Examples of Institutional Failure

Posted by {"login"=>"dvollrath", "email"=>"[email protected]", "display_name"=>"dvollrath", "first_name"=>"", "last_name"=>""} on April 25, 2014 · 1 min read

Miles Kimball posted a link this article from the WSJ on the mess that is Nigeria's electricity grid. A key factoid is that Nigeria produces as much electricity as Montana, yet Nigeria has about 170 million people while Montana has only 1 million. The author (Drew Hinshaw) has comparisons for other African countries that are as disturbing.

The story focuses on Tony Elumelu, who recently purchased a power plant. His logic here is sound:

Thanks to all-day outages, Nigerians consume scant electricity—less than Puerto Rico. Once electricity flows into their homes, though, tens of millions of people will rush to buy refrigerators, air conditioners, electric kettles, he added—all pulling power from his turbines.

But the real question is whether the institutions in Nigeria will allow this to happen. As mentioned in the article, there is rampant theft of electricity from the grid, the grid itself is old and failing, and money is often extorted from providers in exchange for not blowing their equipment up.

I don't know how to properly define "institutions", but when we say that institutions matter, I think this is what we mean. The gains to having regular electricity are obvious, but the question is whether someone like Tony Elumelu will be able to keep enough of the profits from selling electricity to make him stick with his investment.

In a completely unrelated, but to me equally shocking story, Miles Kimball was my professor for Money and Banking at Michigan - 23 years ago.