TO most of us in the third world, the true meaning of the concept of democracy remained shrouded by the rhetoric of the cold war. The impression created at all times was that the "West" and the "East" were pitched in combat about whose way of life should rule the world, democracy/capitalism or communism/socialism, with capitalism being presented as being synonymous with democracy. Not everyone could accept this, and so we have had variants such as ‘democratic socialism’ ‘pragmatic socialism’, mixed economy ‘ and so on, as politicians and rules seek to imbue on their parties and regimes the best attributes of the two contending worlds, or to blunt the perceived excesses of any one system. In Africa, we have embraced these concepts with reluctance as we tried to preserve our heritage, our value and our customs from the threats induced by the dynamics of the modern economy we are building.

The recent collapse of the socialist system appears to have emboldened the ‘West" to declare ‘TINA’, (There Is No Alternative). Even before the Soviet Union collapsed, and over 20 years ago, the true nature of the conflict was brought into sharp focus by Baroness Thatcher, then Margaret Thatcher, when her conservative government took major steps to hand over the commanding heights of the UK economy to the market. The world has not been the same since then and nation after nation is now obliged to arrange an orderly transition involving the cession of control by government to the market.

It is therefore argued that the real battle everywhere was not between east and west as such, but between governments and markets for control of the economy. Whenever it was convenient, government as sovereign declared market failure and intervened to replace the market with administrative fiat. It did not seem to matter that the markets were poorly designed, poorly run or not given a chance to perform! To others, mass poverty and the need to achieve rapid growth compelled the state to take on the role of the market. Whatever the motivation, the use of administrative fiat for the allocation of resources has also now failed, leading to liberalisation, deregulation and privatisation. Hence TINA!.

In Nigeria, we are currently democratising as part of a transition, the transition from military to civilian rule. Our new democracy is coming with all the usual expensive trappings, such as a senate, house of assembly at the federal level and in all the states, assisted by municipal councils in all the local government areas of the country. The popular view appears to be that once we have these structures in place, All IS WELL. All will not automatically be well, but an important first step would have been taken . Unfortunately, unless care is taken the euphoria which civilian rule will create, will, following a long period of military rule, make the people a little short tempered at a time when patience is most needed.

It is therefore not enough to have these political institutions, for even the legislators, never having been used to such structures will need time and practice to become sufficiently familiar with them to make governance efficient and effective. The public, including the media, will require even more time and tutelage to become familiar with the workings of democracy and to accept the slow pace of due process as an adequate substitute for the arbitrariness and ‘automatic alacrity’ of military fiat, to which we all now used. The demands for national stability will therefore be greater in the days ahead.

The concept of democracy that the public, including the elite are talking and think about is political. Since as we earlier observed, democracy assumes a high minimum level of affluence and well being, successful democratisation must be predicated on continuing economic performance. Put simply, continuing economic performance is the foundation for sustainable democracy and national stability.

In this regard, we should note that ‘...The central puzzle of human history is to account for the widely divergent paths of historical change. How have societies diverged? What account for their widely disparate performance characteristics...’ In simple language why do some nation make it while others do not, considering that we all started as primitive societies of hunters and gatherers.

There is no need to look to the stars for answers regarding our performances or lack of it. Posterity will most probably see it as Shakespeare did, when he said in immortal ‘Julius Ceaser’ that the ‘...fault is not in our stars but in ourselves.’

With the benefit of hindsight, we can retrace our history, and in particular our various economic, fiscal, banking, industrial and other policies to determine how much or how little they contributed to our economic performance. Economies do not come ready-made: they are designed, redesigned and built up over time through our policies and programmes. It may therefore be said that they evolve with time. In the process, ‘...Institutions, together with standard constraints of economic theory, determine the opportunities in a society. Organisations are created to take advantage of those opportunities.

Entrepreneurs create organisations to exploit opportunity, which they perceive. The more of such organisations there are, and the more efficient they are at exploiting opportunities, the greater the amount of transformation they bring to bear on the economy and on society. The rate of evolution should be such as to deliver prosperity rather than poverty, and this is achieved where the rate of economic growth exceeds the rate of population growth.

Nigeria’s economic development so far has been characterised by a large measure of central planning and direct state participation in economic production which is progressively giving way to private sector led development. A final major exercise in the cessions of control to the private sector will occur following the planned privatisation of public enterprises for which a decree has only recently been promulgated. There is perhaps little purpose in recalling that government incursion into direct production which was at each stage justified on the grounds of market failure was made possible by the abundance of oil wealth, and the absence of entrepreneurs to bring about rapid change.

Nigeria has had mostly military regimes, and in military regimes the assumption of unity of command and control easily leads to the assumption that the leadership know what is best for society. Abundant wealth and information about the local and international economy gives such leadership the wherewithal to implement its ideas. Unfortunately, as we have not learnt ... the sum total of knowledge available in an economic never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess.

• "...Simply put, no government can posses all the information needed to regulate property or to replace the market..."

It is on account of this new perception of reality that governments are ceding the commanding heights of their economy to the market and the private sector.

Market guided democracy

From this perspective, we immediately look at all members of society including governments as economic units performing one economic role or the other, alone or in collaboration with others in society. Economic policies are guidelines, which encourage economic units to strive to achieve their best, with the ‘invisible hand’ ensuring that in serving their best interests they would be serving societies as well.

Economic policies also prescribe the framework in which these economic units operate and prescribe the manner in which they may compete and collaborate for the achievements of various economic goals. The sum total of these goals becomes the goals and aspirations of the nation.

The organising principle of society made up of economic units therefore becomes an economic institution, The Market. Not every economic unit will operate in the same market or at the same time, but ultimately, every economic unit will operate in at least one market or another. Society needs stability so that markets can function efficiently and so that the people can thrive and prosper. There is this aspects of democracy, its relationship with markets with which we as a people are not yet sufficiently familiar, and yet without it not only will our democracy not endure, there would hardly be any national stability to talk about. In a market guided democracy, government remains the sovereign, but with the limited role of setting up the markets in the first place, ensuring the prevalence of the rule of law under which the markets so set up can flourish and ensuring that they do so in the most efficient manner.

What then is the market and what are its strengths?

It is reported that some years ago, students in the Philippines rioted and that late President Marcos was very upset. He summoned his cabinet and demanded an explanation for what was going on and who was responsible for what. When he was told that the law of supply and demand caused the problem he heaved a sigh of relief. He then demanded that the decree be brought up to him for its immediate repeal! A civilian regime may have the power but does not enjoy the luxury of repealing decrees at will. Even President Marcos with all the awesome forces at his disposal could not repeal the law of supply and demand. Indeed, no government can. So great is the power of the market!

Economic policies are designed to promote economic activity. They can in fact also hinder economic activity, and for these reasons there are wide differences among the citizens regarding them.

According to Friedman, "...differences about economic policy... among citizens derived predominantly from different predictions about the economic consequences of taking action, rather than from foundational differences in basic values... about which men can only fight."

Unsound economic policies can promote markets, which are efficient in creating inequity and further distortions in the economy. Such markets would be doing what they were designed to do, but this would hardly be promoting the general prosperity or long run national stability that we all desire.

It also remains to be seen whether the communal violence which have been occuring with increasing frequency in various parts of the country derive solely from the sudden discovery of such fundamental differences in the basic values’ by people who have lived peacefully for hundreds of years, or from a feeling of marginalisation in the distribution of real or potential economic opportunities at the intersection of informal and formal rules and the traditional with modern society, or both.

The end of the economic activity is to bring goods and services to the point of exchange, or the market. It is here assumed as a goal of economic policy to ensure that as many people as possible are engaged in one form of value-adding activities or another.

• By definition, a "...Market is a place where buyers and sellers meet to transact the business of buying and selling with onlookers..."

Anyone familiar with traditional Nigerian communities will recall the central role of the village market, some held daily, some weekly and some even at night, all usually in an open and central part of the settlement. The market as an institution is therefore not new to us. On market days, everyone went to the market, buyers, sellers and on-lookers. To be cut off from the market was to be ostracised and to perish.

But a market is not always a place and there is now also greater choice and mobility. Increasingly, a market is a framework in which buyers and sellers transact their business.

A market system in a democracy is "...one in which economy activities are left to men and women, freely responding to the opportunities and discouragements of the market place, not to the established routines of tradition or to the dictates of someone else’s command..."

The main instrument with which the market works is the price mechanism, which is what the law of supply and demand, is all about. Every commodity has a price, and the price balances supply with demand at any point in time leaving a surplus or a deficit. These create their own pressures. Changing relative prices creates new opportunity to which entrepreneurs respond.

As economies mature and begin to manage larger amount of capital, they begin to need more complex market to fund industries and other large scale and longer-term projects. They begin to need specialised markets such as foreign exchange markets, money, capital and future markets. Our founding fathers first felt the need for such markets under colonial rule in 1957 when the Central Bank of Nigeria was established. Soon followed the specialised funds and banks such as the NPF (now NSITF) and NIDB. The Lagos Stock Exchange followed in 1961 to provide a market in Nigeria for dealing in stocks and shares and to provide a means of funding the state. That was long before we began to receive the massive capital flows from oil. These massive capital flows have however made little impact on our capital markets and have probably impacted the markets which other countries set up for themselves and a lot more. That is therefore a good reason to be concerned about our markets, especially as we approach civil rule and democratic governance under which our federal and state governments may be going abroad again for their capital needs.

The foreign exchange markets

Let us look briefly at some of our markets, starting with the foreign exchange market. In the beginning, even before foreign exchange became a scarce commodity, there was a market around Bristol Hotel in Lagos, which everyone frowned at, but obviously some used when no one else was looking. People were sent to jail in this county at a time for being seen with even one miserable ubiquitous greenback, otherwise known as the dollar. Then the SAP came and in the words of some our people, the naira went to the dogs, when the autonomous foreign exchange market was introduced as a solution to the rapid depreciation in the value of the naira. You all no doubt recall how this market has transformed from SFEM to IFEM to FEM and back to AFEM. Various techniques including the ‘Dutch’ auction, with or without quota have been experimented with in an attempt to discover an optimal method for the allocation of the scarce commodity. The foreign market at the CBN involving the banks is really a platform for collating the demand of all buyers of foreign exchange with government as the sole seller. This is the official market but it is therefore hardly a market in any sense of the word.

The ‘Bristol merchants,’ for want of a better name, on the other hand are all over the country. I have never seen them advertise, but they have continued to thrive, and have so far, survived all official onslaughts. The official rate of exchange has often seemed to be tracking their own rate. Few foreign exchange dealers in the banks would settle down to business without first touching base with ‘Bristol merchants’ as to what the rate is and where it is tending. Somehow, one finds that the rate quoted by the ‘Bristol merchants’ are closer to international rate than any rate quoted by the finest bank in Nigeria. The ‘Bristol merchants’ also appear to be linked to the international foreign exchange markets and to the forces of supply and demand more closely than the heavily capitalised banking system. Is it therefore unlikely that we shall fully understand our foreign exchange market without understanding the Bristol market as well.

The money market

Let us look at another market, the money market. The money market is as important as the foreign exchange market and as controversial. The official money market is operated by the Central Bank and the banks. The interest rate on this market (the price of money) is based on the treasury bills rate and is determined in annual monetary circulars issued by the Central Bank of Nigeria.

It is admitted in official statistics that the bulk of the currency in circulation is outside the banking system, in private hands, in underground safes and under pillows in private residences. Deposits are taken in this market and loans are granted but all outside the vale of regulation. There is thus an informal money market perhaps as large as or larger than the official money market.

Commercial and merchant banks as the main money market institutions, compete with one another to mobilise deposits from the public by promising them incentives known as interest, which not all persons are obliged to accept. Banks are to convert these deposits into investments by lending them to economic units, which can use them and earn rates of return greater than what they have to pay the banks for the money taken.

Occasionally, the system is said to become too liquid. When this happens, our traditional response, since 1976, has been to go to the banks and extract enough balances from them to reduce liquidity to the level considered appropriate. It does not matter that the bulk of the ‘liquidity’ may have at all times been outside the banking system. Our economy has suffered from excessively liquidity for several years now as economic activities continue to decline. The excuse for the current upsurge in liquidity is that funds from parastatals were transferred from CBN to the banking system. It was known well over one year ago that these funds were to be transferred. Yet three months or so to their being transferred, the interest rate on our treasury bills rose to 19 per cent per annum. Did our markets anticipate that excess supply of liquidity should raise the price of money?

Prior to the transfer of parastatal funds, they were held at the CBN, presumably earning no interest. So long as parastatals are funded by the state, they can have no claim to interest, or else they should be able to charge the state interest on delays in paying up their allocations! It is therefore funny economics for the whole system to incure additional costs just because parastatal funds (funds allocated by the state to parastatals) left the CBN for the banking system. The ‘Special Treasury Bills’ issued by the CBN and which banks were compelled to purchase are identical to ‘Stabilisation Securities’ first issued in 1976 and reportedly discontinued with the advent of deregulation. Even though the CBN now has instrument autonomy, it is doubtful if there can be room for use of instruments, which suggest executive fiat in a market-guided democracy. Nor can the system continue to shy away from having a democratically operated ‘Bankers Association’ in place of the ‘Bankers Committee’.

Finally, the more aggressive marketing of treasury bills recently begun by the CBN puts it virtually in direct competition with the banks for deposits from the public. Since it is the transformation of such deposits into investments which leads to the economic growth we are seeking, it is topical to ask whether the CBN will also be granting direct loans to entrepreneurs to grow the economy?

Here again, as in the other market, we find that there are at least two money markets, the official one and the informal or unofficial one, none fully understood. The efficacy of monetary policy and its contribution to economic performance are therefore likely to remain low until we better understand these markets and how they impact the economy.

The capital market

Finally, let us look at our capital market. In a recent talk, I observed that the colonial administration had found by 1946 when the first capital market instrument was floated, that Nigerians preferred to invest in London than in Nigeria. The Lagos Stock Exchange was set up in 1961 to remedy this deficiency and to provide a framework for funding the state. But as the example of the seventies and eighties have shown, the state itself preferred to borrow in Europe than at home, supposedly because the local capital market could not cope.

Reviews in 1976 (Okigbo Report) and 1996 (Odife Report) admitted defects in the structure of the market and made recommendations for structural change. In 1976, government accepted the recommendations but is yet to carry them out. Many of us could hardly recollect what happened.

In 1996, the Odife Report made recommendations on the capital market. Some term the recommendations as bold and ‘earthshaking’ as the recommendations of the Aguda Panel on the establishment of then new federal capital at Abuja. The latter recommendations were stoutly opposed at the time; but anyone visiting Abuja our new federal capital today with all its splendour would agree that it would have been a fatal mistake not to have made the bold move at the time. How many such bold initiatives has the nation failed to take?

The Nigerian capital market needs similar bold initiative to set up a world class exchange at Abuja with facilities for nation-wide electronic trading using satellite technology, to set up a national depository, capital trade points, a national unit trust, new training institutions and to reform the capital market for the sort of speedy delivery and transparency that the international investors we are courting are used to. We may be surprised to learn that many of our own people are already used to such world class standards abroad and will settle for nothing less at home. The proposed new capital market legislation provides for state and municipalities to be able to borrow money locally like they are allowed to do abroad. I note rather sadly that for sometime now government has not bothered to raise long term bonds from the market, even if only for the information content of such action.

Wherever the government of a country considers the capital market to be unfit for its own use, for whatever reasons, its parastatals, municipalities and agencies will be reluctant to use it. The market will thus remain unfit for use by its citizens. The capital needs of the citizens do not disappear: instead, facing acute shortage of capital both long and short-term, the local business-minded citizens operate on smaller and smaller scales until they wipe out their capital and retire into abject poverty. Unable to fend for themselves they become more disposed to unleashing attacks at the least provocation on their more fortunate neighbours. They thus threaten the stability of the state and compel it to take notice and spend the money, which it did not have for them to curb the resulting unrest.

The private sector to which the economy is being handed over, as part of democratisation requires a robust capital market to handle the task, to guide it and to cater for the needs of the foreign and domestic investor, governments, municipalities and their agencies as well as the rural communities.

Markets and national stability

Economic performance in a democracy will depend on markets, how they are structured, and how they function. Markets are important because they encourage individuals to exert their vital energies, skills, ambition and risk taking in the economic pursuits of life. The market moderates the interplay of these vital energies in a way that minimises conflict and so ensures the prevalence of peace and stability. Democracy requires such a market system to give meaning to the freedom, which goes with it, and to ensure enduring stability.

The new administrations in the country should learn that markets could arise on their own. However, it is best that markets are set up, and after careful study, and that they are properly set up. There can be all sorts of markets, markets for capital, money market, commodities markets, markets for foreign exchange, fish markets, housing market, as well as labour market. Indeed, there are markets for whatever people wish to exchange, provided these are not conspiracies against the public interest. They should also learn that very few commodities could be excluded from the ambit of markets and the price mechanism.

It used to be that some goods were described as ‘public’ and other as ‘private’ goods, such that public goods could not, for example, be privatised. These distinctions have become blurred. Properly studied and conceptualised, it is now possible to privatise anything while providing ‘subsidies’ or safety nets for deserving cases. Economic analysis has thus helped to extend the frontiers of the market and reduce the scope of government. Ironically, the result is usually to enhance the effectiveness of both and improve the welfare of the citizenry.

Most markets are managed now on the basis of self-regulation and they require less supervision than if government were to monitor what everyone is doing. But markets also do fail, and even without or before such failure, they may not always achieve the level of efficiency necessary for them to deliver optimum benefits to society. Government intervention is therefore mandatory.

Government intervention as a result of market failure was the excuse used in the seventies to justify the occupation of the commanding heights of the Nigerian economy. Henceforth, government intervention need not be used as an excuse for anything; markets will tend towards failure and may fail from time to time, unless prompt corrective or remedial action is taken. It will be the duty of government, at all times, to ensure that markets thrive as sound and efficient institutions for economic performance, for democratisation and for national stability. It will be the duty of government at all times to improve the design and functioning of the market to make it more efficient not to supplant it.

In an information age, markets have also become rapidly international. Capital can move in and out of countries before any government or agency thereof can know what is going on. Outside influences can now also have a greater impact on domestic affairs than hitherto, with foreign governments and their agencies also participating in both domestic and foreign markets to achieve their purposes, whatever these may be. Commodities and services are traded with blinding speed across borders. The speed of transaction will only increase with time, not decrease, and physical borders offer little respite.

As we democratise therefore, we must take more interest in our markets, we must build sound markets, monitor them and respond to their demands and or dictates if we are to mobilise resources effectively for prosperity. Economic policies should thus be evaluated from the point of view of their likely impact on our various markets to minimise their unintended consequence, and properly unleash the positive energies of our people.

As we strengthen political democracy with economic democracy, the need for government intervention to ensure the proper functioning of free markets and to deal with all other tendencies towards instability in the manner described by the author will increase not decrease. If governments and their agencies do not have adequate knowledge of the operations of markets or the skills to monitor the markets, informal markets in which the operators will anticipate events faster and respond more swiftly will develop. They will anticipate governments incapacity and respond in a manner which will render government intervention fruitless or counter productive. Government must therefore, equip itself at all times to be abreast of if it cannot be ahead of the market and benefit from participant input in policy making.

Markets will guide government, and economic policies will guide the markets in a dynamic interaction that should only increase our well being. This is what explains why some nations make it and others do not. This perhaps is the greatest challenge facing our nation as we embark upon democracy.

Transmitted: 1999

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) Copyright Africa Economic Analysis 2000