A Recipe For Economic Growth In Liberia


By: George D. Yuoh

The Perspective
Atlanta, Georgia

October 6, 2004

As Liberia recovers slowly from its wounds of self-affliction, the issue of economic security must be an underlining focus for any succeeding administration. And as the presidential aspirants make their rounds of vote courting, how they plan to address the issues of poverty alleviation, national economic growth, and sustainable development will be of paramount interest to many Liberians, both in and out of the country.

Liberia lies below the global poverty line, and it can be argued that as long as the conditions of poverty continue to persist, our national security will be threatened and endangered. It is therefore not an overstatement to argue that any future government in Liberia that will fail to give urgent priority to supporting individual's economic growth in particular, and sustainable development in general is doomed.

In this article, an attempt will be made to offer a suggestion that could help in addressing the issue of individual economic improvement, which would translate into macro-economic growth, and would contribute to our nation's sustainable development efforts. This is meant to be simplistic, and a food for thought as we struggle to overcome the conditions of poverty and social stagnation.

The Liberian Economy

To begin, let's take a closer look at the Liberian economy, and try to understand a few of its peculiarities. This should then joggle our economic sub-consciousness, which would be needed to appreciate the discussions that follow.

In order to measure the economic performance of a country, certain variables must be available, based on statistical facts. These data are then compiled and formulated to attain the necessary indicators of measure. For instance to know whether a country is achieving economic growth, usually its gross domestic product (GDP) index is calculated, and the change over time in the GDP, would indicate how the economy is changing concurrently. The GDP is the measure of all the goods and services produced locally in the economy, or in the country.

In the case of Liberia, it is unfortunate that we have not had any national economic statistics available for ages. There have been no computations of gross domestic product (GDP) and national income statistics. It is the responsibility of the Ministry of Planning & Economic Affairs (MPEA) to collect these data, calculate the indicators, and report on the condition of the economy. When these indicators are reported, they are picked up by international reporting agencies and included in global statistical reports, which among others, are used by investors to determine the potential economic benefits of investing in the economy, all things remaining constant. These statistical indicators are also essential tools used in framing economic and social policies. For Liberia, there have been no facts and figures on the economy, and so no deliberate intervention to improve individual living standards beyond what their pitiful wages can afford. Our economy has been self-evolving with very limited policy intervention.

Another key peculiarity, and perhaps the most telling feature of the Liberian economy is that it is a cash-and-carry economy. This means that everything bought is paid for in cash. As a result, the economy will only grow to the point where individual purchasing power grows. And the purchasing power of individual is limited to personal income, which is currently heavily depended upon money transfer from overseas. The level of personal income generated locally through salary and wages is almost negligible in meeting personal consumption demands, given the high level of unemployment and the low value of wages. What this translates into is that the production of goods and services in the economy will go only as high as personal spending power goes. Personal savings will be low and business investment will drop concurrently. The result is an economy that will never experience any growth. And if the economy doesn't grow, poverty will continue to exist.

Financial System & Culture

The cash-and carry nature of our economy has more to do with the lack of supporting financial structures and systems, as well as our own borrowing culture, than with anything else. One way individual purchasing power can increase, which in effect will cause an increase in GDP, is to add individual borrowings to personal income. This piece, individual/consumer borrowings, is completely missing from the Liberian economy.

The absence of consumer credit facilities is due primarily to the lack of political vision, and the fact that we have not had a culture of credit consciousness, plus we lack the institutions and systems that would compel us to be credit worthy. And as long as there is no system for credit recovery, businesses will shy away from credit sales. And when business income drops as a result of the limitation to cash sales, government tax revenue will also drop, and business investment will go down as well. The result is a small and progressively shrinking economy like we have. And this credit vacuum is not only limited to individual borrowings. Business borrowing is also affected by the lack of an effective system to support non-cash trades. An economy that operates basically on cash transactions will always be volatile and depression prone.

In most of the affluent and some developing economies, credit/borrowing accounts for a very substantial portion of national income. Take the USA for example. The average income of a middle class family is around $60,000 per annum. But this family likely owns two cars valued at about $30,000, a home that cost around $235,000, plus consumer goods/home appliances of around $5,000. The total purchased assets of this family therefore amount to $270,000.00. Except were they won the lottery, the entire purchase was certainly financed through credit. If the economy was a cash-and-carry
economy like ours, that family would have been limited to a spending of $60,000, and it would have probably taken them a lifetime to accumulate $270,000 in savings to be able to buy the home and cars, given the cost of living in the USA. But as a result of the borrowings/credits that facilitated these individual household transactions, business sales increase; government income tax revenue increases, and businesses can expand by reinvesting their excess income. The economy therefore experiences growth because of the increase in domestic production, as a result of the increase in household consumption, ceteris paribus (all things being constant). Again, none of this would have been possible if the Americans did not have in place a system that compels individuals to pay their debts.

National Credit Agency? A Practical Approach
Liberia is probably light years away from building a market driven credit system like those found in the developed economies, one that would eventually change our negative credit culture, and establish business confidence in the process of individual credit repayment. Successive governments (GOL) too have been guilty of non-payment of debts, which have tied up business investments, choked off employment opportunities in the private sector, contributed to the fall and bankruptcy of revenue generating public corporations, thereby adversely affecting economic growth. And the risk of investment is too enormous for individual firms to consider venturing into large-scale voluntary credit sales without some governmental intervention. Instead of the governments being accommodating and obliging, successive administrations created more problems for the economy and have been the main culprits for Liberia's economic woes.

So, in order to increase consumer-spending power, which will help to dig individuals from the depths of poverty and spur national economic growth, the establishment of a national credit agency could be a sure and promising way to start. This public agency, which would be established by an act of the National Legislature, would serve to create and manage credits for both public and private sectors employees. In short, and to be practical, this is how such an agency could work:

· For the first 5 years of operations of the agency, the Government could budget and disburse at least US$15 million (or its Liberian Dollars equivalent) for each of the first two years, and US$10 million per year for the remaining three years to the agency for use in setting up a national credit store. These amounts, which would be special funds, would be separate from operational expenses and salaries of the agency, and would be used exclusively to create consumer credit within the Liberian economy. A small business fund may also be established jointly or separately at this time to encourage the growth of indigenous Liberian businesses.
· The agency would establish a network of participating merchants/creditors, which would include building materials stores, furniture establishments, home appliance and equipment stores, car dealers, and even home building companies. A requirement for participating as a merchant would be that such a firm/company must be at least 60% Liberian owned, and this is for obvious reasons.
· The agency would then set up a system to work with government ministries and other public sector agencies to get their employees to participate in the credit system. The modalities would include the national credit agency disbursing credits directly or through its merchant network, with the approvals of the financial and payroll authorities at the government institutions. Repayments would be done through direct payroll deductions. Private sector institutions would participate similarly as the government institutions, but would be charged some fee. The merchants too would pay for participating in the network.
· The agency would set up different types of credits, including unsecured fixed and revolving lines, mortgage backed credits, and for multiple periods, ranging from 5yrs to 25yrs, in multiples of 5yrs. The interest rates on these credits would not exceed 4.5% per annum.
· The small business fund would be used to finance expansion and start up activities of potentially profitable, 100% Liberian owned small businesses. These businesses would be subjected to the periodic review of the national credit agency, and among others, would be required to annually surrender a very small percentage (not more than 10%) of retained earnings to the agency to be placed in escrows, through a progressively build-up guarantee scheme.
· The culture of fronting would be strictly prohibited, and any company, whether a participant in the merchant network, or a small business, found to be in violation would be seized, and the Liberian and foreigner involved be prosecuted, imprisoned, and banned from ever doing business in Liberia.
· The professional staffing of such an agency would be very essential if the program is to succeed. The agency would be audited annually by an independent and certified private auditing firm, whose report would be submitted directly to the board of directors of the agency, and subsequently published and made available for public knowledge.

Because of time and space, and for proprietary reasons, much more information cannot be provided at this time. Nevertheless, the fact is that such a proactive and practical economic intervention would steer the country towards economic growth. The credits that would be available to individuals and small businesses would now increase their spending powers, which would cause an expansion in the economy. But more importantly, such a program would help alleviate many of the economic hardships being faced by ordinary folks, thereby improving their livelihood.

Every responsible government seeks to improve the living conditions of its people first, before tackling other issues. Towards this end, policies are formulated that give rise to institutions which support such economic empowerment efforts. For example, the Federal Government in the USA, through its policies, caused the establishment of the FANNIE MAE Foundation, which works to get low-income housing for individuals. The State of Georgia has the National Equity Fund, which provides funding for low income housing in Georgia. And there are many other such examples all around, including some in Africa that endeavor to improve the economic and social conditions of their people. We must not be left behind.

This single act, the establishment of a national credit agency as explained above, would cause a very sharp jump in GDP. The credit available in the economy will cause an increase in consumer spending. The increase in consumer spending will necessitate a jump in the production of goods and services in the economy. This would then lead to expansion in investment as a result of more businesses springing up, which would cause unemployment to drop considerably. And if the policy and the accompanying regulations are implemented fully, there is no telling what it could mean for sustainable development in Liberia.

The above recommendation is an excerpt from a broader version, with the original version obviously containing more details like, standard operating procedures, accounting systems and controls, financial reporting requirements, regulatory requirements, and investment diversification plans, among others. It may be available at some appropriate time.

Finally, our past failure to seek the welfare of our people and develop the country has not been due to lack of expertise. In fact we have had people with PhDs in Economics, Finance and political science who served in past governments, and who are even still serving in government today. It has been the lack of patriotism from our current and past leaders more than anything that is responsible for our backwardness. We are looking to the future, and we hope that our next set of leaders will be selfless and patriotic. For, one can write all the finest economic policies there can be, but if the political leadership is not interested in the welfare of the people, the country will not move a single step forward. Let's all hope that Liberia's future will indeed be a brighter one.

About The Author: George D. Yuoh served as the Branch Manager of the LBDI Branch in Harbel, Firestone from 1997 to 2000. He currently works as a financial investment accountant and analyst for a Fortune500 financial company in Minnesota, USA. He can be reached at georgeyuoh@yahoo.com.