Global Journal of Management and Business Research, B: Economics and Commerce, Volume 23 Issue 3

2014). Based on the above explanation about excess money demand and a surge in capital inflow, an unstable exchange rate will discourage foreign direct investment and keep the overall balance of payment weakened. Likewise, Nigeria’s default risk and high political instability may restrict capital inflow which the model fails to address. Also, disequilibrium in the balance of payment may be the cause of domestic monetary sector disequilibrium. Balance of payment current account deficit may cause higher money supply to try and handle the deficit. Like monetarists, the monetary approach assumes that money demand is stable (Bird, 2007). The demand for money is unstable. So, expecting to find a domestic monetary sector equilibrium (Md = Ms) may be challenging. c) The Structural Approach: The Houthakker-Magee Effect The Houthakker-Magee effect points to the fact that countries might just be producing the wrong goods(Bird, 2006). That is, the balance of payment problem is down to not producing the right goods. Wrong goods are classified as goods with low-income elasticity of demand. That is, as income increases the demand for these goods remain low. If a country is producing this kind of goods, its export doesn’t increase with income. So, its export remains low, and it is forced to import goods with high income elasticity of demand- so the import keeps getting higher. As Nigeria only produces raw materials like agricultural products and crude oil, as the income of her trading partners increases, they don’t have a proportionate increase in demand for these goods. Hence, Nigeria’s export does not proportionately increase with income over time. On the other side, Nigeria must import goods with high income elasticity of demand as she does not produce them. Goods like technology often have high income elasticity of demand. This makes import higher than export and weakens the balance of payment account. This phenomenon came because of an experiment by Houthakker and Magee where they realized that countries trading goods with low-income elasticity of demand often have balance of payment current account deficit (Houthakker & Magee, 1969). And it is often suggested that these countries ensure that their growth rate isn’t as high as their trading partners’. This helps manage aggregate demand relative to other countries. Another cause of problem to the balance of payment under the structural approach is when a country has the right goods, but it is in the wrong markets. The wrong market being that it sells in a country with little/no income growth. So, if Nigerian goods have high income elasticity of demand but the income of our trading partners (countries) is somewhat stagnant, Nigeria’s export would be somewhat stagnant also while her import increases because she must meet her increased aggregate demand. As import is greater than export, balance of payment current account weakens. Moreover, another element of the structural approach is when we have the right goods and the right markets, but our production is inefficient. If our competition is advanced countries with better production and more productivity (lower unit cost of production), they can charge lower prices, reinvest their profits into research and development, and lower prices even more while they raise quality. We (with our inefficient production and higher unit cost of production) can’t compete with this. If we choose to match their prices, our profits will be too low that we can’t reinvest profit to make improvements on our products and production. If we choose to charge higher prices, we will be priced out of the market. Either way, our balance of payment is weakened as our export is pushed low and import remains high. This is the conundrum most underdeveloped countries find themselves. The inefficiency might be perpetuated by poor infrastructure (education, health, human capital, physical infra- structure), little access to capital or just political reasons. In all of these, our investment in productivity is greatly affected and our international competitiveness is hindered. As imports remain higher than exports, balance of payment current account is weakened. IV. D iscussion and R ecommendation The structural approach makes the case for a diversified Nigerian economy focused on manufactured goods with high income elasticity of demand. The more reason why Nigerian creative sector and technology sector should be supported as they tend to produce goods whose demands increase with income (Bird, 1983). When done well, the structural approach will shift the BP schedule below the interest rate to create an insurge flow of capital into Nigeria due to political stability, credit worthiness, or the view that Nigerian investments are perfect substitute to investments anywhere in the world as explained above. With increased export, increased capital inflow, and decreased import, Nigeria will be on the way to economic prosperity. There are also some criticisms for this structural approach. One, it focuses on current account alone. In trying to explain the cause of balance of payment problems and making a huge point about the structure of the economy (which is often overlooked), it is unfortunate that the capital account is ignored. The author believes that the role of the financial market of a country in re-structuring of the economy can’t be ignored. The monetary sector often determines what investments go into the real sector. If a country has subpar productivity relative to her competitors, the 5 Global Journal of Management and Business Research Volume XXIII Issue III Version I Year 2023 ( ) B © 2023 Global Journals Nigeria’s Balance of Payment Crisis: Causes and Recommendations