Professor Kwame Adjei Public Lecture (IPAM) given at the British Council, Freetown, Sierra Leone on November 11, 2010
Introduction
The management of national wealth and the reduction of poverty are the key questions of political economy all over the world today. It is no less important in Sierra Leone despite being one of the world’s poorest countries.
For the vast majority of resource rich African countries, the exploitation of these resources were not accompanied by carefully crafted strategies to deal with these questions, nor were they driven by visionary leadership to grapple with the challenges involved. Many of these countries displayed superficial signs of progress, only for the veneer to peel off within ten years releasing them on a downward spiral to civil unrest in many cases. The two Congos, Angola, Chad, Sierra Leone illustrate this phenomenon. All had the potential for considerable wealth at independence and all failed to manage this wealth or reduce poverty.
Fifty years on, Sierra Leone is once again facing potentially considerable income flows from its minerals and agriculture. Failure to manage this wealth and reduce poverty will certainly take us back to the downward spiral and its inevitable ending.
Let me state from the outset that this is not a politically inspired presentation. The intention is to alert the entire spectrum of political tendencies in the country, to what lies ahead. It is equally to spur the intellectuals – who seem content to grumble in the sidelines – to fashion and configure options for our leaders. It is a modest attempt to analyse the possible impact of a major challenge facing the country in the short to medium term, that if not addressed now will pose major problems for the population and the international community as well.
The development experiences of all countries have varied in many ways, but what is common to all is that the most of the matured democracies and developed countries required several centuries to get to where they are. A number of countries have succeeded in leapfrogging the time scale with success, but only with careful planning, enjoying the coalescence of conditions and circumstances, combined with good leadership. African countries stand out, in their failure to exploit the opportunities offered, but rather complain of adverse external conditions and a hostile global market or scheming international community. The fact is that leapfrogging presents considerable challenges that are made even more difficult by our lack of anticipation and courage. One such challenge is how to source and manage increased resources (wealth), and simultaneously deal with the debilitating effects of poverty, or reduce poverty.
Let me briefly remind you of some of the features of the country’s economy and the status of its population.
Sierra Leone facts and figures.
Total GDP is still below $ 2 bn
GDP growth; Real GDP will grow by 6% in 2010, and 9.5% in 2011 in Liberia compared
to 4.2 % in SL, (after a 3.5% growth the previous year) and projected to grow by 5.5% next year. IMF sources.
Inflation is currently 18% here, compared to 9.5% in Liberia according to the latest IMF press release; this compares with 3% in Rwanda
Poverty levels are estimated at 60%[1]
Unemployment is for young adults. The gini coefficient that measures income inequality is .6, one of the worst in the world.
What is wealth?
To begin with, I do not wish to fall into the trap of what could be an interesting, but fruitless debate over the definition of wealth. The literature is replete with various studies on the meaning, measurement, etc of wealth. Ranging from Plato and Aristotle to the founder of classical economics – Adam Smith, on to current day Wolfe. This presentation is not aimed at summarising any of these, or of striking new directions on this subject. Rather I am protecting myself in the relative safety of the commonly understood concept of wealth by mainstream economists.
Wealth usually refers to all assets less debts, owned by a person and by extension a country. For economic analysis though, a more useful concept is marketable asset.[2] To illustrate, the owner of extensive land holdings is not necessarily wealthy, if that land is neither easily marketable, nor generating revenue streams. Accepting this broad definition allows us to understand why Sierra Leone cannot be described as wealthy now, even though there are reports of huge reserves of minerals in the ground – assets – until these resources become marketable.
I do accept that in a low-income country, the dynamism of the market influences the extent to which assets can be considered as wealth. The large land owner just after the conflict is now a wealthy person, now that the economy is more buoyant. Similarly the more the minerals are exploited the greater the country’s prospects for wealth through higher rents or royalties.
I recognise of course that wealth is contextual and that culture and other factors determine how it is conceived, perceived, and accumulated; and above all what it is used for. However, notwithstanding my background in what one may refer to as the human development school, that prefers to focus on the wellbeing of the individual, I will base this discussion on the narrower interpretation of wealth in terms of assets.
Second for the purposes of this presentation, I will use GDP as an indicator of wealth despite all its shortcomings, mainly because its widespread calculation, facilitates comparisons across countries and is the most cited statistic to show improvement in well being of populations within countries. And this while fully accepting the difficulty of using it for measuring or comparing the well being of individuals within and across states. By and large there is significant correspondence between the orders of magnitude of wealth represented by GDP figures and other measures. Thus, at the national level, low income measured by GDP, tends to include countries also found at the bottom of the human development index. Noting that the latter is considered a better measure of well being than wealth through GDP.
Before proceeding further let me share with you some interesting facts and figures on global wealth.
The recent study[3] by Credit Suisse Research Institute published a few weeks ago reveals that global wealth increased by 72% between 2000 and 2010. Total wealth is now $194.5 trillion. By 2015 global wealth is estimated to grow up to 61% of current levels.
Just over 1000 billionaires and 80,000 ultra high net worth individuals are worth over $50 million, and 24 million people are worth between $1 m and $50 m.
At the global level 1% of the richest, account for 43% of global wealth.
Again, I must stress the importance of context to understand and interpret wealth. Personal wealth is more important in Sierra Leone than it is in a developed country because in the latter, there are public services and social safety nets that enhance well being; you need personal wealth to enjoy these services.
So, what do we know currently, of wealth in Sierra Leone?
At the national level our GDP is still hovering below $2 billion; shared among the population of 5.7 million people. Guinea on the other hand enjoys a total GDP of $ 3.8 billion shared among a population of 10 million people. Liberia with almost 4 million people can only boast of less than $1 billion. So out of the three neighbouring countries Sierra Leone, as a country, is not worse off than the other countries currently.
What are the projections for SL in the next 5-7 years?
Here we have to turn to estimates of growth rates. But first what has been the trend so far? From 2007 growth rate has been declining, partly because the double digit growth rate that normally follows a conflict are not usually sustained, and to some extent partly because of the fall in commodity prices. Growth rate declined from 6.4% in 2007, to 5.5% in 2008, 4.0% in 2009, and the estimate for 2010 is 3.5%. For Liberia it has been 9.4%, 7.1% and 4.6% respectively for the same period; and for Guinea, it has been rising from 1.7% in 2007, and 4.8% in 2008.
All three countries have their growth led by exports, hence when the diamond exports fell in SL, output of other minerals increased in Guinea and Liberia, explaining partly the differences in performance by each country.
The turn around for SL is expected in 2011 when growth is estimated to increase to 5% and even higher. In the next five years the figures will increase dramatically. Even accounting for over optimistic projections by some companies, the potential is certainly there.
Anyway, being an optimist, I can say that all this is about to change thanks to iron ore and the discovery of other minerals. Add to that, the massive expansion in agriculture and we should witness a large increase in growth rates, at least at the national level. The forecasts by reputable institutions[4] is that commodity prices will remain stable over the medium term due to the expansion of emerging markets of China, Brazil, Russia, India, and the lesser but significant players like Turkey, Indonesia etc.
What are the good, the bad, and the ugly of wealth?
The Good
Increase in resource flows is generally good for an economy where it allows the creation of capital stock, the building of institutions, the qualitative improvement in human resources through training etc. Above all it is inherently good overall, where it leads to sustained improvement in the well being of the majority of the people.
When developing countries convene donor conferences, the aim is to augment the available resources rapidly in order to meet development costs and sometimes, meet humanitarian needs as well. For SL we get regularly, the sum of about $300 m? In aid every year. The last donor conference earlier this year did not change this. (A reality check however, is that high profile conferences hardly produce significant changes in donor resource flows. Which raises the question, do we need them, if we are not in the midst of major humanitarian disasters? But this should be the subject of another discussion). All of that is the good at the national level.
At the level of individuals, increased wealth defined in terms of income flows, ensures that the individual enjoys a standard of life that is commensurately higher. (I must reiterate here that wealth in the form of intangible assets is ignored for the purposes of this analysis). At the individual level, increased wealth generates both positive and negative or direct and indirect externalities that affect others in the society. A simple illustration is the case of spill over effects. The rich man in a locality, lights up the rest of the area with the perimeter lighting of his compound. We also have the case of charitable contributions from the rich. A more direct effect though, is the investments of the wealthy in factories and enterprises that provide jobs for others. It is interesting that during the transformation stage of the current advanced countries, the wealthy owned most of the assets of their countries and the interests of the country coincided with their own individual and collective interest. Even as the middle class emerged, there were alliances between them and the ruling class. The best example is the case of the merchant vessels that sailed to the new world or the east, were all owned partly or in full by the wealthy. It was not surprising therefore that the country’s navy were used to protect and support these shipping vessels. I will come back to this later.
For us in today’s developing country the most powerful instrument for dealing with poverty, is the government’s budget, which in turn is the avenue for directing the national wealth to build the assets of the poor. IMF studies[5] have shown that the quality and efficiency of public expenditure are significant contributors to the reduction of income inequality. There are two myths that are current with the international donor community that we need to dispel. The first is that direct spending on the poor is the only way to reduce poverty. In fact spending on growth, or the conditions for growth, is more sustainable over the long term than direct transfers to the poor, provided that there are adequate safeguards to ensure equity in the distribution of opportunities. The second is that rapid decentralization will lead to a quicker and more effective impact on rural poor. An excellent article[6] on Namibia debunks the myth, by highlighting the gulf between principles and practice, but confirms that the more political goals were met. Calming the tension from opposition movements.
Turning to the bad of national wealth. A potentially negative consequence is what is referred to as the Dutch disease. When the Dutch began exploiting natural gas from the North Sea, the in-flow of funds led to movement of labour to the non-tradable sector, the currency’s exchange rate strengthened, and manufacturing shrunk. Inflation ensued quickly. SL experienced this in the 60s and 70s when labour moved en masse to the diamond mines – abandoning our agriculture and encouraging the creation of an unsustainable manufacturing sector.
Another BAD can be the result of squandering of the national wealth by a few. Those who have access to, or control national assets may squander it to the detriment of the nation, thereby perpetuating poverty and increasing social tensions. There are reports that this happened here in the 70s and early 80s.[7]
Related to this is the management and administration of national wealth.
What is Sierra Leone’s experience here? There are those who will point to the observations and comments of the international finance institutions as indicative of performance. (Be careful; please forget about the communiqués of the IMF missions. It is rare for these to be overtly negative. Most of the time it is full of understatements and what the French call langue du bois. For years the World Bank and the IMF were reporting positively on what was then Zaire and even providing it with loans until it actually collapsed in the mid 90s)
In Sierra Leone, to get a good handle on how our finances are managed and administered we need to talk to those who effectively augment the wealth of the country, donors; and those who use the money or are compensated for services they render to the state.
First donors. Almost without exception they complain of poor utilisation of money given to us. I am not referring to allegations of corruption here; just efficiency in the use of aid. We had over $200 m of unused funds as at the end of 2009. The Ministry of Finance and Development has since put into motion measures to accelerate expenditure of donor funds; but are these effective?
Next from government suppliers and creditors, there is a universal complaint over the timely delivery of payments, and in full. This again suggests we have efficiency problems.
Moving on to government departments, the common complaint is that of extreme difficulty in getting payment for services rendered; on the other hand MOFED’s defence is that rules are not followed. Wherever lies the truth, we do have a problem.
The final important “bad” is that national wealth per se, does not guarantee improvement in the wealth of the average citizen. Unless there are effective mechanisms for equitable distribution of wealth, the resulting income inequality would create social tensions and even civil conflict. Two key instruments for reducing income inequality are the tax regime, and the pattern of public expenditures.
Let’s start with the tax regime. Our taxes on income, both corporate and personal, are progressive. Similarly, despite the controversy over the GST – which is a VAT – there are studies of similar taxes in other developing countries that confirm its progressive character. In short the incidence of the tax on the poor is lower than on the rich. Our main problem is the granting of waivers. There are unconfirmed reports that these tend to run into hundreds of billions of leones. We’ve go to plug this.
Turning to the ugly of national wealth, in order to see Why we must manage our national wealth.
The good the bad and the ugly of the mining bonanza.
50 years ago, or at the dawn of independence a large number of African countries faced a natural resources boom; mostly mining as in the DRC/ Nigeria/ Angola but also forestry as in Cote d’Ivoire, and the entire Central Africa, and agriculture as in Kenya, Uganda and Zimbabwe. The story of all of these countries is well known and need not be repeated. The question now is how to avoid these errors? First we must understand the nature of the bonanza.
The data presented earlier shows that most of the new resources are expected from the mining boom. What will be the form and structure of this wealth?
To begin with, the massive investments in capital equipment will shore up our growth rates but the real effects will be small in the short and medium term. The big winners will be the transport owners, the caterers, the house and hotel owners, and those in the service industries that support the mines. If they play their cards well, they will be the first millionaires. I understand that today, getting a hotel room in the Makeni area is a challenge.
The next big winner is the government budget. Bearing in mind the state of our administration and management of the budget we should be asking the question, how will this wealth be administered and managed? How will it affect fiscal discipline and administrative efficiency? In less than five years our machinery will have to handle over five time the amount now flowing through its coffers, excluding foreign aid.
Another group of winners will be those with connections. Wheeler- dealers. They get Government and increasingly, donor contracts as well. They are politically well connected and not really entrepreneurs – they tend to be middle-men and women. They secure contracts and then subcontract to others, taking a hefty commission with no interest in quality control. They will make lots of money; and the more the wealth increase, the greater the control over these public contracts.
Turning to the the biggest winners, a small group that could be become Sierra Leone’s own Oligarchs. These would be our first crop of multi-millionaires. They would acquire wealth from their control or access to national assets. In Russia, they tended to be former political leaders and their allies in the security sector, or family relations. They were in direct control of state assets. They became avaricious rent seekers. They sold the nation’s assets to themselves or their proxies, demanded commissions up front; 5 – 10% for signing agreements; awarding concessions, granting tax waivers, and providing contracts. And in Russia, they obtained rent for providing protection as well. This phenomenon is perhaps the most worrying for our future, as it could lead to the criminalisation of our society. And with the widespread unemployment and illiteracy, a worse case scenario could see private armies.
When only a few people command access to so much wealth, they can and often do, buy support. They have the resources to buy justice, pay for all charity, pay for their own security rather than rely on that of the state, and we can only pray that they do not become rivals and begin to enforce their own laws. This is the pessimistic view.
The optimistic view which I support, ignores the source of the wealth but looks at what happens when these oligarchs morph into successful businessmen and women. Their actions can create jobs for the poor. This leads me to the issue of reducing poverty.
The Ugly
What is poverty? Poverty is the result of poor distribution of the national wealth, whether through unequal economic opportunity, inappropriate policies, or the availability of material resources through the absence of natural endowment. It usually refers to a state of deprivation. Any action to reduce poverty must embrace actions linked to the management of wealth.
Current poverty profile of SL, and how it has evolved to this point
Sixty percent of the population live on less than $1 a day and are considered poor by all accounts. Over 70% of the poor, the majority of which women, are in rural areas. Are we then surprised that the city is bulging at the seams? With a gini coefficient of .6 we have one of the most unequally distributed incomes in sub-Saharan Africa. Add to this the fact that over 60% of the population are youths with over 70% unemployed, and we have the ingredients for an explosion, unless their situation is managed extremely carefully.
Maintaining the current policies will certainly worsen the gini coefficient further, particularly in the next five years, when the new oligarchs appear.
No society can survive for long with such extremes in income levels.
All of this call for action now that will help us manage our expected hike in national wealth in such a way as to avoid the excesses – the bad and the ugly – and reinforce the opportunities for the good, and for the reduction of poverty.
What are current trends, and if they continue, what are likely consequences for social organisation, economy, rule of law, stability etc.
The emergence of the Salone oligarchs is inexorable, already they are beginning to show signs of life. Rather than spend valuable time and money to confront, and much less attempt to destroy them, we should encourage them to invest in Sierra Leone. We should think of innovative ways of attracting them to local investment opportunities beyond the construction of mansions. There should be tax – breaks for the new wealthy, that entice them to spend locally and create jobs for our unemployed.
To conclude, I have sought to present the picture of the wealth situation of the country in the next few years. I have demonstrated that we are likely to hit gold – literally through the natural resources boom. The sudden inflow of wealth will strain our managerial and human resources capacity to tackle the problems that will arise. The emergence of Sierra Leone’s oligarchs against the background of widespread poverty, will be accompanied by a different set of problems relating to the worsening of inequality, erosion of the rule of law, marginalisation of our fledgling institutions, criminalisation of our society, distortion of our democratic processes.
What do we do now in order to manage our nations Wealth so that we reduce poverty and minimise the dangers of Dutch disease, avoid the natural resource curse, as well as steer clear of our last trajectory that would lead us to the recurrence of our past history?
I would make the following proposals:
- We must as a matter of priority engage in an overhaul of the institutions managing and administering our finances.
- We must set up an A-political think tank or policy group now. The overall purpose of the group will be to identify and present to the government of the day, immediate policy changes and actions that would tackle the likely negative repercussions of the impending natural resources bonanza.
- 3. The PPRC that comprises all political parties must be challenged to sponsor widespread discussions on revenue management urgently. Plans are afoot for UNDP to conduct a technical meeting on the subject in the coming weeks. This should serve as the forerunner for more open and popular discussion by the majority of the population.
[1] Agenda for Change. Government of Sierra Leone, 2009.
[2] See the writings of EN Wolff of the Levy Economics Institute, Bard College
[3] Global Wealth Report – Credit Suisse Research Institute October 2010.
[4] See IMF/ OECD/ WB publications on Commodity markets
[5] See for example, Mexico: Experiences with Pro-Poor Expenditure Policies. Corbacho and Schwartz . IMF Working Paper Jan 2002
[6] Namibia: Challenges for Decentralization and Local Government Reforms. SB Lwendo NewEra 2009
[7] Corruption and State Politics in Sierra Leone – William Read CUP 1995