You can lead a horse to water but…

I read this very interesting piece yesterday about a guy who is trying to work his way around the CBN’s new cashless policy. The article highlights one of the major problems with top down policies; if people don’t want them they will spend time and money trying to avoid them.
A lot of top down policy makers in Nigeria don’t try to understand why people behave the way they do before forcing policies down their throats. In this particular case why do businesses still insist on carrying out transactions in cash? Okafor suggests it may have something to do with tax avoidance. It may be something else.
I think the idea behind encouraging cashless transactions is a good one. Hopefully the CBN is flexible enough to adjust as people try to work around it.

http://www.thenationonlineng.net/2011/index.php/news/37948-nigerians-devise-new-methods-to-beat-cbn-cashless-economy-policy.html

Filed under: News Stories

In search of justice

It has been all over the news. Former governor James Ibori pleaded guilty to corruption charges in the UK. What struck me though is how difficult it is to remember any politician who has been convicted in Nigeria with a significant jail term. Seemingly corrupt politicians almost always get off the hook when tried locally. Those who manage to get convicted get a simple slap on the wrist.

Seeing as we have apparently outsourced education and healthcare should we consider outsourcing our legal system? Might serve as more of a deterrent than our 2 years in jail for stealing billions.

On a more serious note we (or you the senators and reps) really should consider liberating the EFCC and ICPC from the federal government. That seems to be the major handicap. Oh and the courts and judges too.

Filed under: Random Thoughts, Corruption, EFCC, Nigeria

Are things worse than we think?

I spent the weekend working on an alternative measure of economic activity for Nigeria. Something different from the regular run of the mill GDP. One new option is to measure economic activity by monitoring night lights from space. The basic idea is areas with more illumination at night are assumed to have more economic activity than areas with less illumination. You can read more about it here. It is a good alternative because it is mostly unbiased and can measure activity not just for countries but for smaller administrative districts. I have only compiled it for the entire country and will do the same for state and local governments soon.

Something very interesting shows up when comparing this alternative measure of economic activity to official GDP data. The graph below plots GDP and the light intensity index from 1992 to 2009. The graph speaks for itself.

I know what you are thinking. This probably has something to do with the NEPA situation. Comparing the light intensity index with data on net electricity generation in Nigeria from the Energy Information Administration show that this falling economic activity is not really about electricity. There is a relatively large improvement in electricity generation from about 2000 with no effect on economic activity.The light intensity index also takes into account other sources of night light that are not associated with NEPA. Light from private generators and even kerosene lanterns. This implies that NEPA alone is not responsible for the falling light intensity numbers.

Interesting stuff. If this light intensity index is actually a good measure of economic activity then those poverty numbers released last week actually make sense.

Filed under: Random Thoughts, Economic activity, Electricity, GDP, Light Intensity, Nigeria

Is corruption a rational response to opportunity?

One thing I noticed during the fuel subsidy saga earlier in the year was the demonization of most of the people somehow connected with the oil industry. The oil marketers are wicked and evil, the NNPC staff are wicked and evil, the PPRA guys are wicked and evil, how could anyone with a conscience do all that, and so on. Are these people really “bad” people? If we locked them all up and replaced them with better people would it make any difference? Or are these people just making rational decisions like any other person would?

In thinking about this problem it is useful to use some simple examples.

One of the less talked about discoveries during the saga was the crude oil swap scam. Basically crude oil was being swapped at rates below official rates leaving a margin that just vanishes. Is this under pricing rational behavior?

The two parties involved in this swap deal are the bulk importer and the department at the NNPC that pays the bulk importer. Before the swap takes place the importer knows they can get more swapped crude oil if the crude oil is priced at a lower rate. The department also knows it can get more revenue by under-pricing the swapped crude oil. It has to account for all swapped crude oil but not any side revenues. In essence we have a situation where both parties making the transaction can make themselves better off by allowing some corruption. The bulk importer can get a lot more under priced swapped crude oil if it pays just a fraction of the extra back to the department. The department can get more revenues that it doesn’t have to account for if it under prices the swapped crude oil. Both parties can make themselves better off and will if the benefits are large enough.

Are the benefits large enough? 15m liters of fuel at a cost of say N100 per liter is worth about 90000 barrels of crude oil. If the swapped crude oil is under priced by $1 per barrel and both parties split that 50/50 then the department can make $45000 a day or N2.7bn a year from just under pricing swapped crude by $1. This is at a very generous 15m liters a day fuel imports.

If both parties have the opportunity to make this happen will they take it? Probably. Most Nigerians who face this opportunity will take it as well. It is not really a measure of the lack of morals but of the extra-large benefits that could be made. Corruption, in this case, arises not because the parties are evil but because one of the parties does not suffer any loss from making a bad deal. The department does not lose anything from under pricing crude oil. Sacking and jailing the management of the department will only force the next set of managers to work harder at covering their tracks. Probably in collaboration with offshore Swiss banks.

This kind of set up for corruption is present right through the oil industry where deals are not made by the parties who actually use the product but by some independent 3rd party. A DPR, PPRA, various departments at the NNPC and so on. Solutions for dealing with this will have to go beyond just locking people up and will have to include structural changes. In this particular example breaking up the department into two separate units, one to sell crude oil for cash, and the other to buy imported fuel for cash, will probably reduce the level of corruption. The best case scenario is to not have any departments and let every local distributor or marketer buy fuel from wherever they like.

Filed under: Random Thoughts