Growth fixation and the fallacy of the GDP
For Nigerians, living in Nigeria as of February 2021, and probably many others living outside the country, any news other than the news of the security situation in the country, is good news. Over the past few years, the country has suffered massive economic losses due to insecurity, occasioned by a growing army of terrorists heading south from the north. People wake up every day to hear a different story of how farmers are being killed by herdsmen who dispossess them of their farms and feed their crops to the cattle, or how school children are being abducted in their hundreds for ransom. Things that people would see in the past and cringe have become normal because they have literally been through hell. It was therefore a matter of time before the country plunged into one deep socioeconomic crisis or the other. In particular, food security was at the door when the pandemic struck and further devastated the economy, throwing it into a recession.
Expectedly, when the news broke last week, that the country has exited the recession, there was a more than proportionate joyful reaction. The country has suddenly exited its second recession in five years, most unexpectedly. Some shouted hurray! Others screamed, welcome to the good times. The question to ask is what is good about ending a recession in an economy that excludes most of the people?
What is there to celebrate, some may ask? The answer lies in our understanding of the impact of the growth of GDP on the socio-economic wellbeing of the citizens
The Gross Domestic Product (GDP), which measures production capacity and economic growth, returned a positive growth rate of 0.11 per cent in the last quarter of 2020, effectively ending the recession. The news was expectedly well received. This is understandable as no country wants stagnation, talk less of negative growth. More especially for people so badly traumatized by terrorist activities and looking out for anything that brings the semblance of joy.
The good thing about a growing economy is that it gives hope and improves expectations. Investors are attracted to them and Nigeria has so much in terms of business opportunity to offer investors, despite its leadership challenges. This last recession, began in the third quarter of 2020 when the GDP recorded a negative growth rate of -3.63 per cent. This followed a negative growth rate of -6.10 per cent in the second quarter. These poor numbers were produced by many unfriendly factors happening at the same time. Nigeria had faced declining oil production and low prices for a considerably long time before the pandemic hit.
Efforts to curb the spread of COVID 19 had a lot of negative consequences, the impacts of which are still unfolding. One of such impacts was the virtual disappearance of cash flows from the coffers of both individuals and corporate entities. This had a damaging effect on the economy as it deprived the already struggling MSMEs of much-needed cash flow, and weakened the ability of lending institutions to support their customers. Furthermore, the somewhat controversial closure of the borders set the stage for economic crises. These events were compounded by a high and rising debt service expenditure that has now crystallized as highly unsustainable, even if our debt ratio is within an acceptable threshold and could be considered sustainable.
So what actually is there to celebrate in our exit from the recession? A recession is a period during which an economy experiences a temporary decline in output, measured generally by two consecutive quarters of output contraction. So when output resumes growth, an economy exits a recession. What is there to celebrate, some may ask? The answer lies in our understanding of the impact of the growth of GDP on the socio-economic wellbeing of the citizens. By definition, the GDP is the market value of all final goods and series produced within a country over a given period. It is not intended to serve as an assessment of welfare or indicator of the living standards of the citizens. In fact, if not properly managed, GDP growth might leave the citizens with more to worry about than to celebrate.
The GDP lacks the capacity to comment on the negative or even positive consequences of its growth. It was not designed to do any of those. It takes account of the value of oil produced but ignores the pollution that goes with it. Cars are produced and their value added to the GDP but the emission and pollution they create are not accounted for. Furthermore, housing estates are developed on green belts and added to the GDP but the loss to the environment does not feature. The worse is that the goods produced that led to an increase in the GDP maybe those that add nothing to the peoples’ welfare. Such goods may be arms and ammunition purchased to fight the rampant terrorism now engulfing the country. We don’t eat guns or wear bullets. Thus, the growth of GDP has little or nothing to do with the welfare of the people. So it may well be that the people of Nigeria are economically worse off even as they exit recession with a rising GDP.