In my last two interventions, I had argued that it makes no sense to build up a massive war chest of savings either in foreign reserves or sovereign wealth fund or even in savings accounts in the face of massive infrastructure deficit and a failing economy. Today, we are going to be looking at what to do when faced with the kind of recession or economic crisis we have now, where oil prices have gone down by over 60%, exchange rates have spiked to an all-time high of almost N350/$ in the parallel market from around N170/$ previously, unemployment is nearing 30% and inflation is skyrocketing to around 14%. There are basically two schools of economic thought that could guide as to what to do. One is the classical school and the other is Keynesian school.
The classical (including the neo classical) school of thought was led by the father of economics himself, Adam Smith (1723-1790). Their argument can simply be summarized thus: In time of crisis, there is an invisible hand, a sort of inbuilt self-regulating mechanism that would stabilize the economy to bring everything to an equilibrium level. To demonstrate this, if demand goes up, prices are bound to go up in the short run. Because prices are up, producers are going to produce more which will in turn bring prices down as the rising demand is met. All these economic activities are regulated by the market because people who are assumed to be rational, will always act in their best interest. The proponents of this view, therefore, advised government not to intervene as doing so is bound to distort the economy. One of the writers emphatically states that “it is not out of the magnanimity of the baker that we have our bread, nor the generosity of the butcher that we have our meat, but out of their self-interest”. It therefore, follows that altruism is not a virtue and selfishness is not necessarily a vice in the world of classical economists.
On the other hand, John Maynard Keynes (1883-1946) and his followers disagree. They argue that the idea of a self-regulating mechanism in the economy is a farce. They advocate government intervention to guide the economy towards achieving desired results. In times of crises, this school calls for increased government expenditure and lower taxes to stimulate aggregate demand and pull the economy out of depression. The “demand side” economists as they are often called, believe that supply responds to demand. Supply therefore can only happen when there is demand, so stimulating demand is the most important action of government to help an economy recover. If demand is weak, production will go down leading to increase in unemployment which will lead to further recession as demand will become even weaker. However, if demand is encouraged, more goods will be required and producers will hire more hands to increase capacity, pay them and they will reinforce supply by increasing demand further leading to more revenue for the economy and therefore recovery.
The World Bank and IMF seem to pitch their tents with the classical economic school and most times recommend cuts in spending and belt tightening to countries going through economic crises. In most cases, such countries have gone into deeper recession after taking the recommended pills. One example is in order here. In 1997, during the Asian financial crisis, IMF imposed a policy of closure of 16 banks at the same time on Indonesia, to cut down expenditure on jobs. This had a very disastrous effect of a heavy bank run in the economy and a reinforcement of the recession. The rest like they say, is history.
In his piece “Lessons Buhari can learn from Obama about managing a tough economy” published in July 20, 2015 under “Conversation” by the CNN, Stephen Onyeiwu, Professor of Economics, Allegheny College, Pennsylvania who, by the way, was also my teacher during my undergraduate days over three decades ago, drew some parallel between what Obama met in 2008 when he became the 44th US President and what Buhari inherited last May. Obama was greeted by an economy in turmoil. Unemployment was over 10% and the economy was losing 800,000 jobs per month. Debt to GDP was about 72% with absolute debt stock in excess of US$10 trillion. In addition to all these, US was in major wars in Iraq and Afghanistan.
Obama was faced with two choices. His first choice was to adopt belt tightening measures that would have led to cut in spending and contractionary fiscal and monetary policies. The other option was to engage in expansionary policies, also known as economic stimulus. He chose the latter. Instead of austerity measures, he decided to spend even what he did not have, launching an economic stimulus package of about US$1trillion. Today, the US economy has recovered. Unemployment has dropped to about 5% and the deficit is less than half of what it was when Obama first took office. A few countries in Europe and elsewhere who chose to tighten belts are still going through one economic crises after another. Prof. Onyeiwu concludes by advising that “Buhari would do well to borrow Obama’s economic magic wand. If he does, he will be surprised to learn that Obama turned the US economy around not through austerity measures, but by spending more”
There is no doubt that Buhari has listened to the advice of people like Prof. Onyeiwu, and it explains why the budget that was just passed had some economic stimulus package of about N2.2trillion in it. The stimulus package may not be enough, but we must start from somewhere. The next issue is how to fund the stimulus. The minister of Budget and Planning, Senator Udoma Udo Udoma had indicated during the highlights of the budget that N1.84trillion of the deficit will be borrowed, with N984billion coming from domestic sources and N900billion from the international market. The minister further justified external funding arguing that it would ensure against “crowding out” of the private sector and that there are chances of getting concessions from foreign lenders. While all these are superior arguments, I think the domestic market would have been in a position to absorb the entire borrowing. Besides, the exchange rate risk inherent in foreign borrowing cannot be overlooked in an economy that is experiencing and will continue to experience a declining exchange rate regime in the near future. Depending on where the rates would be by the time the loans are due for repayment, we may require over N1.8trillion to pay back the N900billion we borrowed. The next job for Planning is to determine the amount of stimulus that is required over the next couple of years for the recovery of the economy.
Having understood when to spend the money we do not have, the next set of questions would be how to spend it, on what and with whom. For stimulus to have a direct effect on economic recovery, it must be channeled to areas of the economy that would engender consumption. This becomes critical as consumption would lead to increased production which will in turn lead to demand for labour or job creation. The more jobs are created, the more empowered the hitherto unemployed will be which would now bring them into the “consumption basket” which will in turn lead to more demand for goods and services and more supply and employment and the circle continues ad infinitum. In essence, our spending should be targeted at instantaneous job creation activities and projects. We must focus on programs that deliver cash to Nigerian families and citizens and these would include infrastructure, education, healthcare, energy, tax incentives, unemployment benefits and projects of social welfare nature.
Most of the spending should end up with the middle class and not the upper class. This is where there is a big challenge. What really does middle class mean in Nigeria? To run away from the definition challenge, we will recommend that the spending should not target the upper class. So, anyone who does not belong to the upper class is qualified. The reason for not spending on the upper class is that their marginal propensity to save is higher than the rest of the society. So any of the funds that find their way into the hands of the rich may end up as savings and would not be available to stimulate the economy.
While we are on this, it is important that stimulus package should not be used to increase cost of governance. A line of distinction needs be drawn between raving up cost of governance and stimulating consumption. Increasing cost of governance does not increase consumption, but ends up being a leakage in the economy and an avoidable waste. Finally, investments should, on no account, go down because productive capacity is dependent on continued investment. Government must deliberately encourage investments in labour intensive manufacturing, agro processing, textile processing, solid minerals and other areas where jobs can be created. Government should also be prepared to work out incentives including some form of subsidies to enable these activities happen. In addition, tax reliefs should be given to lower income groups and to producers and hiring companies to encourage them to engage more workers. At the same time, stiff tariffs should be imposed on imports to increase consumption of locally made goods and avoid exporting the jobs that have been created locally outside the country.
We had proposed spending on infrastructure earlier. While we continue to engage construction companies in building new roads, we need to set up functioning Public works departments at all levels of government to manage and maintain the roads. This used to be the situation in the past, but we seem to have lost it. The few roads that were built are left with little or no maintenance. We seem to wait for them to them to almost become impassable so we can award fresh contracts to contractors. I don’t know where else things are done that way. An attempt to deal with this was made at the federal level with the creation of Federal Road Maintenance Agency (FERMA), but the required impact was hardly felt for all sorts of reasons, ranging from poor funding to poor skills. If we get this right, it would be a veritable channel of employment for skilled and unskilled labour. And we can use very experienced private sector managers to drive it as I am sure someone would raise an objection on the basis that the public sector is not wired for efficiency.
It must be noted that any direction we choose to go will fail if we do not have an accountable and transparent implementation capability. A major plank for the success of the economic stimulus package is prudent and honest spending to ensure that funds go to the areas they were earmarked for. Any leakages or diversions would only lead the country into debts without clear sources of repayment. So, there should be zero tolerance for implementing the budget in breach as had been the case in the past. Second, the inflationary impact of stimulus spending cannot be overemphasized, more so, when the rate of inflation is already at 13.8% by the end of April 2016. We are of the view that government must keep an eye on inflation, given the understanding that it can only be temporary. Besides, it is a known fact that unemployment, and economic displacement generate more social tension and crises which make inflation a lesser evil to tame in the short to medium term.
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