The place of comparative advantage in Nigeria’s development
The cacophony of voices speaking about economic issues in Nigeria points to one fact: Many are ignorant of the simple principle of comparative or competitive advantage.
David Ricardo, an English political economist, proposed the principle of comparative advantage in 1817 to help nations play to their strengths. The gentleman, through this principle, encouraged nations to allocate their scarce resources to products or services which they can produce at lower opportunity costs than their trade partners. Without dabbling into complex economics jargon, what Ricardo proposed was that it would be better for Benin Republic to specialise in the production of bathroom slippers if it could produce them at lower costs than Nigeria. Nigeria, therefore, should specialise in the production of textiles if it could produce them at lower costs than Benin Republic. By doing this, Nigeria can supply textiles to Benin Republic and Benin can trade with Nigeria on slippers efficiently.
Ricardo argued that world productivity and output could only increase when nations stop wasting their time on products or services they could not produce efficiently and concentrate on the ones they can, with minimum factors of production.
Though this principle has some shortcomings, it has an advantage of helping nations play to their strengths.
Developed countries became what they are today on the basis of comparative advantage and another concept called competitive advantage, which, according to Investopedia, means producing a good or service of equal value at a lower price or in a more desirable fashion.
The United States of America is world biggest economy with a gross domestic product of almost $20 trillion. It exports automobiles, computers, industrial machines, food, beverages, aircraft and pharmaceuticals. But it does not claim to produce everything. Though it exports pharmaceuticals, it also imports certain types of drugs that it cannot manufacture locally at a comparative or competitive advantage. Drug import to the US in 2018 was valued at $116.3 billion, while export was just about $48.4 billion, according to data from the International Trade Centre, obtained by worldtopexports.com.
The US knows it cannot produce all forms of food, which is why it opened up opportunity for sub-Saharan African (SSA) countries to bring in certain types of food through the African Growth and Opportunity Act (AGOA).
The idea was that countries in SSA would export up to 7,000 products to the U.S. without paying any duty or tariff.
The arrangement was supposed to end in 2015 but it was extended to 2025 to enable SSA countries, which did not take full advantage of the first tranche, to do so.
Some of the products/commodities that qualify for export to the U.S. market are poultry, bees, meat of goats, fresh, chilled or frozen, turkeys, live ornamental fish, other than freshwater, mackerel and sardines.
Others are fresh or chilled swordfish other than fillets, milk and cream, yoghurt in dry form, butter, cocoa powder (sweetened or not), guava, apples, ginger, juice and pine apple, among many others.
By opening borders to Africa, the US is simply saying that its consumers and citizens need these items. The US was never thinking of producing them locally because it might just not be able to produce them. Even if it does produce them, perhaps, they would not be able to compete with those from Africa. In spite of President Trump’s protectionism, the AGOA is still on.
For comparative or competitive advantage to exist, issues such as quality, distribution, certain types of infrastructure and branding, among others, must be in place, say economists. If, for instance, Benin Republic cannot produce bathroom slippers with good standards, or distribute them efficiently, it still does not have competitive advantage on bathroom slippers.
The reason is that the poor quality will undo the products in the global market.
Think about Germany for a while. The European giant manufactures and exports vehicles, but it also imports vehicle parts. A 2018 data show that the US, Germany, China, Mexico, Canada, Spain, France, UK, Japan, Italy and Poland, among others, paid most for auto spare parts in 2018. Yet some of those countries produce automobiles.
The reason is simple: Germany may produce Mercedes-Benz, but it won’t stop citizens from driving Toyota cars from Japan. So, those driving Toyota cars must, from time to time, need their parts.
But this is not the case with Nigeria. The ‘average Nigerian’ and his policy maker, in the name of patriotism, stand logic and economics on their heads.
For them, Nigerians must produce all they consume and consume all they produce—a clichéd expression which makes little economics sense.
In Nigeria’s manufacturing sector today, there are about 77 sub-sectors, with each asking for government support—mostly bans and import restriction. Yet, many of them cannot, with credible facts, tell the current local demand and supply of their sub-sectors.
Unfortunately, monetary policy makers who are expected to know have fallen for this trick by restricting a retinue of items that Nigeria cannot even produce competitively. The central bank has stopped providing foreign exchange for items from milk to palm oil.
But how many of the restricted items can Nigeria produce at comparative and competitive advantages? Cold rolled steel? Wheelbarrows? Private jets? Tiles? Clothes?
Take dairy, for instance. Nigeria does not have many dairy cows like India, Botswana, and the US. The dominant milk producing system in Nigeria is the Fulani nomadic system whose cows have a milk yield of a litre per day. But the average milk yield per day from exotic/crossbred cows in India, United States, the Netherlands, Turkey, China and India is between 30 litres and 90 litres per cow per day, statistics shows.
Nigeria produces 700,000 metric tons (MT) of dairy products annually but demand stands at 1.3 million MT, according to the Federal Ministry of Agriculture and Rural Development. This means there is a shortfall of 600,000 MT.
At the moment, only FrieslandCampina WAMCO gets raw milk locally but the company can’t even get 5 percent of raw milk from them—despite pumping huge amount into the project. There are other dairy firms such as Promasidor, Fan Milk, Chi Limited, among others, who, for years, showed no interest in that. The simple reason is that they could not invest billions in getting local raw milk when doing so would decrease their competitiveness by raising their costs further up.
The closure of Nigeria-Benin border is in line with Federal Government thinking that the country, as the giant of Africa, must produce all it consumes, especially rice. A number of Nigerians have said this should continue forever, asking the government to extend it to all the products, including textiles, to encourage local manufacturers.
But if all borders are closed, will Nigerian consumers have all products at cheaper prices? Ironically, rice prices have been rising at astronomical rates since the border closure, revealing the shortcomings of such a policy decision.
It is high time Nigerians understood basic economics. In his seminal work entitled ‘Principles of Economics’, Havard professor Gregory Mankiw established 10 principles guiding economic decisions. The fifth of the 10 principles, which is of interest in this piece, is that trade can make everyone better off. In simple terms, it means that a country stands to gain when there is an exchange of goods and services with other nations. This principle works on comparative and competitive advantages.
Rather than wallow in the illusion of producing everything, which is impossible, can Nigeria begin to play on its strength by identifying products or items it can produce at comparative and competitive advantages and reducing obsession on others it cannot? Rather than becoming a paint-producing giant, why not think of becoming a major producer of palm oil— which is not getting enough support at the moment? This does not diminish the importance of paint manufacturing but stresses the importance of palm oil, which is used in producing almost every food or beverage. Nigeria is the fifth producer of palm oil, but firms struggle to get quality oil, and smuggling is still rife. The country’s biggest non-oil earner in the past decade has been cocoa. Why not pay a closer attention to that dying industry—with old trees, aged farmers and little investments in the last decade? These are Nigeria’s strengths. Yet they are ignored and neglected, despite having more value chains and export capacities than rice.