Bad policies cause recessions, only good policies can fix them                                                           

The world economy has experienced many “Greats”, most of them unpalatable. The “Great Depression”, from 1929 to 1939, was described in one literature as “the deepest and longest-lasting economic downturn in history”. Then came the “Great Inflation” from 1965 to 1982, a period characterised by four economic recessions, two severe energy crises and high inflation. But after the two turbulent eras, there was a respite, with the “Great Moderation”, from 1982 to 2007. This was an era of relative calm, of decreased macroeconomic volatility, with low and stable inflation and a long period of economic expansion. However, with the economy, any economy, good times never last forever; every boom always turns into a bust! Thus, the Great Moderation ended abruptly in 2008 when the world was hit by the “Great Recession”, a prolonged period of low/negative growth.
Now, history tells us that major economic downturns are caused by a combination of bad domestic policies and adverse external factors. Thus, the Great Depression was triggered or escalated by the strictures of the gold standard and the beggar-thy-neighbour economic policies pursued by many Western countries. In 1930, the US introduced the Smoot-Hawley Tariff Act, raising tariffs on over 20,000 imported goods to over 60 percent, which provoked retaliations and, according to many analysts, not least the famous economist Charles Kindleberger, exacerbated the Great Depression.
The Great Inflation also owed its causes to domestic and systemic policy failures. Aggressive Keynesian fiscal policy in the early 1960s triggered inflation. But the decision of the US to renege on its commitment under the gold-dollar standard to exchange dollars for gold, when President Richard Nixon closed the gold window in 1971, did not only destroy the Bretton Woods system, designed to ensure monetary and economic stability, it ushered in an era of reckless fiscal expansionism and, inevitably, triggered the Great Inflation. But while the Great Depression and the Great Inflation were caused by bad policies, the Great Moderation was induced by good ones. High inflation and volatility inevitably led to the discrediting and abandonment of Keynesianism, which was replaced with better monetary policy, deregulation and more open international trade and capital flows. The result was the Great Moderation, the longest period of economic stability and boom since WWII.
But the prolonged period of relative calm lulled politicians and market operators into a false sense of security and a misguided belief that they had, as a British prime minister once boasted, ended economic boom and bust! They let down their guards, took deregulation to the extreme, embarked on populist economic policies and, in the case of the market operators, took excessive risks. In pursuit of its well-meaning but populist vision of a property-owning democracy, the US government gave cheap mortgages, known as sub-prime loans, to poor people who couldn’t afford them. Banks then repackaged the mortgages and sold them as securities around the world. But massive defaults on debt repayments later caused the value of the mortgaged-backed securities to crash significantly. The consequence was the global credit crunch, which led to financial instability and a downturn in the wider economy. Thus, was the Great Recession born!
Nigeria has entered its own Great Recession. Yes, it qualifies for the adjective, “Great”. I mean, here is an economy that was growing at around 5 percent in 2015, but now has a negative growth rate of -2.06 percent, with inflation running at over 17 percent. But everyone knows why the country is in this mess. Leave aside the fact that Nigeria failed to diversify its export base, which is tantamount to criminal negligence on the parts of its leaders, what about the failure to save and invest when this country was awash with oil money? Of course, the fall in oil prices – an external shock – is a major cause of Nigeria’s recession, but the failure to insure the country against external shocks by saving and investing for the rainy day is a more serious cause of the catastrophe. It’s a reckless neglect of the responsibility to govern well. But, as the saying goes: “If you find yourself in a hole, stop digging”. And this is where the Buhari government is blameable.  Of course, it inherited a bad economy, but it has made a bad situation worse.
President Buhari’s misguided policy, stubbornly pursued for over a year, to control foreign exchange and peg the naira asphyxiated the investment climate and haemorrhaged the foreign exchange. By the time the president grudgingly changed his mind and partially floated the naira and abolished fuel subsidies, the economy was comatose; things had got really bad. But, sadly, even now, the government is making wrong policy choices. I say this because, for me, the Buhari administration’s decision to “spend the economy out of recession” will only sink the country deeper into the economic abyss. There is no evidence that an expansionary fiscal approach is an efficient and effective way of tackling a recession.  Take, for instance, the contrasting examples of the American and British responses to the recession triggered by 2008 global financial crisis.
When President Obama came to power in January 2009, he inherited a recession and a $152 billion stimulus package from his predecessor, George W Bush. But Obama went for a full Keynesian approach, and introduced his own stimulus package, costing more than $800 billion, to be spent on infrastructure, energy, tax rebates and social welfare benefits. But several economists argued that Obama’s expansionary fiscal spending had minimal impact on growth while hugely increasing the deficits. Indeed, the US economy grew this year at a miserly 1.2 percent. Business investment is very weak, falling 2.2 percent. The US economy is out of recession, according to analysts, simply because of consumer spending, which grew by 4.2 percent. If Keynesianism is the answer, a whopping $800 billion spending spree should have stimulated massive business investment, economic growth and employment.
Now, consider the alternative British approach. Despite a serious recession, the British government that came to power in 2010 refused to embark on expansionary fiscal spending, but, in fact, did the opposite: It pursued fiscal tightening, aimed at deficit reduction. The government’s view was that reducing deficits and public borrowing would boost private sector confidence and reduce competition for funds for private sector investment. The only interventions were through monetary policy, particularly interest rates, which were cut by the Bank of England from 5 percent to 0.5 percent as well as “quantitative easing”, an electronic money created by the Bank of England to buy assets and increase money in the economy. But these monetary measures were only possible because the government kept a tight grip on fiscal spending, thereby keeping inflation low. Welfare spending was massively cut. Public sector jobs were scheduled to be cut by 40 percent. Indeed, since 2010 until 2014, the number of civil servants fell by 15 percent, with the target being 23 percent by 2016. The government aims for a budget surplus by 2019/20.
But if you think governments should be spending massively and not tightening public finances during a recession, think about the results of the UK approach. The job cuts in the public sector have been more than matched by increases in private sector employment.  In July this year, unemployment in the UK fell to 4.9 percent, making it the G7 country with the strongest employment rate growth. The UK also has the fastest growing economy in the G7, with 2.2 percent year-on-year growth. Unlike in the US, where industrial output is weak, in the UK, it grew by 2.1 percent. Thus, while an $800 billion fiscal stimulus has had a muted impact on growth and employment in the US, fiscal consolidation and public sector reform haven’t only taken the UK out of recession, but made it the fastest growing economy in the G7, with the highest employment rate growth.
So, when I read that Nigeria wants to spend its way out of recession and intends to borrow heavily to do so, I shudder. The Buhari government is behaving like a socialist regime, wanting to spend, spend and spend. Most socialist governments tax and spend, but this government wants to borrow and spend. Of course, Nigeria should transform its infrastructure, but serious infrastructure projects are financed through public-private partnership. The Buhari government has rarely talked about PPP; it is averse to working with or through the private sector. Rather, it wants to throw public money, borrowed money, at everything. This is what a British politician called “21st-century socialism”. Trouble is, it won’t get Nigeria out of recession. Foreign investors will not go to a country that is living on debt, that can’t get its macroeconomics right and that is crowding out the private sector with fiscal activism. Only root-and-branch reforms to cut the costs of doing business and of running Nigeria, and to restructure it, will move the country forward!

Olu Fasan