«THE CHARACTER OF THE STATE IN FINANCIAL DEVELOPMENT AND ECONOMIC GROWTH THESIS SUBMITTED FOR THE AWARD OF THE DEGREE OF DOCTOR OF PHILOSOPHY AT THE ...»
Unemployment figures for Nigeria can be found on the website of the Central Bank of Nigeria (Flynn 1997). Inconspicuous as it may seem, creating proper channels for the transmission of goods and services, the bulk of which currently flows through illegal channels is a major step towards financial development (Meagher 2003).
2.2 THEORIES OF ECONOMIC GROWTH Economic growth as a subject of discussion is one which is of key interest to technocrats and politicians alike. Since decolonization started in Africa, hopes for rapid growth in African economies were high on the agenda but over the years, long run evidence has largely disintegrated such hopes primarily due to the choice of economic growth models adopted or favoured by most African politicians (Brown 1995). Julius Nyerere of Tanzania after more than two decades in power addressed his parliament saying if he could turn back the hands of time, he would adopt different policies and structures from those he hitherto considered optimal considering that his favoured strategies had widened the gap between the rich and the poor and had as a matter of fact brought abject poverty on the people he so desired to liberate (Brown 1995:41). A brave and noble statement by an elite politician, this brings us to wonder, what he could have done that he failed to do? What other alternatives would have seen the poor people of Tanzania a more prosperous people?
This section examines a few elements of a few well known theories of economic growth to further shed light on the concept of economic growth.
Edozien (1980) argues that economic growth theories in force can not support the growth desires of African economies due to what he refers to as the specific difference in structure of African societies to the Western societies.
His hypothesis draws on the success of the Latin American experience in the re-working of orthodox economic paradigms to suit their own specific societal needs for economic growth. Edozien argues that the concept of economic development has become associated with desirability for ascendance out of a state of underdevelopment while economic growth refers to the change associated with wealthy nations. Leaning on Edozien’s distinction between economic growth and economic development, it can be strongly argued that even though this distinction is not a conventional approach to defining the terms and therefore represents a deviation from classical economic theory, it does serve a purpose in isolating the developed from underdeveloped economies in order to study their different structures, strengths weaknesses and peculiarities with a view to answering the question, ‘can the development patterns of institutions in developed countries be standardised and applied to remedy underdeveloped African economies’. Going back in time to Schumpeter (1911) when perhaps it can be rightly assumed that most Western economies were ascending the ladder of economic development, Schumpeter in his contribution to the literature of the finance-growth theory referred to economic development rather than economic growth. For the purpose of this research, the definition of economic development will refer to those economies where stable political and economic structures do not yet exist such that a level of desirability currently exists while economic growth will refer to countries where stable political and economic institutions exist and desirability for incremental change to these institutions currently exists.
Following this definition, the vast majority of African economies therefore fall into the category of economic development rather than economic growth while economies like the United Kingdom, United States, France and Germany to mention a few falls within the category of economic growth. From the foregoing argument therefore, isolating the issue of economic development therefore refers to the creation of stable institutions such that their cumulative activities could quantitatively lead to an incremental level of Gross Domestic Product (GDP). Such institutions will include, political, military, industrial, educational, financial etc Edozien refers to development as comprising a floor and a ceiling which mark the standards of living below which (floor) it is undesirable for people to live and above (ceiling) which it is equally undesirable for people to live. The floor refers to a minimum acceptable level of poverty below which no human being should be subject to while citizens are viewed to enjoy excess advantages relative to the rest of society if they rise above the ceiling. In a developed economy therefore, such as the United Kingdom, the vast majority of the population live between the floor and the ceiling (middle class citizens) while a minority live below the floor and an equal minority live above the ceiling (elite). A structural attempt to curtail those who desire to cross the ceiling is seen to be in place in the United Kingdom using the tax structure to regulate available income for higher income earners.
This is done by introducing a partly progressive tax system (Petersen 1995).
In Nigeria, the need for economic development is apparently strong as the vast majority of the population fall below the floor with pockets of individuals living between the floor and the ceiling leaving an equally sizeable chunk of the citizens living above the ceiling and in effect above the legal system (Theobald et al, 2008). It can therefore be argued that a key stage of development is the institution of a strong middle class such as is prevalent in the United Kingdom. In taking this view, a key consideration arises which is ‘can the development strategies in terms of both financial and economic theories that formed the framework of development and growth of western economies be applicable to African economies which have sufficiently different characters’ Edozien argues that the evolution of African Economics is primarily of the essence. African Economics in his argument will comprise theories of development empirically tested to work for African economies.
Such theories he argued will stem from existing theories of development tested and adapted or re-modified for suitability within the African political and economic context. Nigeria currently operates what is referred to in generic terms as a Federal government but which in most ramifications defies the very tenets of Mills law of federalism (Mills 1861). Under Mills law, it stipulates that the centre should be weak relative to the appendages (the states) and fiscal revenue should flow from the appendages to the centre to ensure that each federating unit is capable of supporting itself financially. In Nigeria however, since the General Gowon led Federal Military Government, federalism has been practiced contrary to Mills law (Osaghae 1998). Nwabueze (1982) refers to Nigeria’s federal government as ‘Military Federalism’ because of its peculiar reverse structure of the centre being excessively more powerful than the federating units and flow of fiscal revenue being from the centre to the federating units. Various arguments such as Nnoli (1978), Madiebo (1980) and Anugwom (2000) exist to support and reject this system viz the system of military federalism supports a balanced approach to manage the problem of ethnicity which is a key character of the Nigerian state by ensuring that a balanced divide exists between the North and South (18 states in the north and an equal number in the South) even though quite a few states are subject to a near form of parasitic existence on the welfare of other states which is a central tenet of the current Niger Delta petroleum exploration crisis. Under this system of military federalism, representation in the National Assembly is by State membership to ensure that all ethnic groups are equally represented at the federal level. A popular view however argues that the design of a strong centre and weak federating units is a tool to perpetuate the preponderance of Northern hegemonic rule in the country as Mills law of federalism in itself is consonant with the problem of ethnicity and diversification (Osaghae 1998).
While the intention here is not to look into the most appropriate system of federalism, the interest is to highlight the apparent possibility of re-modelling existing developmental theories to take into account specific characters of the African people with a view to achieving the so much desired change. Edozien (1980) has therefore put the challenge forward to African developmental analysts to embark on development plans that are realistic and suitable for Africa and Africans. Under the Military governments in Nigeria, the planning tools deployed were the first, second and third development plans which where well meaning plans but which Edozien argues where not reducible to quantitative magnitudes but where rather politicized to satisfy the desires of a few elitist politicians, military and civilian alike. The most crucial challenge therefore is how then do we go about re-theorizing for African Political, Social and Economic Development? This represents a challenge for young Africans who have attained reputable scholarly achievements both in domestic and leading Western Citadels.
Barro and Sala-i-Martin (1995) describe the growth rate of Sub-Saharan African countries as having increased by only a factor of 1.3% in over thirty years (although World Bank figures for the last decade show an average growth of 5.4% across African economies up to 2007). To understand the implication of Barro and Sala-i-Martin; they describe six factors that represent economic growth viz: per capita output experiences positive growth, growth of physical capital per worker, variation in the cost of capital is minimal through time, physical capital generates a near constant ratio of output, the ratio of labour to physical capital generated as a percentage of national income is nearly constant and the growth rate of output per worker is significantly different from one country to the other. Is it then appropriate to conclude that once these factors have been achieved, then economic growth has a place in our societies? Brown (1995) concludes that economic growth is a highly politically motivated process and its occurrence, progress and measurement is equally a political process.
Classical economic growth theory (the foundation for the modern economic growth theory) was built around the following key concepts of competition, the relationship of returns to human and physical capital, impact of per capita income on economic growth rate, the impact of technological advancement on labour and production techniques as well as the role of monopoly power on technological advancement (Schumpeter 1911, Barro and Sala-i-Martin 1995:9). Early development economists who strongly contributed to the current stock of theoretical knowledge in this field of economics include Adam Smith (1776), Thomas Malthus (1798), David Ricardo (1817), Joseph Schumpeter (1911), Frank Ramsey (1928), Allyn Young (1928) and Frank Knight (1944).
Below is a review of three economic growth models considered to link three different time spans. The intention here is to look at the key highlights of these models with a view to relating them to the financial development process of the country under review. The Smithian model below is considered to be of a much older era than the Rostovian and the neoclassical models. Even though the latter two models have considerably different characteristics, they share some characteristics in common that alienates them from the Smithian model;
they both consider that real wages would rise and that the value of land and natural resources, will rise at a constant rate on the long run and growth in technological advancement will be fairly regular (Rostow 1990, Barro and Sala-i-Martin 1995). All three models below hold the basic assumptions that the economy is closed and comprises of three production sectors viz: primary, industry and services.
2.2.1 The Adam Smith Growth Model Adam Smith in 1776 proposed a theory of economic growth titled an enquiry into the wealth of nations. This model is today considered to be classical due to time factor but also possibly because it holds opposing views from the Rostovian and Neoclassical models as mentioned earlier. Smith’s model was supply side driven and argued that economic growth was as a result of a combination of growth in the labour force, growth in investment and growth in land use. He associated the existence of a labour force to a demand in wage undergoing various levels of change resulting in changing profit levels in the face of a relatively fixed stock of land. The model considers that on the average real wages will not rise over time and that the value of land and natural resources will remain fairly constant over time. In Smiths view, economic growth reaches an optimal point over time when the economy ceases to grow (Smith 1776, Rostow 1990, Barro and Sala-i-Martin 1995).
Because of the similarity in view of the Rostovian and Neoclassical models in contrast to the Smithian model, economists have the tendency to refer to the former two as the modern growth models while the later model is considered outdated and in some cases primitive. The primary distinguishing factors between the modern growth models and the Smithian model therefore lies in labour growth/real wage relationship, growth in value of land and natural resources as well as advancement in technology.
A further insight into these distinguishing factors of the Smithian model point to the model’s definition of some macroeconomic variables such as growth in labour force, the accumulation of capital stock, land and technological advancement. Under the Smithian model, growth in the labour force is measured according to the movement of real wages to the upside or downside of a ‘benchmark real wage’. In other words, when the real wage is above this benchmark, the model assumes growth in the labour force while the labour force is assumed to have shrunk whenever the real wage level falls below this benchmark. The model also assumes that as the labour force attained higher levels of education, the benchmark for real wage will subsequently rise to a new level (Smith 1776, Rostow 1990, Barro and Sala-iMartin 1995).