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More on jobs: giving labour-intensive growth a chance?

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Back to jobs question and my argument for the focus on labour-intensive sectors with the potential for exports. I promised I would write a bit more on how to move the needle on that. First a bit of caveat emptor. The world is very complex and there is no guaranty that if you follow a set of guidelines you will get to the expected outcome. Even if you fulfil all the supposed checklist of currently-known things to do to promote industry, you can still end up without success. That is the unfortunate nature of the global economy and human interactions. Regardless, there are things to learn from those who have successfully tread that path and doing those things in the right context certainly increases the likelihood that you would get to the proverbial promised land.

But back to the matter. When trying to grow a labour-intensive sector for exports the first obvious thing that counts is wages. If you want to compete for labour-intensive exports then your wages must be competitive, all else being equal. Importantly, “wages” here does not mean how much you pay people a month, but how much you pay to get something done. How much would you have to pay for a worker to properly stitch 50 blouses in a working day, for example. How competitive is Nigeria in terms of wages? In a 2009 study by researchers at the World Bank, they showed wages in South Asia were at least 40 percent lower than in Africa. A more recent study also by researchers at the World Bank showed that wages in Kenya were four times larger than wages in Bangladesh in US dollars. You can guess how competitive Nigeria is based on that information, although we have no doubt become more competitive since the series of devaluations between 2014 and 2016.

You might wonder how people in South Asia are able to live on such low wages. Part of the story is the cost of living. If you want people to be able to survive on comparably lower wages, then it must be cheaper to live. So if you create a high cost economy by doing things like creating a protectionist racket for cement which makes construction and housing more expensive, or slapping a 70 percent tariff on vehicles, which makes transportation more expensive, or banning cheap imported food which makes eating more expensive, then you are making your space less competitive by indirectly forcing wages up relative to places where they don’t do all that.

A second important factor is the freedom to trade without restrictions. If you are trying to build a labour-intensive sector that exports, then businesses need the freedom to import raw materials even if you produce some locally. Competitiveness requires having access to the highest quality and cheapest raw materials. If those are domestic, then that’s fine. But if they are not then forcing firms to buy local only makes them less competitive. We tend to demonize imports but if you import $100bn worth of wheat and export $150bn worth of pasta made from said wheat then what is the problem exactly? In fact, most countries who export import just as much. If you restrict the ability of your firms to import freely, then they are less likely to be competitive when it comes to exporting.

Thirdly, if you need to import and export efficiently, then it goes without saying that you need infrastructure that allows you to import and export efficiently. If you are talking services exports, then you need cheap and fast connectivity. If you have scenarios where your only export point comes with an average of 30 days in delays and thousands of dollars in added costs as a result, then you are not going to be competitive.

Fourth, you need trust and fairness, also known as institutions, that allow people to do business without bottlenecks, injustice, and stories that touch. This is easier said than done. We have made a lot of noise about ease of doing business in Nigeria and the supposed improvements in the rankings, but does that translate into actual improvement in the business climate? I don’t know. Other countries have tried to tackle this problem in innovative ways. Some set up “special zones” where legal rules from a jurisdiction where people trust the legal system applies. Either way, you must get both local and foreign investors to trust you somehow.

Finally, you need macroeconomic stability. No industry trying to export can thrive in an environment where inflation is high, where big exchange rate shocks happen every three years, and where arbitrary restrictions on things like buying and selling foreign exchange are implemented randomly. Although, I must point out that macroeconomic stability is not the same as having a fixed exchange rate.

There are more on the checklist of things to do to give our country a chance in growing the parts of the economy that create jobs. A good resource is a book titled “Made in Africa: A new industrial strategy” by a bunch of economists. Should be essential reading for every policy maker. Of course, new threats like automation and artificial intelligence mean that many of these current labour-intensive sectors may not be labour intensive in a few decades. Still, we must give it a good go if not the 20 million unemployed Nigerians might start to get other ideas.

Dr. Nonso Obikili

Dr. Nonso Obikili is chief economist at Business Day.  

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