Understanding the concept of financialisation and its economic implications and the strategy of positioning economies for the financialisation era has made a difference between outperforming economies and laggards in the last 10 years. The Nigerian economy has lagged behind in all economic growth and development parameters. The need to adopt financialisation at the core of all aspects of its economic strategy formation, execution and management is pertinent for Nigeria.
The global economy has passed through many phases in the last couple of thousands of years and has seen different countries and economies dominating the global space and also falling into irrelevance over the period. The metamorphosis of human existence and the evolution of the global economy and globalization have developed over a long timeframe with various stages reflecting different characteristics and opportunities for growth, human development and wealth creation.
From the agrarian era to the industrialization revolution and more recently the information revolution. Various changes in the global economic space in contemporary times have signified the emergence of a new era, the era of financialisation. Financialisation’s foundation was laid in the early 1970s with the fall of the Bretton Woods systems. Financialisation creates new opportunities on the Macro, National, and Micro levels, for growth and wealth creation.
Financialisation will create various opportunities in the economy by ensuring; proper valuation of national assets by financial markets, promotion of funds flow into the economy, provision of new job opportunities
So, what is financialisation? Financialisation refers to the increasing importance of financial markets, financial motives, financial institutions and the financial elites in the operation of the economy and its governing institutions, both at the national and international levels. (Epstein). Financialisation transforms the economic systems at both the micro and macro levels.
Read also: Nigerian economy’s low financialisation
The effects of financialization include a reduction in government participation in the economy, growing influence of financial markets, Increased cross-border financial flows, Rapid increase in domestic and international financial transactions and a change from industrialized economic structures to technology and service-oriented economies
The benefits of financialisation will include but are not limited to a large increase in the number of jobs available in the financial industry, Increased reliance on financial intermediaries and financial markets, Increased participation in the futures markets – futures contracts on bonds, equities, currencies, and interest rates, Profits are generated more through financial channels as opposed to trade and the production of commodities and the financial sector will contribute to a more equitable allocation of money and risk across the economy
Financialisation will create various opportunities in the economy by ensuring; proper valuation of national assets by financial markets, promotion of funds flow into the economy, provision of new job opportunities, efficient utilization of assets and resources and an efficient allocation of funds and risk across the country
The level of financialisation in any economy can be measured by its Industrial output, the proportion of industrial employment and industrial profits. All these can be measured against the financial services output in the economy. The table below compares the level of financialisation in Nigeria against a few countries;
The table underscores the level of financialization of the Nigerian economy and the need to take decisive steps to develop the economy in this direction. Conscious steps at financialization will improve job availability, increase GDP and improve HDI ranking.
The characteristics of the more financialised economies include; diversification of wealth from income streams to balance sheet valuations, well-developed financial markets, development of the services industries, focus on the use of spaces and advancement in information technology. The Nigerian economic management team will do well to focus its energies on these areas. To underscore the above a couple of case studies are discussed below;
Saudi Arabia Listed its flagship Oil and Gas Company on the Saudi bourse at a listing value of $2 Trillion. On the back of the listing, the Saudi government raised $29.4 Billion for its Sovereign Wealth fund PIF for the purpose of investing in its industrial development plan and in the development of alternative energy sources. Saudi Aramco plans to be the largest electricity provider, globally, in 30 years and plans to export electricity abroad as the focus on oil reduces in the future. The listed company plans to pay in excess of $ 153 billion to the Saudi government over the financial years 2022 and 2023.
India focused on developing its economy by setting up a National investment promotion and facilitation agency – INVEST INDIA which focused on marketing investible opportunities in India to the Global investment community. This involved changing the rules of doing business in India and packaging state-owned entities for FDI. Its success is primarily attributed to the ease of FDI rules in India. Total FDI inflows in the country in the last 23 years (April 2000 – March 2023) are $ 919 bn while the total FDI inflows received in the last 9 years (April 2014- March 2023) was $ 595.25 bn which amounts to nearly 65% of total FDI inflow in last 23 years.
The two case studies discussed above focus on how two developing countries, Saudi Arabia and India were able to generate liquidity and wealth for their government and people by adopting the trend of financialization phenomenon. Both Countries have achieved tremendous success.
Areas of focus for Nigeria in price discovery and liquidity generation should include; Infrastructure development, Natural resources, Services and housing. This should be based on a thorough well-planned economic policy using project management methods for strategy formulation, responsibility allocation and execution.
Ayoade, FCIB, FCS is managing director/CEO of MBC Securities Limited (Stockbrokers and Investment Advisers)