Jumpstarting structural transformation leveraging global value chains

The biggest challenge of the Nigerian economy is diversifying away from commodity dependence through the stimulation of structural transformation towards manufacturing growth and high productivity sectors, and export structure upgrading.

Until the country economically restructures, its macroeconomic challenges will continue to metastasize. The volatility induced by oil dependence has fuelled macroeconomic instability for the country. This instability is evident in the continuing spiralling inflation, reduction in government revenues and foreign exchange earnings, naira depreciation, and dwindling economic activities. These phenomena contribute to high unemployment rate, preponderate poverty, and burgeoning debt levels.

Nigeria has experienced such downcast economic trend since the 2016 recession, with “recession 3.0” and other subsequent series – if a cogent effort is not taken – imminent in the short term.

In addition, the country’s structural change trend has seen a shift of employment from low-productivity (agriculture) to low-productivity (non-business services). This shift is contrary to economic development patterns in industrialised countries where productive resources are transferred from agriculture – through manufacturing – to business services.

The absence of manufacturing dominance in Nigeria’s structural transition indicates why the country finds it difficult to achieve sustained economic growth driven by job creation, which is the only way through which growth affects poverty.

The reason is that manufacturing is the special engine of growth because of its productivity potentials. Manufacturing can absorb more labour, pay higher wages and is the locus of technological development.

For the latter, most innovation and technological change emanate from the manufacturing sector before being diffused to other economic sectors such as the services sector. Manufacturing also generates static and dynamic returns and has price and income elasticity.

Several studies have also shown that increasing shares of manufacturing value-added in GDP are associated with faster GDP per capita growth rates. On the flip, non-business services, which include petty trade, hotels and restaurants, and other community, social and personal services often rendered by artisans, can absorb labour quite all right, however, they are of low labour productivity reflective in low wages and limited opportunities for skills’ accumulation and learning.

Furthermore, they are characterized by high job vulnerability, informality rates and constrained by domestic market size.

Against this backdrop, the party is over, and Nigeria must get down to the business of stimulating economic restructuring and manufacturing growth (starting with labour-intensive export industries) by leveraging global value chains (GVCs). GVCs provide that revolutionary vehicle, as gone are the days when countries develop an entire industry from scratch. Instead, developing countries integrate into GVCs and take advantage of wealthier states’ industrial bases.

GVC is the fragmentation of production across countries whereby countries produce what they know best and outsource the rest. It is the globalization of goods and services’ production whereby any country can access the world market, find a niche and establish itself as a global manufacturing place. It involves designing products in one country, procuring parts and components from several countries, and assembling the final products in another.

Essentially, parts and components of products criss cross the globe as firms search for efficiencies wherever they are. Samsung, for instance, makes its mobile phones with parts from 2,500 suppliers worldwide. As a result, productivity and incomes rise in countries that plug into GVCs like Bangladesh, China, and Vietnam, among others – where the steepest declines in poverty occurred. Unlike in conventional trade in which firms in different countries compete, GVCs are firm networks with common goals of minimizing production costs and maximising profits.

According to the World Bank, GVCs account for around 50% of world trade today. Participation in GVCs can deliver a double dividend for Nigeria’s manufacturing sector. Firms are more likely to specialize in the tasks in which they are most productive, which enhances efficiency and productivity.

Second, firms can gain from connections with foreign firms, who pass on the best technological and managerial. This strategy fosters technology transfer and access to capital and inputs so that firms can upgrade along value chains. Nigeria can coordinate firms and have them start from assembling product parts to producing non-complex parts. And subsequently, transit to creating complex aspects of a particular product value chain. This is one of the surest means to sophisticate Nigerian exports.

The decompartmentalization of complex products such as cars, electronics, phones and computers allow countries such as Nigeria (those at an early stage of industrial development) to specialize in simpler parts and tasks and participate in the trade of manufactured goods.

GVC participation is determined by conditions such as factor endowments, geography, market size, and institutions. Nigeria has an abundance of natural resources, large market size and low labour cost.

However, policies play an important role, and there are impediments to Nigeria’s effective participation in GVCs. Policies to attract foreign direct investment (FDI) can address the shortfall of the scarcity of capital, technology, and management skills.

Liberalizing trade at home while negotiating trade liberalization abroad can address the limits of domestic demand and local inputs. Improving transportation infrastructure, reducing high handling fees, providing access to forex, improving customs and border procedures through digital technologies, and enhancing port governance can address the issue of poor trade logistics. At the same time, investing in human capital development and training, skills acquisition, and capacity building can help strengthen domestic capacity to support upgrading in value chains.

One other instance that can help with the understanding of the link between GVCs and specialization is China. China has a “Button Town,” where hundreds of factories produce more than 60 percent of all buttons on Earth.

This strategy is the thinking! Nigeria has rubber in abundance, for instance, and the country can leverage it and plug into tyre manufacturing globally and target to have 5% of global market shares of tyre production.

Nigeria should focus on labour-intensive GVC activities and attract foreign investors while stimulating the emergence of domestic firms. But this will be elusive considering a coterie of factors, including political instability and poor political will. Dutch disease, lack of specific/targeted policies and numerous firm binding constraints (lack of hard and soft public, industrial inputs) still hold Nigeria back. The inability of the government to coordinate and facilitate investments for economic diversification is also an impediment to Nigeria’s effective participation in GVCs.

However, Nigeria can still integrate into several products’ value chains despite these firm constraining structures. For this to happen, the country should first select priority, labour-intensive industries from the lenses of its comparative advantage with which to commence its GVCs journey.

Second, the government must coordinate investments for economic restructuring, address market failures and stimulate cost discovery of entrepreneurs in non-traditional economic activities.

Third, the country should leverage a gradualist, cluster approach, industrialization strategy that targets growth poles in the country. In addition, the government should prioritize the development of a pilot few of its special economic zones (where there is a provision of hard and soft infrastructures necessary for an industry to succeed).

This strategy is likely to address the challenge of the poor business environment. Nigeria should then rigorously seek foreign investments in targeted value chains. After integrating into these GVCs, firms in Nigeria can then upgrade their standing in GVCs through product, process, functional and chain upgrading. The time is now!

Umezulike is a development economist and international development professional

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