Journey towards a four wheel economy

I went to bed thinking of a useful imagery for running a successful economy, hoping to find something in nature that cleverly explains how economic systems work, something poetic. I ended up with a car, a four wheel drive to be precise.

How does a four wheel vehicle move forward? By distributing, equally, the power that is generated by the engine to all four wheels. The key word being equally ( and simultaneously) — because shifting the power in any other proportion will either generate a highly inefficient movement ( such as powering only the front or back wheels ) or turns the car into a spinning wrecking ball ( if we power one side or just one wheel).

Why a four wheel car? Well, let’s start with the four factors of production ( as updated by me). Any production system require a combination of labor, capital, entrepreneurship and land in the right proportion ( which I will replace with government since land is abundant in Africa but only accessible and useful when combined with good government).

Imagine that labour is our first wheel — what happens when all the power is pumped into this wheel while the remaining 3 are barely moving or standing still? You will end up with a very large pool of labor, educated or otherwise, without sufficient opportunities. The immediate and direct consequences of this is high levels of unemployment, rising poverty and mass emigration. That cannot yield economic progress, just as a pot of stew with only tomatoes is barely edible.

Imagine another scenario where we opt to increase the number of entrepreneurs (by creating the conditions for generous profits) , without a commensurate increase in high value labor or improvement in the operating environment for exploiting land and attracting capital, how will such an economy progress? Well, we will suffer the frustration of poor execution as well as non competitive output, as products fail to meet the minimum standards. We may also witness faltering purchasing power as fewer wage earners can purchase whatever products comes out, ultimately leading to a relapse of the economy. Eventually, the limited access to capital will make industrialization improbable, leading to the emigration of high value entrepreneurs to other economies.

Let us then assume a universe where we push all the power into capital, creating an environment where both good labour and competent entrepreneurs are in relative short supply. We can expect a capital bubble, not dissimilar from what is currently happening in the ventures and private equities markets, where a huge amount of new capital in search of the latest Uber ended up funding poorly equipped entrepreneurs unable to deliver the magic. It also meant that even the good entrepreneurs struggled to find the talent necessary to build, further cementing poor outcomes. This is also true of public markets where too much capital without other factors lead to bubbles.

Now to the fourth factor, which in traditional economics, we termed land. Global trade has meant that land ( all the derivatives of it ) is easily accessible once you have capital so the obstacles to land, which is the governing environment, seems more appropriate to me. Nigeria has all the arable lands it needs, all the minerals underneath but they are not accessible for true value because of security, policies, politics, regulations, bureaucracy and enforcement.

So what happens in a universe where we put all our effort into fixing ease of doing business without fixing the labor force, without enabling entrepreneurs and without access to capital? In one extreme, you get a dying economy. as innovations dries up — we can see this in the aging economies which are losing dynamism. At the other extreme, you end up with a country owned by immigrants as entrepreneurs, capital and trained labour are capable of moving across borders. This can lead to social turmoil, with local communities rising against immigrants. We have also seen that in cities that have seen significant immigration of talent from abroad, in the form of right wing anti immigration movement in Europe (the real and concealed anger is against the performing immigrants, not the refugees).

A four wheel vehicle is only useful if the power generated by the engine is uniformly transmitted to the four wheels. It is often easier and tempting to shift all the power to one wheel or the other, but to do so is not a neural act, it is borderline suicidal.

If we want to see economic progress, we have to develop the discipline of moving in tandem, ensuring that we power all the factors at a similar pace.

Historically, we tended to assume that access to capital is the real blocker to economic progress, with most small businesses identifying access to capital ( often mischaracterized as bank loans ) as their biggest challenge. While this is understandable, it is often incorrect.

The single largest obstacle to economic growth is the operating environment which curtails access to land and to capital. Even where companies overcome this, the operating environment undermines productivity — all the polices and bureaucracies that makes it impossible for a Nigerian business to outcompete foreign companies keeps us poor.

Closely following this, and equally important, is the quality of the labor force. Without fixing the quality of our labor force and inculcating a culture of disciple, our output will remain uncompetitive and our dependence on imported finished products will continue.

You don’t have to be a centrally planned economy to seek to deliver reforms orderly, the government has the tools to drive macroeconomic coordination by ensuring it focuses the power generated from its engine in a manner that stabilizes before accelerating. Planning should be about finding the bottlenecks that need to be removed, and it seems these are mostly within the four walls of government today.

We are a country ready to launch, let’s be intentional about how we apply resources.