Slump in oil prices: A progressive way out

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By Bola Tinubu

A worker pours crude oil into a locally made burner using a funnel at an illegal oil refinery site near the Nun River in Bayelsa. Akintunde Akinleye/Reuters

Awash in the great tide of politics, we must not forget why politics can be a noble endeavor. It leads to governance. When done correctly, governance can reform a nation and improve the lot of the people. In the hands of the ignorant and the mean, governance cast abundant misfortune upon a nation and upon the welfare of its citizens.

This commentary concerns governance and policy more than it does politics. I offer it to generate debate on an important economic issue. No matter who is in power, we must do whatever is in our capacity to do to steer the nation away from economic woe. The people have suffered too much hardship already. Neither side of the political divide should seek to purchase transient advantage at the high price of dousing the people in greater economic calamity.

Thus, I suggest this progressive’s position on how best to shape economic policy during this period of falling oil prices. I state this hoping those in charge will take pertinent advice from any quarter. My prayer is that they are not so stubborn as to adhere to a strategy that will deepen the economic misery of our people even when better policy measures are proffered.

I confess to writing this also for a reason essentially political but non-confrontational. It accentuates the distinction between the conservative PDP and the progressive APC. The nation faces momentous elections when next year turns to its second month.  The choice is a stark one; but many people do not believe as such. The differences are vast especially regarding economic policy. On the one side, the PDP champions a conservative, elitist economic model based on the theory that wealth money must first go to the already rich and well-heeled  who shall determine how small a fraction of it will trickle-down to the rest of society.

On the progressive side, we believe government can fillip economic growth and development in such a way that brings the fairness of prosperity to all of society. We don’t seek to penalize those who already have but we will do our utmost to remove from the clutch of poverty the bulk of our people. We seek to turn the hungry suffering of our poor and working classes into a dignified livelihood that provides a dignified existence for all.

Global oil prices have fallen from over 100 dollars a barrel to approximately 80 dollars per barrel. This slide has caused a corresponding drop in government’s dollar revenues. With this, the federal government claims it has less money at its disposal and the paucity of dollars necessitates austerity measures. Most people accept this position as gospel; debate about its correctness has been nil. 

Yet, the stakes are much too high to assume this subjective position as an economic certitude or uncritically accept its propriety. What they proclaim as policy is not based on any unassailable economic principle. It is statement of economic bias that beckons to the wealthy while auguring unnecessary hardship for most Nigerians.

Look at jobless and poverty levels as well as the diminished status of our middle class. After viewing these statistics, most objective economists would conclude Nigeria is mired in a long-term, secular depression. Forget the rosy GDP numbers. They signify a great economic and financial segregation between those who have and others who have not. If we continue with the policy preferences of the current administration, the haves shall become the "have–mores" and the "have-nots" shall become the "have even less."

The vast majority of the claimed GDP growth has fallen into the laps of those already enjoying obvious luxury.  The rest of the people are left to gaze at the enormity of the income and wealth chasm separating them from the cabal orchestrating the discordant political economy. While a small group flourishes, the rest of the nation subsidizes their economic bounty. A tight confederacy rides an economic skyrocket while the bulk of the people languish in the swamp. For one group, the economy is effervescent. For the other, it is catatonic. Nigeria is one nation with two economies.  

For this government to speak of austerity is to further enrich the affluent while casting the average Nigerian into greater hardship and deeper socio-economic depression. As with the Euro zone the past five years since the global financial crisis, austerity has not solved the dire economic weakness of the nations that employed this sickening remedy. All austerity has done is tighten the grip of the wealthy on the economy while weakening the position of the middle class and the poor.

Austerity weakens aggregate demand, deflating an economy already fatigued and against the ropes. Those with hefty portfolios, profit as the value of their holdings appreciates by the very dynamics of deflation. Those who don’t have, find money even dearer to come by. Jobs and commerce disappear. Debt climbs. Deflation turns a noble but poor household into a committee of beggars and street urchins.

The austerity that the current Administration offers is an insensitive, myopic policy that lends primacy of favor to meaningless accounting figures instead of to the material well-being of the people. Austerity undermines our economic pillars and breaks the spirit of the people. Austerity is the merchant of pessimism and hopeless futility. If you desire a nation of thralls, by all means continue this bleak path. If we want a nation of prosperity and economic justice, a different course is our due.

Listen carefully to the position of the Jonathan Administration as articulated by the finance minister and you shall collide into the barricades of illogic and its weighty consequences. The claim is that government is low on funds because the lower price of oil means fewer dollars are being collected from oil sales. This sounds logical but for one fundamental point. 

The dollar intake is basically irrelevant to determining the amount of naira the government commands and places into the political economy. This fundamental point reveals the government’s position to be the antiquated relic of a past era. It is the way of the gold standard which ceased to exist over forty years ago. As such, government’s stance is based more on superstition than on the actual functioning of modern economy with a sovereign fiat currency of its own.

The last I looked, Nigeria operates a Naira-based economy not a dollar-based one. There is no legal or moral restriction strictly limiting the amount of Naira in the system to match the amount of dollars collected via oil sales. More importantly, there is no economic justification for the close linkage implied by the government.

If we take its position at face value, the Jonathan Administration is advocating that we effectively place the Naira and thus our fiscal policy on a “dollar standard.” The world jettisoned the gold standard in 1971 because it proved unworkable, reducing the policy space in which governments could pursue fiscal programs promoting full employment and social welfare. We should likewise reject this government’s imposition of a dollar standard on our nation’s fiscal operations.

Under the gold standard, a national government took pains not to incur budgetary deficits that exceeded the dimensions of its gold reserves. This was because the currency had no value by itself. Its value was based on the convention that the currency was backed by the nation’s gold holdings. Those governments that ran deficits had to pay those debts in gold.

Given that gold supplies were always and everywhere finite and exhaustible, a nation had to keep its deficits within the confines of its ability to pay debts in gold. Because of this straitjacketing effect, nations would abandon the gold standard during harsh economic times in order to give them the fiscal freedom to rejuvenate their economies. This was the case during the Great Depression with the major economic powers. This should be the case with Nigeria today since the bulk of our people live in conditions redolent of the Great Depression or any other depression for that matter.

Our government persists that it must limit fiscal outlays to the amount of dollars the nation holds. Similar to the operation of the discarded gold standard, following this path is to strap ourselves to austerity and the chronic deflation of austerity produces. Worse, it serves to enthrall the fiscal policy of our sovereign nation to the monetary policy of another country. 

That nation plies monetary policy to serve its interests and not the economic interests of Nigeria. I am baffled why this government would give such power over the fate of our economic well-being to another nation that does not incorporate our interests into its decisional processes. This government makes our nation the economic servant of another so that government may turn about to make the Nigerian people its economic servant. While there is a certain logic to this dynamic, it is a perverse and debilitating one.

Because we operate a sovereign fiat currency the federal government issues at its sole discretion, the federal government can never be rendered insolvent in Naira. This means it can run Naira fiscal deficits indefinitely. The only outer bound is to ensure the fiscal expansion does not incur damaging inflation rates. There is no logical reason to peg the flow of Naira into the economy to the flow of dollars received.

The correct perspective is not to mechanistically restrict Naira expenditure to dollar intake. This would be tantamount to those crippled with economic blinders forcefully leading those who can see we are heading for disaster. It points to deflation, recession and worse. The better methodology is to ascertain, then achieve, the level of Naira expenditure needed to expand the economy and create jobs without causing inflation to rise to dangerous levels. This is how broadly-shared prosperity is generated in a sustainable manner.

In this way, the nation’s economic engineers should focus primarily on allocating value and opportunity to our underutilized labor force and our idle, yet potentially productive capital in a way that promotes wealth creation and expansion of aggregate demand. It is this sustainment of aggregate demand that empowers the nation to rescue itself from the whirlpool of economic contraction.

This avenue is more benign than the one the federal administration now advocates. Their way calls for us to forget growth and for government to preoccupy itself with allocating economic misery among those segments of the population too poor and weak to contest the immiserating actions of government against them.

In the face of recessionary headwinds, government should run countercyclical fiscal policy by using its Naira sovereignty to fund fiscal deficits. The deficit is not simply for the sake of running a deficit; the funds cannot be spent on nonproductive matters. It must be used to fuel infrastructural and other projects that not only employ great numbers of people but enhance the overall productivity of the economy.  The funds must be used to backstop state governments in a nonpartisan manner so that each state government may continue to pay salaries and pursue projects essential to that state’s economic critical path.

To accomplish this, the federal government needs to reverse the inimical “dollarization” of the national economy in two ways.  First and most importantly, it must abandon the outdated peg of fiscal policy and expenditures to the dollar intake.  The one actually has no correspondent nexus to the other. Any commanding connection we give it is an artifice not an economic necessity. Related to this, we must reverse a trend that has gained momentum under this government. 

Among government-aligned elites, the fad has been to conduct domestic business transactions in dollars.  Policy must “nairasize” the economy by requiring all domestic transactions occur in our legal tender. As this is done, the government’s infinite ability to issue Naira will come to outweigh the limitations inherent in the overuse of the finite supply of another nation’s currency for transactions wholly internal to our domestic economy.

Inflation is the major risk of running budget deficits to spur growth. We can contain inflation to acceptable levels by ensuring additional government expenditures are for items that can be supplied domestically, particularly labor. Naira paid to poor and working class people mostly circulates in the domestic economy, spurring additional local commerce and production. This is because their consumption patterns do not approach the level of import expenditures associated with their wealthier compatriots. Related to this, we must decrease our level of superfluous imports.

These measures will place downward pressure on the Naira. Devaluation will not be destructive but it will be noticeable. For most nations, such devaluation would be welcomed as it would make export industries more competitive, thus creating jobs and export earnings in the process. However, this will not be the case initially for us because of the moribund state of our industrial sector. Here, government would need to initiate crash programs aimed at enhancing those domestic industries perched on the borderline of international competitiveness.

In the end, the policy I propose is not without risks, inflation being the chief concern. Yet, if wisely prosecuted, the rewards of job creation and economic growth allocated among the bulk of the populace outweigh the inflationary risk. More to the point, the policy now pursued bears no risks at all.  It is certain to toss the average man’s economy into a stagnation that will resemble the onset of a major recession. Saving the people from this unnecessary plight is sufficient imperative to eschew the policies of old and embrace the progressive course.

I offer this advice, this warning, because the people have suffered enough hardship. I offer this advice in the slim hope those in power will ignore the messenger and objectively weight the quality and humane nature of the message. If so, they will spare the people the grief visited upon a vulnerable people when their government blindly imposes last century’s policies in a modern setting inappropriate to the old strictures. 

Regardless of our partisan affiliations, let us consecrate this land by dedicating ourselves to the betterment of the poor, weak, and needy members of our national family. Let this moment not pass like so many others where we have demanded that the most vulnerable among us bear the greatest weight of the national burden. 

Let us give them the hope, change and dignity they deserve and human decency demands. This is how we make the nation great. When I speak of a common sense revolution, this is what I mean.