Watch the Throne: Nigeria is Now leading Africa in GDP

Photo Courtesy of Zouzou Wizman:
Photo Courtesy of Zouzou Wizman:

Nigeria has catapulted ahead of South Africa for the title of largest economy on the African continent. On April 6, Nigerian government officials announced that they had revised their 2013 GDP calculation to the tune of $510 billion. But in 2012 the World Bank estimated Nigeria’s GDP at $262 billion. So what can account for this rapid change? The answer lies in how the Nigerian government did the math.

The process is called “rebasing.” To calculate any country’s GDP, economists must first set a base year on which to model the economic growth. Then economists try to paint a picture of the economy in that year by studying different industries like agriculture, energy, and manufacturing. In the years to come, economists look at how these industries have grown. All GDP calculations, sometimes many years later, are based on this initial point of reference. However, this system of measurement does not account for the informal economy. Nor does it account for rapidly developing sectors such as telecommunications and film—industries that have sprung up in Nigeria over the last 20 years.

Nigeria’s model year was 1990. The new base year is 2010. As we will see, much has changed in the Nigerian economy since 1990. New industries have emerged and historically strong industries have fallen. Thus far, the World Bank has supported Nigeria’s recalculation. It is recommended that a country rebase its GDP numbers every five years. Since Nigeria has held off for so long, the change was quite drastic. Nigeria saw the highest gains in the service industry. The agriculture, oil, and gas industries decreased in terms of percentage of GDP. Telecommunications shot up from less than one per cent to 8.7% of GDP. The Nigerian film industry, known as Nollywood, makes up about 1.2% of GDP.

Sadly, despite these good numbers, the average Nigerian citizen will not see improvements in their quality of life. South Africa, who Nigeria unseated from the throne, has a GDP per capita of $7,336, a long way from Nigeria’s $3,000 (and that is with the new rebased numbers). There is still corruption, terrorism, power outages, and vast inequality in Nigeria. Many have criticized the new calculations, saying that nothing will ultimately change for poor Nigerians. What the new numbers can do, however, is open the door to more Foreign Direct Investment. As Africa’s largest economy, Nigeria has put itself in an advantageous position in the world marketplace by calling positive attention to themselves. As Forbes recently reported, the country is full of potential. They have a growing educated class, energy reserves, and a spirit of entrepreneurship. But as of today it seems that there remains many political and institutional barriers to overcome.


April is the Cruelest Month: the Coming Austerity Measures and Elections in Ukraine

Photo Credit: REUTERS/Anatolii Stepanov
Photo Credit: REUTERS/Anatolii Stepanov

The International Monetary Fund has offered Ukraine a two-year bailout package of $18 billion in return for steep economic reforms. The long-term goal of the bailout package is to stabilize a Ukrainian economy that is running up expenses and moving toward a debt default. It is hoped that economic stability in Ukraine will lead to the political stability that can then ease Ukraine’s transition to democracy, and more importantly, away from Russia. By opening up to the IMF deal, Ukraine will signal to nations like the US and Japan that they are committed to restructuring their economy and are open to investment. For example, the United States Congress is working on a bill for $1 billion in aid to Ukraine as well as economic sanctions against Russia. The European Union has put $15 billion on the table. It total, Ukraine is in position to receive around $27 billion in aid.

The downside to these deals is that the enforced austerity measures will likely hurt the average Ukrainian citizen by increasing gas prices by 50% and inflating the currency, the hryvnia, by somewhere between 12% and 14%. Therefore, we may see the cost of living rise while the purchasing power of the hryvnia plummets. Ukraine’s interim Prime Minster Arseniy P. Yatsenyuk explained that there would be a minimum-wage freeze and an increase in taxes for Ukraine’s largest companies. All of this spells out hard times for Ukraine in the coming years. But consider the result if Ukraine were not to accept the austerity measures. As The New York Times reported, Yatsenyuk “told the Parliament on Thursday that the country was ‘on the brink of economic and financial bankruptcy’ and that gross domestic product could drop 10 percent this year unless urgent steps were taken in conjunction with the fund.” With such instability, Ukraine’s interim government would not have the time or the legitimacy to set up the proper institutions before the planned election in May.

Photo Credit: Genya Savilov/AFP/Getty Images
Photo Credit: Genya Savilov/AFP/Getty Images

The top candidates for the election include former Prime Minister Yulia V. Tymoshenko, billionaire businessman Petro Poroshenko, and Parliamentary leader as well as former professional boxer Vitali V. Klitscho. Tymoshenko, who was born in the industrial and Russian-leaning eastern Ukraine, has support from the western and central provinces. However, it is Poroshenko and Klitscho who lead in the polls. No matter the result in May, the next president of Ukraine is set to face a difficult transition in all aspects of society. Somehow, he or she must ease the pains of economic liberalization, consolidate political factions, and reign in nationalist as well as pro-Russian sentiments. International aid may help, but the real battle for Ukrainian independence must be fought from within. It is a fight to defeat the legacy of authoritarianism; a fight that Ukraine desperately needs to win.

Growth Under the Haves, the Have-Nots, and the Have-Yachts

Ever since the financial crisis and recession hit in 2007, there has been an increased interest in inequality and it’s effects on economic growth. Most of these arguments have been founded on questions of morality, but also some on pragmatism. Emmanuel Saez at the University of California-Berkeley found that 95% of income gains in the two first two years of the recovery after the Great Recession have gone to the top 1% of income-earners in the United States, leaving the rest of society lagging. More globally, 85 of the richest families in the world control 1 trillion ($1.6 trillion), roughly the same as the bottom 3.5 billion people.

Joseph Stiglitz, Nobel Laureate and one of the leading opponents of global income inequality

The issue of inequality and its effects on growth have been debated for a while. One of the earliest hypotheses was put forward by Simon Kuznets back in the 1950s and 1960s, known as the Kuznets curve. This curve basically showed that, empirically, economic development results first in increasing inequality, reaches a peak, and then reduces inequality. The growth in countries like South Korea and Taiwan has largely debunked this hypothesis. An argument put forward by some academics and leaders is that inequality provides incentives for entrepreneurship due to the fact that they have so much to gain. In poor countries, Robert Barro has written that inequality can lead to growth by letting a few individuals get a good education and invest in businesses. Others, in particular Nobel laureate Joseph Stiglitz, have argued that global inequality distorts economic growth through political economic power that promotes rent-seeking and weak corporate governance over strengthening human capital and ideas of fairness.

Through this quagmire, the IMF recently waded into this global argument with a new paper written by Jonathan Ostry, Andrew Berg, and Charalambos Tsangarides about both the effects of inequality on growth and redistribution’s inequality on growth. In particular, they make a distinction between what they call “market inequality”, which is inequality before taxes and transfers, and “net inequality”, or inequality after taxes and transfers. One of the main conclusions from the study is that more unequal societies tend to redistribute more. This is mostly skewed from industrial states, especially in Europe, that have large amounts of redistribution, cutting down their net inequality.

Lower inequality leads to less sustained growth

The bulk of this study focuses on the findings that the higher the net inequality, the lower the real growth rate on GDP. It also finds no statistical significance on redistribution affecting GDP growth. An example given is that an increase in inequality from the level of the United States (ranked 37) to the level of Gabon (ranked 42) would shave 0.5% off of GDP. The last part of the study looked at the duration of the growth spells. Again, the results show that higher rates of inequality are correlated with a higher risk that the spell of growth will end. Turning to redistribution, if there is already a large amount of redistribution in society, such as in some of the developed countries, further redistribution hurts growth. However, for the lower 75% of countries in the world, redistribution has no discernible effect on the duration of growth.

There are a few caveats that need to be addressed with this study, though relatively minor ones. As with any statistical study, these are only correlations, and correlation should not be confused with causation. Data on redistribution is also light, with this study using a proxy of direct taxes and subsidies. Amazingly, they don’t include government provisions, such as health and education. Both of these factors have been proven in various studies to have positive impacts on growth, including studies from the World Health Organization showing adult survival rates improving GDP growth to studies by Eric Hanushek and Ludger Woessmann showing how years of schooling is correlated with higher GDP growth. As these factors are a little more difficult to quantify, it’s understandable that they were not included in the redistribution factors. However, the results of these studies, along with others, show a general trend that countries could improve education and health spending along with other measures to reduce inequality while having economic growth at the same time.

Inequality in the developing world

Just Another BRICS in the Wall

In 2001, Goldman Sachs analyst Jim O’Neill coined the term BRIC to loosely align a group of rapidly growing emerging economies in Brazil, Russia, India and China. In 2010 this group was expanded to also include South Africa, forming the acronym BRICS.

The economic clout and influence of BRICS nations is staggering. Collectively, the five BRICS nations account for 42% of world population, 20% of output, and nearly all of current growth in the global economy.’ And they are looking to capitalize on this collective influence. During the most recent BRICS summit, these countries met in South Africa to begin the unprecedented steps toward establishing BRICS institutions. Out of this, the measure that has garnered the most attention is their plan to form a new international Development Bank to rival the Western dominated IMF and World Bank. Funded by BRICS nations, the aim is to deliver infrastructure and aid to developing markets by bypassing traditional Western structures.

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Banking on Islamic Banks

Islamic finance is an ancient concept, but it has only recently developed into a modern day institution.  Adhering  to the Muslim religious law of Sharia, it has prohibitions against charging interest and investing in morally dubious industries, such as alcohol, gambling, and pornography; furthermore all lending is based on profit-sharing.

Under Shariah, hoarding is frowned upon, so savings earn no return unless put to productive use. Rasheed Mohammed al-Maraj, governor of the central bank in Bahrain explains that “money cannot generate money – money should be used for creating better value in the country or the economy.” For some Muslims, conventional mortgages are regarded as sinful; under Shariah both the lender and the borrower share the risk of the investment.  The Islamic home mortgage functions by adding what would have been the monthly interest into the purchase price of a home. Most commonly, the bank actually buys the house at a qualified customer’s direction, and then sells it to that customer through monthly installments modeled on the payments of a 30-year mortgage. If the borrower loses his job and defaults on the payments, under Sharia it is very difficult for the family to be thrown out of their home, as that would be seen as a creditor exploiting a debtor. For any transaction, borrowers must possess underlying assets, an idea primarily driven by the rationale in Islamic law that borrowers do not over-borrow.  Under Islamic finance, the lender is also an investor, so he remains an active participant through the life of the transaction and is in a position to rectify mistakes before any situation occurs. Continue reading

Can Merit-Based Aid Encourage Better Behavior?

Foreign aid plays a critical role in the international sphere. If it is given in a prudent manner, it can provide much needed disaster relief, stimulate economic growth, save lives, and provide a better future for developing countries. Developmental assistance is by no means a cure-all for poor countries, but it can do a world of good.

The inevitable outcome of foreign aid?

At the same time, however, the regime that governs foreign aid is not perfect. One of the strongest criticisms of foreign aid is that it can actually hinder development, subsidizing inefficiency and fueling corruption. The argument holds a certain degree of validity: if foreign aid is not given in a manner that promotes good governance and economic development, it can do more harm than good. On many occasions, aid has been given to undemocratic countries, propping up autocratic regimes. Critics of aid programs are quick to point to misuses of aid under Mubarak’s Egypt, Mugabe’s Zimbabwe, or Sen’s Cambodia.

Donors of aid are well aware of the fact and have taken measures to guard against potential abuses. The most popular response has been conditionality, the practice of linking the disbursement of aid to a set of predetermined conditions. Countries that do not meet the minimum thresholds for market reforms and human rights protection may find themselves in danger of losing their aid. While it’s a good idea in theory, it hasn’t been very effective: as it turns out, ex ante conditionality gives little leverage over recipient countries and the conditions are often ignored. Aid donors such as the U.S. are often timid to cut aid because the recipients are pivotal parts of national security strategies and pulling the trigger would produce an unwanted backlash. Continue reading

Is China Capitalizing on the Congo?

On May 27, 2011 in Brussels, China and the Democratic Republic of the Congo (DRC or Congo) signed an $9 billion dollar economic cooperation agreement to increase the trade in natural minerals between both countries.

Today, China is the DRC’s largest foreign investor. The Congo is historically deemed as a country rich in natural resources such as oil, minerals, and timber. With China’s increasing need to intensify development and growth, China sees the DRC as both a development partner and a beneficiary of its economic investments abroad. Thus far, China has built a new foreign ministry, a hydroelectric dam, hospitals, sports stadiums, and an extensive network of roads. Cooperation has been extensive, including infrastructural and business investments totaling more than 2,050 miles of asphalt paved roads, repairs on 2,000 miles of highways, two electricity centers, five cobalt and copper mines, 32 hospitals, 145 health centers, a $367 million hydropower agreement, and many others. Unsurprisingly, these investments have been welcomed by the DRC’s government administration.

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