He who waters a stone has received his yield in full but he who waters a field may yet receive a bounty.
Last week’s article asserted that money does not answer everything. In the wrong hands, it is more apt to complicate things than to resolve them. Today’ piece identifies some good money can bring to national development if guided by adroit fiscal policy.
Poverty is the greatest single challenge for Nigeria and Africa. Thus, the intelligent deployment of money to spur growth in the political economy is of keen interest to Nigeria and Africa. Where inordinate poverty exists, pervasive unemployment and idle capacity will also be found. Sage fiscal expenditure is essential to reducing poverty by bringing idle capacity into the productive stream. This is important given current trends in the global economy.
Most African economies depend on the export of natural resources for two essentials that are interrelated yet actually distinct. First, exports are vital to procure foreign currency through which the nation may satisfy its import obligations. Given that our currencies are not considered hard currencies readily traded in the global market, this function is vital and inescapable. The second function is more important but less inevitable. Nations then tend to use the amount of foreign currency received from imports as the basis for determining the amount of its sovereign currency it shall release into the domestic economy. This mechanism is a significant determinant of the activity and employment in an economy so constructed.
Currently, this mechanism augurs poorly for most African nations due to the global decline in commodity prices, particularly of oil. The lower oil prices result from more than a transient downturn in the business cycle. These lower prices threaten to be long-term or secular in nature. The advance of technology has severely undermined the model upon which Africa’s fragile economies are based. Shale oil fracking technology has swiftly catapulted America to being an oil and gas producer of such a magnitude that it can now satisfy its own needs. This self sufficiency has reduced the American appetite for Nigerian oil from a flood to less than a trickle. The prosperity and activity we hoped would be spawned by the deep sea wells of the Nigerian coast has now moved to the oil fields of the American heartland.
China and other Asian nations have taken up the some of the slack but they cannot completely cover the hole left by the American shift in consumption. Moreover, China now invests tens of billions of dollars in alternative, renewable energy. At some point in the near future, those investments will begin to bear fruit for that nation just as investment in fracking gave the American economy a fount of newly available, affordable oil that had nothing to do with importing from Nigeria or other nations. When that day comes, the Chinese economy will have added another buttress to its long-term development and diversity. It is will be a fine day for China. For African nations, it will be the opposite. If the two largest economies in the world lose appetite for a nation’s primary exports, the model upon which that nation’s political economy falls under assault by these harsh realities.
The nation is faced with stark choices. Either it holds course in hope that other consumer nations will increase their demand or that nation must adapt to the new reality. To hold course is to rest the fate of the political economy on the graces and goodwill of another sovereign nation with its own interests and objectives. It is a thin and slender reed upon which to anchor a nation’s future. Even if another nation or a group of them increase consumption, the relief to the exporting nation would be a trembling one. Given the pace of technology and the gradual diminution of oil as the lifeblood of the global economy, the exporter cannot assume the new consumer will align with them forever. Just as America rapidly changed its consumption patterns in the brief span of a few years and as China invests in oil-independent technologies, others nations might well follow either the American or Chinese path. That would leave the exporter in the cold.
This tenuous circumstance calls for a restructuring of the exporter political economy. Such a change cannot be done on the cheap and without government policy leading the way. Herein, the dilemma lies.
Just as the nation is coldly shaken by harsh economy reality into recognizing it must change, the nation now receives even less money than before to accomplish the great change. One setback becomes inescapable. With fewer buyers purchasing reduced amounts of the commodity, the nation earns less foreign currency. The nation will be forced to modify its imports or place great pressure on the domestic economy to answer its foreign import obligations instead of its own internal challenges and imperatives. This will place a visible burden on the national currency’s exchange rate. This would not be so onerous if the nation had considerable industrial capacity. The lower exchange rate would render its manufactured goods more affordable and thus shift export earnings from raw material to the manufacturing sector.
Over the long-term, this feat must be done. At some point, African nations hoping to establish a strong manufacturing base will likely have to endure some of the pain associated with lower exchange rates. However, it can only capture the benefits thereof through government policy filliping the development of nascent industries.
Without such policies fueling a more benign industrial level, the exchange rate drop will be a nearly absolute economic detriment. The weakening exchange rate is only the most visible effect. The hidden costs levied against the productive economy are even more injurious because these costs combine to both suppress economic activity – increasing unemployment of human labor and productive capital. The hidden costs also inflate prices through an external shock while bringing none of the salutary benefits of a reasonable level of demand-driven inflation.
The new economic reality requires a new industrial policy and a new industrial policy cannot be had without the wholesale rebuilding of the national infrastructure ranging from roads, ports and rail to electricity and potable water. To achieve this, will cost money, more money than the government currently produces based on the mechanism of using export dollars to determine the amount of naira the government issues.
Thus, the government of a natural export-driven political economy faces an existential choice in this harsh environment. Retaining the mechanism of basing the quantity of local currency on the amount of foreign currency derived from exports is to consign the nation to the lower rungs. There shall be no escape from national poverty except greater national poverty.
There is no need to retain this anachronism. It is a throwback to a global financial currency regime that no longer exists. Whatever utility this mechanism once had, is long gone while the harm it imposes gets compounded by the day.
To achieve full employment of our human and material capacity, Nigeria must eschew this vestige of a day long past. We must question why Nigeria continues to peg the amount of naira government issues and spends to the quantity of export dollars earned.
To do so abnegates our national economic sovereignty at a time when freedom of decision is most needed. It is to allow the fuel consumption appetite of the leisure vacationer in California, the London cabbie and warehouse owner in Shanghai to determine the level of economic activity in Nigeria, more so than any Nigerian, even more so than the government itself. Few successful nations have given themselves over to the whims of foreign consumers to such a degree. There is no reason why Nigeria or any other African nation should abandon its destiny in this manner.
How government now distills naira is a function of the gold standard. But that system was abolished forty years ago because it proved untenable under modern conditions. This currency regime had a built-in defect. It tended to brief eruptions of exuberance followed by longer periods of deflation. For example, the growth of money supply for the overall system was not dependent on the level of economic activity. It was dependent on the continuous mining and supply of gold, the rate of growth of which may not have been consonant with the rate of growth of the real economy. This asymmetry was a cause of dysfunction sending many an economy into unnecessary recessions and curtailing growth and employment that might have been. Nigeria now experiences a similar turn with the decrease in dollars caused by declining oil prices.
All this means that, instead of chaining the naira to gold as in the former currency regime, Nigeria ties enchains its currency to the dollar. Nigeria has “dollarized’ the economy in such a way that economic and monetary policies decisions an preferences made in America hold undue influence over this economy. While not stated as such, by limiting naira issuance to the amount of export dollars earned Nigeria has imposes a dollar standard on its economy. This denigrates the status of the naira to that of an ordinary tradable commodity, thus forfeiting its rare utility as an instrument of sovereign national power.
Enslaving itself to this mechanism means the nation has inadvertently converted exchange rate management into the primary goal of economic policy. This mistake in policy is tragic given the coarse and steep poverty afflicting so many Nigerians. Nigeria’s economic policy imperative should be sustainable growth derived from the full employment of the people and of the national assets. To focus so much on exchange rate management will be to sacrifice the imperative of growth. In sacrificing growth, maintenance of the exchange rate too becomes unavailing.
We must comprehend that the amount of foreign currency earnings is a good indicator for only one thing: how much the outside world wants a nation’s products and services. The amount of foreign currency earned in no way should be the final arbiter of how much domestic currency is needed to sustain optimal growth.
We must convert ourselves to a different view of what money is. From last week, we now know what it is not. It does not answer all things. We also must not treat it as a finite item, a commodity. Money is nothing but a social construct, a human invention to help us improve our material well being and reshape the world to our betterment. It is an agreed symbol of economic value so that value can be better transferred over space and time to accomplish economic goals that mere barter could not even comprehend. Money is way of attaching economic value to people, goods, services and even ideas.
As such the primary objective of government in exercising the sovereign right to issue currency is to deploy enough money and do so in a manner that allocates a just sum to all productive factors of the economy. As a priority, this includes the vast reduction of poverty and joblessness by allocating funds to people and assets heretofore left idle due to suppressed, inefficient levels of economic activity. Wisely using this sovereign right to allocate value, government can minimize unemployment and begin to construct infrastructure capable of hosting a modern industrial sector that will further tackle joblessness and idle capacity by bringing more people and equipment into productive endeavor.
At some point, the nation will have to full face the bitter medicine of exchange rate adjustment that positions the nation to be export competitive at level of manufacturing. To get to that point, government must spend funds to create an environment with the requisite infrastructure conducive to enhanced industrialization. To be able to make such expenditures, government must ultimately sever the de facto dollar standard now imposed on fiscal policy. If Nigeria does not make this break, the economy will always function at less than capacity. Unemployment and poverty rates will always be too high. The exchange rate will continue to face a permanent downward trajectory characterized by disruptive fits and jolts that reflect the search of other actors for their economic high ground while Nigeria stands as passive backdrop to its own economic reduction.
Nigeria should exchange reliance on the dollar peg with a lever of greater collective purpose and ingenuity. It would help the nation and the legions of poor and jobless people if government fiscal expenditure would be based on a calculation of how much money was needed to lessen joblessness and idle capacity while ensuring that inflation did not climb to unacceptable proportions and the exchange rate did not suffer too steep a decline in too brief a period. In this manner, government can allocate sufficient funds to build the infrastructure required for a non-oil based economy. Government will thus have the funds to develop a social safety net as well as provide meaningful jobs for many. At the same time, government must assertively implement an industrial policy that expands, modernizes and makes competitive our manufacturing as well as agricultural sectors. As Nigeria deepens economic activity, the resultant growth and enhanced diversity of the nation’s export strength will give the nation better leverage to manage the exchange rate than it now has.
Nigeria must face the fact that its current unemployment and idle capacity hover have sunk to what other nations would regard as those of a depression. What is now considered normal in Nigeria would be bemoaned as a disastrous depression in other nations. History shows that rescue from such a dire state is not found in the private sector. Government must do the heaviest lifting or the lifting will not get done. In assuming this rightful status, government will become the main driver of economic development. This is the path that every nation has taken that has escaped from depression without losing a generation over to the economic calamity. It is up to Nigeria to decide whether it will have the courage to try to break the old chains that will bind it to newer depths of poverty and economy dislocation or will it meagerly seek to live within the current confines and try to manage the increasingly bleak consequences of this supine poise.
The clock is ticking. Nothing can stop it.
