ECONOMY - 13 FEB 2017

Economics and Politics: The Cramp Twins

Economics and Politics: The Cramp Twins
IMF's MD, Christine Lagarde (R), President Muhammadu Buhari (L), CBN Governor Godwin Emefiele (Far Right) and Vice President Yemi Osinbajo (Far L)

The present administration has recently turned its attention to Nigeria's borders. Midway through 2015, the Central Bank of Nigeria (CBN) banned importers of 41 items from accessing foreign currency through official channels. The policy was enacted to preserve scarce foreign exchange reserves and at the same time, promote local production of the barred items.

But people want what they want, and Nigerians always want the most. Restricting foreign currency access for rice and toothpick importers simply drove them to the black market and increased the depreciation pressure on the naira. In the meantime, inflation spiked as the currency controls failed to stop rising costs. Notably, higher inflation erodes consumer purchasing power, which is at odds with the pro-social welfare stance of the Federal Government.

Politicians have constantly shown an unwillingness to admit their inability to fully control economic policy. Many politicians have squared up against the prescriptions of economic theories and suffered humiliating losses. But perhaps the biggest puzzle is the failure of the discipline to incorporate the role of politics in economic policy.

 

Efficient Markets?

The most influential branch of modern economics argues that markets work best when left on their own, with price as the sole mediator. This view downplays the role of the state in economic activity, relegating it to a minimalist role. But if or when markets fail, policy-makers, usually politicians, are encouraged to step in to produce the most beneficial outcome. Whereas examples of market failure have been thoroughly examined, government failure – of the political kind – has received little attention in economics. But politicians are fickle agents, subject to the whims of both vested interests and the wider population in their struggle to consolidate and dispense power. As such, economic policy is beholden to political waves. Everything starts with politics, and so, economic policies tend to have political motives attached to them.

 

Beggar thy People

Political institutions have been shown to determine economic institutions. Looking at the case study of Nigeria's borders, the outcome is a deterioration of economic institutions. This can be seen in the shift towards the black market for currency transactions in the country. Moreover, political interventions are often heavy-handed. Punitive policies provide people with less incentive to operate within formal markets, creating welfare losses for society. For example, when the previous administration increased tariffs placed on imports coming through the ports from 20% to 70%, people found alternative ways to get foreign products such as cars into the country. The result – lower revenue from tariffs and reduced efficiency.

And politicians have an incentive to increase tariffs, after all, these are paid into government coffers. To save face, they may argue that such protectionist measures are necessary to revive or protect domestic industries, or similar defences. Their argument is that distortionary effects of the tariff are outweighed by the improvement in the Nigerian automobile industry. However, in the absence of observable investment in the sector, such policy moves take on a more political slant as such investment is necessary to bring about the stated goals. 

This issue is further highlighted by the Nigerian Customs Service (NCS) decision to direct car imports away from land borders and towards seaports. They argue their reason for this is the huge government revenue losses recorded as the seaports became redundant as land border activity increased. But that is the thing about economics; the efficient replaces the inefficient. For a long time, the roll-on-roll-off terminals at our seaports have been very inefficient, with issues ranging from bad roads to long waiting times. So these restrictions must be accompanied by significant infrastructure investment to make seaports a more viable alternative. This way, the policy does not simply favour "our boys at the ports".

 

Paying the Piper to Call the Tune

Economists are obsessed with the concept of equilibrium. However, many factors can prevent the existence of an equilibrium. Often, these factors are political. When economic policies fail to produce an outcome that improves the welfare of society (in the short or long run), it is usually as a result of bad economics justifying politics. This happens when interest groups hijack the political process to skew policies in their favour. Besides, agency problems in politics usually see political representatives acting in their interests but against that of voters. 

Of course, politics must play a role in economics, but economic logic must be the principal driver of economic policy. Without this, we will have political systems that create private gains for elites while impoverishing the wider society. Nigeria provides a good illustration of this. Rallying cries to ban good X, to protect some local cabal, are as frustrating as they are common. 

 

The ties that bind

The link between politics and economics is very fluid, and this is necessary to allow both flow into and feed off each other. Politicians serve as conduits for economic theories and are even expected to find ways to make them more practical. But economic theories should not be treated like family heirlooms – brought down from dusty cupboards to appreciate for a short while, and then put back, clearing the path for the pursuit of self-interests.

 

Follow this Writer on Twitter @FadekemiAbiru. Subscribe to read more articles here.

Fadekemi Abiru

Fadekemi Abiru

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