Akpan H. Ekpo
It is generally accepted that all economies, especially those that rely heavily on the market system, experience all phases of a typical business cycle: peak (boom), decline, trough (recession), and recovery. A prolonged recession would result in a depression.
Besides the Great Depression of the 1930s, the world economy recently experienced a recession in 2007-2008 following the collapse of the mortgage system in the United States of America. Because the recession was global and affected every country (for some as a customer), it is often referred to as the Great Recession.
There are often countercyclical policies to minimize the negative effects of each phase or episode of a cycle, including the peak (boom) period. These policies are often monetary, fiscal and structural.
It is often claimed that during a recession, fiscal policy (increased government spending) would lead out of a recession and propel an economy into a recovery phase.
This is the case if the recession is demand driven. However, structural policies may be needed if the downturn is supply-driven. When an economy is in recession, monetary policy may not be effective.
An economy enters a recession when GDP growth contracts (negative) for two consecutive quarters. It doesn’t matter if the recession is demand and/or supply driven. Whenever an economy records positive GDP growth, even if it is after the immediate last quarter, that economy is on the road to recovery. The focus on GDP growth is problematic.
An economy can technically emerge from a recession, but relevant macroeconomic fundamentals would paint a picture of a system in disarray. Gross Domestic Product (GDP) growth stress is misleading when rates of unemployment, underemployment, inflation, lending rates, incidence of poverty, among others, greatly exceed the acceptable threshold.
When the shock of the COVID-19 pandemic hit in 2019 and the unemployment rate in the United States rose above 4%, it was announced that the economy had entered a recession.
Although the labor market is tied to GDP, the concern in the United States was unemployment and their experts redefined recession by emphasizing labor market challenges rather than GDP growth.
Several palliative measures have been implemented, including an increase in unemployment benefits for citizens. Developed economies have various social protection programs to minimize the impact of negative shocks on their economies. Despite robust monetary (sometimes unconventional) and fiscal policies, these countries experience recessions. Perhaps if any economy were to escape a phase of recession, it would be the United States. The US economy is better managed but yet experiences periodic recessions as the latter is inherent in capitalist economies due to the nature of investments, especially the build up of inventories resulting from any type of shock and/or the search for profit inherent in the private sector.
In Nigeria, it is not uncommon for bureaucrats, technocrats and policy makers to emphasize GDP growth during the recovery phase of a business cycle when the economy is emerging from a recession. There is often over-excitement that GDP will show positive growth after the recession, even if the coefficient is negligible and/or insignificant. The obsession with GDP growth ignores the big challenges facing the economy.
Without calling into question the usefulness of GDP, its measurement per inhabitant being an average concept; is even more difficult. Moreover, the different methods of measuring GDP are fraught with problems, thus signaling the need to consider more relevant indicators when an economy emerges from a recession towards a recovery.
Let us provide evidence from Nigeria. In 2016, the Nigerian economy went into recession with negative GDP growth of -1.58%; from 2012 to 2015, real GDP increased on average by 4.67% more than the population growth rate (3%). However, during the same period, the unemployment rate was 38.4% (the acceptable threshold is 5% or 7% for developing countries), while the incidence of poverty was 67%.
In 2017, GDP grew by 0.82% and it was rejoiced that the economy was on the road to recovery thanks to the implementation of the Economic Recovery and Growth Plan (ERGP). However, in 2017, the misery index was 78.6%, the unemployment rate 38.2%, the incidence of poverty 61% and inflation 13.4%. These indicators clearly show that the performance of the economy was not satisfactory – the economic performance index was 68%.
A score of 80% denotes average performance. Therefore, the evidence pointed to a jobless growth phenomenon. Subsequently, the economy grew by 1.91% and 2.27% in 2018 and 2019 respectively, but crucial macroeconomic indicators remained virtually unchanged.
The Nigerian economy has been in stagflation since 2000 despite impressive GDP growth rates from 2000 to 2014. These are episodes of jobless growth.
In 2019, the COVID-19 pandemic coupled with the sharp decline in oil prices, the Nigerian economy entered another recession in 2020 based on two consecutive quarters of negative GDP growth in the first and second quarters of this year. GDP growth in 2020 was -1.92%.
Aggressively implementing the economic sustainability plan, GDP against all forecasts grew 0.11% and 5.1% in the first and second quarters of 2021. Again, there was enthusiasm that the economy had emerged from recession and was on the road to recovery, highlighting the positive GDP growth.
Yet over 80 million Nigerians remained in poverty, unemployment and inflation rates stood at 33% and 15% while the misery index rose, the economic performance index declined, electricity supply remains epileptic, etc.
Until the fundamental problems of unemployment, underemployment, poverty, inflation and other social indices are aggressively addressed and/or substantially reduced, the focus on the trajectory of positive GDP growth does not make sense.
Perhaps economics, which is an inexact and dismal science, needs to be salvaged.
Ekpo, the former chief executive of the West African Institute of Financial and Economic Management (WAIFEM), wrote from Lagos