Guardian Newspapers

Guardian Newspapers: "The political economy of foreign reserves
By Kenneth Amaeshi

HAVE you ever wondered where the U.S. foreign reserves are? What of those of Britain and Japan? The Central Bank of Nigeria (CBN) and the newly created Presidential Steering Committee on the Global Economic Crisis appears poised to fiddle with the economy to stave off the country from the impending catastrophe that is currently unleashed by the global financial system. One of the mechanisms at the disposal of the CBN, in particular, is the control over exchange rate and external reserves. For example, the CBN has recently switched from the Wholesale Dutch Exchange Mechanism (WDEM) that has been in place since 2004 to the Retail Dutch Exchange Mechanism. One of the reasons the CBN offered, which could hold some water, is that the WDEM fuels currency speculations, which further erodes the value of the naira. However true this may be, it is difficult to isolate the entire global economic crisis, and indeed the responses of economists and central banks all over the world from some political influences.

There is a tendency for some economists to give the impression that economic postulations and theorisations are as constant as natural laws. This inclination often stands in the way of critical reflections on the nature of economics and economic behaviours. Despite the desire of economists to position economics as a physical science - often obfuscated through the mathematisation of the physical sciences - economics still remains intrinsically a performative art and presents an arena of power struggles and interest contestations. This understanding of economics is often suppressed in the neo-classical approach to economics and its operationalisation, by its agents.

What is not often presented to the public is that economics, as a discipline, gains its dynamism through strife, rivalries of views, and socially constructed experimentations, so that at each point in time the discipline is disciplined by uncertainties. In other words, economics is not always about the science of the real and the certain. It could as well be an indulgence in academic sophistry and the performance of artificialities. This indulgence is not better expressed anywhere in economic thoughts than in its corner stone expression: 'ceteris paribus - all things being equal.' What is certain and real is that all things will never be equal. The truth is that economics can be very economical with the truth. It is from this perspective of economics as an art of performance, uncertainty and political contestations that one may appreciate the economic hegemony on which the themes of foreign reserves policies are interpreted and enacted.

Neo-classical economic principles and mechanisms can be weapons of mass subjugation by those who have control of them. At the moment, the U.S. appears to be the master of this weaponry and exercises its hegemony parsimoniously through the market system. Since the great wars of the last century, the U.S. domination of the world currency market has not waned. The U.S. dollar is the major reserve currency of the world. This gives the U.S. cheaper access to the reserves than any other economy and helps to save it from currency crisis since every other currency will be chasing it and thereby enhancing its value through a high demand. There have been attempts by some governments - e.g. the Chinese Government - to de-link their currencies from the U.S. dollars. These attempts are often met by high level of politicking, which goes a long way to suggest that economic thoughts and mathematisation alone do not offer the solution. To extend its domination of the world, the amount of foreign reserves a country has determines its credit rating.

An understanding of the politics of foreign reserves perpetuated through neo-classical economic doctrines induces one to wonder why it is not necessary to rethink our foreign reserve policies. Will it be best to have these reserves outside our economy while poverty ravages significant number of Nigerians or to use them to build our institutions and capabilities to be competitive in the short and long runs? This question is even more pressing now that it has been reported that some credit lines from foreign banks to some financial institutions in the country towards infrastructural and other projects are being withdrawn.

One way to go about it is to ensure that the effects of the withdrawal of funds from external sources on Nigerian financial institutions are cushioned through the substitution of such funds with some proceeds from the countries' foreign reserves. The current global financial crisis may provide a window of opportunity for the economics of the foreign reserves rhetoric and its antecedent globalisation mantra to be politically undermined by national economic patriotism. The Nigerian businesses need all the support they can get to weather the impending global economic recession. The so-called big economies are nationalising their businesses, saving jobs and stimulating their economies, in the name of financial bailouts. Didn't they advise us to deregulate and de-nationalise our businesses? Why have they suddenly changed their tune?

Although the suggestion to de-link from the foreign reserves system may appear simplistic in outlook, it recognises the enormous political will required to enact it, even if it sounds reasonable. First and foremost, Nigeria lacks the economic and political resources to de-link its economy from the reserve currency system. What would we tell the U.S. - the headmaster of the world? What will happen to our oil revenue if the U.S. decides not to buy from us any more? The incentives for the Nigerian economy to be tied to the foreign reserves doctrine, even as the credit lines for Nigerian businesses dry up, arise more from the country's weak negotiating base than the economic superiority of the argument to stick to dictates and demands of the foreign reserves systems. Tied to this weak base negotiating power, the risks of having all our eggs in one unreliable basket - i.e. the corrupt Nigerian politics and the elite class - is even more frightening.

But what does the alternative of investing in local businesses hold for us? One of the likely outcomes of the deliberations of the Presidential Steering Committee could be investments in property and infrastructure, agriculture and '...how best to use the pension funds to continue to sustain liquidity and to fund long term development in the economy' (ThisDay, January 16, 2008). What appears missing or at best taken for granted is that these postulated outcomes would require strong institutional base to function - including the rule of law, strong civil society, good corporate governance, responsible business practices, strong sense of national and economic patriotism, et cetera.

Unfortunately, despite the many pledges to fight corruption in the country and build a civilised society based on the rule of law, lip service appears to be the best we can achieve as a country. The death of national patriotism in Nigeria is the death of our economic independence and political will. In this regard, the hope of building a strong economic foundation and or the political will of de-linking from the foreign reserve system will continue to be an illusive aspiration. Politics and economics are intertwined and should be appreciated as such. The economics of foreign reserves can only be fully understood within its politics and power struggles.

* Dr. Amaeshi is with the Cranfield School of Management in the United Kingdom"