by Cheta Nwanze
Forget about 2011 for a minute, another major source of concern about the country is the economy. Given that recently the credit ratings company, Fitch, revised our ratings downwards, we really have to sit up and take notice rather than the typical armchair reaction of claiming that it is all Western propaganda.
Is the Nigerian economy improving?
It did improve between 2003 and 2007, and there was more cash for people to spend. Did we save for a rainy day? Yes, albeit illegally via the Excess Crude Account. Have we put those savings to good use? NO! The money has simply been shared, and those shared funds have found their way into private pockets.
Following the ‘Hurricane Sanusi’ of last year, our banks which hitherto had been lending only to people who wanted to buy shares, or to people with political connections, simply stopped lending altogether. The banks, which were also the largest employer of labour outside of the government, also stopped hiring, and instead began firing. Our legislators oblivious to the problem (or not giving a hoot), kept increasing their wages and allowances to absurdly ridiculous levels. Our state governments after sharing the money that was left in the Excess Crude Account have now began to go to the bond market in a vain attempt to raise cash for ‘infrastructure developments’.
We have yet to see the infrastructure promised via the bonds that have already been issued. Companies are still firing people, and a lot of them are falling back on the payments of their wages. That is for those who haven’t been forced to take pay cuts. At the moment, the only people who seem to be immune in Nigeria are the people who work in multi-nationals. Let’s face it folks, Nigeria is in a recession.
How do we come out of it?
In the West, people have always talked about Keynesian theory as the panacea to their recession. Depending on who you speak with, the recession in the West is not yet over. For some countries (Germany, South Korea as examples) it is over, for others (the UK, France, Greece) it has become a double dip recession, and may well be on the way to becoming a depression. For those of you who may not know, when the Great Depression started in 1929, most economists at the time struggled to come up with an explanation for what was happening.
John Keynes came up with an explanation of economic slumps that was quite simple. He said that in a normal economy, there is a high level of employment, and everyone is spending their earnings as usual. This means there is a cyclical flow of money in the economy, i.e, what I spend is what the next man earns and what he spends becomes what I earn.
If however, something happens to shake my confidence in the economy, then I will start saving for the future or more simply put, hoarding the money, which impacts on the other man’s earnings. The other man, suddenly faced with a drop in his earnings would also hoard money, and thus starts a vicious cycle of hoarding. According to Keynes, the solution to this was to increase the amount of money in circulation! That was his solution for a recession.
Keynes said that a depression was a recession in which people had fallen into a ‘liquidity trap’, i.e a situation in which no matter how much more money was pumped into circulation, people would continue to hoard their cash. It is at this point according to Keynes that the government should begin to spend, spend, spend, in an effort to kick start the cash flow again.
Back in 1933, Keynes’ theories were eventually applied to the US economy, and by the middle of the 1940s, the US was well on the way to a massive economic boom which ended with them as the world’s number one industrial power. In seven short years, under massive Keynesian spending, the U.S. went from the greatest depression it has ever known to the greatest economic boom it has ever known.
In a nutshell, what Keynes meant was that the economy is a cycle fuelled by spending, and the moment that spending fuel stops, the economy would shudder to a halt. What Keynes did not take into account is that money doesn’t grow on trees, and there is a limit to which even a government can borrow to spend before the debt becomes unsustainable.
Take the example of Greece. When the recession began there, their government like others went into Keynesian programmes in order to jump start the economy. However, fiscal irresponsibility, and the fact that the Greek credit rating is not as good as that of South Korea say, meant that they ran into trouble rather quickly. The lesson from this is that continually throwing money at an economic problem irresponsibly, will not solve it but will only mortgage the future of children just being born.
However, we must bear in mind that cutting spending is what bodies like the IMF recommend to banana republics like Nigeria (think SAP), and we all know that such things don’t work. You see, in a country like Nigeria, with a large population, the safest way of raising revenue is from taxes, not from resources. Like I argued a few months ago, the money that Nigeria makes from oil is not nearly enough, EVEN IF we don’t invest any kobo of it back into the oil industry. However, to raise money from taxes, you need to have a large working population, and there is a need to tightly regulate the informal economy. To successfully pull off stunts like that, we need responsible people in government, and probably more importantly, responsible citizens. Nigeria’s citizens sadly do not appear to know what their responsibilities are with respect to forcing accountability from government, and the government in return does not seem to know what its responsibilities are in terms of wealth creation.
Now consider this scenario, we talk about government tightening its belt because the country does not have as much money as it used to. This means that one or more sectors of the government will have to suffer from cutbacks. Let us take the police as an example. That Nigeria’s heavily centralised police force is an aberration is another matter, what matters here is that in a normal society, an effective police force plays a very vital role in keeping confidence in the ability of society to function. An effective police force has to be equipped and armed.
Imagine a situation where Anabel Nigeria say, has a contract to provide communications equipment to each policeman in the country. Those handsets would need to work, so Globacom would have to provide a dedicated and efficient network for police communications. Then we have DICON providing the arms and ammunition, and PAN providing the vehicles. This alone along with the associated maintenance contracts would generate a lot of jobs for the Nigerian economy. A lot of jobs would generate a lot of income, and expenditure. This would keep the economy moving. We haven’t even talked about the revenue that the government would be able to raise in taxing each of these people.
However, by reducing expenditure, you are affecting not just the police, but the companies that rely on an efficient police force to remain in business. By taking the money to Switzerland, you are doing worse because the Swiss government would use that same money to do what you ought to have done in the first place. By sitting by the sidelines while our government officials either cut down or ferry the money out, we are encouraging them to do worse in the future.
This anecdote about police spending and how it affects other sectors cuts right across the entire spectrum of the economy. From infrastructure (on which bricks, masonry, carpentry, iron-bending, steel works, and a whole lot of others), to hospitals (teaching, agriculture, vehicles, communication, and a whole lot of others), to schools!
In any event, the most important point that has to be taken from this treatise is that the citizens of Nigeria are meant to be the ultimate gate-keepers of our economy. If we fail in our duty of making sure that our duly (s)elected representatives fail in their duty of properly steering the economy, the results of that failure would be seen in what we see daily right now, high rate of unemployment, massive deficit in the system, politicians mortgaging the future of our children.