Beyond Minimum Wage: The limits of Populism and the need for fundamental economic reforms

Yesterday, May 1, our country celebrated Workers Day. This occasion presents an opportunity to consider the situation of the common man or woman in our country, the role of the labor movement in our political economy, and the undoubtedly weak state of the Nigerian economy today.

Congratulations to labor and the Federal Government of Nigeria on the introduction of a new minimum wage. While the new minimum wage of N30,000 will help tackle poverty, we must do more. 95 per cent of Nigerians still live below $5.5 a day (approximately N170 or N49,500 a month) while 90 million (nearly 50 per cent of our 200 million population) leave below the “extreme poverty” line of $2 a day. Employers and labor should increase labor productivity. Together with broad-based growth across different sectors of the economy, this is what creates inclusive economic growth. The emphasis should be on creating a skilled workforce, and dramatically increasing available electricity, in order to increase the productivity of labor, which in turn can support higher wages.

I call on the labor movement in Nigeria to support necessary and fundamental economic reforms in our country, reforms that will ultimately improve the living standards and economic opportunities for Nigerian workers. Labor should hold federal and state governments accountable for their performance on economic management, based on rational factors.

How Economic Populism Blocks Possible Reforms

Economic reforms in Nigeria should be anchored on the following factors:

  • Achieving the right balance between the role of the state and the private sector;

 

  • An understanding of what drives the wealth or poverty of nations – the presence or absence of skilled human capital, strong, independent institutions, property rights, a culture of innovation that is the basis of wealth creation as opposed to reliance on natural resources, capital and affordable access to it;

 

  • An understanding of the difference between GDP growth (total value of goods and services produced annually), human development (real quality of life as expressed in life expectancy, availability and quality of healthcare, education, potable drinking water etc), and structural economic transformation (the shift from dependence on subsistence agriculture or raw natural resources to an industrial economy that creates value-added exports).

Sadly, none of these factors exist adequately in the Nigerian economy today. One of the most important reasons for the absence of these foundations is economic populism – a false appeal to the hopes and fears of the common people, set against the interests of the elite. Economic populism can be exaggerated where political expediency leads, as it does in Nigeria, to a tendency to “admire the problem” while taking no real action to address it in a fundamental manner. In Nigeria, this doctrine has led to the huge cost of governance (astronomical salary costs – including “ghost” workers — for civil servants, politicians and their aides). This phenomenon results in massive recurrent expenditures (currently 70 per cent of the federal budget) that divert resources that should be invested in human development, as well as massive corruption.

The temptation to populism is a universal one. When the industrial revolution began sweeping across the western world three centuries ago, a wave of populism resisted the phenomenon out of fear that machines with far greater efficiency and productive capacity would put men assured of manual labor jobs out of employment. Had the populist streak prevailed, poverty would have been the lot of today’s wealthy industrialized world.  Fortunately for these societies their leaders could see the longer term benefits of industrialization, and parted ways with the old ways.

Petroleum Subsidy versus Oil Industry Reform

For several decades now, for example, successive governments in Nigeria have maintained a wasteful and corrupt petrol subsidy regime in the name of the poor. But these subsidies have favored the rich far more than the poor, who do not own petrol-guzzling vehicles. Nigeria has spent an estimated 10 trillion naira over the past decade in petrol subsidies. Many petroleum importers have gotten wealthy on the basis of fraudulent invoices. Subsidies may be used to stimulate production and export of value –added goods, as the Asian tigers did decades ago, but when applied to consumption they are often a monument to corruption.

The federal government should therefore bite the bullet, remove the petrol subsidy and completely deregulate the downstream petroleum industry. It should move quickly and decisively towards the (at least partial) privatization of the Nigerian National Petroleum Corporation (NNPC). No more dissipation of effort in dictating fuel prizes that are practically impossible to enforce nationwide. The role of the government is an important one. That role is to be a strategic enabler for market economies to create inclusive growth. But government cannot successfully replace the markets as the allocator of the prices of goods. It can intervene strategically and occasionally to moderate any observed excesses of market behavior.

Nigeria’s oil industry ought to be liberalized (but not without strategic provisions for the interests of the populations and the environment of the oil-producing states). That is not because the state cannot run corporations, conceptually speaking. That is a position of classical neoliberalism. It is only partially correct to the extent that deregulation and a level competitive playing field will help achieve price equilibriums and remove corrupt arbitrage and the worst kinds of crony capitalism.

More accurately, the Nigerian state should not run businesses because as a matter of factual contemporary experience, it can’t. The track record is there, from Nigerian Airways to NITEL and the Nigerian National Shipping Line. But state owned or state-invested companies have succeeded in some jurisdictions such as China, France, Germany and Japan alongside the more dominant private enterprises. The main reason the Nigerian state cannot run companies well is because we have fundamental problems of nationhood, ethos, and the organizing principle.

The Federal Government of Nigeria must develop and articulate a comprehensive plan to move Nigeria away from oil dependence over the next seven years. The plan should have timelines, including a short-term three-year plan to 2022, with concrete deliverables and accountabilities. The plan should be inter-sectorial, demonstrating how a linked-up combination of policy and private sector actions in areas such as trade, industrial, fiscal and infrastructure policy will deliver a diversified revenue base. It should have specific targets for revenues from the non-oil sectors. The Economic Recovery and Growth Plan (EPRG) in its present form does not rise to the level of such a plan.

Saudi Arabia, a much wealthier oil-dependent country, has developed a four-year national transformation plan to prepare it for a world beyond oil. The plan’s specific components are known: the country has ended petrol subsidies and will build a new $2 trillion sovereign wealth fund that will be the largest in the world. It will privatize Aramco, its national oil company and turn it into an industrial conglomerate, making its shares part of the new sovereign fund. The whole point of the plan is to make investments by the sovereign fund, not crude oil, the main revenue earner for the kingdom by 2020.

There is little evidence of such an intellectually and programmatically well-articulated economic diversification strategy in Nigeria today. We cannot grow on a diet of good intentions. It is not too late for the Federal Government of Nigeria to create a better economic future for us all.

How Forex Policy Strangles the Nigerian Economy

Our foreign exchange policy is essentially subsidizing a massive import economy that prevents the structural transformation of our economy. The equilibrium exchange rate (price or value) of the naira is determined mainly by purchasing power parity, the strength or weakness of our productive and export economy, the price of oil, and the quantum of our fiscal savings. The price of crude oil, which gives us 90 per cent of our dollar revenues, is subject to external factors beyond our control. Today’s oil price of above $70 notwithstanding, the oil price will drop again. We do not have a “hedging” policy to manage this risk.   The exchange rate of our legal tender relative to others will naturally deteriorate when this happens, especially if external reserves are spent to stabilize the naira. We have no fiscal savings as a buffer, having wiped out our Excess Crude Account for “populist” reasons.

We should reposition by engineering our economy to benefit from this scenario since importation will become more expensive. We ought to shift to a productive economy based on exports not of other raw commodities or crude minerals, but of value added products. The absence of such multi-sectorial policy action is why past devaluations did not help our economy. Meanwhile, we should encourage dollar inflows from investors to address forex supply scarcity. Without a flexible and transparent exchange rate, this will not happen to extent that is necessary. A few years ago, the mere announcement effect of an intention to move to a flexible exchange rate by the central bank (which ultimately did not happen)saw our stock market rise by $1 billion in a couple of days. Nigeria is an important economy, and many around the world are keen on doing business in and with it.  But not at all cost.

Yet, despite not having a strong manufacturing and export base, we erroneously believe that an artificially strong currency is “better” for the purchasing power of “the masses”. So we “must” maintain the naira’s artificial strength in the face of all logic as a matter of “the national interest”. In doing so we carry are, in effect, protecting the “national interest” of the vested interests that have access to and profit mightily from subsidized dollars.

Leadership, and the Role of Labor

Leadership is the antidote to populism.  Rational, evidence-based economic policy is essential for economic transformation. Combined with other attributes such as vision, decision-making and others, the ability to formulate and execute evidence-based policy and to communicate effectively to citizens and stakeholder groups why certain reforms are necessary and cannot be delayed, is a critical aspect of effective leadership. It can make the difference between the progress and wealth of nations across generations, on the one hand, or stasis and retrogression (as is the case in Nigeria) on the other. The lessons from Latin America, which flirted with populist macroeconomics for several decades to ultimate failure, are apt. This is where the role of labor comes in. Labor can work with a competent government to sequence and manage difficult reforms that will yield fruit for workers, citizens and the economy at large.

Conclusion

Populism, resilient in our governance culture since the 1970s, has made us a poor country. It is the reason Nigeria failed to develop a strong savings habit. The political culture operates with the mindset that all public income must be spent, including even what we have not earned! It is why Nigeria is today heading back towards a debt crisis with an ultimately unsustainable debt burden. It is why we did not set up a sovereign wealth fund in the heyday of the oil price, and even when we did decades later, the project still faced stiff resistance from several politicians. It is why the federal government “bailed out” profligate states that carry on as if the only reason they exist is to pay the salaries of bloated bureaucracies. Some of the bailout funds reportedly went missing. The “workers” must be “paid”. In the name of populism, corruption and other bad habits thrive and poverty reigns.

Populism should no longer hold rational economic policy thinking hostage in Nigeria. Our federal and state governments were elected to deliver progress for citizens, not to continue recycling the status quo that, from every evidence, has failed to deliver prosperity.

Beyond immediate policy actions, the constitutional restructuring of Nigeria back to true federalism by transforming our geopolitical zones into regions that will be the federating units and geo-economic zones, remains the long-term path to prosperity for the millions of our country’s poor.

Recommendations

  • The Federal Government of Nigeria should develop and establish, in consultation with labor unions, a set of policies to mitigate the likely short-term inflationary impact of the removal of petrol subsidies, and permanently end such subsides as from the budget for 2020.

 

  • Deregulate the importation and sale of petrol in order to produce a market-determined price of petrol and mitigate adverse inflationary effects in the medium term.

 

  • FGN should establish a moratorium on foreign borrowing alongside measures to improve taxation revenue.

 

  • FGN should commence a progressive reduction of recurrent expenditure by 10 per cent every budget year from 2020.

 

  • The Central Bank of Nigeria should abolish differential exchange rates and establish a uniform exchange rate for all transactions.

 

  • The CBN should abolish the ban on provision of foreign exchange for the importation of most or all of the “40 items” denied forex; prior to this action the Federal Ministries of Finance and Industries, Trade and Investment should establish appropriate tariffs for the imports of luxury and non-essential items while creating policy to give reasonable advantages for locally manufactured goods, including enhanced export incentives, in order to realign the Nigerian economy towards competitive manufacturing for domestic and export markets.

 

  • FGN should submit an Executive Bill for the abolition of the Land Use Act; according to a study by PwC, this legislation and policy action will liberate hundreds of billions of dollars of “dead” capital (potential but suppressed financial values in land and property-related transactions) that could lift off the Nigerian economy

 

  • FGN should strengthen the policy environment to encourage mass production of innovation and a pipeline of the products of innovation into commercial markets.

 

  • As from 2020 turn the N500 billion budget for the Social Investment Programs into a one-time equity contribution to a public-private venture capital fund of N1 trillion for innovation and small scale entrepreneurship aimed at helping the poor and unemployed escape poverty by creating wealth and inclusive economic growth. The venture capital fund should be managed by the private sector, which will bring in the other N500 billion in capital. This reform will bring in equity capital into the lower strata of the Nigerian economy, complementing efforts by the CBN, such as the establishment of National Microfinance Bank that will lend at single-digit rates, to improve affordable access to It will also contribute to bringing in the informal sector, which contributes about 65 per cent of Nigeria’s GDP, into the formal economy and thus expand the tax net. It will also create millions of new jobs for unemployed or under-employed youth.

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