Is Nigeria about to become the next Venezuela? The signs are not good

Is Nigeria about to become the next Venezuela? The signs are not good

 

An emerging market is one from which it is impossible to withdraw money intact, according to an old investment joke. Nigeria, which once had the largest economy in Africa, seems to best illustrate this truism. In fact, Nigeria fails the test if the dictionary definition of an emerging market is an economy with low income but high growth prospects. It is unquestionably low income, but in recent years it has also experienced low growth.

 

Nigeria’s GDP has been steadily declining both in absolute terms and per capita for the better part of four years, and in the last year it has once again lagged South Africa in terms of the size of the continent’s economy. Only now is it starting to emerge from this protracted recession. However, over the past ten years, the value of its currency, the Nigerian naira, has catastrophically declined, falling by nearly 70% against the US dollar. There is a good reason why some experts predict that Nigeria will soon become the new Venezuela.

Although the similarities between the two are striking, this judgement might seem overly harsh. Nigeria, an oil-rich nation, is led by the recently re-elected left-wing populist Muhammadu Buhari, whose chief of staff has openly declared his admiration for Jeremy Corbyn, who was a supporter of Venezuela’s late Hugo Chavez.

 

Nigeria and Venezuela both have economies that have blatantly alienated foreign capital and completely failed to utilise their oil wealth. Even Ghana, which today receives more foreign direct investment than its close neighbour despite having a GDP that is less than one-seventh that of Nigeria.

 

International investors and businesses have lost faith in the nation and are departing in large numbers. Its middle class has also grown. According to estimates, emigration has cost Nigeria a tenth of its wealthier citizens in recent years. Numerous of its brightest and best citizens, including doctors, nurses, engineers, accountants, business owners, and lawyers, have cast their votes with their feet. The Buhari government regularly demonises success and wealth. Over sound economics and practical policy, the filthy practise of populist vote buying has prevailed.

According to the political blogger from Nigeria, David Hundeyin, Buhari’s recent election campaign was characterised by attacks on the typical populist scapegoats, such as “corrupt people,” “treasury looters,” and “arrogant elites,” rather than any serious acknowledgment of Nigeria’s extreme investment deficit in infrastructure for healthcare, education, and power generation. In contrast to success, poverty was exalted.

 

What is this all about, anyway, the West? Nigeria may have a population of close to 200 million people, but with less than 1% of the world’s GDP, it is neither here nor there. It may serve as a cautionary example of the politics of left-wing populism, similar to Venezuela, but its wider significance appears to be minimal at best.

Well, maybe, but the reality is that, like much of the rest of Africa, Nigeria is experiencing explosive growth even as Western populations age and decline. The United States Census Bureau has predicted that, if current trends continue, Nigeria’s population will more than double over the next 30 years, reaching a hardly believable 750 million people by the year 2100. Even if only partially accurate, this poses numerous problems for the West in the absence of extremely rapid per capita economic growth. It is obvious that this cannot be sustained, making it highly unlikely to actually happen in practise.

 

Mass migration from sub-Saharan Africa is a problem that threatens to grow to positively biblical proportions. Conventional border controls, no matter how strict, would likely fail to stop it. Therefore, it is crucial for the West that Africa follow Asia in experiencing rapid economic growth.

 

But the paradox is right here. According to historical data, migration from the developing world peaks when per capita income reaches the $6,000–$7,000 range. Below that, only the middle classes and the entrepreneurial have the means to succeed. But when it does, mass migration is made possible by the increased income.

 

Currently, Nigeria’s GDP per capita is only £2,450. Therefore, one could contend that the West has an unfavourable incentive to maintain the relative poverty of Africa. We may not need to worry too much about an African invasion with an anti-business politician like Buhari in charge. Cynically, we can choose the best educated among them and leave the rest to make due.

 

Charles Robertson, chief economist at Renaissance Capital, has created a handy little system for figuring out whether a nation is capable of the kind of industrialization required to achieve middle income status or better. Robertson’s system is based on analysis by the American economist Mary Jean Bowman. A minimum literacy rate of 70% was one requirement outlined by Bowman. About 20 years after China, India reached that level in 2015. Nigeria is still some distance away. It is battling to advance because of ethnic and religious division.

 

In addition, Robertson stipulates that a nation’s investment rate must be at least 25 percent of GDP and that per-person electricity consumption must equal 300 kilowatt hours, which is sufficient to run a TV and three low-energy lightbulbs. Again, Nigeria falls far short of these benchmarks, especially when it comes to investment, which is only half of what is required.

 

Robertson has a more positive outlook than most on Nigeria’s chances of eventually making it there. He also emphasises that Buhari’s administration is not as wholly unreconstructed as a hard left populist cabinet might at first appear. It contains some well-known reformers whose campaign against corruption can only be praised. Nigeria’s economy is still currently utterly dependent on the state of the oil market and, like Russia, appears to be unable to grow at a respectable rate when the price is low. Oil wealth has been both a blessing and a curse for Nigeria. Population is the issue once more. Production per capita is just high enough to disincentivize the development of alternative sources of income growth but is too low to have a significant impact on average incomes. Venezuela’s successor? It’s incredibly likely.

Source: The Telegraph