Disclaimer: This information in this article is NOT investment advice. It is intended for information and entertainment purposes only.

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