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Broken windows and the Buhari fallacy 21 Dec 2015

The parable of the broken window is a well-known story written by French economist, Frederic Bastiat. In an essay, “That Which is Seen, and That Which is Not Seen,” published in 1850, Bastiat tells the story of an angry shopkeeper whose son carelessly breaks the window pane of his shop. As bystanders observed the damage, they come to the conclusion that the shopkeeper's son has actually done a great service to the local economy.
    
From the bystanders' point of view, the broken pane has provided an opportunity for the glazier to earn money. But the fallacy in the bystanders' logic is evident in the fact that they have simply focused on that which they can see. Bastiat points out that what the onlookers do not realise is that although fixing the broken pane might provide income to the glazier, it has denied the shopkeeper the opportunity to replace his old pair of shoes or buy a new book for his library, hence the broken window fallacy.  

Just like the bystanders in Bastiat's parable who believe that it is actually a good thing to break window panes because it stimulates the economy, some economists today also hold the view that going to war could be useful for reviving economies in a slump. Renowned economist, Paul Krugman, has argued that the Second World War was what effectively ended the Great Depression because of the massive investments that were poured into post-war reconstruction. But Bastiat argues that destruction actually adds no net benefit to society. He writes, "Society loses the value of things which are uselessly destroyed;" so broken window panes do not result in the aggregate increase in wealth, but rather in the reallocation of resources.  

I provided this background for what I call the Buhari fallacy. President Muhammadu Buhari's anticorruption campaign has become the de facto economic policy of his administration. He wants to fix Nigeria's broken system of governance by eradicating it of high-profile corruption. When he had his first opportunity to meet with the U.S. president at the White House in July, Buhari was seeking Barack Obama's "assistance in locating and returning $150 billion in funds stolen in the past decade and held in foreign bank accounts on behalf of former, corrupt officials," as the Nigerian president wrote in the Washington Post. And since that time, whenever the president has met with world leaders, repatriating Nigerian loots has been top on the agenda, along with fighting Boko Haram.

While the president fixates on anti-corruption, it doesn't matter if the economy is slowing as GDP growth rate in 2015 has declined to 3.02 percent, from average 6.3 percent annual growth recorded over the past decade. As at November 30, the benchmark stock index had declined 23.35 percent since April 2 – the trading day after Buhari was declared winner of the 2015 election – and 19.56 percent since June 1.  

The Buhari fallacy is the mistaken belief that the elixir to Nigeria's decades-long problems is the eradication of corruption. There is no question that a crackdown on corruption is good for Nigeria. Research by Yiping Wu, Associate Professor at the Shanghai University of Finance and Economics, and Jiangnan Zhu, Assistant Professor at the University of Hong Kong, has shown that Chinese counties that are tough on graft have higher incomes than those counties that tolerate corruption. Investors have chucked Nigerian equities and bonds neither because anti-corruption is anti-markets nor is it anti-growth. Certainly, the perfect storm of low oil prices and reduced government revenues is a valid constraint on the Nigeria outlook. What has spooked investors is the administration’s lack of economic policy response to these headwinds.

No one can possibly contest the value of blocking leakages in the system to prevent wastage and preserve future output of the country. Buhari is doing a great service to the nation in this regard. However, we are adding pretty little to the economy with this focus on recovering resources that were lost from past output. Recovering stolen loot is not an economic activity that can add to the GDP. We are losing opportunities for drive productive activities that would generate new output to expand an economy with immense potential.

The initial euphoria from the election of President Buhari has since fizzled out, and people are looking for the dividends of electing him into office as the electric power situation worsens and another downtime of petrol scarcity recurs. We have also seen spurts of occurrences around the country that point to escalation of insecurity and crime.

In his first six months in office, the president made at least 13 foreign trips. It cannot be that he is little interested in attracting foreign investors. He even seems to speak more on economic policy when he is abroad. It was in New York he told reporters he would be the Minister of Petroleum, even long before he announced his cabinet. The president must fight corruption – especially because he rode the crest of a wave of popularity to power on his anti-graft reputation. But he must combine anti-graft with sound economic policies. A well-rounded implementation strategy is also required to avoid the growing situation where the optics of his administration is tending towards alienation of private sector investors.