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Tuesday, May 9, 2017

Explaining our Journey into Recession: Nigeria's Trade with the rest of the World III

      The rallying point for the East Asian countries that facilitated their rapid economic growth was 'export push strategy'. Among other factors, the East Asian success stories pushed for macroeconomic stability and low inflation; they also avoid deficit financing at some stages of their development story. They do all they could to accelerate export including using preferential treatments, soft credits, protectionist policies, currency devaluation. Buhari government aim at reviving the economy should not just stop at supporting local firms to produce for domestic consumption but must include export push as done by the East Asian success stories. In both the developed and emerging economies, one barometer widely use to measure health of an economy is export. Export is at the heart of German economy leadership of the euro area economy, likewise the extraordinary performances of both Japaneses and Chinese economies. We can barrow a leaf from both the US and Germany where states and regions have specialised in exportation of specific commodities and services. In Nigeria, for example, Kano shall start by exporting Agro-allied products such as processed foods, Shoes, and Garments as well as retails services; Lagos can specialised in exportation of financial services, and electronics; while Port Harcourt specialised in petrochemicals.  Federal government must find ways to rekindle export rivalry between the 36 states of the federation including allocating export quotas to be filled by each state. The  main difference between the economic strategy of China and India from 1980 to 2010 is very clear to the observers of the region; while China aggressively push export growth, India on the other hand emphasized on producing for its domestic market. Today we all know who is the winner, China has moved hundred of millions of its citizens out of poverty while India's population remain one of the poorest in the world.

     The case of Japan and South Korea is worth mentioning here, these two countries are not very much endowed with natural wealth like most African countries, but that notwithstanding they were able to import the raw materials they need, process them into finish goods and export them. There example is a case of what is called 'forced growth'.  In the case of South Korea, at the end of the Korean wars that led to the creation of today's North and South Korea, almost all of the industrial capacity of the Korean nation before partition were located in the North. Thus, after the war South Korea was left with nothing but agricultural lands; but now compare where the two countries are today - South Korea is a developed economy while the North is a developing economy. Innovation and entrepreneurship are at the center of Israel successes over the last decades. Small firms that were established as start ups with contributions from academia, military, and business later turned to become export power houses, exporting everything from security software, microchips, to agricultural outputs. The successes of the US in information technology can rightly be linked to small businesses (start ups) established in Silicon valley in the 1970s and 1980s. In the last two decades, these start ups have become the engine of US economic growth, accounting for large percentage of total US exports to the rest of the world. The great Austrian economist Joseph Schumpeter, for example, see economic development as synonyms with innovation, without technological innovation there would be no development. But, the kind of development Schumpeter was talking about can only be actively promoted by a serious government, which is the case in the US, Israel, Taiwan, South Korea, Denmark and many other developed nations. Schumpeter also emphases the role played by entrepreneur in all these, who is the innovator that make it all happens. Thus, at the end everyone will see that entrepreneurs are the back bone of export growth around the world.

      In most times, in the management of foreign exchange, it is much easier and practicable to use manage float than fixed exchange rate system, as it is not easy to know the actual rate that brings both internal and external markets into equilibrium.  The amount of human and material resources that will be devoted to the task of determining fixed exchange rate will then be put elsewhere in the interest of the economy progress. Multiple exchange rates do no one any good, CBN shall go for single exchange rate for every one with interest in Forex . Multiple exchange rates encourage corruption and inefficiency. Some of the problems we are having today with our foreign exchange can be linked to the activities of speculators who hoard Dollar thinking they understand very well the mind game of Buhari and his economic advisers. As recent discoveries by EFCC and other security agencies have shown, a lot of Nigerian elites have buried millions of Dollars somewhere in their houses, farms, and other properties; which contributed in no small way to the scarcity of Dollar we are facing today. Nigerian banks cannot be said to be innocence in the speculative attacks on Naira, either on their own or in collaboration with some powerful elites Nigerian banks have been working to undermine Naira to their own advantage. We all remember what happened during former President Babangida military regime's deregulation of the economy, when virtually all our banks abundant their primary assignments and become overnight Bureau De changes. But no matter what, Buhari government must also control inflation in order to establish the needed economic stability for healthy economic growth. CBN must double on it current effort to subdue inflation including stabilizing the foreign exchange market and reduction in interest rate. Buhari government push to revolutionarise our agricultural sector shall be encouraged. Agricultural export shall provide a short term solution to our over dependence on crude oil export.


Saturday, May 6, 2017

Explaining our Journey into Recession: Nigeria's Trade with the rest of the World II

     Foreign Direct investment (FDI) has played important role in the growth and development of developed and emerging economies of today. US itself could not be where it is today without the contribution of businessmen from Europe during its early history. The same thing goes  with China in the 1980s and 1990 after opening its doors to the world, substantial foreign direct investment came from Chinese residing in Taiwan, Hong Kong, Philippines, Indonesia, Malaysia as well as from Japan and South Korea. Every country has at one time or the other protected certain sectors of it economy from competition abroad. Before now, Nigeria virtually have no any active policy in place to protect it local industries apart from the localisation policies of the 1970s and early 80s. This turn of event become worst after return to democracy in 1999, as elected leaders fear backlash from their citizens for putting protectionist policy that would lead to increase in price and reduction in welfare. While over the last three decades, we have failed to established ourselves as an exporting country; but we have become very good at exporting one commodity, i.e. Labour. It is estimated that there are hundred thousands of Nigerian expatriates working in North America, Europe and Middle East. While the remittances they have been sending home serve as important source of foreign exchange in this period of scarcity of Forex in Nigeria, on the other hand their absence has deprived Nigeria of needed human resources to achieve rapid economic growth and development. This particular issue has been the genesis of now growing market in medicine tourism, foreign education, and capital exportation out of the country that have contributed to deterioration in the value of Naira against world major currencies.

       Our rate of inflation is not sustainable as it erodes gains this government want to achieve in term of encouraging domestic production and exportation. The simple true here is that higher inflation means foreign countries who want to purchase made in Nigeria goods find it expensive relative to that of other countries like China. While  domestic consumers find Nigerian goods expensive compare to those imported from abroad. This is why it is important for Nigeria to be careful in fixing its foreign exchange rate to avoid scenario where it achieves opposite effect of what it intends to achieve. There are empirical evidences that linked higher inflation with depreciating currencies around the world. Hence, CBN shall watch over inflation as at the same time it tries to stabilizes Naira. At this point one is forced to ask the question what happen to our previous priorities of focusing on agro-allied industry as our export base? A simple visit to Bompai, Sharada and Challawa industrial estates in Kano state left one stun. There are hundreds of closed plants in the three locations that (before they stopped production) specialised in production of agro-allied products for Nigeria markets and neighbouring countries. But today they are closed down because they cannot compete with imported commodities that flooded our markets. Like i have made mention before, with our high interest rate, poor roads, lack of power and unfavourable government policies of the last three decades there is no way these industries would have survived. Thus, as Buhari government tries to build roads, power plants, railways and new airports, it must have these industries in mind. Particularly, how current reforms connect to the issue of reviving our manufacturing?

    The point i have been trying to make shall be clear by now. That Nigeria as exporter of primary products, with declining international price relative to final output they are processed into, will continue falling behind those countries who purchase raw materials from her and turned them into finished output. Raw materials, in themselves, constitute small part of total monetary value of inputs into production of  outputs.  At the end, the amount of money Nigeria receives from selling her primary products will be lower than the amount she pays for her imports. under this scenario, Nigeria has no other alternative than to start producing those imported products herself as it is cheaper to produce locally than import, taking into consideration the deterioration in her term of trade i have made mention of earlier. This is how countries like China, South Korea and Brazil moved away from being primary producers to manufacturing power houses with active government support to private sector producers. These countries put local companies first before firms from other countries. In Nigeria, if not of recent, foreign companies were given preferential treatment over their domestic rivals. Look at our West African neighbour Ghana which in recent years was able to attract manufacturers away from Nigeria despite small size  of her domestic market compare with Nigeria. At the heart of the attraction of Ghana to manufacturers over Nigeria is combine impact of business friendly policies, constant power supply, good infrastructures, and political stability. These factors persuaded many foreign firms to move their head offices from Nigeria to Ghana from where they export their finish goods to back to Nigeria. The size of Nigerian market in Africa is enough to give Nigerian government bargaining power over any foreign investor coming to Africa who want to enter Nigeria market. One such condition must be that before any foreign businessman is allowed access into the Nigerian market she/he must establish plants in Nigeria.

Watch out for the concluding part of this series.....

Wednesday, May 3, 2017

Explaining our Journey into Recession: Nigeria's Trade with the rest of the World I

     No country in the world can be defined as an island to itself, as every country in the world trades with others through selling commodities or services to them and buying other commodities and services from them. Nigeria can be described as a mono-economy that depends solely on the exportation of crude oil to the rest of the world for most of its foreign exchange, while at the same time importing everything from car to cotton underwear. Thus, contribution of Nigeria to globalization virtually amount to its position as a consumer nation that supply raw materials to more serious economies around the world. From this vintage point one can see some of the causes of Nigeria's  current predicament i.e. when you consumed more than you produced. This is to me what Buhari government has being battling to correct  through it recent emphasis on reduction in importation and localization of productions. The collapse of crude oil price clearly exposed our precarious balance of payment position and the subsequent deflation in our foreign reserve position. Thus, we have negative balance or rather we operate with a trade deficit. Unlike the  Gulf oil producing nations who have very large savings which they fall on when oil price collapsed, Nigeria as at the time Buhari came to power has no such luxury, but depended on borrowing from other nations in order to balance the deficit in its trade with the rest of the world. As many commentators have observed, it was the spending spree of the PDP years in power that brought us to where we are today. Had it been previous PDP governments have saved for period like the one we found ourselves today, we would not be in the present mess.

    I do not know what happens to Nigeria priorities in term of its foreign relations which previously have Africa as it focus? Do we have its foreign trade equivalence today? Figures from NBS show that Nigeria trade more with countries outside Africa than with African countries; if we can remedy this and focus on Africa it will go along way in changing our current economic fundamentals from consumer nation to a producer nation. Because with our relatively low industrial base we can be able to supply African countries with some of the things they need. If China, which is today the second largest economy in the world, started this way by producing first for it Asian neighbors before others, why not us. Our real interest rate is today higher than the average real interest rate in our main trading partners which means that Nigeria is a net importer of capital from these countries. But, international capital do not move freely as domestic capital does, it takes time and come with stringent conditions attached. Thus, when the Chinese said they would lend Nigeria some ten billion dollars to finance railways and energy infrastructure, you shall remember that there are conditions attached that includes buying the equipments needed for the projects from Chinese manufacturers, using Chinese companies for the project, employing Chinese labour and the interest rate charged on the loan is higher than what Chinese banks charged their domestic borrowers back home in china. In short, China is using its foreign loans to find markets for its exports. Another negative side of our precarious position is that nations that agree to lend us money do so charging premium for the risk of default doing that taking into consideration our international credit rating as provided by rating agencies such as S&P, Fitch and others.

    With current high domestic interest rate in Nigeria, it is difficult for any  domestic investor to borrow and invest profitably without some assistance from the federal government in, say, imposing higher tariffs on imported commodities from abroad that compete with locally produced goods. But, this also come with its negative side effect in term of higher inflation; thus, more worries for domestic consumers of the same commodities who are used to cheaper alternatives from China and other low cost countries. Another incentive for local producers is where government reduce the amount of tax paid by certain industries that are considered strategic in our economy. Specifically, tariff policy should be used by the Buhari government to attract foreign producers into Nigeria in order to establish local production plants to replace those being imported. Nigeria has failed to take advantage of it abundant cheap labour and lunch itself as Africa's cheap labour alternative to Asian producers, but instead continue to depend on oil which is not sustainable, more especially with increased agitations from oil producing states in the Niger Delta. Everywhere around the world, oil producing nations from Saudi Arabia to Russia have come to the conclusion that their future do not depend on oil.This explain Saudi authorities current change of direction through emphasis industrialization, tourism, and service industries. In this kind of atmosphere such as we are in here in Nigeria, the best thing for the government to do is to put things in place for possible attraction of foreign investors in order to bridge the gap created by low investment in the domestic economy. But, central in that arrangement is getting our foreign exchange right first, which as we are now the foreign exchange position is not in a good shape to perform that function. No foreign investor invest his money where he is not certain about the country's foreign exchange regime.

To be continued...