Why moving Nigeria's economy forward isn't just about GDP

Times are hard, even for advanced economies. 

Everyone feels the pinch of high inflation and general economic slowdown—economists call this stagflation. There is a 98.1% chance the global economy will slide into a recession next year. And the IMF predicts that global growth will fall to 3.2% in 2022 from 6% in 2021, while inflation will peak at 8.8% at the end of 2022.

Nigeria is not left out.

The Nigerian economy is deep in the throes of rising energy and food costs. Diesel prices rose by 174% to ₦790/liter between January and September. And on average, the price of sliced bread (500g) has climbed by 33% to ₦512 (September 2022) from ₦384 last year (September 2021). So, it is no surprise that the latest inflation data puts Nigeria’s inflation rate at 21%. Even Nigeria’s core inflation (which excludes the prices of more volatile items like food and energy) is at 17.6%, a 3.7% increase from January. You will agree that Nigerians are getting poorer every day, and living standards are deteriorating quickly.

Further, Nigeria’s economic growth has been sluggish over the years. Since 2003, our growth rate has been in the single digits, with the highest being 9% in 2004, and in the last decade, Nigeria’s economic growth has averaged 2.5%.

Unsurprisingly then,  you would expect the run-up to the 2023 General Elections to include promises to deliver more robust economic growth. At least one of the presidential aspirants already plans to deliver 10% growth over the next five years as one of its campaign promises. But, growing an economy is hard work. It requires creating more and meaningful jobs that will lead to higher incomes. In turn, businesses will earn more as consumers spend more, which should also mean more revenue for the government through taxes. 

It all seems great but as we will soon see, focusing on growth numbers alone can be superficial. This is why I argue that focusing on growth often distracts policymakers from what matters—true economic development and progress. That’s what we’re going to unpack today. First, we will consider what goes into measuring economic growth and its limitations. Then we’ll see, using China as a case study, how focusing on development should be the goal of Nigerian policymakers. 

Let’s start with why fixating on growth is a problem. 

The problem with economic growth is how it's measured

Often, policymakers and politicians are excited about growth numbers, it is a trophy for a job well done. But it can be problematic when the core of policymaking is to achieve economic growth at any cost. Focusing on growth alone isolates people's well-being, making it a shortsighted approach to actual economic progress. 

Economic growth is good, but it needs to be holistic to capture the improvement of the well-being of people living in a country. This is why a country can record positive growth while people remain impoverished. For instance, Nigeria’s nominal GDP grew by over 100x to $440 billion in 2021 from $4.2 billion in 1960. Meanwhile, GDP per capita (a measure of economic well-being) has only increased by 22x to $2,085 from $93 in 1960. And if we discount inflation, the amount is much less. This drives home the point that a country can grow while the people remain poor. 

The problems with economic growth at the core of policy-making start with how it's measured—Gross domestic product (GDP). Most times, policymakers have their objective as growth and, in turn, obsess over GDP numbers which have limitations. So, in the following paragraphs, we’d see the limitations of GDP as a measurement of the economy's overall health. And by extension, it shows the limitations of economic growth at the heart of policymaking. 

GDP measures the total value of goods and services produced in a country and how much is spent in the economy. It’s a helpful metric because it tells us an enormous amount about how a nation is doing. From GDP numbers alone, we can tell which economic sectors are doing well and which are doing poorly. This helps guide business and individual choices. For example, the boom in the Nigerian tech industry (while the oil and gas industry has floundered) has caused a shift in the skills employers demand from workers and the type of jobs Nigerians seek. For context, of the 1.7 million job seekers from Jobberman, 12% applied to the tech industry; that's double the number of individuals actively seeking jobs in the energy industry (6%). 

That’s why the statisticians at the National Bureau of Statistics (NBS) put a lot of effort into crunching GDP numbers.  

However, GDP does not recognize the citizens' prosperity and overall well-being, which is essential. GDP does not show the quality and access to good health and education; it does not cover environmental degradation and how it deters well-being. In fact, according to Robert Kennedy, a former United States senator, GDP measures everything but the things that make life worthwhile. The shortcoming of GDP as an accurate measure of economic health and growth has often been criticized, and here’s why.

First, GDP was designed to measure the value of goods and services produced, but it does not consider the changes in the quality of goods and services or the damage caused by creating these goods. A good example would be oil spillage (caused by oil exploration activities) in the Niger Delta and how it has affected the host communities. Host community residents have less income, and their living standards have deteriorated as they cannot fish or farm. 

Second, GDP numbers are based on heavy estimations to determine the size of an economy and how quickly it grows (or not). Expectedly, these would need to be more accurate. That's why we go through GDP revisions and rebasing exercises (last Nigeria rebased their GDP, we saw an 89% increase in our numbers). 

The third is that GDP focuses on what people pay for goods and services: the price. But how can we be sure the price of a good captures its actual value? Short answer: it doesn't. For instance, a senior medical doctor in Nigeria earns around ₦490,000 (on average), while an A-list actor earns at least ₦1,000,000 per script—more than double the doctor (104%). The doctor’s lower earnings don’t mean their work is less valuable to society than the actor’s. Unfortunately, that's how GDP presents it. 

Finally, GDP does not capture the full benefit or utility (satisfaction) we derive from certain goods and services. This is because, sometimes, there is a difference between what people are willing to pay for a good or service and what they pay (consumer surplus). For instance, someone might be willing to pay $200 for a pack of beer, but the market price is $100 (which he/she pays). The additional $100 the person was willing to pay (consumer surplus) measures the additional satisfaction the person would have derived from the good. And so, what could have been versus what happened is not accounted for in the GDP calculations. 

It’s important to draw these limitations of GDP because policymakers are anchored to growth numbers when they make critical policy decisions. In some cases, growth is prioritized, even at a cost to the rest of the economy. A good example would be the Central Bank of Nigeria (CBN) refusing to increase interest rates when inflation began to rear its ugly head this year.

According to the CBN governor, this policy decision was intended to spur economic growth. An increase in interest rates would have placed upward pressure on borrowing costs, which could stall business activity. To be fair to the CBN, that makes sense. Even the People’s Bank of China (PBOC) is facing a similar trade-off between economic growth and raising interest rates to defend the renminbi's peg to the dollar. 

Typically, when the US Fed increases rates (as they have been doing), the PBOC follows suit, albeit at a much slower pace. However, more recently, the PBOC has been reducing interest rates to (surprise, surprise) spur economic growth, which runs contrary to the rules of maintaining a peg. As a result, the renminbi has experienced an 11.5% dip in value, which places pressure on the peg.

Admittedly, policymakers will always face trade-offs (the joys of economics!). Even now, the US Fed has been criticized for focusing on taming inflation even though its actions pose a significant threat to economic growth. So, is there a win-win solution? Well, one could argue that when you focus on development, you at least create a resilient enough economy. That way, even during hard times (like what we have now), there are still enough buffers in your economy so individuals and businesses aren’t so exposed.

At this point, we turn to the benefits of focusing on development. 

Economic development is all-encompassing

Development, also called people development, means economic growth plus changes in economic structure and efficient output distribution. It involves investments in education, health, and the environment to ensure a better quality of life and, in turn, boost human capital. The core concept of development is to invest in people to grow the economy. So it's a win-win as people live better lives and still contribute positively to the economy. A measurement of development is the human development index, which covers indicators like GDP per capita, life expectancy, poverty, and years of schooling (covering education). 

Here’s what a development mindset looks like.

A development mindset often produces growth. A good example is China—the largest economy globally by purchasing power parity (PPP). Nearly 40 years ago, China was poor, and interestingly, back then, Nigerians were better off than the Chinese. In the early 1990s, Nigeria’s GDP per capita ($1,589) was 76% higher than China's ($905). Remember, GDP per capita is one of the measurements of economic well-being embedded in the human development index.

In the 1960s and ‘70s, the Asian country undertook some economic reforms by investing in human capital, eventually leading to rapid industrialization. Like in Rostow's stages of growth, the country started with agriculture (traditional society). A step the Chinese government took was pooling all individual farms into large communities to boost its agriculture output. People were encouraged to farm, and the government invested resources and time to ensure it achieved the overall goal of self-sufficiency in food production. This was a considerable risk in preparing them for the next phase. 

Next, they began making structural changes, like providing critical infrastructure (like roads, railways, etc.) that would complement their initial agricultural investment (including the people involved). This was the pre-conditions/preparatory stage. China then moved towards the take-off stage, which involved its industrial revolution plan that first started by investing in human capital, i.e., training citizens in industrial processes and encouraging them to work in factories.

The perfect example is the “Made in China” initiative, wherein the government aimed to produce finished goods (using raw materials from its now buoyant agric sector) and export them. They started small, like producing clothes, before moving to more complex items like electronics. The country then focused on sustaining this newfound growth in its agriculture and manufacturing (drive to maturity stage) sectors before re-opening its borders to welcome the age of mass consumption. Following these development steps by harnessing and investing in human capital (by educating the people), China doubled its GDP per capita between 1950 and 1978. 

From China, we see that development is a long but much-appreciated process as it requires continuous investment in physical and human capital over extended periods. 

So far, we’ve seen true economic progress when the economy grows, and people are better off. We have also identified that economic growth is not harmful. Still, it can be catastrophic when policies are fixated on achieving growth at the expense of better living standards. We have also highlighted how efficiently following the stages of development can lead to true economic progress. Just like in China, a development mindset that guides step-by-step policy making is what Nigeria needs.

A development policy mindset is what Nigeria needs

Remember that development is growth plus sustained economic well-being. Therefore, a development mindset focuses on growth delivery while ensuring the well-being of citizens. 

Hence, the conversation is no longer about fast and likable growth numbers but the actual impact (measured by the quality of life and improved standard of living).

As of today, Nigeria is lagging on almost all development indicators. 

According to the latest human development index report by the United Nations, Nigeria has low human development. Of the 191 countries tracked in the report, the country ranks 163 with an HDI score of 0.53. Nigeria is performing poorly compared to its peers like South Africa and Ghana, which rank 109 (high human development) and 133 (medium human development), respectively. 

Nigeria’s government has not been investing enough in education. The chart below shows that government spending on education (as a percentage of GDP) has been declining from 2014 (9%) to 5% in 2021. 

Nigeria’s low human development further attests to poor living standards in the country. I had mentioned that our GDP per capita (which is gotten by dividing GDP by population) has only grown 22x in sixty years. The graph below shows that our population growth has outperformed GDP growth since 2015. 

To be fair, the government has started the development process. But we are still in the first stage (traditional society) of boosting the agriculture sector. An example is the Anchors Borrowers program. However, due to poor implementation and monitoring, amongst other structural issues plaguing the agriculture sector (which employs about 55% of Nigeria’s total workforce), we are yet to see significant improvements of this on food supply across the country.

Another step the government took was the FX restrictions on food imports and the border closure to support local production. But as we said before, these supposed growth policies only made matters worse for Nigerians. The development mindset (we discussed earlier) towards instituting these policies would have exposed the loopholes and helped policymakers adopt better approaches. For instance, before abruptly closing the borders or restricting food imports, the government should have ensured that we have attained reasonable self-sufficiency in food production in at least major staples like rice. 

Another good example is the issue of the recent flooding that has affected our central food-producing states. If the government had built the Dasin Hausa dam (Side note: the dam is a project, not a policy) forty years ago, the flooding would not have been this big a problem. Again, if development were at the core of making policies, it would have helped to solve this problem.

Admittedly, policymakers focusing on GDP growth is not a problem. But it can be disastrous when we prioritize numbers over impact.

The way I see it, Nigeria today is like China in the 1950s. Hence, the strategy we adopt now will tell where we will be in a few years. We should focus on development, which involves investing in human capital and targeting productivity that leads to substantial economic progress. Eventually, growth will follow. 

As I said, politicians are good at using abstract numbers like GDP to make promises to get into office. Economic growth is the bait for politicians seeking office and the holy grail for incumbents seeking re-elections. But as the saying goes, who can eat GDP? In the end, it will be best for policymakers and you, the people, to be more focused on development-focused policies.