ECONOMY - 13 JAN 2016

How To Grow

How To Grow
GDP Cartoon @

All that glitters isn’t growth

Economic growth is good. That’s what we are generally told. But dig deeper and things don’t look that simple. The nature of growth matters. For example, economic growth slower than population growth means that people are still collectively worse off. Moreover, growth usually imposes social and environmental costs and if these get too high, long-run welfare declines. Meanwhile, the dispersion of growth is critical. Today, fewer economists believe in the power of trickle-down economics; wealth has been stubbornly immobile in recent times. Finally, the high levels of growth in the last decade, especially in the world’s poorer regions, shows that growth on its own is not an effective poverty-alleviator. The lesson is that economic growth on paper does not necessarily translate to a general improvement in the welfare of the polity.

So how economies grow is important. Like many African countries, much of Nigeria’s growth has been commodity driven. A mixture of political instability, ethnic conflict and lackadaisical economic planning over the decades hampered true economic development, making it unsurprising that we fell victim to dutch disease. The problem is that oil wealth was channelled towards consumption rather than creating a more viable and sustainable economy. Today, the economy is feeling the worst effects of this mismanagement, with flagging economic variables, fuel shortages and severe foreign exchange controls dampening confidence for the new year. And contemporary issues are in tandem with the structural reality of the economy – the explosion of a middle class never really happened, poverty remains high, and power supply is digressing.

The benefits of economic growth – In theory and in practice 

As economists have stressed over time, not all GDP growth is created equal. Growth accounting, the field of macroeconomics that studies the breakdown of economic growth, differentiates between level effects – one off changes in economic parameters that lead to GDP growth, and factor productivity growth – improvements in the efficiency with which a country utilises its resources. Growth spurred by level effects (e.g. high doses of FDI) is beneficial but has limited, waning effects. Conversely, changes in total factor productivity usually have more long-lasting effects on economic growth. When it comes to economic growth, the “how” matters.

In practice, economic growth has proven reliable in one aspect – driving social change. In early economies, a need to protect private property and newly discovered wealth shaped ideological leanings and guided legal and institutional reforms that now form part of the basis of modern society. The pattern replays itself today as economic growth births a middle class that eagerly demands economic and political reforms to protect and promote their new economic status. Economic prosperity acts as a catalyst for creating productive institutions and practices. But again, the “how” matters. In Nigeria, resource-driven growth has instead created a culture of extraction, leading many to turn a blind eye towards corruption and short-termism as long as they benefitted from resource rents. Ironically, decelerating growth in countries such as Nigeria and Brazil has now un-distracted the electorate from addressing the costs of corruption and economic inefficiency. This is important because Nigeria wants social change, as well as economic growth.

A path to growth

After ignoring the issue for so long, Nigeria is now faced squarely with the task of determining how to grow. The political rhetoric so far has been centred around inclusive growth and economic diversification. How may the country come to achieve this? Firstly, considering economic growth at the national level can be misleading as it is an aggregation of many localised stories of development. Nigeria’s fiscal structure is too centre-dependent and this has repercussions on the wider economy. Thus, a decentralised, bottom-up framework must be embedded into Nigeria’s economic thinking

Nigeria needs economic growth but it cannot pursue it blindly. The economic growth we need has certain key pillars that ensure its sustainability and inclusivity. First of all, Nigeria’s future economy cannot be such a political economy. The optimal level of government involvement in an economy remains imprecise but the state still has a role to play. For Nigeria, the public sector is too partisan and disreputable to thrive, even when compared to a private sector that has often suffered from the largesse and graft straddling the whole economy. Nevertheless, market-based policies and strategic deregulation will serve the economy well in the long-run.

Secondly, sustainable economic growth requires the existence of dependable, transparent and effective soft institutions (e.g. judicial, political, religious etc) as part of the immaterial infrastructure of the nation. Naturally, physical infrastructure is also important. The emphasis here needs to be on optimising connectivity, safety and scalability, three features that have often been neglected in Nigeria’s infrastructural planning. 

Furthermore, Nigeria needs to produce more. The political rhetoric has focused too much on the what (e.g. toothpicks) and ignored the who (Nigerians). Industries are able to generate large numbers of jobs at good wages, a potential remedy to Nigeria’s unemployment problem. Finally, social insurance schemes – not handouts – need to be crafted to create safety nets for Nigeria’s large population. Social insurance remains a crucial cog in well-functioning mixed economies, a fact that has perhaps been considered by the new administration.

Economic development is a long and arduous process. There is no magic bullet and clever policies must be married with an appreciation of the fundamental elements of growth – careful deregulation, infrastructure and trust in institutions. Nigeria’s economic future depends on her leaders learning to appreciate the importance of how nations grow.


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Kitan Williams

Kitan Williams

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