In support of supply-side policies, By Uddin Ifeanyi

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Is there, thus, a case to argue that as it is presently structured, the Nigerian economy will be better served by reforms that expand its supply-side (including the productivity-enhancing sort, and infrastructure investment), rather than from pure consumption stimulus? The unvarnished answer is, yes. Done well, a boost to the economy’s supply-side would create the jobs that drive demand for the economy’s new output.

Peek under the buzz around its reform credentials, and the truth is that the Tinubu administration’s policies, thus far, have largely favoured the economy’s demand side – an increase in the minimum wage, and, through tax reforms, a redistribution of income away from high earners towards low-earning segments of the population, representing the high watermark episodes of its policy bias. Given that folks lower down the wage ladder consume more of their earnings than their richer corporate brethren and employers, it is tempting to think of a boost to their earnings as a solution to the recovery in domestic demand that the economy so badly craves. That, though, is before you consider the more general effects of demand-side policies on an economy.

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While an increase in disposable income (unsupported by productivity growth) may serve to pull in investment that will supply an increase in demand, structural impediments to an economy’s supply responses inevitably mean that this new money would more likely result in an increase in prices. This is the main inflationary argument against excessive fiscal or monetary stimulus: domestic prices go up, when aggregate demand rises, faster than the economy’s ability to produce goods and services.

An increase in government spending, a reduction in taxes, an expansion of credit, or the lowering of the economy’s cost of borrowing should boost spending by households and businesses. This, in turn, should boost domestic production. But where poor electricity supply, weak transport systems, import dependence, insecurity, and FX shortages prevent firms from increasing output, even when consumers have more money to spend, the result is the upward pressure on prices. The extra demand may also boost imports and put pressure on the domestic currency.

…it is a conversation about spare capacity. Which Nigeria has not had and currently does not have. Over the years in this country, therefore, the inflationary effect of demand-side policies has been exacerbated by severe supply bottlenecks, high import dependence, significant exchange-rate pass-through, and the limitations of huge and widening infrastructure gaps…

This is not always the case, though. After 2023, the post-pandemic stimulus programmes that we saw advanced economies implement did not drive prices up in those economies – at least initially. The outcome was far more benevolent. Why so? In economies with high unemployment, idle factories, weak consumer demand, and recessionary conditions, governments may stimulate demand and see both increases in output and employment, without causing large price increases.

This is the Keynesian argument. In this sense, it is a conversation about spare capacity. Which Nigeria has not had and currently does not have. Over the years in this country, therefore, the inflationary effect of demand-side policies has been exacerbated by severe supply bottlenecks, high import dependence, significant exchange-rate pass-through, and the limitations of huge and widening infrastructure gaps on the economy’s ability to drive productivity growth.

Is there, thus, a case to argue that as it is presently structured, the Nigerian economy will be better served by reforms that expand its supply-side (including the productivity-enhancing sort, and infrastructure investment), rather than from pure consumption stimulus? The unvarnished answer is, yes. Done well, a boost to the economy’s supply-side would create the jobs that drive demand for the economy’s new output. Jean-Baptiste Say put it more concisely, “A product is no sooner created, than it, from that instant, affords a market for other products to the full extent of its own value.”

Whatever our policymakers’ intent, we cannot continue to indulge two conceits. First, we cannot hope to attract foreign direct investments if Nigerians with means (i.e. the ones who do not consume most of what they earn) would rather keep their nest eggs in dollars. Neither can we continue to believe that the investment that the Nigerian economy needs can be provided entirely by government.

But, not before, in the Nigerian case, our governments start to prioritise policies and measures aimed at increasing the economy’s productive capacity — improving how efficiently labour, capital, infrastructure, technology, and institutions work so that businesses can produce more goods and services at lower costs. This brings us back to the consideration of what our policy wonks mean when they discuss power sector reform, transport and logistics infrastructure, agricultural productivity, peoples’ skills and education, industrial and manufacturing policy, regulatory and institutional reforms, financial sector deepening, exchange rate and trade reform, security and rule of law, digital and technology infrastructure, etc.

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Whatever our policymakers’ intent, we cannot continue to indulge two conceits. First, we cannot hope to attract foreign direct investments if Nigerians with means (i.e. the ones who do not consume most of what they earn) would rather keep their nest eggs in dollars. Neither can we continue to believe that the investment that the Nigerian economy needs can be provided entirely by government. Government spending, at its most enlightened, ought only to be to the extent that it makes private investments easier. The problem is that even assessed against its own development programmes, the Nigerian government increasingly lacks the financial muscle to do what needs to be done.

Uddin Ifeanyi, a journalist manqué and retired civil servant, can be reached @IfeanyiUddin.