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Why Is Africa Underdeveloped? - Kingsley Moghalu
00:25:45
Why is Africa underdeveloped? Is it the commonly-cited reasons of political corruption and colonization, or its modern counterpart, globalization? Kingsley Moghalu has his own ideas. He believes Africa's development potential lies in the hands of...
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Foreign.
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Hello, this is the CGD podcast with me, Rajesh Merchandani. Thanks for joining us. Today we're thinking about why is Africa underdeveloped? Is it the reasons that we've heard for many years, you know, age, dependency or corrupt leaders or the legacy of colonialism or as some might say, its modern counterpart, globalization? Kingsley Mogalu has his own ideas. He thinks ultimately, Africa's development potential lies in the hands of Africans themselves, and consequently, the responsibility for the lack of development also lies with Africans themselves. Kingsley is the former deputy governor of the Central bank of Nigeria. He's also written a book called Emerging Africa, and he's my guest today on the CGD podcast. Welcome, Kingsley Mugaldu.
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Thank you. Thank you very much.
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Let's start with one of the key statements that you say very early on in your book, and that is that economic globalization has hurt Africa.
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Why is that economic globalization has hurt Africa? Because Africans have embraced globalization without interrogating it. Africans have blithely assumed that globalization is a good thing at all times and in all ways. And one of the things that one of the reasons that has hurt Africa, as I explained in the book Emerge in Africa, is that, for example, in opening up the continent's trade to liberalized trading patterns without preparing for it, without having manufacturing economies, 55% of world trade is based on manufacturers. And so if you operate a liberal, completely liberal trading regime and all your manufacturing or all your trading on is just raw materials, of course you're bound to be at a disadvantage. So this is one of the reasons why I say that globalization has not necessarily been a good thing for Africa.
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And you make the point that just because Africa is a market for globalization doesn't mean it's globalized.
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Doesn't mean it's globalized. The globalization rides on the back of technology. And for you to be a participant in globalization and have benefit from globalization, you must find yourself somewhere in the value chain of production of the goods of globalization. And African countries haven't done that yet. A number of Asian countries have done that and are doing that. That's the difference. And so, you know, if you don't do this, then you're not getting benefit. You're simply a market, and that's not good enough.
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And philosophically, what does it take to kind of make that happen? You talk about this in the book as well. It's a mind.
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It's mindset. Yeah, absolutely. You see, development begins in the mind. That's the central thesis of this book. Development doesn't come through economic equations. Development comes by people having a vision of how to engage in productive economic production and going about it single mindedly. So for that to happen, you, you've got to have some sort of worldview.
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That's really interesting. I want to talk more about that, but in the context of your direct experience, which is in Nigeria, does Nigeria.
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Have the relevant worldview at some point in history? Clearly Nigeria had leaders, politicians that had a very strong worldview. For example, and this is the same across Africa. They had a worldview of decolonization. They had a very profound strong political worldview that African countries must be free of colonialism. And they were remarkably successful in achieving this worldview or making it a reality. But where African countries, including Nigeria, have not been as successful is in developing and articulating and executing a worldview of economics. And that is the problem with Africa today. You've got to prosper. You can't just matter because you are a source of extraction of raw materials. You've got to matter because you're prosperous. And that's part of the title of the book because the book says Emerging Africa how the global economy's last frontier, and I use the word last frontier in quotes, can prosper and matter. That's the point.
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So in terms of Africa's largest economy, Nigeria, when you were in the central bank in Abuja, what were the problems you came up against in terms of this lack of worldview? In terms of economics from the politicians?
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Yes. Well, I mean there were a number of problems. It manifested itself in our role in the central bank in the question of the management of monetary policy. That's the remit of the central bank. That's the central bank's function. It's not the job of the central bank to manage the government's finances. That's the, the responsibility of the Ministry of Finance. It's not the job of.
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Did the Ministry of Finance realize that?
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Well, you know, it's not the job of the central bank to create industrial policy. I mean, that's the job of some other parts of the government. So. But in terms of the fact that Nigeria's economy is based largely, or revenues actually have been based largely on oil and the central bank had to deal with this problem because of course it meant that the value of the country's currency was tied a lot to the fortunes of oil and the oil price tended to determine the value of the currency. And so if oil prices fall and the government doesn't have a lot of savings, the naira, which is the currency becomes weaker and that's the crisis we have today. So this is one of the ways in which this whole question of a worldview came to play out in macroeconomic management from the perspective of the central bank. Because we kept swimming against the tide. We were managing monetary policy against the backdrop of very weak fundamentals. You've got to have an industrial manufacturing economy that produces value added things and exports them. That should be the basis for the value of a currency. And so in that context, if you devalue your currency if it is necessary, you may actually gain some advantage. But if you don't produce anything and the only thing you produce is oil and the price is denominated in dollars, not in your domestic currency, devaluing the currency becomes a difficult option.
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Why aren't there savings when Nigeria has so much oil revenue?
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Well, I mean, a lot of people feel that the reason why the savings are not the way are not at the level they should be. We once had them at a certain level. Actually at the last global financial crisis in 2008, the country had quite a lot of savings and this helped it to weather the storm. But in this last time of, you know, oil price declines, it just so happened that the savings funds had been significantly depleted. One of the reasons for this is a problem that is very peculiar in Nigeria and that is that the political class needs to have a better appreciation of rational economics. And that's not always the case. A lot of politicians are driven by the need to be quote, unquote popular. And so they love to spend and they don't understand or appreciate enough that you must save as well as spend. And that even when you spend, the quality of spending is critical. So spending for the sake of spending or spending without saving is bad economics. And I think that has become very clear in recent times.
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I think that's a problem that has affected many economies, not just Nigeria.
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Indeed, of course this is a problem in many, many economies. Yes. Yeah. And politicians, you'll be surprised, are the same in many countries.
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When you were the deputy governor.
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Yes.
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And you talked about the financial crisis at the end of the last decade, you also had a banking crisis that you needed to clean up. How did you approach that? Well, this wasn't a knock on effect from the global crisis.
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It was, it was, but only partially. It was the second round effects of the global financial crisis that affected the banking system.
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You know, because it exposed weaknesses underlying.
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Exactly. Well, because the banks were overexposed to oil and gas lending and oil prices crashed in 2008. The banks were overexposed to the capital markets and the banks were overexposed to margin lending. And so those were. And of course a lot of foreign investors withdrew their money from the stock market and the markets crashed. So there was that element of the global crisis, but there was also a strong domestic element of a failure of corporate governance and risk management. And so when we were at the central bank and I was deputy governor and under Governor Lamido Sanusi, we were able to undertake very far reaching reforms of the banking system. The first thing to do was to stabilize the banking System. There were 24 banks at the time and about eight or nine of them were wobbly. And so what the central bank did was to first intervene and to inject massive capital of about $4 billion into these banks. Then. This was actually before I came. Then the governor fired the CEOs of these banks and placed new management teams into those banks. And then we began a series of reform models, changing the banking model, the structure of banking. We ring fenced depositors funds from speculative trading.
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You know, had they been raided before?
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Yes, of course, of course they were under the previous, under, you know, what was going on before. And so we changed, we changed this and you know, we guaranteed depositors funds. We made sure that no depositor in the Nigerian banking system lost his or her money. It was not, you know, and we created a bad bank, an asset management corporation which bought up all the toxic assets from the weak banks and now manages them long term, freeing up the loan book or the balance sheet of those banks so that those balance sheets are now unhealthy and they can lend properly.
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That was going to be my next question. What did you do to encourage lending which would help small businesses and would help Nigeria diversify its economy?
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Well, actually the Central bank of Nigeria also did quite some quantitative easing, but we did it in a very different way from the way it's been done in the United States and some of the advanced economies where, you know, people just sort of print money and buy bonds and all that. We did it in a different way. We put a lot of money between 2010 and 2012 into new development funds for a lot of small businesses and, and small and medium enterprises. So that was critical to pumping a lot of money into the economy, to jumpstart businesses in many directions. So that's development finance. We're a central bank of a developing country. We are not the bank of England. And so we cannot just focus on price stability. And that's an important, the core function, of course, of the central bank. But we also play the central bank also has played significantly in Nigeria developmental role by providing concessionary financing to help small businesses, to support agriculture, to support industrial business and so on.
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B
We talked earlier about the kind of dichotomy between the politics and the economics. You're talking about sort of getting the economics right, getting the banking right, the macroeconomics. But did you find that there were still political barriers that aided development? You know, things like restrictions on businesses via the cost of shipping goods or trucking them around the country and between countries. That's still quite prohibitive, isn't it?
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Well, that's not a political problem. It's a problem of inadequate infrastructure. One of the problems is that of course the absence of electric power is the biggest infrastructure problem that we face in our economies and certainly in the Nigerian economy because that makes every aspect of business expensive because people use generators and these generators need to be fueled and that's very expensive. And of course they must part, they must pass on the costs of, of this onto consumers. Even the banks that run themselves on 24 hour generators, 24, 7. They must pass on the costs of those generators into their bank lending. And this, this is and has remained a big structural problem. And so until the power sector reforms that are going on now in the country, until those reforms come to a certain point of maturity and electric power wattage is significantly higher, only then can the costs of doing business begin to come down. And when the costs of business begin to come down, credit becomes easier to access.
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With Nigeria being the largest economy in Africa, I mean just, I think it was just a couple of years ago the GDP was recalculated upwards and huge boost and suddenly it's become, you know, it's overtaken South Africa and it's this huge economy. What does Nigeria need to do to really achieve inclusive development which has escaped it so far? And in order therefore to be a trailblazer for the rest of Africa to emerge, as you say.
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Yeah, well, I think Nigeria needs to focus on pro poor economics.
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Pro poor economics?
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Yes.
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So policies that benefit the poor.
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Absolutely. More. Absolutely. Not just GDP growth, but a lot of that GDP growth may not be trickling down to poorer segments of the population. It's important to provide unemployment, there's a lot of unemployment. It's important to address the infrastructure problems of electric power especially and other problems, you know, and I think it's important to continue as the government is doing to shift more and more into industrial policy which will, you know, support or soak up unemployed people into jobs. So job creation is absolutely essential to move to pro poor economics and anything that will create jobs is what the Nigerian government should be doing.
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And in terms of that government, what confidence do you have that there will be free and fair elections in Nigeria?
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Well, I'm reasonably confident. The president. Good luck. Jonathan has made it very clear. He has said unequivocally that the elections will be held and that the handover date of May 29 is sacrosanct and we must, you know, believe him and hope that things will work out exactly that way. So, yeah, I'm reasonably confident that elections will hold. I'm reasonably confident that they will be free and fair. There are always logistic problems. Logistical problems with elections in Nigeria is because the independent national elections commission, you know, is still maturing as an institution. You know, democracy has been in existence in the more recent times for 16 years. And although the organization of elections tends to get better, but it's not yet, you know, and even in many advanced countries they still have problems with logistics over elections, you know, but you know, I'm reasonably confident. I mean, despite a lot of fears and a lot of pessimism and all that, we must keep an open mind about elections in Nigeria.
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But it does raise the question, doesn't it? And this isn't just Nigeria. This is a lot of African countries about the issue of political capture or elite capture. There is a sense of a self imposed ruling class.
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Well, I mean, there is a political.
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Class, but they see themselves as more than stewards, don't they? They see themselves as rulers.
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Indeed.
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And they pass that on to their families.
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Indeed, indeed, indeed, yes. I mean, the concept of leadership as service is not yet as developed as it should be. A lot of people see public office as an opportunity, not as an honor or a privilege to serve and contribute to progress, but they see it as an opportunity to exercise power for some to get wealthy and so on and so forth. In that sense, yes, there is some elite capture. But remember that a lot of these political chaps were voted in. And so another dimension of the problem is voter education and voter responsibility. The responsibility of the citizens themselves to assert themselves and demand the type of leadership that is in their best interest. Often you find that this is not as easy as it sounds because there is some level of poverty, a lot of people's judgments will be clouded by financial or material benefits and they may not be able to demand this type of leadership. So. But where as poverty's levels go down, we become freer and freer to Think about the right things, to think about the things that really matter long term, beyond their personal survival day to day, and to think about the future of their country as a nation.
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And in terms of people's priorities, what they really need to be able to think beyond poverty.
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Exactly.
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Is stability. Exactly what effect is Boko Haram having on stability in Nigeria and that whole region? Because it's transnational now. It's across borders.
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Well, Boko Haram, of course, has been a scourge to the country and to the region. But it's important to know that in recent times, the government, the army and the multinational forces have been winning a string of victories against Boko Haram and beating them back and driving them out of territory that they previously occupied. This is not very well known around the world that in the last couple of weeks a lot has been achieved militarily against Boko Haram. And so I believe that ultimately they will be contained and in terms of conventional warfare, they will be very significantly degraded.
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Forgive me for being skeptical, but if this is happening, as you say, multinational forces are driving back Boko Haram, why aren't we hearing about it more then it would seem to be a very important thing for the Nigerian government to be publicizing if it was actually winning.
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That was the narrative until very recently. And when a narrative has been in the air for so long, it takes time to reverse. In Nigeria, people know that some progress is being made in the in pushing back Boko Haram. They've been removed from a number of local government areas where they had taken territory and mounted their flags. That's a fact. Now, if you're talking about long term, you know, Boko Haram will remain a threat. It's not a shotgun, one day war. But, you know, I mean, they got a bit audacious and began to mount a lot of conventional warfare to try to take territory. It's important again to remember that Boko Haram is contained. The crisis is in the northeast part of the country.
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There's been bombing Abuja. They've been bombing the capital.
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That just happened once in 2010. Just once? Yeah.
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That doesn't concern you?
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Of course it's concern. It's concerning. I mean, you know, but I'm just trying to.
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And when they swear allegiance to the Islamic State, that doesn't cost us.
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But of course it does. Of course that's terrible. But it doesn't. It doesn't change the fact that. That militarily they are now on the defensive and that in the long term, whatever government is in power in Nigeria has no other choice but to really defeat Boko Haram. That's my own personal view. Whatever temporary victories they may have achieved or terrorist attacks they may have achieved in recent times. But you know, it's a horrible organization. And I believe that with the right type of resolve in Nigeria and across the west African sub region, eventually they will be defeated.
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And if they are, that will hopefully bring some stability to Nigeria and the region. Would you say that bringing stability is one of the key things that the next government, whoever leads it, must bring to Nigeria in order for the country to head down this path, path towards inclusive development?
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I certainly agree with that, yes.
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What else would you say are the key things that the next government needs to do?
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Well, take a very serious look at a number of other problems, such as the problem of the challenge of creating jobs. You know, they will need to look at problems with the educational system, you know, building very strong, high quality educational systems that are targeted in directions that create economic transformation. That is technical skills. They need to develop an educational system that builds technical skills. The next government will need to look at the question of electricity. It's very, very important that in the next five years, Nigeria's electricity energy situation must change fundamentally. You know.
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B
So do you see things that power Africa are helping?
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That Certainly, I think that power Africa is helping, but I think power Africa needs to be much more ambitious. I mean, the needs are so huge. And so I think there's a lot of opportunity in that space and it's opportunity that if foreign investors move into it will be a win win situation. It will help Nigerians, it will benefit the foreign investors as well.
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And you're talking about foreign investors as opposed to foreign donors?
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Yes, I'm talking about foreign investors.
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A key shift as well.
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Yes.
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Not just for Nigeria, but for Africa as well.
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Well, I mean, I'm not saying that the economic destiny of Africa depends on foreign investors. I actually don't have that view. But I think that foreign investors are a significant player if they invest in the right things and if African country governments have proper investment strategies and policy. For example, for foreign investment to be able to give you economic yield, you've got to have infrastructure, you've got to have skilled manpower so that those foreign investors can invest or you make them invest in areas that create economic complexity. Manufacturing, light manufacturing, you know, industrialized agriculture, those types of things where foreign investments should be going.
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In that case, what do you think should come out, will come out, or you hope will come out of the Addis Ababa Financing for Development Conference well.
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I certainly hope that it creates an awareness and more imaginative thinking about financing for development. And I should certainly hope, and I certainly hope that it interrogates the role of developing countries themselves in generating financing for development. If it is just another conference about foreign aid or how foreigners can come and bring finance for development, it just, it will continue the old paradigm which has not brought about transformation. We've been talking about financing for development for the past 50 years, you know, but the real transformations must come from within those countries themselves, whether it's finance. They must create systems that unlock finance from within those systems, you know, unlock capital from within those systems and then foreign capital can be added onto that. That's the way I look at financing for development. The governments, central banks, you know, must come up with schemes that provide low interest credit for small and medium scale entrepreneurs. That is what takes people out of poverty. And that's what I think the Financing for Development conference should be looking at.
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B
It's fascinating to talk with you, Kingsley Mugalu. It's almost like a chicken and egg situation. We could go and talk about this probably all day. Well, I'm certain, but we have run out of time, so. Kingsley Mogalu, the book is called Emerging Africa. It's been great to have you on the CGD podcast. Thank you for joining us.
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Well, thank you. Thank you very much. Thank you.
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Don't forget, you can find out more about what CGD does on our website, www.cgcgdev.org. i'm Rajesh Merchandani and join us again for the next CGD podcast.