First published August 30, 2022
By Mahmud Tim Kargbo
The national financial crisis, which began in 2016 which the current SLPP regime promised to fix when they were in opposition, and whose repercussions will continue to echo in Sierra Leone for years to come, has triggered myriad criticisms of our capitalist system: it is too ‘speculative’; it rewards ‘rent-seekers’ over true ‘wealth creators’; and it has permitted the rampant growth of finance for the selected few at the expense of the suffering majority, allowing speculative exchanges of financial assets to be compensated more than investments that lead to new physical assets and job creation.
Debates about unsustainable growth have become louder, with concerns about the rate of growth the regime inherited and its direction. Recipes for serious reforms of this ‘dysfunctional’ system include making the financial sector more focused on long-run investments; changing the governance structures of corporations, so they are less focussed on their share prices and quarterly returns; taxing quick speculative trades more heavily; legally blocking financial leakages and curbing the excesses of the wage bill.
I have argued that such critiques are important but will remain powerless – in their ability to bring about real reform of our economic system – until they become firmly grounded in a discussion about the processes by which economic value is created. It is not enough to argue for less value extraction and more value creation. First, ‘value’, a term that once lay at the heart of economic thinking, must be revived and better understood.
In Sierra Leone, value has gone from being a category at the core of the economic theory, tied to the dynamics of production (the division of labour, changing costs of production), to a subjective category tied to the ‘preferences’ of economic agents. Many ills, such as stagnant real wages, are interpreted in terms of the ‘choices’ that particular agents in the system make; for example, unemployment is seen as related to workers’ choice between working and leisure. And entrepreneurship – the praised motor of capitalism – is seen as a result of individualised choices rather than the productive system surrounding entrepreneurs – or, to put it another way, the fruit of a collective effort. At the same time, the price has become the indicator of value: as long as a good is bought and sold in the market, it must have value. So rather than a theory of value determining price, it is the theory of price that determines value.
Along with this fundamental shift in the idea of value, a different narrative has taken hold. Focused on wealth creators, risk-taking and entrepreneurship, this narrative now seeped into political and public discourse. It is now so rampant that even ‘nationalists’ critiquing the system sometimes unintentionally espouse it. When the APC lost the 2018 election, certain leaders of the party secretly claimed they had lost because they had not embraced the “wealth creators”. And who did they think the wealth creators were? Businesses and the entrepreneurs leading them. Feeding the idea that value is created in the private sector and redistributed by the public sector. But how can a party that has the words “All People’s Congress” in its title not see workers and the state as equally vital parts of the wealth creation process?
Such assumptions about the generation of wealth have become entrenched and have gone unchallenged. As a result, those who claim to be wealth creators have monopolised the attention of past and current governments with the now well-worn mantra of; Give us less tax, less regulation, less state, and more market. By losing our ability to recognise the difference between value creation and value extraction, past and current governments have made it easier for some to call themselves value creators and, in the process, extract value. Understanding how the stories about value creation are around us everywhere – even though the category itself is not – is essential for the future viability of our economy.
To offer real change, we must go beyond fixing isolated problems and develop a framework that allows us to shape a new type of economy that will work for the common good. The change has to be profound. It is not enough to redefine GDP to encompass quality-of-life indicators, including measures of happiness, the imputed value of unpaid ‘caring’ labour, and free information, education, and communication via the Internet. It is also not enough to tax wealth. While such measures are important in themselves, they do not address the greatest challenge: defining and measuring the collective contribution to wealth creation so that value extraction is less able to pass for value creation. As we have seen, the idea that price determines the value and that markets are best at determining prices has all sorts of nefarious consequences.
This narrative emboldens value extractors in finance and other sectors of our economy. Here, the crucial questions – which kinds of activities add value to the economy and which simply extract value for the sellers – are never asked. In the current way of thinking, financial trading, rapacious lending, and funding property price bubbles are all value-added by definition because price determines value: if there is a deal to be done, then there is value. By the same token, if a pharmacy can sell a drug at a hundred or a thousand times more than it costs to produce, there is no problem: the market has determined the value. The same goes for Ministers, other political appointments, and professionals who earn 100 times more than the average worker. The market has decided the value of their services – there is nothing more to be said. Our economists must be aware that some markets are not fair.
Price-equals-value thinking encourages rogues in the investment world to put financial markets and shareholders first and to offer as little as possible to other stakeholders. This ignores the reality of value creation – as a collective process. In truth, everything concerning an investor business – is intimately interwoven with decisions made by our elected governments, investments made by schools, universities, public agencies, and even movements by not-for-profit institutions. Corporate heads in Sierra Leone are not telling the whole truth when they say that shareholders are the only real risk-takers and hence deserve the lion’s share of the gains from doing business.
This market story confuses policymakers. By and large, policymakers of all stripes want to help their communities and their country, and they think the way to do so is to put more trust in market mechanisms. Step back and let the market magic work; this has become the slogan of our governments in Sierra Leone. The crucial thing is to be seen to be business-friendly. As a result, Sierra Leone politicians and all too many government employees are like putty in the hands of those who claim to be value creators. Regulators end up being lobbied by businesses and induced to endorse policies that make incumbents even richer. Examples include ways in which our governments have been persuaded by the World Bank and other rogue neocolonial institutions to reduce capital gains tax, even though there is no reason to do so if the aim is to promote long-term investments rather than short-term ones.
And lobbyists, with their innovation stories, have pushed through with rogue policies, which reduce tax on the profits generated – even though the policy’s main impact has been merely to reduce government revenue rather than increasing the types of investments that led to strengthening the economy. All of these serve only to subtract value from the economy and make for a less attractive future for almost everyone. Not having a clear view of the collective value creation process, the public sector is thus ‘captured’ – entranced by stories about wealth creation which have led to regressive tax policies that increase inequality.
The confusion between profits and rents appears in how we measure growth: GDP. Indeed, it is here that the production boundary comes back to haunt us; if anything fetches price values, then the way our national accounting is done won’t be able to distinguish value creation from value extraction, and thus policies aimed at the former might simply lead to the latter. This is not only true for the environment where picking up the mess of disasters will definitely decrease GDP (due to various services paid for) while a cleaner environment won’t necessarily (indeed, if it leads to no disaster, it could increase GDP), but also as we saw to the world of finance in our contraption where the distinction between financial services that feed industry’s need for long-term credit versus those financial services that simply feed other parts of the financial sector are not distinguished.
Only with a clear debate about value can rent-extracting activities in every sector, including the public one, be better identified and deprived of political and ideological strength.