Wednesday, 25 November 2015

#MustRead: Inflation And The Supply Side

by: Lekan Sote

This is no pitch for supply side economics and its handmaiden trickle-down economics that reduces capital gains tax so that owners of capital can reinvest their gains and create jobs for others. But that government adopts policies to positively cause an increase in the supply of all goods, and enable the Central Bank of Nigeria to effectively control inflation. This argument will be quite tricky to pull through, though.

Supply side economics says you could increase the Gross Domestic Product if you creatively tinker with the supply side of the economy: Increase investment in infrastructure and productive capital, and reduce barriers to the production of goods and services, to increase supply, and lower the prices, of goods.

Don’t believe anyone who says Nigeria has no money, though there may not be as much money in circulation as in richer nations. The problem is that most of the cash, the bulk of which comes from crude oil, is not in circulation within the country. Think of the oil money as flotsam floating above the waters, and the Nigerian economy and masses, as the undergrowth of the sea, and the state as the water buffer between the two.

Proceeds from crude oil sale are kept in foreign reserves in foreign currencies, the vaults of the CBN and commercial banks, and those with access to the commonwealth, in their various capacities as operators in the oil industry, kleptomaniac public servants, emergency contractors, 10 per cent collection agents, and sundry errand boys in the corridors of power.

The money remains within an invisible wall around these individuals. The bulk of their toys, like aircraft, limousines, designer shoes, bags, wristwatches, clothes, android phones, video games for Junior, and food items like butter (not margarine, please), apples, corn flakes, and Pringles, are not, cannot be, made in Nigeria because of reasons you already know – there is a dearth of infrastructure and conversion machinery in Nigeria.

The few Nigerian businessmen that get a crumble are those who sell those imported toys. That is why some cynics refer to Nigeria’s economy as “obioma economy,” or the hawkers’ economy. Former President Olusegun Obasanjo says Nigeria (or did he say the whole of Africa?), is a trading outpost for the metropolitan economy of the West or the North economy. Whichever.

Inflation is the increase in the prices of goods and services in a way that reduces the purchasing power of the currency. It is also undue increase in the quantity of money in proportion to buying power. A working definition says inflation is too much money chasing too few products.

You can understand this when swank Shoprite increases the price of bread because too many nouveau riche with too much money suddenly show up at its cash register, ready to buy the product, at any price. Buyer fatigue may set in if the price increase goes too far; you can only have so much money. American economist, Lester C. Thurow, says “When goods become more expensive, individuals buy less.”

A depressed economy is worse than an inflationary economy. Here, no one is manufacturing or selling; no trade, and there is almost no one with money to buy anything; no jobs. It’s like a war situation, and only those in government, the military, and their consorts have cash and supplies. Ask anyone who has been in a war zone, and he’ll give you an earful. But “more worse” (pardon the double superlative) is recession, a deceleration of the economy, where the hole is getting bigger than the dough in the donut.

A government may however choose to pump more money into an economic system for reflationary purposes. The N5,000 that the Buhari administration proposes to pay the 25 million unemployed Nigerians is a reflationary measure, even if they have not said so. You can almost predict that the stipend would be spent on basic items, like food; that’s if there will be enough food to buy.

This idea, which admittedly stimulates demand, is taken from the work books of economist John Maynard Keynes who thinks that a government can stimulate an economy by putting money in the hands of the people, and expect that they’d spend, rather than save it, and so grow the economy. Chief Obafemi Awolowo is fond of the aspect that suggests that government could pay a group of unemployed to dig holes, and pay another group to refill the holes.

But seriously, he that controls the supply side of an economy will ultimately determine the inflation rate. Though he seems to no longer terribly fancy the idea, Thurow has brilliantly argued that those who own productive capital are the generals in command of capitalism (and by extension, the supply side of the economy-and maybe the prices).

That will explain why the American government, in a bid to stabilise the prices of certain agricultural produce, ensure plentiful and adequate food production, guarantee good income to farmers, and generally strengthen the agricultural sector, intervenes in the supply side of the agricultural sub-sector.

Because America thinks that food supply is too critical to be left to Adam Smith’s Invisible Hand, some farmers are paid to reduce the number of acres they cultivate, government buys up and keeps surplus crop in silos, to guarantee minimum prices for some farm produce, while also giving generous loans to farmers.

America can do this because it has the infrastructure and a productive agricultural sector. By stabilising prices, the scheme prevents a contraction in the supply of farm produce that could ultimately lead to inflation, if prices fell to too much. You can see the advantage over Nigeria’s “physical” price control mechanism that mercilessly flogs prices, but neglects the supply side.

Even though spending power or effective demand determines what will be produced and who will be paid, the supply side will determine what quantity to produce, and for how much. The way death is the wage of sin, earning is the wage of supply.

When you begin to read those sterile economic indices (growth rate, GDP, per capita income, inflation rate, unemployment rate, mortality rate, from the Federal Ministry of Finance, the Central Bank of Nigeria and the National Bureau of Statistics, you just wonder why they always have to be dismal. The NBS just said that the increase, by 9.9 per cent, of unemployment rate is the fourth rise in a row.

The figures could have been better if the managers of the economy were more conscientious. It was a great relief when former President Obasanjo volunteered that the Buhari administration would not measure its performance by those indices, but by the number of Nigerians it brought out of poverty. Sometimes, you think that somebody went into an Eeny-Meeny-Miny-Moe children’s counting rhyme mode to get the figures.

The Nigerian economy produces too few goods at high unit costs partly because the energy and transport infrastructure is clearly inefficient. Instead of banning small generators (for good reasons though), government should concentrate in ensuring that the electricity infrastructure generates higher throughput. Its inefficiency is a major cause of high cost of production in the manufacturing sector.

Government must take charge of the command, communications, and control of this critical infrastructure. Its failure has consistently retained the economy in a state of inflation, never mind the economic indices from government.

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