What is Nigeria’s best chance at high economic growth?

Election campaign season is upon us, and presidential candidates are gearing up to tell Nigerians how they plan to improve their lives over the coming years if elected. On the other hand, Nigerians are eager to hear not just what the aspirants plan to do but, more importantly, how they plan to do them.

As usual, these candidates will probably list their most ambitious goals: record-high GDP growth, more jobs than ever, and so much more. They are ambitious because history (at least from the last two presidents) has shown us that successful candidates struggle to meet these goals. For example, President Buhari promised 10% annual growth and yet only managed less than 3% and two recessions (negative growth). 

Ultimately, double-digit growth (the kind of growth typical of emerging economies) can be possible with the right policies in place. Two weeks ago, I wrote about how India, with its consistently high GDP growth, surpassed the UK as the fifth largest economy in the world while implementing protectionist policies similar to Nigeria.

India achieved this by building its domestic industries by being an open economy, which increased savings and investment in the economy. They did this by market-led resource allocation (restructuring the economy through competition), opening up to the world, stabilising the economy and increasing savings and investment.

Many other countries have also implemented these four policy areas, including the East Asian Tigers, Rwanda in Africa, and Brazil in Latin America.

Given how diverse these countries are, it is clear that the success of these policies is not determined solely by location. Whether the country has a population of 2 billion people like China, or five million people like Singapore, these policies work irrespective of size. It has also worked for resource-rich countries like Malaysia and non-resource-rich countries like South Korea.

However, one similarity these countries share with Nigeria is that before implementing these policies, these countries were experiencing low growth and, in some cases, even fresh from war with fragile economies. In this article, we’ll focus on the first two policies: market-led resource allocation and opening up to the world to see what lessons Nigeria can glean from them.

The first step to achieving this growth is deciding where to allocate most of the country’s resources. The countries basically ask themselves, what key sectors would drive the kind of growth we desire? After identifying these sectors, they dedicate financial, human and physical resources to those sectors.

For instance, between the 1950s and 60s, when South Korea was beginning its growth journey, the government prioritised building the steel industry because it believed it was instrumental to manufacturing. After establishing the steel industry, the government then focused on construction and shipbuilding, which fed off the output from the steel industry. Then it focused on building the automotive industry. By the early 1980s, South Korea was already the second-largest exporter of sophisticated vessels like oil tankers and more. All these efforts increased the country’s GDP per capita by 18x between 1962 and 1980.

So, what do countries consider when deciding where to allocate their resources?
 

Do you start with what you have?

Resource allocation is critical to the development plan of the economy.

It goes a long way in informing the government's investments over time. For Nigeria, the question could be whether to build more roads, and rail lines—like President Buhari vigorously advocated for—or improve the education sector. Now, this is not to say that countries have to pick one and completely neglect the other—resource allocation is hardly ever a zero-sum game. The idea, however, is to decide what sector deserves more of the country’s resources. Choosing the area is critical because resources are scarce, and depending on the economy's structure at the time, there is an ideal combination of resources that would foster growth.

One way the countries decide on the area to focus on is by choosing the sectors with some sort of natural comparative advantage. For resource-rich countries, this could be the sectors where they have natural resources—as Botswana did by making its economy reliant on the exploration and sale of diamonds. Countries with a large labour force often focus on labour-intensive sectors like services or manufacturing. 

However, one mistake many countries make is to stop at what gives them a natural competitive advantage by fostering growth in only that sector and neglecting the others. This is similar to what the Nigerian government did in the late 1980s by neglecting the agriculture sector for crude oil exploration. 

Another way the government decides where to invest most of its capital and human resources is by picking a sector that it believes is strategically important to the country and reducing competition in the sector. A sector could be strategically important if the government believes the country spends a lot of money in that sector or could earn a lot from it. We see this in how the Nigerian government prevented foreign competition in the agriculture sector by shutting the land borders and the CBN’s efforts at importing maize and rice into the country.

Clearly, choosing the sector to focus on is no easy feat, but the government attempts a choice that would yield the most fruitful benefit. However, in both cases, the government is preventing the efficient use of resources because it either neglects some sectors or sabotages growth in a sector it plans to protect.

In Nigeria (crude oil) and South Korea’s case, both countries focused on one sector. In the beginning, although they did it differently, the South Korean government took on the work of investing in the steel sector because of the large capital outlay required for investors. In comparison, the Nigerian government welcomed the likes of Shell to extract and export crude oil on their behalf.  The difference, however, was that while South Korea went on to develop other manufacturing industries that aided the development of the rest of the country using the output from the steel sector as inputs (such as the manufacturing and construction sectors), Nigeria did not. As shown here, Nigeria’s failure to develop other sectors, like refining and chemical production, at the same scale as it did with its extraction was where Nigeria failed. 

The South Korean route led to its growth because developing the steel sector was critical to restructuring and rebuilding other aspects of the economy.

However, the private sector can steer the economy if the government fails to choose the right sector to focus on. This is the third way of deciding on the right allocation of resources, and it’s common among high-growth economies. I’ll explain how it works.
 

Or let the market decide?

Basically, the government promotes investment across all sectors by investing in infrastructure: everything from roads to electricity and security to reduce the cost of production across all sectors and make the country attractive for doing business. What this does is that first, it encourages investment in several sectors. As people continue to invest in key sectors, the more rewarding ones demand more labour and capital for expansion, shifting the demand for labour from unproductive sectors to the more rewarding ones. 

Another way to level the playing field for investors is by removing barriers to entry. The idea is for competition to drive efficiency in the sector and economy such that the best sectors remain and the inefficient sectors fizzle out of the economy. For instance, Vietnam became one of the world’s largest producers of mobile phones by liberalising trade—opening its borders to producers from all over the world.

Shortly after the country’s war ended in 1975, it was one of the poorest countries in the world. The country began implementing key policies to liberalise trade and reduce the cost of income. The country joined the Association of Southeast Asian (ASEAN) free trade agreement, devalued its currency and invested in human and physical capital to reduce its cost of production.

This ushered in all sorts of investors into the country. Since 1990, the average annual foreign direct investment (FDI) inflow into Vietnam has been about 6% of its GDP. For context, the highest FDI inflows into Nigeria in the last 30 years is less than 3% of GDP. The inflows in Vietnam resulted in average growth of over 7% in the last 30 years.

Like Vietnam, it’s impossible to talk about growth in China without referencing its special economic zones (SEZs), which were instrumental in ushering manufacturers into the country. In China’s SEZs, private organisations from abroad got cheap land, tax holidays, quick customs clearance and even their own judicial system. These countries allowed foreign investors into the country to develop it. The results for them were similar to Vietnam’s. Between 1979-1991, FDIs were about $2 billion annually but increased to $135 billion in 2017. China’s GDP per capita multiplied by 9x during the same period.

The idea is that investors are always looking for where they can put their money and get the best returns. Countries where production and output—irrespective of the sector—is low, have the potential for high growth. This explains why small countries tend to grow faster than large ones because there’s so much to do to induce economic growth.  So, when these countries liberalise trade and investment, they welcome businesses.

But the policies were also triggered by the country's composition at the time.

Many countries in their early or low growth stages typically have a labour surplus. That is, there are fewer jobs than required in the country, so the cost of labour should be cheap, attracting investors. Where a country has other comparative advantages but lacks the required capital to develop that sector, it invites investors by reducing the barriers to entry. When these investors come into the country, they then restructure the economy.

Basically, the sectors where there’s surplus labour, low pay and low productivity give way to the more productive sectors that need labour and can pay well. The same happens to capital. Investors move their funds from unproductive sectors to those that can generate significant returns for investors. Over time, labour begins to migrate to more productive sectors. For example, Vietnam started with light manufacturing (i.e. producing clothes, leather goods and wooden items that don’t require heavy machinery), attracting the likes of Adidas and Nike who wanted to take advantage of Vietnam’s uber-productive workforce.

Today, the Southeast Asian country has evolved to more complex manufacturing like electronics, where it now contributes highly to the likes of Apple and Samsung in assembling airpods and mobile phones for the rest of the world.
 

Growing pains

The lessons worth learning from the experience of these countries are that first, you have to select the sectors through which you want to drive growth. If the country decides to do this by selecting the sectors themselves, they have to ensure those sectors have a significant multiplier effect across others. Another, and more effective way, is to induce market-led resource allocation by creating an enabling environment for companies across all sectors to thrive and open up the economy to the world. 

As we’ve seen in Nigeria’s situation (in comparison with other sectors), the government has failed to properly allocate resources to generate the growth desired for the country. Therefore, a much better route would be to create an enabling environment for the economy to thrive, such that the market selects the best sector to allocate resources to. Also, as highlighted above, opening the economy to take advantage of foreign expertise and demand would also be critical to growing the economy.

However, a downside to opening up the economy is that it will displace many sectors and companies. For example, as more companies requiring manufacturing labour start to spring up in countries, farm labourers will start to leave the fields for the factories. Rural-urban migration will also start to increase, and as less productive companies and sectors fade off, people will lose jobs—all this will inconvenience the economy. 

At that point, the government has two jobs: equip the people who lose jobs to be better suited for new roles and to soften the blow of the job losses by introducing unemployment benefits.

In Nigeria, it’s no longer news that having an education is not the only gateway out of poverty. We’ve written severally about how the skills mismatch and how there's no difference between people with university degrees and those without a formal education in the Nigerian labour force—either way, you’ll probably end up unemployed. This means that the Nigerian labour force is not skilled enough to meet the needs of the changing economy.

Vietnam, on the other hand, has a literacy rate of 90%, and graduates are more likely to be employed than people without an education, despite the change in the structure of their economy from light to complex manufacturing. 

Another solution might come from introducing unemployment benefits for the people. This could come in the form of cash transfers to people, subsidies and/or health insurance for people while they are unemployed. The goal is simple—provide a cushion for citizens while they search for better paying jobs.

As we close out this article, one thing to note is that Nigeria is never devoid of great plans. The execution is where we’re seriously lacking. So, while listening to the enticing words and speeches of the presidential candidates, we need to look at how they plan to execute plans that position Nigeria for high growth in the coming years.