Analysis: What If ‘Buharinomics’ Is Right About Its Approach To Market Reforms
Nairametrics| Over the course of the last decade, most people in the world have felt the pains of neoliberalism’s mantra of stabilizing, privatizing, and liberalizing economies. Nigeria has been no exception. Following World Bank and IMF intervention in the 1980’s Nigeria has officially been on the neoliberal economic bandwagon, and since our return to democracy in 1999, we have pressed on even further. Experts and academics alike all employ the Federal Government to minimize fiscal deficits, minimize inflation, minimize tariffs, maximize privatization, and maximize liberalization of the economy as the main focus of our growth strategy.
Faster economic growth, faster increase in poverty
A 2014 McKinsey Report shows that these neoliberal economic reforms have been successful – between 2002 and 2012 Nigeria was the 5th fastest growing economy in Africa, in 2013 the economy was valued at $510 billion. Nigeria attracted over $7 billion in FDI making it the number one destination for investments in Africa, according to a 2013, UNCTAD Report. The size of the economy grew astronomically from $87bn in 2004 to $521bn in 2013.
Curiously, in the same time period, an NBS study shows that poverty increased from 54% in 2004 to 61% in 2010. The same study also showed that 69% of the population was deemed moderately poor to extremely poor, while 31% was deemed not poor based on its relative poverty matrix. Even though the country was making more money than ever, people seemed to be getting poorer and a lot of people are still poor.
This ugly scenario has been worsened by the recent exchange rate crises and a high inflation rate that has sent the cost of living skyrocketing across most homes in the country. Most people will argue that Nigeria’s protectionism is bad for business. Some argue that we should freely float the naira and like CBN Governor Emefiele has argued, have you considered what would happen to inflation?
The Invisible hand misconception
The invisible hand is Adam Smith’s most famous phrase. He used it only once in his seminal book, the Wealth of Nations, 1776. Smith used the phrase “invisible hand” when rejecting the mercantilism system of the 18th century, which was basically when the European governments amassed national wealth by using trade, they would limit imports of foreign goods and expand exports finished goods and ban export from extractive industries like farming. To pay for this, they encouraged their colonies to move away from their own locally produced goods to buying products produced by Britain. This created an unfair trading balance that is persists till today.
Often referred to as the father of laissez-faire economics, modern distortion of Smith’s views on competition and economic growth have led many to think that he supports the unhinged free flow of capital that we see in the world today.
In the 18th century, states assumed they were rich because of how much gold or money they had. Against this Smith argued (in Chapter 2 Book IV of the Wealth of Nations, 1776), that the wealth of a nation was more than its gold or money but included the lands, labour and natural resources. He went on to say that limiting the importation of goods from abroad will only afford domestic producers monopoly of the home market but will not increase output. His reason is that society cannot increase production beyond its capital. He goes on to say that when a domestic producer in a society uses his capital to direct an industry, he does so for his gain and security. So, therefore, just like the invisible hand would direct, it makes sense to allow foreign capital, but only to enhance the wealth of the nation.
Smith was therefore not rejecting protectionism; he was just arguing that there should be flexibility to allow in foreign capital sometimes to compensate when there is a shortage, but only enough to increase capital. It is likely an unhinged flow of capital will likely give foreigners an advantage and therefore more control of the market, an outcome no serious nation wants.
In support of measured approach to market led reforms
Smith’s advice is a far cry from the unhinged free flow of capital we see today, which although helps to expand goods and services, has adverse effects like inflating asset prices, and expanding inequality as more people become poor over the long run. It makes economic and social sense for Nigeria to take a measured approach to further liberalization given the precarious state of its economy. A free-floating naira means that the naira will be completely vulnerable to the whims of the market. The economy is already vulnerable to the whims of the crude oil market, would the wisest option then be to open the economy to more peril? The CBN has a tough job of balancing dollar needs of businesses and citizens on one hand, and maintaining a rate of inflation that does not severely threaten the cost of living of the poorest people.
Nigeria was in a similar position in the mid 1980’s; the response then was more market liberalization that led to a severe drop in the standard of living of most Nigerians. Nigerian government is in the privileged position of directing the course of economy, so it has the flexibility to develop policy that match its unique situation. It should not be boxed in by competing ideas on economic reform.