July 17, 2015by Tope Fasua0

(Serious lessons for Nigeria’s economic managers).


Just how did Puerto Rico get itself into such a fix? $72billion owed by a country of 3million people? The country’s population had even been decreasing in absolute terms. Over 400,000 of its citizens simply disappeared in the last decade. The future points to a ‘ghost country’; totally abandoned, or parceled and sold off to foreign moneybags. Puerto Ricans are US Citizens, the USA having ‘inherited’ the island from Spain after the Spanish-American war of 1898. This American affiliation should have been a prestigious and advantageous thing, but Puerto Rico is a ‘territory’ of the USA, and therefore doesn’t enjoy some of the perks of being a proper ‘state’ of the USA; for example the right to declare bankruptcy, like Detroit did not so long ago. Some also say, that what the US gives, the US takes back. At least Puerto Ricans can migrate to US mainland at will, hence the consistent drop in population.

Puerto Rico is in a bind. What sort of economics makes a country owe so much without anything to point to? Apparently someone bought some economic policy off the shelf and implemented it hook, line and sinker. Puerto Rico is a testimony to the fact that a nation must look inwards and understand itself. If you read textbooks, invite foreign ‘experts’ and listen to those who don’t really have a stake in your country and your people, what you get is total disaster! Everyone, every economic manager, especially coming from ‘successful’ countries, has only one allegiance. That allegiance is not to foreign countries… or towards a better world.

The history of the Puerto Rican debt and recent default goes thus; at some point, the US Government tried to ‘encourage’ that country by exempting entities who buy its bonds from taxes. This led to Puerto Rican bonds being very attractive. Hedge funds, mutual funds and individuals pumped in money and loaded up on Puerto Rican bonds. Moral hazard set in. At some other time, the US Government granted tax incentives to companies that establish industries in Puerto Rico. A pharmaceutical industry developed. Many Puerto Ricans found jobs. But by 2006 the same US Government removed all incentives and many of the companies closed down, throwing their staff on the streets. The lesson to learn here is that the bulk of the benefits in a capitalist society does not go to workers, or labour, but to Capital and those who own capital. Salaries and wages are great, so long as they keep coming. What sustains generations though, are good, sometimes mega profits, made from entrepreneurship. The ease with which companies can pack it all up and leave is also subject for discussion on another day. The world has changed.

At every point where the Puerto Rican economy grew on the back of these incentives, the owners of industries cashed out big time, while employing less and less numbers due to technology and innovation. It was thus easy for these entrepreneurs to up and leave once the incentives disappeared. Puerto Rican labour, was left, holding the can. Pardon the pun.


There is the reason why the per capita income of Puerto Rico is over $16,340 (as compared to Nigeria at $2,400), yet a whole 41% of its citizens live below poverty lines! Where is the money at? It must be that a few Puerto Rican residents – who are also Americans – are extremely rich, while most people there, are extremely poor. The promise of a better life, which shows up in the occasional wave of job availability, was all but flashes in the pan. Economic managers must discipline themselves with long term planning. Momentary accolades seem to be their preoccupation presently. The speed with which capital retracts/migrates to wherever it gets the most returns, is also evident here. Are we to buy the usual refrain, that all a country has to do is be competitive, attract foreign capital, borrow and devalue, in order to get out of the doldrums?

For Puerto Rico, it is even a bit more complicated. Like Greece, that country is in some sort of economic union. Puerto Rico does not have an economic base, yet it spends US Dollars, having no currency of its own. It therefore cannot even devalue its currency even if it wanted. That is where devaluation could have led – hypothetically – to some imaginary Puerto Rican ‘export’ becoming more ‘attractive’. The real idea behind devaluation (if it works), is to annoy your citizens to the extent that they stop buying foreign goods which you will put beyond their reach. This also leads to riots on the streets and a spike in crime rates.


Then there is a US law which totally screws up everything for this tiny country. The law says that no goods can be shipped first into Puerto Rican ports and then onwards to the US mainland. Using Cabotage laws, goods are shipped first to the US mainland, from where US shippers will then ship back to Puerto Rico, making everything more expensive for the citizens of this small country. This law has led to a permanent increase in the cost of living on the island, where they enjoy the same minimum wage as mainland USA (another luxury they could ill-afford; imagine such a high minimum wage with no economic basis to justify it?). Such a high minimum wage just locks out too many people from gaining access to employment. Nigerian labour unions are asking for higher wages presently. Government will do well to resist. Better to spread the jam, rather than concentrate it in one corner of the bread. Too many people – especially the youth – need to get on board the gravy train. They cannot all become overnight entrepreneurs and self-employed can they?

Governor Padilla of Puerto Rico declared recently that the country (or is it territory) will have to default on its debts. It missed a payment just yesterday. But the USA will hear none of that, because most of the bondholders are US citizens and financiers. What many people ignore is that this is all a trading strategy (buying bonds of countries that cannot easily default or where some backings exist from a stronger entity. By the way, many financiers would have made tons of money off Greece with all the ‘support’ they have got from Germany and Europe at large).


When the big boys invite you to the big dining table, know your limits. Think for yourself, know when to quit eating before it gets to your turn to pay for everybody. Make sure you can afford what you eat. If a union doesn’t work for you, realize it and reposition quickly. Don’t delude yourself. And lastly, get real patriots to run your economy, not ivy-leaguers whose allegiances are totally elsewhere. Also, when in a hole, stop digging. Always have Kenny Rogers ‘Gambler’ playing in your head…. ‘’You’ve got to know when to hold ‘em, know when to fold ‘en, know when to walk away… know when to run… you never count you money when you’re sitting at the table…’’


This is classic. The Greek mythology books will have to be rewritten. This time, Zeus and Odysseus will have to be deconstructed. The Greeks are being reduced to Zero! Apparently, given the plan of Europe and the Germans especially for this country, we have absolutely nothing to learn anymore, from fabled Greek mythology. Oh, Aristotle, Plato and the rest must be turning in their graves! The new deals being struck by Germany takes everything away from the used-to-be-great Greeks. The land of thinkers now looks like the land of the thoughtless. Athens, the city of the open-minded now resembles an open sesame; a vacuous phenom that retains no institutional memory. How did we get here?

How did Greece, a country of 11million people come to owe 360billion Euro? Just what sort of economics takes a country to such a destination? On what basis did they rack up this debt and towards which projects? Or, like San Juan, those in Athens also subscribed to the school of thought that proposes for a country to keep borrowing because the economy will right itself; that some variant of the ‘trickle-down’ economics will kick in and an ‘invisible hand’ (which is invisible because it doesn’t exist), will sort out everyone? Was Greece deceived too, by the consistent book-cooking reported as GDP growth?


What is evident in the cases of Greece and Puerto Rico, is that yes Socialism may be an utterly stupid idea, but Capitalism is often a dangerously wicked idea (if implemented to the letter, without introspection or conscience). Both are zombie ideologies – they are dead but they still prowl at night. Eventually, in this rat race, we all run out of steam, and those who had taken initial advantage remain on top. And instead of being mere competitors, they hold the rest down by the jugular. Capitalism may have been touted as the ‘best’ economic ideology and is very attractive to human greed, plus it leads to a lot of improvement in society, but when it shows up with its dagger you don’t want to be at the other end of the knife. The cards are also stacked in favour of some countries and entities, and while we all hustle to get better and richer, we had better take note and not delude ourselves.


Greece is presently being asked to sell-off all State-owned companies – at least $50billion worth of them. These companies (utilities) will be bought by none else than foreigners. Germany also wants the proceeds from this sell-off (call it fire-sale because they cannot get anything substantial at such a time), should be managed by Greece’s creditors. $25billion will go towards recapitalizing Greek banks, while the remainder goes towards settling part of the debts. Greece will no longer be owned by Greeks anymore.

Germany played a classic game with the Euro; a game which made some people remark that this is the third world war. The first world war, they say, was fought with guns, the second with tanks and the third – this one – with banks. There is a reason why unfortunate and unprepared countries – like Greece, Puerto Rico, and most of Africa – wallow in one financial trouble or the other. It’s either you know the game and understand what you are doing, or you don’t. If you don’t, your people will reap the rewards; in poverty, disease, unemployment, crime and every bad thing that goes down that alley.


According to an article in Business Insider by Charles Hugh Smith, Germany is an aggressive export-oriented country (Nigeria buys loads of its BMWs and other machines don’t we?). Between years 2000 and 2008, Germany grew its exports by a whopping 65%. In that same period, its domestic demand grew by exactly 0%. Its people had become so content, efficient, logical and disciplined, they weren’t rushing to the shops to buy things they don’t need. Nigeria had better learn from this. Here we binge on everything and anything. Recipe for disaster.

Germany’s exports stands at $1.5trillion as at 2014, comparing favourably with the two top big hitters USA ($1.6trillion), and China ($2.5trillion), yet it’s population is a mere 86million compared with USA at 317million and China at 1.4billion. This is the brutally-efficient country with whom Greek is yoked in a single currency called the Euro. Germany is so efficient, it has a way of subtly devaluing the Euro (for itself only and not for other Eurozone countries), by keeping production costs for its exports down and maintaining wage levels. Whereas countries devalue their currency in order to make exports more attractive, all Germany has to do is to maintain wages and get its people not to binge on all sorts. This way, its cost of production is kept low and exports continue to boom. These people have evolved. What does Greece have to sell in return? Nothing but tourism.

This mismatch brings out a clear issue relating to Economic Complexity. Successful countries are those who export or manufacture value-added and complicated goods and services – into which they have priced their intellectual capital. There is so much tourism Greece could drive, that will match the equipment, cars and machines it buys from Germany


This is the way things work between brutally efficient, export-oriented, or financial-markets driven developed and wise countries (China, USA, Britain, The Netherlands, Germany, Japan, and a few others), and the rest of us;

Under the din of the general daily bustle of the marketplace, these powerful countries keep buying the debt of consumer nations. By doing this, they keep the credit flowing and interest rates fairly low up to some point. For a country like Nigeria, high interest rates work because the Nigerian state gives sovereign backing to its bonds (even state bonds and indeed any foreign borrowing by a Nigerian entity) only assures very good returns for these ‘foreign investors’. While this is on, consumer nations borrow even more to maintain positive GDP growth. But at some point, the borrowing hits the radar and interest rates come under pressure. Consumption slumps. Higher interest rates accelerates the debt burden. The genie is out of the bottle by now. Higher interest rates indicates to ‘foreign investors’ that there may be a default soon. Reserves deplete leaving no buffer. Herding and contagion sets in. Investors then bail out en masse and default actually occurs. Riots on the streets.

This is the game China tries to play with USA, but the USA is a strong, thinking, and equally brutal country. The USA may no longer be a manufacturing hub, but it – and the UK – is holding on to Finance. Add Intelligence to that package. The US, UK and other big countries equally deploy finance around the world, purchasing assets on the cheap and often getting undue advantage. This is the only reason one can adduce to the current demand for Nigeria to devalue by all means – and to increase interest rates at the same time. How can investors be insisting that a nation devalues its currency before they come in? How can they be demanding that interest rate levels increase when it is already criminally high? That cannot be for the benefit of the home country. It is all about profit maximization.


The lesson for Greece too, is that a country has to choose its ‘mates’ around a card table. Don’t sit for too long with hardened card sharpers and loan sharks else they eat you for dinner. Greece has no currency of its own to devalue and now is being disemboweled in the open. What a fate!

This is a great time to revisit Nigeria’s attempt at protecting its economy as recently underlined by the insistence on conserving foreign exchange resources. The CBN had listed a number of goods it believes we should as a nation build capacity in, and for which it will not encourage the sale of cheap official foreign exchange. Many ‘professionals’ had tried to take the CBN to the cleaners on that policy, which in my view may be insufficient, or even seem rudimentary, but is a good start in our new trajectory if we are but a serious people. Let us take into cognizance the experiences of Greece and Puerto Rico, and also identify our strengths and weaknesses. For sure, the fates of those two countries, awaits every other country that forgets to put on its thinking cap.

These are the learning points;

  1. Nigeria has a Naira, its own sovereign currency, to manipulate, but rudimentary devaluation has not worked and will not work. Those pushing it are merely trying to push Nigeria down the precipice as our export will not necessarily become more attractive. Many external factors affect the value of crude oil and other minerals. Devaluation should hardly be the first step a country takes when confronted with such problems as ours.
  2. Except we affect our other profligate habits, trying to get the Naira to ‘find its level’ will result in a free-fall akin to what happened in Zimbabwe or if we are lucky, Ghana, where the currency has fallen from 9,400 to over 40,000 (effectively) to the US Dollar – a devaluation of almost 400% since its ‘redenomination’ experiment of 2007. So, to those who have proposed redenomination, forget it. At least it is way too early when we haven’t curbed our excesses.
  3. The barrage for increase in interest rate and a concomitant currency devaluation, a clamour by portfolio investors, should now be seen for what it is; a cynical attempt at destroying the Nigerian economy and hobbling its proud people. God forbid we arrive at Athens or San Juan soon.
  4. We cannot ban importation of items outright, being signatories to several WTO conventions. But we can start to tell ourselves some home truths, that the consumption superhighway leads to nowhere but grief. Wise countries are aggressive in pushing their value-added (not raw or crude) exports. This is called Economic Complexity. Nigeria has yet little or no capacity in this regard. While we remind ourselves of the need for economic complexity, the least we can do is conserve our resources, emphasise crude exports less, reorganize our internal economy like Germany, assist ourselves, and ensure we don’t spend our little earnings on every fleeting fad the world throws at us.
  5. Trade deficits are financed by the selling of financial assets (bonds), which leads to an increase in a nation’s debt level. Our real problem is trade deficit, just like Greece. The other option to get out of trade deficit is depreciation of the currency to a hypothetical point where life reverts to the Hobbesian state (brutish, nasty and short). The better option is a proper consideration of our strengths and weakness, an approach that shows that we are awake behind the controls. Devaluation is often if not always for a country like ours, speculative. Will more of our oil be bought just because we devalue? No. Will more of our anything be bought? No. We have already denominated the economy in dollars anyway. Will we buy less education and other items from abroad? Probably. But if we don’t fix public schools, we will then only churn out armed robbers. And if we devalue without building capacity, we will just throw more people into poverty. That will be counterproductive. Like the Greeks are being asked to sack public sector cleaners as part of the bailout deal – a situation that promises a dirtier Athens – general cutbacks in education and public works will spell disaster for Nigeria.
  6. We should recall the effect that devaluation had on our public debt in the 90s. Nigeria actually borrowed N18billion in all. Interest accruals and penalties ensured that we ended up paying $38billion while still owing $35billion as at 2006! We were then asked to pay $12billion in order to get a debt write-off, of $18billion. That $12billion cash we paid, was an equivalent of N1.5Trillion (at N120 to the $ as at then). All these for a loan of N18billion. Of course we borrowed the bulk of the money when Naira was at par with the US Dollar. But when repaying, we had basically mortgaged our future, no thanks to devaluation.
  7. Never build an economy to look attractive to investors in your stock and bond markets. They are influential no doubt, and have influence too on real sector investors. But they are usually playing games. Don’t fall for their tricks.
  8. Don’t delude yourselves by quoting GDP growth figures. They are often skewed in favour of a few rich people in society. Many countries have posted great growth figures only to run into quagmire few years down the road. Our economists know this. I just wonder why they prefer to stick their heads in the sand instead. Don’t also deceive yourself with your low Debt to GDP ratio. What matters most is cash flow with which to pay your debts. You pay debts with cash, not GDP.
  9. There is a need to consider your economy from an eagle-eye perspective. There is a need to start Nigeria’s economy afresh rather than go along on this seemingly helpless and endless journey. We cannot just ‘financialise’ the economy while ignoring the other elephants in the room presently sucking out our lifeblood. Corruption. Low productivity. Youth bulge. Unemployment. A neglected environment. Insecurity. Import dependency. Profligacy. Malgovernance. No matter what we throw at our financial sector and monetary policy, if these issues are not tackled methodically, we will only reap disaster. If we tackle monetary policy first, we will get distracted and get enmeshed in confusing grammar, discussing inflation, devaluation, and such like, when our problems are rather more basic and require native intelligence. We will spend all our bullets and the problems will reemerge as a stronger, more complicated variant.
  10. Don’t laugh at Greece. Don’t dismiss it all as their fault. Don’t call them lazy (the average Greek puts in more hours of work per week than the Germans. But the question is; what kind of work? How much value-add?). Don’t snigger at Puerto Rico. Remember that our ‘children’ still flock to these places in search of ‘better’ life. So what is there for us to brag with? As a matter of fact, what caught up with Greece and Puerto Rico will eventually catch up with Nigeria, and indeed every other developing country. If Greece and Puerto Rico are in trouble for rubbing shoulders with highly strategic superpower countries who sucked the lives out of them, so are we all. It is called Globalisation. It is the reason why we have to keep buying any and everything from countries that have formidable export bases, that add value to whatever they export. It is the reason why those of them who don’t export goods, export aggressive capital and dictate conditions in our country even as they make huge amounts off our markets. It is the reason why we can never catch up with these countries because our products are crude. Yes, we have no ECONOMIC COMPLEXITY. It is the reason we have to somehow, given any opportunity, try and protect whatever little we’ve got. It is the reason why we should never act like we have arrived. Our people say ‘the death that kills one’s kin, is a mere parable of what can happen to one’… or something to that effect.

by Tope Fasua

Tope Kolade Fasua is a Nigerian ex-banker, entrepreneur, economist and writer with 28 years of work, business and policy analysis experience. He is the founder and CEO of Global Analytics Consulting Limited, an international consulting firm with its headquarters in Abuja, Nigeria, and footprints in the United Kingdom, USA and United Arab Emirates. Fasua has authored numerous columns on newspapers and six books. He currently keeps regular columns on policy analysis issues with Premium Times and Daily Trust newspapers.

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