Let me thank the President and Management of the Hult International Business School for the invitation to share some thoughts on the emerging world economy post 2008. I am particularly happy that our budding future leaders—the Masters and MBA students—especially from Africa and emerging markets are interested in looking into the future. That future is here with us now because there can be no tomorrow without today. Today is the right time to plan and strategize for the future; otherwise the calamities that befell the world economy during the financial and economic crisis of 2008/09 may repeat with even greater damages.
A key feature of the world economy today is the deepening of globalization. Every country, in one way or the other is a part of it. Through the instruments of trade, financial flows, information and communication technology, and migration, countries have become increasingly networked in an interdependent manner. One lesson of the recent crisis is that as a consequence of deepening globalization, crisis triggered in just one country can cause unprecedented ruin and pain to other countries, especially the developing countries.
Most analysts contend that the 2008/09 crisis which started first as a financial crisis in the United States and then spread to some industrial countries and ultimately became a global economic crisis was the severest in scope, depth, and calamitous impacts on the world economy since the 1930s. The speed with which the crisis spread around the world and the damages wrought on its path were unprecedented: stock markets in most ‘emerging markets’ crashed and hundreds of billions of dollars in wealth destroyed overnight for no fault of the residents of developing countries. They have been lured by the attractions of the new economy and embraced the new global capital markets. Major currencies depreciated overnight and exchange rate losses were huge; external reserves denominated in US dollars lost huge values; debts rose. In addition it is estimated that over 200 million poor people became poorer. The entire financial system of Ireland was virtually wiped out; recently Greece was bailed out, and much of Europe still has not recovered.
In Africa, the debris of the ruin still adorn much of the landscape as literally no one anticipated nor prepared for a crisis of such magnitude. Africa depends largely on primary commodity exports as well as aid and foreign capital inflows. The sudden crash of commodity prices (oil, agricultural products, etc), drying up of aid flows, freezing and reversal of capital flows, especially the credit lines for domestic banks, have combined to put immense pressures on domestic budgets, exchange rates, banks’ balance sheet, stock prices, incomes,
unemployment and poverty. Many countries will continue to struggle under the weight of these impacts as they have little instruments to quickly overcome these effects on their own.
This interactive session must be one of the hundreds of initiatives to think through the implications of, and the responses to, the global crisis. I am aware that there have been many international conferences and seminars to brainstorm on the future of the world economy, especially the fate of the developing countries and how to ensure a more robust and inclusive global economy.
Literally every international organization such as the IMF, the World Bank, the G-20, United Nations General Assembly, the African Development Bank, the EU, and many regional organizations have organized one initiative or the other to design or implement some proposals in response to the crisis. There is a host of proposals for the future, and the extent to which the international community will muster the political will to ensure a more stable world economy remains to be seen.
Our focus in this lecture, as was suggested to me by the organizers, is the emerging markets post 2008. In particular, I focus on how Nigeria and Africa should prepare to reap maximum advantages from the emerging new global economy. My potential role in the process of building a new and strong African economy, if elected President of Nigeria, will also receive brief mention.
II: Which Countries Are Emerging Markets?
Do we all mean the same thing when we refer to ‘emerging markets’? I doubt it. The term is often used in very loose forms, and connoting different things to different people. It is, therefore, important to clarify the context in which we use the term in this discussion.
The World Bank classified as ‘developing’ all countries with per capita income of less than $11,000 in 2006, and the ‘rich’ countries as those above that threshold. Many analysts refer to subsets of developing countries as ‘emerging’ depending on the focus of the analysis.
When it was first used, it referred to fast growing economies with rising financial markets and which offered new opportunities to international investors. Two classifications have included Nigeria in the list of emerging economies. Goldman Sachs, 2005 (which coined the BRICs—Brazil, Russia, India and China plus the next eleven ‘large developing economies’) included Nigeria in the ‘N-11’. Price Waterhouse Coopers (2008) came up with the BRICs + 16 other emerging markets, and also included Nigeria in the list.
Steven Radelet, in a well researched book published this year entitled Emerging Africa, identified 17 sub Saharan African countries as ‘emerging markets’ on account of the steady progress their economies have made on several fronts since the mid 1990s. These countries are: Botswana, Burkina Faso, Cape Verde,
Ethiopia, Ghana, Lesotho, Mali, Mauritius, Mozambique, Namibia, Rwanda, Sao Tome and Principe, Seychelles, South Africa, Tanzania, Uganda, and Zambia. These African countries, with about 300 million people account for about five percent of the world population, and have maintained an average per capita GDP growth of 3.2% between 1996- 2008.
If you add to this list South Africa, and North African countries—Egypt,
Tunisia, Algeria, and Morocco—you may get about 22 non-oil exporting African countries which can be described as ‘emerging markets’. Other regions of the world (Asia, middle East, Latin America, and Europe) have far greater number of ‘emerging markets’ on the criteria described above.
However, Bensidoun and others (2009) distinguish between emerging markets and rentier economies. To them emerging markets are those countries which have increased their share in world markets of manufactured goods or services by at least 0.05% between 1995 and 2005.
Those whose economic rise depends on more than 40% of their exports of natural resources are ‘rentier’ economies. They included Nigeria in the list of rentier economies. In this perspective, economic size (size of GDP and exports) and structure of the economy (whether production is dominated by industry/manufacturing or primary commodities/natural resources) are important considerations in classifying an economy as emerging market or not. On this score, Nigeria is probably a hybrid of a rentier state and an emerging market.
What emerges from the foregoing is that the term ‘emerging market’ is an
imprecise one, and is often loosely used to refer to the developing countries that are undertaking reforms. In general, however, the key features of the economies often referred to as ‘emerging’ include: a deepening of market-oriented reforms, increasing sophistication of the financial markets, rapid growth of GDP per capita, and increasing integration into the global flows of trade and finance. On this score, a larger number of developing countries which have been undertaking reforms in the last three decades would qualify as ‘emerging markets’. Each region of the world has several of such economies if these are the features that define emerging markets. Again, it depends on who is doing the classification.
I am, however, concerned that aside from the World Bank’s and IMF’s
classifications of ‘developing countries’ which includes a lot of countries, the classifications by some notable private sector groups (Ernst and Young 2008; Boston Consulting Group 2007; Goldman Sachs 2005; and Price Waterhouse Coopers 2008) have only three African countries in the list of countries considered as ‘emerging markets’. These are Egypt, Nigeria, and South Africa.
If being an ‘emerging market’ is meant to carry a toga of ‘success’ and to distinguish faster developers and integrators into the global economy from the group of ‘other developing countries’, then a list of only three out of 53 African countries is a source of concern. This particularly worrisome because of the plethora of reforms they have undertaken in the past three decades. This probably explains why in many international fora where discussions are about emerging markets, Africa (with about 800 million people and 53 countries) is often missing or added as a passing footnote. This needs to change. Unfortunately a crisis of the magnitude and severity as the 2008/09 crisis has the greatest immediate and lasting effects on this “missing” majority of
III: Surviving the Crisis
As we all know, the 2008 crisis started in the US (due to certain laxities in the US financial system, especially with the sub-prime mortgages). It quickly spread to Europe, and became a global crisis. Ultimately, the credit and capital crunch snow-balled the global economy into an economic crisis as all markets – labour, products, foreign exchange—were severely affected. At the root of the crisis were loose regulatory regimes in the context of several unregulated financial markets and products. Loose monetary policy also provided huge liquidity to banks which were under pressure to lend and hence embarked upon riskier investments.
When the crisis first started, banks literally stopped lending and were recalling some of their loans, leading to a credit crunch. This crept into the capital markets leading to stock market crashes. Banks made provisions for huge non-performing loans, and many became undercapitalized.
The impacts were massive. Liquidity and credit crunch led to confidence crisis in the banking system, as well as weak consumer demand. Insufficient aggregate demand spilled over into the supply side leading to declines in real output, and eventual global recession. There were bankruptcies and take-overs. Commodity prices crashed, and major currencies depreciated massively. Counter-part risks increased. Hell was literally let loose around the world. Unemployment and poverty increased around the world, and trillions of dollars in wealth were wiped out all over the world.
Nothing in recent history has called to question the principles and operations of the free market than the 2008 global crisis. There were screaming headlines about the ‘end of capitalism’ or the end of market economy. Governments all over the world became ‘activists’ once more in the economic space. Each government tried to reassure its citizens about its commitment to their welfare. Bankers all over the world were openly blamed for their ‘greed’ and recklessness, while regulators all over the world were blamed for their ‘laxity’. It seemed the end of the old order, and the rebirth of a new one in which governments were going to, once more, take over the ‘commanding heights of the economy’.
Though the details of the responses around the world differed, they could be grouped into two broad categories: direct interventions by the Governments (Treasury) and indirect interventions by the Central Banks. Largely the measures included: interest rate cuts and liquidity injections by Central Banks; capital injections into banks and other corporations by Governments; lending guarantees by governments to restore liquidity; reviving the ailing banking system through recapitalization and strengthening of supervision; bank deposit guarantees; subsidies to ailing sectors; and fiscal stimulus packages to shore the economy out of recession.
An important point to note is that globally, the effects of the crisis were severest among the highly integrated industrial countries, especially the US and West European countries. Emerging markets were affected to varying degrees, depending on their extent of integration with the global financial system. The ‘emerging markets’ or developing countries bailed out the global economy. As a group, the developing countries did not experience a recession, although their growth rates declined significantly. China and India continued to power on with high growth rates. While aggregate Sub-Saharan Africa grew by about 3% in 2008, Nigeria actually grew by about 5.8%.
Paradoxically, the lower the degree of integration of a country into the global economy, the lower the effects of the crisis on the country. For Africa, people have argued about it being ‘decoupled’ from the global economy as a major factor. This is an issue for our analysts and researchers to ponder: is there an optimal level of integration for an economy to guarantee maximum benefits and minimum harm from such integration? Nigeria, for example, is to some extent integrated with the global economy.
However, there are several factors that helped the country to absorb the shocks of the global crisis and minimize the full weights of the crisis. It was as though Nigeria prepared for the crisis. First, as a result of the deep economic and institutional reforms we undertook while I was in government, we built a more liberalized, private sector-led economy. Due to our reforms, we had secured debt relief in 2006, and reduced external debt burden to less than $4 billion.
We also implemented one of the most fundamental restructuring of a banking system in the world through banking sector consolidation ahead of the crisis. This ensured that our banks were well capitalized such that even after providing for bad loans due to the crisis, our banks still remained one of the most capitalized in the world. We accumulated huge external reserves which stood at about US$52.9 billion in December 2008 (the highest in Sub-Saharan Africa).
Our monetary and fiscal policies were better aligned, and the exchange rate was allowed to adjust early on during the crisis. This helped to cushion the effects of the crisis. Furthermore, about 60 percent of Nigeria’s arable land remains fallow, providing significant idle capacity that could be put to use. The growth of the agricultural sector (averaging 7%) in the last several years helped to mitigate the effects of the crisis on output.
IV: Post 2008: An Agenda for Nigeria and Africa
The global economy and its governance structures are full of paradoxes, and the recent global crisis helped to draw serious attention to them. It has become obvious that the higher the degree of integration, the more likely are shocks emanating from any part of the system likely to affect everyone. Yet, there are no strong global institutions to enforce coordinated responses or actions.
The rule of the international system can be caricatured as follows: integrate and become an emerging market and reap the benefits if you can, but if negative shocks hit you as a consequence, you are on your own! Responses to any global shocks are national. Rich industrial countries that can afford huge ‘stimulus packages’ were bailing their banks and economies out while the poorer countries were left with few options.
This leaves us with a poser: can the world economy continue to be stable if each country is left to prepare for future crisis and thus become selfishly defensive of its narrow national interests in this age of globalization? In the alternative, what kinds of global collective actions will be required to minimize future crisis and ensure a more stable and prosperous global economy?
These are big questions that require huge volumes to answer. I believe that the numerous initiatives put forward since the global crisis have shed some light on these questions, and I do not intend to bore you by rehashing them here. The threats of national economic wars are ever present.
Remember the threats of ‘currency wars’ as Japan, the US, and China were almost on the verge of competitive devaluations of their national currencies a few weeks ago. Without coordinated collective actions, countries would prepare for the ‘next shock’ by being defensive-- build more foreign reserves than required, keep exchange rates competitive or even undervalued to gain competitive advantages, etc. This would be a race to the bottom. It is a wake-up call for the international community to seek new ways of greater economic coordination than before—to protect the common destiny.
For references to the outstanding proposals for reforming the international monetary and financial system, I refer you to ‘The Stiglitz Report’—Report of the UN Commission of Experts on Reforming the global monetary and financial system; the G-20 Proposals for reforming the global economic system in response to the crisis; the Monterrey Action Plan on mobilization of resources for development; etc.
On Africa, there are many international initiatives, including the over 12 Special UN initiatives on Africa, New Partnership for African Development (NEPAD), Tony Blair’s Commission on Africa, etc. The point, however, is that there is no shortage of ideas or proposals on how to fix the global system to make it more inclusive, prosperous and stable. What is lacking is the political will to make progress.
One of the immediate aftermaths of the global crisis was the threat to ‘market economy and globalization’ as many analysts pronounced capitalism dead. It was premature to do so. However, countries are going to behave differently. A Special Report of the Commission on Growth and Development on the Implications of the 2008 Financial crisis (published this year by the World Bank) entitled Post-Crisis Growth in Developing Countries argues that although the crisis will raise the threat of protectionism, an open trading system is expected to survive. In essence, outward-looking, market-friendly strategy will still largely prevail, although the Report expects slower global trade and costlier
capital. Countries, especially emerging markets, may also choose to be more cautious in seeking to become globalized and hence may sacrifice some growth.
Regardless of what happens with regards to building global institutions of governance, there will be no substitute for domestic and regional policies and programmes. Unless and until we have a world government, much of the politics will remain within national boundaries and, hence, domestic policy actions will continue to dominate.
For Nigeria and Africa, the need for even deeper reforms remains critical. Nigeria is Africa’s most populous country and potentially its largest economy. If Nigeria does not succeed economically, it will be difficult for aggregate Sub-Saharan Africa to make it.
Despite nearly three decades of reforms since the structural adjustment
programmes (SAP), African economies remain undiversified with dependence on highly volatile primary commodities and aid. My goal, if the good people of Nigeria employ me as their President next year, will be to lay a solid foundation for Nigeria and Africa to be weaned of this precarious dependence and vulnerability. We would seek to deepen regional integration and diversify national economies to be globally competitive. In essence, my objective is to prepare the economies and ensure that they can withstand future crisis.
As Vice-President of Nigeria, I was the Chairman of the National Planning Commission, Chairman of the National Economic Council (NEC), and Chairman of the National Council on Privatization (NCP). These provided me the platforms to overview and oversee the general economic policies and programmes of government. I hope to build upon my experiences over those eight years as Vice President to
take economic and institutional reforms to the next higher level.
For a start, I understand the importance of critical skills in economic
management. As Vice-President, I helped to assemble what has remained Nigeria’s best economic team ever.
As President, I would assemble a formidable crack economic team and give them all the necessary political support to succeed. Double digit growth of the economy, with millions of high-paying jobs, remain our main target.
We will seek to re-invent government by fundamentally reconstructing our public finance on a path of sustainability, rationalize public sector institutions, and curtail the profligacy that currently adorns public expenditure. Our focus is a private sector-led, competitive economy, and we shall therefore seek to deploy the bulk of public resources to build capacity for the private sector to boom. We shall create the enabling environment for international private capital to flow and stay. A specific target is to significantly improve Nigeria’s rating on
the “Ease of Doing Business Report”, and make Nigeria one of the preferred destinations for FDI in the world. Nigeria and Africa can provide some of the highest rates of returns on investment and we must exploit this.
On specific sectoral issues, my government will insist on the full
implementation of the Financial System Strategy 2020 (FSS 2020), especially as they pertain to tighter regulation and supervision of the financial system, development of a robust mortgage system and consumer credit, commercial courts, and mainstreaming of insurance. We shall lay the foundation for Nigeria to become Africa’s financial hub. Infrastructure development, especially electricity and transport system will be of high priority.
As a former senior official in the Customs service, I am concerned about the inefficient ports and customs clearance system. My target is to embark on a revolution of the sector and ensure that after one year of reforms, importers will be able to clear customs in no more than 48 hours. We shall embark on a revolution in the agricultural sector by mainstreaming large scale commercial agriculture. We shall, for the first time in our history, develop an explicit business plan for our businesses by ensuring that it pays to be in business. For example, there is no reason why we should not cut the tax rate on businesses to say, 10% from the current 33%, and provide them with all the incentives to compete globally.
Of course, our education and health sectors are key priority areas. We have developed the building blocks to fight corruption and money laundering, and we will give the institutions the necessary support to succeed. Safety of life and property is a major concern, and we shall fight tirelessly to reduce crimes and criminality to the barest minimum.
Externally, Nigeria under my leadership will champion the acceleration of regional integration in Africa. We shall critically evaluate the European Union’s Economic Partnership for Africa (EPA) with a view to taking a position. As responsible members of the international community, Nigeria will push for the conclusion of the Millennium Development Round under the WTO.
More fundamentally, Nigeria will work hard with other emerging markets to push for the full implementation of the various accepted proposals for reforming the global financial and monetary architecture. This will be the surest way to ensure that progress made at home will endure, and not be wiped off by the next crisis.
The President, distinguished ladies and gentlemen, let me end this lecture by once more thanking you for the opportunity. The world economy has gone through the worst financial crisis in the last six decades and, thankfully, it has largely survived it. We should not wait for the next crisis to react to.
The world has all it takes to prepare to proactively pre-empt any such potential crisis and deal with it. If we are not careful, the world might be returning to ‘business as usual’ as we are witnessing only marginal changes to the institutions that brought the world so much ruin. There has been so much hype about ‘tightening of regulation, transparency and disclosure’.
What happens if a country fails to fully implement the reforms and future crisis erupts from its own system and destroys others? There is no punishment for being negligent and causing others harm. In effect, the defects of the global system that amplified the 2008 crisis are yet to be remedied.
The Emerging Markets and other developing countries (now accounting for nearly half of world output) are projected by the World Bank and the IMF to continue to grow much faster (about 6%) compared to the average of 2% for the rich industrial countries in the medium term. As developing countries continue to out-pace the industrial countries, tensions might grow as each country tries to ‘protect’ its gains. Only an effective global coordination system can stabilize the future.
As for me, while I am optimistic that world leaders will sooner or later rise up to the challenge of acting to preserve our common destiny, my primary focus now is how Nigeria and Africa will claim the 21st century. We are determined to do our part, and hope that the rest of the world will not pull us back.
Thank you for listening.
Being the text of a lecture delivered by Atiku Abubakar, former Vice President of Nigeria and Presidential Aspirant, as part of the Executive Speaker Series of the Hult International Business School, at the Chancellor’s Hall, Senate House, University of London,Tuesday 30 November, 2010.