Productivity is the real minimum wage and how Industrial Policy can boost it

This is not part of my normal series of articles. I have added this first paragraph on Thursday 13th of June 2024, As this article is about events rapidly unfolding in real time, the rationale and justification for the article naturally changes.

Following the announcement today 12th of June, Democracy day that the Federal Government had reached an agreement with Labour on the issue of the minimum wage removes much of the rationale for preparing this document which I started on the evening of 10th of June, 2024. Still there is much to gain from the discussion of several issues in general way like for instance nominal vs real wages, the relationship between wages and productivity and the need for industrial policy. I hope the reader finds that to be true.

Unsurprisingly, the standoff between the Federal Republic of Nigeria and the National Labour Congress (NLC) concerning the implementation of a new minimum wage has been dominating the headlines. As at Monday, 10th of June, 2024 there was a standing counter-offer of 62,000 naira made by the government, after consultation with the Organized Private Sector (OPS), in response to NLC’s initial proposal of 494,000 naira. In response, NLC’s reduced its minimum wage demands from 494,000 to 250,000 naira.

Much has been said by both sides about the current minimum wage impasse. The government has pointed to its strained finances making it impossible for it to accept NLC’s minimum wage demands, while NLC has pointed to the increased hardship the people have had to endure since the oil subsidy and FX reforms commenced. While both sides are both making important points, I am of the opinion of the debate has been carried on with insufficient, though not totally absent economic rigor.

On this point, I see more fault with NLC than I do with the government. NLC’s seems to show little recognition or concern for the potential for further increases in inflation (or in the worst case hyperinflation) brought on by wage increases that are not driven by economic productivity increases. Little recognition is made of the crucial distinction economists make between nominal wages and real wages. I have heard little or no mention of the nominal/real wages dichotomy in the current debate over the minimum wage so I feel compelled to briefly discuss it here.

The nominal/real wage dichotomy is really about the differences between the nominal and real value of money. Nominal value of money simply refers to the numeral figures that are printed on a country’s currency. Put that way, it shouldn’t come as too much of a shock that these figures can be changed at will, by for instance, printing more money, but even casual observers (like my retired mother for example), recognize the danger of this. Indiscriminate printing or indiscriminate increase of money in circulation leads to inflation, which increases the general price paid for goods and services, thereby nullifying whatever increase in money printing/circulation that was done. The import of this for the current minimum wage saga is that we are likely going to have to revisit the minimum wage issue in the future with no end in sight for subsequent demands for minimum wage increase.

Why does change in the nominal value of money always bring with it the risk of inflation. It is because of the less appreciated fact that money also has a real value, and what drives this real value is even less appreciated. The real value of money refers to what money can actually buy in a market subject to the forces of demand and supply. The quality, quantity and variety of goods and services available in the market are determined by the level of worker productivity in the nation. Increase in the money supply without a corresponding increase in the quality, quantity and variety of goods and services on offer (and these are of course, increased by increases in worker productivity) will render the increase in money supply ineffective and this ineffectiveness manifests itself in the form of inflation.

In summary, it is productivity that determines the real wage people earn. Why is this so? Productivity means two things, first, it means producing more goods and services with less resources. Producing more with less reduces the real costs of goods and services and in a competitive economy, those reduced costs are passed onto consumers in the form of reduced prices. All this increases the real value of a wage earner’s salary, even though the nominal value of that salary remains the same or in fact reduces. So long as the increase in the real value of the salary brought on by productivity increases is greater than the reduction in the nominal value of that salary, the wage earner, in real terms has become richer. Secondly, productivity also means acquiring the ability to produce goods and services that before now the nation wasn’t able to produce but for which a demand for existed and so the nation had to rely on imports. This kind of productivity reduces the import bill, conserves scarce foreign exchange, strengthens the local currency and thus boosts the real wage.

The tone of this essay thus far may give the reader the impression that I am against an increment in the minimum wage. I am not against it per se, neither am I for it per se. My position on the minimum wage is that whatever decision taken needs to be informed by economic science and backed by data in the form of productivity statistics. Fortunately, there is a government parastatal that is charged with the responsibility of producing such statistics. That parastatal is the National Productivity Centre (NPC). Part of NPC’s mandate is to produce data inform policy decisions. There hasn’t been a more appropriate time for it to fulfill this part of its mandate. NPC should able to produce data that conclusively show whether a minimum wage increase is warranted or not.

The benefit of such a study is that it would elevate the current minimum wage debate from the depths of emotional assertions, accusations and counter-accusations into the realms of rational, scientific discourse. I am not so naïve to believe that the NLC will readily accept scientific evidence, should the outcome not be in their favour, but if the results of such a study were widely publicized, into would greatly help the government win over the public to see the merits of its case and make it that much harder for the NLC to make its case and thereby it would be risking the public wrath by continuing to demand what would now clearly appear to all as unreasonable.

On the other hand, should the (NPC) data favour a wage increase, then the data should also be in a position to tell what the optimal amount of increment should be and both parties can rest assured that they can adopt a new minimum wage that would not have any long term adverse effects that the present or future administrations would be called upon to later rectify, which the NLC would most likely want rectified by implementing further wage increases.

They say “those that ignore the mistakes of history are doomed to repeat it!!” At this point I would like to point out the dangers of indiscriminate policies that stoke up inflation by looking at one or two famous hyperinflation incidents in history. The first comes from the time of the Weimar Republic in Germany in the year 1923.

In 1923, the German economy was on its knees. This was largely due to the fallout of World War I. Germany, on the losing side of this war (They would yet again be on the losing side in World War II), had been forced to sign the infamous and humiliating Treaty of Versailles (in France), which compelled them to make a series of payments to the victors of the war as reparations for their role in the war. These payments were strangling the German economy.

While there are significant differences between Germany’s circumstances and our current circumstances, there are I think enough similarities that ought to make both government and the NLC push their respective positions with caution. Like us currently, Germany in 1923 was suffering from high inflation and heavy government debt. Germany missed a reparation payment, claiming it had paid all it could afford to pay in the last payment. France, the main benefactor of the payments, refused to believe Germany’s claim, much like how NLC does not believe the Governors Forum when it says that governors cannot afford to pay above 60,000 naira. France forcefully moved into and began confiscating industrial goods and occupying Germany’s major industrial operations. The German government responded by asking industrial workers to engage in passive resistance by refusing to cooperate with the French or stop working altogether while continuing to pay workers.

The strikes of course further undermined the German economy as strikes tend to do to any economy including ours, making it increasingly difficult for Germany to pay both France and its workers. Under extreme pressure, it ultimately resorted to printing more money even though there was no commensurate increase in productivity to justify the printing of more money. This lead to a hyperinflation spiral that caused the price of a loaf of bread to rise from 250 marks in January of 1923 to 200 billion marks in November of the same year. Workers were often paid twice a day because prices rose so fast that their wages were virtually worthless by lunch time.

The worst outcome surely of all this was that among the rebellions that inevitably sprang up was one carried out by a relatively small group known as the National Socialist German Workers’ Party also known as the Nazi Party led by an intense, obscure, small-time army corporal and failed artist by the name of Adolf Hitler. Hitler would lead the Nazis to carry out a failed coup, which earned him a prison sentence for all his troubles. But the hardships of the times made the German people ready to listen any demagogue who appeared to have ready answers to their crushing problems. These circumstances would lead to his rise to power and ultimately winning the supreme leadership of Germany in 1933. We all know how that turned out.

Much closer to home and much more recently is Zimbabwe’s on-going battle with regimes of inflation and hyperinflation. Zimbabwean inflation increased by 25,000% in 2007 during which it printed notes ranging from 10 dollars to 100 billion dollars within that one-year period.

My fear for Nigeria is that in order to meet NLC’s demands, the government might resort to simply printing more money and move us ever closer to a hyperinflation death spiral. This is why carrying out a study of the NPC’s productivity statistics is so important. NLC’s posturing suggests in does not believe the government nor the OPS when they say its minimum wage demands are not possible. It seems to feel that if the government were to curb corruption and waste, its minimum wage demands could be met. I think the onus lies on government to show that there is in fact a productivity problem that makes paying more than 62,000 naira unsustainable. It cannot convincingly do that without productivity statistics.

With so much hinging on the issue of productivity, it behooves to try understand where productivity comes from. How do we get more of it?

Productivity in the main comes from technological progress. It comes from the deliberate attempt to develop and utilize science and technology by a nation to increase the productive powers of its people so that they become increasingly efficient in producing the goods and services they already know how to make and also acquire new capabilities that enable them to produce the goods and services that before now, they didn’t know how to produce. The first type of productivity reduces the real costs of goods and services, thus improving the real wage. The second reduces dependence on imports, thus preserving scarce foreign exchange and ultimately improving the real wage.

The sustained wealth creation of the advanced, rich nations has been brought about by sustained increases in productivity. These increases are not accidental. They are the result of determined, long term application of an over-arching policy known as Industrial Policy.

Industrial Policy is a country’s official strategic effort to encourage the development and growth of all or part of the economy, often focused on all or part of the manufacturing sector. The government takes measures aimed at improving the competitiveness and capabilities of domestic firms and promoting structural transformation.

Industrial policy is used to change the production structure of an economy in favour of the manufacturing industry by channeling a government’s selected budgetary and non-budgetary resources and by channeling private capital, labour, and entrepreneurs towards the manufacturing sector.

Industrial policy, as other ‘structural policies,’ is designed and implemented in order to improve the long-term growth performance of the economy. In particular, it helps countries surmount the so-called middle-income trap by raising growth performance over the long term. This is made possible by the innovational and growth-inducing nature of the manufacturing sector.

Today’s industrialized nations have all employed industrial policies at different times in their development cycles. This is confirmed by the stories of Britain, France, the USA, Japan, Germany, South Korea, Russia, China etc. In each of them, one or more dominant leaders pushed for economic (and social) reform and industrialization. They did it for the country to become powerful, militarily, politically and economically.

We will briefly look at the Industrial Policies some nations have employed to create wide spread prosperity of and lift millions of their people out of poverty.

United States of America

At many different points in the USA’s economic trajectory since its independence in 1776, it has made extensive use of Industrial Policies, though this fact tends not to be explicitly acknowledged, perhaps in a bid to keep up the appearance of an economy driven solely by free market fundamentalism. America’s use of Industrial Policies in order to change its economic trajectory started a couple of decades into the life of the new nation having recently gained independence from Britain. Though politically independent from Britain, the USA was still economically dependent on Britain in that it imported manufactured products from Britain while only exporting raw materials to it, just like how sub-Saharan Africa does with the advanced west.

America’s first Secretary of the Treasury (Minister of Finance) Alexander Hamilton realized that such a development did not bode well for the long term economic health of nation, and so he began vigorously to campaign that the American government needed to put in place policies to protect the fledging home grown industrial concerns until they were to compete in a free market with the likes of Britain. To this end, in 1793 he drafted what is known as the Report on Manufactures, which is considered to be America’s first Industrial Policy. He is also credited with being the first to coin up the expression, “Infant Industry”, an expression also made popular by the German Political Economist, Friedrich List. It took a long a while for Hamilton’s proposals to be truly adopted but by the mid to late 19th century, a time at which the US was at the height of its Industrialization drive, Hamilton’s proposals in the Report on Manufactures were implemented to the letter.

American government policy played a crucial role in the development of railroads in the 19th century. American historians identify the railroad as the driving force behind the Industrial Revolution during the nineteenth century. Railroads not only became the country’s first corporate giants but also stimulated the coal, iron, and steel industries and linked the different regions of the country into a single national market that provided new opportunities for manufacturers because they stimulated the demand for mass-production technologies and led to monumental increases in the size of business enterprises.

The capital requirements of railroad construction were so enormous that state and federal governments frequently became involved. Land donations were the most common way of helping lines with construction costs. The policy began in 1830 when state governments first began making these land grants, and the last federal land grant for railroad construction costs came in 1871. A total of 179 million acres were eventually donated to about seventy railroads, with the bulk of the contribution — 130 million acres — going to just three lines.

The Second World War was also significant period for the development of innovation policies in the US. It was during the period following the Second World War that the Pentagon worked closely with other national security agencies like the Atomic Energy Commission and the National Aeronautics and Space Agency (NASA). The interagency collaborations led to the development of technologies such as computers (and the semiconductors on which they rely on), jet planes, civilian nuclear energy, lasers and biotechnology.

The Defense Advanced Research Projects Agency (DARPA), an office created by the Pentagon in 1958, played a most crucial in the development of the internet starting in the late 1960s. It funded its development for about 2 decades, and its scientists, in collaboration with university scientists, built most of the fundamental technologies that comprise the internet.

After Artificial Intelligence (AI), it is now commonly accepted that Nanotechnology is very likely to be the next general purpose technology, having a pervasive effect on many different sectors and becoming the foundation of new economic growth. It wasn’t always so. That change in perception came as a result of decisive action taken by the US government back in the 1990s.

The US government has in fact been the lead visionary in dreaming up the possibility of a nanotech revolution — by making the ‘against all odds’ initial investments and by explicitly forming dynamic networks that bring together different public actors (universities, national labs, government agencies) and when available, the private sector, to kick start a major new revolution which many believe will be even more important than the computer revolution. It has done so through the active development of what is referred to as the National Nanotechnology Initiative (NNI), which is basically an Industrial Policy to drive the adoption of Nanotechnology.

Industrial Policy is alive and well even in the current administration. The Biden White House has put together America’s most ambitious Industrial Policy plans in decades. The intention is to regain the lead in key areas that it has lost to China and other East Asian nations. Much of the current plans focus on Clean Energy and Semiconductor manufacturing.

The sum total effect of America’s industrial policies is that it has gone from a country that was 90% agrarian in 1791 to being the world’s industrial powerhouse today with just about 1.3% of the population being farmers producing enough food to feed about 320 million people while exporting about 20% of its agricultural produce.

The immense productivity of America’s farmers stands in stark contrast to farmers in sub-Saharan Africa. About 60–70% of the region’s population are farmers and yet the region is still a net food importer, with its food import bill estimated to reach $110 billion in 2025. This is not because African farmers are lazy but because of the grossly insufficient use of science and technology in their operations.

An industrial policy for agriculture along with measures to combat flooding and insecurity will be needed to reduce Nigeria’s food import bill which in conjunction with current reforms is currently causing runaway inflation. Such a policy will have to be a part of a comprehensive Industrial Policy Plan for the entire economy so that the manufacturing and services sectors are stimulated to the point that they will be able to absorb the surplus labour that will no longer be needed for agriculture.

South Korea

The Industrial Policy implemented by South Korea in 1960s and 70s radically and drastically changed the South Korean economy from an agrarian one to an export-oriented industrial one.

South Korea was in very bad shape at the end of the Korean War with North Korea in the 1950s. In 1961, the yearly income of the average South Korean was $82. That is less than half what the average Ghanaian was making at the time, which stood at $179. Half of its manufacturing base and at least 75% of its railway system had been destroyed in the war. Their primary schools were even more crowded than African primary schools in the 70s and 80s. Today, South Korea ranks amongst the world’s wealthiest nations.

Samsung, is emblematic of the journey the South Korean economy has undergone as a whole and is a pointer to the economic structural change the economies of Sub-Saharan Africa need to undergo, if our economies are to generate mass prosperity. From its inauspicious beginnings in 1938 as an exporter of fish, vegetables and fruit, Samsung is now a world leader in the production and export of high end mobile phones, semiconductors, computers and consumer electronics in general, as well as ocean-going ships.

The following table shows the changing percentage composition of GDP going to agriculture, Industry (Manufacturing, mining + Utilities, Construction) and services in South Korea.

I don’t have data for the remaining years till date but a Google search reveals that in 2021, around 56.98% of South Korea’s GDP went to Services, 32.45% went to Industry and less than 2% went to Agriculture.

The following table shows the change in South Korea’s production pattern, basically, its top ten exports over the decades.

Notice how in the 1960s that its top 10 exports were exclusively natural resource based? They were agricultural, aquacultural, forestry and mining produce. In just 10 years, they had started exporting light manufacturing products that used these natural resources as inputs. Here I am talking about textiles, Wigs, footwear, tobacco, iron/steel/metal products. They had even started exporting electronics (most likely consumer electronics like radios and TVs). Note that for them to be exporting means that they were already successfully producing for the domestic market. By the 2000s, a mere 40 years later, they were exporting advanced electronics like semiconductors, computers and wireless telecommunication equipment. By 2015, South Korea, representing less than 1% of the world population, became the fifth largest exporter in the world, accounting for 3% of world exports.

That is the kind of progress we need to be making if we are to create mass prosperity in Sub-Saharan Africa. Note also that this is also typically the pattern of development for any country that has industrialized and managed to pull the bulk of its population from poverty.

It is also important to understand that Manufacturing is the pioneering driver of growth; it is the sector in which the productivity is relatively high and which raises the growth of the sector. That in turn leads to productivity increases (hence growth and wealth) in the non-manufacturing sector, importantly including services. The British fashion industry will serve as an example to illustrate this. A 2010 study showed that 90% of the jobs in that industry are involved in conveying the product to the consumer, not making it but without the 10% required for making the product, the other 90% would not exist.

I hope this short exposition on minimum wage, productivity and industrial policy will at the very least stimulate reforms that will finally put us on the path to sustainable growth and development.

References

1. Mohammed, Abdul. 2022 Why Africa is not Rich like America and Europe. Self-Published

2. Tyson, Laura D’Andrea. 1992 Who’s Bashing Whom? Trade Conflict in High-Technology Industries. Washington DC: Institute for International Economics

3. Yulek, Murat A. 2018 How Nations Succeed: Manufacturing, Trade, Industrial Policy, & Economic Development. Singapore: Palmgrave Macmillan

4. Mazzucato, Mariana. 2013 The Entrepreneurial State: Debunking Public vs Private Sector Myths. London: Anthem Press

5. Johnson, Chalmers. 1982 MITI and the Japanese Miracle: The Growth of Industrial Policy, 1925–1975 California: Stanford University Press

6. Krugman, Paul. 1995 Peddling Prosperity: Economic Sense and Nonsense in the Age of Diminished Expectations. New York: W.W Norton and Company

7. Naughton, Barry. 2021 The Rise of China’s Industrial Policy 1978 to 2020. Mexico: Universidad Nacional Autonoma de Mexico

8. Chang, Ha-Joon. 2007 Bad Samaritans: The Guilty Secrets of Rich Nations & the Threat to Global Prosperity. London: Random House

9. List, Friedrich. 1837 The Natural System of Political Economy. London: Frank Cass and Company

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