The Myth of Trickle Down Economic Policies


We need to question how we reward value as a society. You cannot have so many billionaires and yet so much poverty and unemployment. What then have these billionaires created of value that serves to justify their wealth?

 Dr. Makanjuola, Resident Surgeon LUTH, Lagos, Nigeria

    image via mediafreedominternational.org

     The IMF, World Bank, African Development Bank believe that to drive development in the third world, particularly in Africa, there is need to make the local investment climate suitable to foreign investors. They insist that governments that must benefit from their funds must put in place policies that guarantee the safety of foreign investments, ensure emphasis on improving public infrastructure so as not to erode investors’ profits and enable ‘fair’ competition for foreign investors by removing subsidy regimes that prevent foreign investors from risking capital for critical ventures. For many governments that buy into this argument, there usually is the hope that the foreign investments that result from pursuing these dictates will enable their country’s economy pick up and that the ventures that start up will generate employment for their teeming unemployed.

     That many governments still buy into this model despite poor antecedent results remains a puzzle that is explained only by that these governments are simply desperate for these funds and that they lack a better alternative source of funding.

      These policies do create jobs. However most of the jobs created are usually of a temporary nature i.e. contract jobs with few benefits and minimum wages. Most of the high earning jobs created are usually filled by expatriates or friends and family of the political elite of these nations. As a result, the direct benefits of these policies benefit western economies/companies and the political elite that collaborate with these companies.

     The real economy i.e. the one that concerns the ordinary man is however unaffected and employment numbers remain dismal especially as more children of ordinary citizens come of age and begin to seek for jobs.

  The trickle down effect is thus a myth and it benefits only the top tier economy of the elite and expatriates. Most of the high growth figures for developing economies, that make use of trickle down policies, apply only to large companies and it is no wonder that the outlook for the ordinary citizens despite strong macroeconomic figures remains bleak.

Ngozi Okonjo-Iweala,

Nigeria’s Coordinating minister for the Economy
cp-africa.com

  Unfortunately these same policies are being pursued vigorously by the Nigerian coordinating minister for the economy, Okonjo Iweala. Her approach is no surprise given her background and work experience in the World Bank. Hence, consciously or not, her training makes her execute policies that benefit the imperialistic interests of the West.

 It saddens me that most of the people here will not be able to afford these top level programs in the USA. Most of those who can will be those who have a rich father or uncle who has become wealthy dubiously.

 US top official at a recently held top level MBA fair in Lagos, Nigeria

     Her policies are creating jobs. But the question is jobs for whom? Can young school leavers who only boast of First degrees, fill these vacancies? Most of these jobs are open mostly to those with skills that are beyond what the first degree can confer. Also a lot of the technical positions are usually for those with multiple years of experience in the field. However as most of these job functions are new in Nigeria, it implies that there will be few local people who can have the relevant skills for these jobs and thus only those with foreign training and work experience can fill these positions. And can the children of the ordinary man afford to study overseas? Is it not the elite, with their stolen funds who can foot the exorbitant study fees for their children overseas? Hence one can thus see the self perpetuating ways of the rich and why jobs in Nigeria go to the children of the political elite and their cronies. Most of the children of ordinary citizens must remain content with low pay contract jobs or must remain unemployed.

    The foregoing thus explains the myth of the trickle down effect of international development bank policies. Simply put they do not work to the benefit of the ordinary citizen but they rather serve to accentuate economic disparity between the elite and ordinary citizens of developing economies.

 

    Lamido Sanusi

Central Bank Governor, Nigeria
image via ynaija.com

     Many times these policies sacrifice the little gains made by ordinary citizens in the guise of reducing budget deficits or meeting absurd monetary policy rate targets. Take for example the recent bid by Lamido Sanusi’s central bank of Nigeria to avoid inflation. In order to do this, he has increased the cost to banks of holding on to funds hence most of them have to turn their cash over to the CBN thus reducing their ability to lend. Thus real economy operators who seek funds must borrow at exorbitant rates and this increased borrowing cost is passed on to the consumer. This leads to higher prices for basic commodities, higher cost of living and further erosion in whatever value is left for ordinary citizens. Yet has the CBN governor addressed the real cause for the large amount of funds in the various banks? Is it not due to outrageous salaries of the political elite and the wanton and imprudent spending of the government he is working for? Why should the CBN governor not seek to address this? Why should the poor man on the streets and the hard working entrepreneurs of the real economy pay for the indiscretion of the political elite? Is it because it is more difficult to force change against the ruling elite than against the ordinary man?

 Logo of Lagos State, Nigeria

image via lasg-ebs-rcm.com

     Yet it is not only the federal government of Nigeria that pursues these self serving policies. Even states run by so-called opposition parties with the possible exception of Osun state make use of these policies that cater to the elite. Take for example Lagos state. In many places in the state, informal markets spring up in the evenings. Many of these people who trade in these markets cannot afford to pay rents or taxes in the demolished markets that have now been rebuilt into lock up shops. The Lagos state government asked many of these people to return to their places of origin forgetting that Lagos is what it is because of the various and large number of people who seek their living within its boundaries. Without such a number it will not be the great commercial hub it currently is. Imagine how much more these traders will make daily if they could get to trade during normal hours. Imagine how much better they will be able to take care of their families. Many of the policies of this government cater to the interests of the state’s political and economic elite and the real cost to the ordinary Lagosian is that he pays higher and multiple taxes at every turn and is subject to living in fear of the arbitrariness of the state government’s numerous uniformed officers.

     The real economy can however be affected positively if economic policies relevant to the ordinary people are pursued. To do this, the following must be done:-

A)     Invest in public infrastructure:

     The focus should be on roads and power. Contracts issued in these sectors should be to local small and medium enterprises rather than to foreign companies or large local firms. The SME’s that receive these contracts can hire expatriates to provide whatever technical skill they lack. The cost for this will of course be covered by their contract bid.

      Investment in power will keep small scale artisans e.g. tailors, welders etc employed while good roads especially from rural areas to the cities will ensure that farmers get good returns for their produce.

        Contracts to local SMEs will lead to employment for ordinary citizens without the need for ‘connections’ and will help improve local technical capacities.

You simply cannot grow an economy by promoting the interests of its elite; you grow an economy by directly addressing the economic challenges of your poor and working class. You grow an economy by connecting with the ordinary man.

 

Adebayo Alonge, ‘Solutions Ideator’

B)     Focus on Micro financing

     The loans that benefit the people are not the huge sums negotiated in billions of dollars in Paris but rather the small thousands of naira disbursed through cooperatives to small business people. The CBN’s focus should be on how to ensure that microfinance loans have interest rates that are affordable to the small business owner rather than stifling economic activity in its bid after illusionary inflation control.

C)    Outlaw foreign accounts for the political elite

              A lot of stolen funds are in foreign banks unable to create value for the local economy. In the absence of the will or ability to stem corruption, if political office holders, their families and cronies can only have accounts within Nigeria, a lot of expansionary value as per increased lending at lower interest rates can be done by local banks. Also the availability of these funds close by may spur the looters into thinking up economic activities in a bid to get their loot to work and in the process this will create jobs and increased local productivity. This will increase the chances that export oriented industries will emerge given that possible surpluses will be generated and this will be of immense benefit to multiple sectors of the economy.

African leaders need to connect with their people. If they love their people rather than rule them, their people will love them back in return. This will prevent the numerous conflicts over resources on the continent.

 

Joyce Banda, President Malawi

image via malawivoice.com

D)     Use savings to create welfare fund

         The Nigerian government needs to cut public spending drastically. It needs to reduce significantly salaries and allowances paid to public officials, serving and retired political office holders. It needs to cut down the public work force given the huge redundancies in many ministries all over the country. It needs to adopt a unicameral legislature and streamline public offices nation wide.

         The savings made should serve as welfare fund for the unemployed. This will motivate citizens to try out entrepreneurship without the fear of economic ruin if they fail in their ventures. The attendant benefits will be immense as creative and innovation industries will emerge .

E)    Focus on technical education

           Artisans

image via johnpool.net

     A lot of the unemployment seen today is due to the larger number of university graduates churned out yearly. The university is not set up to train students to apply solutions on their own. It is set up so that its graduates provide manpower for corporations. As these corporations are mostly non existent or fill vacancies using expatriates, unemployment is high amongst university graduates who are in the majority given the recent societal craze for the university degree.

           Technical schools on the other hand prepare their graduates to be self sufficient- able to apply solutions for themselves within the context of their environment.

       The reason why so many graduates today seek paid employment almost by reflex is because of where they have trained. Artisan trainees set up their workshops on attaining ‘freedom’ from their masters. It is this sort of artisan and technical education that the government should aim to encourage. The export industry of India is built on this premise and is why many households in India have factories however small; whose products solve problems millions of miles away on other continents. This can be Nigeria’s story as well.

 image via justynsmith.com

          The coordinating minister for the economy, Dr. Okonjo Iweala needs to reassess the policies she is currently pursuing. She needs to take seriously the recent comment in Nigeria by the Malawian President Joyce Banda, on the need for African leaders to connect with their people. She needs to connect with the ordinary man in Nigeria so as to assess whether her policies affect him positively or otherwise. This will help her modify her policy thrust in a manner that impacts positively on the ordinary Nigerian rather than enriching those close to the seat of power. Trickle down economic policies do not work. President Bush of the USA tried it to disastrous effects. The IMF and World Bank have tried it in numerous countries with disastrous effects to the livelihoods of ordinary people. You simply cannot grow an economy by promoting the interests of its elite; you grow an economy by directly addressing the economic challenges of your poor and working class. You grow an economy by connecting with the ordinary man.

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7 thoughts on “The Myth of Trickle Down Economic Policies”

  1. The rate at which these economic policies are churned out, one wonders if a body of economists that are not disconnected from reality are the ones making these decisions as an institution or just individuals with political motives. Whichever case it is, there is an obvious disconnect with respect to the impact of these policies on d ordinary nigerian and their supposed outcome. We need to increase net export, reduce interest rate, increase govt expenditure relative to investment rather than recurrent expenditure and stimulate aggregate demand. Progress is what we need not circumambulation

    1. Dear Adagba,

      Well summed up. Our economic team needs to look beyond theoretical economics and be inventive enough to modify economic thrusts in such a manner that directly impacts on the people positively.

      They need to let the people know where they are going with the economy rather than pursuing economic policy somersaults on a consistent basis.

      Nice one there.

  2. Sorry but while I do not always subscribe to policy dictates of the Bretton Woods Institutions – i feel they are not 100% but at least 70% right. The author of this piece seems contradictory himself – for starters he says IMF/WB postulates can be broken down into three major thrusts > Having a good legal/regulatory framework, Infrastructure and and the establishment of the market system. He then dismisses all three as simply for the benefit of foreign investors but crucially when he prescribes his ideas he first lists infrastructure, outlawing foreign accounts for political elite, a welfare fund and technical education like artisans.

    His first idea is synonymous with Bretton Woods ideas so nothing there, foreign accounts are already outlawed for political office holders in Nigeria so that is a pretty useless prescription – a welfare fund has its advantages and technical/artisan-ship education in this day and age of technology. you gotta be kidding me.

    Now to the IMF drugs having a good legal and regulatory systems is not bad because if u had one why would politicians flout it by sending stolen wealth abroad. the purpose of setting up a good legal system with clear rules and efficient enforcement of contracts is not just for foreigners but indeed for locals. why do people have this culture of impunity – its simple they can get away with it. on this you’d agree with the IMF good policy

    on the establishment of a market system and removal of subsidies again the argument here is as clear as Nitel and our current telcoms market. Nitel will soon go bankrupt and file for liquidation why? they had no incentive to be efficient and thus wasted a whole lot of money delivering crass services to Nigerians not saying that the current telcos are perfect but would you go back to Nitel days or agree competition has benefits. It ensures everyone are on their toes and deliver their best as they wouldn’t survive.

    this morbid fear of the IMF would do no good – its meaningless. Nigeria needs to make structural reforms that enable us grow they will be painful but we would be better for it. And now a case study while Nigerians groaned, complained and rejected SAP Ghana took the same SAP medicine painfully but today they are better for it. Nigerians want to get to the promised land without making those painful adjustments. we want out govt to give us low interest rates yet we wont buy a Nigeria made bullet proof vest or eat cassava bread we want to import everything and then when the CBN fights the resulting price inflation through interest rates we complain they are not allowing growth. You ban certain imports we claim govt is evil and harassing and not being rational. Tell me seriously what to do in this den of irrationality.

    Clearly the writer is a doctor – i think if he wants to dabble into economics he should read up a few books on it. He’ll adopt a clearer position and be better for it. the gaffe on fighting inflation pretty much exposes this. if you dont fight inflation who would be worse off – the rich or poor?

    1. Wallesmit,
      You make some very valid points. But you cannot dismiss the author’s points- as things are now, stimulating FDI will only serve the interests of the elite because that’s how it is right now. Multinationals in Nigeria are populated by children of the elite. (These are very subjective statements but I’m talking from personal experience). He also has a point that infrastructure must be improved to stimulate the growth of small businesses and interest rates must be lowered to encourage the setting up of these small businesses. In essence, the economy will grow if these SMEs are given the right environment to thrive. SMEs are set up by the ordinary man. The economic policies must therefore cater to the needs of the ordinary man. If this is what the author is saying, I agree with him.
      You say that Nigerians are unwilling to make sacrifices but let me ask you this – why should they if the people they elected to lead them refuse to make any? These people pay themselves astronomical amounts of money but minimum wage is a paltry N18000. And you expect them to be willing to make sacrifices? It has to be a collective effort. The CBN governor, in his bid to fight inflation, makes it more expensive to acquire capital. How is this not an elitist policy?

      1. Thanks fatsoul 😉
        The statement that FDI stimulation only serves the elite is as you pointed out subjective. A bit of history here again FDI serves to fill in a gap – inadequate domestic savings mobilization for capital investments that take advantage of local economies of scale to ensure efficient production of goods and services at profitable returns. African countries have a problem mobilizing local savings due to weak financial systems thus local entrepreneurs cannot obtain capital to finance profitable ideas. A way out is to import capital from abroad. Now the folly in your FDI logic -> while you espouse these protectionist ideals against foreign capital investments, Ghana and many other economies have attracted it and are developing because their regulatory/legal framework was also developed to avoid exploitation. The problem you observed from your subjective personal experience is an effect not a cause – being a weak legal system we cannot protect ourselves from exploitation. Which leads to the erroneous prescription of SMEs as a solution to economic growth. No mainstream heavily populated country developed by SMEs check it. The Asian tigers all developed by massive capital injections/investments in heavy industries and technology aided directly by their govts support. Take Japan nearly all major Japanese companies except Honda are inter-linked via a system called ‘keiretsus’ via which the Japanese govt provides funding for. S. Korea adopted a similar approach called ‘chaebols’ via which the Samsungs, LGs etc emerged. We cannot apply same idea in Nigeria as we unlike many Asian countries are a plural society: A govt backing one side may be viewed as tribalism/nepotism.
        The SME/Micro financing idea spun from the Grameen Bank logic has a clear problem : Micro-finance has failed as a development aid. Bangladesh is no better than Nigeria and even in Nigeria nearly all the MFs failed thankfully now the CBN is reforming them. There is no evidence to support success of SMEs, well they help fight direct poverty but fighting poverty does not spur economic growth but leaves the poverty fighter perpetually dependent on foreign aid.
        At the heart of the issue is that SME’s are by nature are high risk, thus what they need are people who can bet against such risk – Venture Capitalists/ Private equity funds. Bill Gates and many top firms were funded by VC’s who took risks that these ideas would work. Capital mobilization of the proportion required to set-up heavy industries critical for economic growth cannot obtain rewards commensurate to the risks involved in SME’s.
        On your people not wanting to make sacrifices because of the public officers – there’s a thing called the ‘time inconsistency problem’. I will explain, let’s take the fuel subsidy for example: in time period 1 Govt declares, “we want to remove fuel subsidy so that in time period 2 we can use the money saved to develop the economy”. The people say, “ok if we allow govt to remove the subsidy in time period 1 what hedge do we have if in time period 2 the govt changes their mind and decides to reverse its decision by eating the savings?” Can we also change our mind and reverse our action? i.e. put our subsidy back? No! So in essence we are taking a gamble that govt will keep its promise and be credible but we have a long history of dubious politicians so NO to subsidy as we cannot reverse a decision. In essence the problem is time inconsistent because one party cannot go back to reverse its action while the other can.
        That’s why we are here today – the CBN has to fight inflation by fostering high interest rates because of our exchange rate management system. If nominal interest rates are lower than inflation rate – no wise investor will borrow money invest locally what you will have is capital flight i.e. normal people will lend from the banks use it obtain forex and warehouse the money abroad earning arbitrage profits in the process because the economic realities tell u this govt isn’t going to fight inflation so why hold capital locally when its value its eroding by inflation. You might say why don’t we change our exchange rate management system – again that would involve devaluing the naira to a much higher rate which would be unacceptable to the populace again for the time inconsistency issue they don’t trust the govt. to utilize the reserves conscientiously
        Thus our policies are a reflection of this status quo because govt lacks credibility it cannot undertake painful structural reforms that require its credibility upfront. Policy making only serves to keep the stalemate till the next external shock comes along. Furthermore looking at inflation it’s really fired by food and fuel prices – both of which we import and thus outside the jurisdiction of the central bank. Economics is not an exact science it’s a study of choices among trade-offs whose costs are real. Even if Buhari or Angel Gabriel were head of state we would still have to make the painful adjustments – the question is are we ready?

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