Poverty and inequality are not solved by mere growth
In a rather disingenuous dramatization of “why can’t these fools understand simple economic logic?” she was reported to have held up a sponge cake, representing the Gross Domestic Product, to an audience of amused officials, in a crude attempt to rebuff critics who are insisting that all is not well with our economy because it […]
In a rather disingenuous dramatization of “why can’t these fools understand simple economic logic?” she was reported to have held up a sponge cake, representing the Gross Domestic Product, to an audience of amused officials, in a crude attempt to rebuff critics who are insisting that all is not well with our economy because it has failed to lift millions out of poverty.
“Having this cake does not mean that every problem in your household is solved,” she said, holding up a sponge with figurines of a family on it, at a televised conference. “But (supposing) you have one wife and three children and … if you have only this cake you’re going to be suffering. You want this cake to grow,” she added, swapping the sponge for a much bigger one. Her audience found it funny, and some probably thought she was very convincing. If we could double the current GDP growth rate to 13 per cent we could become one of the World’s top 20 economies by 2020, she argued, which would then solve problems like high unemployment and poverty.
The problem is that her grasp of the problem is neither logical nor is it rooted in economics. She failed to understand that Nigerians expect, and logically too, that their lot should improve as the economy expands. More critically, she forgot (or never understood) that in economics it is often possible to have growth of the “national cake” without commensurate improvement in wealth, employment or welfare for the vast majority.
Capitalism is rooted in private enterprise for private profits. As an economic system it has created enormous wealth. However, this wealth goes into the bank accounts of the owners of capital. In the long-run, and given certain preconditions, these people would be expected to invest in new ventures or expand existing operations thus employing more people and paying them new or additional incomes. Wealth is then said to “trickle-down” to almost everybody. In really existing capitalist system this only takes place in developed settings and not in underdeveloped countries like ours, especially not in those depending on oil rents, contracts and kick-backs.
The fallacy lies in projecting what the logic of the system says to what real world behaviour should be. If a business makes money we expect it to reinvest in machinery, spares and parts as well as raw materials. It should employ more or better qualified people, produce more and sell more. In our case however, people make money from kick-backs or agency fees. They keep what they have, after adding to their fleet of cars, wives and so on. They may take foreign holidays and buy more land and houses. But the bulk of the money goes to fixed deposits and other, non-employment-generating assets. In addition, because the money is tax-free and often far from legal, such people, even when they are business savvy, would rather not invest on what would attract too much attention. Some even sprint the loot out to foreign bank accounts. The end result is that few employment or income generating opportunities are created here at home. It therefore hardly matters if the GDP growth rate is 5, 10 or even 15 percent. The additional income, profits or loot hardly get invested.
A second problem is the “propensity to spend” as well as what we spend it on. People with low incomes spend all they earn almost immediately. All their money goes to food, rent, transport, education, second-hand cloth, ghetto-based clinics and drugs of dubious quality. They create jobs and incomes for others like them, mostly in the informal sector. The very rich spend more on these but how much more can one spend on the basics if one has hundreds of millions? Instead, they buy designer clothing, watches, jewellery and stuff mostly made abroad, creating jobs and incomes for foreigners. The hope lies in the middle, but the middle class is shrinking.
Oil, telecommunications, banks and a few other sectors account for most of the new wealth being created but these employ few people and hardly reinvest their profits in Nigeria. Manufacturing has collapse and we import most of what we eat, wear, ride or otherwise consume thus creating jobs and incomes for companies based abroad. Even areas like electricity, roads and other infrastructure and government procurements all are imports based and have little impact on local jobs or local income generation.
Most of the money spent by government on boosting the economy or providing infrastructure go companies, mostly foreign owned, who have limited local links.
Yet the problem of little or no linkages goes much further. Agriculture, the “main-stay” of our economy, the largest employer of our people and largest contributor to the gross domestic product is also not linked to industry. Those products that can be sourced locally are not; our industries import even those raw materials that are available locally. The tariffs set on the advice of the Finance Ministry are not supportive of the local producers either.
Existing, and aspiring entrepreneurs cannot create new or additional jobs because band credit are too cumbersome to secure even when they can absorbed the highly exorbitant interest rates. Essentially, the Central Bank interventions were used to shore up banks exposed to old and uncollectible loan. New businesses cannot therefore be created.
The basic economic truth is that a free market, left to own devises creates incomes and employment haphazardly. Those nations, like China and Brazil that have witnessed the highest reduction in poverty and unemployment did so by both expanding the economy and intervening in a targeted way to compensate for market inequalities and randomness. So, Minister Okonjo-Iweala, if we are to see an improvement in employment and general income level we need targeted interventions, rational tariffs, reasonable interest rates and more public projects that employ more Nigerians. The cake can be baked bigger but it must be shared more evenly. Understanding basic neo-liberal is not enough, political economy is the key.
And now to our great loss
Trust readers must by now have been inundated with tributes to our Managing Editor and “Permanent Secretary” of our Editorial Board, Suleiman Mohammed. But, bear with us for no words would ever suffice as accolades to the great, decent and wonderful human being that he was. I have seen him annoyed and even disturbed, but never bitter or angry enough not to smile and look for a solution to whatever he was confronted with. A young man who taught me a lot I would eternally be grateful for. Simplicity, modesty, commitment and hard work were to him second nature. Cerebral, cultured and friendly, we would forever remember him as the epitome of a truly patriotic Nigerian, African and a citizen of the world. May his gentle soul rest peacefully in Aljannah firdausi. Ameen.