• Wednesday, July 17, 2024
businessday logo

BusinessDay

Debunking Economic Myths: Mono-economy is always not bad

Debunking Economic Myths: Mono-economy is always not bad

“Don’t put all your eggs in one basket” is a widely accepted piece of advice that warns against over-reliance on a single source. For Nigeria, a country heavily dependent on oil, this advice seems particularly pertinent.

However, the notion that a mono-economy, an economy heavily dependent on a single sector or commodity, is always a disadvantage overlooks important aspects of economic development and management.

The prevailing narrative also suggests that a mono-economy is inherently detrimental to a nation’s economic health. This notion is particularly relevant in the context of Nigeria, where oil has long been the cornerstone of the economy.

While it is true that over-reliance on one sector can present significant risks, the assertion that a mono-economy is always bad oversimplifies the complex dynamics at play.

Q: “However, the notion that a mono-economy, an economy heavily dependent on a single sector or commodity, is always a disadvantage overlooks important aspects of economic development and management.”

Nigeria’s economy is heavily reliant on oil, which accounts for the majority of export earnings and more than half of government revenue. This dependency has led to significant economic vulnerabilities, particularly when global oil prices fluctuate.

In the fourth quarter of 2023, exports were dominated by crude oil valued at ₦10,310.70 billion, representing 81.23 percent of total exports.

Meanwhile, the value of non-crude oil exports stood at ₦2,382.92 billion, or 18.77 percent of total exports, with non-oil products contributing ₦1,095.43 billion, representing 8.63 percent, according to data from the National Bureau of Statistics (NBS).

More so, the National Bureau of Statistics (NBS)shows that exportrade in the first quarter of 2024 was dominated by crude oil valued at N15.48 billion,representing 80.80 percent of total exports, while the value of non-crude oil exports stood at N3.68 billion,, accounting for 19.20 percent of total exports.

Read also: The cake is shrinking: Marketing battles in Nigeria’s economy

The Abuja-based statistics bureau also revealed that non-oil products contributed N1.78 billion, or 9.28 percent, of total exports. This export value seems paltry for a country of over 200 million people, with a projection to double in the next four decades.

However, it is essential to recognise that this reliance on oil has also brought substantial benefits. The revenue generated from oil has funded infrastructure projects, social programmes, and other essential services, impacting millions of lives.

Focusing on the oil sector has allowed Nigeria to develop specialised skills and technology. It also made Nigeria a key player in the global energy market. The country’s ability to extract and process oil efficiently is a testament to the advantages specialisation in.

Skilled labour in the oil sector commands higher wages, contributing to a more robust middle class. Additionally, the technological advancements and innovations driven by the oil sector can have positive spillover effects on other industries.

On one hand, the most significant risks of a mono-economy are its vulnerability to price fluctuations in the global market. For instance, the sharp decline in oil prices in 2014–2016 had severe economic repercussions for Nigeria, leading to a recession, as reported by the World Bank and the International Monetary Fund (IMF).

The economy’s over-reliance on oil revenues makes it susceptible to global economic trends and geopolitical tensions. Thus, the volatility then led to sudden and severe budget shortfalls, impacting public services and development projects.

Echoing that sentiment recently is Oyebanji Oyelaran-Oyeyinka, a professor of developmental economics and senior special assistant to the president of the African Development Bank, who said oil dependence has encouraged overconsumption during peak oil price periods, which has stunted the country’s economic growth.

Nigeria’s oil dependence has severely reduced government incentives to develop institutional infrastructure for the regulation and taxation of non-oil sectors in the economy. This crippled fiscal capacity over time,” he said.

Oyelaran-Oyeyinka stated that a diversified economy, especially one focused on the manufacturing and industrial sectors, is needed for rapid growth and development in the country.

According to him, manufacturing comprises a significant source of demand for goods in other sectors, including banking, transport, infrastructure, insurance, and communication services.

A strong manufacturing and industrialised sector leads to a more diversified economy because of the plethora of forward and backward linkages in manufacturing production and the necessity for inter- and intra-sector collaboration, which also produces spillover effects.

Hence, over-reliance on oil can stunt growth in other sectors. In Nigeria, agriculture, manufacturing, and services have not been developed to their full potential due to the overwhelming focus on oil.

This lack of diversification can lead to economic stagnation and reduced resilience to external shocks. For instance, during periods of low oil prices, other sectors may not be robust enough to compensate for the lost revenue, exacerbating economic downturns.

A renowned economist who chose to remain anonymous argued that a mono-economy is not inherently problematic. “The issue is not the reliance on a single, substantial source of revenue,” he stated, “but rather Nigeria’s failure to employ appropriate economic growth models.”

He emphasised the unbalanced growth model, which advocates for targeted investment in key sectors to stimulate overall economic growth. This model, he suggested, offers a nuanced perspective on Nigeria’s economic strategy and highlights a path towards sustainable development.

Beyond the Nigerian Border: Case Studies of Successful Diversification

United Arab Emirates (UAE)

During the 1970s and 1980s, the UAE’s economy was heavily dependent on oil revenues, which constituted over 70 percent of its GDP, as reported by the UAE central bank. However, recognising the volatility of oil markets, the UAE began its diversification efforts in the 1990s.

Recent data shows that the contribution of the oil sector to the UAE’s GDP has been steadily declining, making up around 30 percent or slightly less as the country continues to diversify its economy. According to the UAE Central Bank, “the non-oil sector grew by 7.8 percent in 2022, reflecting the UAE’s successful diversification strategy.”

The development of Dubai, along with other emirates like Abu Dhabi, showcases the UAE’s successful economic diversification efforts. Dubai has become a global hub for tourism, finance, and real estate, while Abu Dhabi has also made significant strides in these areas and others, such as renewable energy.

As reported by The National News, “Abu Dhabi and Dubai are leading the UAE’s economic diversification with significant investments in renewable energy, advanced technology, and infrastructure projects.”

Saudi-Arabia

Initially reliant on oil, Saudi Arabia has been making significant strides to diversify its economy through its Vision 2030 initiative, investing in tourism, entertainment, and technology. Today, oil still plays a crucial role in the economy, but its contribution to GDP is steadily decreasing.

The development of sectors such as tourism, showcased by projects like NEOM and the Red Sea Project, highlights Saudi Arabia’s efforts towards economic diversification. The country’s strategic investments in non-oil sectors aim to transform its economy and reduce its vulnerability to oil price fluctuations.

During the 1970s and 1980s, Saudi Arabia’s economy was overwhelmingly dependent on oil revenues, which constituted over 80 percent of its GDP and government revenues. Recognising the risks associated with oil dependency, Saudi Arabia launched its Vision 2030 initiative in 2016 to diversify its economy.

Recent data shows that the contribution of the oil sector to Saudi Arabia’s GDP has been declining, now making up less than 50% as the country continues its diversification efforts. According to the Saudi Arabian Monetary Authority (SAMA), “the non-oil sector grew by 6.2 percent in 2022, driven by significant investments in tourism, entertainment, and technology.”

The development of Saudi Arabia’s tourism sector, with ambitious projects such as NEOM, the Red Sea Project, and Qiddiya, along with growth in technology and entertainment, showcases the country’s successful economic diversification efforts.

As reported by Bloomberg, “Saudi Arabia is leading its economic diversification with significant investments in tourism, entertainment, and technology as part of its Vision 2030 strategy.”

Botswana

Botswana, renowned for its diamond wealth, has effectively utilised its mineral revenues to invest in education and infrastructure, significantly reducing poverty and enhancing economic stability. This strategic management has transformed Botswana into one of the most stable economies in Africa.

In 2022, Botswana’s GDP growth was 5.8 percent, though it is projected to slow to 3.3 percent in 2023 due to a decline in diamond production and prices amid weaker global demand. Despite diamonds still constituting over 90 percent of total exports, Botswana is diversifying its economy by focusing on sectors like renewable energy and technology.

Investments in human capital and infrastructure are crucial, yet challenges such as high unemployment (24.9 percent in Q3 2023) and significant income inequality persist. Continued efforts to diversify and enhance private sector growth are essential for sustained economic stability and growth, as reported by the IMF and the World Bank.

Nigeria’s path forward

For Nigeria, the challenge lies in transforming its economic structure to reduce dependency on oil while leveraging its current advantages. This involves:

Investing in infrastructure

Improving infrastructure to support other sectors like agriculture and manufacturing can enhance their productivity and global competitiveness. For instance, better roads and transportation networks can facilitate market access for farmers.

Upgrading infrastructure, such as power supply and telecommunications, can also attract investment and stimulate growth in diverse industries.

Education and skill development

Focusing on education and vocational training to prepare the workforce for diverse economic opportunities beyond the oil sector is crucial. By investing in human capital, Nigeria can foster innovation and growth in various industries.

Educational reforms that align with the needs of the economy can ensure that the workforce is equipped with the necessary skills to drive diversification and economic development.

Policy and governance

Implementing policies that encourage investment in non-oil sectors, reducing bureaucratic red tape, and improving the ease of doing business are essential steps. For example, Nigeria’s push towards agricultural development through initiatives like the Anchor Borrowers’ Programme has shown promise.

Effective governance and policy frameworks can create an enabling environment for businesses to thrive, attracting both domestic and foreign investment.

While a mono-economy presents risks, it is not inherently detrimental. The real issue lies in how the economy is managed and whether there is a strategic vision for diversification and sustainable development.

For Nigeria, leveraging its oil wealth to invest in other sectors can pave the way for a more resilient and balanced economy. Thus, the myth that a mono-economy is always bad is debunked by understanding the potential benefits and implementing effective management and diversification strategies.

 

Oluwatobi Ojabello, senior economic analyst at BusinessDay, holds a BSc and an MSc in Economics as well as a PhD (in view) in Economics (Covenant, Ota).

Wasiu Alli is a business and finance journalist at BusinessDay who writes about the economy, business trends, and politics. He holds a BA. Ed. and M. Ed. in English Language and Education.