Promoting structural transformation in Nigeria through government coordination of investments
Recent macroeconomic trends in Nigeria suggest the velocity at which Nigeria must structurally transform and industrialise. The trends encircle gross fiscal deficit which has necessitated severe budgetary cuts; burgeoning and unsustainable debt profile; reduction in government revenues and foreign exchange earnings; and poverty preponderance. While the global COVID-19 economic implications contributed to sharpening this macroeconomic crisis, the evolving global energy dynamics suggested that recession 3.0 and other subsequent series (if a cogent effort is not taken) are imminent for Nigeria, as a rentier state.
The most sustainable way for Nigeria to address these challenges both in short and long terms is through economic diversification, industrial restructuring and export structure upgrading. Considering the latter, the manufacturing exports share of total exports in the country from 1960 to 2015 averaged less than 2 percent annually. Nigeria simply manufactures just a nanoscopic fraction of items on its exports list. Depending on commodity rents since its independence has always inferred occasional and inevitable economic crises.
Previous efforts to improve the country’s performance in manufacturing have failed to produce anticipated results from the days of development planning (import substitution and big push) and structural adjustment (openness and macroeconomic stability) to the fourth republic. Although measurable macroeconomic progress was made in the first few years of the present republic, specific industrial progress from then till now has been slow. Factors responsible for the failure of the country’s industrial policies include inadequate political will, the Dutch disease, and the inability of the government to coordinate investments for industrial upgrading and diversification.
To turn the tide, Nigeria can still be transformed structurally despite its constraining business environment and non-Weberian bureaucracy. To do this, it must first pick winners – select priority industries that can spearhead its industrialisation quest and the improvement of manufacturing sector performance. The importance of this selection is that industries require specific hard and soft infrastructure (industrial inputs). The type of infrastructure needed for automobile assembly is distinct from the one needed for the textile industry or for attracting tourism. To this end, Nigeria evidently has fewer administrative and financial resources to embark on large scale provision of industrial inputs for each industry.
This rationalises the essence of identifying new and existing industries and prioritising the government’s limited resources to facilitate the development of those industries for quick successes. Tax revenues from firms in these selected industries, once they prosper, would provide the government with more resources to improve country-wide infrastructure, for instance. In selecting these industries, factors such as local comparative advantage, low capital-intensity, large domestic markets, transferable labour skills, existing supply chain and raw materials in the domestic economy, should be considered.
Following this, the government must appropriately coordinate investments for industrial restructuring and address market failures. This starts from developing a longer, multi-year, legislated industrial agenda which should have clear targets in terms of employment projections, industrial outputs, foreign investment and export growth targets. Such an agenda must also have a high political profile and the ingredients of transparency and accountability with a focus on effective citizen engagement so that citizens are enabled to hold the government accountable in the implementation of this agenda.
In this light, the Nigerian government must provide simultaneous improvements in financial, legal, and educational institutions, and in hard infrastructure so that firms in the priority industries can become competitive and reach the production possibility frontier. This entails the establishment of deliberation councils for industrial policymaking which should compose relevant bureaucrats, private sector representatives, academics, media and other relevant subsects. The councils should meet regularly, dialogue, so that the government can easily extract the specific binding constraints for industrial growth and productivity from firms, and work with the private sector to address them.
These councils should be independent of political influences and would make the industrial policy process more effective by improving information flows between the government and the private sector, and amongst the private sector. A central budget to address market failures in priority industries should also be set up. To limit rent-seeking through such dialogues, their processes should be transparent. Gone are the days when it was advised that governments need to keep private firms at arms’ length to minimise corruption and rent-seeking. While the government’s autonomy from private interests is important, it must have to engage the private sector to elicit industrial information in a more systematic manner.
Third, in line with this, the government should compensate first-movers in new and high-productivity industrial activities for externalities, in a way to stimulate entrepreneurs to cost-discover. Uncertainty about new products that can be profitably produced in an economy is a major obstacle to industrial upgrading and diversification. As such, subsidising cost-discovery could be done through tax incentives; setting up mechanisms for risky finance and investment guarantee; internalising coordination and labour training externalities; covering part of the costs for feasibility studies, business proposal developments etc.
These subsidies should be subject to ex-ante performance requirements so that bad projects could be phased out (a sunset clause). Compensating first movers is because of the asymmetry between the high cost of failure and limited gains of success of their attempts. Their failure provides a learning curve for other firms looking to explore such industries. On the flip side, their success attracts imitators who reduce the rents they earn, presenting high social returns but low private returns from entrepreneurial attempts thereby reducing appropriability of cost discoveries.
The high social returns from first-mover success present the case for inducing them to cost-discover especially in high-productivity activities. This all plays a role in helping the country acquire technological capabilities in new productive activities where it might not have had a comparative advantage. Examples of such successful attempts include the salmon industry in Chile, ICT in India, textiles in Bangladesh etc.
With this set up in place, the government must then rigorously seek foreign investors from East Asia where a rise in factor costs are making firms less competitive. Governments must also use special economic zones to circumvent binding constraints to firm growth and unconducive business environments.
Post-Oil Nigeria requires fostering an environment that promotes entrepreneurship and investment in non-traditional economic activities. This is critical to economic growth and convergence, as well as Nigeria’s future!
Umezulike is an International Development Professional and Development Economics Researcher. He can be reached through email@example.com and on Twitter via @Prof_Umezulike