The failure of the Nigerian security forces to recover the more than 200 schoolgirls abducted in April by the Islamist insurgency group, Boko Haram, has generated much public anger at home and abroad. President Goodluck Jonathan has been derided by all sorts of groups amazed by the inability of his administration to find and rescue the girls. As understandable as this outrage is from a moral perspective, much of the criticisms have side stepped the real dilemma facing Nigeria in dealing with the Boko Haram insurgency.
It is obvious that Nigeria’s military and police forces lack the competence to adequately protect citizens against the onslaught of Boko Haram, a ruthless group that has over the past five years grown in military and operational capabilities. But the common suggestion that the inadequacy of the security forces is mainly due to corruption and indifference is plainly over-simplistic. Also dubious is the idea that poverty is the underlying cause of the unrest in parts of the north, leading to the conclusion that the solution to the crisis is more development spending in the affected areas. Without meaning to diminish the importance of reducing poverty in any part of Nigeria, the linking of organised violence with poverty stems from false assumptions. Boko Haram militants do not bomb or kidnap civilians because they are by poor – the movement is comprised mainly of religious fanatics who want to topple secular government to impose their version of Islamic dictatorship.
To defeat Boko Haram and other terrorist groups the Nigerian state must devote much more resources to developing its capacity to protect the lives and property of citizens. The view that government already spends large sums of money on security is simply baseless. The fact is that government expenditure on security as a ratio of GDP in Nigeria is one of the lowest in the world. Federal budget allocation to the security sector, which includes the military, police and the state security service, rose from US$3.3 billion in 2009 to US$6 in 2013. Despite the doubling in allocation, the current level amounts to only 1.17% of the country’s GDP, which is very low. Much is said about the incompetence of the Nigerian military, presumably compared with armed forces in more developed parts of the world, but few critics consider that annual budgetary allocation for defence in Nigeria is about US$2.3 billion, equivalent to just 0.5% of GDP. This compares with the United States which spends about US$680 billion (2.5% of GDP), Britain US$61 billion (2.5% of GDP) and South Africa US$4.6 billion (1.3% of GDP). It is hardly surprising that U.S. counter-terrorism capabilities are far superior to Nigeria’s considering that spending on homeland security in America rose from about US$17 billion in 2001, before the 9/11 attack, to nearly US$70 billion in 2013. Similarly, it is not amazing that the British police force is a more capable fighter of crimes than the Nigerian police, considering that UK taxpayers pay about US$20 billion a year for police services compared with US$2 billion spent in Nigeria.
Some readers will retort that is misleading to compare government expenditures in poor and rich nations and make the valid point that Nigeria can only spends what it can afford. But the cost of an effective security service does not depend on the wealth of the nation or client but on the cost of the factors needed to achieve the desired level of safety. The fact that the security forces in Nigeria lack basic equipments required to operate effectively is not made less consequential because the country is poor. The minimum amounts of human and physical capital needed to establish an effective intelligence and surveillance networks is not lessen by consideration of financial constraints.
The bottom line is that the Nigerian security forces lack the capabilities to adequately deal with Boko Haram largely because they are poorly trained and poorly equipped for the job. They are lacking in all kinds of essential instruments, including facilities for transportation, surveillance, communications, data gathering and analysis, combat and combatant safety. The reality is that modern day soldiering and policing are more capital intensive activities than they were in previous eras. Strength depends on expensive hardware as well as costly human capital, including stocks of knowledge and cognitive skills.
No matter what opinions critics have about the competence of the Nigerian government, the fact is that the current level of financing of the security forces is grossly inadequate for dealing with the many different conflicts raging in the country. The issue that should be debated is how to radically reprioritise state spending. Indeed, the situation calls for redefining the nature of the state. Government, already facing mounting domestic and foreign debts, may have to drastically cut or totally eliminate its involvement in some non-security spheres of activity to free up resources to improve its ability to protect the lives and property of the citizenry, which is the prime purpose of the state. How to achieve this restructuring is the real dilemma in the fight against Boko Haram.
Needless to say, increasing financial provisions for the security services will not invariably improve their ability to better protect civilians. Not much would be gained if any extra funding is mismanaged or diverted into the pockets of officials. However, the potential for corruption cannot be a reason to leave the state weak in its ability to maintain law and order.
Saturday 6 December 2014
The high cost of government economic intervention
By Tunde Obadina
In its Economic Development in Africa Report 2012 published recently, the United Nations Conference on Trade and Development (Unctad) focuses on the continent’s dependence on natural resources as drivers of economic growth. The agency noted that though Africa has experienced relatively fast growth since the start of the new millennium, the pace of the expansion is unsustainable. Also the growth has not been matched by poverty reduction. Unctad is right to be concerned at Africa’s current situation of little or no industrialisation, rapid urbanisation and its growing working population. According to the UN body, for African countries to avoid the future consequences of depleted natural resources and economic underdevelopment they must sooner than later undergo a process of structural transformation to create economies that are driven by gains in productivity in manufacturing, services as well as agriculture.
Few people would disagree with the assertion that African nations should move away from reliance on producing primary products and at the same time transform their agricultural sectors to boost their productivity. The question is how this process of economic evolution will occur? Unctad proposes a leading role for the state. It urges African governments to become proactive in promoting structural transformation, including introducing subsidies and regulations to induce producers to adopt productivity enhancing technologies. The problem with this advice is that it ignores the fact that state intervention has largely been to blame for the inability of individuals and companies in resource-dependent countries to diversify and industrialise.
The challenge facing people in Africa is how to produce a much wider variety of goods and services that consumers want and at prices they are prepared to pay. It boils down to supply and demand. What is lacking are modern productive units; i.e., firms that are organised for the sole purpose of creating goods and services for the market. There are tens of millions of subsistence farmers in rural areas and petty traders in cities who exist by scratching out a living, doing all sorts of things. But there are relatively few modern firms. It is they that provide the organisational context for the efficient combination of the factors of production. Firms do this largely through a division of labour, which enable workers to specialise in one or a few functions within the production unit.
Before we can talk of pre-industrialised societies increasing industrial productivity to generate more wealth and better utilise scarce natural resources, there must first exist firms with capacity to maintain modern economic production. When a country has few factories there is little sense in advising it to boost manufacturing productivity. What it needs at the initial stages of economic development are more factories. There must be initial investment in bringing together the ingredients of production in a modern form of production before major gains in productivity are attained. The reality is that most African countries lack an industrial base from which to grow.
A primary reason for this unfortunate situation is that the overall costs of production for most goods and services in most African countries are too high for potential investors to reasonably expect to profit from establishing production units. In other words, entrepreneurs will not deploy money or effort to set-up businesses in an environment that offer investors little or no prospect of worthwhile gain. It is the bleak outlook for making profit that more than anything else explains the shortage of investment in manufacturing in Africa. High production cost is a more important impediment to industrialisation in Africa than is the often cited explanation of lack of financial capital. If the business operating conditions in a society are conducive to making profit we can be sure that capital will flow there.
Many factors contribute to the high operating cost environments in Africa. Most of these stem directly or indirectly from state intervention in the economy. Government policies and the behaviour by state agents that hinder the flow of economic resources, such as trade restriction and corruption at sea port, minimum wage laws, inefficient tax regimes and excessive bureaucratic regulations, have an impact on production costs. State monopolies in energy provision and fixing of energy prices are often largely to blame for shortages of electricity supplies and their high cost. Virtually every economic decision taken by government has cost implications for some or all producers. For example, when the state prohibits the importation of certain goods, ostensibly to protect local industry, the resulting delays and corruption at ports of entry increase the costs of shipment clearance for all importers. Government deficit spending that leads central banks to print money and thereby fuel inflation, push up borrowing costs for producers.
Most African countries have abundant supply of low wage, low-skilled labour but this is not enough for industrialisation in the 21st century, even via labour-intensive activities. Unfortunately, most African countries lack the skilled workers to fuel rapid growth in manufacturing and high-skilled services and too often misguided government policies impede the inflow of human capital from abroad. For example, immigration restrictions make dearer the cost of hiring foreign workers to perform tasks that can raise productivity and for which there is shortage of capability in the local labour market.
Governments do have an important role to play in the structural transformation of underdeveloped economies. This role is to stop impeding the effort of their citizens to create wealth for themselves. As labour costs rise in China, there are increasing opportunities for some African countries to enter export orientated labour intensive manufacturing. To achieve this, African governments must cut private enterprises some slack to enable them to produce at costs and quality levels that are competitive with growth hungry Asian countries outside of China and under-exploited inland areas in the Asian powerhouse.
In its Economic Development in Africa Report 2012 published recently, the United Nations Conference on Trade and Development (Unctad) focuses on the continent’s dependence on natural resources as drivers of economic growth. The agency noted that though Africa has experienced relatively fast growth since the start of the new millennium, the pace of the expansion is unsustainable. Also the growth has not been matched by poverty reduction. Unctad is right to be concerned at Africa’s current situation of little or no industrialisation, rapid urbanisation and its growing working population. According to the UN body, for African countries to avoid the future consequences of depleted natural resources and economic underdevelopment they must sooner than later undergo a process of structural transformation to create economies that are driven by gains in productivity in manufacturing, services as well as agriculture.
Few people would disagree with the assertion that African nations should move away from reliance on producing primary products and at the same time transform their agricultural sectors to boost their productivity. The question is how this process of economic evolution will occur? Unctad proposes a leading role for the state. It urges African governments to become proactive in promoting structural transformation, including introducing subsidies and regulations to induce producers to adopt productivity enhancing technologies. The problem with this advice is that it ignores the fact that state intervention has largely been to blame for the inability of individuals and companies in resource-dependent countries to diversify and industrialise.
The challenge facing people in Africa is how to produce a much wider variety of goods and services that consumers want and at prices they are prepared to pay. It boils down to supply and demand. What is lacking are modern productive units; i.e., firms that are organised for the sole purpose of creating goods and services for the market. There are tens of millions of subsistence farmers in rural areas and petty traders in cities who exist by scratching out a living, doing all sorts of things. But there are relatively few modern firms. It is they that provide the organisational context for the efficient combination of the factors of production. Firms do this largely through a division of labour, which enable workers to specialise in one or a few functions within the production unit.
Before we can talk of pre-industrialised societies increasing industrial productivity to generate more wealth and better utilise scarce natural resources, there must first exist firms with capacity to maintain modern economic production. When a country has few factories there is little sense in advising it to boost manufacturing productivity. What it needs at the initial stages of economic development are more factories. There must be initial investment in bringing together the ingredients of production in a modern form of production before major gains in productivity are attained. The reality is that most African countries lack an industrial base from which to grow.
A primary reason for this unfortunate situation is that the overall costs of production for most goods and services in most African countries are too high for potential investors to reasonably expect to profit from establishing production units. In other words, entrepreneurs will not deploy money or effort to set-up businesses in an environment that offer investors little or no prospect of worthwhile gain. It is the bleak outlook for making profit that more than anything else explains the shortage of investment in manufacturing in Africa. High production cost is a more important impediment to industrialisation in Africa than is the often cited explanation of lack of financial capital. If the business operating conditions in a society are conducive to making profit we can be sure that capital will flow there.
Many factors contribute to the high operating cost environments in Africa. Most of these stem directly or indirectly from state intervention in the economy. Government policies and the behaviour by state agents that hinder the flow of economic resources, such as trade restriction and corruption at sea port, minimum wage laws, inefficient tax regimes and excessive bureaucratic regulations, have an impact on production costs. State monopolies in energy provision and fixing of energy prices are often largely to blame for shortages of electricity supplies and their high cost. Virtually every economic decision taken by government has cost implications for some or all producers. For example, when the state prohibits the importation of certain goods, ostensibly to protect local industry, the resulting delays and corruption at ports of entry increase the costs of shipment clearance for all importers. Government deficit spending that leads central banks to print money and thereby fuel inflation, push up borrowing costs for producers.
Most African countries have abundant supply of low wage, low-skilled labour but this is not enough for industrialisation in the 21st century, even via labour-intensive activities. Unfortunately, most African countries lack the skilled workers to fuel rapid growth in manufacturing and high-skilled services and too often misguided government policies impede the inflow of human capital from abroad. For example, immigration restrictions make dearer the cost of hiring foreign workers to perform tasks that can raise productivity and for which there is shortage of capability in the local labour market.
Governments do have an important role to play in the structural transformation of underdeveloped economies. This role is to stop impeding the effort of their citizens to create wealth for themselves. As labour costs rise in China, there are increasing opportunities for some African countries to enter export orientated labour intensive manufacturing. To achieve this, African governments must cut private enterprises some slack to enable them to produce at costs and quality levels that are competitive with growth hungry Asian countries outside of China and under-exploited inland areas in the Asian powerhouse.
Reasons to be positive about economic growth in Nigeria
By Tunde Obadina
The familiar story of Nigeria is that of a nation that has made little or no economic progress since the British left the country in 1960. Africa’s most populous nation is seen as an incompetent giant, mired by corruption, ethnic strife and unrelenting poverty. The country is more often listed with ‘frontier’ economies than placed among emerging economies. This view of Nigeria as a big disappointment is, however, not supported by facts.
Between 1980 and 2013 Nigeria’s annual real GDP growth averaged 6.04%, according to the International Monetary Fund data. This was slower than the super-fast 9.86% clocked by China but only slightly slower than India’s 6.13% and faster than 5.21% attained by Indonesia – countries that Nigeria is often unfavourably compared with. The West African country’s per capita GDP, based on purchasing power parity, rose from US$889 in 1980 to US$5,720 in 2013, while over the same period India’s per capita income increased from US$571 to US$5,450, which suggests that Nigeria is now slightly richer than India.
Nigeria has not lagged behind in relation to other economies in the world. Its share of total global output doubled from 0.48% in 1980 to 0.95% in 2013. Though still much less than its 2.5% share of total world population, its growing contribution to world output is narrowing the wealth gap with developed economies. In 1980 the U.S. economy was 47 times larger than Nigeria’s while its GDP per capita 14 times bigger. In 2014 the corresponding differences was 16 and 9 times respectively.
There are some who acknowledge that substantial growth has occurred in Nigeria but diminish the achievement by arguing that virtually all the gains have gone to the rich, leaving the poor masses stuck in absolute poverty. This is another unwarranted claim. Notwithstanding that living conditions of tens of millions of Nigerians remain dreadfully low, there has nevertheless been clear evidence of improvements in the standard of living of increasing numbers of people since independence. The proportions of Nigerians suffering hunger and malnutrition have fallen over the decades; more people have access to modern healthcare, clothing and shelter than did in 1960 and 1980. Access to primary education is no longer limited to a minority of children and attendance of secondary schools and higher education institutions have risen substantially. Indeed, the phenomenal increase in populations of Nigeria, as with other African countries, over the past sixty years has in part been due to the improvements in social conditions.
Markets have evolved in Nigeria, as elsewhere in Africa. When the lifestyles of today’s generation of Africans are compared with those in the early 1960s, it is evident that a greater portion of people have many more choices now than they did at the end of colonial rule or at any other time in history. Many of the products and services we now regard as essentials today were either unavailable or affordable only to a tiny minority in the 1960s. For example, many of the pharmaceuticals purchased by ordinary folks today had not been developed in the mid-20th century. Few people wore manufactured shoes, used modern kitchen utensils, commuted in motorised transport systems, owned radios, drank treated water, etc.
Traditional rulers and political leaders who reigned six decades ago may have been socially and politically supreme, but their material standards of living were in many ways inferior to those of today’s middle-class and even segments of the poor.
A mistake made by those who contend that there has been little meaningful economic development in Nigeria is to base their assessment mainly on the performance of the state. They equate enduring official corruption and mismanagement as well as slow growth in government social spending with lack of progress. But economic growth and poverty reduction have not stemmed mainly from public sector programmes, but from the activities of private individuals and companies operating in evolving markets. The part played by governments has been to implement liberalisation reforms which have to some extent loosened the state’s crippling grip on the economy.
People have not been waiting helplessly for governments or charity organisations to rescue them from poverty as some international aid organisations would like us to believe. They have, to the best of their knowledge and abilities, engaged in production and trade. They have also benefited from the expansion of international markets, especially the rise of China as a global workhouse for the production of cheap manufactured goods.
Acknowledging progress in Nigeria and other African countries is not to deny that too many people in these places still live in poverty or to suggest that economic growth and poverty reduction could not have been faster. The point is that the notion that Africa is caught in a never-ending poverty and underdevelopment trap is absolute nonsense.
The familiar story of Nigeria is that of a nation that has made little or no economic progress since the British left the country in 1960. Africa’s most populous nation is seen as an incompetent giant, mired by corruption, ethnic strife and unrelenting poverty. The country is more often listed with ‘frontier’ economies than placed among emerging economies. This view of Nigeria as a big disappointment is, however, not supported by facts.
Between 1980 and 2013 Nigeria’s annual real GDP growth averaged 6.04%, according to the International Monetary Fund data. This was slower than the super-fast 9.86% clocked by China but only slightly slower than India’s 6.13% and faster than 5.21% attained by Indonesia – countries that Nigeria is often unfavourably compared with. The West African country’s per capita GDP, based on purchasing power parity, rose from US$889 in 1980 to US$5,720 in 2013, while over the same period India’s per capita income increased from US$571 to US$5,450, which suggests that Nigeria is now slightly richer than India.
Nigeria has not lagged behind in relation to other economies in the world. Its share of total global output doubled from 0.48% in 1980 to 0.95% in 2013. Though still much less than its 2.5% share of total world population, its growing contribution to world output is narrowing the wealth gap with developed economies. In 1980 the U.S. economy was 47 times larger than Nigeria’s while its GDP per capita 14 times bigger. In 2014 the corresponding differences was 16 and 9 times respectively.
There are some who acknowledge that substantial growth has occurred in Nigeria but diminish the achievement by arguing that virtually all the gains have gone to the rich, leaving the poor masses stuck in absolute poverty. This is another unwarranted claim. Notwithstanding that living conditions of tens of millions of Nigerians remain dreadfully low, there has nevertheless been clear evidence of improvements in the standard of living of increasing numbers of people since independence. The proportions of Nigerians suffering hunger and malnutrition have fallen over the decades; more people have access to modern healthcare, clothing and shelter than did in 1960 and 1980. Access to primary education is no longer limited to a minority of children and attendance of secondary schools and higher education institutions have risen substantially. Indeed, the phenomenal increase in populations of Nigeria, as with other African countries, over the past sixty years has in part been due to the improvements in social conditions.
Markets have evolved in Nigeria, as elsewhere in Africa. When the lifestyles of today’s generation of Africans are compared with those in the early 1960s, it is evident that a greater portion of people have many more choices now than they did at the end of colonial rule or at any other time in history. Many of the products and services we now regard as essentials today were either unavailable or affordable only to a tiny minority in the 1960s. For example, many of the pharmaceuticals purchased by ordinary folks today had not been developed in the mid-20th century. Few people wore manufactured shoes, used modern kitchen utensils, commuted in motorised transport systems, owned radios, drank treated water, etc.
Traditional rulers and political leaders who reigned six decades ago may have been socially and politically supreme, but their material standards of living were in many ways inferior to those of today’s middle-class and even segments of the poor.
A mistake made by those who contend that there has been little meaningful economic development in Nigeria is to base their assessment mainly on the performance of the state. They equate enduring official corruption and mismanagement as well as slow growth in government social spending with lack of progress. But economic growth and poverty reduction have not stemmed mainly from public sector programmes, but from the activities of private individuals and companies operating in evolving markets. The part played by governments has been to implement liberalisation reforms which have to some extent loosened the state’s crippling grip on the economy.
People have not been waiting helplessly for governments or charity organisations to rescue them from poverty as some international aid organisations would like us to believe. They have, to the best of their knowledge and abilities, engaged in production and trade. They have also benefited from the expansion of international markets, especially the rise of China as a global workhouse for the production of cheap manufactured goods.
Acknowledging progress in Nigeria and other African countries is not to deny that too many people in these places still live in poverty or to suggest that economic growth and poverty reduction could not have been faster. The point is that the notion that Africa is caught in a never-ending poverty and underdevelopment trap is absolute nonsense.
The Money Illusion
By Tunde Obadina
African politicians and policymakers have probably been watching with a sense of schadenfreude the unfolding drama of the public debt dilemma facing governments in the West. Not too long ago western commentators were poking fun at African nations crippled by high debt burdens, while multilateral agencies were advising African leaders on the wisdom of financial prudence.
Yet today government debt levels of most western nations are higher than those of many African countries when they were derided for their indebtedness. America’s public debt to GDP ratio is now around 106%, compared with Nigeria’s 60% before Abuja negotiated a debt buyback/cancellation deal with western creditors. As some economists have pointed out, US government debt is actually several times more than the official figure when the state’s commitments to future spending on welfare schemes are factored in. Today, Nigerian government debt to GDP is less 20%, below the level of debt of all developed nations, except Estonia. Perhaps a better way to view the debt burden of governments is to use the ratio of debt-to-government revenue. The IMF considered impoverished African countries with debt-to-government revenue ratio exceeding 280% as Heavily Indebted Poor Countries (HIPC) in need of debt relief. Today, the US federal debt is more than US$15 trillion and federal government revenue for this year is projected at US$2.6 trillion. I leave you to do the maths.
Before we get too carried away with the comparison between African and western debt levels, it is worth bearing in mind a major difference in debt management in the two areas. Unlike Nigeria before its debt restructuring, the US regularly services its debts. As long as it continues to meet its obligations, its debt burden is not an immediate threat to its economy. Debt becomes a problem when the borrower is unable or unwilling to service its loans, or when creditors fear it is going to default and as a result stop providing more credit.
Debt is not intrinsically a bad thing. It has been crucial source of financing for the establishment and operation of industries and infrastructure that have generated material prosperity in modern economies. Without debt it would have been difficult if not impossible to build railway systems, electricity power stations and manufacturing factories that require large amounts of capital. When loans are invested in projects that generate sufficient revenue to service the debt, indebtedness is not an unmanageable or unsavoury burden. All parties to the transaction – the borrower, the lender and the consumer – benefit.
Where debt is a problem and arguably immoral is when money is borrowed to pay for consumption, without prospect of revenue to service and repay the loan. Debt is particularly bad when the borrower acts in the expectation that somebody else will be lumbered with the repayment obligation. Here, not everyone benefits from the transaction. A striking feature of government debts today – both in the west and elsewhere – is that they largely comprise of this unwholesome type of debt. Basically, governments have and are incurring debts which are claims on future generations. Debt is being used as a means of enabling some of today’s generation to live off the earnings of future generations. This is what happens when government borrows to provide welfare benefits to people today or to finance military campaigns or to fund other non-revenue generating projects.
Although Nigeria’s debt to GDP ratio fell to 11.8% in 2006 as a result of the Paris Club deal, it has since risen to 18.3%, according to IMF data. The debt, mostly domestic borrowing, is liable to continue climbing as governments continue the habit of spending more than they earn. Most of the existing debt related to consumption expenditures, including payment of fuel subsidies and funding of unproductive state agencies. Even where government has spent on potentially revenue generating projects, such as power generation and distribution, the expenditure has been used for consumption. The billions of dollars spent by successive Nigerian government on the power sector over the past decade produced little extra electricity, only lumbered the present and future generations with debt.
The inequality resulting from government debt does not only affect the relationship between different generations but also that between different classes of people in the here and now. Besides borrowing from creditors, government also simply create money to fund their activities and even to repay their debts. One of the consequences of printing money is inflation – too much money chasing too few goods and services – which affects different groups in different ways.
Inflation may not be a problem for people who can offset the rise in prices by increasing their earnings. But individuals unable to do boost their incomes, inflation means a decline in living standards. One section of society so affected is the poor with limited or no earning capacity. So in printing money that fuels inflation government in effect robs the poor to enrich the better off. This has been the story in Nigeria and other parts of Africa where inflation rates have been high for decades.
The challenge facing people in both developed and developing nations is how to stop governments from running budget deficits, accumulating debt and printing money.It is essentially a political problem with economic consequences. Governments make claims on future generations and print money whenever they feel like it because they have power to do so. Today’s children and the unborn are powerless to prevent plundering adults from incurring debts whose repayment obligations await them in the future. While the poor, whose meagre earnings are eroded by inflation, may not be even aware that they are being robbed by elites who spend phantom money in the cities.
African politicians and policymakers have probably been watching with a sense of schadenfreude the unfolding drama of the public debt dilemma facing governments in the West. Not too long ago western commentators were poking fun at African nations crippled by high debt burdens, while multilateral agencies were advising African leaders on the wisdom of financial prudence.
Yet today government debt levels of most western nations are higher than those of many African countries when they were derided for their indebtedness. America’s public debt to GDP ratio is now around 106%, compared with Nigeria’s 60% before Abuja negotiated a debt buyback/cancellation deal with western creditors. As some economists have pointed out, US government debt is actually several times more than the official figure when the state’s commitments to future spending on welfare schemes are factored in. Today, Nigerian government debt to GDP is less 20%, below the level of debt of all developed nations, except Estonia. Perhaps a better way to view the debt burden of governments is to use the ratio of debt-to-government revenue. The IMF considered impoverished African countries with debt-to-government revenue ratio exceeding 280% as Heavily Indebted Poor Countries (HIPC) in need of debt relief. Today, the US federal debt is more than US$15 trillion and federal government revenue for this year is projected at US$2.6 trillion. I leave you to do the maths.
Before we get too carried away with the comparison between African and western debt levels, it is worth bearing in mind a major difference in debt management in the two areas. Unlike Nigeria before its debt restructuring, the US regularly services its debts. As long as it continues to meet its obligations, its debt burden is not an immediate threat to its economy. Debt becomes a problem when the borrower is unable or unwilling to service its loans, or when creditors fear it is going to default and as a result stop providing more credit.
Debt is not intrinsically a bad thing. It has been crucial source of financing for the establishment and operation of industries and infrastructure that have generated material prosperity in modern economies. Without debt it would have been difficult if not impossible to build railway systems, electricity power stations and manufacturing factories that require large amounts of capital. When loans are invested in projects that generate sufficient revenue to service the debt, indebtedness is not an unmanageable or unsavoury burden. All parties to the transaction – the borrower, the lender and the consumer – benefit.
Where debt is a problem and arguably immoral is when money is borrowed to pay for consumption, without prospect of revenue to service and repay the loan. Debt is particularly bad when the borrower acts in the expectation that somebody else will be lumbered with the repayment obligation. Here, not everyone benefits from the transaction. A striking feature of government debts today – both in the west and elsewhere – is that they largely comprise of this unwholesome type of debt. Basically, governments have and are incurring debts which are claims on future generations. Debt is being used as a means of enabling some of today’s generation to live off the earnings of future generations. This is what happens when government borrows to provide welfare benefits to people today or to finance military campaigns or to fund other non-revenue generating projects.
Although Nigeria’s debt to GDP ratio fell to 11.8% in 2006 as a result of the Paris Club deal, it has since risen to 18.3%, according to IMF data. The debt, mostly domestic borrowing, is liable to continue climbing as governments continue the habit of spending more than they earn. Most of the existing debt related to consumption expenditures, including payment of fuel subsidies and funding of unproductive state agencies. Even where government has spent on potentially revenue generating projects, such as power generation and distribution, the expenditure has been used for consumption. The billions of dollars spent by successive Nigerian government on the power sector over the past decade produced little extra electricity, only lumbered the present and future generations with debt.
The inequality resulting from government debt does not only affect the relationship between different generations but also that between different classes of people in the here and now. Besides borrowing from creditors, government also simply create money to fund their activities and even to repay their debts. One of the consequences of printing money is inflation – too much money chasing too few goods and services – which affects different groups in different ways.
Inflation may not be a problem for people who can offset the rise in prices by increasing their earnings. But individuals unable to do boost their incomes, inflation means a decline in living standards. One section of society so affected is the poor with limited or no earning capacity. So in printing money that fuels inflation government in effect robs the poor to enrich the better off. This has been the story in Nigeria and other parts of Africa where inflation rates have been high for decades.
The challenge facing people in both developed and developing nations is how to stop governments from running budget deficits, accumulating debt and printing money.It is essentially a political problem with economic consequences. Governments make claims on future generations and print money whenever they feel like it because they have power to do so. Today’s children and the unborn are powerless to prevent plundering adults from incurring debts whose repayment obligations await them in the future. While the poor, whose meagre earnings are eroded by inflation, may not be even aware that they are being robbed by elites who spend phantom money in the cities.
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