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Nigeria’s industrial growth and the comparative advantage debate

Amongst policymakers, academics, private sector practitioners and international development enthusiasts, the inevitability of Nigeria to structurally transform, industrialise and upgrade her exports is generally understood. This is considering the country’s precarious position as a rentier state, its dependence on oil rents for government revenues and FOREX earnings, and the resultant macroeconomic consequences. However, the puzzle remains that in such industrial transformation, should Nigeria progress with its comparative advantage or defy it?

There is a background to this puzzle. First, developing countries have a comparative advantage in mostly unskilled labour and resource-intensive industries which are mostly of low productivity, as against the capital-intensive ones which are highly productive. Second, a country’s per capita income is an outcome of the prevailing industries and technologies in the country. If a country successfully defies its comparative advantage along the industrial ladder and develops viable, high-productivity industries, it can easily converge with developed countries economically. As such, there is a huge correlation between a country’s export structure and its per capita income.

In discovering Nigeria’s choices in transforming structurally, there must be an examination of the theses of the proponents of each of these paradigms (follow or defy comparative advantage) under the third wave of development thinking (new structuralism). It is also key to note that both paradigms under new structuralism are a retooled set of principles distinct from the first wave of development thinking (import substitution and big push) and second wave’s (Washington Consensus). In addition, the duo paradigms agree that the market is still the elemental mechanism for resource allocation and that the government must coordinate investments for industrial diversification and upgrading.

The adherents of comparative advantage following (CAF) argue that developing countries should embark on industrialisation by focusing on industries that are consistent with their comparative advantage (labour and resource-intensive industries), considering that a country’s comparative advantage and industrial structure are determined by its factor endowments. Going contrary implies replication of the mistakes several developing countries made under the first wave of development thinking whereby most of them pursued investments in heavy capital-intensive industries when capital in their economies was scarce. Following their nonviability, most of these industries failed despite the use of distortionary policy instruments to protect them which occasioned rent-seeking, monopoly and elite capture.

In furtherance, the CAF school argues that countries should pursue CAF investments for firm competitiveness in domestic and international markets and large returns. Additionally, successful attempts along the line of comparative advantage enables the poor to benefit in growth through unskilled labour-intensive employment. This enables developing countries to gradually accumulate the requisite capital, upgrade their endowment structure, and move into new economic activities following their success in low-end industries. Finally, the school argues that by following its comparative advantage, a developing country that ventures into new economic activities can also benefit from the backwardness advantage in the upgrading process. This advantage refers to the easy adoption of production technologies from the developed world at low-risk and costs, as well as courting foreign investments from countries with increasing factor costs in similar low-end industries.

Contrary to the CAF school, the comparative advantage defying (CAD) school argues that the same deployment of import substitution strategies which the CAF school frowns at, in building capital-intensive industries, away from a developing country’s comparative advantage, is exactly what Japan, South Korea and China etc. did. These countries successfully protected and nurtured what could have been termed nonviable firms that defy comparative advantage, in their industrial journey. An instantiation is that China has an export bundle of a country between three and six times richer. If China, considering its agricultural labour, specialised in the type of products that are unskilled labour-intensive, it would not have been able to sophisticate its export basket.

In addition, even if a country has all the right engineers, machines, and workers, they still cannot be combined into an internationally competitive firm just like that. This is considering that they need to be subjected to a long learning process before they can acquire all the necessary technological capabilities to be competitive in the production of requisite goods. As such, a country’s acquisition of higher technological capabilities in trying to catch up with developed countries, requires it setting up and nurturing industries in which it does not have a comparative advantage. As such, it would be increasingly difficult for a developing or backward economy to accumulate technological capabilities in new industries without defying comparative advantage and entering the industry before it has the ‘right’ factor endowments.

Furthermore, while the CAF approach will help policymakers in the early stage of development, there is much work to be done to have countries move beyond the middle-income trap. Lastly, CAD argues that patterns of specialisation for countries with similar economic realities, diversification and economic development are not driven by comparative advantage but by concerted government efforts, coordination with the private sector and lone self-discovery attempts by entrepreneurs.

Following this examination of the debates of the schools, Nigeria has two choices. First, focus on new and existing industries that are consistent with its comparative advantage, following its factor endowments in labour and natural resources. Second, focus on industries or investments that are both CAF and CAD. A recommendation for Nigeria is to follow the second approach which is heterodox and analogous to what China, Korea, Japan etc. did. This way, the country can develop CAF firms that are competitive, viable and tap the backwardness advantage, so as to facilitate inclusive growth, and address unemployment. At the same time, it is acquiring technological capabilities in selected high-end industries to improve the value of its exports and circumvent the middle-income trap. This could be the only way the country can industrialise and catch up with developed Asia and her former economic comparators.

Post this debate, the Nigerian government must facilitate investments in new and existing industries through addressing externalities, providing the requisite public inputs for industrial growth and stimulating entrepreneurial economic cost-discovery. It can also leverage special economic zones to selectively provide such inputs and reduce firm transactional costs for competitiveness.

 

CHAMBERS UMEZULIKE

Umezulike is an international development professional and Development Economics researcher. He can be reached through chambers.umezulike@gmail.com and on Twitter via @Prof_Umezulike

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