B y Chukwuma Charles Soludo
In 40 years, Nigeria’s population will be approaching 400 million – if
you believe the population figures. Before then (29 - 40 years),
Nigeria’s oil would have finished. So far, we have earned over $600
billion from oil since 1973 but cannot guarantee any of the basic
necessities to the citizens – food, water, good roads, electricity,
education, health, etc. The NBS tells us that 40 per cent of Nigerians
were food poor in 2010 meaning that they could not afford the basic
nutritional intake. For 50 years since 1962, the central objective of
economic policy has been a transformation or diversification of the
economy away from dependence on primary commodities. It has not
happened, and will probably not happen in the foreseeable future.
So, how is Nigeria preparing for a life without oil? Where is the
emerging new economy that will support the burgeoning population? A few
months ago, the NBS released the first quarter GDP growth rate for
Nigeria, and the public response was uproar. Many, including a major
opposition political party, a former president, organised private
sector, some professionals and analysts openly questioned the figures.
This is not a good sign. Some boldly asked: where did the growth come
from? This is a deep question but one without yet an answer.
In the next few weeks, this column intends to challenge the hypothesis
that we have correctly diagnosed the problems and the solutions known
but the problem is to get ‘good leaders’ that will effectively
implement. We shall show that the Nigerian economy is holed up in some
structural traps, and if the current constitutional - political - and
economic arrangements continue, we will continue to move in circles.
Progress will be by fluke, with occasional three steps forward and five
backwards.
Unfortunately, we do not have the luxury of time. The dynamics of the
global economy and geopolitics is changing in fundamental ways with huge
risks and uncertainties. We are in a world in which the old order is
fast disintegrating, and there is a rapid structural rebalancing of
economic power away from the Euro-American beltway to the Asia-Pacific
and emerging markets. The rebalancing of economic power will inevitably
entail a rebalancing of geo-political and perhaps even military power. I
see a world economy in the near future with three dominant reserve
currencies (US$, Euro, and Chinese Yuan/Renminbi) with all the
instabilities this would entail, and a world economy with increasing
turbulence where only those countries which are constantly ahead of the
curve will continue to prosper.
Given the new landscape of struggle for geopolitical supremacy, oil and
raw materials; pressures to create and preserve jobs for citizens at
home while capital is mobile across boundaries; as well as contest for
dominance of one currency over another (as the US struggles to maintain
the seigniorage and subsidised cheap credit from the rest of the world
as issuer of global reserve currency), the global economy will have to
brace up for a bumpy ride ahead. Where is Nigeria in all of these? Is
Nigeria preparing to cope in the new world of competition or are we
running yesterday’s race, and continuously playing a ‘catch-up’ race?
Can we win a nuclear war with our bows and arrows? These are issues for
another day.
For now, we focus on the deep question of where growth comes from.
Output of goods and services (GDP) is determined by the accumulation of
factors of production (labour) and (capital – investment in plant,
machinery and equipment) and the productivity of these factors
(determined mainly by the knowledge and skills embodied in the workers).
So, which of these factors- employment of labour, new investment or
productivity drive output growth in Nigeria? If you believe the
unemployment numbers and what many analysts call ‘jobless growth’, then
the announced ‘growth’ can only be explained by rising investment and,
or, rising productivity per worker.
On the supply side, the NBS latest figures show that the structure of
the Nigerian economy has remained largely the same since the 1970s. The
three dominant sectors and their shares of GDP are: agriculture (40%);
wholesale and retail trade (20%) and crude petroleum (15%). Solid
minerals sector (0.4%) is insignificant. These primary sectors and
trading constitute 75 per cent of our national output, and also account
for 99 per cent of exports. The so-called ‘modern sectors’ –
manufacturing (4%); telecoms and post (5.7%); finance and insurance
(3.5%); building and construction (2%); real estate (2%); and hotel and
restaurant (0.5%)—all account for just 18 per cent. These are the
sectors in which one would expect innovation and high value-adding jobs
to occur.
The NBS says “agriculture in Nigeria is predominantly rain-fed”. It
does not explain its growth in terms of increased investment or
productivity improvements but in terms of weather. So, once we have
clement weather, growth occurs. Irrigation is largely absent; average
age of the peasant dominated sector is about 57 years with their hoes
and machetes, and productivity per hectare is very low. Curiously,
year-in-year out, the ‘growth’ of the sector is pre-set at 6-7 per cent.
If it is not new investment and increased productivity or new
employments, is it that rainfall improves each year to drive ‘growth’?
The manufacturing sector is largely comatose and declined from a share
of 7 per cent of GDP in 1970s to 4 per cent currently. Our manufacturers
are fighting a losing battle against the armada of imports from cheaper
and more productive locations abroad. Given Nigeria’s membership of
WTO, there is little room to manoeuvre. Most of the industries in Nnewi
and Aba are closed, and if the data from MAN are correct, then the
Lagos-Ibadan industrial axis as well as the textile industries in the
North are in trouble.
Nigeria’s export of manufacturing is still less than 1 per cent (after
more than 50 years of attempts at industrialisation whereas all our
comparator countries such as Indonesia have more than 40%). We have not
been able to utilise most of the preferences under the EU-ACP pacts
under the Lome Conventions and Cotonou Agreement. The manufacturing
sector today cannot compete. Many erroneously believe that once we fix
power, industrialisation will automatically happen. It won’t. We have
not begun to prepare to industrialise.
On crude petroleum, it is basically an issue of capacity utilisation.
Given the installed output capacity of more than 3 million barrels per
day, anytime we increase output from say, 2 million barrels per day to,
say 2.7 million barrels, we would record a huge ‘growth’.
On the demand side, the components of national expenditure present
interesting dynamics. The components and their shares of aggregate
expenditure as computed from the NBS 2010 GDP Expenditure Report are:
private final consumption (60%); government final consumption (15%);
gross fixed capital formation (13%); and net exports (12%). Many
imponderables in the said report make me raise serious caveats on the
reliability of the figures.
The NBS report makes a very serious statement when it argues that “in
Nigeria, national savings has always been greater than investment”.
Given the huge idle capacity and potentials of the Nigerian economy, it
requires an annual investment rate of at least 35- 40 per cent to
jumpstart the road to prosperity. Our gross national saving rate
averages 15 per cent, and investment rate is below that. For a country
that is grossly undercapitalised to be a net exporter of savings
(capital flight) abroad is serious. NBS also gives a clue as to where
the bulk of the miniscule investment is going. According to it, “the
country’s gross fixed capital formation is largely influenced by
acquisitions of machinery and other equipment arising from increased
crude oil and natural gas exploration activities as well as investments
in transport equipment”. We also know that the foreign direct investment
goes mostly to the enclave oil and gas sector.
If it is not employment and investment, is it then productivity that
drives growth? I have not seen any empirical study that does not
conclude that productivity in Nigeria is either negative or very low.
Yes, we have over 100 universities but the effective labour wage (wage
adjusted for productivity) is not cheap. It is a common mistake to think
that labour is cheap in Nigeria: it is not. Once you take account of
productivity, labour in many respects can become very expensive. The
pool of skills per 1000 workers is very low. As a visiting professor in
the US in late 1990s, the entire administration of the Department of
Economics was effectively run by one grandmother. Enough said for now!
What is the quality of labour force produced by our educational system?
There is little research and development (R&D) happening. So, what
will be our advantages to compete and win in today’s world economy?
This brings us to the key conclusion. Nigeria’s ‘growth’ story is
largely an oil price and consumption story, with occasional jump in
capacity utilisation and punctuated with bad data. Nigeria’s growth is
cyclical and somewhat opportunistically tied to the swings in oil
prices. When oil price booms, domestic aggregate demand—largely
consumption—spurs the rest of the economy. According to NBS 2010,
“government final consumption expenditure increased in real terms by
17.84 per cent in 2010 over the level recorded in 2009”. Government
expenditure grew at almost three times the growth of the economy! This
is the issue. Note that government here refers to aggregate of all
governments at federal, state and local governments.
The consumption-based system fuels the ‘booming’ but unrecorded
underground, largely criminal and speculative economy. This ‘booming
sector’ is different from the informal sector, and involves activities
in the speculative and criminal economy as well as briefcase-carrying
rent-seeking activities (oil bunkering, corruption, asset price
speculation, prostitution, drug trafficking, yahoo scammers or 419;
kidnapping, armed robbery; smuggling; dealership in fake and substandard
products; etc). The global criminal economy is estimated at over $4
trillion and Nigeria has its share. Today, a large proportion of
potentially productive elite are trapped in this rent-driven sector, and
it will take more than ‘reforms’ to re-engineer the system.
A collapse in oil prices also translates into catastrophic effects on
the macro economy. If the oil price crashes to say $30 tomorrow, the
economy and its ‘growth’ will collapse again. We experienced the same
‘growth boom’ during the first and second oil booms of mid 1970s, and
1979 - 81. Bear in mind that Nigeria is currently at about half of its
per capita income of $2,300 in 1980. In so far as oil price continues
to remain high and given our existing excess capacity, we will continue
to have “one of the highest growth rates in the world”. But we know that
it is a fluke: no country has prospered in the long term that way.