“As at December, 2011 our income per capita grew from $1,200 to $1,400, this has actually moved us from low income country to Middle Lower income country, as per World Bank classification” – Haruna Ngama, Nigerian Minister of State for Finance.
“As at December, 2011 our income per capita grew from $1,200 to $1,400, this has actually moved us from low income country to Middle Lower income country, as per World Bank classification” – Haruna Ngama, Nigerian Minister of State for Finance.
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Nigeria’s economy is growing. We are assured of this fact by the Nigerian Minister of State for Finance. The numbers can’t lie, or can they? Per capita income (GDP divided by population) has allegedly increased from $1,200 to $1,400 and real GDP has grown by 7.68%. The logic is that somehow these numbers translate to improvements in the lives of the Nigerian masses. In many other nations, this might be true, but in Nigeria Macroeconomic numbers don’t mean much.
To estimate per capita income you need to know how many people live in the country. The Nigerian population commission says there are 140 million of us. The World Bank says the number is 158 million. There are only 58 countries in the World with a population above 18 million. There are 135 countries that can be comfortably swallowed up in the uncertainty of our population figures, and these include nations like Chile (17 Million), Senegal (13 Million), Belgium (11 Million), Tunisia (10.5 Million) and Israel (7.6 Million).
Economists measure GDP in two ways - the expenditure approach and the income approach. The expenditure approach adds up all the expenditures or spending in an economy by individuals, businesses and government. The income approach on the other hand requires summing up all the incomes earned by households in a given year. It’s like calculating how much wealth an individual has access to in a period, by how much they spend and have left over as savings in a bank; or by how much they were paid in that period. Whatever approach is used for GDP estimation the accuracy of monetary inflows or outflows at the household (income) or personal level (consumer expenditure) are crucial to the integrity of the estimation process.
The expenditure approach requires adding up consumer spending, government expenditures, investments, and Net exports. Three of the measures are easy to track. Government expenditures are based on the budget and any deviations from that are captured as surplus or deficit positions which are usually reported. Investments refer to spending by industry, and tend to be relatively easy to track. Net exports refer to the difference between the exports out of, and imports into an economy. There are many global agencies that monitor and track global trade traffic, so this number is also fairly easy to obtain. The problem, at least in Nigeria, is estimating consumer expenditures.
To establish consumer expenditures, sales receipts from businesses are necessary. Most governments get these figures from tax receipts and tax filings. In Nigeria, only about 1% of the population (1.5 million people) is employed by Government. The informal and private sector accounts for much of Nigerian production of goods and services, and very few of the people in these sectors pay taxes or file any tax forms. Even when businesses file tax returns, they understate their earnings so that their tax liabilities are reduced. The vast majority simply do not make any filings at all. Consumer spending is hard to track in an economy that is largely in the shadows.
The shadow economy concept is not a mythical phenomenon. Economists have long recognized that in economies that are largely informal, and where tax evasion, tax avoidance, and unreported or underreported wages, are rampant, the official GDP figures represent only a fraction of the true size of the economy. Any economic activity that is not covered in the official estimates is in the shadow economy and economists have developed ways to track these figures.
The only published numbers available for Nigeria estimate the size of the shadow economy to be about 68%-76% of GDP based on energy input analyses (http://www.econ.jku.at/members/Schneider/files/publications/JEL.pdf). Even though those numbers are staggering, putting Nigeria at the top of the world list on shadow economies, most Nigerians know that any estimation of the Nigerian economy based on official figures for energy usage or input (i.e., PHCN power generation) is a gross understatement of the true size of the shadow economy. Most businesses in Nigeria generate power using diesel, gas or petrol powered generators, and there is simply no data available on the related economic output from self-generated power. In a functional system, the Okada rider’s fares, payments to the Hairdresser or Barber, to drivers, Gardeners, or Maids, and earnings from food crop sales by subsistence farmers should all end up in the GDP estimates.
When other methods are applied for estimating the size of the Nigerian economy, such as comparatively evaluating the per capita consumption of discretionary items (like beverages, Noodles, cigarettes, etc.) as a function of GDP across a cross section of nations, the Nigerian shadow economy estimates can be several multiples of the official GDP numbers.
Why is this relevant? On the one hand a large shadow economy suggests that the efforts of Government for job creation and economic growth might not be translated directly into commensurately measurable increases in employment rates or GDP growth. On the other hand, a Government that does nothing but simply reduce the size of the shadow economy by closing down tax evasion and tax avoidance opportunities can lay claim to economic improvement when none has in-fact happened, and all that has occurred is an accounting shift from the shadow to the measured economy.
What does MTN have to do with all this? In 2001, MTN was a relatively small cellular company in South Africa. It was a distant second to a powerhouse called Vodacom. When Nigeria invited bids for cellular licenses for $285 million each, Nigeria had an “official” per capita income of $320 per annum in that period, meaning the average Nigerian had less than a dollar a day. Surely, people with less than $1 per day would have to eat, before they would consider using a phone. The official GDP numbers suggested Nigeria would offer slow returns, and Vodacom passed up on the opportunity to invest in Nigeria. Desperate for growth opportunities outside of the Vodacom controlled South African market, and well advised by firms that understood the Nigerian market to take the official GDP figures with a grain of salt, MTN took the gamble. It paid off nicely. The company broke even in its first year of operations, and MTN is today the largest telecommunications company in Africa. By 2004, MTN had overtaken Vodacom in total revenues largely on the strength of its amazing performance in Nigeria. Has MTN’s performance in Nigeria been spectacular? Yes, without a doubt. But it hasn’t been surprising. By some estimates, in 2001, the Nigerian shadow economy was likely in the region of 300%-700% of the official economy, implying that the real per capita income was not $1 per day, but about $4-$8 per day.
Now to Fashola and the lessons from Lagos State. In 2009, Lagos generated N10 billion monthly as internally generated revenue. In 2010, that number increased to N14 billion. Did the local economy of Lagos increase by 40%? It most definitely didn’t. The Lagos State Government aggressively went after tax evaders and avoiders, shedding light on a portion of the shadow economy. If Lagos reported GDP numbers based on this accounting shift of N4 billion monthly in earnings (and therefore about 20-40 billion Naira in monthly output, since taxes are about 10-20% of revenues) from the shadow to the official economy, it would have wrongly claimed economic growth, where none probably occurred.
Between 2004 and 2011, Tax Revenue in Nigeria grew from $7.9 billion to $30 billion due largely to the efforts of the Federal Inland Revenue Services (FIRS) under the leadership of Ifueko Omoigui-Okauru. In cumulative growth terms this amounts to 21% average annual growth. Again, much of what happened was that funds that had been in the shadow economy were now being transferred into the regular economy.
For the people who live the everyday reality of the Nigerian economy, macroeconomic data mean nothing. The argument over these macroeconomic numbers is intellectual. While commentators, pundits, opposition politicians and academicians might spend time pondering these numbers, what matters is the price of a mudu of gari, the fare paid for an Okada ride, the tuition fees at the neighborhood private school and the cost of fish at Garki Market. And by the way, we know without a doubt that those have all been rising!
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