The Merits of the Conventional

I enjoyed talking to Nonso on this episode - and many thanks to him for making the time. This is not part of our COVID-19 quickcast series because we had scheduled this conversation before news of the outbreak and subsequent lockdown. Nonso was characteristically eloquent and got straight at the heart of the questions. We talked about different models of economic development, the Central Bank of Nigeria, and how we are better with a more democratic approach to economic policymaking.

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TRANSCRIPT

Tobi: This is Ideas Untrapped and I am here with Nonso Obikili, remotely. Nonso is the Chief Economist of BusinessDay Newspaper and a non-resident fellow at The Centre for Global Development. Welcome, Nonso.

Nonso: Thank you, happy to be here. Remotely.

Tobi: [Laughs] So... we're really in the midst of a lockdown, at least the three supposed epicenters of the outbreak...that's Lagos, FCT, and Ogun. So I just want to gauge what you think the effects are going to be from a macroeconomic standpoint. Just a brief overview, for you.

Nonso: Well, I think it's important to understand the context. So in this instance, because of the pandemic, we know that from an economic perspective the best thing to do would be to get through the pandemic as quickly and as painlessly as possible. And to do that, it is necessary to shut down some sections of the economy. When we say a lockdown that equivalent to a shutdown of some sections of the economy. So that's a deliberate action to, in a way, shrink the economy to deal with the pandemic. That's the context. If you're deliberately shrinking the economy, of course, you would have a fall in...if you measure it, but you're doing it on purpose. But the whole idea is to respond to the pandemic quickly and then recover quickly. So the real question is how are we able to get the economy started again once we are able to deal with the pandemic and, of course, to deal with the pandemic as quickly as possible? That's one side of things, but from that perspective, you can't really see a slow down in the economy as a bad thing. It's a necessary action in that sense, and we would only see the full impact once we start to try to kick-start the economy again. But in the Nigerian context, there are other issues going on. Now, this is a global pandemic and one of the things that happened is that it has resulted in a collapse in crude oil prices and as we know Nigeria is still very vulnerable to the oil industry. It still accounts for roughly 90 percent of all our exports and it still accounts for maybe 65 percent or so of government revenue. So any decline in oil prices means a real shock to the economy and this decline is particularly bad because if oil prices drop from 100 to 70, that's a drop but there are still inflows coming in. But this is dropping to the 20s and if you add production costs to that then we may necessarily be getting almost nothing to very little in the short-term from the oil industry which is a big, big shock. I think this is probably the biggest shock we have we have seen in a very very long time. I think that's problematic. But it's even more problematic because a lot of the emergency responses that we would have had are unavailable. In the past, we had an excess crude account that we could use to kind of managed through a couple of months until we figure out a proper response but the excess crude account is essentially empty and the replacement which is the sovereign wealth fund has very little funds in its stabilization account, so there’s not much fiscal buffers there. Another alternative would have been to rapidly increase debt to deal with the short-term crisis, but again because this is an international pandemic - it's a global pandemic - the international debt markets are very difficult right now and so it's very difficult to raise funding from there. But our debt position is already very constrained. As at last year, we had about a debt servicing costs to revenue ratio of about 65 percent which, again, implies that for every one Naira of the Federal Government revenue 65 percent went to servicing already existing debts. So we're already kind of limited on the debt front. And as a final kind of option, the nuclear option as we say, you could always resort to monetary financing which is what we are seeing in places like the US, in the UK where the Central Bank just steps into kind of deal with the problem temporarily. But, again, even on that front, we've already been doing that for a while... and it's not clear just how much space the Central Bank has to take that kind of action. So on all these measures to deal with the collapse in oil prices, we seem to not have all these emergency measures available. And so the question now is what do we do? How do we get through? Remember the first part is to get through the pandemic and the second part is to start to recover after the pandemic. So it's not really clear what we're going to do, for now.

Tobi: Yeah. So given the tight position we seem to be in from what you just explained, what would be your... I know forecasting is not an exact science, but what would be your prognosis for the economy in the next few months? I think a few days ago with the minister of finance came out and said that Nigeria could be in a recession in six months. So is that accurate? And if true, what do you think really could be a way to avoid the worst-case scenario?

Nonso: Well, I think we might already be in a recession. Remember, we are only growing at 2 percent. So you don't need to fall too far to get to below zero. Of course, recession technically is two-quarters of negative GDP growth which means technically you can't get into a recession officially until the second half of the year. But in practice, I think there has been already a big collapse in economic activity and again part of that is on purpose. Remember, we're shutting down the largest state in terms of economic activity - Lagos. We're shutting down Abuja which is also a very big state. So you are shutting down these key parts of the economy which mean that if they are really shut down then you should see slowing economic activity. So I would bet that we are already in a recession now because of the lockdowns. That being said, remember the goal is to lockdown, deal with the pandemic and then recover. Do I think we will recover out of recession in the next six months? I don't think so. Simply because there are already all sorts of other issues that we need to deal with. Q1, of course, is the collapse in oil prices which does not look like it's going to recover soon, but even before that there were already a lot of pressures building in which this collapse in the oil price is kind of... it's kind of like a straw that broke the camel's back to put it that way. So I think we would already be in a recession once we incorporate this lockdown but I don't think that we are going to get out of that in the next six months or even in the next year. Now, what can we do to prevent that? Again, that question is kind of moot because if you're already in a recession, the question is how do you recover? What can we do to recover? I think there are many things. As an emergency thing, one thing we can think of doing is to look for an emergency bailout from somewhere. That would give us the kind of space to deal with issues over the next six months to one year. But barring that, I think we need to move towards a more conventional kind of policy environment.

One of the things we've seen over the last few years is that we've gone into all sorts of creative economic policies. You know, things like border closures and foreign exchange windows and all these things. And I think getting rid of some of those things might help the economy grow a bit faster than it was before. But ultimately I think we need to have some fundamental changes in just how the economy works. In terms of government revenue, I think we need more fundamental tax reforms because anyone hoping that the era of oil prices going back to 60, 70, 80, maybe a 100 to kind of save us, I think those days are well and truly over. But it's pretty obvious that there are problems with the current tax structure. So I think we need to start asking that question. I think in general, we need a more open economic policy agenda. Open in the sense of allowing people to trade relatively freely, incentivizing ways to participate in global markets. I'm not a deregulate everything person, but I think we need more flexible regulation to allow people to make decisions and take risks. And so I think if we do all these things in the near-term, then we might be able to start to see the economy pick up again more quickly. Of course in the medium to long-term, it's the big investments that count. The investment in education, investment in health, investment in infrastructure. But that is a medium to long-term agenda.

Tobi: Okay. Let's zoom out a bit. Say these were happening like 30, 35 or probably 40 years ago, we can say that China or South Korea could be in the same position that Nigeria is currently. But I think they made some deliberate choices, policy-wise... maybe to industrialize, to open up to trade, be more export-oriented, etc. Why haven't we been able to do that? Where exactly is the logjam in terms of policy in Nigeria?

Nonso: I think our political economy has not allowed at that kind of focus. Of course, we can, you know, forget about the dictatorships days... the military regimes. In those days the whole point was how to extract and share oil revenue. But since 1999, with democracy, we've seen a bit more freedom, but we've also seen a bit more (kind of) political misadventures, to put it that way. We've seen a big rise in crony capitalism and the idea of using government to kind of corner market for specific businesses. So that has been kind of something we've seen. We've also seen a kind of short-termism in terms of just government spending. We've seen successive governments think only about the next 3-4 years and how to deliver returns that give political victories. So we've seen government focus on things like fuel subsidies and all these short-term plans that really ignore the key underlying factors that grow economies in the long term. I think from an economic perspective the issue has been that the political environment has not been suitable to make those kinds of long-term decisions and long-term investments in education, in health, in trade, in exports and all that. But again, it's easy to blame politicians. I don't think it's a result of politicians alone. I think just in terms of the development of the Nigerian voters, I think these issues that are fundamental to long-term development have not been the issues that are focused on during elections and I think that's where the fundamental challenges [are]. If you think about the issues that have driven past elections, they haven't been about trying to boost education, it hasn't been about trying to build a proper healthcare system, it hasn't been about how to invest in infrastructure or trade, it's been about other issues and I think that's the fundamental challenge. Because if you don't have a population that puts these major investments as a primary concern, then you end up with outcomes that are not about those concerns.

Tobi: But isn't that a feature of the political space itself? Like electorates are usually faced with should I say poor choices in terms of who to elect?

Nonso: Well, yes. Our political system is very difficult in the sense that the process of getting on a ballot box is completely useless, for lack of a better word. So you end up with electoral choices that are in many cases not particularly ideal. Having to choose between two candidates that you don't particularly like. That's part of the problem, that's part of the issue...that once it comes to elections, especially at the highest level, the issues that count for getting on the ballot box aren't the issues that are important for policy-making for long-term development. They are other things. And I think that's...again, it's always easy to kind of blame politicians, I think it's a society problem in general. And it's a challenge that we still... as a society, as a country we still haven't found an answer to yet.

People who are poor know best about how to live in poverty than people who are not. -NO

Tobi: You wrote an article, I think [in] January (I'm not sure now) about a rights-based approach to development. Can you expand on that a bit?

Nonso: Honestly it's a very simple idea that even though we have a lot of poor people, even though we have a lot of less-educated people, people know best about their situation than anybody else. People who are poor know best about how to live in poverty than people who are not. People who are trading know best about how to trade than people who are not. People who are doing any kind of business know best about their business than most other people. And so the idea that a policymaker can sit down in an office in Abuja and unilaterally decide everything that should be done without taking into account the people who are actually living... who are actually living through this, who are going to implement this, I think that's always problematic. Most people want to get better off in life. Most people have constraints, of course, but I think incorporating the thoughts, opinions and rights of people I think is a fundamental part of any kind of economic development strategy simply because people are a lot more active and a lot more knowledgeable about their particular conditions than most people, especially most economics and policy analysts give them credit for. That's kind of like the basic idea, and you can think of it in very straight forward terms. A very simple example is the decision on what to do with foreign exchange, for example.

Tobi: Okay.

Nonso: If I am a farmer, I grow ginger and I export that ginger to, say, China and I'm paid in dollars. Who should decide what to do with my dollars from my hard work? Should it be some guy saying I am the CBN and or should it be me? It's a very simple example but a rights-based approach to development says it should be me who decides what to do with my dollars. Of course, you can have regulations, rules and all that. But fundamentally, I should decide what to do with the fruits of my labour after paying in all taxes, of course. And if you have that, then you tend to have foreign exchange markets that are more pragmatic, that are more realistic compared to if you have somebody in an office somewhere trying to unilaterally decide what to do. Because, of course, when you unilaterally decide what to do, you're taking away the rights of the person who actually did the work to use the fruits of their labour. That is also a very kind of simple example, of course, you can see that in many other parts of the economy. Who decides what to grow? Who decides which port to use? How do we decide how to transport that stuff from point A to point B? Do I have the right to decide what to do or do I get orders from Abuja to do what needs to be done? If you think of the border closure, for example... if your exports are sitting down in Sokoto, it may not be particularly useful to have to export through Lagos, it might be better to export through Niger, or through Cotonou or even through Togo and if you had the right to choose what to do then you could choose the best option for you. But if you have somebody who unilaterally decided that the land border should be closed and everybody most export through Apapa, then you end up with a worse outcome. The rights of the person who's trying to export have been ruined over forced-on development agenda...again, which I think is not ideal.

So, yeah, that's just a basic idea that "look, the best development policies are those that acknowledge the rights of the people who are the targets of development" and to recognise that they are not mindless chess pieces but they are actually human beings, they actually have rights and they actually want to improve their lives, so taking that into account and should be front and centre of any kind of development agenda.

Tobi: Where I really want to push you a bit on this issue is, I don't know... it reminds me of another paper by Easterly "Progress by Consent". I think the basic idea is there. So now, do you think in all honesty that the sort of Adam Smith tolerable administration of justice and other rights-based approaches is enough at this stage in our development and globalisation generally, do you think that's enough to push the rapid income convergence that places like Nigeria need? You have East Asia that went with a whole different approach and so far so good it's worked for them. So what you think about that?

Nonso: When you say a whole different approach what do you mean?

Tobi: Well, for example, South Korea did unconventional monetary policy for one. They had multiple exchange rate windows, but they were more export-oriented, they were more... they were highly bureaucratic in their approach. We can say that they trampled on people's freedom a bit but they still focused on what I think were the right things which are exports, manufacturing...yes, some of those measures were relaxed after a while and today we can talk about those countries in the same light as the other Western nations. So, yeah, that's what I mean.

If you think of most of the Nordic countries, for example, you wouldn't find episodes of 10 percent GDP growth and all that in their history. What you would find is just sustainable growth for 60, 70, 80 years and they are developed as any anywhere else. - NO

Nonso: Okay, well, I think there are many things there. I think one of the things that people try to forget about most of the Asian Tigers, to use that phrase, is that in the 60s there was this rapid improvement in education. Even before you started to see all the rapid growth there was a rapid improvement in the education of the masses and that served as the foundation for most of the growth that we saw in the 1980s. Now if you have a very highly educated population, then even if you end up with a dictator, you kind of have to have a smart dictator to put it that way. And as you said, even given that they were "dictatorships", the policy focus was always kind of outward-looking. More exports, more trade, more interactions with global markets. And then there is the final factor which I think a lot of people tend to forget when we just simplify things as dictator or democracy. I think state capacity itself is independent of the mode of governance and in many of these places you have histories of very long states. Remember the world did not start in 1960 even that's when we started collecting most data. But the world is pretty old and in many of these places you have a history of very strong state capacity, which of course means that even if you end up with a dictator or a democrat, you have some of these elements of an effective state. Now, if you transition to most of sub-Saharan Africa especially Nigeria, for example, they are very few places where you have that kind of history of state capacity. In Nigeria prior to the colonial era, there is no Nigerian state at all, there is just a plethora of smaller states - some bigger, some smaller. In most of West Africa... most of sub-Saharan Africa, you don't have the same kind of historical state capacity that you have in some of these Asian countries which means that the idea of trying to use dictatorial brute force to develop a place was always going to be a bit more challenging. If you think of Nigeria for example, even though one of the things that the literature has kind of seen is beneficial for dictators in terms of promoting development is if you expect the dictator to stay a long time. That is, if you're a dictator, you're expected to be a dictator for 20, 30 years then you tend to do better, to put it that way. But in Nigeria, despite all our history of dictatorships, we've never actually had a long dictator. I think the longest we had was Abacha, if I'm correct? Which was about six years, right? Which is not a long time. So even within our dictatorial past, we do not have like strong leadership or a strong authoritarian government in the sense of longevity. We had a series of coups and a series of dictators come and go, always trying to prevent the threat of another coup and always trying to solidify their regimes to put it that way. I think a big part of that scenario is there is just no history of national state capacity in Nigeria. So the idea that we can, in some way, copy the South Asian path I think is problematic. I think just because of the issues that we have, we have to till towards a more republican, a more democratic structure and we need to find our path in that direction. Everybody kind of focuses on the Asian Tigers that grew rapidly over a short period of time, but the truth is, for most countries who have developed there was no rapid growth. There were just long, sustainable growth for a long time. If you think of most of the Nordic countries, for example, you wouldn't find episodes of 10 percent GDP growth and all that in their history. What you would find is just sustainable growth for 60, 70, 80 years and they are developed as any anywhere else. So rapid growth is nice, it looks cool but for most countries, it's not about rapid growth, it is just about growing consistently for a long time. And I think given our past, given our structure, that's what we kind of need to aim for. Of course, we want to grow as fast as possible but sustainability is just as important. Yeah, I don't think that we can adopt the dictatorial Asian Tigers' model. I think we can adopt parts of it ... which is the focus on education and the focus on trying to participate in the international economy. But I think given our history, given the dynamics of our politics we probably need a more democratic, more rights-based economic path.

Tobi: I think Gowon served for nine years. I'm not sure. Yeah, I think Gowon served for about 9 years.

Nonso: But a chunk of that was the war, so...

Tobi: [Laughs] Okay. Let's talk about the Central Bank, of course. So talking about rights and all that... monetary policy in Nigeria has been, I don't know, unconventional recently. I think you had an exchange with the CBN governor sometime last year and a lot of issues came up. Here is an institution that we would agree functions better when it's independent but there's a bit of a paradox, at least, with the current regime where it's gotten a bit political at least on the currency issue where monetary policy is kind of towing the presidential line from 2016 upward and at the same time there is really no oversight for what the CBN can do. How have we found ourselves in that position?

Nonso: Well, I should do the selfish thing and say it's what happens when you have no economists at the Central Bank.

In terms of our macro policy space, it has been dominated by FX over the last five years and everything seems to revolve around trying to manage the exchange rates which again has led to all sorts of unconventional policies as we say. - NO

Tobi: [muffled voice]

Nonso: Oh, we have a few economists but over the last maybe decade-and-a-half the Central Bank has been filled with bankers and accountants who have a different background and a different view of economic policy than most macroeconomics will have. That is kind of the fundamental problem to me. Because you will always have issues of Central Bank independence, you will always have issues of Presidents wanting ABC, but what you need in that kind of situation is a Central Bank that can articulate the reasons why ABC are not ideal, not feasible and that can explain an appropriate monetary policy path not just to the Presidency, but to everyone in a credible way. And I think that has been lacking. Once you have a Central Bank where there is not a basic understanding of macro policy, then you tend to have all these kind of challenges. I mean, let me just be fair, there are lots of very good economists at the Central Bank but very few in actual decision-making positions which is problematic. In terms of our macro policy space, it has been dominated by FX over the last five years and everything seems to revolve around trying to manage the exchange rates which again has led to all sorts of unconventional policies as we say. We've seen lots of administrative measures trying to limit demand for foreign exchange. We've seen the bans on the use of FX for importing XYZ, I think there is still a 41 or 42 items list. We've seen all sorts of things like milk being banned. All that to try to limit the demand for foreign exchange and then at the same time we've seen all sorts of policies to try to incentivise short-term portfolio funds to bring foreign exchange, chief of which is the issues in the OMO market with the CBN bills, where the CBN is essentially indirectly kind of borrowing foreign exchange at very high rates 14, 15 percent which is unheard of. But the foundation for all that is an attempt to keep the exchange rate fixed. Not fixed in any particular real sense, but fixed to the US dollar which is a crazily strong currency. And what has happened is you've had all these imbalances kind of build up as a result.

Nigeria is not the only country in the world that has its own currency, many other developing countries have their own currencies - South Africa, China, even India. But if you look at the Naira relative to these other emerging markets or developing countries' currencies, the Naira has strengthened a lot over the last 2-3 years. Again, all that is as a result of trying to arbitrarily keep the exchange rate fixed to the US dollar which has been kind of the foundation for most of the macro policy, and all that seems to be maybe indirectly a consequence of a political decision to manage the exchange rate as tightly as possible. So yeah, it's problematic and it's resulted in a lot of heterodox, as you've said, monetary policy. But I think importantly, that kind of environment has proved difficult for economic growth. We've seen growth struggle and I think that is partly because of that macro-policy environment. Of course, there are all sorts of other issues with the Nigerian economy beyond just monetary policy but we've seen investments into short-term securities as the only investment that is incentivized which is not ideal for a country of Nigeria's position. We should be doing what we need to do to incentivise long-term investment (foreign long-term investment). What we are seeing is a push towards short-term securities which has its uses but again it's not ideal for economic growth in a country like Nigeria. So yeah, many challenges, many problems but I think fundamentally the attempts to try to, like, maintain exchange rate stability to the dollar at all cost is kind of like the source of many of the challenges.

Tobi: Okay, let's talk about the role of the media in all this. I know you write a weekly column for a newspaper, is part of the problem public discourse on economic issues? What is the role of the media in this? Economists are not really driving the conversation in the media and yes I know there is Twitter and all that...but is that part of the problem? Is economic education broken because the media landscape has been empty in that regard?

I think leadership needs to have a proper policy philosophy and get the public to buy into that. - NO

Nonso: In a way, I'll say yes and no. Let me be a fencist on this one, I'll say yes and no. No, because economics is like a very weird field in the sense that for any particular issue, for many issues you have economists who disagree and that kind of disagreement means that there is no consensus on many things. Which, again, means that it's difficult to kind of drive the public towards one direction if there is even no consensus within economists. But on the other side, yes. A lot of the discussions around economic policy seems to be focused on trivial issues without any kind of long-term thinking. A good example we could think of is the discourse during the fuel subsidy debate in 2011 or 2012. I think in that instance the media played a big role in driving home the idea that the issue was corruption, not necessarily that the subsidy itself was not ideal. And that definitely made an impact into the relapse of the policy. So yeah I think the media can do a bit more in terms of driving the debate, nudging the public towards a more ideal kind of position. But I think ultimately it's truly about leadership that needs to articulate that position. Populism is a very common problem around the world, and so if you always follow what people want directly then you end up in difficult situations. So it's not just in Nigeria, it's everywhere. I think leadership needs to have a proper policy philosophy and get the public to buy into that. And from that perspective, the media plays a role, but the media is not the key determinant of the outcomes. I think leadership is a bit more important. If you have a leadership that has a credible economic policy and that convinces people via the media to buy into its policy philosophy, then the media has a role to play there... but if you have the media just regurgitate some of these more populist agendas then you end up being in a difficult situation.

Tobi: Okay. Before I let you go... if you had to choose between these three long-run structural forces as one with the heaviest hand in our affairs in Nigeria, which would you choose between institutions, geography or history?

Nonso: I think it's obviously institutions. Geography is fixed for the most part and part of the story of human development is being able to overcome your environment, so geography cannot be an excuse. History is history. History has already happened and even though history counts, history matters, nobody is locked into a particular historical path. Every country, every society has the agency to change its direction, erm, so I don't think history is a big constraint. But I think the institutional capacity is where the big challenges lie. So, yeah, I will lean towards the institutions answer...although institution is a very broad term encompassing lots of things but even at that, I think I will lean towards institutions.

Tobi: Okay. I want to indulge in a bit of gossip before I let you go finally.

Nonso: [Laughs]

Tobi: There is an anecdote out there, I want you to confirm whether it's true for me...that the current CBN governor actually said "I'm not your mate", is that true or not?

Laughs

Nonso: Well, I think it will be unfair to only pick out a part of what was a much longer conversation. So I would decline to answer that. But of course, I'm much younger than the CBN governor, so, technically I'm not his mate.

Tobi: Okay, but you're not going to get off that easy. What was going through your mind at that exact moment? What was going through your mind?

Nonso: To be honest I was just excited to be having that conversation in the first place. So for me, I think getting my message across was for me the most important thing and I think I was able to do that. Everything else was just secondary. But, I mean, it was an interesting event, to put it that way.

Tobi: Alright, thank you very much, Nonso.

Nonso: Thank you too.