Jobs. Jobs. Jobs. Part I
This is what you need to remember: The Nigerian government has set ambitious targets to grow the economy by over 4% in 2016 and ensure the growth is inclusive, by creating 3 million jobs. Now, since President Buhari is not a magician and cannot wave a wand to deliver the jobs, we need to work out the process of actualizing this plan.
Let us start with the today’s reality. According to the National Bureau of Statistics (NBS)in its GDP Report for the 3rd Quarter of 2015:
The nation’s Gross Domestic Product (GDP) grew by 2.84% (year-on-year) in real terms.
This means actual growth is 1.5% lower than the Federal Government’s target. If that was not bad enough, the Job Creation Report for the 3rd Quarter is enough to give the President a headache. It reads:
In the third quarter of 2015, the Total number of jobs recorded in the economy was 475,180 jobs, . The increase in the number of jobs in the third quarter was driven mainly by informal sector jobs, which accounted for 90.2 percent (428,690) of total jobs.
To make it worse, the Unemployment/Underemployment Watch for Q3 2015, now tell us how difficult the task is.
In Q3 2015, the labour force population (i.e those within the working age population willing, able and actively looking for work) increased to 75.9 million from 74.0 million in Q2 2015. This means 1,929,800 economically active persons within 15‐64 entered the labour force between July 1 and September 30 2015.
This means Nigeria added 1.5 million unemployed people in Q3 2015 and suggests our GDP growth rate of 2.84%, is clearly not enough to generate the number of jobs needed to reduce unemployment or underemployment.
So, the first thing President Buhari needs to understand is simple: our current approach WILL NOT deliver the growth needed to create jobs and improve lives. Only a comedian can tell him otherwise.
Now let’s examine economic growth. Gross Domestic Product is the monetary value of all goods and services produced in Nigeria. This is usually measured in two ways either by adding up what everyone earned in a year (total compensation to employees, gross profits for businesses and taxes less any subsidies), or by adding up what everyone spent (total consumption, investment, government spending and net exports.). Normally, both methods will give you the same result, but I personally prefer the second approach of using what everybody spent. This is known as the expenditure approach. One last thing you need to know, GDP is measured over a period, usually a quarter or year. Therefore, in most cases, you will compare GDP growth between periods to get a sense of how the economy is performing. So, when the Nigerian Government sets a GDP growth target of 4.37%, it means the Government is expecting the economy to grow by 4.37% more than it did in 2015.
How does growth happen? Let us use a cocoa farmer in Ondo who produced 10 tonnes of cocoa in 2014, sold it for N500,000 per tonne and made N5 million. But due to the freezing weather in London, more people seem to buy chocolate drinks, which has led to an increased demand, while supply has not matched this increase. This is how markets work; since more people now want chocolate drinks, the price of the drinks will increase to reflect the higher value placed on the product. The price convinces makers of chocolate drinks to increase its supply, which means more cocoa is needed. Now our farmer, the cocoa supplier does not have Twitter or Facebook, and does not know what is happening in England. All he knows is more people are buying cocoa from him, and he also raises the price of his cocoa to reflect increased demand. So, from N5 million from his 10 tonnes in 2014, he now makes N5.5 million in 2015. Our farmer is a sharp man, so he does what any sharp man will do, buys the next farmland, hires two new farmers and plans to increase his output to 15 tonnes in 2016.
So from making N5 million (500,000*10 tonnes) in 2014, the farmer now makes N8.25m (550,000*20 tonnes) in 2016. Not only has the business grown by N3.25 million, he has also hired two new workers. Now if you know cocoa farmers, you must know they love their Mercedes Benz. So you can guess what our farmer does with his profits, he goes to the car dealer to buy a new car, which means he also buys petrol, and possibly new clothes for his wife and children. The effect of one man’s output can be felt in the community, and everyone from the car dealer to the petrol attendant is now benefiting from rising cocoa prices, because our friends in London now drink more hot chocolate.
This is a simple example of how economies grow. To achieve the example of our cocoa farmer, a lot of different things need to align: he needs capital to own a farm, buy input, and hire staff; he needs good roads to move his produce from the farmland to a storage facility; that facility needs electricity to store the produce and prevent wastage; the right policies must ensure the cocoa can be exported easily without having to bribe too many people. I can go on, but I am sure you get the gist. This is what those smart people call competitiveness. According to the World Economic Forum, competitiveness is defined as:
The set of institutions, policies and factors that determine the level of productivity of a country. The level of productivity, in turn, sets the level of prosperity that can be earned by an economy.
Nigeria ranked 124 out of 144 countries on the 2015 Global Competitiveness Index. The index measures 12 factors and considers the country’s stage of development in recommending priority areas for reforms. For countries like Nigeria, that are factor driven (i.e. the economies depend mainly on unskilled labour and natural endowment for growth), the emphasis should be on: building institutions; macroeconomic stability (more on this later), developing infrastructure; and maintaining a healthy and literate workforce.
What President Buhari needs to understand are the critical levers needed to deliver on these four critical areas, to ensure that jobs are created; wages rise; and Nigeria moves from a factor-driven economy to an efficiency driven one.
Now, what do these mean for Nigeria.
Developing Infrastructure: According to the Nigerian Integrated Infrastructure Master plan, Nigeria needs to spend $3 trillion on infrastructure within the next 30 years, but especially $160 billion in the next 5 years. This means Nigeria needs to spend $32 billion or N6.4 trillion per year on infrastructure. The problem here is immediately obvious, the government cannot afford such investments. The overall budget for 2016 is N6.1 trillion, and only 30% of this or N1.8 trillion was budget for capital expenditure. At best, we can expect infrastructure will account for about N1 trillion of the 2016 budget, which is 15% of the needed spend. This is a very important point to note, because it means most of our infrastructure needs will be financed by private sector investments, mostly sourced from foreign investors who consider Nigeria an attractive destination for their capital. We will revisit this later, because it is a major consideration in agreeing the optimal policy for economic growth.
Macroeconomic Stability: This is critical for investments, because investors prefer destinations that spare them the heart attack that comes from uncertain economic conditions. Specifically, investors want some certainty that the holy trinity of interest rate, exchange rate and inflation are fairly predictable. For example, an investor who brings foreign currency into Nigeria is not worried if the Naira exchanges at 200 to the dollar, or 250. The major concerns are twofold: will the dollars be available whenever the investors need it; and will it be reasonably priced to ensure their investments don’t diminish. If you invest $1 million in Nigeria at an exchange rate of N250:$1, you will hold N250 million. Let’s now fast forward to 6 months, and you want to take your capital out of Nigeria; only problem is the exchange rate is now N300:$1. It means you will have to change your N250 million at the new rate, which comes to $830,000. This is the problem with uncertainty; investors are worried they will buy deer, sell sheep and make losses. So if your investors believe your exchange rate for example, is uncertain, only the bravest or dumbest investor will put capital in that economy.
So how does the exchange rate affect GDP growth and job creation? It all starts with something called Balance of Payments…