Tag Archives: economy

Nigeria’s Economic Magic Trick

On April 6th, something fascinating happened. As if by a work of magic, Nigeria grew its GDP by 89% and suddenly became the largest economy in Africa. With this clever sleight of hand, Nigeria’s economy increased its worth from $263 to  $510 billion. South Africa, with a GDP of $370 billion has lost the top economic standing in Africa. How did Nigeria pull this off? Did they really construct over $200 billion of goods over night? Or did they rely on the types of magic tricks as displayed below? The actual reason for the phenomenon lies somewhere between reality and illusion. Let me go further into detail and explain what happened.

michael-scott-magic-tricks_2133841_GIFSoup.com
Nigeria’s Finance Minister right now

With a large population of 170 million people, Nigeria has been growing at a rapid pace of almost 7% over the past decade. Previously, the nation’s abundance in oil and other natural resources had been the main drivers of Nigerian growth. However, in recent years, Nigeria has drawn significant foreign investments and has witnessed thee emergence of new consumer-oriented sectors such as telecommunications, entertainment and banking. 20 years ago, Nigeria had only one phone operator and 300,000 telephone lines. Today, Nigeria has an entire telecommunication industry with over 120 million subscribers. Similarly, Nollywood, the Nigerian film industry, now produces the most movies in the world and makes up 1.4% of the country’s GDP. Finally, Nigeria’s services sector has grown by over 240% since 1990.

nigeria gdp chart

The reason for Nigeria’s overnight economic expansion is due to the way the Nigerian GDP was previously measured. For the past 24 years, Nigeria’s GDP calculation did not give much weight to these newly developed sectors. The new system of GDP calculation now incorporates the revenues from Nigeria’s new business sectors which had been overlooked before. This process of revising GDP calculation is referred to as rebasing. The IMF advises countries to go through this process every five years. However, many African countries such as Nigeria do not rebase on a consistent basis. International aid donors urge African nations to rebase regularly so that they can make more precise decisions regarding foreign aid.

nigeria GDP
Source: The Economist

The stastical illusion has not changed anything in reality . The important problems in the Nigerian economy still remain. Even though Nigeria’s economy is large, its people are still poor. Nigeria ranks 153rd out of 187 countries in the United Nation’s Human Development Index, unemployment is over 20% and GDP per capita is only $2700.Given that GDP per capita figure, South Africans are still twice as rich as Nigerians. Additionally, despite the emergence of new industries, the country still draws a majority of its revenues from oil and gas exports. Once again in contrast to South Africa, Nigeria has an underdeveloped infrastructure and has outbreaks of violence in certain parts of the country.

Goodluck Jonathan is the President of Nigeria. Despite having one of the funniest names I have ever heard, still has a lot of work to do. Yes, Nigeria has greatly grown over the past decade and has been the posterchild of rapidly growing African nations.  But in order to lift Nigeria to the upper echelons of nations, President Jonathan should seek to reduce corruption, incrase the efficiency of tax collection and reduce the bureacratic barriers to doing business in the country. As the cradle of mankind, Africa needs more nations such as Nigeria to rise above and help their people live in prosperity and security, something that they have been desperately seeking for many years.

“The work of Nigeria is not complete for as long as there is any one Nigerian who goes to bed on an empty stomach”
– Ibrahim Babangida

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Hard Landing?

Over the past month, the Chinese economy depressed global markets with several negative figures. In a global economic climate where slow and sluggish growth is starting to be accepted as the new normal, China has always been the safe haven of dependable robust economic expansion. However, the pace of China’s growth has slowed over the past several years and the data received over the past month has spooked investors that China’s transition from a developing to a developed economy may end in a massive failure. To put it into simpler terms for you movie fanatics out there, China’s economy is like the bus driven by Keanu Reeves in the hit thriller Speed. If it slows down below a certain speed, it will explode and end horribly wrong for everyone on board. For those of you who haven’t seen it, here is a summary of the movie in 5 seconds. The following video may contain some explicit content.

China may not have one of the most untalented actors in Hollywood to keep its economy in the right pace, but it does have the Chinese Communist Party in sole charge of the Chinese economy. Will they keep China on course? We’ll have to wait and see. I will discuss my own analysis and opinion on the state of the Chinese economy soon, but first let’s discuss the data that filled the tickers with red arrows over the last month.

The first data point is retail sales, which displayed a year-over-year increase by 11.8% in January and February and combined. 11.8% growth may seem to be a tremendous figure, but take a closer look at the graph below and you will notice that it is quite low compared to historical data. In fact, I failed to find a graph that goes back that far, but 11.8% is the slowest pace of increase in Chinese retail sales since 2004. Some experts have speculated that Chinese Premier Li Keqiang’s recent movement to crack down on corruption and extravagant spending is the reason for declining consumption. I will soon explain why I don’t think that is the main reason.

china-retail-sales-annual

The second data point which also added to the panic regarding China is industrial production. Chinese industrial production witnessed a 8.6% year-over-year increase in January and February combined. Once again, 8.6% is a dream figure for most developed nations but as the graph below proves, China has been accustomed to rapid industrial growth over the past several years. The latest figure of 8.6% is the slowest figure that China has seen since 2009. Another disappointing figure from the Chinese.

china-industrial-production

Continuing the negative trend, on March 8th, it was announced that the consumer price index (CPI), which is a general indicator of inflation, expanded by a meager annual rate of 2% in February. Like many nations, following the financial crisis of 2008, the Chinese government opened the floodgates and unveiled a large monetary stimulus package to revitalize their economy. Even though they succeeded in keeping the economy on the path of rapid growth, inflation rose significantly throughout this period. As the graph below shows, inflation peaked at around 6% in 2011. However, it has consistently fallen since that year and has reached an alarming rate of 2%. Why is deflation alarming? If consumers are aware that prices are rapidly dropping, they will save and prefer to consume in the future. This is because they are aware of the fact that in a deflationary climate, their money will be worth more tomorrow than it is worth today. Why buy a BMW today when you know the price will drop tomorrow; right? A decrease in consumption due to deflation can lead to a slowdown in economic growth, which is what investors fear might happen to Chinese economy. (On a side note, this is also becoming a serious problem in the Eurozone as well)

china-inflation-cpi

Finally, on March 7th, Shangai Chaori Solar Energy Science & Technology, a solar-cell maker, became the first Chinese company to default on its corporate bond, adding to the scare about the Chinese economy. After being bombarded with a heap of bad news from China, pessimistic investors responded as emotionally as Keanu Reeves, and rushed to sell their Chinese stocks.

So what is the current condition of the Chinese economy? The economy is the foundation of the Chinese Communist Party’s (CCP) authoritarian rule over China. Their largest way of affirming their rule has been that they have been able to engineer rapid economic growth and transform China from a poor rural nation to an urban developed nation. Given the importance that the CCP has placed on the economy, if it falters, then the government is bound to lose its legitimacy to a certain point. Before we determine if the CCP will be able to keep the bus that is the Chinese economy at the right speed, we have to take a closer look at the key characteristics that define it.

So what is the current condition of the Chinese economy? The economy is the foundation of the Chinese Communist Party’s (CCP) authoritarian rule over China. Their largest way of affirming their rule has been that they have been able to engineer rapid economic growth and transform China from a poor rural nation to an urban developed nation. Given the importance that the CCP has placed on the economy, if it falters, then the government is bound to lose its legitimacy to a certain point. In order to determine if the CCP will be able to keep the bus that is the Chinese economy at the right speed, looking at a few data points isn’t enough. We have to take a closer look at several important trends on a larger scale.

Urbanization

The Chinese economy has been in the process of maturing for over two decades now. Throughout this period, it boomed in two ways; by developing the country’s underdeveloped infrastucture (ie. roads, bridges, telecommunicaiton), and by putting underemployed peasants to work in better jobs at urban factories. Just like in England during the Industrial Revolution, a rural and isolated low income nation has been on the path to become an urban and middle class nation that is connected to the rest of the world. Initially, this process yields incredible economic growth as the rural population, especially in a country with such a large population as China, urbanizes and occupies jobs in more productive sectors such as services, technology and industry. To stay consistent with the Speed references, China’s rural population is the gasoline that keeps Keanu’s bus running. However, China is approaching what is know as “the Lewis turning point”, which is the point when underemployed farmers have already left the farms and new immigrants to the cities do not add to productivity. The slowdown in China’s population growth has had a big effect on the gradual decline in urbanization. Mao Zedong, renowned Chinese historic leader, encouraged Chinese woman to have six children, which boosted the Chinese workforce in the 1980s and 90s. After Mao’s death in 1976, party leaders turned against his ideals and institute the One Child Policy in 1979. The result of this policy is that only 5 million people between the ages of 35-54 will join the Chinese labor force this decade, versus 90 million in the previous decade. Many factors about the Chinese economy remain a mystery, but one thing is certain, China’s fountain of youth is about to run dry.

china-economy-working-class-production-line

Cheap Labor

Mass urbanization of rural Chinese workers to the cities also allowed the Chinese economy to take advantage of cheap labor costs. Because these workers used to barely make a living in rural towns, they were willing to work for very low wages in the early stages of China’s transformation. However, the transformation process is reaching its latter stages. Cheap labor costs used to be the main reason why China attracted so many foreign companies and was able to maintain its status as a net exporter. “Losing jobs to China” was a phrase used by many Western politicans. But now, the cost of labor in China has risen compared to other developing east Asian countries such as Bangladesh and Indonesia, and skeptics believe it is a matter of time before China loses its advantage on labor. The graph below displays the steady rise in Chinese manufacturing wages since 1998.

china-wages-in-manufacturing

Consumption

Many economists agree that as China’s economy matures, it will be rely less on exports and will instead be driven by domestic consumption. This belief draws its roots from the idea that until now, personal savings have been intentionally raised by the govnerment in order to fund the spending on large scale investment over the past decade. Once the savings rate drops, China will export less but the Chinese people will spend more. I approach this idea with suspicion. Over the last 30 years, Chinese consumer spending has increased at almost an average rate of 9%. This rate faster than the rate generated by Taiwan and Japan dring their peak growth years. China may also be known for being home to many cheap knock-off brands but global luxury brands are now operating in China as well. In 2010, Rolls Royce sold more cars in China than it did in Britain for the first time. In my opinion, the data just doesn’t prove the notion that the Chinese government has been intentionally keeping consumption down. If the consumption is forecasted to make up for the recent drop in Chinese investment and industry output, then recent indicator pointing to a slowdown in retail sales could be a major issue for future Chinese economic growth.

rr_china_1

The Future

China is much diferent than the country it was just severaly years ago. A significant Chinese middle class has emerged risen and now demands better social services, cleaner air and less political corruption. Due to the slowing economy, the CCP consistently has set a lower target for the annual GDP growth rate, with the latest being at all time low of 7.5%. In the latest annual session of the National People’s Congress, premier Li Keqiang placed economıc growth as a secondary objective and vowed to crack down on corruption and pollution. In fact, looking at China reminds me of Japan in the 60s and 70s. Following WW2, the Japanese economy also grew at a rapid pace and was also driven mainly by exports. Many Americans feared of Japan ovepowering the United Stats on the global economic stage. However, Japan was forced by the United States to appreciate its currency against the US dollar, which contributed to Japan’s gradual slowdown and eventual economic crisis.

In all honestly, I do not understand the mystery behind the future of the Chinese economy. The pessimists are as wrong as the optimists. China is obviously in the middle of transforming from a developing market to a developed and matured economy. Thus, China still has a lot of room to grow, albeit at a slower rate.  Low inflation also means that the Chinese Central Bank has more room to expand the economy with monetary easing. The recent data are symptoms of this transformation and the fact that the state is gradually releasing its hold on the economy and allowing more free market functions to operate. The default of Shanghai Chaori Solar Energy is a sign that free market principles are gaining a foothold in the Chinese economy. This is a very small company, and in an economy dominated by companies propped up and supported by the government, a bond default is a good sign. The days of +10% Chinese growth are past us.  If China moves to a 6-7% growth rate in the coming years, it might appear that China is entering a recession. However, this will hardly be a cataclysmic event. The Chinese economy is now so big (over $9 trillion) that even at a 6% growth rate, China will still be the largest contributor to global growth in the upcoming years.

breakout-nations_apr172

On a final side note, I gathered much of the information and developed my personal opinion on the Chinese economy after reading Ruchir Sharma’s book, Breakout Nations. I advise you to read through it if you want to get a better understanding of the countries that are seen as the next big players on the global economic stage.

“The biggest problem with China’s economy is that the growth is unstable, unbalanced, uncoordinated and unsustainable.”
– 6th Chinese Premier Wen Jiabao (2008)

The Economy in Digits – 12/28/2013

Welcome to this week’s edition of the Economy in Digits. Without further adieu, here are the economic highlights from the week ending December 28th.

United States

Pending home sales, which measures contracts to purchase previously owned sales, rose less than forecast in the month of November. Pending home sales rose only 0.2% whereas economists had predicted a rise of 1%. This indicates that rising borrowing costs due to the FED tapering its asset purchases is resulting in a slowdown in the residential real estate market. When compared with the previous year, pending home sales have fallen 4%. The graph below displays an aggregate of 30 year mortgage rates in the United States. As you can see, mortgage rates dropped after 2008 but have recently been picking up.

fredgraph (3)

Since the start of the financial crisis, the US government and the FED had been artificially supporting the housing market. For example, the FED’s Quantitative Easing program had been purchasing $40 billion of mortgage backed securities since last year, leading to an artificial decrease in mortgage rates. The recent indicators displaying a slowdown in the housing sector points to the fact that the housing market is returning to its fundamental levels instead of being inflated by external factors.

Japan

In response to Prime Minister Shinzo Abe’s expansionary monetary and fiscal policy, Japanese inflation (measured by the Consumer Price Index) increased by 1.2% over the previous year, which is the largest increase over the last 5 years. In an effort to bring Japan out of a two decade long era of slow growth and deflation, Shinzo Abe promised to stimulate the Japanese economy and increase inflation with massive fiscal and monetary easing. The recent inflation figure indicates that Abenomics, as some have labeled this policy, seems to be working. The graph below depicts Japanese CPI since 2010.

japan-consumer-price-index-cpi

But as I had stated in the previous Economy in Digits post, not everything is clear sailing for the land of the rising sun yet. Monetary and fiscal stimulus devalues a nation’s currency. This usually has the effect of increasing exports. But because Japan imports a majority of its energy, devaluing its currency has the effect of increasing the value of its imports too. Additionally, the Japanese government is expected to implement a tax hike later this year which could weaken demand and bring inflation back down again.

China

Ever since the Chinese Communist Party first started opening up China’s economy to the world and adopting free market principles under the leadership of Deng Xiapoing in the 1908s, China had been experiencing extremely rapid growth,  As you can see from the graph below GDP growth had been almost 10% on average over the last decade. But over the past few years, as China enters the final stages of its transformation from a rural to an urban economy and implements the reforms to become a middle class nation, its economy has started to slow down. With that in mind, the Chinese government announced last Tuesday that their target GDP growth for 2014 would be 7.5%. As you can see from the graph below, if you exclude the crisis of 2008, 7.5% is lower than the growth numbers that China used to produce in the past. However, Chinese President Xi Jinping has promised to continue to reform the Chinese economy and the Chinese society. In line with that promise, Chinese officials have stated that they are confident that maintaining a 7.5% growth rate will help keep creating more jobs, while providing room to deepen reforms as well.

china-gdp-growth-annual

That is all for this week ladies and gentlemen. I was late in posting this week’s Economy in Digits due to an exam I had to take on Sunday. But I can assure you that it won’t happen again. So tune in next Saturday for the upcoming week’s economic indicators.

“The economy isn’t some vengeful being that takes things away from us. The economy is just made up of people, and people have just lost their faith in it. What people really should be doing is spending more. Spending is fine. People should just go outside. People should just go outside. They should buy the things they need for their friends and family”
Kyle Broflowski