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The way forward for Nigeria’s economy

It has long been acknowledged by policy makers, by academia and other stakeholders that Nigeria needs diversification of its production base to grow in line…

It has long been acknowledged by policy makers, by academia and other stakeholders that Nigeria needs diversification of its production base to grow in line with its “potential to become a major player in the world economy by virtue of its natural and human resource endowments”. The last part of the sentence is captured from the Government of Nigeria’s Economic Recovery and Growth Plan (ERGP). It continues: “However, this potential has to a large extent remained untapped over the years”. The need for diversification is especially notable for exports. The international demand for Nigeria’s main export, crude oil, has historically been sufficient to drive growth in Nigeria. The other side of the coin is of course that the very large dependence on crude oil exports makes Nigeria extremely vulnerable to downward changes in international oil prices, which is beyond control of Nigerian policymakers. Hence, diversification is an integral part of the ERGP. The question is how to achieve diversification. In this article, some elements of such policies are proposed; elements that acknowledge todays realities characterized by global value chains. 

Growth and well-being

First a few remarks on growth and well-being. Growth is a necessary condition for fighting poverty. But it is not sufficient, as illustrated with the case of Nigeria in UNDP’s Human Development Report from 2016. Here, Nigeria’s social indicators position the country at par with its much poorer neighbours in Africa. Nigeria ranks 152 out of 188 countries in terms of the Human Development Index (measuring life expectancy, education level and GDP). Nigeria’s immediate neighbours in the ranking is Tanzania and Cameroon. However, Nigeria’s GDP per capita is 5639 USD while that of Tanzania is 2510 USD and Cameroon 2939 USD, roughly half of Nigeria’s. So, although a much richer country than Tanzania and Cameroon in terms of income per capita, this income has not been transformed into well-being for the average citizen. 

How could growth be used to increase the well-being of the population? Slightly simplified, growth can benefit the population essentially through two mechanisms: either directly by growth in production of goods or services, where the income directly accrues to producers, such as self-employed farmers or service providers. The other essential mechanism is through redistribution of incomes, using taxes. Redistribution can for example be in the form of cash transfers or by providing for education and health services. A healthier and better-educated population is more productive, and increased productivity is the main source of growth in the long run. Together with good policies for business, a healthy and well-educated work force is also attractive to businesses. And businesses – existing or new – are essential for diversification. So, we come back to the issue, what are the good policies for economic recovery and growth? In a world where countries are interdependent in different ways, not least in economic terms, national policies need to take account of this basic fact. 

What to make of globalization

Small and large countries alike are integrated in the global economy. For a small country such as Sweden, our welfare depends on specialisation according to our knowledge base and the natural resources that we have. We export goods and services in which we are competitive and import for the income that exports generate. Being a small country, our exports and imports are large in relation to our GDP. Larger countries, such as USA and India, have larger domestic markets and their exports (and imports) are smaller in relation to their respective GDP. But without trade in goods and services, their GDP per capita would be much lower. The policy challenge is to find out how, given the circumstances of each country, to best use globalization to that country’s own advantage. 

In order to meet the policy challenge of taking advantage of globalization, it’s important to read the map correctly. What does world production and trade and investment look like today?

Global value chains

The global economy is increasingly structured around global value chains (GVC). A product can be designed in one country, and finally assembled in another, with components produced in yet other countries. At each stage of such a production chain, value is added. In fact, over half of the world trade in goods consists of input goods, not final products. In services, this share is even larger. Take a Volvo car for example. It is usually designed in Sweden. Some electrical components are manufactured in Germany. Other components in Asia. Finally, it is assembled in Gothenburg in Sweden (at least some of the models). After-sales services are also important parts of value chains in the automotive industry. Although Volvo today is a Chine owned car, much of the value-added (difference between final price and input costs) ends up in Sweden. The value-added is then divided into profits, taxes and salaries. The important factor for employment and well-being is where value-added ends up, not ownership. The same basic principles also apply to simpler products. Also, traditional trade statistics are becoming increasingly misleading regarding the economic significance for a country of its trade in a particular good. The emerging TiVA (trade in value added) database is a better indicator of the economic significance for a country of its trade. 

One important lesson from the evolution of global value chains, is that exports require imports. Or in other words, to diversify a country’s exports, a country would need to be open to imports of input goods and most likely also to capital goods necessary for production of goods in a global value chain. Barriers to imports would negatively affect the country’s competitiveness in exports. As would barriers to direct foreign investment in the cases where local investors do not exist or are not sufficiently competitive. 

However, the benefits of participating in GVC:s do not come automatically but require specific understanding of value chains and deliberate policies to participate in the global economy in such a way as to maximize the gains over time. Global value chains are a reality, and by acknowledging and addressing these realities, Nigeria could define policies to capture a greater share of the gains of participating in GVCs.  

Implications for Nigeria

What then are the right policies? Although presumptuous to claim to have an answer to that question, we have pointed to some realities in the world economy today that suggest a certain set of policies. These policies would, we claim, lead towards the objectives stated in the Government of Nigeria’s policy documents, such as the ERGP and the most recent budget speeches: building a globally competitive economy and contribute to restoring growth by diversification.

We argue that Nigeria, by being attractive to investments (local and foreign) that links the country to global or regional value chains, would have the opportunity to reach out to markets that otherwise are out of reach. In the process, Nigeria would earn FOREX, increase employment, and the foreign firms would bring technology and also management skills. Nigeria would then have the opportunity to share in the value-added that is created in global production networks. However, the approach to these kinds of investment must be purposeful, companies that are willing to share technology and skills should be prioritized. If properly managed, such companies would contribute to advancing the human capital base in Nigeria. By sourcing some inputs locally, employment and income would be further increased. 

For this to happen, it must not be too complicated to do business in Nigeria. Burdensome procedures lead to less business, costlier production and less diversification. Consequently, ease of doing business is already a policy objective of the Nigerian government. More specifically, the aim is to climb up to among the 100 countries where it is “easiest” to do business. In July 2016, President Buhari established the Presidential Enabling Business Environment Council (PEBEC) with a mandate to remove bureaucratic and regulatory constraints to doing business in Nigeria. This Council is chaired by Vice President Osinbajo. Reliable power supply and more efficient border procedures are two such elements important for producers to local and foreign markets alike. 

It is sometimes suggested that import substitution policies (IS) is an option for Nigeria. India has been cited as a positive example. However, it was not until India eventually opened up to foreign investment and trade in the 1980-s that growth took up pace in India. During the heydays of the “Washington Consensus” in the 1980’s, policies of industrialisation became a “bad word”, alternatively was redefined to mean export-oriented industrialisation with as little government interference as possible. The pendulum is now swinging towards a more balanced view. There is room to manoeuvre in relevant trade agreements. It stems from the so-called “special and differential treatment” clauses in WTO agreements, which takes account of countries’ different levels of development. 

Nigeria is still contemplating whether to sign the Economic Partnership Agreement (EPA) with the EU. The EPA agreement has potential, in our view, to strengthen Nigeria’s quest for diversification by opening the EU market for Nigerian exports and strengthening Nigeria’s capacity to take advantage of this market, while providing adequate protection to the local infant industry from possible competition from EU products. 

Sweden would be happy to engage with policy makers in Nigeria, in discussions on our experiences of integrating in the global economy and to what extent our experiences could be relevant also for Nigeria. After all, trade is not a zero-sum game, we all benefit from exchanging not only views on policies, but also from exchanging goods and services. 

 Keller is the Minister-Counsellor, Embassy of Sweden, Abuja.

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