Woe to the player who takes to the field after the final score has been written
The economy is a game that is not a game. It is a matter of numbers and competition wherenumerical figures are more than mathematic abstractions; they speak of the real lives of flesh and bone human beings. Competition is all about, ceaseless and unrelenting. Much of it is unfair, its results mostly precooked if not preordained. The largest teams select and arrange the field of play, keep score, and amend the rules during the game as they see fit. Initial advantage is made compound and then turned perpetual. An initial disadvantage multiplies itself to become permanent setback. As things are, affluence begets affluence; poverty begets poverty.
The current structure of the global economy tends to exacerbate not alleviate disparity. The game is less than a game because weaker nations have not a fair chance to win. Even when they gain, their gain is never sufficient to close the gap between them and the affluent. When they lose, they lose in chunks much bigger than the piecemeal benefits earlier attained.
That the wealthy control the game does not mean they always win as they would like. This is because the game is more intricate than human mental processes. The economy is too complex to outthink and completely master. It can only be guessed at and approximated. Moreover, this is a game where avarice often supplants skill and greed exceeds acumen. The affluent may overshoot their mark by overestimating their ability to control the uncontrollable complexity. Sometimes, events take place none could foresee and the consequences thereof none could prevent.
Yet, even when they guess or guide wrongly, the big dogs remain atop. They may lose or not profit optimally. The affluent derive their solace knowing that if they are at a loss, poorer nations and people have lost even more. This is the turn that the global economy is currently taking. It has entered a period where all may be losing; however, the losses of the poor damage them much more than wealthy’s losses hurt them.
The global economy partially recovered from the 2009 financial crisis but was never rehabilitated or restructured to prevent a similar event. Today, the world economy now tailspins because it refused to break old habits. This current downturn will not erupt into the major calamity that was the 2009 breakdown. However, the current slowdown will be painful to many nations, including Nigeria.
Moreover, it is a warning that something more bleakly profound could be in the offing if the game continues to be played as it is. This warning will be ignored by all save a small few. Sadly, today’s stumble will likely be an insufficient alert for the world to protect itself from itself and a greater fall. That the world will recover from this brief clip will boost the confidence of those at the helm who have but scant knowledge of what they are doing. They will act even bolder; their ignorant boldness will push the economy into the realm of deeper risk and a plunge that may rival the 2009 meltdown. Fortunately, that major global major meltdown lies sometime in the future. Sadly, that future may be less than a decade away.
While today the international economy may not be suffering a major slump, it undergoes a painful slowdown. Aggregate demand is weak throughout the world. America, the world’s largest economy, has experienced modest growth but of an uneven, unsustainable variety. Due to loose monetary policy, money has flowed to the rich who used the influx to purchase financial assets not invest or spend in the real economy. This dynamic elevated financial asset prices and fueled the excessive speculation in commodities that has helped lead to the current downspin.
America’s economic growth has been one of the affluent class enjoying an appreciation of their assets. However, wages for the majority of Americans have stagnated since the 2009 recession. Thus, they do not have enough new spending power to fuel a robust recovery of the productive economy. Although the American government fortunately did not indulge in fiscal austerity during the last few years, it also did not undertake a fiscal stimuli of the dimensions needed to jumpstart the economy.
The European economy has fared worst. With governments chaining themselves to the burning pyre of austerity, the Eurozone has languished in or near recession the past five years. The two main drivers of global consumer demand – America and Europe – have tapered. Tapering of these economies has undermined the export-driven model of the Chinese economy. The dominoes have started to fall.
China’s unprecedented growth was built on a neo-mercantile strategy of exporting manufactured goods and suppressing local demand for those goods as well as for imports. This export model worked well until the economies of the North Atlantic went tepid under cataracts of private sector and household debt. The Chinese were slow to recognize the changed environment. They continued to pump too much investment into manufacturing, real estate and construction. The government also encouraged investment in the stock market. As a result, the market mushroomed by over 250 percent from mid-2014 to mid-2015. This steep growth ran contrary to underlying economic reality. Both the world and Chinese economies were slowing. This climb of stock valuations was nothing more than an exercise in mass irrationality, a classic bubble. It busted.
While all this was happening, the Chinese government took modest steps to boost internal consumer demand to compensate for slack external demand. These steps were too small and came too late. China had erred into overreliance on an economic model that needed readjustment and had engaged in overinvestment in manufacturing and related sectors.
The slowdown of the Chinese economy and crash of its stock market would cascade globally.
The damage to the Chinese economic model would spread damage to those nations and other economic actors that relied on the Chinese model if not directly relied on the Chinese economy itself. These nations had gotten used to high commodity prices, mainly driven by China’s appetite for commodities, including oil, to fuel its manufacturing sector. Nigeria and other African commodity producers have been scarred by their unwitting reliance on the durability of this neo-mercantilist model. Until the last half of 2014, Nigeria enjoined the flush of currency caused by high oil prices exceeding $100 per barrel. It was thought that the price level would be sustained as the world economy put more distance between it and the 2009 recession.
But the economy does not always travel in straight lines. Like the world itself, sometimes the economy rotates. Moving in an erratic circular fashion, the economy often returns to where it has been without most people understanding that they have been there before and would not have returned but for the arrogance of those who deem themselves the masters of world and all that is of economic worth.
Thus, Nigeria and other African nations allowed themselves to become too reliant on the economic prowess of the Chinese to sustain their economic model. This in turn made Nigeria and other nations dependent on the spending patterns and debt levels of the American consumer. As always, Nigeria’s economic fate would be decided in locations thousands of miles from its shores and by people with only a passing idea of where Nigeria is located.
Other important factors compounded this process. Technology even conspired against the nation. America was able to commercialized the ability to extract oil from shale rock formations. With this development, America quickly ended its tryst with Nigerian crude. With both China and America looking for less oil, global demand grew slack. However, Saudi Arabia refused to reduce production. Despite the short-term injury to its economy, the Saudis appear to be chasing a political objective of which Nigeria seems painfully unaware. Saudi Arabia wants to retain market share by keeping prices down so that American fracking becomes unprofitable and Russian production is also brought to heel. Saudis understand that market share gives it global political clout otherwise unavailing.
The Saudis also want to revamp or scuttle OPEC so that it can claim greater leadership. The Saudis believe OPEC has become unwieldly and leadership too diffuse within the organization to suit Saudi national interests. Thus, while Nigeria prays for higher prices, the Saudis work the opposite side of the street.
This latest downturn is another warning that Nigeria and other African commodity producers need to revamp their economic strategies. African nations have been too easily lulled into a false euphoria when commodity prices rise, only to go into a recessionary swoon when the prices collapse. The worst part is that African nations have little influence over price trends. They remain at the mercy of economy forces they cannot command.
The truth is that the rise in commodity prices witness the past few years was the yield of speculative impulses fueled by lax American monetary policy. Lax monetary policy put money in the hands of affluent investors. After the real-estate driven 2009 recession, they were reluctant to sink too much money too fast back into the real estate market. They turned to commodities. Speculation in commodity markets approached historic levels. This helped pump prices higher. But this speculation became divorced from economic fundamentals over time. A contraction was inevitable. The inevitable is now here.
Oil prices are half of last year’s. Given the sluggishness of the global economy and America’s embrace of fracking, this modesty of oil prices promises to last for some time. The Nigerian economy has already felt the severe sting. Their federal allocations reduced, state governments were unable to pay salaries or service their debts. The naira has devalued. Import prices have climbed. Economic activity has slowed. Hot money invested in the stock market has fled back to America or Europe, causing the stock market to jettison significant value. The banking system is not as strong as it portrays itself.
Nigeria faces an economic challenge that, because of secular changes in the international oil market, may be more momentous than the 2009 downturn. Nigeria weathered the prior downturn with emergency measures such as establishing AMCON to salvage the financial sector. However, the nation did not restructure the economy.
The warning and challenge are here again. This downturn shows that reliance on oil revenues is becoming an increasingly uncertain risk with returns diminishing after each successive economic crisis.
Nigeria has a fateful choice. Does it crawl into a recessionary ball and seek to outwait the storm of economic reduction or does it take fiscal measures to avert the worst of recession’s consequences? The braver and more logical course is to engage in fiscal activity to bolster the real economy by funding projects that will put the able jobless to work in rebuilding critical infrastructure so that business activity is made more efficient and less costly. If this mode is chosen, it should not be just as a temporary emergency measure to bridge the gap between boom periods in commodity prices.
These measures should be part of a larger-term plan to transform Nigeria into a nation with a manufacturing and industrial sector that services domestic as well as export demand. There is a psychological component to this. Historic incident lulled Nigeria into falsely believing it held a secured place in the global economy. For a long period of time, it had oil for which the world was willing to pay a high price. This convinced the nation that the world would buy whatever Nigeria had to sell. Nigeria was needed.
However, technology and the geo-political considerations of others have dashed this false comfort. Nigeria now has to learn that it must make itself needed. This comes not by what Nigeria can pull from underground but by what it can fashion with its hands and ingenuity. Nigeria must alter its economic mind to see that prosperity does not lie in simply selling what it might have by reason of geographic incident. Prosperity is found in making and selling what the world is willing to pay the seller’s price for.
This is the challenge of Nigeria today. In the midst of economic challenge will the nation undertake the steps required to begin the structural reform needed to transform the economy into what the present and future requires?Or will it stay mired in the past and succumb to the reduced future that awaits all nations that fall to realize the diminishing value of their once precious chief commodity? The decision is nigh and so much is at stake.
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