• Wednesday, April 24, 2024
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Stability of policy is critical to accessing investment, economic development – Narula

professor-rajneesh

RAJNEESH NARULA is the John H. Dunning Chair of International Business Regulation at the Henley Business School, University of Reading, UK. His research and consulting have focused on the role of multinational firms in development, innovation and industrial policy, R&D alliances and outsourcing. He spoke to NOSA IGBINADOLOR on Nigeria’s quest for economic development and the failure of policy making in government.

The Nigerian economy over the years has been unable to attract significant foreign capital to drive economic growth and development. Why is this so? And what in your view should the government do to attract FDI?

Well, to be honest, Nigeria suffers from two challenges and when I say two, I mean two that includes many other sub-issues. One of the key determinants for attracting foreign investment is location advantage, the quality of infrastructure and the human capital that the company needs. As you know, the electricity issue is always there and it adds twenty percent to the cost of everything and Nigeria has managed to add an extra layer of bureaucracy to everything.

Multiple federal ministries are monitoring the same thing and you see this at the state and municipal level and you can see companies like Shoprite exiting the country. Meeting all these regulations is quite costly. Once you add all the costs and these are transaction costs, it makes doing business in Nigeria fairly challenging. And of course it is a reputation Nigeria has acquired and it is a deserved reputation. With the absence of public goods like roads, water, electricity, you have to build your own, and these are the kind of big costs that accrue to companies. So, when you see the kind of investments coming to certain states more than others, for example Lagos and Kaduna states, that is because the governments there have taken special interest in reducing the bureaucracy for companies. So that is one.

The second side is the instability of policy. This is something that has hounded Nigeria for many years; this tendency towards flip-flop of policy. So, the government says we want to focus on this sector and attract investments into this industry and then they change their minds a few years later and put back tariffs and non-tariffs. They say we want to have more cooperation among West African economies and then they stop trucks from going to Benin Republic. These rapid changes in policies makes one wonder if Nigeria is really keen on portraying itself as an environment conducive for investment.

Talking about policies, policy is critical to effective economic growth and development, where would you say Nigeria has been deficient in terms of policy design and policy implementation and how can we get it right?

The key thing to remember is simplicity of policy. When we make policy and this was what I was alluding to earlier on, there are multiple levels of policy; the state level, the federal level and the municipal level and there are multiple ministries interfering in the same activity. So, I think it is about simplicity and it is one of the key aspects. The second thing of course is implementation. Nigeria has a lot of smart people and they have brought in a lot of smart people to help but the problem is that these policies are proposed but not implemented. We haven’t got a shortage of ideas and really Nigeria is blessed with a lot of smart people and I can say that with great confidence, but there is a lot more talk and less fire when it comes to policy implementation.

Read Also: Fixing Nigeria’s economy from a policy angle

Nigeria’s policy

There has been this debate as to which is the better driver of economic development; FDIs or LDIs. Can you help to situate Nigeria within this debate? Where should we focus on?

For both, the absence of reliable public goods underlies the inability to perform and to be competitive. So, a domestic company that wants to compete whether as a manufacturer, a rice grower, maker of bicycle parts or providing services will have to take into account the twenty percent, and I think twenty percent is an underestimation. It is more like thirty percent, that is the extra transaction costs it takes to do business in Nigeria. This is something that applies to domestic firms and the foreign firms. The difference is that the foreign firms have to satisfy their stakeholders abroad who want to see returns that justify the twenty to thirty percent transaction costs, whereas domestic investors are mostly focused on domestic markets and they have less competition in that sense.

Nigeria is blessed with a lot of smart people and I can say that with great confidence, but there is a lot more talk and less fire when it comes to policy implementation

It is a local market, they do not have the transportation costs that the imported goods have, so they are able to overcome some of those things. But domestic firms face the same problem of under-qualified staff. Nigeria has produced a lot of universities from my time when we had five federal universities and nineteen or twenty-one state universities and even that time there was a lot of discussion about the state universities being stressed as they could not compete with the federal universities for staff and infrastructure, and that they were putting a lot of stress on the budget. Now, I’ve stopped counting.

So, this is the kind of fundamental problem both sides (foreign and local investors) face. In order to make money effectively, you need to have good people; not just good people, but good people with the skills. Companies shouldn’t be the ones providing basic skills that should be learnt in schools. So, this is going to be the long term problem and it is connected to your previous question; implementation hasn’t happened. We are going to keep paying the price for the absence of implementation.

You have done a lot of work around the role of multinationals in development, innovation and industrial policy. Can Nigeria and I ask this question with the former Nigerian Finance Minister in mind. A couple of years ago, she bemoaned the large cadre of government officials and policy makers who were hostile to FDIs and reforms. So, can Nigeria grow and develop without FDIs from MNCs?

You see, it is. But it is a very slow process and you must recognise that one of the ways in which knowledge transfers from one location to another is from the arteries of multinational companies. The other way is from Universities, but this is not what everybody has the privilege of doing. So, we can really manage without FDIs provided there are enough opportunities and skill creation taking place and I mean the right kind of skills. But, this is not happening.

In the absence of the arteries of universities and the arteries of knowledge flow, FDI becomes inevitable. But even direct investment and this is what I try to teach my students, an economy must be ready to accept it through. If you do not have a well skilled economy, direct investment makes little difference. Carrying a great idea and making it a commercial success are two different things and one thing in Nigeria is we have a lot of people who have great ideas and they want quick returns on it but such an idea could take you ten years to bring returns. So, domestic investment requires commercial skills, engineering skills and many other skills and we are not nurturing the skills.

Import substitution was the initial factor that led to the Asian Tigers success. Now, in Nigeria today there is a debate around import substitution; whether it is still critical for economic growth and development. What do you think?

First of all, many people do not realise, but Nigeria followed the same exact regulation of import substitution as the Asian Tigers did. In fact, there is a very good book, which I’m sure I made you read when you were my student, which documented regulations, which we utilise in Nigeria that were more or less copy and paste of what the Asian Tigers did. So, we did see some growth in domestic industries in the 1970s and this was through direct investment. It was import substitution; you had substitute import first.

There were foreign investors; automobile companies and manufacturing of various sorts and import substitution attracted these investors and gave them markets. But, the problem of course was that the moment you took away the profit motive for both sides, you raised the cost by making infrastructure inaccessible or of low quality. So, there is some case for import substitution, but ISI in the old way is no longer possible. Globalisation has come. There is no way you can raise tariffs. Nigeria, like every other country, voluntarily signed up to the WTO. There is no way back to import substitution in the twenty-first century. We can utilise some aspects of ISI without calling it that. Most countries do, they call it strategic industries. But, you can use the strategic industry argument for a limited period, five years or seven years under the countervailing measures agreement.

The point of import substitution is to allow infant industries to grow up, but people think that infant industries must remain infants forever. You can’t have a child that does not grow. So, it is possible to go back to import substitution but for a fixed period, not forever.

Looking at China route to development from Deng Xiao Peng in the late 1970s to today, I ask myself if some form of trade protectionism isn’t needed for countries like Nigeria to grow and develop?

Nigeria does not have the benefit of being China. I know people think that China did it, why can’t we do it? China has 1.5 billion people and it is strategically important. They can piss off the United States and get away with it. They are too important to be cut off completely, Nigeria is not. What China did was no different from what the Asian Tigers did and is still doing.

They are not using import barriers and tariffs. They have negotiated these things. So, when they ask companies to share technology, they are doing so systematically and with the understanding that they are going to compensate foreign companies for giving them access to their technology. That is to say, they give them access to their markets in exchange for technology. That is exactly what we did in Nigeria in the seventies with Peugeot, Volkswagen and others where they had access to our markets and used some twenty to forty percent local content and transferred technology to us. The difference is that China followed through while Nigeria did not. China continuously reduced the subsidies local firms were getting over time, making them get stronger and stronger. So, stability of policy is critical, China has continued with the same policy since the 1970s. They’ve reviewed, tweaked it and continued with it. Unfortunately, successive Nigerian governments have not been consistent with national policies.