Roadmap for Developing Economies: A Conversation with Dr. Okonjo-Iweala
Immediate past Cordinating Minister for the Economy and Minister of Finance, Dr. Ngozi Okonjo-Iweala, who served on the UN Secretary General’s High-level Panel of Eminent Persons on the Post 2015 Development Agenda, in this interview with Akshan de Alwis,
During your tenure as Finance Minister, Nigeria became the biggest economy in Africa, overtaking South Africa in 2014. You are credited with the measures taken to turn Nigeria around. The National Economic Empowerment and Development Strategy (NEEDS) development plan has been highly influential throughout the developing world. What are the lessons that you can share with other developing nations, both in Africa and around the world? First of all, we tried to find out why has the country not been doing well all these years. You have to really dig. People talk very highly about the lack of reforms or corruption and such, but you need to go beyond that really; get granular about why your country is not performing well. When we dug into it; the first time in 2003, and did this study that led to the NEEDS document and to the reform. It was fouling out that one of the biggest sources of instability and lack of growth in the Nigerian economy—that had been growing at about 2.3 to 2.5 percent per annum, with a population growth rate of 2.8 percent —one of the biggest reasons was that we didn’t know how to manage volatility. Oil prices would go up, we’d spend everything, they’d then crash, and so on and so forth. So we really went to look at the core reason—no one had ever really done that in the country. The World Bank had done some studies, but none of the policy makers had really looked at this or paid attention. So when we tried to map this, we saw that our expenditures were volatile, incomes were volatile, GDP growth was volatile. So of course we had to put in place a mechanism, and I think that was one of our biggest successes from the first time.
It must be difficult maintaining economic stability when so much of Nigeria’s success is associated with the current oil price? Despite having a massive oil industry, Nigeria famously struggled with paying back its outstanding debts to the IMF and Paris Club. The first concrete step was to bring in some microeconomie stability into the economy, managing the fiscal framework much better. We put in place what they call an “oil—price—based fiscal rule, which the linking of the way we budget to the price of oil and just smoothing out consumption and expenditures. So we put all those things in place, and you could see the World Bank had estimated that Nigeria was losing three percentage points per year due to volatility, and lo-and—behold, when we developed something called the “Excess Crude Oil Account” into which we could just put the savings. When we decided to budget at an oil price lower than the one prevailing in the market and delinked our budget from the volatility, we were able to save an amount over and above that price we used in the budget because oil prices were going up then — I saved them into a sort of stablisation fund, which we call the Excess Crude Oil Account. So in bad times we could draw on those savings to smooth our consumption. When we put all of these mechanisms into place, growth tripled — almost to six percent to seven percent per annum. So, one of the key lessons is that macroeconomic stability matters — if you’re a natural resource producer managing volatility matters, grappling with that matters.
Oil is an exhaustible resource, and ultimately rather volatile. There have also been significant efforts to diversify Nigeria’s economy — to move away Nigeria’s economy from this central pillar ‘of oil, right? Cry much so. The second thing we tried to do or beginning to do was some of the structural reforms that would be necessary for the economy. We tried to look at what were the biggest sources of fiscal drain, we looked at enterprises and we looked at those places in the economy where we needed to tackle issues that could unleash private sector investment. Of course, infrastructure was one of the big ones. So we started with telecommunications reform, brought in the private sector, auctioned licenses, and lo—and-behold, that whole sector was unleashed. And you could see the effects: it used to be 0.8 percent of GDP, by my second time around, it had grown to 9 percent of GDP. Just as an example, and then we started reforming the power sector, we started looking at some of the really special issues, and then of course, the government was over. We captured a lot of this in my book. So the lessons are macro stability, structural reforms, and building institutions. lf you want to sustain development, and leave a lasting impact, you really need to put in systems, processes, and institutions that will drive development going forward — same with the SDGs. We really started to look, what are the missing pieces? Our whole financial management framework, if you’re going to finance the SDGS, you need to diversify your economy away from one resource; you need to strengthen your revenue management framework, you need to present leakages. We put into place financial management systems with biometrics that really began to build a framework that would take us away from cash management with the problems of corruption and leakages to electronic management systems for finance.
We also built, in order to finance SMEs, you find that they are excluded from the financial system, they don’t have access or it’s too expensive ~ so we built the Development Bank of Nigeria, and it’s just in its infancy now, but at fulI-fledge, it’s supposed to provide resources to SMEs so that they can begin to grow, since they’re the engine of job creation within the economy. This is another trend that is critically important: how do you bolster growth within an economy, how do you help informal enterprises to grow and create more jobs, because it’s not the huge businesses that create the most jobs. So building an institution that can begin to plug the gap and be sustainable - the same as many countries have done: the German’s have Kt’W; the American’s have the Small Business Administration. We don’t have these kind of things in our countries and because we are missing these institutions that means we continue to struggle. So the second lesson that l would say we learned that is important for development is to really look into what is missing institutionally from your economic landscape and try to put them in, because without those institutions built, you will not be able to develop. And then undertake the right structural reforms in those regulatory reforms, freeing up space for business that will enable your private investment to take place, because the government creates the jobs needed. So you really need to do the necessary things.
As the final word, you’ve passionately fought corruption throughout your career. What is the role of fighting corruption and illicit cash flows in achieving the SDGS? The size of the flows, not just African countries, but worldwide — is estimated at one trillion dollars a year according to International Financial Integrity. But even if you just look at the costs to Africa, 50 billion (from the Thabo Mbeki report on illicit financial flows) is significantly more than the aid flows to the continent. So in terms of the numbers, the issue of transparency, and the issue of fighting corruption, ‘the world needs to pay very strong attention to this issue of illicit financing and illicit capital flows. Harnessing this will help with the financing of some of the goals of the SDGs.
We tried to look at what were the biggest sources of fiscal drain, we looked at enterprises and we looked at those places in the economy where we needed to tackle issues that could unleash private sector investment Of course, infrastructure was one of the big ones So we started with telecommunications reform, brought in the private sector, auctioned licenses, and lo— and- behold, that whole sector was unleashed