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How do nations get rich?

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Lately I have been having a recurring nightmarish thought. What if Nigeria’s growth rate gets stuck at the current miserable 2 – 3 percent per annum level for the next one, two or three decades?

Running the numbers, 2 percent per annum average growth rate gets you to a $1 trillion economy in 40 years (2060) , growing at 3 percent gets you there a decade earlier in some 30 years’ time (2050) starting from the current base (size of Nigeria’s economy) of $400 billion.
Of course this is cold comfort for a couple of reasons, first of all for the estimates to pan out the assumption is that the N/$ exchange rate stays stable (at N360/$1) over that time period, which would be largely unrealistic given the economic history of Nigeria.

Secondly the United Nations (UN) recently projected that Nigeria’s population would hit the 400 million mark by 2050.

When looking at nations, economists often use GDP per capita as an indicator of the average economic well-being within a country or a measure of a nation’s standard of living.
This means that even an optimistic exchange rate influenced trillion dollar economy (by 2050/60) would still leave Nigeria’s gross domestic product (GDP) per capita at $2,500, roughly the same levels as it is today.

By comparison, in 2017, World Bank data shows that the United States had a GDP per capita of $59,531; in Canada it was $45,000; $29,742 in South Korea; $8,826 in China; and $9,821 in Brazil.

These nations however were not so wealthy in recent pasts.

In 1960 these countries had GDP per capita of USA ($3,007), Canada ($2,294), South Korea ($158.24), China ($89.52), and Brazil ($210). The growth seen in South Korea, China and Brazil is particularly striking.

Nigeria is also unfortunately plagued by rising poverty.

Some 86.9 million Nigerians are now living in extreme poverty (according to a report by the World Poverty Clock) representing nearly 53 percent of the estimated 189 million people, a problem that will likely worsen given the rosy population projections.
Interestingly whether for people or nations, the key to escaping poverty lies in rising levels of income.

So how do nations raise income levels of their citizens and grow wealthy?

Various theories abound.

Scott A. Wolla writing in a paper published by the Federal Reserve Bank of St. Louis, USA notes that achieving higher rates of economic growth, which is a sustained rise over time in a nation’s production of goods and services, is dependent on increasing total factor productivity (TFP).
Wolla argues that to increase TFP and escape poverty, two things matter the most for countries, Institutions and Trade. Institutions matter because they protect property rights (the ability of people and businesses to own land and capital), engender free markets and promote the rule of law. For trade Wolla’s point is that it provides a broader market for a country to sell the goods and services it produces.

Many poor nations, including Nigeria however, have trade barriers that restrict their access to trade.

Recent research (Mutreja, Piyusha; Ravikumar, B. and Sposi, Michael J. “Capital Goods Trade and Economic Development”) suggests that the removal of trade barriers could close the income gap between rich and poor countries by 50 percent.

Mike Milken, a pioneering American investor, who developed a formula rooted in American free market values in the 1960s to describe national prosperity observed that “prosperity in any society depends on the leveraging effect of financial technology on the sum of human capital, social capital and real assets.”

An April 2015 paper by Stanford University economist Charles Jones tries to answer the question “Why are people in the United States, Germany, and Japan so much richer today than 100 or 1000 years ago? Why are people in France and the Netherlands today so much richer than people in Haiti and Kenya?

Jones again zeros in on productivity and misallocation.

According to Jones misallocation at the micro level can show up as a reduction in total factor productivity (TFP) at a more aggregated level.

The essence of this insight is quite straightforward: when resources are allocated optimally, the economy will operate on its production possibilities frontier. When resources are misallocated, the economy will underperform or TFP will be lower: a given quantity of inputs will produce less output.

Scanning through these theories sheds a lot of light the steps that Nigeria should be taking to grow wealthy and increase the incomes of its citizens, which does not include gimmicks like the Trader Moni scheme.

In Nigeria productivity is low in a lot of sectors, resources are routinely misallocated by all levels of Government and sometimes the private sector and trade policies often have an overall negative impact on the economy.

For most firms in Nigeria things that affect productivity negatively include, inadequate electricity supply, limited access to finance, multiple taxes and regulations and poor transport infrastructure.

Tackling these issues that restrict productivity, removing unhelpful trade barriers and import bans, building up our institutions, promoting the rule of law, respecting property rights and engendering free markets would be a major step forward in accelerating growth and increasing the wealth of the Nigerian nation and people.

 

Patrick Atuanya

2 Comments
  1. Yinka Akinkunmi says

    You are so fixated on Tradermoni that cost mere 20 billion and ignore much bigger ticket waste and misallocation of resources in the Nigerian system. This include security votes to governors, humongous pensions for political office holders, expensive convoys, private jets and it’s maintenance, bogus allowances for few legislators.

    I am not surprised it’s tradermonie that catches your fancy in all these

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