Nigeria is Africa’s largest economy with a GDP of about $447 billion. The economy grows on an average of 2.0 percent with a disproportionate population growth of about 3.0 percent resulting in a low standard of living as measured by real GDP per capita of $2,200 compared to South Africa with a real GDP per capita of $6,100. This denotes that if Nigeria is to double her GDP by the golden rule of 70, it will take Nigeria about 35 years while her population will double in less than 24 years explaining a widening disparity and the reason for alarming poverty and unemployment rates.
Currently, unemployment rate is projected above 30 percent and about 40.1 percent of the population lives below the poverty line. In fact, according to the World Poverty Clock about six Nigerians enter the poverty line every minute. Over the years, the economic fundamentals have not really changed and a lack of economic diversification is associated with such vulnerabilities not only to global shock but also undermining long-run growth. However, it is becoming clear that diversification is not just a challenge but also misconstrued by many. Thus, an economic insight into the mystery of diversification in Nigeria.
A cursory look at several policy documents-NEEDS, Vision 202020, the 7-point Agenda, the Transformation Agenda, and recently the ERGP, it is evidently clear that diversification emphasis has been a recurring decimal over the years. In fact, the current administration’s bid to salvage and reverse the current economic order in repositioning the country and a commitment to complement the vision 202020, economic diversification became a major focus for growth restoration and consolidation in the ERGP. Despite this unwavering effort from 2015 till date, it is still unclear of any evidence of improvement on the diversification scorecard. Has diversification become a mystery or myth in policy stance? What does it even mean to diversify Nigeria’s economy?
From an economic perspective, diversification encompasses three broad areas in Nigeria. First, diversification with regards to economic activities-GDP. Several commentaries are hovering around that Nigeria’s economy is diversified with the existing GDP structure but this is incorrect. If it is, then why are we still traversing around the same economic woes? The structure of Nigeria’s GDP is 90 percent contributions from the non-oil sector and around 10 percent from the oil sector. This trend has remained the same for decades. A further disaggregation of the 90 percent contributions from the non-oil sector revealed that manufacturing contributes less than 10 percent to GDP while agriculture-mainly subsistence farming contributes about 22.0 percent.
Basically, the agricultural GDP is more rain-fed than accumulation of factors of production and their productivity. Hence, the capacity to generate employment and revenue for the government is undauntedly low. Also, the agricultural production process in Nigeria is more labour intensive than capital investment, thereby exposing the low knowledge intensity of the products for global demand and explaining the insignificant foreign exchange earnings from the sector. Consequently, the economy lacks the capacity for ensuring long-run growth and sustainability. For instance, in 2019, Cote D’ívoire the world leading supplier of cocoa beans to the tune of 38 percent of the world cocoa supply realised $3.78 billion as export earnings while Mars, just one of the leading chocolate companies that would have imported cocoa beans from Cote D’ivoire had a net sale of $18 billion.
The huge variance is occasioned by the value addition that would have resulted in Mars paying company income tax and personal income tax by the employees. It is a sorry case juxtaposing this to Cote D’ivoire’s extractive cocoa sector that generates far less revenue and employment for the country. Cocoa beans price will always remain uncertain but chocolate price remains stable. Also, extractive based products have inelastic demand but agro-allied or manufactured products have elastic demand hence more beneficial to a country.
Second, diversification with respect to domestic resources mobilisation-revenue generation. As at today, the oil sector contributes about 65 percent revenue to the federation account and this is susceptible to uncertainty because oil price is exogenously determined explaining the ceaseless fiscal shock in the country. If 90 percent of a country’s GDP comes from the non-oil sector but the oil sector that contributes less than 10 percent now takes a lead in revenue generation, it portends from the above that the non-oil sector lacks the capacity to generate revenue cum employment in matching the 90 percent domestic economic activities’ contribution. Revenue is a percentage of output-GDP and with so much non-oil GDP, less revenue is generated undermining the production intensity of the non-oil sector indicative of an undiversified economy.
It makes economic sense for the non-oil sector to take the lead in revenue generation but this has always been the challenge for decades exposing the fact that the subsectors of the non-oil sector making this significant contributions lack the capacity hence a low tax-GDP ratio of around 6 percent and the upward trending of the debt-GDP ratio of 20 percent. It follows that the economic activities in the non-oil sector accounting for the 90 percent GDP operates more in the informal sector. This is because about 60 percent of the country’s GDP emanates from the informal sector that also employs directly and indirectly around 80 percent of the countries’ labour force. This informal sector is yet to be integrated into the mainstream economy thus, the low domestic resources mobilisation-revenue generation.
Third, export diversification. About 91 percent of the country’s export stems from the oil sector that accounts for less than 10 percent of domestic economic activities. The economic intuition is that the non-oil sector with a significant 90 percent contribution to domestic economic activities records less than 10 percent presence in export earnings to the country. This shows that Nigeria’s products are not globally competitive to cross our borders in fetching the country significant foreign exchange earnings alluding to the weak knowledge intensity of the economy. This only unravels the low production complexity of the subsectors accounting for the significant 90 percent GDP contribution. Production is a function of mainly labour and capital and at the take-off stage of any economy, labour takes the lead in the production process but this production process will always be slow and engenders low productivity for expansionary wealth creation. Thus, low standard of living for the majority of the populace.
However, when an economy has experienced growth for some time, it is imperative for the country to accumulate capital to substitute labour in the production process to ensure greater expansion, sustainability and diversification of the production base for global competitiveness.
Capital accumulation is basically, the accumulation of machines, equipment, new plants as well as consistent provision of industrially relevant integrated infrastructures (that is, linking airports to railways and as well seaports) as part of fixed capital. Nigeria has failed along this all-important input to production over the years instead spending her hard-earned foreign exchange to import capital goods. This keenly explains the quagmire of the extractive industry dependent structure of our economy struggling to even develop agro-allied industries along the agricultural value chain. In 1960, Philippine and South Korea with similar population figures had real GDP per capita of about $1,500 but in the year 2000, the difference became clear between these two countries. South Korea’s real GDP per capita grew to about $16,000 while that of Philippine was around $3,400.
The reason is not farfetched; South Korea consistently invested a major fraction of her output for capital accumulation knowing the imperativeness of capital and with the fact that capital depreciates. This triggered their growth rate making their products globally competitive as more capital replaced labour in the production process. The knowledge intensity of the economy improved significantly with the conscious efforts to invest a significant aspect of their output. Capital is not just an input to production but determines the productivity level of a country’s labour force. What South Korea did was to increase the capital per effective labour in the supply side of the economy.
In Nigeria, consumption takes about 60 percent of our GDP by expenditure but this is not really the problem. The problem is that, public capital which is part of gross fixed capital formation (from the Federal Government budgetary allocation) accounts for less than 2 percent of GDP hence the country’s infrastructure-GDP ratio remains around 35 percent of GDP compared to South Africa with about 75 percent. To make matters worse, actual deficit financing is more than 3 percent of GDP and in fact for 2019, it was more than 4 percent of GDP resulting in crowding-out of private investment due to rising debt profile.
Consequently, private investment contribution to capital accumulation also remained at its embryonic level over the years currently standing at around 18 percent of GDP. This also elucidates the deteriorating purchasing power and rising cost of production as deficit financing is inflationary causing declining real wage and real money balance. The question is how can Nigeria increase her accumulation? This is simple.
The economic complexity index which measures the knowledge intensity of an economy with regards to the production process showed Nigeria with an index of -1.9 with a rank of 124 out of 126 countries compared to South Africa with an index of 0.3 ranking 47th position. This index shows not only the knowledge intensity of an economy but also the production complexity as well as the export competitiveness. This indicates that Nigeria needs to increase her knowledge intensity and this is where both human capital and physical capital becomes imperative questioning the global relevance of our education and health systems.
No country grows more than her knowledge stock hence we need an overhaul of the education system especially science and engineering. The next industrial revolution will come through digital cum technological advancement but how ready is Nigeria? How relevant is our current human capital development stride to the diversification need? What is the state of our vocational cum technical education to the realities of the world now? Today, artificial intelligence, cloud computing, blockchain technology and issues of big data analytics are on the rise in business decisions and industrial production. For instance, after three months of COVID-19 lockdown, our higher institutions are still unable to move academics activities online as the new normal except private institutions like Pan-Atlantic University that has fully moved all academic activities online.
The government budget constraint had inhibited the public sector from providing the required industrially relevant integrated infrastructures to also spur private sector support for capital accumulation as total government expenditure is far less than 10 percent of GDP despite deficit financing. Hence, instead of patronising the bond market, the equity market provides a veritable tool for long term capital not only for private investment but also for revenue generating public investment. Currently, equity capitalisation in Nigeria is around N13.1 trillion which is less than 10 percent of GDP compared to South Africa with about 343.5 percent of GDP indicative of the presence of the private sector participation in total gross fixed capital formation. Thus, calling for the securitisation of revenue generating public assets to reduce the debt burden on government and the attendant negative effects on the economy.
Perekunah Eregha
Prof Eregha is of the School of Management and Social Sciences, Pan-Atlantic University, Lekki-Lagos.
