Understanding the Sorry State of Nigeria Economy through the Lens of Paul Collier’s “The Bottom Billion” (Part II) By Semiu A. Akanmu

The trap of being landlocked and the trap of bad governance are other poverty traps that are chaining the countries of “The Bottom Billion”, according to Paul Collier. Being geographically landlocked, i.e. when a country’s geography does not support transatlantic trade, or landlocked with bad neighbours. In development, geography matters, but this does not absolutely imply that landlocked countries are damned. Collier gave examples of Switzerland, Austria, and Botswana in Africa as landlocked but prosperous countries.

Nigeria is not landlocked, geographically, but we are surrounded with not-too-prosperous neighbouring countries. This essentially suggests that, resource trap, conflict trap, and trap of bad governance are the carcinogenic principalities that have eaten deep to the fabric of our economy. 

Our inability to manage our resources, wastage spending during oil boom, and eventual lingering economic recession during oil bust, are results of bad governance, corruption and bad policies. Nigeria had it so rough, that at a time, stealing was not a corrupt practice. $1 million aid money was spent on Beyounce and Jay Z. $17.8 billion was recorded illegal capital moved out of Nigeria between 2004 and 2013. The country’s sole dependency on oil has finally become plain stupidity. Diversification will continue to be elusive when “sharing-oil-money” has taken a centre stage in our public governance. Power fix becomes rocket science. Nigerians are reduced to wretchedness and poverty, while their leaders live in stupendous affluence. “The leaders of many poorest countries in the world are themselves among the global superrich. They like things the way they are, so it pays to keep their citizens uneducated and ill-informed,” writes Paul Collier.

Collier proffers certain actions and instruments of reversing the economic logjam of the poor countries. These cores are Aid, Military intervention, Laws and Charters, and Trade policy for reversing marginalization. And the nine peripheral strategies are: 1) increase neighbourhood growth spill-overs, 2) improve neighbours’ economic policies, 3) improve coastal access, 4) become haven for the region, 5) don’t be air-locked or e-locked, 6) encourage remittances, 7) create a transparent and investor-friendly environment for resource prospecting, 8) rural development, and 9) attract aid. 

Collier’s prescription of Aid –a sum total of both concessional loans and grants from donors (mainly Western) to Africa countries –as an instrument of poverty reduction is grandstanding; his suggestion of military intervention is condescending. But in all, he could mean well. It is the shameful posturing of African leaders and the ruinous legacy of their earth-shattering corruption that have reduced Africa countries to entities that depend on hand-out to survive, and must be internationally policed so as not to plague their nations to cycles of conflicts and civil wars. A counter-advocacy for aid-dependency in Africa is what Dambisa Moyo’s Dead Aid espouses, it is worth alternative consideration. 

Another weary suggested instrument is “Trade policy for reversing marginalization”, instead of industrialization. This is the particular route that has turned Africa countries into trash bins of Europeans goods. Trade is good. Yes. But, the priority of Africa countries must be muscling industrial strength for trade comparative advantage. We must be set to export chocolate (finished goods from our own cocoa nuts), export Tomato paste, export palm oil, export fruits, and import electronics, and others that are our weak niches. Till we have our finished goods to trade in the international market, any adoption of free trade policy, or globalization, which opens our borders to free importation of all junks (including tooth picks), is damnation. The Francophone countries are valid examples of such sorry state.

But Colliers’ suggestions of the need for increasing our neighbourhood growth spill-overs and improving our neighbours’ economic policies are rightly-posited. As he suggested, Nigeria, just as other African countries, must improve their coastal access, and ensured they become haven for their region. We must not be air-locked, or e-locked (i.e. we must unlock the technology-driven economic potentials). We must encourage remittances, and create a transparent and investor-friendly environment through reliable legal institutions, and hassle-free regulatory framework. Microfinancing and lending can also induce rural development. We must do all compatible with material and immaterial peculiarities of African economies to expunge ourselves from “The Bottom Billion.”

Read: Understanding the Sorry State of Nigeria Economy through the Lens of Paul Collier’s “The Bottom Billion” (Part I)

Mr President, Don’t Make Us a Market, By Taofeeq Ayinde & Semiu Akanmu

President Buhari, consequent to your government policy pronouncement on foreign exchange (forex) in the last Presidential media chat, the most popular reaction disagreeing with your adopted policy is those demanding that our forex should be totally floated. This implies that the “invincible” forces of demand and supply of dollar should be made to determine the price at which Naira equates to United States Dollar. Re-echoing the Miltonian school of free market thought, Feyi Fawehinmi shared this sentiment in his essay titled “Mr President, Make Us a Market.” We want to demand otherwise: Don’t Make Us a Market.

 

Photo Credit: Naij.com

We have carefully perused Feyi Fawehinmi’s submission. It’s clearly refreshing and interesting. However, it appears too disentangled from the reality of developing economies, and especially how management of flexible exchange rate (otherwise known as dirty float) operates. It equally repeated the myth of “free market.”

Even though the theoretical literature tries to draw a line between fixed (i.e. where the government pegs the value) and floating exchange (i.e. where market determines the value) rate, the operations of the exchange in real world is a mix of both –with varying degree. This is so because Balance of Payment Equilibrium (i.e. when autonomous receipts from exports and the sale of securities abroad equal autonomous payments for imports and the purchase of securities from foreign residents) –an offshoot of exchange rate stability –remains the cardinal macroeconomic objective and economic business of every government in this globalized world. To do otherwise, as Feyi’s essay suggested, is to make your government irresponsible.

It is also instructive to note that both fixed and flexible exchange rate regimes are two extremes in the continuum of exchange rate stability. There is really nowhere in the world where exchange rate is just allowed to operate so freely and enjoy a free movement at the mercy of market forces. The developed economies, which are erroneously seen as practitioners of free market, also tamper with free operation of exchange rate by undertaking a sterilization control. Sterilization control is the use of counterfactual measures in the domestic economy to nullify unfavourable exchange rate transactions abroad. This has been the strategy of developed nations to tamper with the free operations of flexible exchange rate regime. Therefore, in practical sense, free market is a myth.

Now, if advanced economies are tampering with unfavourable exchange rate, how can Nigeria; a developing and poorly diversified economy, allows a free movement of its currency? As an alternative, managed float regime, which your government has adopted, though with excessive demand control which is understandable at the moment, is preferable. This strategy had been with Nigeria for so many years now and the price differential between the inter-bank and black markets –which is the major point of the policy antagonists –has not been this much. This suggests that the aspersion should not be cast on the managed float regime but rather on the degree of our central bank’s interventions. The current degree of government intervention has been the highest in history.

Can we then blame the central bank of Nigeria for this high level of control and intervention? No! We say “No”, on these following grounds:

Exchange Rate Equilibrium is not Mean reversion: Feyi agreed that floating exchange will amount to sharp drop in naira value but believed it will revert back to its former value; with time. No, Sir! This is the classical position which has never been empirically supported for a less-diversified economy. This can never be the case for a developing economy such as Nigeria. Historical evidence even suggested that what we will have is a rather new equilibrium of a higher level of exchange rate. Naira will settle at higher value against dollars, and this will definitely hurt importers of “essential items” that our economy needs, as you rightly highlighted.

Between Arbitrage and Efficiency: Arbitrage is obtaining profit in exchange rate trading due to the inefficiency of the market. Market inefficiency is when the market does not fully incorporate available information into its pricing system. It can be weakly inefficient (if private information is not incorporated) and strongly inefficient (if both private and public information are not fully incorporated). Arbitrage is a common feature of financial market. In the short-run, it appears the buyers are having a field day of buying in the cheaper market (inter-bank) & selling it in a dearer market (black market), i.e. arbitraging.

We want to state categorically that this is a short-run phenomenon. By the time the black market have succeeded in selling all they have and then need to convert all the dollars to naira (people would have been forced to cut away excessive demand for dollar), they have to buy at the rate obtainable at the inter-bank market. As such, both markets will clear and the inefficiency of the market would have been "forced" efficient. By this time, the rates differential in both markets would be cleared. The CBN only need to properly control the supply of money in the economy. One of these is through the Treasury Single Account (TSA). Stoppage of corruption infestation: Whereby people, who are not covered by the government’s forex subsidy policy, manage to obtain dollar at inter-bank price to sell to black market.   No underground economy should exist in any part of the country. All arms of the government and especially the legislature should also be integrated into the TSA system.

Freedom to free purchase: We want to state that this is a long-aged myth that must be discarded. Nigeria still remains a mixed economy where the means of production, distribution and exchange of goods and services is still concentrated in the hands of private individuals and public entities. Away from that, the regulatory, re-allocative and redistribute roles of the government, irrespective of the economic system, still demands government intervention in determining what to use your money to purchase –especially when it is toward pareto-efficiency. This preaches that the greatest good is to the greatest number of persons. It is the first principle in welfare economics.

We hope that your administration take us to a Welfare state!