Ideas Untrapped

I had an interesting conversation with Eloho Gihan-Mbelu who is the MD/CEO of Endeavor Nigeria. Endeavor not only funds, but also provides advisory and networks services to high-growth companies. Eloho is a private equity investor with decades of experience, and her wisdom shone through this conversation. Many thanks to her for speaking to me.

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Transcript

Tobi: Hi and I am on today with Eloho Gihan-Mbelu, the Managing Director and CEO of Endeavor Nigeria. You're welcome.

Eloho: Hi Tobi. Thank you for having me.

Tobi: The way I think about this now is that, whether we like it or not, going forward, there will always be a pre-Covid and a post-Covid world. Either socially or otherwise. What I want to know is - recovery, going forward. Adapting. What is the most important node in getting things back to the new normal? Is it government interventions? Is it investors, or the adaptability of businesses? What are your views on that?

Eloho: I think this sort of pre-and-post Covid type dynamic, the reality is post-Covid is not post-lockdown. Post-Covid is post recovery and so we will only really be able to assess the impact of post-Covid in another, by all indications, if we're lucky, depending on the pace of the recovery, maybe 18 to 24 months' time. Because what Covid has done is it has triggered this... you know, we now have two crises, right? There's the immediate health crisis which some countries are coming out of, we are still sort of trying to manage and navigate a little bit here and then, of course, there's a broader economic crisis that Covid was the catalyst for. So in terms of just what post-Covid means first of all - it's today, and it's 18 months' time. I think the element then with regards to what that recovery looks like or could look like and what the biggest influencers could be - whether it's government, whether like you say its investors and whether it's the companies themselves. I think the elements play against each other.

The first is on the company side, I think there are [a] certain profile of companies that will have a higher likelihood of survivability through the crisis to get to that post-Covid world. I think the easy way to look at that on almost, there are certain sectors that will tend to sort of be a little bit more resilient, I think that's true, there are some which are much harder hit, that's also true. But I also think within the companies themselves there are all kinds of individual questions and dynamics and criteria that will mean that a certain profile of company survives. So the companies that survive will be the companies, very simplistically, that have the most cash in the bank so they are able to almost sort of hunker down and navigate the crisis and wait for it to play its way through. I think it will also be those founders who are you able to adjust their companies to thrive, who are you able to potentially have capital structures and profitabilities that allow them to respond very very quickly.

It will also be the ones that are able to spot trends and spot trend waves that their companies can ride to get to the end of the crisis. It will be the ones who have taken the time to get the right investors behind them, if they had that opportunity to begin with - investors who are experienced, who have a deeper pocket and are able to...and the one who have been better performers, I guess, historically as well...so they are able to count a little bit on that as investors support as they go through [the crisis]. That's on the entrepreneur's side. I think on the Investor's side, then a couple of things also - people who have the capital support the companies through the crisis. But of course, investors are not going to necessarily protect or support companies that are not doing well through the crisis. I will actually expand that investor bracket to say... to my mind, it's really a private sector bucket and that we can talk a bit more about it later if you want. I think there are so many different actors within the private sector that should be part of and helping to define that post-Covid future, whether they are philanthropic organisations, whether they are investors but not necessarily funds. Whether they are family offices, whether they are commercial banks and lenders, I think the toolkits around what that support for the innovation sector should look like relies on all of these different players playing different roles to meet the needs of startups and scale-ups and SMEs through this crisis. And then finally, the government, I will say... I really view the role of the government as a galvanizer of capital.

The role of government as helping to organise this different actors and players, but really taking a step back and letting the private sector do what it does best which is allocate capital to the companies that are likely to have the strongest and the most robust responses through the crisis. Because I think we must also be careful that in a scenario where there is limited resources, limited capital and we're under a bit of time pressure to make sure that we're able to navigate to the recovery quickly, I think we must be careful...this not really a time, frankly, to worry about things like mass programs etcetera etcetera. I would much more prefer a response that is targeted and focused on making sure... of course, there are issues with the way that capital sometimes is declared in Nigeria under these public sector programs ...but in ways that are making sure that the best founders with the highest chances of surviving and the highest chances of driving returns with the capital that they will have access to are the ones that get access to the capital. And we're not funding businesses that probably would not have...before, the crisis was one more thing but they were probably not financially healthy propositions before. I think those are how I will view those three things playing in terms of what the post-world could look like and what the different roles could be.

Tobi: If I'm a founder or a business owner, I'm thinking one of the dilemmas I would be facing if I make it through this crisis, going forward, is to build some resilience into my business model and how my organisation is structured and at the same time, I would be looking at some form of future growth.

Eloho: Sure.

Tobi: So, how can businesses balance those two things going forward?

Eloho: I think the most important thing is surviving. The most important thing is not taking your eye off the ball so that you have business at the end of it that you can then...I'm not saying you necessarily only at that time think about growth, but the business should grow, right? There's nothing to grow if you've taken your eyes off the business because you're focused on revenue opportunities that may not necessarily be that immediate and that actionable. I think that the way that we have tried to advise some of our founders to think about it is: first of all, to just sort of batten the hatches, secure the business that you have today, create a war room, know what your sort of critical scenarios look like, know what your critical responses are going to look like so that you're not making last-minute decisions, emotional decisions as the crisis kind of unfolds - there's a bunch of unknowns, and you'll be hit by a range of unknowns. But I think you are able to sort of think about the kinds of triggers they would sort of provoke certain responses as you go through. And then, once that happens, I think it creates a little bit of flexibility for you to then be creative I think about what the future could look like. Creative around "okay, so, where have I seen..." in the stark case, for example, of a full lockdown "where have I seen vulnerabilities in my business model?" The vulnerabilities might come through the fact that, for example, I'm only selling through one particular channel which might be more of a physical channel, and if you accept that we are going into a world where...I am not a full believer that we're going into this zero-touch models, especially not in Nigeria, but I do think that you will find that we are lower touch for a while, but also that we might have finally seen that big boost to a digitisation change that we been waiting for for a while and that in and of itself create opportunities. So I think having the bandwidth to take a step back and say "okay, so how can I take advantage of these opportunities, how do I access the vulnerabilities that my business has exposed, through the crisis, and how do I then respond to those opportunities?"

I think the third thing I would say in terms of, again, being ready to respond and being ready to grow is there's a lot of people at the moment that are cutting back assets, they're liquidating assets or they're cutting back on investment spend. They're not spending on marketing, they're letting some of the people go...taking all kinds of actions in response to the advice to shore up capital. I think it's a fine line, but the entrepreneurs are going to have to find where that line lies between taking all the right prudent actions to make sure that there is a business that survives but also then making sure that you've not cut so far and so deep that when the recovery comes you have to spend so much time reinvesting in these things. So if, for example, you are a consumer-facing business that, of course, the brand in and of itself is a major asset, then investing nothing in that brand for the next 12 to 18 months because you take the view that "marketing spend is discretionary, and I have a core base of customers that are doing work with me or transacting with me, I just need to sort of maintain that level" may not be the most prudent thing. If you're a business that has... I don't know, you have a sales team, for example... and you've potentially cut that too far and you also have a sales team that if you brought new people on you would have to sort of spend quite a bit of time training, it means that you probably want to be a little bit careful, one: who you even let go. Two, careful that you're timing your recovery right so that you are able to bring them back.

So I think that's the way I would think about it. I would think about securing the business that you have today, creating a war room - having a set of decisions (having a playbook around how you make decisions through the crisis) and then creating a recovery kind of response and scenario where you say "here are the different assets that I need to sort of keep productive or I need to be able to quickly and readily turn on when that recovery starts to come. And it's a little thing. It's in the way that you even engage... if you have to let people go, it's the way you engage with them through that process. That's the difference between, for example, being able to quickly call on some of your lieutenants and say "look, I can offer you another job back if you want it" for example, versus having burnt a bunch of those bridges. And I think as that business owner that you described at the top of the conversation, I think that's the difference between surviving through the crisis and I would say thriving in the post-recovery.

Tobi: If I ask you to construct an opportunity profile for companies and some industries, and please, be specific if you want to... so what would the picture look like for thriving through this crisis? Is that even possible or are we stuck in some kind of medium to long-term risk management/survival mode?

Eloho: I think, to begin with, there are a couple of industries that...so not everybody has done badly. So the picture is not all bad. I think that there are some industries that are benefitting through a crisis like this. Businesses that are built digital first - I think that's the first factor that separates a couple of businesses and I think you are finding that, for example, businesses that addressed people's healthcare needs, mental health needs, but are doing them virtually, digitally, are actually doing relatively well through this crisis. Businesses that are providing critical equipment and infrastructure through the crisis are doing relatively well. Businesses that are helping people to educate their kids whilst they are at home through this crisis, like to say post lockdown into this lower touch world, those ones are doing relatively well broadly as a category. I think businesses that are allowing...we all know the Zoom story, right? The crazy growth numbers that are [indinstinct words] through this crisis. But businesses that are also helping teams to be more productive are doing super well. In more traditional sectors, businesses that have been able to pivot very quickly to switching on digital channels - for example in places like food and groceries retail have actually fared better than the alternative which is businesses that were not able to turn on or open up some of those channels as quickly. There are examples of that happening and I hope those are specific enough.

The second part of your question is how does one thrive rather than just survive through it, and I certainly don't want to paint a picture and sort of be glib in suggesting that, you know, just thrive through the crisis and therefore it must be relatively easy but I think this is really where the mettle of entrepreneurs really gets tested. I think that we will also see, of course, businesses that are built through this crisis, in response to the opportunities that open up by virtue of the crisis. But the thriving point is a little bit of an alchemy of a bunch of things - It's an alchemy of the business model that you had to begin with, it's an alchemy of those things that I talked about before around...in the response, what are those critical assets that you preserve and you maintain and you keep warm so that you can turn some things back on relatively quickly. It's also an alchemy of the investors and the advisors that you have around you. So from the investor perspective, especially if you're a portfolio company that has done well through the crisis, that has historically performed well for your investors, you have a good relationship with them etcetera, you're more likely to find that you are funded through to the crisis by your existing investors. There's also something around the mentors and the networks that you have around you and your ability to rely on all those and apply course learnings and look for advice and things like that. I think that's really, ultimately, what will help a bunch of founders not just survive but thrive.

I think the last piece that I don't want to sort of underestimate its importance is tied to that investor point but it's not necessarily related to investors. So the point I made, again, about the role of the organised private sector should play into stepping in at a time like this. I think liquidity becomes critical. I think that this is when we should see and we're seeing it in other parts of the world but I think particularly in an environment like Nigeria (where the government is under fiscal pressure, we all know the story), I think this is when I would love to see for example a Covid fund...but for the innovation sector - that is focused on startups and scale-ups. Designed to deploy different kinds of instruments into these businesses, but the ones that you can genuinely access and say the direct impact on this business has been due to the Covid. It has some great founders behind it, the underlying business model is fundamentally sound, but they need some short term liquidity or medium-term liquidity support. Or they need a bridge to their next major equity round. How do we do that? This is also when you should see, I believe, grant structures being created or grants being created or grant programs being created for some of these other businesses as well. And I really genuinely believe that that is a role for the private sector. Like I said at the beginning of the chat, I think that government should play an organising role, perhaps. Government should help to galvanise capital into the innovation sector in Nigeria. Government should help to create a conducive investment environment etcetera, but the actual capital and the allocation of capital should be done by the private sector, they have deeper pockets anyway as a collective.

Tobi: Yeah, yeah, thanks for that. Moving away from that a bit, one distinction I encounter often is social versus market ventures. Well, it's usually not put that starkly...

Both grinning

Tobi: But yeah, so is that a helpful distinction? Is it even a real distinction and what are the differences, if any?

Eloho: I think that it's not a new distinction. I think fundamentally you're talking about for-profit businesses or pure for-profit businesses versus what I think today people think about as double or triple-bottom-line businesses. So that's on the social impact side where, of course, you want to run the business sustainably but you're not driven by pure profit motive and you have a bunch of other goals around environmental, around social impact, typically [a] sort of bottom of the pyramid or addressing under-represented or unrepresented segments in whatever your area of focus is versus a business that is being run purely for-profit and I want to maximize my shareholder value, I want to give a great return to my investors and I want to walk away as a nice happy rich entrepreneur myself. So I don't think that's a new distinction. I'm not sure, are you asking me which I think is better?

Tobi: No, not really. I'm just asking what really are the distinctions because to my mind, even triple or double bottom-line businesses like you said still need a profit formula, so I'm not...

Eloho: They need sustainability, I agree with you. But I think they don't need to maximize their profits. So, it might be the difference between me setting a margin on my business, a gross margin, I don't know...a fifty percent gross margin versus a twenty percent gross margin. If I'm a profit maximiser and I have space to drive a greater per-unit profit on whatever it is I'm selling or better unit economics on whatever it is I'm selling, then I will do that. But as a double or triple-bottom-line business, I might look at it and say "well, if I'm able to sell this thing at a lower price to people in certain segments then...I'm also tracking things like access, I'm also tracking things like the number of people that came in touch with our product because there's a greater good or there's a social good that I viewed as part of that product or that service. I think that's fundamentally it, but I agree with you that I think at their core, that both of those businesses, but certainly the social impact business needs to be profitable, otherwise it's not sustainable. And to be fair to a lot of the very successful social impact entrepreneurs, I don't think that the ones that you and I admire from afar, people who are not running their businesses as sustainable propositions, right? I think they're very aware of the fact that the businesses ultimately need to be sustainable, they're just not so worried about necessarily delivering a maximum [return] to their investors. And in fairness to them, their investors are not invested in them for that reason either. Their investors have a bunch of other metrics as well as the financial return that they track.

Tobi: Looking at the African startup ecosystem now, I don't want to generalize to all markets and, of course, all markets have their unique challenges and context but looking at the African startup ecosystem generally, there is a common problem - which is, public goods, policy, and the overall business environment. Now, do you think that African startups can really leapfrog some of these challenges or we are just ahead of our time so to speak? Because, here is what I have in mind...if you look at China I think the startup ecosystem, for example, started growing and started getting a lot of traction when the economy itself has already gotten some mileage in terms of overall economic growth, but when you look at Africa, of course, we have diverse policy environment that but the general growth environment is poor. So are startup ecosystems in Africa ahead of their time and is there hope on the horizon?

Eloho: I think that your question even in the way it's phrased paints a very dismal picture when you say "is there hope on the horizon?" [indinstinct words] looks like there is gloom and doom which I don't believe that there is. I think the first thing I would say is there's always a counter-narrative, right? So you talk about a low-growth environment and the second you say that, to me... I think about, for example, Endeavor companies in Argentina in the worst of their economic crisis - double-digit inflation, negative GDP growth year-on-year that were counter-cyclical in that they were growing very quickly, they were generating jobs. I think in the data, there's something like about six of the first companies that we selected or eight of them...Between them, I think over something like maybe a 5-year period created 20,000 jobs at the time when low-growth environment etcetera. So it does happen. We've seen it happen, of course... in Nigeria, we've seen examples of periods when broadly the narrative is not exactly exciting or encouraging, but you see spots, bright spots of success. So I don't think it's all doom and gloom. Now, the question of what do I think the role of the government is which is where I think you started. You said that even, for example, in China, the government sort of created that enabling environment and there was growth, and then on top of that the Chinese, I guess, e-commerce or tech consumers are able to build their company on top of it. 

I certainly think you're on to something. I think that it's important that there is a layer of... there's a conducive layer. I think that conducive layer has elements to it. It has hard infrastructural elements depending on what it is you're trying to do, it has software infrastructural elements and the touch on things like policy. But I also think that the beauty of being part of an ecosystem that is increasingly organised, increasingly advocating, increasingly influential is that you don't necessarily need to wait for those things to have happened, you can put those things in place and be a part of pushing for those things as you build. And I think that's why it's so important that you have organisations like CC-Hub etcetera, but you also have organisations like Endeavor at the scale-up stage that are focused on making sure that the ecosystem works. That then means that you can always put on a policy hat and say "what should we be doing, for example, through this Covid-19 crisis and then how do we then use the networks and the influence that we had to make sure that the right actions are being taken and the right conversations are being had, and the right voices are being heard where those conversations are being had?" So I don't think you necessarily have to weight one for the other, I don't think you need to have a perfect environment to build. But like I said I think that there are some enabling infrastructures and the great thing about the way we think about this organised ecosystem-type entrepreneurship at least today, not just in Nigeria, in many other parts of the world including silicon valley is that the ecosystem itself is a driver of change towards those infrastructure needs. The companies themselves sometimes can be the solutions that bring in...or can provide the solutions or build the solutions or iterate around solutions that solve some of these harder infrastructural challenge. The quick answer to the first question - which is can you leapfrog? - is that I don't believe...I've never believed in this leapfrog theory, I've always found it a little bit silly. I think that what would happen is you potentially just sort of accelerate a little bit faster to creating the layers around which other things get built. And I think the classic example is a fact that we cannot leapfrog is when 8 years ago, we were all talking about e-commerce in Nigeria and it was always a very difficult story to sort of close the loop on because I remember I would always ask people "have you ever ordered anything from Jumia? It was 8 years ago, and they would say 'yes'". Well, some people will say yes. 

To be honest, a lot of people would say "no, I've never used it." So I could never quite understand this thing that was meant to be exploding but beyond that, people who did say yes, I'll say "well, what was your experience?" and I've never heard a story about it being delivered on time and I don't think that was Jumia per se, I think it was just really the fact that we had these core infrastructural challenges around which we were trying to bring build certain things on top of. I remember trying to do, at the time, diligence on a couple of these companies and the question around cash on delivery was always a big one of course and that comes with all kinds of issues. It comes with massive return rates, it comes with security issues and cost on top of that. So it's really really hard to build and to build profitably when the foundational elements are not done. The other side of that story though is to think about what's happening in fintech today. And think about the fact that a company like Interswitch and others as well, but I think the most prominent one that we will all be aware of is Interswitch - Mitchell Elegbe has built that business over 17 years. And a lot of what he has done has been to build the infrastructure and the layer on which a lot of companies are building today. I don't think he necessarily thought to himself when he started “I am going to build the rails and build the infrastructure under which great companies like Flutterwave and Carbon and PayStack and Mines and the like are going to be built on top of in 17 years' time. But I think at some point he was probably aware of the fact that “we kind of have to lay the infrastructure here”, and I think that's what the entrepreneurs that you and I, again, probably get the most excited about - I think there is that level of consciousness around what they’re doing. So in as much as often, their businesses are for-profit, I think their missions are always bigger than themselves and are always bigger than the exit story in necessarily. Those are the entrepreneurs that excite me the most, those are the entrepreneurs we get the most excited about at Endeavor, the ones whose broad missions are around things like building sustainable models in their local ecosystems, and galvanizing multiplier effect and paying it forward and those big galvanizing missions and stories are the ones that tend to end up building the infrastructure on top of which the next generation of companies come. 

Tobi: Yeah...sorry if I'm being gloomy in my picture...

Laughs

Tobi: But here's a bit of what I have in mind...great point about Latin America but when you look at countries like Argentina, Brazil and co. and here is what I have in mind - these are countries that are middle-income economically. These are countries that are averaging between six to ten thousand dollars in per capita income. Yeah, they may be having slow growth and there's always problem in the policy arena, public finance that regularly distress some of these economies but the market, the nature of the market is really different. These are countries that are a third or a fourth bigger than even the richest economy in Africa and even the infrastructure environment is different. I don't wanna use the word better, but different. So what I'm saying is...I'm not saying it's impossible but what I'm saying is given the nature of the investment effort, are we going to see the explosion in that startup ecosystem space in terms of growth? Or are we going to see anytime soon or a lot of these things...

Eloho: I think you’ve used the example of Latin America.

Tobi: Yeah.

Eloho: I think you used the example of Latin America but you’ve ignored the example of SouthEast Asia.

Tobi: Okay.

Eloho: So, yes...GDP per capita is slightly higher than in some of our African countries but by no means are countries like Vietnam high-income countries and you have some really really interesting high growth businesses being built there and you have really really compelling flows of capital into those businesses and into those founders. I think that where it really gets interesting is on the digital play when there is a digital adoption story and when there is an access story around it. But for example, I don't know that you need a high...well, I think you're probably right to a certain extent, but I don't know that you need a middle-income country’s level of GDP per capita to be able to build a lending business sustainably...a digital lending business sustainably in Nigeria, for example, you probably need the opposite to a certain extent. So I think it depends [on] what you talking about, I think it depends [on] what sectors, things like that but I certainly don't think that it cannot be done. I'm not a big big fan of the narrative that Nigerians are too poor to build a business around them. It's not tech but one of my favourite stories and I know this one of the stories that a lot of our entrepreneurs in Endeavor actually really like. It is the story of what Promasidor has done or did in the FMCG sector. So they have lots of dairy products things like that and they basically went on a whole new strategy with their distribution and their sales, whereby they were basically distributing in product sizes at price points that were accessible and affordable for the bulk of Nigerians. It was not people sitting in Lagos, but it was distributed all over the nation, in environments that are much lower GDP per capita at the sub-national level than we have even in Lagos and did that successfully.

I think it comes down to a business model fundamentally. I think there are certain businesses that you will struggle to get the unit cost of what you're trying to do so low that you're able to scale it profitably, and I think that's fundamentally some of the issues that e-commerce face in Nigeria - that the unit economics fundamentally just didn't work because it was just so expensive and so hard to ultimately get the product to the end customer and people were often doing things like...and I think some of the blame also potentially lies with some of the companies themselves but people were doing things like they were only going to the e-commerce businesses to buy for their phones. And the phones, because these companies were competing with each other for customers and for growth, the margins on those 3C units...so whether it was phones, whether it was whatever else but typically phones...were so thin, sometimes even negative that of course, you're not going to drive any kind of profitability off that sale but the idea was that I'll bring you onto the platform as a customer and you will come back and you buy other things. I don't think there's any escaping the question or need to sort of build a business fundamentally profitably, but I also don't believe that because Nigerians are poor then we’re not able to do it. I think if you also take a step back and really think about what we're talking about, we are so early in this journey towards finding the sustainable business model. Because like I said to you when we started, from my perspective, it's in the last 10 years that the potential of entrepreneurship to really fundamentally shift our regional economies, for example, in Nigeria has become clear. Because [it's] so much more accessible, so much more democratic than the idea used to be. People are actually building business in Nigeria now in a way that they were not even thinking about doing 15 years ago, 20 years ago. I think those success rates will come. I think we already have some of them. I think the next generation of future business leaders are emerging. I think many of their businesses will continue to survive and would be sustainable and I think scale takes time but I think businesses are scaling every day around us.

Tobi: You're probably right. I certainly don't think that Nigerians are too poor for businesses to be built around them. It depends on what your building, right?

Eloho: Yeah.

Tobi: So, maybe I'm being impatient here.

Laughs

Eloho: And it's hard, right? Because you want to see your environment change and you want to see lives touched and you want to see the successes that entrepreneurship is...and we’re seeing it. But I'm also a little bit impatient like you, I want to see more of those stories as well, and they're coming. I’m in a privileged position whereby I get to see what's coming, we have a pipeline, we have a bunch of founders that we are very excited by, we know what's going on within the companies that are within our portfolio as well, that I think I'm excited by what the future looks like.

Tobi: Yeah, so, I want you to solve another puzzle for me.

Eloho: [Laughs]

Tobi: Let's talk about domestic capital. The startup ecosystem, that space, is really interesting. There's a lot of things that's going on that personally excites me, but one of the things I'm not seeing is domestic capital - funds, banks and other forms of traditional finance rushing to take advantage of that opportunity, even when you have policies like the loan deposit ratio for banks, and... I don't know how the CBN defines real sector in this case, so I'm not going to get into that, but why aren't banks, for example, starting VC funds? Solve that puzzle for me. Is it a case of exit?

Eloho: I think it’s a couple of things. Well, I don't think many banks set up VC funds anywhere in the world. The skillset and the risk appetite is pretty different. I think that as a banker, you grow up in an environment where your entire training is: extend the loan, earn some interest on it and don't lose your capital. Whatever you do, don't lose your capital. That's how you fail. I think in a VC environment, you appreciate some risk around potentially losing your capital and you price that in. But of course, the return for that is: what if I don't lose my capital and I make 10 times on this investment? So I think those mindsets are just fundamentally different, and of course, then the infrastructure, and the teams, the models and the approaches and all of those things and the cultures are just built differently in those two ways. But the question around why do we not see more local capital more generally going into businesses? I think it's a little bit of... I think it's a complex answer. I think there's also something around the exits as well. I think that if you're investing same way as I said, you know, the first rule on the banking side is don't lose your money, the first rule on the VC side is - where is your exit? If you can't see an exit, then what are you doing? This 10x is 10x on paper if there is no exit. And so I think there is an issue around the... I want to say "the depth" I guess, and the quality of the investment ecosystem more generally so that you know that I can see a path to a company circling through its potential points of capital... potential funders of capital. So that I'm coming in, for example, as an angel and I can see where they're going to get the first institutional round. I can see where I'm coming in as a growth investor and I can see where potentially that business is going to IPO and give me my liquidity. I think a lot of the exits that we've seen, for example, at the later stage or at the private equity stage in Nigeria/Africa, a lot of them are secondaries. I know that there's not very much in terms of IPO exit etcetera. And all of those things compound. So I think, again, it will come. I think one of the ways that we solve for that, interestingly enough, is by attracting foreign capital into the ecosystem so that you know that the liquidity is there for your exit. I also think there's also something around how and where Nigerians invest. I think that there is something around the fact that we are in a high inflation environment. At the moment we are even now worried about things like foreign-exchange, devaluation etcetera. So you've got to really be sure of some massive or be comfortable with the risk anyway of some massive outsize returns probably before you're putting your money in such an asset class versus keeping it in foreign exchange potentially offshore. I think all of those things coming into play. I would like to see more local capital going into earlier-stage businesses. I think it will come. I think it's one of those things where success breeds success a little bit and once you start to see the exit, once you start to see the liquidity come into the ecosystem, it will come. But also, of course, we're now going into a broader recessionary environment and that doesn't bode favourably for broad investment trends whether it's local capital, whether it's foreign capital into Nigeria. But I actually think an environment like this also creates an opportunity for local capital providers because it's harder for some of these companies...it will get increasingly harder to raise capital offshore and so if you are an entrepreneur-friendly investor, if you're writing fair cheques on fair terms, I think this really is an opportunity to...and if you have the conviction around what's happening in the ecosystem and the growth that our founders are able to deliver, then this really is an opportunity, potentially, to write some of the interesting deals.

Tobi: Interesting. What has been the most challenging thing for you running Endeavor, so far?

Eloho: Explaining what we do. I remember 18 months ago when I first started talking about how we focus on the scale-up companies, a lot of people didn't even know what scale-ups were. And I don't think that was because it was a brand new term that I discovered...I think it's just because it wasn't something that we talked about very actively or openly in our ecosystem. It comes back to what I was saying earlier about how we assume that once a company has, for example, raised a Series B, then they're already successful and let's worry about the earlier stage companies. Interestingly, when I sit one-on-one with people and I explain it they get it immediately but most people from the outside don't get it, so what they say is "you're are helping people who are already successful to be even more successful." And I suppose that's one way of looking at it, but the way that I see it, really, and the way that at Endeavor we see it, our theory of change is actually really really simple and super powerful, and effective - we believe fundamentally that it's actually the entrepreneurs that do more than just think big, but they're successful, they will successfully scale their companies. And for us, you've scaled your company successfully when you are able to employ a couple of hundred people.

But critically we also want people that are then going to turn around and say "okay, so I've been successful and I've scaled my company in this ecosystem, how do I then help this ecosystem and reach back and help the next person do something similar? So how do I invest in that founder as an angel? How do I mentor that founder" etcetera? And we find that by creating that culture, by having that sort of almost virtual feedback loop, of course by selecting the great entrepreneurs to begin with, having them role model, having them play this sort of mentorship investing role, you then create a multiplier effect that means that you're able to scale an ecosystem much quicker at the scale-up stage. So we would be a little bit counter that theory if what we are worried about was "how do we help a hundred ideation stage founders launch their companies? There [are] people that are doing that and doing it much better than we would because it's not our area of expertise. But like I said, if you think about an ecosystem and think about the different needs of founders at different stages, we're very lucky to be in this unique position whereby we are very very laser focus on scale-up stage founders because we think that people who have successfully navigated to [the] scale-up stage, are really the people who then understand what it takes to scale a business in that ecosystem. And helping them, then go back and plough that experience back into the ecosystem, from our perspective, is what will be the most effective thing that you can do from a support perspective

Tobi: That's interesting, and I don't want to ask this because it can easily get controversial and also...

Eloho: [Laughs] But you're going to ask anyway.

Laughs

Tobi: Yeah, I'm going to ask you anyway. Also because it distracts from some of the real important issues sometimes... but have you had gender-related challenges and in what colours do those come?

Eloho: Ooh...that it distracts from the issues, I disagree. I think this is a very very important front and centre issue, so I'm glad you raised it. Have I had gender-related challenges? I think we all do, as women, unfortunately. I'm not sure if you mean professionally but I'm just going to hatch this out and answer your question broadly because I think that it kind of all just blends into one experience as a woman.

Tobi: Okay.

Eloho: I find that I have up till a point in my career, I would have told you categorically that at work I didn't have gender-related challenges because I was so certain that I was being treated absolutely the same as all my male peers, has getting compensated exactly the same as all my male peers and I was respected in exactly the same way. Interestingly, the more that I understand how these things play out, the more I understand that that was probably a voice of naivety that was speaking in that actually the way that these kinds of biases play out is in little things like, for example, microaggressions - which mean that you say certain things and you're teased in the office in a way that your male colleague might not be...and of course, I had a lot of that when I was growing up in my career. It is in things like you're nervous about asking too many questions during your review because you don't necessarily want to be seen to be aggressive when, really, all you're doing is being assertive. But it's in your male colleagues not having to worry about things like. It's in being nervous about negotiating and not taking the first offer that you are given, again, because you don't want to create the impression that you this pushy woman. I think that's how, indirectly, some of those things play out. In terms of direct challenges by virtue of being a woman, the kinds of things I noticed as I got more senior in my role is things like... you know, I've had men come into my office to meet the boss and they will turn and speak to my male colleagues, to my male staff, not understanding that I was the boss which I always found funny and end up ultimately embarrassing the male staff. I've had people come into my office...it's been one guy and this story always makes me laugh. And then he comes into my office and I think when he realised... I think he also went through that thing of "oh, he wanted to talk to the boss" and he was surprised that it was me, then when he realised that it was me, he recovered very quickly and then he sort of made a couple of comments as he was leaving "oh, hmm, I wonder what the average age is of everybody in this office?" and he kind of made this nervous comment twice and it was funny because he wouldn't have cared what the age was if he was talking to a room predominantly full of men. So he was confused, my team is mostly women not by design but he was confused, there [were] all these women and you could see he was flustered...and so the next thing that came out was "ah, that's interesting, you must have a very young team" and of course he left and even the guy in the team was like "what the hell kind of comment was that?"

So you see it play out in a different way, but I've never had any direct confrontations or direct issues by that... I think the issues play out for me or have played out for me much more subtly. But like I said, the colour of those issues has changed over time by virtue of my experience as well and by virtue of just the fact that I think there's a lot of more information out there as well with regards to what the experience is as a woman, as a professional woman and I think it's empowered me and I hope it's empowered lots of other young women as well to... when you have that niggling doubt in the back of your mind and you have one more question under review, I think the younger a lot Eloho would not have asked the question. The older Eloho, today, probably would because she's now aware of the fact that these biases are actually real, so you don't have that struggle of trying to convince yourself that what you suspect is actually a real issue that you're facing. I also think we're in an environment where more men are listening. I think it's helped by the fact that there's a lot more data, there are many more male advocates and male allies as well. I think corporates and institutions have the issue of diversity and gender balances on their agendas, so it's a corporate agenda. Not as many as they should but it's on their corporate agenda as well so it's a legitimate topic of conversation and I think all of that helps to mean that the experiences that I had when I started out my career 20 years ago are very different from the experiences that I would hope that a young lady who was charting the same path was having today.

Tobi: I'm so happy you brought that up, thank you.

Eloho: Did I bring it up or did you bring it up?

Laughs

Tobi: I did. Okay. I'm so happy you answered my question. Because this is one area where I would easily admit my ignorance, so...

Eloho: Yeah, and I'm glad you've admitted it openly... the truth is I think we are all a little bit ignorant because first of all, even for women, not every woman's experience is exactly the same. So sometimes you hear stories and you see the data, and you're like "absolutely, I believe that cause I directly went through it" and there are times that even for me I'm like "oh my gosh, I didn't know that women went through this." For example, the concept that I could have been paid less than my peers in exactly the same role was foreign to me. I was just like "what do you mean? I got the job, I was given an offer, it was on paper" but the difference is the guy probably walked in the room...for multiple reasons including probably the way that he socialized in the way that we're not socialized women... he probably walked into the room and said "I want 20 percent more" and they said, "okay, fine." But I think that you might be ignorant of certain things, the most important thing is that you are open to understanding certain things and to learning. But I think there's probably a level of learning that can and should happen on gender biases in general for men and women, I don't think gender biases are the exclusive purview of men, I think it's a societal thing. It affects all of us. It affects all of us and it plays out in all of us.

Tobi: Yeah. So it's kind of a tradition on the show. So I'm going to ask you if you have one idea... I know you have many ideas...but I'm restricting you to one.

Eloho: One.

Tobi: Yeah. So if you have one idea you want everybody to be excited about that you would like to see spread far and wide, what would it be?

Eloho: Ohh, I'm a big big big fan and I'll tell you a secret. I'm working on a project where hopefully... it's been a dream of mine and hopefully, I get to be a part of making this happen... is I think that people should tell stories more. I don't think we tell stories more and I think it's critical in Nigeria for people to tell stories of their journeys more. And I think we need to get into a mode where... for some reason, we only tell two kinds of stories I think, at the moment. We tell stories of success - so everything is up and to the right and, you know, here you are slaying and breaking barriers and that's the only story you tell. Or we tell stories of extreme disenfranchisement and somebody is hard-done-by in some really horrible way. And I think the truth is, the path that we each take, for the most part, is not always the case for everybody, unfortunately. But for the most part, the path that we take kind of oscillate between those two things. You're massively successful in certain things. Every once in a while, you probably fail at things more often than you're successful at them and it's not this up and to the right journey. So one big idea I think that I'll like to sort of encourage people to do and one that I'd like to be a part of [is] role-modelling... is just telling frank candid stor[ies]. I think there is this myth that if you tell the truth it's not going to be interesting. If you tell the truth and it's not a sad story or it's not a story of overnight success it's not going to be interesting. And I'm testing that and I'm finding that there is a lot of energy around using platforms just to tell stories. So people kind of have something to relate to and connect to as they navigate the different inflexion points of their lives, whether it's family, career, jobs, marriage, having children, what have you. I don't think we do enough of that as a society.

Tobi: So when you say you are involved in that, are you telling your own story, because I'll like to get an exclusive?

Eloho: [Laughs] I was told off by somebody who said it that I didn't tell enough of my own story and I guess she's right if people are interested, I don't do much of that. But aside from that, I think rather my own story, I want to tell other people's stories but I think it would be inauthentic for me to push people to tell their own story if I wasn't telling my own. So hopefully, that will come. In terms of exclusives, let's talk about the exclusives later because I'm not quite ready for it. But I'm actually trying to put together a small project around the storytelling. And I'm happy to talk to you about it off the podcast.

Tobi: Alright. Thank you very much, Eloho. It's been fantastic talking to you.

Eloho: Thank you, Tobi.

This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit www.ideasuntrapped.com

I spoke to Andrew Nevin about the many implications of the COVID-19-induced global economic crisis. He thinks we are not going to see a "V-shaped" recovery. We also talked about the geopolitical patterns that may emerge.

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This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit www.ideasuntrapped.com

Co-founder of Andela, Flutterwave, and now with Future Africa. We talked about the demand and supply of governance. His belief that the challenges we have are opportunities. He firmly believes that "innovation precedes development". Iyinoluwa is bullish in his optimism about the future of Nigeria and Africa. I thank him for sharing his insights with us.

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This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit www.ideasuntrapped.com

We started with a Biola masterclass on the state of sports investment in Nigeria- then it was football all the way. Biola is brilliant, generous, and measured in his analysis. He is quite right on most things than you might admit. You can listen on Apple Podcast, Stitcher, TuneIn, and Pocket Cast. Please kindly give us a rating on any of these platforms (it helps others find the podcast) or rate us directly here.

This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit www.ideasuntrapped.com

He is the founder of Wella Health - a company that wants to help solve the demand problem in the Nigerian healthcare sector. Neto is a physician, but he has a polymathic grasp of the industry. He is brilliant and gracious. I am strongly rooting for this company - many thanks to Neto for sharing his insights and vision with us.

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I spoke to the chief economist of PwC in Nigeria Andrew Nevin. We had a conversation on taxes, central banking, and economic reforms in general. Andrew also explained his preferred measure of economic progress as opposed to GDP, and whether we should be more like China or India. I thank Andrew for agreeing to share his views with us.

You can always listen or download right here on Substack or do the same on Apple Podcasts, Stitcher, TuneIn, and Pocket Casts. There is also a transcript below. You can rate us on any of these platforms, this helps others find the show.

TRANSCRIPT

Tobi: Hi everyone. I am on today with Andrew Nevin, the Chief Economist of PricewaterhouseCoopers in Nigeria. It’s great to have you, Andrew.

Andrew: Great to be here, Tobi. Thank you so much.

Tobi: I will like to start about taxes. Oil prices have collapsed, and along with government revenue, so naturally, the government is looking towards taxes as a way to buffer the government’s revenue source. What I just want to ask is, how realistic is that plan, especially in the current economic climate? 

Andrew: Well, I think that we all understand by now that Nigeria collects a small amount in tax compared to other countries. I think the number is about 6 percent of GDP, very small. So for the last few years, there's been this narrative from the government: we need to bring people into the tax net, people need to pay more taxes, more tax compliance, that I think we've all seen. And now of course with the collapse of oil revenue there's essentially no tax revenue coming from oil for the next few months, at least, and maybe longer. So, of course, the government is in a very difficult fiscal position. So naturally, they're going to say "we now need to increase our efforts to bring people into the tax net to increase the tax revenue". There are two problems with that. The first problem and we've highlighted this over the last four-five years is: it's very difficult to increase taxes when people feel like they're not getting services. So if we think about the social compact in Nigeria, certainly over a decade that I've lived in Lagos, the social compact is simple: the government doesn't really tax you very much but it also doesn't provide services. So people provide their own security, their own electricity, their own healthcare, their own education, their own infrastructure, and that has been the social compact. It’s not ideal, but that's the way it’s worked. Now the government comes along and says, well, we want to bring you into the tax net, we want to increase taxes, the rates, the number of taxes, and people say: hold on a minute, this social compact doesn't work unless I'm getting some services. So that's one challenge. The second challenge that we’ve talked about over the years and is really now quite a huge pressure is, [it’s] very hard to raise more taxes while the economy is not growing. Over the years from the 2015 recession we still had very low growth, 1-2 percent, a little over 2 percent in 2019. So [economic] growth has been below population [growth], which means that incomes have been going down, which means it's hard to take more money out of people. So both of those things remain challenges, we now have this confluence of events where effectively half of the revenue or more than half of the revenue going into the federation accounts collapsed and yet it’s very difficult to take taxes from other places. 

Tobi: It’s interesting you talked about growth because I was looking at data from the IMF a few days ago and per capita income in Nigeria has basically stagnated in the last four to five years. So basically people are not growing their income and it's very difficult to raise taxes. But there is another argument that I would like you to explore with me, which is that, is it also about capability for government? I mean, there is no national database and that is not cheap. How significant a barrier is that to expanding the tax base?

You asked on a general level, on a general level, if we don’t get investment up, we won’t be able to bring people out of poverty. - AN

Andrew: Well, I think that there has been a lot of progress on that, certainly in Lagos where I live. The electronic record of the LIRS [Lagos Inland Revenue Service], the ability to bring people into the tax net, the [indistinct words] that they have, those things have got[ten] stronger and stronger over the last few years and they've made progress on that. But I think that what you raised, Tobi, is a really...is a general point. I think there is a lot of capabilities, certainly the Federal Government, the Lagos government which I know best, and other States. But I think sometimes the problem is the capability is spread too thin. We have so many MDAs at the Federal level, so you have a pool of very talented civil servants and people [who] come from the private sector...to cite a couple - Dr Jumoke, Yewande Sadiku at the NIPC, Engineer Chidi over at the concession group...I mean you have some very high-quality people, high-quality staff, but we'll get so many MDAs, sort of create complexity and then there are pockets where the Federal Government or the State Government don't necessarily have enough capability. I think also at the state level, it's a real challenge. Many states as we know have very small IGR [Internal Generated Revenue], they haven't yet sort of got their records or their system in place to raise internal generated revenue from the businesses that do exist in the states, but the states are trying on that... but I think you highlight a really...yes, a very critical issue.

Tobi: Still on income growth, what do you think has to change for per capita income to start growing in Nigeria? There are a few hypotheses that we are going to explore as we talk along but just your general view, what would it take, what has to change?

Andrew: Well, I think the perspective we’ve had over four or five years is pretty simple. People talk about this program, and agriculture, it’s small business, and concessionary financing, all of these little pieces...but when you ask in general what the issue is? We need to grow. We’ve said for years that the country needs to have GDP growth of 6 to 8 percent a year to reduce poverty and alleviate unemployment. Why? Because we have population growth that is probably almost 3 percent a year, so if we're growing at 6 to 8 percent, per capita income will be 3 to 5 percent growth per year. So that starts to be meaningful over a few years. But more than just GDP growth it needs to be inclusive. I think the period from 2010 to 2014, there were lots of GDP growth but it was not shared evenly or not shared appropriately throughout the country. So we need to grow 6 to 8 percent. Now, how does that happen? At the very basic, almost mathematical or physics level, to grow requires investment. So how much investment? When we look around at the economics of this in some other countries, the investment needs to be close to 30 percent of GDP which in Naira terms, say, in 2018-2019 come in with, maybe, a 150 trillion Naira...so 30 percent is 45 trillion Naira of what economists call gross capital formation. We are only getting a little more than half of that, maybe 25 trillion roughly. We cannot grow 6 to 8 percent when there is not enough investment. So then that leads to a very simple question, why is there not enough investment?

I lived for ten years in China. I went to China the first time in 1983 which was the beginning of their economic transformation and they have lifted 500-600 million people out of poverty, they’ve grown 8 to 11 percent, 8 to 12 percent, 6 to 10 percent for forty years almost now, and how do they do it? Well, you have to invest. So we have to invest in Nigeria. Then the question is, given that Nigeria is probably the number one economic story on the planet right now for potential, why are people not investing in Nigeria? Why are Nigerians not investing enough? Why is the diaspora, who have resources and know the country not investing enough? And then if those two groups invest, then foreign investors, direct investors will also invest but they are not investing. So that's the question we’ve posed to the Federal Government. You asked on a general level, on a general level, if we don’t get investment up, we won’t be able to bring people out of poverty. But why are people not investing? If we want to explain it very simply, what we say is: right now, it’s too complex and too costly in Nigeria to do business. Despite the incredible efforts of Dr Jumoke [Oduwole], a national heroine over at PEBEC, it’s still too hard. Too many agencies, too many costs, too much complexity, so people choose not to invest. I was talking yesterday to the CEO of a major Nigerian company, very successful company, and he was talking about one of the global giants that I won’t name here but who is evaluating between South Africa and Nigeria for coming into the country and they made the decision... they’ll eventually come to Nigeria, but they made the decision, for the moment, to go to South Africa. He said it was very simple, they just found it too complex dealing with too many agencies, too many taxes, not just the level of taxes but the complexity of taxes.

So until the Federal Government and the State Governments are serious about wanting to make it an attractive...and I said this, sorry, let me also add, Tobi... I say this not as just the Chief Economist. My main role at PwC is I oversee our financial services practice, so I am out-serving clients, I run a business - PwC. I also have two technology companies that I have helped found in Nigeria, so, you know, I'm doing this I'm not just speaking about it and I can tell you - it is not easy in Nigeria. So we have this incredible opportunity, we have incredible entrepreneurs both Nigerians in Nigeria and in the diaspora and yet it’s not been tapped quite yet.

It may be distressed, but I prefer democracy and Nigeria's democracy is a work in progress but it's a democracy. - AN

Tobi: That's interesting. You mentioned China, so let's explore that. Everybody would love to copy the East Asian model, right? But in Nigeria, it seems, at least to me, that we are still doing import substitution industrialisation rather than exports and oriented manufacturing that lifted Asia out of poverty. Now, I'm asking at a conceptual level, what has to change in policy circle for us to see the distinction between those two models?

Andrew: Well, I think to begin with, I said I’ve lived ten years in China and I think there are some positive things we can take from it but the truth is, China is not a democracy. It's an autocratic, one-party state and I'm not sure it's a great model. Maybe, in the end, that would win out economically. It may be distressed, but I prefer democracy and Nigeria's democracy is a work in progress but it's a democracy. I think that we've advocated over the last one or two years that the right...and of course people come all the time, I go to conferences and people say Rwanda, Singapore as models for Nigeria, we said very clearly, we think: look, if you're going to take one country as the model for Nigeria, that we have the most lessons to learn from, it's actually India. And why? India is a large, diverse country. It has religious differences, it has cultural differences, it has geographic differences, it has very different topography and no one can argue that Nigeria is more complex than India. They are both complex. India, like Nigeria, is a messy democracy, a work in progress. But despite that, they have made a lot of economic progress in the last twenty years, really unlocking things starting in the beginning of the ‘90s. Then when you go to the economic model, what unlocked it for India was not exporting goods (physical goods), it was exporting services... particularly around IT. 

Many countries have a diaspora but the thing about the Nigerian diaspora is, they are at the top end of the income ladder. - AN

So one of the things that we are starting to say is, like, should we be focused so much on exporting physical goods because if you think about where we're at, a couple of things are going on. One, of course, is, to export a physical good, it just requires a real improvement in the infrastructure that we have - port infrastructure, road infrastructure to bring down the cost to be competitive. Secondly, where are we going to export to? If you think about what's happening in the world, the population in Europe is shrinking population, the population in North America is basically flat, are we going to be able to export into a shrinking market into Europe? There are already people that export physical goods into Europe, can we displace them? I'm not sure that we can that easily. Can we export to India? Well, they already have their own manufacturing. Can we export to China? Well, they’re sending their manufacturing here. So I'm starting to think that we should kind of leapfrog and actually go back to the lessons from India and export Nigerian brains without exporting the people. If we go back for a minute to the way the economy works here, the biggest source of FX is actually diaspora. So Nigeria, unlike many countries...I mean, many countries have a diaspora but the thing about the Nigerian diaspora is, they are at the top end of the income ladder. They are the best-educated group in the United States, they earn above the average American which is an amazing accomplishment for a new immigrant group. We are exporting Nigerian brains and then a lot of the money falls back. Now, we then ask the question, can Nigeria export people but without people leaving Nigeria? So that they are working in Nigeria but they are earning foreign exchange, they’re being paid at the global level or a little bit below because that's what people bid from the demand side, and it’s starting to happen.

I want to highlight on this show one incredible woman, incredible Nigerian heroine, and [her] company. This is a company called Outsource Global which is based in Kaduna and Abuja and it outsources to global companies for different kinds of support - call centres, but also…the other support is not necessarily voice to voice but task, legal task in some cases. It has over a 1000 seats on there and it’s founded by this amazing woman Amal Hassan, and it's growing in the Covid-19 because people need more remote work. So think about what's happening here, we now are exporting Nigerian brains, very high value-added, they are not physically leaving Nigeria and this is starting to happen. If you look at some of the global companies like Microsoft, for example, they are putting more and more of their development into Nigeria. So what is that? Again, that's an export of Nigerian people, of Nigerian brains. So I'm starting to think that rather than advocating for trying to follow the East Asian model (that model is gone historically), we should follow more the Indian model, companies like Webpro, Infosys that has turned into giants now. They employed millions of people in India. Tek Experts is another one in Nigeria that is exporting Nigerian brains. To me, that's a higher value-added path at the moment.

Tobi: My follow-up to that would be: that requires a relatively high level of human capital and the distribution is unequal and the ability to take advantage of that opportunity will be unequal as well. Maybe it will be different for Lagos, Kaduna, as opposed to Kebbi or...so now my question is do we really have to adopt a distributed, varied development strategy at the sub-national level?

Andrew: Let me just go back to the point you made about exporting people being high end... absolutely. Remember, you want to export very high value-added things, that doesn't mean it's the whole economic strategy, so in terms of domestic sectors, we said for four years now the number one sector is real estate. Why? Because, first of, there's a housing deficit. I don't want to give the number because the number that's being repeated, very large number is not very accurate, we don't have that many homeless people in Nigeria but a lot of people live in substandard housing and there is a housing deficit. We need more housing not for the high end but for the middle-income people, lower middle-income people, and that drives employment domestically. So we are not exporting housing but we're doing housing, that is the biggest sector for us. The reason to our employment is every time you build, you need local building materials, you need carpenters, electricians, plumbers, labourers, caterers come on site. And once the place is sold, the family that moves in, they want to furnish it, [and] over time that drives other industries so that's one domestic industry. Agro-processing, we are very keen on as well, we've written a lot on it. But, again, it may not be for export. Some of it could be for export - cashews, maybe eventually palm oil will export but, of course, we have such big domestic uses of... just the domestic use of that is huge. So I don't want to say that exporting brains is the whole economic strategy [be]cause you're right, but it's so high value-added that if we had, I don't know...if we had a hundred thousand educated Nigerians exporting their brains but sitting in Nigeria will have a massive impact on the economy because they're earning good salaries. Now, they're spending the salary, they're buying homes and that's important to labourers, you get the normal, sort of, knock-on effect. So we need [the] export strategy and we also need, kind of, the domestic strategy.

Now your question about sub-national, yes, we've said for a long time that one of the major issues in Nigeria is the imbalance of economic development. We have Lagos 30-40 percent of the formal economy in Nigeria and yet many people who are in Lagos that come to work but they don't want to be in Lagos. All of us who live in Lagos are aware of the challenges with the traffic, with the infrastructure. And if you talk to some of the senior political people in Lagos, they will say the biggest problem we have in Lagos is every time we address something, we get more people coming in. So we need development across the country, we need it in Cross River, we need it in Sokoto, we need it in Niger, we need it in the North-East as well. But I think that what's happened over the last two years is it’s not just us saying it, I think everyone recognises it. Domestically people are doing this and you start to see the emergence of some really incredible governors who have taken responsibility for their states. To name a few that I am familiar with...

His Excellency Governor el-Rufai in Kaduna working very hard to move the state forward. Governor Makinde in Oyo State. Governor Obaseki, I mean, obviously there are some critical challenges in Edo State but he is very focused on the right things. So I think that's a great movement forward and the Federal Government recognises this too. So, again, we talk about PEBEC and Dr Jumoke, we talk about the National Investment Promotion Council with Yewande. Those groups are now working at the subnational level, I think that's a major step forward for the country and we're going to start to see the fruits of it. I think most governors recognise they themselves have to be out and getting this investment I talked about earlier and are making real efforts. So I think we should be encouraged by that but it's got to accelerate, we have to take the pressure off Lagos, we have to give young people, in particular, a reason to want to stay in their state, or not necessarily move to Lagos [but] to move to some other commercial center where they can find opportunities.

Tobi: Deindustrialisation: how plausible is it an hypothesis for slow growth in Nigeria? I mean, services is growing really fast and in terms of value-added it has a higher share of the economy, and agriculture has also a large share but industry has shrunk over the last few decades. So how plausible is deindustrialization as an hypothesis for slow growth?

Andrew: Well, I think that we all understand the challenges that industry...talk to MAN (the Manufacturers Association of Nigeria), for example, all the members there understand just how difficult it is to operate and of course you have power issues, you have infrastructure issues et cetera. But before commenting on that, one thing that is important to remember is sometimes the statistics are difficult to interpret. So if you look at the division in the country between services, agriculture, manufacturing get certain numbers... but if we have a tomato paste processing plant, does that get classified as agriculture or manufacturing? So I'm not so worried about, kind of, the statistics [be]cause it is very arbitrary which is what's happening on the ground. But in terms of the manufacturing side of things or the agro-processing which I think is a big component of it that should grow, (and) of course, it already happens...we have companies that do agro-processing. We have Flour Mills, UAC, Dangote...they do a lot of these. But of course it's been difficult. As I said before people have to build their own infrastructure, their own power situation et cetera. So MAN said, we’ve said, others have said...it's so obvious that [the] precondition to moving forward for more value-added manufacturing in any sector is obviously power. We've struggled with it with the privatization that happened 2013, but it seems sensible “oh, privatization, hopefully that will lead to a better power situation” but the truth is it's got[ten] worse and I think now the whole country, everyone recognises that. But I'm quite hopeful on the power situation. Again, first of, there has been [an] admission by everyone, every government, every private citizen that we’re in a power emergency. Two, you’ve got one of the leading figures/leaders in this country stepping up to lead the new super committee that is looking at power and I expect they’re going to come out with some...sorry, let me also say that I'm very very happy that Governor el-Rufai has recovered from the Covid-19 virus, it makes you realise how everyone at every level of society is vulnerable. Thank God that he recovered.

But Governor el-Rufai I expect that committee comes out with its recommendations to do some radical things on that, recognising, obviously, we need a cost-reflective tariff, we need a way the bottom of the pyramid can get access to some power. We also need some, probably, decentralization because there are so many technologies for power, and so many decisions to be made it's difficult to make them all at the center. But I do think that would unlock a lot of these issues over the next few years, so I'm very hopeful on the power situation. 

Tobi: On the power issue, if you have to come up with, say, three things that would really need to happen for that sector to see the needed to change, what would be on your list?

Andrew: I'll give you one thing. So we did put out a paper that suggested actually that we should focus the power that we have, uninterruptible power, to manufacturing [and] charge them more for it if they're willing to pay for that, but that's one idea. But the big idea that we put out for three or four years is simply decentralisation. If you look around the world...so I'm Canadian, I think most people who follow me know that. We often on Twitter have discussions about immigration to Canada from Nigeria, but in Canada, power is a provincial issue. So you have Nova Scotia which is a province of about a million people and I think it has (I'm just guessing) probably between 200 and 400 thousand customers between residential, commercial, and industrial and it's a provincial matter. As far as I know, I don't even think there is a national regulator of electricity in Canada. The provinces sort out their own electricity, there's lots of different models - some privatisation, some state/public-sector lead pieces of it and it works fine and then, of course, the provinces sell power between themselves, they sell power to the United States. The power from Niagara Falls which is a large (I am sure people have seen pictures of it, also not far from where I grew up) which [has a] massive hydroelectric dam there, sells its power to New York State and the Federal Government doesn't get involved. So if you wanted to put one big idea out there, it's decentralization. Today, the decentralisation is even more critical because there are so many technologies to produce power on a smaller scale than we had before. 

If you go back to when I grew up in the sixties, you had this image of big power plants, big thermal plant, big hydroelectric plants, big nuclear plants...now power can be produced in situ where you are at a smaller scale. If you take gas power for example, the scale economics aren’t that strong so if you have gas, you could produce power locally for local needs. So, in answer to your question 3 big ideas, let me put one big idea which is let’s decentralized the power decisions. And I think if you told States "get on with your power situation", they would find local solutions to their own situation to make sure that they had power, that their manufacturers had power, that the bottom of the pyramid had access to some power, maybe subsidized rates, but those decisions can only be sorted out locally.

Tobi: Interesting. Decentralisation seems like the solution to a lot of problems in Nigeria.

Andrew: Well, people say to me, why do you stay in Nigeria? You’ve lived all over the world, you can be anywhere. I say this is the future. I mean, as we know, the population projections having us come third largest most populous nation, hopefully in my lifetime we’ll see that. It's the biggest economic opportunity, people are incredibly entrepreneurial in tough conditions. So how do you unleash that energy? It's just easier to let people get on with it at the local level. I'm not the only one or PwC is not the only one saying it, except there is now widespread recognition that things have to happen at the sub-national level. I mean, of course, one powerful idea you want to see in any country is, a state has a great governor, I mean Governor Makinde focused on health care, focused on education, focused on continuing the projects of his predecessor rather than abandoning [and] wasting those resources. If the Governor in the next State is not doing it, people are going to say "Oyo is moving forward" and they are going to hopefully elect someone. But that goes back to what we discussed earlier, it's an imperfect democracy but all we need to do is push forward.

Tobi: I would want to talk about the Central Bank, how Central Banking is being done in Nigeria. Now, take the power situation, the Central Bank Governor has been on a tour the last couple of years that, oh, this sector, textile, whatever, so they say power is the problem and this is what we are doing to finance power provision. My question is should that really be the remit of the Central Bank?

Andrew: I think I will just go back in history a little, a short-term history. What brought me to Nigeria was the financial crisis in, well, the developed world in 2008. I moved to Nigeria in 2009 and my first client in Nigeria was the Central Bank of Nigeria when Governor Sanusi who, of course, became the Emir of Kano (and now is no longer the Emir of Kano) was running it. And he in 2013...I was at the bankers’ committee strategic retreat in Calabar in Cross River and that was his last bankers’ committee retreat. So CNBC came to the meeting and they asked him this... and we all watched while he was interviewed...it was sort of live interview with us in the room, bank CEOs, and people like me, advisory people, sitting in the back and the sides and they asked him exactly that question seven years ago (cause he started intervention programs and, in fact, some of the work that we did with him earlier was what encouraged his interest in agriculture because we pointed out that agriculture was 35 or 38 percent of the economy but had none of the lendings, so that got him thinking about that). So he said, look I get you, you can look around at different Central Banks around the world and they don't do things [like] what we're doing here. And he said but the reason I’m doing it is if we don't do it, who else is going to do it? [The] Central Bank has always been the Federal Government’s MDA that has the most capability, very talented people, high-quality organisation, so they've sort of stepped into the breach. That said, given your question, I guess we've sort of said...look, we're asking too much of the Central Bank in Nigeria.  

Sometimes I go on television, and the monetary policy committee will be meeting and the next day or the next week they will be asked: should they cut rates, raise rates 13 percent, 12 and a half, 13 and a half? And I say, look, I don't even think that question is that important because the issues that we have in Nigeria the Central Bank can't solve that way. We have, I won't even call it fiscal issues, we have structural issues that can only be solved by the executive and the legislature at the federal level, at the state level working together, for example, on the real estate... to unlock the real estate sector. So we ask too much of the Central Bank, I wish it wouldn't get so much attention. If you look at developed economies, if I take Canada, for example, I don't think most people can name the Central Bank Governor. He does his part on that, adjust interest rates to some monetary policy intervention. Basically the economy works because it's structurally sound and I can give you an analogy. The Central Bank Governor of any Central Bank in the world is a racecar driver and if you give him a car from the 1920s, it's only going to go as fast as the car from the 1920s goes. If you give him a car from the 1950s, it's only to go as fast as a car from the 1950s. And if you give him a car from 2020, Ferrari (F1 Ferrari), it's going to go that fast. So the issue [is] that people should not be putting so much pressure on the Central Bank in Nigeria to fix our economic and social challenges. It's going to be fixed elsewhere.

Tobi: Forgive me, Andrew, this leads me to a sort of question about institutions generally. Yeah, Sanusi started this and maybe, just maybe, he had the sense to know where the limits are, the extent of the capability of the Central Bank to actually solve what you have also said are structural problems that should be fixed at [a] political and fiscal level in Nigeria. Now, we've had some situation in the last couple of years where the Central Bank itself has been the source of domestic economic distortions, in terms of prices and exchange rate. I was reading a paper a few days ago by the former World Bank Chief Economist where he clearly said that there is some evidence, as much as we know what evidence are in economics, that there is some evidence that Central Banks in developing countries would generate a lot less distortions if they adopt some kind of rule-based intervention in the market as opposed to discretions. What I want to ask you is this: is it time for some kind of rule-based regime at the Central Bank? Some kind of legislative oversight over what the Central Bank is allowed to do so we don't have a situation where central banking will only function according to the disposition of the personnel in charge.

If we wanted to have a more rules-based approach to monetary policy, absolutely, that would benefit the country, but it also requires the other pieces of the national leadership to do their parts so this will be part of a comprehensive whole. - AN

Andrew: I think I would agree with that but the way I phrase this is, we need to take pressure off the Central Bank. I mean, the legislative and the executive arms need to say, okay, we get it, there's a limit to what the Central Bank can do. Obviously Central Banks need to be involved with questions around the currency, interest rates, stability of the financial sector, let's simplify the role here and you can do that and we will create rules that send positive signals to people involved in the economy and investors to do that. That would be great, but then the legislative and the executive arms then need to take on the task of doing what needs to be done to fix the economy structurally. In a way, what's happening is the Central Bank is intervening in tomatoes, intervening in SMEs, intervening in cultural things, in the power sector because the other arms of government have not stepped up to their responsibilities. So, absolutely. But it will have to be part of the whole package. It wasn't like the Central Bank was entering into terrain that was being already done, they enter in because there was a vacuum. If we wanted to have a more rules-based approach to monetary policy, absolutely, that would benefit the country, but it also requires the other pieces of the national leadership to do their parts so this will be part of a comprehensive whole.

Tobi: Okay. Another question I want to ask you on that is, I spoke to Nonso on this show a couple of weeks ago. You know Nonso Obikili and one point he raised is that over the last ten years or so, there's been not too many economists at the Central Bank. Bankers have, sort of, exerted a lot more influence on the Central Bank. What I want to ask you is should we separate banking regulation from monetary policy? Would that be a useful way to go, like they did in the UK, for example?

Andrew: It's a good question. Canada where I [am from]... everyone knows I'm Canadian...those functions are separated. The Central Bank of Canada is effectively just doing monetary policy. Regulation of the banks themselves, and we have five big banks, some other banks and, of course, the larger financial sector is regulated by any other group, works perfectly fine for us. So I think it's certainly an option. One of the things people may not realise, just for historical reasons, if I remember right two-thirds of the banks are supervised by the Central Bank and one-third supervised by the NIDC. Just for historical reasons they use the same standards, as an example. So we already have supervision done by [a] non-CBN group there, so I think both models can work but I think it's probably, you're right, easier in a leadership sense if the Central Bank can just focus on the core issues of monetary policy, exchange rate policy, interest rates and some other group does the supervision. But I think that issue in the context of our overall problem is probably a secondary issue for the moment.

Tobi: Let's go out of that orbit a bit. The creative industry, Nollywood, music and all, how much of a growth potential does it have? Netflix is now in Nigeria and there's a lot of excitement.

Andrew: It's massive. We've done some work in the creative industries, how to get funds to them. Even though there are lots of barriers, you'll still see the incredible success of the music industry and now the Nollywood industry around the world, and of course it's massive domestically. But to make it grow more we need to have a little more structure in the industry, particularly people that are creative, that create these incredible products need to be able to get the fruits of their labour. I mean issues around piracy and distribution. But I think enough people have recognised this now, as I said we've done some work...there are people, groups with money outside of Nigeria who now recognise and want to invest in this industry. And again, as we're saying earlier, Outsource Global, Tek Experts, Microsoft...they are exporting Nigerian brains and earning FX for the country increasingly. Nollywood and the music industry as well are earning FX for the country, big exports. And of course, it's not just Nollywood, it's also fashion, for example, it is a big part of African fashion, people around the world are listening. Last night after dinner we listened to Nigerian music, it's just... that's what we do now. It's fantastic, and I think it is also a fun industry. One of the things that Nigeria does better than any other place that I have ever really lived is events. I mean it's just incredible when you sort of see some of it...and of course, it's tied together and night clubs, parties, all of that is tied together with the entertainment industry is a great part of Nigeria.

So I think it should get a lot of attention. Now, one of the things that is critical to it, of course is, again, financing. What's happened over the last few years is the banks have become a little more specialised in what they support. Five years ago you never heard of this but now there are some banks, I won't name them here, that are focused on the entertainment industry. The way it works in banking or financial industry is, you really need sector expertise. So if you look at, say, for example, Sterling Bank they have a public strategy, health, education, agriculture, renewables and transport. They really go deep in those sectors. FCMB has come out very clearly says it's going to be agriculture-focused and then some other banks as I said now focused on Nollywood and the music industry. To the extent they've got [the] expertise, they have better ways of channelling money into it. So I think we'll see it develop rapidly and that should be encouraged. Again, it's a service industry but it has great potential to generate value for Nigeria.

Tobi: Let's talk about the tech sector. You are an investor and also an entrepreneur in that sector, what is the current state? I'm asking this because, of course, this is going to be a bit controversial... I have a few friends who think that the way things are currently is still a bit overrated...

Andrew: The tech sector. The tech is overrated?

Tobi: Yeah.

Andrew: I think the thing about the tech sector you have to remember is... I meet so many young entrepreneurs, I always make time, someone reaches out on LinkedIn, I'll read the business plan...and, you know, the energy level of the entrepreneurs is just fantastic and just the sheer courage to try something. But the truth is into these, sort of, startup tech things, most of them are going to fail. Sometimes the young entrepreneur is absolutely convinced of his or her success which is fantastic, you need that energy. But the point is you might have fifty fail, but if you have three that succeed in a big way that makes a difference to Nigeria, that is what we want. I don't want us to focus on the failures, what I want us to focus on is how do you create something that works in the Nigerian condition? If we take two areas or three areas, so we take edtech, healthtech, and cleantech/energy. So, health and education - we have said it's basically impossible for Nigeria to duplicate the models that were built 150 years ago in these areas in developed countries. So if you think of medicine, you have physical doctor, physical nurse, you have one doctor for every 500 people on that. We can't mathematically ever get that many doctors in the right location, so there has to be some technological/healthtech kind of breakthrough to deliver. And I know lots of people working on it, we should encourage that and there will emerge out of that some successful ones that find the right models to put things together.

In a way, Nigeria has spent its money and in many cases not getting anything for it. - AN

Similarly in education, particularly with Covid-19, people have started to realise they can learn remotely, they can interact with people remotely. Now, how do we solve it for education for Nigeria? But, again, the local conditions are so critical. I've seen some people trying to bring solutions from developed markets, but we don't have the power, we don't have the bandwidth and then your solution fails. What I want to encourage our young entrepreneurs is to try to find things that work under the Nigerian conditions and can piece together these challenges and solve it. Cleantech, as I mentioned, [is] exactly the same thing. Even if we build out the grid, we'd still have, I think estimated for Africa, if the grid was built out economically we would still have 400-500 million people who are not connected to the grid in Africa in 10 years. So the only way to deliver power to them is in situ, like, where they live the only way to do that is obviously through solar. Because if you have to deliver them some kind of fuel, one that pollutes but too, it's just the same problem as the grid, it doesn't really solve the issue. Again, what are the solar solutions that are coming through? Lagos is actually the centre of solar technology around the world, small-scale solar right now. We have so many companies trying so many different things. Some will fail and many will fail, some will work. What I will say about the tech industry is, yeah, there's a lot of hype, one of the areas that I'm not so convinced about is AI (artificial intelligence) you're always hearing about it, what does it really mean? But out of that hype, there's going to be people that build organisations and companies that solve real problems for Nigerians.

Tobi: How significant is the talent gap in that sector? Jumia has their engineering staff in Portugal, I know a popular fintech that has their [it’s] engineering staff in Turkey, and is that a function of our low investment in education?

Andrew: Well, I think as we know, when Nigerians are given the opportunity, they are incredible learners. We said before, the diaspora has gone and done great things in many countries when they get the education. But in answer to the question, Tobi, yeah, the country is underinvested. People are not getting enough education, resources are diverted to the wrong things, so we started to say the only thing that public money should be spent on are education, health and to some extent some infrastructure, particularly roads. Toll roads are quite inefficient so it makes more sense for the public to finance the roads, but not the port, not the airport, not Ajaokuta Steel, not refineries. In a way, Nigeria has spent its money and in many cases not getting anything for it...it has wasted its money the wrong way. The way we put it is, the only thing that [the] government should be investing in is the Nigerian people. Invest in Nigerian people, [the] economy is going to improve. [If] what you just described doesn't happen, we get programmers in IT people who are domestic, we get some of that exported through these kinds of companies I talked about, some of it go to the diaspora and we get a flow back. But, yeah, we need to invest in people, it's that simple. So if there is one message that we as PwC would like to give the country is if public sector resources are invested in people, the country will thrive.

Tobi: Let's close out with coronavirus, the pandemic. The conversation in Africa and, of course, Nigeria has been about how affordable are the economic cost of this, weighed against the public health measures that are being taken - the lockdown, and everything...what some are calling a Keynesian supply shock that has caused even a larger plunge in demand and margins are down for a lot of companies. What I want to ask you is this, if you are in the room with the presidential committee or task force that is responding to this, what are the things that we need to do to have the right balance between the economic cost and the public health measures right now?

Andrew: Well, Tobi, I'm not sure I'm wise enough to know the answer to that. I think we all grasp just how difficult the situation is and I really...as you said, the health unknowns, the economic challenges. Six or seven weeks ago, we said the two things that countries need to focus on are: one, getting resources to the bottom of the pyramid and, two, keeping the food supply chain intact. Why is that? Because we understood a lot, you know, in the beginning of this...what would happen is if you have a lockdown, all the people who are in the informal economy or even the formal economy that are effectively earning daily income, daily wages, they are going to lose her job. We've had tens of millions of people in Nigeria lose their source of livelihood in a very short space of time. Everyone needs to eat, so getting them resources is the most important thing and, of course, it doesn't work if the food supply chain isn't intact. The issue with the food supply chain is you actually need some movement [because] where food is grown is not the same place as where it's processed which is not the same place where it's consumed.

I think the government has done a good job of focusing on those two fundamental issues, it's imperfect, we don't really have a great system for getting resources to the bottom of the pyramid on that, but I think that between the government, civil society, private sector...people have recognised this issue and they've really been doing the best they can. And, of course, individuals - every individual that's doing well in Nigeria is connected to people who rely on their daily wages and to the extent that they can, many I know are supporting people who have lost their livelihoods. So in the short-term, that's what the country needs to focus on and I think that the Federal Government has done a good job. That said, it's just so complex...it complex from a science, health perspective, we don't know everything about Covid-19, the transmission, asymptomatic people, how many people have it... it's challenging from a testing viewpoint in a place like Nigeria. Testing is being ramped up but still, we haven't tested in a lot of the population.

So I don't know the trade-off, I think the Federal Government agency/taskforce is doing the best job they can but we're also seeing cracks with the coordination with the state level Governors, they are under pressure. We all see what's happening in Kano, what the Governor is saying about relaxation during Ramadan (Kano lockdown), yet, there are 100 new cases, over 90 in Kano. How many real cases are... I'm not second-guessing the government, I think they've done all they can in a very difficult situation and I think we're in for, at least, a few months of real challenges in Nigeria. And I want everyone listening to stay safe, keep as many people safe as you can, it is not easy.

Tobi: Finally, Andrew, it's kind of a tradition on the show...what's the one idea that you would like to see everyone either in Nigeria or globally adopt?

Andrew: We, and I, personally, have started to advocate in Nigeria that we don't measure GDP, that we measure the progress of Nigeria by the progress on the Sustainable Development Goals. The relationship between GDP and human welfare is not that strong and as I said in the 2010 to the 2014 period GDP grew a lot, but the benefits were disproportionately distributed. SDGs are very clear - no hunger, no poverty, good education, clean water access to healthcare... those are things that actually really matter to the welfare of Nigerians. So the one big idea we have is rather than every day we stand up and talk about GDP growth 2.1 percent, 1.6 [percent], 5 percent, whatever the number is, I would like to have a scorecard across the country in every state [of] how is the state doing on their SDGs and have a way of gathering. So people like me can stand up and say" Kwara State is doing fantastic on these dimensions that really matter to people, Cross River is doing great, this other state is doing not so well, Lagos is making progress". I want the language, let's call it the "lens" to shift from a GDP lens to  Sustainable Development Goal lens in Nigeria. That's my one big idea for the day.

Tobi: That's interesting. Thank you very much, Andrew, it's been fantastic talking to you.

Andrew: Thank you, Tobi.

This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit www.ideasuntrapped.com

I spoke with Dolapo Oni, an energy analyst, and wealth manager. We started off with the recent downward spiral of oil prices. We also talked about his preferred political reform, the capital market, and how to boost productivity in oil production.

You can listen or download here if you prefer Stitcher. We are also working to make the show available on Apple, Google, and Spotify. I thank Dolapo for generously sharing his insights and time (I had to wake him up early morning twice!) with us.

This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit www.ideasuntrapped.com

I spoke with economist Omotola Abimbola on the CBN governor's manifesto for Nigeria's post-crisis economy. We talked about the flaws of our current development model, and he proposed some credible reforms. Omotola is one of the smartest in the business and a complete gentleman. You can follow his twitter feed here. You can also listen or download this episode on Stitcher.

This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit www.ideasuntrapped.com

An unscripted, unstructured conversation with my friend "the black bandit". The listening options are unchanged (Stitcher here).

This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit www.ideasuntrapped.com

I enjoyed talking to Nonso on this episode - and many thanks to him for making the time. This is not part of our COVID-19 quickcast series because we had scheduled this conversation before news of the outbreak and subsequent lockdown. Nonso was characteristically eloquent and got straight at the heart of the questions. We talked about different models of economic development, the Central Bank of Nigeria, and how we are better with a more democratic approach to economic policymaking.

The listening options are the same as always(play or download above or do the same via Stitcher here), you can also listen or download all our previous episodes by subscribing to the newsletter.

TRANSCRIPT

Tobi: This is Ideas Untrapped and I am here with Nonso Obikili, remotely. Nonso is the Chief Economist of BusinessDay Newspaper and a non-resident fellow at The Centre for Global Development. Welcome, Nonso.

Nonso: Thank you, happy to be here. Remotely.

Tobi: [Laughs] So... we're really in the midst of a lockdown, at least the three supposed epicenters of the outbreak...that's Lagos, FCT, and Ogun. So I just want to gauge what you think the effects are going to be from a macroeconomic standpoint. Just a brief overview, for you.

Nonso: Well, I think it's important to understand the context. So in this instance, because of the pandemic, we know that from an economic perspective the best thing to do would be to get through the pandemic as quickly and as painlessly as possible. And to do that, it is necessary to shut down some sections of the economy. When we say a lockdown that equivalent to a shutdown of some sections of the economy. So that's a deliberate action to, in a way, shrink the economy to deal with the pandemic. That's the context. If you're deliberately shrinking the economy, of course, you would have a fall in...if you measure it, but you're doing it on purpose. But the whole idea is to respond to the pandemic quickly and then recover quickly. So the real question is how are we able to get the economy started again once we are able to deal with the pandemic and, of course, to deal with the pandemic as quickly as possible? That's one side of things, but from that perspective, you can't really see a slow down in the economy as a bad thing. It's a necessary action in that sense, and we would only see the full impact once we start to try to kick-start the economy again. But in the Nigerian context, there are other issues going on. Now, this is a global pandemic and one of the things that happened is that it has resulted in a collapse in crude oil prices and as we know Nigeria is still very vulnerable to the oil industry. It still accounts for roughly 90 percent of all our exports and it still accounts for maybe 65 percent or so of government revenue. So any decline in oil prices means a real shock to the economy and this decline is particularly bad because if oil prices drop from 100 to 70, that's a drop but there are still inflows coming in. But this is dropping to the 20s and if you add production costs to that then we may necessarily be getting almost nothing to very little in the short-term from the oil industry which is a big, big shock. I think this is probably the biggest shock we have we have seen in a very very long time. I think that's problematic. But it's even more problematic because a lot of the emergency responses that we would have had are unavailable. In the past, we had an excess crude account that we could use to kind of managed through a couple of months until we figure out a proper response but the excess crude account is essentially empty and the replacement which is the sovereign wealth fund has very little funds in its stabilization account, so there’s not much fiscal buffers there. Another alternative would have been to rapidly increase debt to deal with the short-term crisis, but again because this is an international pandemic - it's a global pandemic - the international debt markets are very difficult right now and so it's very difficult to raise funding from there. But our debt position is already very constrained. As at last year, we had about a debt servicing costs to revenue ratio of about 65 percent which, again, implies that for every one Naira of the Federal Government revenue 65 percent went to servicing already existing debts. So we're already kind of limited on the debt front. And as a final kind of option, the nuclear option as we say, you could always resort to monetary financing which is what we are seeing in places like the US, in the UK where the Central Bank just steps into kind of deal with the problem temporarily. But, again, even on that front, we've already been doing that for a while... and it's not clear just how much space the Central Bank has to take that kind of action. So on all these measures to deal with the collapse in oil prices, we seem to not have all these emergency measures available. And so the question now is what do we do? How do we get through? Remember the first part is to get through the pandemic and the second part is to start to recover after the pandemic. So it's not really clear what we're going to do, for now.

Tobi: Yeah. So given the tight position we seem to be in from what you just explained, what would be your... I know forecasting is not an exact science, but what would be your prognosis for the economy in the next few months? I think a few days ago with the minister of finance came out and said that Nigeria could be in a recession in six months. So is that accurate? And if true, what do you think really could be a way to avoid the worst-case scenario?

Nonso: Well, I think we might already be in a recession. Remember, we are only growing at 2 percent. So you don't need to fall too far to get to below zero. Of course, recession technically is two-quarters of negative GDP growth which means technically you can't get into a recession officially until the second half of the year. But in practice, I think there has been already a big collapse in economic activity and again part of that is on purpose. Remember, we're shutting down the largest state in terms of economic activity - Lagos. We're shutting down Abuja which is also a very big state. So you are shutting down these key parts of the economy which mean that if they are really shut down then you should see slowing economic activity. So I would bet that we are already in a recession now because of the lockdowns. That being said, remember the goal is to lockdown, deal with the pandemic and then recover. Do I think we will recover out of recession in the next six months? I don't think so. Simply because there are already all sorts of other issues that we need to deal with. Q1, of course, is the collapse in oil prices which does not look like it's going to recover soon, but even before that there were already a lot of pressures building in which this collapse in the oil price is kind of... it's kind of like a straw that broke the camel's back to put it that way. So I think we would already be in a recession once we incorporate this lockdown but I don't think that we are going to get out of that in the next six months or even in the next year. Now, what can we do to prevent that? Again, that question is kind of moot because if you're already in a recession, the question is how do you recover? What can we do to recover? I think there are many things. As an emergency thing, one thing we can think of doing is to look for an emergency bailout from somewhere. That would give us the kind of space to deal with issues over the next six months to one year. But barring that, I think we need to move towards a more conventional kind of policy environment.

One of the things we've seen over the last few years is that we've gone into all sorts of creative economic policies. You know, things like border closures and foreign exchange windows and all these things. And I think getting rid of some of those things might help the economy grow a bit faster than it was before. But ultimately I think we need to have some fundamental changes in just how the economy works. In terms of government revenue, I think we need more fundamental tax reforms because anyone hoping that the era of oil prices going back to 60, 70, 80, maybe a 100 to kind of save us, I think those days are well and truly over. But it's pretty obvious that there are problems with the current tax structure. So I think we need to start asking that question. I think in general, we need a more open economic policy agenda. Open in the sense of allowing people to trade relatively freely, incentivizing ways to participate in global markets. I'm not a deregulate everything person, but I think we need more flexible regulation to allow people to make decisions and take risks. And so I think if we do all these things in the near-term, then we might be able to start to see the economy pick up again more quickly. Of course in the medium to long-term, it's the big investments that count. The investment in education, investment in health, investment in infrastructure. But that is a medium to long-term agenda.

Tobi: Okay. Let's zoom out a bit. Say these were happening like 30, 35 or probably 40 years ago, we can say that China or South Korea could be in the same position that Nigeria is currently. But I think they made some deliberate choices, policy-wise... maybe to industrialize, to open up to trade, be more export-oriented, etc. Why haven't we been able to do that? Where exactly is the logjam in terms of policy in Nigeria?

Nonso: I think our political economy has not allowed at that kind of focus. Of course, we can, you know, forget about the dictatorships days... the military regimes. In those days the whole point was how to extract and share oil revenue. But since 1999, with democracy, we've seen a bit more freedom, but we've also seen a bit more (kind of) political misadventures, to put it that way. We've seen a big rise in crony capitalism and the idea of using government to kind of corner market for specific businesses. So that has been kind of something we've seen. We've also seen a kind of short-termism in terms of just government spending. We've seen successive governments think only about the next 3-4 years and how to deliver returns that give political victories. So we've seen government focus on things like fuel subsidies and all these short-term plans that really ignore the key underlying factors that grow economies in the long term. I think from an economic perspective the issue has been that the political environment has not been suitable to make those kinds of long-term decisions and long-term investments in education, in health, in trade, in exports and all that. But again, it's easy to blame politicians. I don't think it's a result of politicians alone. I think just in terms of the development of the Nigerian voters, I think these issues that are fundamental to long-term development have not been the issues that are focused on during elections and I think that's where the fundamental challenges [are]. If you think about the issues that have driven past elections, they haven't been about trying to boost education, it hasn't been about trying to build a proper healthcare system, it hasn't been about how to invest in infrastructure or trade, it's been about other issues and I think that's the fundamental challenge. Because if you don't have a population that puts these major investments as a primary concern, then you end up with outcomes that are not about those concerns.

Tobi: But isn't that a feature of the political space itself? Like electorates are usually faced with should I say poor choices in terms of who to elect?

Nonso: Well, yes. Our political system is very difficult in the sense that the process of getting on a ballot box is completely useless, for lack of a better word. So you end up with electoral choices that are in many cases not particularly ideal. Having to choose between two candidates that you don't particularly like. That's part of the problem, that's part of the issue...that once it comes to elections, especially at the highest level, the issues that count for getting on the ballot box aren't the issues that are important for policy-making for long-term development. They are other things. And I think that's...again, it's always easy to kind of blame politicians, I think it's a society problem in general. And it's a challenge that we still... as a society, as a country we still haven't found an answer to yet.

People who are poor know best about how to live in poverty than people who are not. -NO

Tobi: You wrote an article, I think [in] January (I'm not sure now) about a rights-based approach to development. Can you expand on that a bit?

Nonso: Honestly it's a very simple idea that even though we have a lot of poor people, even though we have a lot of less-educated people, people know best about their situation than anybody else. People who are poor know best about how to live in poverty than people who are not. People who are trading know best about how to trade than people who are not. People who are doing any kind of business know best about their business than most other people. And so the idea that a policymaker can sit down in an office in Abuja and unilaterally decide everything that should be done without taking into account the people who are actually living... who are actually living through this, who are going to implement this, I think that's always problematic. Most people want to get better off in life. Most people have constraints, of course, but I think incorporating the thoughts, opinions and rights of people I think is a fundamental part of any kind of economic development strategy simply because people are a lot more active and a lot more knowledgeable about their particular conditions than most people, especially most economics and policy analysts give them credit for. That's kind of like the basic idea, and you can think of it in very straight forward terms. A very simple example is the decision on what to do with foreign exchange, for example.

Tobi: Okay.

Nonso: If I am a farmer, I grow ginger and I export that ginger to, say, China and I'm paid in dollars. Who should decide what to do with my dollars from my hard work? Should it be some guy saying I am the CBN and or should it be me? It's a very simple example but a rights-based approach to development says it should be me who decides what to do with my dollars. Of course, you can have regulations, rules and all that. But fundamentally, I should decide what to do with the fruits of my labour after paying in all taxes, of course. And if you have that, then you tend to have foreign exchange markets that are more pragmatic, that are more realistic compared to if you have somebody in an office somewhere trying to unilaterally decide what to do. Because, of course, when you unilaterally decide what to do, you're taking away the rights of the person who actually did the work to use the fruits of their labour. That is also a very kind of simple example, of course, you can see that in many other parts of the economy. Who decides what to grow? Who decides which port to use? How do we decide how to transport that stuff from point A to point B? Do I have the right to decide what to do or do I get orders from Abuja to do what needs to be done? If you think of the border closure, for example... if your exports are sitting down in Sokoto, it may not be particularly useful to have to export through Lagos, it might be better to export through Niger, or through Cotonou or even through Togo and if you had the right to choose what to do then you could choose the best option for you. But if you have somebody who unilaterally decided that the land border should be closed and everybody most export through Apapa, then you end up with a worse outcome. The rights of the person who's trying to export have been ruined over forced-on development agenda...again, which I think is not ideal.

So, yeah, that's just a basic idea that "look, the best development policies are those that acknowledge the rights of the people who are the targets of development" and to recognise that they are not mindless chess pieces but they are actually human beings, they actually have rights and they actually want to improve their lives, so taking that into account and should be front and centre of any kind of development agenda.

Tobi: Where I really want to push you a bit on this issue is, I don't know... it reminds me of another paper by Easterly "Progress by Consent". I think the basic idea is there. So now, do you think in all honesty that the sort of Adam Smith tolerable administration of justice and other rights-based approaches is enough at this stage in our development and globalisation generally, do you think that's enough to push the rapid income convergence that places like Nigeria need? You have East Asia that went with a whole different approach and so far so good it's worked for them. So what you think about that?

Nonso: When you say a whole different approach what do you mean?

Tobi: Well, for example, South Korea did unconventional monetary policy for one. They had multiple exchange rate windows, but they were more export-oriented, they were more... they were highly bureaucratic in their approach. We can say that they trampled on people's freedom a bit but they still focused on what I think were the right things which are exports, manufacturing...yes, some of those measures were relaxed after a while and today we can talk about those countries in the same light as the other Western nations. So, yeah, that's what I mean.

If you think of most of the Nordic countries, for example, you wouldn't find episodes of 10 percent GDP growth and all that in their history. What you would find is just sustainable growth for 60, 70, 80 years and they are developed as any anywhere else. - NO

Nonso: Okay, well, I think there are many things there. I think one of the things that people try to forget about most of the Asian Tigers, to use that phrase, is that in the 60s there was this rapid improvement in education. Even before you started to see all the rapid growth there was a rapid improvement in the education of the masses and that served as the foundation for most of the growth that we saw in the 1980s. Now if you have a very highly educated population, then even if you end up with a dictator, you kind of have to have a smart dictator to put it that way. And as you said, even given that they were "dictatorships", the policy focus was always kind of outward-looking. More exports, more trade, more interactions with global markets. And then there is the final factor which I think a lot of people tend to forget when we just simplify things as dictator or democracy. I think state capacity itself is independent of the mode of governance and in many of these places you have histories of very long states. Remember the world did not start in 1960 even that's when we started collecting most data. But the world is pretty old and in many of these places you have a history of very strong state capacity, which of course means that even if you end up with a dictator or a democrat, you have some of these elements of an effective state. Now, if you transition to most of sub-Saharan Africa especially Nigeria, for example, they are very few places where you have that kind of history of state capacity. In Nigeria prior to the colonial era, there is no Nigerian state at all, there is just a plethora of smaller states - some bigger, some smaller. In most of West Africa... most of sub-Saharan Africa, you don't have the same kind of historical state capacity that you have in some of these Asian countries which means that the idea of trying to use dictatorial brute force to develop a place was always going to be a bit more challenging. If you think of Nigeria for example, even though one of the things that the literature has kind of seen is beneficial for dictators in terms of promoting development is if you expect the dictator to stay a long time. That is, if you're a dictator, you're expected to be a dictator for 20, 30 years then you tend to do better, to put it that way. But in Nigeria, despite all our history of dictatorships, we've never actually had a long dictator. I think the longest we had was Abacha, if I'm correct? Which was about six years, right? Which is not a long time. So even within our dictatorial past, we do not have like strong leadership or a strong authoritarian government in the sense of longevity. We had a series of coups and a series of dictators come and go, always trying to prevent the threat of another coup and always trying to solidify their regimes to put it that way. I think a big part of that scenario is there is just no history of national state capacity in Nigeria. So the idea that we can, in some way, copy the South Asian path I think is problematic. I think just because of the issues that we have, we have to till towards a more republican, a more democratic structure and we need to find our path in that direction. Everybody kind of focuses on the Asian Tigers that grew rapidly over a short period of time, but the truth is, for most countries who have developed there was no rapid growth. There were just long, sustainable growth for a long time. If you think of most of the Nordic countries, for example, you wouldn't find episodes of 10 percent GDP growth and all that in their history. What you would find is just sustainable growth for 60, 70, 80 years and they are developed as any anywhere else. So rapid growth is nice, it looks cool but for most countries, it's not about rapid growth, it is just about growing consistently for a long time. And I think given our past, given our structure, that's what we kind of need to aim for. Of course, we want to grow as fast as possible but sustainability is just as important. Yeah, I don't think that we can adopt the dictatorial Asian Tigers' model. I think we can adopt parts of it ... which is the focus on education and the focus on trying to participate in the international economy. But I think given our history, given the dynamics of our politics we probably need a more democratic, more rights-based economic path.

Tobi: I think Gowon served for nine years. I'm not sure. Yeah, I think Gowon served for about 9 years.

Nonso: But a chunk of that was the war, so...

Tobi: [Laughs] Okay. Let's talk about the Central Bank, of course. So talking about rights and all that... monetary policy in Nigeria has been, I don't know, unconventional recently. I think you had an exchange with the CBN governor sometime last year and a lot of issues came up. Here is an institution that we would agree functions better when it's independent but there's a bit of a paradox, at least, with the current regime where it's gotten a bit political at least on the currency issue where monetary policy is kind of towing the presidential line from 2016 upward and at the same time there is really no oversight for what the CBN can do. How have we found ourselves in that position?

Nonso: Well, I should do the selfish thing and say it's what happens when you have no economists at the Central Bank.

In terms of our macro policy space, it has been dominated by FX over the last five years and everything seems to revolve around trying to manage the exchange rates which again has led to all sorts of unconventional policies as we say. - NO

Tobi: [muffled voice]

Nonso: Oh, we have a few economists but over the last maybe decade-and-a-half the Central Bank has been filled with bankers and accountants who have a different background and a different view of economic policy than most macroeconomics will have. That is kind of the fundamental problem to me. Because you will always have issues of Central Bank independence, you will always have issues of Presidents wanting ABC, but what you need in that kind of situation is a Central Bank that can articulate the reasons why ABC are not ideal, not feasible and that can explain an appropriate monetary policy path not just to the Presidency, but to everyone in a credible way. And I think that has been lacking. Once you have a Central Bank where there is not a basic understanding of macro policy, then you tend to have all these kind of challenges. I mean, let me just be fair, there are lots of very good economists at the Central Bank but very few in actual decision-making positions which is problematic. In terms of our macro policy space, it has been dominated by FX over the last five years and everything seems to revolve around trying to manage the exchange rates which again has led to all sorts of unconventional policies as we say. We've seen lots of administrative measures trying to limit demand for foreign exchange. We've seen the bans on the use of FX for importing XYZ, I think there is still a 41 or 42 items list. We've seen all sorts of things like milk being banned. All that to try to limit the demand for foreign exchange and then at the same time we've seen all sorts of policies to try to incentivise short-term portfolio funds to bring foreign exchange, chief of which is the issues in the OMO market with the CBN bills, where the CBN is essentially indirectly kind of borrowing foreign exchange at very high rates 14, 15 percent which is unheard of. But the foundation for all that is an attempt to keep the exchange rate fixed. Not fixed in any particular real sense, but fixed to the US dollar which is a crazily strong currency. And what has happened is you've had all these imbalances kind of build up as a result.

Nigeria is not the only country in the world that has its own currency, many other developing countries have their own currencies - South Africa, China, even India. But if you look at the Naira relative to these other emerging markets or developing countries' currencies, the Naira has strengthened a lot over the last 2-3 years. Again, all that is as a result of trying to arbitrarily keep the exchange rate fixed to the US dollar which has been kind of the foundation for most of the macro policy, and all that seems to be maybe indirectly a consequence of a political decision to manage the exchange rate as tightly as possible. So yeah, it's problematic and it's resulted in a lot of heterodox, as you've said, monetary policy. But I think importantly, that kind of environment has proved difficult for economic growth. We've seen growth struggle and I think that is partly because of that macro-policy environment. Of course, there are all sorts of other issues with the Nigerian economy beyond just monetary policy but we've seen investments into short-term securities as the only investment that is incentivized which is not ideal for a country of Nigeria's position. We should be doing what we need to do to incentivise long-term investment (foreign long-term investment). What we are seeing is a push towards short-term securities which has its uses but again it's not ideal for economic growth in a country like Nigeria. So yeah, many challenges, many problems but I think fundamentally the attempts to try to, like, maintain exchange rate stability to the dollar at all cost is kind of like the source of many of the challenges.

Tobi: Okay, let's talk about the role of the media in all this. I know you write a weekly column for a newspaper, is part of the problem public discourse on economic issues? What is the role of the media in this? Economists are not really driving the conversation in the media and yes I know there is Twitter and all that...but is that part of the problem? Is economic education broken because the media landscape has been empty in that regard?

I think leadership needs to have a proper policy philosophy and get the public to buy into that. - NO

Nonso: In a way, I'll say yes and no. Let me be a fencist on this one, I'll say yes and no. No, because economics is like a very weird field in the sense that for any particular issue, for many issues you have economists who disagree and that kind of disagreement means that there is no consensus on many things. Which, again, means that it's difficult to kind of drive the public towards one direction if there is even no consensus within economists. But on the other side, yes. A lot of the discussions around economic policy seems to be focused on trivial issues without any kind of long-term thinking. A good example we could think of is the discourse during the fuel subsidy debate in 2011 or 2012. I think in that instance the media played a big role in driving home the idea that the issue was corruption, not necessarily that the subsidy itself was not ideal. And that definitely made an impact into the relapse of the policy. So yeah I think the media can do a bit more in terms of driving the debate, nudging the public towards a more ideal kind of position. But I think ultimately it's truly about leadership that needs to articulate that position. Populism is a very common problem around the world, and so if you always follow what people want directly then you end up in difficult situations. So it's not just in Nigeria, it's everywhere. I think leadership needs to have a proper policy philosophy and get the public to buy into that. And from that perspective, the media plays a role, but the media is not the key determinant of the outcomes. I think leadership is a bit more important. If you have a leadership that has a credible economic policy and that convinces people via the media to buy into its policy philosophy, then the media has a role to play there... but if you have the media just regurgitate some of these more populist agendas then you end up being in a difficult situation.

Tobi: Okay. Before I let you go... if you had to choose between these three long-run structural forces as one with the heaviest hand in our affairs in Nigeria, which would you choose between institutions, geography or history?

Nonso: I think it's obviously institutions. Geography is fixed for the most part and part of the story of human development is being able to overcome your environment, so geography cannot be an excuse. History is history. History has already happened and even though history counts, history matters, nobody is locked into a particular historical path. Every country, every society has the agency to change its direction, erm, so I don't think history is a big constraint. But I think the institutional capacity is where the big challenges lie. So, yeah, I will lean towards the institutions answer...although institution is a very broad term encompassing lots of things but even at that, I think I will lean towards institutions.

Tobi: Okay. I want to indulge in a bit of gossip before I let you go finally.

Nonso: [Laughs]

Tobi: There is an anecdote out there, I want you to confirm whether it's true for me...that the current CBN governor actually said "I'm not your mate", is that true or not?

Laughs

Nonso: Well, I think it will be unfair to only pick out a part of what was a much longer conversation. So I would decline to answer that. But of course, I'm much younger than the CBN governor, so, technically I'm not his mate.

Tobi: Okay, but you're not going to get off that easy. What was going through your mind at that exact moment? What was going through your mind?

Nonso: To be honest I was just excited to be having that conversation in the first place. So for me, I think getting my message across was for me the most important thing and I think I was able to do that. Everything else was just secondary. But, I mean, it was an interesting event, to put it that way.

Tobi: Alright, thank you very much, Nonso.

Nonso: Thank you too.

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