Surviving the Political Economics of “Akotileta” Governance

It will be beneficial to the general population of an oil-producing country, if the oil revenues are applied to improve the socio-economic lives of the people.

Many citizens of oil-producing countries expect responsible governments to ensure that this IS what actually happens. Responsible governments use the monies received to create a domestic enterprise-enabling community. The empowered community raises domestic productivity, creates employment, and pays tax revenues back to the government.

Popular economics is based on the theory that demand for produce and supply of produce determines the equilibrium market price of produce. This theory is falsifying because it is incomplete. It ignores the effect of demand for money and supply of money on the prices of goods.

Money is a commodity, just like bread, suya, palmwine, rice or crude oil. Like any commodiy, money is used as a medium of exchange as well as a store of value. What makes money unique is the fact that it can be created by "fiat", an order enabling the creation of money, nowadays executed in most countries by a central bank.

Most central bank actions are conducted as part of a government's monetary policy (decisions to control the demand of and/or supply of money). Responsible governments attempt to regulate the productivity of their economies via monetary policy and fiscal policy (decisions to control the production of and consumption of goods).

The supplier of produce has a demand for money. The buyer of produce is a supplier of money. In any market transaction, these negotiations attempt to attain two equilibrum prices: one for produce and one for money. Two commodities are exchanged - produce and money - at the equating equilibrum price level.

= Suppliers of money and produce are not created equal =
Usually the supplier of produce sets the desired asking price that a buyer must meet. For example, Mr. Agbee may want Money1000 for his 1000kg of corn. If Mrs. Bureedi only has supply of Money600, some negotiations must begin or she walks, empty handed.

However the total quantity he can offer for sale remains 1000kg: this reality represents the tangible bounds of physical commodities. Economists will say that if Mrs. Bureedi has higher wages, she may be able to afford money supply of Money800 or Money900.

Economists will say the increase in Mrs. Bureedi's wages will usually cause Mr.Agbee to increase his prices (lead to inflation in market prices), and that inflation is a bad thing. If he expects market prices will go up, Mr Agbee will aim to supply more grain to the market next time. In an enterprise-enabling community, he goes to a bank to obtain the funds necessary to increase production. However, if Mr Agbee expects market prices to go down, he must still sell his product or watch it waste into rot. So, if the market is about to close for the day, Mr Agbee may despairingly drop the asking price to within Mrs. Bureedi's money supply.

quantity
^ of produce
|.......\..../ supply of produce (Sp)
|........\../
|.........\/ * Equilibrium market price at intersection *
|........./\
|......../..\
|......./....\ demand of produce (Dp)
|_______________ > prices of produce (market prices)

Money is different from other commodities =
There are no physical bounds restricting the suppliers of money, previously identified as the central bank acting, presumably, on behalf of a responsible government. Banks will happlily make new loans (supply more quantities of money) if they expect higher interest rates. Making such loans is a matter only of entering records in a computerised ledger in this days of fiat currency. In the very olden days when physical commodities were used as money, "merchant-bankers" were at greater pains to "under-write" a loan.

A responsible government can strongly regulate money supply in a local currency market. However, governments lose control of money supply in a "free" market with minimum capital controls. When uncontrolled money combines with weak domestic productivity, money supply then depends largely on the manipulations of the banks.
Severe capital value devaluation in a highly consumptive political economy that has low physical productivity; high external debts denominated in foreign currency; and money markets with little capital controls. The government's own demand for foreign currency with which to repay the foreign-denominated external debt is matched by increased government supply of the local currency into the money markets. This will cause the value of local currency to fall with respect to foreign currency, resulting in a weaker exchange rate.

Falling local currency values also mean lower interest rates. Borrowing is more affordable at lower interest rates for producers like Mr Agbee or consumers like Mrs Bureedi. Their demand for demand for money increases.

Unfortunately, responsible banks will want to supply less money at the lower interest rates. Fiat currency money cannot rot and with weak capital controls in place, banks have no reality check that forces them to supply their money commodity even at low interest rates. So they try not to. Governments occasionally force banks to release money by conducting "mopping up" operations at the central banks.


quantity
^ of money
|.......\..../ supply of money (Sm)
|........\../
|.........\/ * Equilibrium interest rate at intersection *
|........./\
|......../..\
|......./....\ demand of money Dm)
|_______________>
prices of money (interest rates)

= The role of a responsible government =
A responsible government can do a number of things to stimulate DOMESTIC ENTERPRISES and to boost DOMESTIC PRODUCTIVITY.
# Domestic businesses are stimulated, jobs are created, and longer term productivity is attained if government increases demand for domestically produced goods and services e.g by using domestic producers in construction of roads, housing, stadia, furniture, etc. Purchasing locally made goods and services by governments will cause the demand of produce (Dp line) to shift rightwards (along the Sp line) and cause market prices to rise.

Eventually, increased domestic production (shift up the Sp line) and a higher equilibrum market price is achieved. Responsible government intervention MAY result in higher costs of living.

# Likewise, domestic productivity is stimulated if a responsible government uses its fiat to make borrowing AFFORDABLE for domestic businesses. Two actions are possible:
## A naive government may demand more money from banks (e.g increased reserve levels), consumers (e.g increased minimum fuel prices), or businesses (e.g. as taxes or licenses). Interest rates will fall. But such an action will eventually bankrupt the community. This is because consumers, businesses and banks (!) must supply such money from earnings on sale of commodities, and neither have infinite source of those commodities.
## On the other hand, a responsible government may inject more money into the community e.g by lowering reserve levels for banks, lowering fuel prices, or lowering business taxes and other statutory costs. Interest rates will rise EVEN IF the increased government spending (shift up along the Sm line) IS NOT MATCHED by a increased DOMESTIC DEMAND (rightwards shift of the Dm line) to yield a higher equilibrum interest rate.

The ensuring LEVEL OF INFLATION (rate of increase in interest rates) depends (in simplified terms, adjusting for complexities of elasticity in demand and supply) on the origin of rhe additional money supply and the purpose to which it is utilised.

Inflation is MORE manageable IF the increased money supply originates from domestic consumers and enables domestic producers to produce more goods and services. Inflation is extremely damaging IF the increased money supply originates from consumption of foreign produce (which is what foreign direct investment is) or does not increase domestic productivity in goods and services.

What then is the NET effect on domestic productivity and enterprise-capacity in a community when a government that does the following:
# Increases the supply of domestic money through a combination of devaluation e.g selling domestic currency to purchase of foreign currency (= rightward shift along Sm line and increase in local interest rates)
# Places high demands for money on domestic consumers, businesses and banks (= shifting the Dm line rigtwards and increase in interest rates).
# Increases demand for foreign produce that are cheaper than equivalent local goods. This reduces demand for and supply of domestic produced goods. Lack of sufficient foreign produced goods or domestic prodced goods results in persistent high market prices.

This situation is exacerbated by actions that impede market activity: persistent consumption of foreign produce by governments or the people; produce hoarding by businesses; and money hoarding by banks.
The observed effect is a definate strangulation of domestic production (especially manufacturing) capacity, rampant unemployment, intense economic emigration, and a market concentration of domestic businesses into "non-tradable services" such as hotels, restaurants, schools, transportation, haircuts, unfulfilled contracs etc.


= Surviving an irresponsible government =
All governments have three core responsibilities to the general population they govern:
# Create an enabling environment for domestic enterprises to grow and prosper;
# Provide community services that to assist the needy;
# Vigorously defend the property, territory and well being of the general population they govern.

Only a bad government fails in ANY of these three responsibilities. Bad governments do not deserve to govern and should not be in office. By these measures, most modern governments do not deserve the people they govern. Yet, a general population deserves its government, whether strong or weak; good or bad. This is because no government exists in a vacumn. All are drawn from the general population. By implication, a weak government reflects the weakness of its people. A corrupt government arises from a corrupt mandate.

A responsible government facilitates the enfranchisement of its people by performing its core responsibilities diligently. To enfranchise is to take control of the rule of law and of the markets in which one operates. The rule of law underlines the political system, which includes and defines the economic system of markets and payments. A bad government fails in these responsibilities. An akotileta government is not only bad, it goes further to actively impoverise, impede or attack the people it effects to govern. A government that disenfranchises its people can continue in governance only if the people have no self-conviction. The "values" of the population under bad government need to be restructured. Only when revalued, can the population restructures the government.

The only way to survive a akotileta government is to recreate the failed responsibilities at the community level. This has the added benefit of decentralising and localising both the rule of law and economic markets.
Observation indicates that people derive maximum socio-economic benefit from community-based policies and markets.

Working examples range from large countries such as China and Germany (prior to the unifications), to the Scandivanian nation-states, to self-referencing tribal-states confined withing in larger country borders. The keys to these communities are strong domestic production efficiency and an effectively local currency.
# Small, homogenous, and productive communities may have increased access to an export-oriented strategy but they often lack the population mass to sustain an effective local currency.
# Larger countries can sustain a strong internal market for both local currencies and import-subsititution goods, provided they are not handicapped by foreign debt repayment obligations.
# Those with large foreign currency repayment obligations need to implement strategies that protect the internal market, convert foreign debt obligations into the local currency, and induce the opening of foreign markets for domestically produced goods and services. Interestingly, these "beggar-thy-neighbour" policies are most often associated with contries that manifest a robust military strength.

When enduring an irresponsible government, communities need also to protect themselves against attempts by such government to impoverise its own communities!
An "akotileta" government has the particulary nasty property of focusing so much on meeting demands of foreign producers that it ends up suffocating domestic producers.

=Self-help enterprises are essential=
Communities need to be resourceful in order to control bad fiscal or monetary policy imposed by akotileta governments that are bent on destroying local productivity. These policies have historically included bans on organised labour, decentralised provision of infrastructure services, operation of local currencies or exhorbitant minimum prices in essential commodities.

Businesses in such communities should consider associative or cooperative operating or organisational strategies. Rather than rules of law formulated by such governments, trading may organised by informal code of conduct which is enforced at community level. Rather than bank-based money transfers, market transactions are conducted via barter exchange or by interest-free local currencies.

The essential glue of community-level businesses is communal trust. Crime and corruption are less likely when the family of potential culpits face the option of becoming ostracized from the community and subsequent difficulty in joining another. Even thefts are not so damaging in local currency economies as the stolen money must be spent within the same community.

Best of all, community-level enterprises result in bottom-up prosperity and in enhancement of living standards at the local level. As the communities grow and prosper, businesses can expand to link across regions and nations. Such networks of businesseses retain loyalty to their roots and are more likely to engage in complementing (or conducting) the normal responsibilities of responsible governments.

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This article appeared at the NigeriaVillageSquare.com website on Monday, 08-11-2004
Remi-Niyi Alaran writes on enterprise and society.
All rights reserved. (c) Alaran 2007