The stimulus for the idea of a session on the role of government in society came from the session where I presented my book. That session eventually devolved into a fierce debate about what are the proper limits of the government’s role in society with you forcefully arguing that its role should not go beyond ensuring the peace and security of the state and though you didn’t say this, you would probably agree to the enforcement of contracts in addition to ensuring peace and security, with you specifically stating it had no place being an economic actor and even managing schools, citing our fintech sector and education (I am guessing higher education) in America.
I personally feel your choices of internet-fueled economic activity and higher education (in fact education in general but in terms of statistical data I shall only be concentrating on higher education) are mistaken but before I go into that I would like to make a general point. There is no country in the world today whose government has no role beyond providing security and the enforcement of contracts, in other words, a purely free-market system. The last time anybody probably had a free-market system was 1920s America. That is almost a 100 years ago. That system ended with the onset of the Great Depression in the 1930s. From that point on till present, governments around the world, including the US and UK, the world’s most market-friendly nations, have thought it necessary to actively intervene in the workings of the economy despite the free-market gospel they constantly preach. Businessmen world over may bicker about this but there is little to suggest that the world has any plans to return to a purely free-system similar to what obtained in the 1920s. By the way, those same businessmen don’t mind government intervention when it comes to subsidies and bailouts.
Having got that out of the way, I would like show how our fintech sector is just reaping the rewards from the years of investment made by the US government in building the underlying internet architecture without which, there would be no fintech sector anywhere let alone Nigeria and also how mistaken your notion of US government’s non-involvement in higher education is. To buttress the fact about the US’ government’s critical role in pioneering major technologies, I point out how Apple, arguably the most prominent symbol of corporate innovation was dependent on the US government and university labs for many of the breakthrough technologies embedded in its iconic product, the IPhone (and IPod).
The internet was a project started in the 1960s by a U.S government agency known as the Defense Advanced Research Projects Agency (DARPA) (The same DARPA originated many of the technologies that found its way into the Personal Computer but that is another story). The impetus for the project was to build a communications network that could withstand a nuclear attack. To achieve that it was decided that the network should have a distributed design. By distributed, I mean that there is no main processing node on the network functioning as the brain that sends information to the computers (as opposed to being distributed, this kind of network is known as the client-server model). With it being distributed, even if a nuclear attack were to take out part of the network, the rest of the network could continue to function.
While one small but highly innovative company called BBN won a competitive tender to build a crucial piece of equipment, a tender that IBM declined to take part in because it thought it was impossible to build to the specifications asked for; AT&T, the telecom giant was even worse because it was positively hostile to a key concept needed to make the internet work at scale because it thought the concept threatened the business, the vast majority of the intellectual work in conceptualizing the internet, in designing the underlying architecture and actually building the protocols to actually transport data around the internet was done by government and university scientists. This would be the pattern for over 2 decades, during which funding required for continuous development was provided by government sources. It was only from 1992-1995 that companies would begin to get involved en masse with the internet and this was mainly because of the development of the World Wide Web. You should note that the internet and the web are not strictly the same thing, though the two terms are used interchangeably mainly because since the development of the web in 1991, the two have grown together. Strictly speaking the internet is a text-based network such that in order to navigate it, you will need to have a firm grasp of sophisticated UNIX commands (UNIX is a mostly text based operating system favoured by engineers and scientists over graphical operating systems like Windows). The web was built by Tim Berners Lee, an employee of European intergovernmental experimental physics research lab known as CERN. He designed the markup language for designing web pages, Hyper Text Markup Language (HTML), the protocol for locating web pages on the web, Hyper Text Transport Protocol (HTTP) and the world’s first browser. Now the browser built by Tim Berners Lee wasn’t particularly user-friendly. Lee had envisioned the web as an academic research tool so it didn’t support images and only read one line of text at a time. Quite a number of people/groups would try and improve on his browser. One of them was a computer science student doing research at a research center called the National Center for Supercomputing Applications (NCSA) at the University of Illinois, Urbana-Champaign. His name was Marc Andreesen. He and a fellow researcher would build a browser called Mosaic that did support images. He did this as a result of feedback he was getting by spending a lot of time in internet chatrooms so he was highly attuned to what users wanted. Andreesen had an entrepreneurial itch, so he would eventually join hands with legendary tech entrepreneur Jim Clark to build the world’s first massively adopted commercial browser called Netscape Navigator. It was from this point companies started getting onto the internet bandwagon in droves and the internet started to resemble what we have today.
I had said earlier that I was going to discuss how the IPhone (and IPod) was crucially dependent on a number of technologies developed in government and university labs. What Apple mostly did was integrate these technologies into one slick package (an admirable feat in itself). Some of the technologies of which the IPhone is dependent on that were built in government or university labs include the internet just discussed, Global Positioning Systems (GPS), touch-screen displays, giant magnetoresistance (GMR. I don’t want to go into the details of this, it is needlessly technical. Just note it was crucial to enabling the IPod store so much digital content. This breakthrough was also important to other hard disk makers like IBM and Seagate), Liquid Crystal Displays (LCD), lithium-ion battery technology, SIRI the ‘virtual office assistant’, cellular communication technology etc. While the microchips that make the IPhone smart were built by private companies, most of them went from shaky start-ups to stable corporate giants by feasting on contracts from government agencies like the US Airforce and the National Aeronautics and Space Agency (NASA). Finally, government industrial policies have helped ensure companies like Apple have survived through good and bad times. Much of what I said in relation to the internet, the US has done or is doing in other industries like aerospace, clean energy, nanotechnology etc. You might argue that much of this does not apply to Nigeria since we don’t carry out such research intensive economic activities. Well, we should. That is where the wealth we are all clamoring for will come from and not doing so is what keeps us mired in poverty. Besides, such government activity will be no less important for the more mundane but no less important manufacturing sectors that need rejuvenation like textiles (which was once the 2nd largest employer after agriculture), paper production, leather products etc.
Now that we are done with the issue of the internet, let us face public schooling. Most nations understand how critical education is for effective citizenship, America is no different, in fact it has to be considered a leader in that regard, with much of the rest of the world emulating it, including ourselves.
America’s founding fathers, back in the 18th century, understood that preserving their fragile democracy would require an educated population that could understand political and social issues and would participate in civic life, vote wisely, protect their rights and freedoms, and resist tyrants and demagogues. To that end, they knew that instituting a formal system of public schooling was necessary and they went ahead to do just that. I will spare you the details of the evolution of their public school system but I will share with you some facts about American tertiary education (I am leaving out the lower levels. That would be too unwieldy) as it stands today.
America has at least 682 public universities affiliated with the various states. It also has about 1,462 community colleges (sometimes referred to as junior colleges) of which 1,047 are public and 415 are private. It also has 29 public liberal arts colleges. Liberal arts colleges tend to be small and private. The private ones number more than 650. There are about 1,687 private, non-profit schools (The likes of Harvard, Stanford are here). The private liberal arts colleges are included in this number. There are about 685 for-profit universities. In all, the US has over 1,700 public institutions of higher learning.
One interesting but not very important fact, I share it just for enlightenment and amusement. In terms of reputation and prestige, the private, non-profit schools are generally the most prestigious. Like I said this is where you have Harvard, Princeton, Yale, Stanford, Cornell and others. Next in terms of prestige are the state public universities. Some of them are as well regarded as the likes of Harvard. Examples would be University of California at Berkeley and University of Michigan (Barack Obama’s younger daughter chose to attend University of Michigan unlike her elder sister who chose Harvard). The private, for profit universities are generally not esteemed. It is widely believed that anybody who chooses to attend these schools is academically deficient and does not have what it takes to survive at a private, non-profit school or at a public university (Most public universities are state universities. Very few public federal universities exist in the US). They are disparagingly referred to as “diploma mills”. George Weah attended one of these diploma mills before he became president (Disclaimer: I am a fan of George Weah. Just noting that he went to one of these schools). Not sure where the community colleges rank but definitely, they will be after the private non-profits and the public state universities.
This topic about government’s proper role in the workings of society is a critical one that has been taking place the world over for at least a few centuries now. The popularity of the view you hold has been responsible for the waves of privatization in recent decades. Free marketers often make it seem like it is the only logical choice but sober reflection from others suggests a more complicated picture. I would like to highlight some insights have come out from this more nuanced discussion about the privatization of State Owned Enterprises (SOEs).
Much of the free marketers’ case against SOEs (And I admit that there is a lot of truth in it) is what is known in the economic literature as the principal-agent problem. Here the principals being the citizenry have elected bureaucrats (the agents) to manage SOEs in the principals’ best interest but the problem is linking the pay of public bureaucrats to the profitability of SOEs is an incentive system that is notoriously difficult to design. Moreover, individual citizens are not incentivized to monitor the SOEs because the costs will be borne by them alone while the benefits will be shared by everybody. An associated problem is the soft-budget constraint problem: Being a part of the government, the argument goes, SOEs are often able to secure additional finances from the government if they make losses or are threatened with bankruptcy, which could lead to lax management.
Now it has been noticed that despite the threat of market discipline, these problems occur as well in large private sector companies to a significant extent.
Most large private sector companies are managed by hired managers because they have dispersed share ownership. If a private enterprise is run by hired managers and there are numerous shareholders owning only small fractions of the company, it will suffer from the same problems as state-owned enterprises. The hired managers (like their SOE counterparts) will also have no incentive to put in more than sub-optimal levels of effort (the principal-agent problem), while individual shareholders will not have enough incentive to monitor the hired managers just like with SOEs.
In addition, politically important, large private companies often get bail-outs from government (e.g in Nigeria, banks, gencos/discos. Global examples include defense contractors, large companies in the finance, automotive and aerospace industries). In other words, there is the private company version of the soft budget constraint problem. To take the example of Nigerian banks, CBN is reputed to have spent over N3 trillion in 8 years between 2009 and 2017, in the wake of the Global Financial Crises of 2008 to stabilize the financial sector. Conversely SOEs are not totally immune to market forces. Many SOEs around the world have been shut down and their managers sacked because of bad performance. For example, during China’s market reform period between 1978 and 2006, lots of new entrepreneurs were allowed to compete against many SOEs and the SOEs that couldn’t compete were allowed to fail.
Furthermore, there are examples of first class SOEs so it is not inevitable that SOEs will be poorly run. Examples include Singapore Airlines, EMBRAER from Brazil, which is the third largest aircraft maker after Boeing and Airbus. Though it is privatized now, it achieved world class status under state ownership. Petrobras, the Brazilian state owned oil company is also world class. Locally, I would add NAFDAC under Dora Akunyuli was well run.
Economic theory shows that there are circumstances under which public enterprises are superior to private-sector firms. This happens when a project has clear long-term viability but private capital refuses to get involved because the short term risks are large. An example is the internet described above and this is often the case when spawning new industries that are capital-intensive. A good current example would be the renewable energy industry.
The 1980s to the early 2000s saw a wave of privatization across Africa, the results of which appear to have been mixed. No doubt there have been some stunning successes like the privatization of telecoms by Obasanjo. There have also been terrible failures, like privatization of our paper mills. I don’t want to make this document longer than it is already but there are enough examples on both sides to show that privatization is not a straightforward no-brainer.
I took the time to write this document because like we previously discussed, I am hoping this will become the basis of a zoom session. Also since this idea is a critical response to statements you made in the zoom session about my book, I thought it would be only fair that you get advanced warning.
If the zoom session goes well, then I think we can go on and plan the conference you suggested. Then you would be able to invite relevant dignitaries from government, academia and the private sector and have a round-table discussion on the issue.
Please do not give this to David to post. The tone of this document makes it clear that this is a private discussion between me and you. I will convert this to a post at the appropriate time. I also have other ideas for zoom sessions. For instance, I plan to do one on public policy and another on institutions.