What Happens to the African Economies When Governments Change?

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Prof. Charles Okeke
Prof. Charles Okeke

By Prof. Charles Okeke

 

“A high of economic security is essential for maximum production” – J.K. Galbraith

 

It is a settled case in economics that uncertainty affects economic performance. However, there is a huge difference between risk and uncertainty. Insurance companies, for example, deal with risk and not uncertainty. We can insure against risk because it has probability distribution, but uncertainty does not have a probability distribution and, as a consequence, cannot be insured against. Uncertainty negatively affects business investment and capital formation. Kliesen (2013) observes that “Increases in economic uncertainty index tend to be associated with declines (or slower growth) in real GDP and in real business fixed investment.” So, whether political transitions have positive economic impact on Africa’s economies would depend on the degree of uncertainty they bring with them.

            In the seventies and eighties military coups swept through many African countries. It would make a good graduate paper to examine how these events affected African countries in terms of economic performance. As first approximation, the wholesale removal of government officials and bureaucrats that occurred with the military in some countries meant that on-going economic programmes and policies were aborted. The hope of economic transformation will remain just that for Africa until the issue of governance and effective leadership is resolved Omosegbon and Okeke (2014)

 

Background

Around the world, the degree of government involvement in economies lies on a continuum: from high level of engagement in such countries as Eritrea and North Korea to minimal involvement in pre-China Hong Kong. In most modern economies, such involvement takes one or two forms: monetary and/or fiscal policies. The former entails the changing of the quantity of money to impact interest rate and price level with the aim of affecting the economy. The fiscal policy is aimed at impacting the macro-economy by changing government spending and taxes.

The impact of governmental actions on economies is a matter of continuing debate among researchers, scholars and policy makers and this debate is not new, but has been going on for centuries.

The extent of government involvement in an economy has ranged from Robin Hood type to everybody to himself and God for us all and everything in-between. These approaches have moral implications, philosophical underpinnings, and political consequences.  It is, therefore, not surprising that among the earliest studies on the subject was done by an Irish moral philosopher, Adam Smith, in his celebrated book called for short, The Wealth of Nations published in 1776. The issues he raised remain as relevant today as they were then. In this book, Smith carved out limited role for government that includes provision of defense, police, infrastructure, and administration of justice. Everything else, he left to the individual who he believed would serve the interest of the society as he pursues his own private interest, as if guided by an invisible hand. This represented a marked departure from the past where individual worked to serve the interest of the kings and guilds.

He further opined that production of goods and services should be left in the hands of the businesses who in pursuit of their desires for profits would serve the interest of the buyers as if guided by the invisible hand. This philosophy and the economic arrangement resulting from it (in its various mutations) became the order of the day. In particular, it affected greatly the economy that emerged in the United States whose Independence from Britain coincided with the publication of Adam Smith’s Wealth of Nation. In Smithian economy, businesses and consumers will continually pursue their respective interests. For businesses, it is profit: if prices are too high, they would be unable to sell their products, so they would have to lower the prices. For workers, it is wage: if wages are too high, they do not get hired, so they would have to lower their asking wages to get hired. Some economists refer to this as Free Enterprise economy. In such an economy, everything has a price and the higher the price, less of such an item would be bought.

 

It Takes A Theory (not facts)

            Some time, in the eighteen-hundreds, as if guided by Smith’s philosophy, a social scientist named Karl Marx applied for employment as a reporter for The New York Times, but was rejected. Subsequently, he wrote a very influential book that would turn the world on its head called Das Capita. It is possible to speculate that, may be and just may be, the world would have been spared the pains that accompanied socialist experiment if Marx was successful with his job application.

The Great Depression of the nineteen thirties made a mess of the assumptions of Adam Smith’s free-market theories. Businesses were lowering product prices, but people were not buying; workers were lowering their wages, but they were not being hired. Unemployment rate was reported to be as high as 25% in the United States and in many places even more. All over the so-called developed-countries, shouts of revolution as predicted by Karl Marx was in the air. Adam Smith’s theory was losing its adherents.  Against this background of concern and trepidation, another English Economist, John Maynard Keynes came up with a new theory to explain the puzzling phenomenon. He published his theory in 1936 in a book called The General Theory of Employment, Interest, and Money. Among economists, this book is commonly referred to as The General Theory. In this book, he laid the guiding principles of when and how the government should get involved in the economy and effectively raised questions about the free-enterprise theory of Adam Smith. This development ushered in massive government involvement in the economies around the world. Africa’s governments are no exception. Take away from this section: it takes a theory, not facts, to kill a theory.

I have heard people say, “it is just a theory.” You must have heard that said too or may even have said it yourself. I am, however, reminded that Keynes notes in The General Theory that “the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.” (Keynes, p.383.)

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