On the money

The issues in the Niger delta stems from the battle between profit and social responsibility. Companies such as Shell often are able to reap massive rewards from the Niger delta while leaving the area at a permanent disadvantage. Environmental, and socio-economic issues are the most prominent adversaries to profit. Notable examples include gas flaring and environmental degradation as well as wealth drainage and a lack of corporate social responsibility all of which are overlooked in the pursuit of monetary gain. A lack of acknowledgement of these issues has led to the unsustainable business practices and we see today in the Niger delta, otherwise known as modern imperialism. Modern imperialism, the contemporary cousin of conventional imperialism, is a pervasive issue stemming from the outward and unsustainable expansion of multinational corporations (MNCs) into second and third world countries, often in the pursuit of profit. Due to the unsustainable nature of many MNC operations, there is often a losing party that suffers at the expense of the company’s growth. 

Shell’s current oil extraction strategy has resulted in a net negative production externality – in extracting oil, damage is caused to the environment and population of Nigeria that it doesn’t fully bear the costs of. This means that Shell has a reduced incentive to cease acting in environmentally harmful ways, as it experiences reduced responsibility for its own actions. To resolve this, I suggest a two-pronged solution. First, implementing an unprecedented welfare credit system, and secondly, tackling corruption in both the public and private sectors. Working off of these two concepts, we could in future form a detailed and viable policy solution to deal with the socio-economic crisis in the Niger delta, and potentially scale and modify this solution to act as a blueprint to resolve modern imperialism in other regions.

Novel welfare credit system

Implementing a welfare credit system similar to the carbon credit system could potentially offer a novel approach to addressing the environment and social challenges associated with Shell’s operations in Nigeria. This system would involve granting a fixed number of credits to oil companies based on their adherence to environmental and social responsibility standards, which can then be traded or sold in a market. While there would doubtless be teething issues with such a system – namely, establishing incentives for companies to seek ‘credits’, accurately quantifying net environmental and social impacts of projects and assigning them a value in ‘credits’ , its effectiveness ultimately will depend on a reasonable initial supply of credits, appropriate level of regulatory oversight, stakeholder engagement and the market-based incentives driving businesses towards ethical and equitable development.

In practice, The new welfare credit system will operate by assigning a monetary value to net welfare gain that would be obtained by a certain cut to oil production. Companies that reduce their production below a certain threshold, where marginal benefit is equal to marginal cost, can earn welfare credits. These welfare credits can then be sold or traded to others who need to offset their negative impact. This created a market-based incentive for the reduction of the negative production externalities arising from oil extraction (and potentially other harmful economic practices across the economy), and promotes investment in cleaner and more ethical technologies and practices.

At its core, a welfare credit system functions on the principle of “cap and trade”. A cap is set on the total amount of natural resources, specifically oil in this case, used within a specified period. This creates a finite supply of production allowances, which are then allocated or sold to entities, such as companies like Shell or even other governments. These entities are then required to hold a certain number of credits equivalent to their production. If a company exceeds its allocated level of production, it must purchase additional credits from those who have surplus allowances or face penalties.

The economic rationale behind the new welfare credit system lies in its ability to internalise the external costs of the use of natural resources in production. In a market with little to no regulation, like that currently of Nigeria, companies do not bear the full social cost of their production. This then leads to the overconsumption of natural resources, and goods and services linked to their production. By assigning a monetary value to production through the credits, the system ensures companies face the true cost of their negative impact to wider communities, incentivising them to reduce their negative impact and participate in greener and more socially sustainable business practices.

The allocation of welfare credits can occur through various mechanisms, including government auctions, free allocation based on historical data, or a combination of both. The importance of the primary allocation of credits cannot be understated. It determines the distribution of costs and benefits among participants. For the system to be effective, this must occur impartially. Additionally, the flexibility of trading allows companies to buy and sell credits based on their individual abatement costs, ensuring production reductions are achieved at the lowest possible cost to the economy.

One key advantage of this proposed system is its cost effectiveness in achieving reductions in the current welfare loss. By allowing the trading of credits, companies with lower abatement costs can sell excess credits to those facing higher costs, resulting in a more efficient allocation of resources. This reduces the overall cost of compliance for regulated entities, making a region more attractive for investment, while still achieving the desired reduction in welfare loss due to a predetermined number of credits. Moreover, a welfare credit system fosters innovation and technological advancements in clean energy practices and low social cost initiatives. The economic incentive to reduce a companies’ contribution to welfare loss encourages companies to invest in research and development to help produce more efficient and ethical production methods. This can lead to technological breakthroughs and increase Nigeria’s competitiveness in the global market. Since, ‘better’ business practices both help the country domestically (positive multiplier effect), while internationally pushing the nation forward as a more competitive and exemplary member of the global economy. We can look to carbon credit as an example, the European union’s emission trading system (EU ETS) has catalysed investment in renewable energy and energy efficiency measures across various sectors in Europe. (Climate action, 2023).

However, a welfare credit system has some challenges. Market volatility and potential market manipulation can affect the stability and credibility of the system. Furthermore, Impartiality in allocation of credits as well as fairness in auctions may be unrealistic given the high levels of government corruption. In addition to this, due to being left to free market principles, it is very feasible that larger corporations buy out all the credits available. This means that smaller corporations may be pushed out of business leaving large multinational corporations like Shell the only participants in the market. The increased barrier for entry will create an oligarchical model which could lead to a loss of revenue and the negative multiplier effect, which would end up being an overall worse outcome than the current state of affairs of the locals and the country.

However, a few companies buying up all the credits does not change the supply of credits since it is completely inelastic. Therefore, no matter who owns the credits the net welfare loss will be reduced since the number of credits originally created were set in order to do so. If, however, the number of credits owned by one corporation exceeds 50% and has too great of a market influence, government policy can be introduced in order to limit any such influence. For example, a cap at 45% (which is the largest permissible market share owned by any nation in the voluntary global carbon credit market), a single company’s influence on prices is limited and hence market integrity is preserved.

This novel approach would revolutionise the way multinational corporations such as Shell work. By causing these corporations to internalise the externality of their production it creates direct economic incentives for more ethical socio-economic and environmental practices. Its sister system, carbon credit can already be seen to be doing good work, though effective regulation, and market oversight as well as consideration of equity issues are essential for ensuring the fairness and success of the new system. This means that, for this system to work, corruption in Nigeria is one of the most key factors to address.

Addressing Corruption in Nigeria

Addressing corruption from an economic perspective in Nigeria requires targeted strategies aimed at reducing the pervasive impact of corruption on economic growth, investment, and development. Corruption undermines the efficient allocation of resources, distorts market mechanisms, and erodes investor confidence, ultimately hindering economic progress and exacerbating the effects of malpractice in industry.

One key aspect of combating corruption from an economic standpoint involves enhancing transparency and accountability in public financial management. According to the World Bank, Nigeria loses billions of dollars annually to corruption, with public procurement being particularly susceptible to corrupt practices. Strengthening public financial management systems and implementing measures to ensure transparency in budgeting, expenditure, and revenue collection are essential for combating corruption in this area. For instance, adopting electronic procurement systems and conducting regular audits of government expenditures can help detect and prevent cases of fraud and embezzlement (Internal audit of the Nigerian country office, 2020). Furthermore, corruption undermines the business environment and deters both domestic and foreign investment. Nigeria ranks low in terms of perceived levels of corruption, which negatively impacts investor confidence (Corruption Perception Index, 2023). Corruption increases the cost of doing business, as companies may be forced to pay bribes or engage in rent-seeking behaviour to navigate bureaucratic hurdles. This hampers economic growth and stifles entrepreneurship and innovation.

To address these challenges, Nigeria must strengthen its legal and regulatory frameworks to combat corruption effectively. Enacting and enforcing anti-corruption laws and regulations can help create a deterrent effect and hold corrupt individuals and entities accountable for their actions. For example, the passage of the Nigerian Extractive Industries Transparency Initiative (NEITI) Act in 2007 aimed to promote transparency and accountability in the natural resources industry by requiring companies to disclose payments made to the government (Key highlights of 2021 Oil & Gas Industry report, 2021).

Moreover, promoting competition and reducing monopolistic and oligarchical practices can help mitigate the impact of corruption on the economy. Monopolies and oligopolies are often associated with rent-seeking behaviour and corruption, as firms may use their market power to extract rents from consumers or engage in collusive practices. Promoting competition through antitrust regulations and ensuring a level playing field for businesses can help reduce the incentives for corruption and foster a more dynamic and competitive business environment.

Additionally, investing in education and capacity-building initiatives can help address the root causes of corruption by promoting a culture of integrity and ethical behaviour. Educating citizens about the detrimental effects of corruption and the importance of ethical leadership can help foster a more transparent and accountable society. Moreover, providing training and support for government officials and public servants can help strengthen institutional capacity and reduce the prevalence of corrupt practices.

Addressing corruption from an economic perspective in Nigeria requires a complete overhaul of the political system aimed at promoting transparency, accountability, and good governance. Strengthening public financial management systems, enhancing the business environment, enacting, and enforcing anti-corruption laws, promoting competition, and investing in education and capacity-building initiatives are essential steps toward combating corruption and fostering economic growth and development in Nigeria. However, sustained political will, strong leadership, and active citizen engagement are crucial for driving meaningful change and building a more transparent and accountable economic environment. 

In conclusion, the new welfare credit system will be successful in reducing welfare loss due to the way it is structured. The only thing that could undermine it is corruption from both the government and the corporations. If Corruption is tackled effectively in the ways suggested, it would mean that the novel system can work to its full effect. If it does work to its full effect, the benefits of having Multinational corporations such as shell within a county can be felt, while the negatives can be stamped out or at least mitigated. Though this model will take time to implement, and may receive major pushback, it will in the end bring down the social costs of production. Thereby majorly reducing the negative imbalance and inequitable and unsustainable usage of Nigerian resources. The definition given of modern imperialism, the unequitable usage of foreign resources by Transnational corporations and nations, and the expansion of influence and power. This two-pronged solution would completely stop the expansion of influence and power and would be able to regulate the usage of resources, adequately solving the conflict of profit and social responsibility in conjunction with Modern imperialism.

References:

Climate action. (2023). Retrieved from European Comission: https://climate.ec.europa.eu/eu-action/eu-emissions-trading-system-eu-

(2020). Internal audit of the nigerian country office. Office of Internal Audit and Investigations.

Corruption Perception Index. (2023, january 31). Retrieved from Transparency International: https://www.transparency.org/en/cpi/2022

(2021). Key highlights of 2021 Oil & Gas Industry report. Abuja: NEITI.