Nigeria needs a growth miracle
By having a president who could not sustain the path we were on for 8 years, per capita income is 61.8% below potential.
The formidable work needed for a full recovery after a period of material decline is hard for humans to comprehend, even for people who work with numbers.
The destination is always clear and an obvious desire but the level of work that must be done for full recovery is always understated.
Maybe that is a good trait among the general population. We need more optimists to get in the arena, right? But for policymakers, it is horrible. You are stuck in a go-slow mode when you require urgency.
How much has an economic slump cost Nigeria?
Even analysts like myself who track the performance of the economy and make forecasts do not properly account for the cost of a premature slump.
We think of how well the economy has done in the past and expect economic growth to return to such levels after some downturn. We expect a mean reversion; a concept that suggests that growth will return back to trend.
But mean reversion is a “lie” with exceptions. Mean reversion to the upside is harder than to the downside. Based on the natural order of things, it is easier to collapse to the mean and even below it than to grow up to it. When you collapse, a complete recovery requires even more work.
But mean reversion is not a “lie”. It is easier to go back up when you are down. Now, if we work hard to return growth back to trend, we analysts say the economy is doing as well as it used to do.
In the Nigerian case we talk about a return to the growth of 7% that drove improvements in per capita income until 2014. With some conditions, such as the government implementing some reforms, we expect a renewal. The sort of renewal that pulls growth back up, back to trend. What we never say is that returning back to trend does not restore the path of a more superior quality of life we were on.
Returning growth to trend is not enough. At least not for a developing economy with huge potential.
If we had continued on the 2014 trajectory, per capita income would have been $5,722 in 2022 rather than the actual $2,184 (which is generous because it was at a N448/$1 exchange rate) reported by the World Bank. By having a president who could not sustain the path we were on for 8 years, per capita income is 61.8% below potential. And compared to the historical peak of $3,200 in 2014, we are down 31.8%. This is why there is so much hardship in the country at the moment.
This needs to be a clear message that guides any serious governance in Nigeria. We are $3,538 short in per capita terms as at 2022! It means we have our work cut out for us, otherwise the costs pile up.
If over the next 10 years, we happen on good fortune and start growing at around 7.53%, the per capita income growth for 2014, we will only reach a per capita income of $4,515 by 2032 rather than $11,828 based on pre-2015 trend.
At this point, I am sure we will take $4,515 over the next 10 years. However, the point is that we are horrible at counting the costs of an economic slump. We must count these costs properly, document it and ensure we never make the same mistakes again.
Politicians, like analysts, are terrible at counting the costs of a slump, and even worse at taking accountability.
To catch up to our per capita income trend of $11,828 by 2032, we need to grow per capita income by 18.4% annually. Considering our population growth of around 2.5%, this means that we must grow nominal GDP in dollar terms by 21.4% annually to reach that target. Now, let’s throw currency depreciation into the equation. If we assume that our currency depreciates annually based on the historical inflation differential with the US of 10%, then we most grow GDP in local currency by 33.4% annually.
In simple terms, we could have just maintained our 7.5% per capita income growth over the past 8 years. But since we did not do that, we now have to grow per capita income by 18.4% over the next 10 years to return to the path we were on before 2015.
The longer you stay below trend, the harder it is to rise up to it. Yet you must if you desire prosperity.
I know some people will argue that it is not realistic to grow per capita income forever at the 7% trend that existed prior to 2015. That is true, but we can try it for some decades. A 7% growth over 20 years is only a tripling of per capita GDP.
Is it enough?
It is not unrealistic for a developing economy that has aspirations to lift 100 million people out of poverty to grow faster and for longer. It has been done in Asia too. Over the past 30 years, Vietnam has increased per capita income by 28.4x to $4,163 — that is 11.8% per capita income growth annually. Nigeria grew per capita income to an overstated $2,184 in 30 years by only 4.3% annually. We both started at a low base, with Nigeria at $477 per capita income and Vietnam at $141 in 1992.
We need our own growth miracle.