• Sunday, July 14, 2024
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Failure to reform will deepen extreme poverty in Nigeria

poverty

Nigeria faces a perfect storm. A combination of unfavourable circumstances – low growth, low productivity and rising population – is locking this country in the extreme poverty trap. Already, Nigeria has overtaken India to become the “poverty capital of the world”. While India, with a population of 1.3bn has fewer than 70 million of its people living in extreme poverty, Nigeria, with a population of 200 million, has an estimated 100 million, half its population, classified as extremely poor, that is, living on less than $1.90 a day!

Yet, the World Bank has now warned that the situation could get worse. In its Nigeria Economic Update, launched in Abuja last week, the World Bank said that, unless this country urgently undertook much-needed reforms, the number of its citizens living in extreme poverty could rise by more than 30 million by 2030; it would thus account for 25 percent of the world’s total population of the extremely poor. The World Bank based its dire prognostication on Nigeria’s “economic and demographic projections”, namely, the country’s anaemic productivity and growth levels and its bourgeoning population.

Of course, growth is the rising tide that lifts all boats; it produces economic expansion, which helps to create jobs, while productivity drives efficiency, which ensures higher incomes and reduces poverty. But Nigeria’s economy is growing at just above 2 percent, while its population is growing at nearly 3 percent. Meanwhile, the average productivity of a Nigerian worker is $3.24/hr, compared with $19.68/hr in South Africa. This combination of low-growth, low-productivity and rising-population is a trigger for a perfect storm: poverty.

To avert a disaster, economic growth and productivity must rise much higher than population growth. But higher economic growth and rising productivity do not just happen; they are products of structural reforms. Thus, the World Bank stressed the urgent need for reform in Nigeria, warning that “the cost of inaction is significant”!

Yet, policy reform inertia is the defining characteristic of President Muhammadu Buhari’s government. The Buhari administration is long on intentions but very short on actions. For instance, President Buhari talked about “lifting 100 million Nigerians out of poverty in 10 years”, but the World Bank is concerned that his government’s inaction could actually cause the number of Nigerians living in extreme poverty to increase by 30 million by the end of that ten years. You can’t say that you want to lift 100 million people out of poverty in ten years and yet refuse to take the critical actions needed to achieve that goal. China did not reduce the proportion of its people living in extreme poverty from 60 percent in 1990 to 12 percent in 2010 by simply saying it; rather, it undertook far-reaching structural reforms.

But, in Nigeria, it’s all talk and no action! Trade, investment and macroeconomic stability are the key drivers of growth and productivity, the main antidote to poverty. Yet, the Buhari government stubbornly refuses to recognise, despite the preponderance of empirical evidence, the strong links between open markets and poverty reduction, and between productivity and prosperity.

An empirical study of OECD countries shows, for instance, that an increase of 10 percent in trade openness translates into an increase of around 4 percent in income per person. And a World Bank study found that, in the 1990s, per capita income grew more than three times faster for developing countries that had lowered trade barriers than for those that had not. Another study shows that productivity in European manufacturing increased by 11 percent between 1988 and 2000 as result of trade openness.

Free trade gives local industries access to essential intermediate inputs but also puts them under a competitive pressure to innovate, adapt and become more productive. And the ability to export enables local industries to enter foreign markets and to grow. We also know that free trade benefits consumers by offering them greater choice and better value, which lead to higher living standards. What about foreign investment? Well, you can’t credibly talk about tackling poverty without attracting significant foreign direct investment, which is a major source of employment. Inward investment also brings know-how and technology, boosting an economy’s productive capacity.

So, the evidence, both theoretical and empirical, supports the argument that open markets stimulate economic growth and productivity, creating jobs and raising living standards. Which was why the World Bank urged Nigeria to leverage trade integration to harness the benefits of the African Continental Free Trade Area, AfCFTA. Yet, only recently, the minister of industry, trade and investment, Adeniyi Adebayo, said that the border closures and foreign exchange restrictions would boost Nigeria’s economy.

Clearly, that statement betrays a lack of understanding of the mechanics and benefits of open markets and shows that Nigeria doesn’t see AfCFTA as an incentive to build its productive and trade capacities. Yet, unless Nigeria’s economy is open for and to business, trade and investment in Africa and globally, it would not generate the private-sector-led growth needed to create jobs and tackle poverty. Nigeria needs to adopt open markets, free trade and investment as a growth strategy, without which it cannot achieve strong and sustainable growth, and avert the detonation of the ticking poverty time bomb.

But open trade and investment policies are not enough; they must be underpinned by macroeconomic stability. You can’t achieve competitiveness and productivity in an economy without a sound macroeconomic framework. Thus, the World Bank was right to stress the need for strengthening macroeconomic management in Nigeria. The confidence of businesses and consumers to invest and spend is predicated upon macroeconomic stability, particularly low inflation, low interest rate and flexible, stable exchange rate.

Yet, by international standards, inflation and interest rates, at double digits, are too high to boost the competitiveness of industries or stimulate consumer spending in Nigeria. What’s more, the unwillingness of the interventionist Buhari government to allow efficient allocation of resources, such as foreign exchange, through the market mechanism, and the government’s often harsh treatment of foreign-owned companies in Nigeria, undermine investor confidence and constitute a barrier to business, trade and investment, to private sector dynamism and, thus, to job creation and poverty reduction.

As I have written many times in this column, Nigeria must be an open, competitive market economy. It must be one of the best places in the world to start and grow a business. Without that, Nigeria can’t generate the growth and prosperity needed to tackle poverty and improve living standards. Free and open market are the surest route to prosperity.

Finally, there is the critical role of human capital. Higher levels of education and skills expand an individual’s economic capabilities and facilitate technological diffusion and innovation, which stimulate growth and productivity. But, as the World Bank said, the productivity gap between Nigeria and comparator countries “reflects both its relatively low stocks of physical and human capital and the inefficiency with which inputs are transformed into outputs”.

Truth is, the level and quality of education and skills in Nigeria are appallingly low. There is an acute mismatch between the quality of graduates and the needs of industries. Such a mismatch is a major barrier to growth and productivity, and a major cause of unemployment, low wages and poverty. Sadly, Nigeria de-prioritises and under-invests in human capital. Yet, to tackle poverty, it must pay attention to human capital development.

Nigeria faces a no-alternative-to-change moment: Its growth, productivity and poverty crises are acute and call for urgent structural reforms. The World Bank is right to warn that inaction could be catastrophic. Sadly, Nigeria has a tendency to be sclerotic. Yet, it must urgently reform or deepen the misery of its people!