IMPACT OF MICROECONOMICS TO ECONOMIC DEVELOPMENT
OF A COUNTRY
EVOLUTION OF MICROECONOMICS
Microeconomics is the
study of the behaviour of individuals and small impacting organisations in
making decisions on the allocation of limited resources. The modern field of
microeconomics arose as an effort of neoclassical economics school of thought
to put economic ideas into mathematical mode.
THE CONCEPT OF TRAUMATIZED ECONOMY
The financial failure
left many people around the world traumatized. Coming back was never going to
be easy. And it hasn’t been. The second and third round of resulting traumatizing events are only now playing out.
And there are many who still fear far worse to come. In such unpromising
circumstances to sound a quiet word of encouragement may not seem particularly
bright. Rather howl with the wolves, the louder the better. No kudos in
attracting too much of the wrong attention. Yet there is really no need for
such terrible desperation, provided not getting the short end of some stick
(unemployment, bankruptcy, victimisation, premature retirement, early death).
The world is actually doing quite well, thank you, that is the bit that hasn’t
been sunk or holed. But not all quite see it that way.
The core of what went
wrong is (financial) innovation. We discovered fire, and invented dynamite,
too, didn’t we? Expect to get burned while trying things out. Always remember
Madame Curie and her radiation death. We tend to want to bury the bankers
alive, minus finger and toe nails, and a few other choice body parts, who did
this to us. But we are an inventive specie, have overcome much of ugly nature
(though not all – yet), and continue to transform our earthly existence
THE NEED FOR MICROECONOMICS IN NIGERIA’S ECONOMY
In 1937, “The Nature
of the Firm” was published by Coase introducing the notion of transaction costs (the term itself
was coined in the fifties), which explained why firms have an advantage over a
group of independent contractors working with each other.[18] The idea was that
there were transaction costs in the use of the market: search and information
costs, bargaining costs, etc., which give an advantage to a firm that can
internalise the production process required to deliver a certain good to the market.
A related result was published by Coase in his “The Problem of Social Cost”
(1960), which analyses solutions of the problem of externalities through
bargaining,[19] in which he first describes a cattle herd invading a farmer's
crop and then discusses four legal cases: Sturges v Bridgman, Cooke v Forbes,
Bryant v Lejever, and Bass v Gregory. He then states:
"In earlier
sections, when dealing with the problem of rearrangement of legal rights
through the market, it was argued that such a rearrangement would be made
through the market whenever this would lead to an increase in the value of
production. But this assumed costless market transactions. Once the costs of
carrying out market transactions are taken into account it is clear that such
rearrangement of rights will only be undertaken when the increase in the value
of production consequent upon the rearrangement is greater than the costs which
would be involved in bringing it about. When it is less, the granting of an
injunction (or the knowledge that it would be granted) or the liability to pay
damages may result in an activity being discontinued (or may prevent its being
started) which would be undertaken if market transactions were costless. In
these conditions the initial delimitation of legal rights does have an effect
on the efficiency with which the economic system operates. One arrangement of
rights may bring about a greater value of production than any other. But unless
this is the arrangement of rights established by the legal system, the costs of
reaching the same result by altering and combining rights through the market
may be so great that this optimal arrangement of rights, and the greater value
of production which it would bring, may never be achieved."
THE RELATIONSHIP BETWEEN MICROECONOMICS AND THE
ECONOMY OF A NATION
Microeconomics is
based on models of consumers or firms (which economists call agents) that make
decisions about what to buy, sell, or produce with the assumption that those
decisions result in perfect market clearing (demand equals supply) and other
ideal conditions. Macroeconomics, on the other hand, began from observed
divergences from what would have been anticipated results under the classical
tradition.
Today the two fields
coexist and complement each other.
Microeconomics, in its
examination of the behavior of individual consumers and firms, is divided into
consumer demand theory, production theory (also called the theory of the firm),
and related topics such as the nature of market competition, economic welfare,
the role of imperfect information in economic outcomes, and at the most
abstract, general equilibrium, which deals simultaneously with many markets.
Much economic analysis is microeconomic in nature. It concerns such issues as
the effects of minimum wages, taxes, price supports, or monopoly on individual
markets and is filled with concepts that are recognizable in the real world. It
has applications in trade, industrial organization and market structure, labor
economics, public finance, and welfare economics. Microeconomic analysis offers
insights into such disparate efforts as making business decisions or
formulating public policies.
Macroeconomics is more
abstruse. It describes relationships among aggregates so big as to be hard to
apprehend—such as national income, savings, and the overall price level. The
field is conventionally divided into the study of national economic growth in
the long run, the analysis of short-run departures from equilibrium, and the
formulation of policies to stabilize the national economy—that is, to minimize
fluctuations in growth and prices. Those policies can include spending and
taxing actions by the government or monetary policy actions by the central
bank.
Bridging the
micro/macro divide
Like physical
scientists, economists develop theory to organize and simplify knowledge about
a field and to develop a conceptual framework for adding new knowledge. Science
begins with the accretion of informal insights, particularly with observed
regular relationships between variables that are so stable they can be codified
into “laws.” Theory is developed by pinning down those invariant relationships
through both experimentation and formal logical deductions called models.
Since the Keynesian
revolution, the economics profession has had essentially two theoretical
systems, one to explain the small picture, the other to explain the big picture
(micro and macro are the Greek words, respectively, for “small” and “big”).
Following the approach of physics, for the past quarter century or so, a number
of economists have made sustained efforts to merge microeconomics and
macroeconomics. They have tried to develop microeconomic foundations for
macroeconomic models on the grounds that valid economic analysis must begin
with the behavior of the elements of microeconomic analysis: individual
households and firms that seek to optimize their conditions.
There have also been
attempts to use very fast computers to simulate the behavior of economic
aggregates by summing the behavior of large numbers of households and firms. It
is too early to say anything about the likely outcome of this effort. But
within the field of macroeconomics there is continuing progress in improving
models, whose deficiencies were exposed by the instabilities that occurred in
world markets during the global financial crisis that began in 2008.
THE DIFFERENCES BETWEEN MICROECONOMICS AND MACROECONOMICS
Contemporary
microeconomic theory evolved steadily without fanfare from the earliest
theories of how prices are determined. Macroeconomics, on the other hand, is
rooted in empirical observations that existing theory could not explain. How to
interpret those anomalies has always been controversial. There are no competing
schools of thought in microeconomics—which is unified and has a common core
among all economists. The same cannot be said of macroeconomics—where there
are, and have been, competing schools of thought about how to explain the
behavior of economic aggregates. Those schools go by such names as New
Keynesian or New Classical. But these divisions have been narrowing over the
past few decades (Blanchard, Dell’Ariccia, and Mauro, 2010).
Microeconomics and
macroeconomics are not the only distinct subfields in economics. Econometrics,
which seeks to apply statistical and mathematical methods to economic analysis,
is widely considered the third core area of economics. Without the major
advances in econometrics made over the past century or so, much of the
sophisticated analysis achieved in microeconomics and macroeconomics would not
have been possible.
IMPACT OF MICROECONOMICS TO SOLVE THE ECONOMIC
PROBLEMS OF NIGERIA
Microeconomics with
its vast statistical analysis and utilization plays a vital role in the
country’s economic sector. In Nigeria, the following sectors are found and
these sectors need the aid of microeconomics in order to compute and solve the
various economic activities of the country
Agriculture
Agriculture has
suffered from years of mismanagement, inconsistent and poorly conceived
government policies, neglect and the lack of basic infrastructure. Still, the
sector accounts for over 26.8% of GDP and two-thirds of employment. Nigeria has
19 million head of cattle, the largest in Africa. Nigeria is no longer a major
exporter of cocoa, groundnuts (peanuts), rubber, and palm oil. Cocoa
production, mostly from obsolete varieties and overage trees, has nevertheless
increased from around 180,000 tons annually to 350,000 tons.
A dramatic decline in
groundnut and palm oil production also has taken place. Once the biggest
poultry producer in Africa, corporate poultry output has been slashed from 40
million birds annually to about 18 million. Import constraints limit the
availability of many agricultural and food processing inputs for poultry and
other sectors. Fisheries are poorly managed. Most critical for the country's
future, Nigeria's land tenure system does not encourage long-term investment in
technology or modern production methods and does not inspire the availability
of rural credit.
Agricultural products
include cassava (tapioca), corn, cocoa, millet, palm oil, peanuts, rice,
rubber, sorghum, and yams. In 2003 livestock production, in order of metric
tonnage, featured eggs, milk, beef and veal, poultry, and pork, respectively.
In the same year, the total fishing catch was 505.8 metric tons. Roundwood
removals totaled slightly less than 70 million cubic meters, and sawnwood
production was estimated at 2 million cubic meters. The agricultural sector
suffers from extremely low productivity, reflecting reliance on antiquated
methods. Although overall agricultural production rose by 28% during the 1990s,
per capita output rose by only 8.5% during the same decade. Agriculture has
failed to keep pace with Nigeria's rapid population growth, so that the
country, which once exported food, now relies on imports to sustain itself.
Oil sector
The oil boom of the
1970s led Nigeria to neglect its strong agricultural and light manufacturing
bases in favor of an unhealthy dependence on crude oil. In 2000, oil and gas
exports accounted for more than 98% of export earnings and about 83% of federal
government revenue. New oil wealth, the concurrent decline of other economic
sectors, and a lurch toward a statist economic model fueled massive migration
to the cities and led to increasingly widespread poverty, especially in rural
areas.
A collapse of basic
infrastructure and social services since the early 1980s accompanied this
trend. By 2000, Nigeria's per capita income had plunged to about one-quarter of
its mid-1970s high, below the level at independence. Along with the endemic
malaise of Nigeria's non-oil sectors, the economy continues to witness massive
growth of "informal sector" economic activities, estimated by some to
be as high as 75% of the total economy.
Nigeria's proven oil
reserves are estimated to be 35 billion barrels (5.6×109 m3); natural gas
reserves are well over 100 trillion cubic feet (2,800 km3). Nigeria is a member
of the Organization of Petroleum Exporting Countries (OPEC). The types of crude
oil exported by Nigeria are Bonny light oil, Forcados crude oil, Qua Ibo crude
oil and Brass River crude oil. Poor corporate relations with indigenous
communities, vandalism of oil infrastructure, severe ecological damage, and
personal security problems throughout the Niger Delta oil-producing region
continue to plague Nigeria's oil sector.
Efforts are underway
to reverse these troubles. In the absence of government programs, the major
multinational oil companies have launched their own community development
programs. A new entity, the Niger Delta Development Commission (NDDC), has been
created to help catalyze economic and social development in the region.
Although it has yet to launch its programs, hopes are high that the NDDC can
reverse the impoverishment of local communities. The U.S. remains Nigeria's
largest customer for crude oil, accounting for 40% of the country's total oil
exports; Nigeria provides about 10% of overall U.S. oil imports and ranks as
the fifth-largest source for U.S. imported oil.
The United Kingdom is
Nigeria's largest trading partner followed by the United States. Although the
trade balance overwhelmingly favors Nigeria, thanks to oil exports, a large
portion of U.S. exports to Nigeria is believed to enter the country outside of
the Nigerian government's official statistics, due to importers seeking to
avoid Nigeria's excessive tariffs. To counter smuggling and under-invoicing by
importers, in May 2001, the Nigerian government instituted a full inspection
program for all imports, and enforcement has been sustained.
On the whole, Nigerian
high tariffs and non-tariff barriers are gradually being reduced, but much
progress remains to be made. The government also has been encouraging the
expansion of foreign investment, although the country's investment climate
remains daunting to all but the most determined. The stock of U.S. investment
is nearly $7 billion, mostly in the energy sector. Exxon Mobil and Chevron are
the two largest U.S. corporations in offshore oil and gas production.
Significant exports of liquefied natural gas started in late 1999 and are
slated to expand as Nigeria seeks to eliminate gas flaring by 2008.
Oil dependency, and
the allure it generated of great wealth through government contracts, spawned
other economic distortions. The country's high propensity to import means
roughly 80% of government expenditures is recycled into foreign exchange. Cheap
consumer imports, resulting from a chronically overvalued Naira, coupled with
excessively high domestic production costs due in part to erratic electricity
and fuel supply, pushed down utilization of industrial capacity to less than
30%. Many more Nigerian factories would have closed except for relatively low
labor costs (10%–15%). Domestic manufacturers, especially pharmaceuticals and
textiles, have lost their ability to compete in traditional regional markets.
However, there are signs that some manufacturers have begun to improve
competitiveness.
The pump price of
P.M.S. in Nigeria currently stands at 87 naira, but some fueling stations in
Nigeria, especially in towns far from the state capitals, tend to sell the
product at a much higher price, ranging from 110 naira to 140 naira. An initial
increase in the price of Petrol (Premium Motor Spirit) triggered by the removal
of fuel subsidies on January 1 2012 triggered a total strike and massive
protests across the country. Then President Goodluck Ebele Jonathan later
reached an agreement with the Nigerian Labour Congress and reduced the pump
price to 97 naira. The pump price was further reduced by 10 naira to 87 naira
in the runup to the 2015 general elections. The government cited a drop in costs
due to the global fall in the crude oil price.
Transport
Nigeria's publicly
owned transportation infrastructure is a major constraint to economic
development. Principal ports are at Lagos (Apapa and Tin Can Island), Port
Harcourt, and Calabar. Of the 80,500 kilometers (50,000 mi.) of roads, more
than 15,000 kilometers (10,000 mi.) are officially paved, but many remain in
poor shape.
Extensive road repairs
and new construction activities are gradually being implemented as state
governments, in particular, spend their portions of enhanced government revenue
allocations. The government implementation of 100% destination inspection of
all goods entering Nigeria has resulted in long delays in clearing goods for
importers and created new sources of corruption, since the ports lack adequate
facilities to carry out the inspection.
Five of Nigeria's
airports—Lagos, Kano, Port Harcourt, Enugu and Abuja—currently receive
international flights. Government-owned Nigeria Airways ceased operations in
December 2002. Virgin Nigeria Airways started operations in 2005 as a
replacement and serves domestic and international routes. Also, The Nigerian
Airforce began a new airline called United Nigeria, with a Boeing 737-500 in
2013. There are several domestic private Nigerian carriers, and air service
among Nigeria's cities is generally dependable. The maintenance culture of
Nigeria's domestic airlines is not up to internationally accepted standards.
Overseas remittances
Next to petrodollars,
the second biggest source of foreign exchange earnings for Nigeria are
remittances sent home by Nigerians living abroad. In 2014, 17.5 million
Nigerians lived in foreign countries, with the UK and the USA having more than
2 million Nigerians each.
According to the
International Organization for Migration, Nigeria witnessed a dramatic increase
in remittances sent home from overseas Nigerians, going
Human capital
Human capital is an
important factor for the wealth of a nation due to its influence on the overall
production of the country. Technological progress can provide more efficient
production-methods like machines and computers, but skilled labor is necessary
to manage and develop them as well as to improve the quality and productivity
of the existing labor. The formation of Nigeria's human capital is therefore of
great importance in the coming years if Nigeria wants to be competitive in the
future. However, Nigeria is having a problem with its human capital.
Inflation
In the light of highly
expansionary public sector fiscal policies in 2001, the government sought ways
to head off higher inflation, leading to the implementation of stronger
monetary policies by the Central Bank of Nigeria (CBN) and underspending of
budgeted amounts. As a result of the CBN's efforts, the official exchange rate
for the Naira has stabilized at about 112 Naira to the dollar? The combination
of CBN's efforts to prop up the value of the Naira and excess liquidity
resulting from government spending led the currency to be discounted by around
20% on the parallel (non-official) market.
A key condition of the
Stand-by Arrangement has been closure of the gap between the official and
parallel market exchange rates. The Inter Bank Foreign Exchange Market (IFEM)
is closely tied to the official rate. Under IFEM, banks, oil companies, and the
CBN can buy or sell their foreign exchange at government influenced rates. Much
of the informal economy, however, can only access foreign exchange through the
parallel market. Companies can hold domiciliary accounts in private banks, and
account holders have unfettered use of the funds.
Expanded government
spending also has led to upward pressure on consumer prices. Inflation which
had almost disappeared in April 2000 reached 14.5% by the end of the year and
18.7% in August 2001. In 2000, high oil prices resulted in government revenue
of over $16 billion, about double the 1999 level. State and local governments
demanded access to this "windfall" revenue, creating a tug-of-war
between the federal government, which sought to control spending, and state
governments desiring augmented budgets, preventing the government from making
provision for periods of lower oil prices.
Foreign economic relations
Nigeria's foreign
economic relations revolve around its role in supplying the world economy with
oil and natural gas, even as the country seeks to diversify its exports,
harmonize tariffs in line with a potential customs union sought by the Economic
Community of West African States (ECOWAS), and encourage inflows of foreign
portfolio and direct investment. In October 2005, Nigeria implemented the
ECOWAS common external tariff, which reduced the number of tariff bands.
Prior to this
revision, tariffs constituted Nigeria's second largest source of revenue after
oil exports. In 2005 Nigeria achieved a major breakthrough when it reached an
agreement with the Paris Club to eliminate its bilateral debt through a
combination of write-downs and buybacks. Nigeria joined the Organization of the
Petroleum Exporting Countries in July 1971 and the World Trade Organization in
January 1995.
Foreign investment
In 2012, Nigeria
received a net inflow of US$85.73 billion of foreign direct investment (FDI),
much of which came from Nigerians in the diaspora. Most FDI is directed toward
the energy and banking sectors. Any public designed to encourage inflow of
foreign capital is capable of generating employment opportunities within the
domestic economy. The Nigerian Enterprises Promotion (NEP) Decree of 1972
(revised in 1977) was intended to reduce foreign investment in the Nigerian
economy. This type of policy is not relevant in an economy with a rapidly
growing force like Nigeria.
Although one may
accept the rationale for the promulgation of that decree at that time i.e. to
promote indigenous entrepreneurship. But the decree or any exchange control
policy that has the potential to discourage foreign investment will not be
relevant under the present economic dispensations. The abrogation of the NEP
decree was therefore a step in the right direction.
Furthermore, another
reason for the low level of foreign investment in Nigeria is political
instability. The various coups and counter coups since 1966, the discontentment
and politically motivated riots following the long-drawn and inconclusive
political engineering of the Babaginda Military Administration, all combined to
create an environment not conducive to foreign investment.
Foreign direct
investment (FDI) is arguably an important source of employment opportunities
for developing countries like Nigeria. As a consequence, it is imperative that
the federal government promotes a healthy private sector that can earn a
reasonable rate of return.
Developing countries
that wish to attract FDI flows should consider measures such as establishing a
transparent legal framework that does not discriminate between local and
foreign investors; adopting liberal foreign exchange regime (e.g., a regime
without large gaps between official and market rates); creating simple,
investor-friendly regulations and institutions and effectively administering
them.
Therefore, the
convertibility of naira, the relaxation of the control on remittance of profits
and technical fees and the abrogation of the Exchange Control Act of 1962 and
the Nigerian Enterprises Promotion Decree of 1989 as spelt out in 1995 Budget
are the kind of reforms that can promote the inflow of foreign direct
investment a politically stable environment is also of immense importance.
Although Nigeria must
grapple with its decaying infrastructure and a poor regulatory environment, the
country possesses many positive attributes for carefully targeted investment
and will expand as both a regional and international market player. Profitable
niche markets outside the energy sector, like specialized telecommunication
providers, have developed under the government's reform program. There is a
growing Nigerian consensus that foreign investment is essential to realizing
Nigeria's vast but squandered potential. European investments are increasing,
especially since Belgian consultancy companies such as Genco are exploring the
Nigerian market.
Companies interested
in long-term investment and joint ventures, especially those that use locally
available raw materials, will find opportunities in the large national market.
However, to improve prospects for success, potential investors must educate themselves
extensively on local conditions and business practices, establish a local
presence, and choose their partners carefully. The Nigerian Government is
keenly aware that sustaining democratic principles, enhancing security for life
and property, and rebuilding and maintaining infrastructure are necessary for
the country to attract foreign investment. The stock market capitalisation of
listed companies in Nigeria was valued at $97.75 billion on 15 February 2008 by
the Nigerian Stock Exchange.
REFERENCES
"Nigeria". World Economic Outlook
Database, April 2015. International
Monetary Fund. 26 April 2015.
"News 2012".
Nigerian National Bureau of Statistics. Retrieved 26 March 2012.
"Nigerian Gross
Domestic Product Report Q2 2015". National Bureau of Statistics Retrieved 22 September 2015.
"Labour
Productivity Report". National Bureau of Statistics. August 2015. Retrieved 22 September 2015.
"Labour Force
Statistics, 2010". Nigerian Bureau of Statistics. 2010. Retrieved 22 June 2015.
Onuba, Ifeanyi (15 May
2015). "Only 4.67 million Nigerians are unemployed — NBS". The Punch
Newspaper. Retrieved 17 May 2015.
"NBS Rates
Nigeria’s New Unemployment Statistics At 6.4%". Channels Television. 15 May 2015. Retrieved 17 May
2015.