Way Out of Economic Recession


 Sunday, September 11, 2016 9:55 PM / By Temitope Oshikoya*   

In February 2015, we wrote an article in leading news outlet including Business day and Proshare titled “A roadmap for inclusive prosperity” drawing on economic research and practical policy best practices to address potential economic recession and high unemployment with counter-cyclical monetary and fiscal policies. It appears policymakers and financial intelligence gurus are now beginning to scramble to underscore the same issues that we raised more than a year and a half ago. Here are the main pertinent extracts from the article as well as updates on economic data. 

Prosperity economics of inclusiveness 

Prosperity economics of inclusiveness is founded on a virtuous cycle of shared growth, security, and corporate and democratic governance. The immediate economic objective of inclusive prosperity is to address the growing insecurity, widespread unemployment and pervasive inequality in Nigeria. Economic policy research has found that long spells of unemployment can permanently lower both workers’ earnings and potential GDP. The high unemployment and underemployment rate of 24 (now 33) percent and over 50 percent among the youth as well as low productivity may explain the gap between the actual GDP growth rates of 6.5 percent and 7 percent since 2009, half the targeted GDP growth rate of 13.8 percent in Vision 2020. Celebrating the current growth rate of 7 percent as high may encourage complacency at a time when the gap between the targets needs to be closed. The economy has since entered recession with consecutive two quarters of negative growth rates. 

Unemployment needs fiscal stimulus 

Government interventions on both the aggregate demand and supply side can make a difference with such levels of high unemployment. As Bradford DeLong and Lawrence Summers have argued in ‘Fiscal Stimulus in a Depressed Economy’, “If fiscal interventions can affect long-term aggregate supply, the costs of fiscal stimulus are much lower than previously thought…. That there are no long-term costs to doing nothing to increase demand is also wrong.”

We noted how the US President Obama responded with fiscal stimulus, and the US central bank with monetary stimulus, during the great financial crisis. The proactive and counter-cyclical responses explain the more robust economic growth and reduction of unemployment rate by more than half to 4.5 percent in the USA, compared to the economic malaise with high unemployment rate in the Eurozone, especially in Greece and Spain.

The alarming unemployment crisis in Nigeria demands an immediate shock therapy with an intensive and acute care. Fiscal and monetary policies can help in the short-to-medium term. Pro-cyclical fiscal and monetary measures should be replaced with counter-cyclical measures, as the former would worsen the unemployment situation. In Nigeria, the current unemployment situation calls for responsible fiscal stimulus package to stimulate both aggregate supply and demand, especially of the poor and majority of Nigerians; the 99 percent will spend more to uplift the domestic economy than the less than 1 percent few elites that spend more on foreign goods and services.

Our high unemployment and insecurity are intertwined and require immediate scaling up of public sector investments in social safety nets, conditional cash transfers, public works and other public goods employing direct labour and can be stimulative across sectors, especially agriculture and manufacturing which are more labour-intensive, and raise aggregate demand. Such public sector investments are not impossible as fiscal leakages from corruption, over-bloated high recurrent expenditure, and untapped revenue sources at both the federal and state levels are plugged. External borrowing especially via the multilateral development banks and euro-bonds, as well as foreign direct investment will be crucial. A letter of comfort from the IMF will be helpful especially as the key contention issue of flexible exchange rate has now been partly addressed.

Further, 2015 budget ratio of 9 out of 10 in favour of recurrent expenditures needs to be tilted towards capital expenditure. Prosperous economies in China and East Asia had up to 40 percent of budget in capital expenditures and a third of GDP as gross fixed capital formation for several years. We note that while the 2016 budget has increased capital spending to 30 percent, both the budget passage and its implementation have been delayed contributing to the recession. In addition, critical public sector reforms are needed in key areas: long-term fiscal sustainability at all levels of government, corruption, and democratic governance. It also requires freeing government from narrow corporate interests with a network of patronage and opaque system fuelling rent-seeking opportunities and corrupting our democratic system. 

Full-employment monetary policy 

Besides public investments and fiscal rationalization, another immediate step to support the objective of employment generation and job creation deals with monetary policy. The central bank needs to pursue full-employment and welfare-oriented monetary policy objectives, which include lowering the high monetary policy rates of 13 percent, aimed essentially at foreign portfolio investors, with their capital feast and famine cycles. It is difficult for businesses, especially SMEs and manufacturers, to afford and grow businesses and employ more people with lending rates of more than 20 percent.

While the mantra of monetarism has helped with price stability (not any more as inflation rates rose to 17.1 percent year on year, but abated month-on-month) as defined by the CBN, the hawks within the MPC still do not believe that high unemployment rate is the number-one economic evil today. With the high rate of unemployment and jobless growth, it is safe to state that the economy is already below its potential output; and added to it are the potential recessionary gaps from realized and emerging shocks. Other leading economists including Kenneth Rogoff, a former chief economist of the IMF and one of the early proponents of inflation targeting in the 1980s, recently noted that excessive emphasis on low inflation targets can be counterproductive in the aftermath of severe shocks such as the Nigerian economy is currently witnessing.

Beyond the immediate fiscal and monetary policy measures to support job creation, each government or regime needs a signature economic success with scalable impacts on inclusive, shared, sustained prosperity. Avoiding the recession with counter-cyclical fiscal and monetary policies and measures was clearly foretold.

Dr. Temitope Oshikoya, an economist and chartered banker, is CEO of Nextnomics Advisory

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