The Economy and You: Tales of the Unexpected

By Prof. O Anya

Introduction

A cursory glance at the Nigerian print media as well as the social media paints a gloomy picture of the state of both the Nigerian society and economy. Apart from the insurgency in the North East and the upsurge in attacks on oil/gas installations in Niger Delta by the militants there is an explosive increase in such social maladies as mindless murders, kidnapping, rape, arson and the marauding Fulani herdsmen in the South and North Central geopolitical zones. It is as if Nigeria is on the verge of an undeclared war. These social maladies have been there over the last several years admittedly at a much lower intensity but now it is as if it has now reached an inexplicable crescendo. It is therefore not surprising that the economy is in dire straits. Naturally we are forced to ask why and particularly why at this point in time?

The State of the Economy: 2014 vs 2016:

If we cast our minds back as recently as 2014, there was literally an upbeat tone to discussions on the state of the Nigerian economy. The GDP calculations had been rebased, conferring on us the status of the largest economy in Africa ahead of South Africa and Egypt. On the international scene, Nigeria had consistently posted a GDP p.a. rate of over 7% for the previous 3-5 years and although this had dropped, it was still impressive at more than 6%. What is more Nigeria was touted as one of the preferred destinations for Direct Foreign investment (DFI) and was regarded as one of the emerging markets that was poised to break through to sustainable high growth rate. Corruption was mentioned as a problem but the outlook was nevertheless positive.

Unemployment especially of the youth was unacceptably high but not as high as the current situation indicates. So the question is why the economy seems to have unraveled and regressed in less than one year of the new administration? The reason is simple although not so obvious even to the unprepared economist.

The fundamental driver of economic activities is human behaviour. The economic data that we use to gauge the state of the economy are mere aggregations of patterns of human economic behaviour. When the patterns of behaviour indicates a positive feedback the individual responds in an optimistic frame of mind. This is so because human behaviour responds to incentives, rewards and sanctions. Responses to each of these different stimuli produce different outcomes that will be summed up as economic trends in one direction or another. Hence when the narrative on the Nigerian economy suddenly tended to emphasize elements of unsavoury news, the new situation bred a new climate of uncertainty, fear and doubt.

This incipient environment of uncertainty and fear was amplified and garnished with a dose of well-honed propaganda, often propagated with flourish. The harvest is what we have seen in the cautious approach to normal life which we find in the market place. It is not for nothing, that the “feel good” attitude is a necessary companion to good economic environments. This is not to say that the negative and unacceptable behaviour that have been exposed in the recent past can ever be acceptable. What is critical is how we do handle the situation.

The natural human tendency is to expect the necessary ameliorative programme that is rational, fair, just and reformist. When our response stops at denunciation alone shorn of these other actions that will rebuild and inform in a manner consistent with a hopeful future, the alternative is confusion in the social psyche – the harbinger of a problematic economy. Even in the direst of situations, the citizenry expect a plan of action beyond the trading of blames.

Economies operate through signals and the responses to those signals. Hence we need a new repertoire of signals to deal with the new climate of uncertainty, fear and doubt. To tackle the current problems we need to know where we are coming from and how the current problems emerged. So we need not only a short term view of our own problems and their solutions but also a long term view of the strategies that are needed to take us to the more desirable destination of our hopes.

Where we are coming from

It has been said that the welfare of the citizenry is the primary goal of governance. In the pursuit of that end, our founding fathers opted for a federal system of governance in recognition of the plural nature of our society. Then came the military intervention and interregnum. This imposed on us a more centralized government without accountability to civil society and which often lacked transparency. What is more the checks and balances which the legislature confers on the system was abrogated. Thus the governance system imposed by the military lacked moral legitimacy and thus bred institutional instability. Not surprisingly, the command structure of the military imitated in governance led to the privatization of the state with patrimonial incentives and bureaucratic management. Clientilism usurped the moral and political legitimacy where political and personal loyalties are rewarded more than merit. Hard work did not count anymore as the basis for rewards in the system.

This situation understandably transformed the environment and dynamics for development in a society that promoted social justice, equity and fairness. What is more it constrained the development of institutions and organizations that promoted these values. Against this background, the reward system and income distribution became distorted thus, undermining the harnessing of individual initiative, the basis of entrepreneurship, and the driver of wealth creation. Over time this was reflected in the poor state of infrastructure and the low levels of productivity. Expectedly, this situation promoted dependence on low value added products as the major items of international trade especially in the emergent situation of lack of education and constraints on science and technology. This encouraged the emergence of a dominant public sector which created the impetus for political instability that provided the incentive for capital flight. To provide a new environment to tackle this situation we need to recalibrate the point of balance between the government and the market.

In doing this we must recognize that political factors often affect the economic performance of firms in emerging markets. Consequently the politics that shapes the economic behaviour of the political leaders significantly impacts economic growth and the environment in which economic enterprises operate in. The danger is particularly important since it is recognised that;

“When there is a disconnect between the state and civil society, the state can be privatised by those who have power, reward is often a function of how close you are to those in power. So much is invested in developing access to those who make decisions that a profitable agency for opening access develops. Policies that provide rent-seeking opportunities emerge to open more avenues to those who have access…”

Current Situation and current Policies

It can be argued that there is an emerging national consensus as indicated by the policies of the new government that there is a national objective to build a thriving free market economy. A basic challenge of market economics is how to calibrate accurately the balance between supply and demand of goods and services within an economy. While the supply side economics emphasizes the constraint imposed on the economy by the willingness of individuals to work and to save, the demand side of the equation harps on the constraints imposed by the demands on the economy which enforces on firms the imperative not to produce if there are not people to buy their goods.

The balance is struck by the government’s ability to deregulate or to regulate. When done in an appropriate way, regulation serves to restrain conflicts of interest and abusive practices so that investors can be confident that the market provides a level playing field for competition, and that those who are expected to be acting in their interest actually do so. Hence there is the need in a functional market economy, that there must be laws and regulations that guarantee fair competition, to protect the environment and to make sure that consumers and investors were not cheated.

It has been argued, however, that deregulation would be of benefit to consumers and society at large. But a basic law of economics also suggests that competition drives profits down, perhaps to zero. It may well be that the argument is not regulation versus deregulation but a reformed framework of regulation that strikes the right balance for the economy between growth and the social demands like education and health.

This framework should include an appropriate mix of incentives, rewards and sanctions that will conduce towards optimum incentive for diversification of the economy with emphasis on education and Science, Engineering, and Technology (S.E.T). But this is necessarily a long term objective and not the quick fix.

Attention had been drawn to the speed with which the economic indices regressed as between 2014 and 2016. We have also noted that since economics is rooted in observing and understanding human behaviour, signals, incentives, rewards and sanctions are part of the tool kit in the management of the economy especially one in which there was pent up desire for change. The expectation was for dramatic and decisive action on a few targeted areas as signals to the inauguration of the new era of change popularised by the change mantra.

When this did not happen, there was a loss of momentum generating an atmosphere of indecisiveness. This was sign posted by the fact that it took close to six months to put the cabinet in place. It took an unconscionably long time along with the associated controversies to get the 2016 budget in place. Along with these came the several avoidable gaffes from the supreme leader as well as the controversies on appointments that did not appear to have followed in a clear, and decisive manner or to have followed the stipulations of the federal character principles of the constitution or to have adhered to any clear definition of merit, excellence or experience.

Apart from the epic and monumental onslaught on the dragon of corruption whose legitimacy cannot be questioned although the methodologies in its pursuit have been severally questioned as to fairness, justice and decorum. Razzmatazz, drama, and the associated propaganda blitz that has developed in the handling of politically exposed persons has raised issues of methodology and political motives. Despite these, it is a necessary programme of social and moral redemption. Nevertheless there are three areas of policy thrust of this administration that are of great economic moment. These are in the areas of deficit budgeting, inflation management and unemployment.

The reliance on deficit budgeting is particularly worrisome because it raises the concern that share prices and investments may actually fall as the deficits will drive medium and long term interest up. This is to be expected since the basic law of supply and demand suggests that increased government borrowing will drive up rates and higher interest should lead to lower share prices. What is more increased deficits will in the long term lead to lower incomes and not the expected higher growth especially as government will crowd out the private sector in accessing funds. So it is a risky gambit.

There should also be concern in the area of the management of inflation rates. In the last five years or more the inflation rate has tended to lie in the realm of the single digit. But no more. Over the last year this inflation rate has climbed inexorably north with the latest figure at 13.8%. What is worrying is whether there is a credible strategy to control it particularly at this time when the growth of the economy has been constrained.

With regards to unemployment it does not appear as if our policy makers have given thought to the development of a comprehensive programme to deal with it. What efforts that are discernible would seem to be mainly of the populist kind. We need a more comprehensive approach particularly since the problem is critical in the youth cohort of the population which normally would form the productive base of the economy. Indeed, it has been suggested that the upsurge in crimes of violence such as armed robbery and kidnapping have arisen from this factor of youth unemployment.

Managing Uncertainty and the issue of legitimacy

It should be noted that legitimacy or acceptance rooted in the conventions of a community or nation is not necessarily an attribute that is acquired by a government once it is set up. It has to be earned. Whenever a sizeable proportion of the population feel excluded or issues of social justice arise, the matter of legitimacy of the governing authority obtrudes. For example, whenever the reward system is not merit-based and does not appear to reward hard work the result is increased uncertainty with the system.

The fact of uncertainty in complex transactions tends to lead to pressure for constraints to behaviour. So rules are not always motivated by considerations for human welfare but devised in the interest of private well-being and this often provides opportunity for rent seeking. It should also be noted that; “economic decline which robs off badly especially on those that are beginning to prosper triggers off a constituency which for self-interest desires rules and institutions that constrain behaviour in a way that affects the common well-being positively”.

The challenge of managing pervasive uncertainty is not about what areas of the economy to avoid or actively pursue but about the values that drive decision making. For example lopsided income distribution which can arise from differential access to power has implications not only for social justice but also for wealth creation. Income inequities frustrate the emergence of a middle class who are the purveyors of wealth creation and hence development. What is more an economic system’s ability to create wealth and spur economic growth comes largely from the private sector whose response to competitive pressure is to develop sustainable competitive advantage over rivals.

The anvil of their strategy is to understand the business environment such that they can match emerging threats and opportunities with their strengths and competencies within the firm. This situation arises from the nexus of reward and creativity for while reward motivated and affects behaviour, creativity which is the foundation of entrepreneurship emerges under competitive pressure.

Rebuilding Confidence

It is obvious that one of the challenges to the economy is how to restore confidence in the system. Trust and confidence is the fundamental basis of all business transactions. We need to restore the confidence of business to invest in growth and innovation while the people will have their confidence restored to spend on their needs. Confidence however is a fragile plant. Confidence is important but it cannot be whipped up out of thin air. It must come out of the reality in people’s experience.

Paradoxically the most effective propaganda is that rooted on the truth of people’s experience. So the narrative on the socio-economic affairs of the nation needs to change. The extreme negativity and the aggressive denunciation of even the positive aspects of our recent past cannot conduce to an amiable and responsive environment that can project hope and realistic appreciation of our capabilities. All negative stories have a hidden cost.

What needs to be done has to be at two levels. There is the need at the social level to project a new message of inclusiveness in the effort to rebuild the economy and the nation. The projection will have to come from all levels but most importantly at the highest level of governance. The national symbol of power and authority must be seen engaging his people. At the economic level, there has to be a greater degree of projection of competence, expertise and empathy.

We cannot ask our people for sacrifices at the same time as we are projecting an image of pomp, circumstance and grandeur. There is work to do and that must involve all of us even as we project the message that the rewards will be equitably distributed to all without discrimination of ethnicity, gender or creed. The real change that Nigeria needs presently is the change in our mind-set and attitudes in both the leadership and the led such that the Nigerian narrative can change from the negative to the positive without boundaries.

At the level of our business we need each other to put together a survival kit which must be built on understanding of our individual and corporate competence and on our knowledge and understanding of our particular business environment. We must out of the myriads of challenges construct our safety anchor. In doing this, we must remember that in this economy and in this time the most daunting challenge that will face all business however big or however small is that of liquidity management. It is of the utmost necessity for each business to construct its own survival strategy to manage this threat. In this we must remember the story Lehmann brothers at the time this mighty vessel went down its assets were three times its liabilities – it went down at the point when it could no longer cope with its liquidity management despite all the creative accounting.

– Professor O. Anya is former chief executive officer, Nigeria Economic Summit Group