ON NEO-LIBERAL ECONOMICS AND NEED FOR ADAPTATION
"Neoliberalism is contemporarily used to refer to market-oriented reform policies such as "eliminating price controls, deregulating capital markets, lowering trade barriers" and reducing, especially through privatization and austerity, state influence in the economy." Wikipedia
Price stability and low inflation is central to economic growth. In many economies, certainly in an import-dependent economy as Nigeria, exchange rate stability is crucial for price stability. *Put bluntly, price stability and low inflation is impossible without exchange rate stability.* Thus, while we need exchange rate stability and exchange rate targeting as an explicit economic policy, neo-liberalism stresses market reflective rates almost to the exclusion of the overarching need for stability. Indeed, it is important for rates to be market-determined. But it is as important that rates are stable. So, the declared strategy should be building the capacity to direct market forces to achieve rate stability.
Interest rates have limited impact for domestic economic agents in a high-poverty economy. NDIC reported that 99.4% of bank accounts have less than N500,000. There are probably less than 100,000 mortgages/home acquisition loans in Nigeria. Most Nigerians with bank accounts are excluded from the benefit of high interest rates because their retail balances attract lower than 5% regardless of general interest rates. Their purchasing power is also unaffected by higher interest since they neither have mortgages nor other forms of loans. In essence, high interest rates only rewards three classes. Firstly the banks which on account of mass poverty enjoy extremely low weighted average cost of funds deriving from huge poverty-driven retail balnces. Secondly the exlusive HNI class that own large deposits. Thirdly corrupt fund managers in both public and private sector who negotiate corrupt commissions from banks for funds placement. So, how useful is the huge effort invested by a Monetary Poli
cy Committee in setting interest rates. How many of us does it affect? While mentioning interest rate objectives, might our MPC meetings not be more useful if it sets exchange rate targets for the next 6 months and details the supply-stimulation and demand-management actions to achieve it.
In contrast, interest rate adjustments have significant impact in developed economies. Many homes have mortgages and various asset-backed credits. Higher or lower interest rates immediately translate to marked purchasing power and disposable income changes. Our estructures are different. Monetary Policy emphasis should reflect this. FX rates affect the average Nigerian infinitely more than interest rates.
Reckless lowering of trade barriers hurts domestic production capacity. No reasonable father exposes a 3-year old to rugby with full-grown men. This is a major neo-liberal weakness.
Perhaps one of the greatest weaknesses of neo-liberal thought is the minimal emphasis on the importance of institutions. The institutions that must be built and protected such as institutions that promote pervasive transparency and integrity. No nation grows without them. The local institutions best suited for activating voluntary ethical compliance must be identified and nurtured. The judiciary and police, central to rule of law, must be well remunerated, corruption free, and fit-for-purpose. The Customs Department must transparently and efficiently process imports and exports, collecting punitive tariffs without deals, ensuring exports don't experience any bottlenecks. Agencies charged with tariff waivers must carry out their tasks transparently under rigorous, visible and pervasive public scrutiny. Then at all costs, education and health must be maintained at continental leadership standards, at the minimum.
Institutions matter. Integrity is key to prosperity. Neo-liberals take these for granted. These things just don't happen. They only happen when painstakingly implemented.
By far, FX inflow is crucial to currency stability and simultaneously low interest rates. For many emerging markets, Diaspora Remittances have become a potential game changer. Sufficient thought is yet to be invested in how to make Remittances more important than Foreign Portfolio Investment in both quantum and consistency.
We need to rethink neo-liberal thought and adapt it to our realities in a way that spurs and protects quantum growth.
Kola Ayeye