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Echoing the Need for More Hand in Hand Economics

Proshare

Friday, April 20, 2018 09.44 AM / Proshare Research 

Introduction: Hand in Hand Economics
 

There is an urgency to achieve a broad-based   growth that is accommodative of more social inclusion. Therefore, in one of the several series to come, we take on the hard nut on how best to achieve prosperity again.    

Economists are more inclined to look at specific countries like Brazil, Chile, Mexico, Columbia and Argentina to shape their opinion. On the broader macro position of the Latin America, after all they make up 66.7% of the gross domestic product of the region. 

Trend has shown that systematic risk that occurs in countries like Brazil and Mexico engulfs the region; eventually triggering decoupling effects on the region. Such brings to mind the Mexican peso crisis and the Brazilian debt crisis of 1995. 

Therefore, it was not surprising to see the region in recent times reel from the Brazilian recession, forcing foreign direct investment to decline sharply.  

However, Uruguay has shown resilience even in the face of cross-symmetric shock: Especially with the   continuous   upward trajectory in foreign direct investment, in contrast to most part of South America. 

Sadly, the economic structure of Latin America put a country like Uruguay in a position to be less spotted by the market nor talked about. 

After all it doesn’t take much   for a country with a population of 3.5 million and a GDP of $52.4 billion to get lost in the shadow of regional giants. 

Uruguay a nation lauded consistently for its “’hand in hand economics”’. A combination of free market and pro-poor policies dialled towards human development. 

Considered to be a small open economy that has fully repaired the social well-being of its citizenry: after the duo of the argentine crisis of 2002 and the global recession of 2008.  Evidently    the feat achieved by this nation makes it worth studying.         

Fig 1: Growth Dynamic in the Region
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Source: World Bank
 

Moreover, it provides a unique opportunity on how best to create the necessary pre-conditions for prosperity through effective political leadership.    

Political Leadership and Growth: “Magnificent Pep”’
The twist and turns of history leaves us at awe, more importantly when it comes from the most unexpected places.  In the wake of the pink tide, Jose Muscilca, popularly referred to as Pep became the Uruguayan president in 2010.  

Unlike fellow left leaning Presidents in Venezuela, Bolivia, Ecuador Argentina and Brazil, that bolstered government size, escalation in public debt, spurred consumption through pro-poor policies and eventually tilted in to a closed economy. 

Pep took a different approach by further improving the ease of doing business, strengthening institutions and fine-tuning   pro-poor policies towards human development: Like placing emphasis on early education and pre-school.  

For some Pep had become a prodigal son as he favoured free markets, ahead of his initial socialist base.   Well to others he was more than just a new convert to the free market scion, he was an “angel at home ‘’ 

Although pep never strayed away from activist economics but the manner at which it was employed   to improve human capital and expand the social nets differed from other left tendencies in region.  

Besides who says a little bit of Keynes kills?  Just ensure it doesn’t become an opium that gradual underpins macro prudential and weigh down output.  

Fig 2:   Pro-Poor Polices
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Source: IMF
 

Such action provided a window to reduce both inequality adjusted HDI and income inequality, eventually allowing both growth and social inclusion to go on hand in hand.  Something that remains largely elusive in the current Nigeria. 

Fig 3:  Human Development
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Source; UNDP
 

The ability to strengthen institutions especially the nation’s Central Bank, Bank Del Central Uruguay further cemented the bank’s autonomy and widened the bank supervisory powers.  The icing on the cake followed when the Uruguayan Peso was floated in 2013.    

In addition to the establishment of a public –private partnership framework in 2011, sustaining the existing debt management strategy, improving transparency and accountability in the public sector and creating a mining legislation that support large scale mining.  

The ability to improve compliance with regards to value added taxes, pruned down evasion to one of the lowest in Latin America.   

Thereby the wiliness to continue with reforms led to a consistent    accretion in foreign direct investment.  

Uruguay reaffirms once again, the ability to create the right pre-conditions for growth hinges deeply on the kind of political leadership. 

There is nothing more beautiful, than to have a political leadership that understand their economics and are consistently prudent with the existing social trust of the people.  

Economic Structure: Expanding the Formal Sector
In most circumstances, the external conduit of most developing economies is shaped by their inherent natural resources. 

However, the ability to improve human capital and allow a consistent inflow of foreign direct investment did not just smoothen out income but expanded Uruguay production possibility frontier. 

For instance, critical investment in human capital has made Uruguay one of the major producers of renewable energy and a destination for software start-ups   in the region. 

The ability to make the appropriate investment and widen private participation in infrastructure has contributed to reducing the nation export concentration to o.21.  

The effort has widely diversified the exports of Uruguay compared to countries like Chile and Columbia.  

Concurrently the expansion in the formal sector provided more leg- wind for domestic revenue mobilization, at the same creating some containment to public debt. 

Fig 4:  Export Concentration
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Source: UNDP
 

Thereby, the Uruguayan case study clear point out the reality, Nigeria cannot reach it optimum capacity without making the right investment in human capital and providing the right incentives to attract foreign capital.

It is inevitable; the greatest legacy handed over to incoming generation by any nation is the quality of education coupled with the   opportunities made available to them. Shocking both are products of the kind of investments carried out at any point in time.

Conclusion
 
The decision to stick with the existing policy path enhanced the reputation of Uruguay ahead of the likes of Argentina, Ecuador and Venezuela with regards policy clarity and sustainability. 

At the same time allowed it to boost its competitiveness and avoid caught up in the 2016 cyclical   downturn    

Moreover, the ability to ensure political stability and public transparency in government owned enterprises compare to its neighbour Brazil certainly made it an attractive investment destination, eventually rubbing positively on its tourism sector. 

On the long run, the choice of policies created the needed balance and steered Uruguay from the structural inefficiencies, rising bureaucracy and price distortions that have riddled most of Latin America.

Fig 5: Index 

Index

Ranking in Latin America

Democracy index

( BIU)

1

Low corruption

( Transparency international)

1

Prosperity index

(world justice project)

1

World Governance  indicators

(World bank) 

2

Source; World Bank, EIU 

Even though we must admit that Uruguay do have certain flaws such a relatively high Public debt to GDP, coupled with a narrow financial sector compared to most part of south America and high vulnerability to Dollarization. 
Certainly coming from a monetarist there is still a lot of rocks to throw at this particular bin. 

Thus, an urgent need for a hand in hand economics in Nigeria is inevitable, so as to repair the social well-being of the citizenry. 

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