Our firm Olisa Agbakoba Legal (OAL) and BusinessDay Newspapers co-presented the LEGAL POLICY DIALOGUE in 2014. The forum was a strategic partnership that highlighted the impact of the law on economic development and investment by the two sector leaders in law and business reporting.
Waking Up Dead Capital in Nigeria: The Business Case
At the center of our discussion was the assertion by Economists and Development Law experts that Law plays an important role in economic reforms and development outcomes. This was in recognition of the fact that certain legal and institutional frameworks are particularly conducive and enable economic growth.
The need to focus on these institutional and legal frameworks stems from what Amartya Sen had described as the need to “adopt a broad and many-sided approach to development…” Some of these has been noted to include well defined and alienable private property rights; a formal system of contract law that facilitates impersonal credit process; a corporate law regime that facilitates the capital investment function; a bankruptcy regime that induces the exit of inefficient firms and rapid redeployment of their assets to higher valued uses; and a non-punitive, non-distortionary tax regime hold the key to effective economic reform.
This is the conceptual basis of development law. This concept is far less appreciated in developing countries and has contributed to the low space in economic development actualization.
Overview of the Theme:
In his masterpiece book “The Mystery of Capital”, Hernando De Soto gives credence to the notion that law is crucial to economic development and asserts that development law can be a very powerful tool for development planning and economic reform.
De Soto links economic failure in the third world and post-communist nations to legal failure in particular of property systems and the informal sector. According to Margaret Thatcher, “The Mystery of Capital” has the potential to create a new, enormously beneficial revolution, for it addresses the single greatest source of failure in the Third World and ex-communist countries — the lack of a rule of law that upholds private property and provides a framework for enterprise.” A summary of the interplay between law and Economic Development;
Critical Areas We Reviewed:
Again 70% of money circulates outside the banking system. So it is important to use new legal tools to integrate formal and informal banking. It is difficult to envisage how economic policy will do this all by itself. A Legal framework is required to drive money into the formal system.
De soto gives a very striking example of law as a key primer of development and used property law as illustration. Property consists of two values, physical and conceptual. The physical value may be fixed in say, a house. The abstract or conceptual value is fixed in property law systems.
In developed nations, property law allows owners of housing, to represent their value in the conceptual realm. This possibility allows easy access to credit that in turn generates capital for development. In Nigeria with a very weak legal regime, a conceptual representation of property to create value is missing. Yet the housing asset inventory of Nigerian property exceeds six trillion Dollars. If the value of property is indexed to the banking system by massive legal reform of the property system, we can create an instant credit market in excess of our gross national domestic product multiplied by a thousand times — money will be then available to finance development.
Thailand Example of Property Law
Thailand is an example of how land administration reforms can add enormous value to capital creation especially for the poor. In 1982 the Thai government began a 20- year project to title and register farmland throughout the kingdom. The aim of this was to Enhance farmers’ access to institutional credit and increase their productivity by giving them an incentive to make long-term investments. Just over 8.5 million titles were issued during the life of the project. Along with those issued outside the project, the number of registered titles increased from 4.5 million in 1984 to just over 18 million by September 2001. Studies conducted during the project showed that it met both its objectives: titled farmers secured larger loans on better terms than untitled farmers, and productivity on titled parcels rose appreciably.
Our key constraints to development include poor security, extremely weak commercial judicial systems, a generally weak legal system, impunity, corruption and an unviable regulatory framework. These may be described as economic constraints. No economic policy will remove these constraints. But it is development law that can help remove constraints of no mortgage systems in Nigeria, by the repeal or amendment of the Land Use Act and erection of a new law on property.
This should clearly identify owners of title deeds and allow easy transfers on property exchanges — the so-called notion of fungibility. De Soto’s book on development law was published to critical acclaim and is widely viewed as one of the most important contributions to development issues of all time. Milton Friedman, Nobel Laureate in Economics says that De Soto has demonstrated in practice that titling hitherto untitled assets are an extremely effective way to promote the economic development of society as a whole. A thriving market economy with an active role for the private sector is all that it takes for economies to develop. This is certainly the time to rethink our economic policy and include development law.
The Potential of the Untapped Informal Sector
This is about Small Businesses and Enterprises including industries. The size of the Informal Sector (IS) in Nigeria is estimated at over 80% of the overall business. The Informal Sector is largely ‘underground’ contributing nothing to development. The informal sector operates below the legal radar hidden from regulation, tax and fiscal control. This is due to the cumbersome and expensive registration process.
The burden of government on the Informal Sector is crushing e.g Programme Information Licensing and Taxation. These are bottlenecks that drive small business underground. The impact of the “informal sector” on economic reform and development is potentially massive but first needs to be ‘captured’ and brought to the “formal sector”. Only Law can do this.
The Legal and Justice Sector:
This involves Legal Systems and The Courts. The Legal System is a set of CODIFIED laws that govern the affairs of a state- for example, the Laws of the Federation of Nigeria (LFN) or Laws of a State. Rules of court are the software that facilitates speedy resolution of disputes. The quality of business regulation comprised in the Laws and the legal institutions that enforce it are major ‘determinant of development. Outdated laws and Rules of Court constitute a major constraint to development.
Private Sector Participation in Development:
This relates to the Private-Public Sector Partnership and Privatization. The government cannot fund all development projects. Private sector funds are crucial. Law enables private-public sector initiatives covering issues like BOT (Build Own Transfer), LOT (Lease Operate Transfer), and Concessions etc. These have become development alternatives. Legislation in this field is urgent. Privatization is another viable developmental tool. We need legislation so that Government can divest from the private sector. Privatization is one of the 3 key strategies of the NEEDS document.
2014 – 2019: How Far Have We Come?
We have not come very far in terms of “waking up dead capital in Nigeria”. A recent report by PricewaterhouseCoopers Limited (PwC) reveals that the country is under-performing and needs to unlock as much as $900bn worth of dead capital to increase economic activities and stimulate growth. The major challenge identified is the need for a transformational agenda to be put in place to implement Development Law policies.