Economic diversification and the wealth of nations: Lessons and the path forward for Nigeria (3)
Third, Nigeria must become an economy driven by innovation. We have seen this trend in services such as financial technology (FinTech), but we need to have it both as a policy and as a way of economic life in other aspects of science and technology that can be turned into the local mass manufacturing of value-added products of innovation in our country. This requires a revamp, and the socialization of the idea of intellectual property, which drove innovation to become the main creator of the wealth of economically advanced countries.
Fourth, for Nigerian innovation to drive economic diversification, we must pay very special attention to trade policy. As a result of its inability to achieve structural economic transformation, Sub-Saharan Africa including Nigeria’s share of global merchandise exports has remained virtually stagnant for two decades between 1998, when the continent’s share of global merchandise exports was 1.9%, and 2018, when it was 2.5%. Global trade is based far more on manufactured, complex products (about 50%, than on primary commodities such as agriculture which account for less than 10%.
The fact that most of Nigeria’s trade is with advanced economies makes our trade disadvantage worse. With Nigeria’s ratification of the African Continental Free Trade Act in November 2020, we must now shift our strategic trade focus toward African countries. But this requires that we manufacture competitively and manage the phenomenon of dumping from foreign countries such as China. We need to seek a special dispensation from the World Trade Organization’s Special & Differentiated tariff regime with a strong case for why Nigeria should adopt “smart protectionism” for a limited period to ensure the survival of its infant industry at home.
Fifth, industrial policy must be the basis of our push toward economic diversification, since it is the basis on which we can push for a more favorable international trade environment. Industrial policy requires a certain amount of state intervention even in a market economy, provided that such intervention is targeted and ultimately productive for broad manufacturing sectors, as opposed to special favors for individual industrialists that distorts the market playing field for competitors in the same sector. Industrial policy will typically include identifying areas in which productive knowledge exists to confer competitive advantage, targeted subsidies for export industries, special economic zones, import-substitution industrialization, and temporary protectionist measures for some key sectors such as manufacturing.
Sixth, foreign exchange policy in Nigeria needs to be revamped away from state control, which encourages scarcities, smuggling and arbitrage, if we are to create incentives for a diversified economy. Artificial exchange rates only encourage an import-based economy. Allowing the naira to find its true value in the marketplace will discourage imports of unnecessary items (except, with the appropriate tariffs, for consumers that can afford it) and encourage exports to earn foreign exchange.
Seventh, as explained above, achieving economic diversification depends, at its core, on the existence of knowhow or productive knowledge. This requires Nigeria to focus on creating the skills amongst its young population that will drive competitive manufacturing for exports. This calls for a revamp of the education sector in favour of science and technology, at least for the next two to three decades. This is how China was able to achieve spectacular economic transformation and become the world’s second largest economy.
Eighth, Nigeria’s 1999 Constitution, by placing ownership of natural resources exclusively in the hands of the central government, creates a dis-incentive for economic diversification because it hampers a regional approach to economic diversification and economic management in what is supposedly a federal state. We need a constitutional restructuring that will devolve fiscal autonomy to regions or states, which will engender competitive manufacturing and the diversification that will drive it. This was the case in the First Republic, when Nigeria recorded its best levels of broad based economic growth rather than subsequent boom and bust cycles that were driven by reliance on oil rents.
Finally, Nigeria’s economic policy makers need to begin to measure economic diversification outcomes in an empirical manner. Measuring the sectors of the economy that contribute most effectively or have the promise of diversification, and the exact extent to which this is so, will help the government develop targeted export policies and incentives that will drive diversification. The Theil Index is a well established way to measure economic diversification.
All of this is why the Economic Advisory Council to the President needs to become a full-time body. Managing Nigeria’s economy to transformation will require capable hands that work on it full-time, doing the granular work and analysis that will drive policy. It is important that such a council, and the rest of the country’s economic management apparatus, acquire and establish strong competence in industrial policy if our economy is to become truly diversified.
In conclusion, economic diversification is a 24/7 agenda of decades, not just a slogan. It needs to be made the central thrust of economic policy in Nigeria because we simply cannot achieve development without it.
Text of a keynote address by Professor Moghalu, a former Deputy Governor, Central Bank of Nigeria at the 2021 Annual Conference of the Nigerian Economics Students Association (NESA), University of Port Harcourt