To Lift The Nigerian Economy, We Need Manna From Heaven
The numbers have been coming in and they aren’t pretty GDP contracted for the first time in 12 years, foreign direct investments are down over 70 per cent, company profits are dropping. It does not take a genius to see that the economy is working as it should be.
How should an economy work?
The economy has two jobs
- To create wealth
- To share the wealth
Wealth is created by taking something that naturally occurs in the earth, raw materials, like sand, plant seeds, crude oil and bitumen and using your knowledge, skills and equipment(manufacturing) to transform it into something more valuable like glass, food, petrol and road tar.
This process of transforming a raw material to something more valuable is not just the way a country creates wealth, it is the major aim of an economy, every other business(retailers, banks, stock market investors, insurance companies) rely on companies that can do this.
Every country is blessed with a fixed amount of raw materials, the prosperity of the country depends on its ability to apply its knowledge and skills to transform those raw materials into more valuable goods.
The Nigerian economy barely creates anything, we’ve survived so far because we are blessed(cursed?) with a raw material(crude oil) which we extract and then sell to those who are able to transform it to something more valuable(refined petrol).
How do countries get rich?
I’ve mentioned that countries create wealth through manufacturing, but that’s only half of the story.
Let’s imagine a country called Macronia
There are ten people in Macronia and they each have only 100 Naira and they spend their days manufacturing goods and trading with each other. Naturally, the more efficient ones will get a larger slice of the wealth in the country but total wealth in that country will remain 1,000 Naira. They spend half of the money on importing “glamorous dresses” and “toothpicks”, leaving only 500 Naira in Macronia’s local economy. Reduction of imports may increase the amount of money that exists in Macronia, but there is a limit. The total amount of money in that country cannot increase above 1000 Naira, even if they completely eliminate the importation of glamorous dresses and toothpicks. This is the flaw in all import substitution policies, they are self limiting.
The only way Macronia can grow beyond a 1,000 Naira economy is if they convince people from other countries to bring money into Macronia or they take some raw materials that exist in their country, use their knowledge, skills and equipment to transform it to something more valuable and then sell it to people in other countries, thereby, bringing more money into the economy.
By now you may have guessed correctly that the other half of the wealth creation system is exports.
That Nigeria manufactures almost nothing, and exports only one item, crude oil, is the major reason we are in our current situation. This fact has further been exacerbated by our foreign exchange and petroleum sector policy, I’ve written about those here and here, but that is not really what this article is about.
How can Nigeria get rich?
The only thing harder than manufacturing, is manufacturing for exports. You can force your country men to use your manufactured products regardless of how substandard they are by putting high tariffs on some imported goods, banning others and some #BuyNaijaToGrowTheNaira hashtag economic policy. But the global market only buys your goods if they are of a satisfactory price and/or quality. For instance, the EU banned some Nigerian agricultural exports because they had too much pesticide residue on them
It’s difficult, but not impossible for Nigeria to manufacture at an acceptable price and quality for the international market. Although a few thing have to be in place notably infrastructure and skills.
Infrastructure
As the executive secretary of the Lagos State Employement Trust Fund, Akin Oyebode wrote here:
According to the Nigerian Integrated Infrastructure Master plan, Nigeria needs to spend $3 trillion on infrastructure within the next 30 years, but especially $160 billion in the next 5 years. This means Nigeria needs to spend $32 billion or N6.4 trillion per year on infrastructure. The problem here is immediately obvious, the government cannot afford such investments. The overall budget for 2016 is N6.1 trillion, and only 30% of this or N1.8 trillion was budget for capital expenditure. At best, we can expect infrastructure will account for about N1 trillion of the 2016 budget, which is 15% of the needed spend. This is a very important point to note, because it means most of our infrastructure needs will be financed by private sector investments, mostly sourced from foreign investors who consider Nigeria an attractive destination for their capital.
Nigeria needs a lot of foreign investment to help build the required infrastructure. Now only one thing brings in foreign investors- the opportunity to make profits.
There are two factors within the Nigerian governments control that can affect the ability of foreign investors to make money.
- The investor must be free to charge a fee for his product or service that justifies the amount he used to make it(i.e. it must be a free market with no restrictions on pricing)
- The exchange rate must be fair and stable; No investor is going to invest funds in a country where the currency is incorrectly priced, because there is a high risk that the currency will be devalued and this could wipe off most(or all) of their profits.
This is where devaluation and deregulation come in, while on their own they don’t grow the economy, they provide the environment for the investment that will grow the economy.
You may doubt that simply floating a currency and loosening trade restrictions is enough to bring Foreign Direct Investment pouring in like manna from heaven.
Let me tell you about Argentina, Argentina borrowed heavily from foreign investors in the early 2000’s and was unable to pay back, subsequently, they became pariahs on the international borrowing markets.
Foreign Policy magazine described the Argentina of 2014 as, “mired in economic limbo…… combined with rampant inflation, a colossal budget deficit, and currency restrictions.”
Sounds familiar?
But then Argentina elected President Mauricio Macri, here is what he did in his first 100 days;
Having addressed key structural issues, such as the lifting of currency controls and the reduction of administrative restrictions to international trade, Macri intends to attract investment flows that will make Argentina globally competitive again.
So were these policies effective? You bet they were. Argentina then went ahead to ask for $16.5 billion from the international markets and they were offered $69 billion instead, investors were described by the Financial Times as “scrambling for more bonds”. Like manna from heaven.
Nigeria on the other hand, to quote Feyi Fawehinmi, “has been looking for Eurobonds, Panda bonds and Samurai bonds too and has not yet got any luck from the markets.”
Knowledge and Skills
To develop the knowledge and skills needed for most kinds of manufacturing requires large investments in education and vocational training and it takes years for fruits to be reaped from these investments. This is why low income countries start manufacturing in industries like textiles and assembly of electronics which require little skill. Most of which can be learned in a few weeks/months.
Lucky for us, China is in the process of dashing out millions of such jobs, John Page at the Brookings Institute stated that as many as 85 million factory level jobs may be leaving China by 2030. What is needed to ensure that these jobs come to Nigeria? Here’s more from John Page;
Getting all your ducks in a row, it is not enough to tell the central bank governor to have an effective exchange rate that is competitive, without telling the Minister of trade you also have to have your free zones and trade agreements working and a consistent trade policy that maintains neutrality of incentives between exports and import substitution and that foreign investment office has to work
Again…. Exchange rate, free trade, exports and foreign investment.
Some African countries are already reaping the benefits of these jobs being leaving China. An article in the Wall Street Journal mentioned
A Hisense factory in Cape Town, which uses twice as many workers as the same factory would in China. Additionally, “Auto maker China FAW Group Corp. is building a new factory in the South African industrial hub of Port Elizabeth to produce trucks and light commercial vehicles. Huajian Group, a Chinese shoemaker, plans to invest as much as $2 billion in Ethiopia over the next decade to make the country a base for exports to Europe and North America. Chinese factories also produce steel pipe and textiles in Uganda. — See more at: http://china-africa-reporting.co.za/2014/05/china-moves-manufacturing-to-africa/#sthash.gQboLLyS.dpuf
With 500,000 Nigerians losing their jobs in the first three months of 2016, and a further 1.5 million entering a labour market that has no jobs to offer, it is time for Nigeria to start making sensible economic decisions. The government needs to stop shooting itself in the foot with its economic policy.
Sensible exchange rate policies, liberalisation of trade and manufacturing are the easy parts. After we have done these comes the difficult part, attracting foreign investment, building infrastructure and crafting industrial policy.
The best time for all this was when oil prices were above $100, the second best time is now.
