NIGERIA NEEDS A RETHINK ON ITS INTERNATIONAL FINANCE

This thread attempts to explain how Nigeria got its international finance right in the period 1960-1985 but wrong from 1985 till date. Needless to say that Nigeria is currently trapped to remain in economic slavery

To start with, there are three things in international finance that you cannot have all. You are permitted to have just two. Whether you are US or Germany or Brazil or China or Nigeria, the maximum you can have of the three is two

What are these three things?

1. Monetary autonomy: be free to influence the economy with monetary policy when and how you like

2. Capital mobility: be free to allow financial assets to move in and out of your country without restrictions

3. Currency management: be free to determine the level and volatility of exchange rate of your currency against foreign currencies, most notably US dollar

In international macroeconomics, you cannot have all these 3 things at the same time. At a go, you cannot freely use monetary policy, freely allow capital flows and freely manage your exchange rate. It's a hard trinity to get

We call this trilemma of international finance. You wonder if trilemma is really an English word? Yes it is. It is used to describe choice among three options and whatever the choice leads to inevitable problems. The trilemma is an offshoot of the Mundell-Fleming model

This picture summarises the trilemma. You can be at only one side of the triangle at a time

Let's now see how countries solve this trilemma

The United States chooses monetary autonomy and capital mobility and forgo currency management. The US Federal Reserve can increase or decrease interest rates to affect its economy (monetary autonomy) and foreigners are free to buy US assets as Americans

are free to buy assets from the rest of the world (capital mobility). This is why you hear of US stocks often

But achieving these two objectives means dollar is not under the control of the US government. It takes its price from the market. It is determined almost entirely by market forces

Europe has done differently. Capital freely flows as well there and adoption of euro has eliminated major currency worries: euro is spent in 19 European countries. That is why you rarely hear their governments panic over currency. But monetary autonomy is forgone.

The 19 countries have one central bank (European Central Bank). France, Spain, Italy and co cannot set interest rates freely to influence their economies: they have to wait for what ECB does or says. This led to major problems in Spain and Greece recently. Italy is still in one

Now to the third possibility. China has chosen monetary autonomy and currency management and forgo capital mobility

Because its economy relies mostly on exports, China manages its renminbi vigorously. Market is not the major determinant of price of renminbi. China has little worry on currency volatility. China also uses monetary policy effectively to influence the economy

But you rarely hear of people buying Chinese stocks. And you hardly hear of Chinese people buying assets overseas. That is because capital movements are restricted by the government of China

Those are how countries make their choices. There is no golden rule as to what you decide to pursue. But the rule is that you cannot have all the three

Now back to Nigeria. We were using the approach of China until 1986 when structural adjustment programme was introduced. 1960-1985 was a great period for our economy. We were managing our economy successfully

We used monetary policy discretionarily and meaningfully. We managed the value of naira well. 1 naira was sold for around 1.2 dollars until 1986. We were moving on the path of China. In fact, our per-capita income was more than China's

But flows of capital into Nigeria were limited, so we looked critically to develop ourselves from within. Just as China was doing

But the US came and distracted us. It forced us to take loans. In return, we obliged to introduce Structural Adjustment Programme. That scattered everything. We have been solving the trilemma using the US approach since 1986

Deep down in its mind, Nigerian government doesn't worry about price of naira as ordinary citizens do. The reason is simple. We are following the US on the trilemma. So we can't have all. We are enjoying monetary autonomy and capital mobility. But this is backfiring seriously

China has not left the path and it is still making sense. No developing country can allow its currency floated freely and get anywhere. Naira can never be strong on the US path

I'm suggesting we try to follow China again. Let's practice a styled fixed exchange rate system, use monetary policy aggressively and grow our economy from home. The downside is that capital will no longer flow in and out freely

But this happened in 1960-1985 and we did beautifully well. China was less than Nigeria in many ways before we introduced SAP. Now, Nigeria is bigger than us in many ways. China solved the trilemma with the mind of managing their prosperity on their own

China is still doing it and it is working for them. We can also do it. We can study China critically. It's not that hard. Nigeria needs a rethink. Let's stop following the US on macroeconomics and international finance. It will lead us nowhere

The US is already developed. And they followed the model of China before they developed

Thank you for reading

The End

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