Last week we raised the issue of economic linkages, by which we mean the interactions among operators in a value chain, backward or forward, but in a mutually beneficial way. Originally conceived with the extractive industry at the background, linkages may be defined in relation to inputs and outputs of the extractives sector of an economy in terms of the relations between the different parties to the value chain. We tried to posit that growth, and indeed, expansion of Nigeria’s economy in general and the manufacturing sector, in particular, has been sacrificed to the absence of any significant economic interaction among her economic sectors, especially between her industrial giants and the small players in the value chain. The idea is that any extractives industry can create multiple linkages – fiscal, production and side-stream linkages (infrastructure, power and water), that could bolster development. However, for many extractive rich nations, the industry has left destruction rather than development in its trail, especially oil.
For Nigeria, the result was first, the Dutch Disease – a term used by economists to describe the negative consequences that may follow the sharp rise in the value of a nation’s currency, usually as a result of the discovery of an extractive resource, such as oil. The unexpected consequences of such a discovery on the overall national economy could be negative, if mishandled. A related condition that afflicts resource-rich countries is what is termed Resource Curse, which is also known as the Paradox of Plenty, refers to the failure of a resource-rich country to benefit maximally from its natural wealth, due to the failure of public policy to respond effectively to the demands of public welfare. Nigeria is afflicted by both conditions. The oil sector is not the only enclave sector of the Nigerian economy, in the sense that the citizens are literally observers of events. There is widespread lack of linkages among economic sectors.
A typical Honda car has between 20,000 and 30,000 parts, made by hundreds of plants and firms. The trend of productivity growth of the past several decades reflects the extensive application of the division of labour among industries making and trading specialized inputs among themselves. The self-sufficiency dream of Henry Ford, whose aim was total in-house production of automobiles at his River Rouge plant, was exactly that – a dream, which proved to be inconsistent with the course of economic history.
“Located a few miles south of Detroit at the confluence of the Rouge and Detroit Rivers, the original Rouge complex was a mile-and-a-half wide and more than a mile long. The multiplex of 93 buildings totalled 15,767,708 square feet of floor area crisscrossed by 120 miles of conveyors. There were ore docks, steel furnaces, coke ovens, rolling mills, glass furnaces and plate-glass rollers. Buildings included a tire-making plant, stamping plant, engine casting plant, frame and assembly plant, transmission plant, radiator plant, tool and die plant, and, at one time, even a paper mill. A massive power plant produced enough electricity to light a city the size of nearby Detroit, and a soybean conversion plant turned soybeans into plastic auto parts. The Rouge had its own railroad with 100 miles of track and 16 locomotives. A scheduled bus network and 15 miles of paved roads kept everything and everyone on the move. In 1992 the only car still built at the Rouge, the Ford Mustang was about to be eliminated and assembly operations in Dearborn Assembly terminated.” This is what happens when an industry takes on the production of all its needs alone.
Nigeria may have lost the opportunity of creating the necessary fiscal linkage from its extractive industry, having poorly invested her revenues as the sector enters its twilight, and oil gradually fossilizes.
The first visible sign of the discovery of an important resource is usually the rapid increase in financial inflow, which tends to raise the value of the national currency and boost imports. For most internationalized sectors, like oil and gas, the challenge is how to create, for the local economy, adequate benefits from the resource extraction. In many countries, the main source of benefits is through royalties and rents, which are collected by the State from the companies exploiting the oil resources. Ideally, these financial inflows should be applied to develop other sectors – what is termed financial linkage. Unfortunately, this is where the seed of both Dutch Disease and Resource Curse are planted. In nine of ten cases, especially in the developing world, these rents may not go to transformative investment.
There are two ways a country can internalize the benefits of oil and gas endowments. One is fiscal linkage – effective investment of oil money in other sectors to generate growth and development. Nigeria may have lost the opportunity of creating the necessary fiscal linkage from its extractive industry, having poorly invested her revenues as the sector enters its twilight, and oil gradually fossilizes. Apart from fiscal linkages on the investment side, there is also the opportunity to invest oil money in other industries to stimulate growth. This is called localization. To localize is to promote local participation, by increasing the local content of the industry. Many developing countries have made elaborate local content legislation to facilitate this objective. Nigeria has made substantial progress in local content development in the oil industry.
The fundamental or defining characteristic is that industries interact in a mutually beneficial manner with elements in the value chain to create growth and boost development. It therefore follows that we should take relevant policy action to ensure proper handshake among players in every industry value chain, from telecommunication to manufacturing. We should discourage big players from having the River Rouge dream. Division of labour makes for specialization and efficiency. That is the only way we can avoid creating enclave industries all over the pace.
