Cheta Nwanze, Lead Partner, SBM Intelligence

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Subjects of Interest

  • Fiscal Policy
  • Geopolitical Analysis
  • Governance
  • Politics

Building institutions to deliver national economic prosperity 09 Nov 2020

I attended a course in the United States last month and had to visit El Paso, Texas, a US-Mexican border city located on the Rio Grande. A visit to the Rio Grande afforded me the opportunity to think again about some of the factors that determine the differences in income and living standards that separate poor and wealthy countries. My reflections during that visit are the subject of this article.   

The Rio Grande is the fifth-longest river in North America and the 20th longest in the world. Located in the southwestern US and northern Mexico, the river is 3,051 kilometres long and serves as part of the border between the two countries. Much shorter than the Niger River, the deepest point of the Rio Grande is about 60 feet, a depth that is just over half of the former, notably seldom useful for navigation.

Bridges across the Rio Grande connect El Paso with Ciudad Juárez, located in the Mexican state of Chihuahua. The stark difference in the living conditions of both cities opposite each other epitomises the impact of political choices of societies and the governance and economic systems that they foster. While the Rio Grande connects the two cities, the rule of law separates them.    

On one side of the river is Juárez, once acknowledged as the world's most violent city. In 2009, it was considered the world’s murder capital. On the other side is El Paso, which has been ranked several times, including in 2019, by the Congressional Quarterly publication as the safest US city.

In 2017, the El Paso metro area had a gross domestic product (GDP) of $29.03 billion. Tourism alone accounted for $1.5 billion in revenue and the presence of almost 80 Fortune 500 companies in the area helped create a median per capita income of $42,037 in 2019.

 But just across the river that can be hopped across at some points, you have a Juárez with median earnings of $18,125. It is difficult to attract tourists in the city due to a lot of drug cartel violence. In fact, researchers at the New Mexico State University and the University of Texas at El Paso found that more than 10,000 businesses closed and over 430,000 residents fled the city between 2007 and 2011.

Imagine if Dubai and Kano were placed side by side. Dubai, situated in the middle of a desert, in the United Arab Emirates has a GDP per capita of $37,251.94, according to Statista. Kano, which is very close to the Sahara Desert, has a GDP per capita of $504, according to Nigeria’s National Bureau of Statistics. The juxtaposition of these two cities may sound odd because of the disparate geographies, compared to the North American cities of El Paso and Juarez that share the same border. However, there are similarities in terms of religious beliefs. Dubai, like Kano, is overwhelmingly Muslim. People in El Paso and Juarez are overwhelmingly Catholic.

From the foregoing, similarities in climate and geography are not factors in determining governance and economic outcomes. Cultural similarities also do not produce similar economic outcomes. In fact, modern-day El Paso disproves any sense that cultural similarities could engender the extent to which the rule of law is entrenched in societies. El Paso was part of Mexico until 1846 and was officially ceded to the US in 1848. The descendants of the natives of ancient El Paso who might have chosen to move to Mexico would rue their ancestors’ decision. Their kinsmen across the border to the north would be forever grateful for the cession to the US.      

Political choices underpinned by institutional changes are key drivers of the divergent economic outcomes in El Paso and Juarez. The same can be said about Dubai and Kano.

While US democratic institutions progressively ensured more accountability of the government and paved a way for the expansion of opportunity, Mexico’s political system is one that is engineered to reward political loyalty with access to state-owned pathways to wealth and power.

For 71 years between 1929 and 2000, Mexico was ruled by the Institutional Revolutionary Party (PRI). The party notoriously used electoral fraud, corruption, bribery, and repression to maintain power. The Mexican system produced political strongmen who got rewarded for being above the law instead of promoting and applying the rule of law.

In the New York Times and Wall Street Journal bestseller, "Why Nations Fail: The Origins of Power, Prosperity, and Poverty," Daron Acemoglu and James Robinson argue that the different institutions in the US and its southern neighbour are what created very disparate incentives for their inhabitants. Political institutions are a universal indicator of improved economic and social outcomes.

Apart from the Mexico and US dichotomy, there is the South Korea-North Korea situation where different governance choices have led to remarkable differences in the economic wellbeing of the two countries, despite being of the same ethnic stock. Such economic and social differences can cut deep across generations.

Germany celebrated its third decade of the reunification of eastern and western Germany at the beginning of October. According to a Pew Research Center survey, per-capita GDP was €32,108 in the former East German states in 2018, compared with €42,971 in the former West German states. In other words, productivity in the five eastern states was 75 per cent of productivity in the West on a per-capita basis.

According to the Annual Report on the Status of German Unity, published in September 2020, incomes in the East are 10 per cent lower, and the unemployment rate is higher. This is regardless of the financial support flowing from the former West into East Germany estimated at just under €2 trillion.

But there is an even sharper difference in democratic attitudes. The German state broadcaster, Deutsche Welle, reported that only 78 per cent of the people in the former eastern Germany consider democracy as the best system, compared with 91 per cent in the western states. The political inclinations and economic outcomes in eastern Germany could perhaps be explained as the legacy of the 45 years of the east being under communism, or command economy, after World War II.

Institutional changes are crucial for countries like Mexico and Nigeria to begin to see meaningful improvements in the socio-economic conditions of their people. For one, both countries must assert the primacy of the rule of law. Building economic institutions that are inclusive is also key to expanding opportunity and achieving prosperity. These institutions include a proper judicial system that enables economic performance by securing property rights and the sanctity of contracts, while enforcing social justice and ensuring accountability for deviant behaviour.

A judicial or legal system that is transparent and dependable will boost investor confidence. A country where leaders are held accountable will minimize the prevalence of institutional extortion and support for organised crime by the security agencies.

Where there is accountability, economic freedom will improve. Lack of social mobility is a recipe for chaos and instability in a society. The groundswell of support for the #EndSARS protest movement in Nigeria last month was not just because of the injustices of a repressive policing system, which festered for decades due to political choices made by successive administrations. The protests also laid bare a system that stifles the potentials of the majority of Nigerian youths.

More than 40 per cent of the Nigerian population currently lives below the national poverty line of less than $1 per day. It is time for the country to have a conversation on replacing its oppressive institutions with inclusive ones. This is the only way Nigerians can have not just their human rights protected, but also their economic fortunes improved.

Cheta Nwanze is Lead Partner, SBM Intelligence