A PAPEER
PRESENTATION: RECESSION, STAGNATION AND STAGFLATION. REVIVING NIGERIA’S ECONOMY
THROUGH DIVERSIFICATION AND INDUSTRIALIZATION.
BY YUSUF NASIR AHMAD
“NIGERIA BEYOND OIL
AND ITS ECONOMIC FUTURE”
INTRODUCTION:
The debate as
to whether government should diversify Nigeria’s economy is or has been on for
decades by various administrations. I
think, particularly, that the notion that states “economist never agree” has
been one of the major factor responsible for the diversification not being put
into effect.
However, we will
appreciate this presentation better if attention has been put on the specific
definition of the economic terminologies for the sake of those that are not too
familiar with the terms.
Starting with
recession. What really does it mean to be in economic recession?
Economic recession has been define by various school of
economics thoughts, however we are going to adopt one generally used in the
Britain for the sake of simplicity. In economics, recession can be define as a
business cycle contraction which results in a general slowdown in economic
activity. Macroeconomic indication such as the gross domestic product, known as
the GDP, Investment spending, capacity utilization, household income business
profits and inflation fall, while bankruptcies and the unemployment rate rise.
In the United Kingdom, it is define as negative economic growth two consecutive
quarters.
Recession
generally occur when there is wide spread in spending (an adverse demand
shock). This may be triggered by various
events, such as financial crises , like the global financial crises of 2008, an
external trade shock, an adverse supply shock, or the busting of an economic
bubble. Government usually respond to
recession by adopting expansionary macroeconomics policies such as increase in
money supply, increase in government spending and decreasing taxation.
On the same breadth, economic stagnation refers to a
prolonged period of slow economic growth (traditionally measured in terms of
GDP growth) usually accompanied by high unemployment. Under some definitions,
“slow means significantly slower than the potential growth as estimated by
macroeconomists, even though the growth rate maybe nominally higher than in
other countries not experiencing economic stagnation.
Likewise, stagnation can be define as a situation where by
the inflation rate is high, the economic growth rate slows down, and
unemployment remains steadily high.
In economics, stagflation is a situation in which the
inflation rate is high, the economic growth rate slows, and unemployment
remains steadily high.
All these negative economic signals have secured a place one
way or the other in the Nigerian economy. Moreover, the Nigerian economy is
currently in a state of what the two economists, W. Max Corden and J. Peter
Neary in 1982, called “The Dutch Diseases”
Nevertheless, with
the contemporary growth or advance in the technology sector, one has to look at
Nigeria beyond oil and its economic future.
Crude oil has been the major sources of income for Nigeria
for decades. All most getting to a century now.
But we need to put in factors that have been responsible for
the demand for crude oil globally into considerations. What are the factors
responsible for the demand for crude oil? What are the effects of relying heavily on a
single sector as the major sources of income? What are the agents that has been
responsible for these negative economic signals in our country? And finally,
what is the possible solution to being optimistic of a better economy in
Nigeria?
In an attempt to
answer these devastating malady, this unprecedented and impeccable annual
conference has been organized so as to collectively see and design a prompt
policy that will surely revive Nigeria’s economy from the bottom to apex. And this is exactly the essence of my
presentation as well. How do we revive Nigeria’s economy through
diversification and industrialization? Due to problem of limited resources,
which sector do we diversify into?
In contributing to bringing solution to this economic
malady, this presentation has been categorized into 4 different chapters:
I: diversification and industrialization
2: Dutch diseases
3: The probability of crude oil to be obsolete
4: Economic and political institutions
It is your curiosity and the idealness for a better economy future
for Nigeria that has brought you here. I am therefore, pleading with you to
listen attentively to this presentation.
DIVERSIFICATION AND INDUSTRIALAISATION
A strong growing,
sustainable economy is the goal of every nation in the world.
A sustainable economy enhances a nation’s standard of
living. Having a diverse is a key role in a sustainable economy. Economic
diversification can increase a nation’s real activity performance because the
country now have incomes from many different sources that are not directly
related to each other.
A good example of
a better diversified economy is when a country get its income from many different
types of economic activity such as:
1: Manufacturing
2: agriculture
And 3: Financial service and other economic activities.
Poor economic diversely is linked to low productivity and
competitiveness. Productivity is directly related to competitiveness because
the more people and/or capital it takes to do a job or create a product, the
lower productivity is, which in turns rise the products price and lower its
potential for competition in the market place. Low productivity because a very
large part of nation’s income depends on only one economic activity. As is the
case in Nigeria, crude oil.
A good example
of a poorly diversified economy is that of Nigeria, a very large part of our
income depends on the production and sales of oil to other countries. That
alone can lead to the emergence of Dutch disease in the nation.
While the US
economy is a good example of a better diversified economy. Because they get
their income from many different sources or types of economic activities
including the manufacturing, agriculture and financial service.
Therefore we need
to look at Nigeria beyond oil and its economy future through diversification
and industrialization. A lot of people talked about diversification , different
governments have been saying it for many years. But what I as well, think most
time is nor evident based and you don’t have enough data and analysis to
actually tell you exactly what you need to do. How you need to do it. And because
of limited economic resource , because we can’t diversify into all sectors.
Thus, we have to make survey and
analysis of where should we start?
Which of the
sectors will have the biggest impact? In the quest for answers to these
questions, we can put these data into consideration. In 2012 the GDP was
composed of the following:
1: Agriculture; 40%
2: service; 30%
3: manufacturing; 15%
And 4: oil; 14% (Nigerian
Bureau of Statistic. Retrieved 26 March 2012)
By 2015, the GDP was composed of the following sectors:
1: Agric; 18%
2: service; 55%
3: manufacturing; 16%
And 4: oil; 8%
Putting into
effect these data we can see clearly that some sector, like the agric
appreciated in 2012 and declined by 2015. Why?
I can suggest that a committee should be set up so as to
carry out survey of more than hundred business heads across 30 or more
different industries in Nigeria to say this is how it should be done.
Nigeria has about average one hundred and
seventy million people at 2.7% growth rate. A carefully diversify economy will
double up our growth rate and even create employment for the unemployed and as
well, subsequently reduce crime rate in the country.
Because if we get
diversification right, Nigeria can be among top 10 economy in the world by 2050
we will worth more than $6.4 trillion at the time we will expect that
population will be more than 300 million people so we are going to be at the
top four most populous in the world because we are growing at a very fast rate.
The problem in that is if we don’t provide for them is that we are just seating
on a gun powder that explode in time.
There are also impediments in diversifying
economy and parts of them are:
1: corruption
2: infrastructure
3: low level of skill
Economic diversification
cannot be achieved unless the government brings a prompt solutions to this
malady.
With regard to corruption, it is good that we are now
fighting corruption in our beloved country, in terms of bribery, nepotism and
its likes. Furthermore, we cannot achieve economy diversification under an
extractive political institutions.
Infrastructure as
well is another setback to economy diversification in our country. These are
the fundamental facilities and systems serving a country, city, or area,
including the service and facilities necessary for its economy function.
(O’Sullivian, Aurthur; Sheffrin, Steven M, 2003)
It typically structure such as roads, bridges, tunnels,
water supply, sewers. Electrical grids, telecommunications and so forth, and
can be defined as the “physical components of interrelated systems providing
commodities and services essential to enable, sustain, or enhance societal
living conditions” ( Fulmer, Jeffrey (2009). What in the world is
infrastructure?)
Diversification can only be achieved when these means to the
ends have been provided by the government.
Low level of skill: Government have to invest intensively in
education and technology. Education to me, is the human capital which without
we are definitely going nowhere. It is in education that the know-how lies.
Business organizations cannot employ unskilled man power to manage sensitive
firms and industries for them. Except if we want to exploit or underemployed
which I believe is not our goal.
With respect to technology, this is to me the bedrock of our
economy diversification through effective industrialization. I can define
technology as thus, it is a vehicle. It can take you wherever you want to go.
Those driving technology today are driving it to make profit. We can also drive
tech in order to diversify our economy effectively and cure a social catastrophe.
If we can
successfully achieve the solutions to these problems keeping us behind
“economic calaboose” then we can carefully diversify into either of the
following sectors:
1: manufacturing
2: Agriculture
3: financial service
After deriving our total satisfaction we can export our
surplus to foreign countries so as to earn more income and increase our revenue
for our country
“Population is the indispensable factor”, say Walter
Rodney,” of production”
Dutch
Diseases
For the Nigeria commodity,
the intensive revenue sources are known as Dutch Diseases. Diversification into
different sectors improve the resilience of an economy through business cycle.
Dutch Diseases is a big setback of a
very good opportunity ( discovery of national petrol, gas, oil and it’s like..)
that could hurt the economic health of a
nation. Dutch Diseases represents a
crises that took place in the Netherland after the discovery of Gas deposit in
the North Sea.
In economics, the Dutch Diseases
is the apparent casual relationship between the increase in the economic
development of a specific sector (for example, natural resources) and decline
in other sectors (like the manufacturing sector or agriculture).
While mostly is often refers
to natural resource discovery, it can also refer to “ any development that
results in large inflow of foreign currency, including a sharp surge in natural
resource price, foreign assistance, and foreign direct investment.
(Ebrahim-zadeh, Christine March 2003)
The term was coined in 1977
by The Economists to describe the decline of manufacturing sector in
Netherlands after the discovery of large Groningen natural gas filed in 1959.
(November 26, 1977, The Economists, pp 82-83)
The Netherlands convert the
following discovery into a problem because of the following factors:
1: exportation
2: Dutch coin revaluation
3: Unemployment
4: Industry weakling.
EXPORTS;
The Dutch started exporting gas as they saw
it as a chance of growing economically, instead of that this process hurts the
country, at the beginning, increasing the value of their coin.
INDUSTRIES;
The coin revaluation leads to an industry
deficiency in the Netherlands because citizens started importing instead of
buying natural products because of rise in price.
Unemployment;
As the industry of the country
was getting hurt, unemployment rise from 1.1% to 5.1% .
The Dutch Disease comes from something
that looks like a chance to improve the economy of a country. From this we can
as well recall vividly that we also experience was is called the Dutch Disease
back in the 1970s when we had the oil boom.
In the
words of Max Solium, a Nigerian historian, He says” those who don’t heed to
history are doom to repeat it”. Therefore when diversifying our economy we need
to be very vigilant of this disease that originated from the Dutch in terms of
putting this opportunity into our favor by market policies, country
reorganization and to fight against it. The country should make some decisions
that would change the part to growing.
High productivity is argued
to be leading to lower employment. There are differences across sectors,
whereby manufacturing is less able than the tertiary sector to accommodate both
increase productivity and employment opportunities; more than 40% of the
world’s employees are “working poor” whose income fails to keep themselves and
their families above $2 poverty line. It is worth noted that there was also a
phenomenon of deindustrialization, as in the former USSR countries transition
to market economy. And agriculture sector is often the key sector in absorbing
the result unemployment.
THE PROBABILITIES OF
CRUDE OIL BEEN OBSOLETE
Before the boom of the oil sector, the major sources of
energy was coal. The steam engines were all powered by coal in the 17th,18,
and 19th centuries even after the industrial revolution.
To show us that the
world is not static we have moved from coal powered energy to crude oil today
as the major sources of energy in the world right from the beginning of the 20th
century. Similarly the world is changing rapidly, in the response to change
with the world system direct evasion has been made from coal to crude oil not
because of anything but rather because of necessity.
Technology has been the agent behind this rapid change from
coal to oil sector because of the mechanization, advance in mining and its
likes.
Without doubt, renewable energy is on a roll; Denmark is
producing 43% of its energy from renewable, and it aims for 70% by 2020.
Germany, at more than 25% now and 30% soon, is going for 40% to 45% clean power
by 2025, 55% to 60% by 2035, and an incredible 80% by 2050. China, despite many
challenges, is the world’s leading sources of renewable investment, as well as
the largest solar manufacturer. (Making the Transition to a Low-carbon Economy,
sponsored by The initiative for Global Environmental Leadership and Bank of America, 2015)
Countries across
the world now adopt ways of powering their vehicles, houses, and industries
either through wind energy, battery or solar energy.
And these mediums of energy have been appreciating in
advance countries, like we aforementioned, which are the major importers of
crude oil from particularly from Nigeria.
In 1970s in Nigeria alone the price of crude oil per barrel
was about $150 but what is the price today? You can all tell. I leave it for
you to kindly find out. Or at least to save time, it’s less than #50 per barrel
today!
This is a very significant fact that vividly states to us
that we don’t have control over the price of crude oil due to some exogenous
variables existing outside the economy like let’s say, OPEC who determines the
oil price. Yet the price keeps on depreciating
In advanced countries like Japan, Israel, US and some other
countries we began to witness the emergence of charging stations for vehicles
and not gasoline anymore! Like we all know revolution doesn’t start completely,
it’s a gradual process.
Therefore, too much dependence on oil in Nigeria is like a
seating on a gun powder that will eventually explode with time.
Nigeria is also at stake because we depend heavily on income
from oil sector. Thus, I think the need to diversify our economy is compulsory
for better economy future. The need to look at Nigeria’s economy through a
binoculars beyond oil and gas should be a quest for every patriotic and
rational economists in this beloved country of ours.
ECONOMIC AND
POLITICAL INSTITUTIONS; THEIR EFFECTS ON DIVERSIFICATION
To me, I believe it is only in theory that Economics and
Political Sciences are both separated each one being independent of the other.
However, in practice the reverse is exactly the case.
Economics and
Political science are two Siamese twin. That is, for a better society the two
work hand in hand with one another positively.
One of the major reasons for economic development and
prosperity in any country is the economic and political institutions they are
operating on. It has to either be inclusive or extractive.
For a better diversification from the oil and gas sector I
believe, we need an inclusive economic and political instructions.
What then are these institutions? In their book, Why Nations
Fail; the origin of power, money and prosperity, Daron Acemoglu and James A.
Robinson define these terms as follow:
Inclusive economic instructions are those that accommodate
free markets which gives people freedom and opportunity to choose a vocation
that suits their talents, or to easily apply their entrepreneurial skills. And
the inclusive economic institutions have two engines of prosperity which are
technology and education, which will support the process of innovation.
Inclusive political institutions are those political
institutions that distribute power broadly in society and subjected to limits.
The power rested with plurality of groups, not to jut single individual or a
narrow group. In order to succeed must be centralized.
On the other hand, extractive political institutions
concentrate power in the hands of a narrow group and place very few limits on
the exercise of this power.
While extractive economic institutions are structures to
extract resources from the many by fewer and fail to protect property rights or
provide incentives for economic activity.
From the aforementioned definitions various political and
economic institutions, one will see clearly that the inclusive, for better
economy, can’t work hand in hand with the extractive. Major problems face in
the diversification of an economy is corruption, sabotage and evasion. Likewise
those enjoying monopoly will never welcome such an idea if the system is
operating on extractive institutions.
The inclusive political institutions will help dealing with
these problems of designing policies which will only suit the interest of all
the nation and not only the capitalist. A very good similitude can be coined
from the USA in 1996 when the world’s famous billionaire, philanthropist and
Microsoft co-founder was sue to court in the USA for claiming monopoly in their
firm. Despite his fame and his influence in the state, it’s never stops the US
government from filing a case against him! Such is the result of inclusive
institutions.
Human beings are generally selfish. Suppose I am an importer
of generator into the country and the country choose to diversify to solar
energy if I happen to be in posses of political power I will do all it takes to
making sure the policy is not being implemented so as to secure my business.
We can therefore say, economic institutions are the roots
influencing how the economy works and the incentives to motivate people.
North Korea with extractive economic and political
institutions can practically illustrate this theory. While South Korea, with
the opposite can as well testify to this fact of inclusive institutions.
Despite been so close yet they so different.
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