Poverty barters away morality. It turns saint into sinner and kindness into conflict.
e will shift from American politics for the next few weeks. With the Democratic and Republican conventions behind us, the campaign veers into the trenches. The candidates will engage in the prosaic fare of daily rallies and stump speeches memorizes by rote. Barring unforeseen happenings, the contest will not intensify until mid-September when the series of debates commences.
At the moment, the contest is in Clinton’s hands. She enjoyed a significant boost from the well- choreographed Democratic convention. Meanwhile, Trump appears to be doing his utmost to caricature into an even odder version of himself; he appears intent on making his campaign implode and his chances of winning disappear. Since the Democratic convention, not a day has passed without Trump committing somejaw-dropping verbal miscue. Because of Trump’s clumsiness, Clinton’s relativelystaid, unenthusiastic campaign has surged to a nearly double-digit lead in most national polls.
During these anticipated electoral doldrums, I hope to examine the weakness of the global economy and the particular vulnerabilities of strategic states within it. Barring a spectacular event that diverts my pen, we will look at Nigeria, Brexit, Venezuela, Greece/Italy and finish the series with some general observations on global economic trends.
The central theme underlying this discourse is the belief that the world economy will regularly be crippled by frequent crises and near crises because the model upon which it is based is a malign one. The undue financialization of the global economy has shifted too much power to the banking and financial sector. This deprives the real economy of the resources and policies needed to achieve levels of production and employment adequate to sustain growth that benefits the bulk of the people. Increasingly, people have to assume higher debt in order to maintain their already modest living standard. Modern peonage will be in the form of mounting debt not chains and shackles. Yet, it will still bring a neo-feudal taint to the structure of society. As the financial sector gains, the real sector loses and most of us along with it.
Moreover, current economic and social policies are skewed in manner that perpetuates the imbalance. The populace is inculcated into believing this injury to their wellbeing is the inherent order of things, that at every point in time the world is as good as it can get and that reform will simple make matters worse. We are handed subjective conclusions about economic policy and about how the economy is to be structured as if these biased views are inexorable natural laws. With our minds so conditioned, we gaze into the mud and plod away step by step, trying to hold forth in a world that, day by day, offers us less to hold to. We are told not to look up so that we never venture to see a better avenue than the sodden path we tread.
We are mentally bludgeoned to not question anything. To do so is to invite criticism for being irresponsible, disruptive or naïve. We are told we are too ignorant and dumb to understand the complexities of how we are employed (or not) and at what wage we work. We are commanded to leave our fate to those who know better. Yet the only thing they know better is how to get what they want. This is what guides the actions of those controlling the global economy. They call it policy. I know it by its truer name: deceit.
With no further delay, let us grapple with the tight fix into which the dynamics of the global economy and the financialist mindset have placed Nigeria.
To make this journey, we must learn to distinguish between nominal feats and genuine progress, between myth and fact. If not, we shall always be vulnerable to side-plays and artifices distracting us from the kernel we should be seeking.
During the Jonathan administration, its economic team lauded that Nigeria had become Africa’s largest economy under their stewardship. Today, that victory seems more mockery than achievement. The elevation in GDP was accomplished without any material improvement to the nation’s productive capacity or output. It increased not the amount of food on the average family’s table nor the disposable income in the pocket of any working person. It was all done with the stroke of a pen. They altered figures on paper then persuaded us that reality had been improved by their cunning handiwork.
Now, we know the truth. It was a cynical endeavor not meant to change reality as much as insult it. Reality has given its apt reply. We must learn from this. Gimmickry is a vain substitute for wise, frank policy. In the end, better one step truly taken than five steps fancifully imagined.
Slumping oil prices have severely afflicted this economy. This disruption was caused by a convergence of geopolitical and technological factors. For the past two decades, geopolitical considerations and technology generally worked to the national benefit. This time they became the villians. North American oil fracking brought more oil into the market, depressing the price thereof. Saudi policy to maintain market share and to counteract the intrusion of American oil fracking by elevating Saudi production further eroded prices. A languishing global economy did the rest.
This external shock to the economy had compound negative effects. It reduced domestic activity while also lifting price levels. As such, it brought recession and inflation at the same time. Unfortunately, monetary and fiscal policy cannot adequately battle both simultaneously. Because of this limitation, we are compelled to focus policy on defeating them in detail, one at a time. Economic elites tend to see inflation as the worst of the tandem. Empirical history indicates that a modest increase in inflation is easier to withstand that is a protracted economic downturn. For the majority of the economy, recession is more ominous. It is the one that should first be tackled.
This realizationshould lead to certain policy options and emphases yet away from others. One unavoidable decision in this situation was to move to a floating currency regime. Here we must pause a moment to understand the significance of the exchange rate. Discourse on the exchange rate has been voluminous. Perhaps my submission here will add nothing; but, better a helpful word repeated than one left unsaid. Thus, in hopes that it does add to the collective understanding, I venture forth.
Proponents of a so-called strong currency often seemed to have embraced the position that a low exchange rate automatically begets a vibrant economy. Thus, they see the exchange rate as an important economic objective. Yet, it is not. Exchange rate policy is more prudently a tactic employed toward the more fecund objective of maximizing national economic output and wealth creation. The exchange rate is not any end in itself; it is a means to a salutary end. The overall welfare of the economy should not be sacrificed for the purpose of maintaining an exchange rate any more than a tree should be sacrificed to please one of its branches.
We must divorce ourselves from the fallacy of defining the currency as strong or weak simply by looking at the exchange rate. If the exchange rate is low but the economy lagging, the currency is weak. Conversely, if the exchange rate is high yet the economy growing, the currency is sufficiently strong. We must not confuse cause and effect. A vibrant economy gives rise to a low, stable and strong currency. A low rate does not result in a strong economy. If the exchange rate and economic health do not jibe, the exchange rate eventually will give way or it will result in additional distortions pullingthe economy deeper into the shoals.
Also, we must see beyond the false dichotomy that net economic gain is only and always associated with good economic policy and netloss with bad policy. There is much space and complexity between these polar opposites. During idyllic times when some level of gain is almost inevitable, imprudent policy may still yield positive,albeit not optimal, growth. Gain in such a convivial environment is not evidence of fine policy. Progress would be said to have come despite policy not due to it. Conversely, when inevitable downturn takes form, sometimes the best that even thewisest policy can do is to reduce,not reverse, economic loss in the short-term. The move to the flexible rate is of this latter type.
There are basically two types of rate devaluations: offensive and defensive. An offensive devaluation occurs when a nation purposefully devalues its currency to bolster preexisting export opportunities. This implies a heretofore idle but ready capacity to increase exports. A defensive devaluation takes place when a nation’s foreign exchange inflow is materially reduced while outflows remain unchanged or perhaps grow. This latter description fits Nigeria’s situation.
The slide in oil prices altered net foreign currency flows to the national detriment. As the dollar became less available, it became dearer. The naira became less valuable in comparison. To maintain the old rate was to ignore this inexorable fact. Facts may be unsavory; in the end, we are forced to swallow them.
Downed oil prices placed the economy in retreat. The lone question was whether retreat would be orderly or chaotic. To have stuck to the old exchange regime invited chaos. The new regime brings more order and reason. Yet, make no mistake. It is still a retreat. The retreat was necessary; it will help us find better ground on which to defend the economy. But victory is never defined by the orderliness of one’s retreats. It is won by the soundness of our advances and the ability to repel subsequent counterattack.
At this point, we must accept the downward direction the exchange rate has taken. Even with the reform, the divergence between the bank and parallel market rates is too extreme. This roughly 25 percent gap lends itself to arbitrage and corruption. Both vices will misdirect precious financial resources away from the productive enterprise needed to revive the economy and thus bolster the currency.
For exchange rate policy to be effective in the long-term, it must be complemented by other monetary and fiscal policies redressing the conditions that occasioned devaluation in the first place. While our devaluation was initially defensive, we must institute policies that, in the longer-term, place us on footing similar to that suggested by an offensive devaluation. Ideally, devaluation would have taken place with Nigeria having industrial capacity in place that could have exploited the cheaper naira by quickly expanding non-oil exports.
Because our manufacturing sector has become a crippled limb, Nigeria could not make this adjustment quickly. That we could not engage in this more beneficial sequencing of policy and economic adjustment does not mean we can never reach a like result. We can attain the same outcome in the long run.
This requires that we augment the exchange rate decision with policies favoring domestic manufacturing and industrial production. We can invert the optimal sequence and still achieve a benign outcome. This is because there is no causal relationship between exchange rate policy and these other industry- and employment-friendly policies. Although complementary and made more effective by the other, neither policy is wholly dependent on the existence of the other. This means the sequencing can be changed yet still arrive at nearly the optimal result in due season.
If we fail to marry the two policy sets, we not only reintroduce chaos to our retreat, we make the retreat longer and more onerous than need be. Recovery will be feebler when it finally arrives. It would be like carefully pruning the branch while neglecting to water and fertilize the roots of the tree upon which the branch depends.
Against this backdrop, the Central Bank’s recent decision to increase the interest rate must be seen as a half-step backward. The decision was done with good intentions but was captive to the financialist ideology that has jailed the global economy. The decision intends to attract investors, particularly foreign investors, and to combat inflation. This is revealing.
Note the type of investors the Bank seeks.The type of investors influenced by such interest rate changes are those who invest in financial instruments that pay a return directly or indirectly based on the rate set by the Central Bank. The bank’s policy is thus intended to encourage financial sector investment. On the other hand, the rise in interest rates discourages investment in the plant and equipment needed to fuel real sector expansion and job creation.
Financial sector investors are those most strongly attracted by high interest rates. Real sector investors see high rates as an impediment. The eyes of real sector actors are fixed on the profits derived from the sale of their goods. Tight money and higher rates undermine their profits in two ways. Steeper borrowing costs reduces profits. Steeper costs mean higher prices on what they produce; this suppresses consumer demand which means sales will be leaner still.
Added to this is the uncertain nature of the financial investors the policy seeks to attract. These are “hot money” investors; their money has no firm home. Primed to sniff out high interest rates, their nose is for interest rate arbitrage. Minute change in interest rates here or abroad will cause them to pull stakes faster than when they came it. Nigeria has acted this play before. The entry of such investors was hailed 10-15 years ago. During the global recession of 2008-9,the fast exit of such investors contributed mightily to the domestic banking crisis. Courting such investors merely sets Nigeria for similar disruption, particularly given the weakness of the global economy.
While the Bank’s tack may alleviate some short term money shortages, the medium- to long-term consequences are much less benign and certain. Once the money is here, it must be paid returns or it leaves. Unless more portfolio investment is constantly arriving, financial portfolio investment becomes more of a drain than an augmentation. This type of investment is mostly incestuous. In remains in the financial sector and doe little good for the productive sector. Thus, a focus on this investment merely perpetuates the financialist imbalance that has ill served the national and global economy over the past two decades.
Perhaps worse is the fatalism the Bank’s move implies. For this decision to have taken shape, the Bank implicitly concluded the domestic real sector will be less a catalyst of the economy than foreign portfolio investment. This is an extraordinary admission.
The decision connotes that neither government fiscal policy nor expansionary monetary will fillip domestic private sector growth to any discernible degree. Signaling its belief that neither it nor the government are up to the task of reviving the economy, the Bank thus surrendered the real economy to defeat in hope of rescuing its precious financial sector. All that can be done is to blow some hot air into financial asset prices, unduly inflating them for a transient moment. This comes at the expense of the real sector by hoisting an even higher interest rate on its borrowing.
Implicitly accepting the present condition as beyond the ambit of fiscal and monetary policy to change, this move will not help the overall economy recover. The decision does open the door to higher nominal profits for international Big Money and its local allies. However, it moves in a direction opposite to that required to fight the recession that weighs on the back of the average person more heavily than does the marginal increase in inflation which seems to spook the moneyed class. This is an unfair transaction that ensures moneyed people against greater loss at the expense of leaving the rest of the population to their own meager devices. This is policy defeatist when courage and vision are most needed.
(Next week’s piece will suggest policy steps that just might help Nigeria exit this economic dilemma.)
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