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Friday, July 12, 2024

Where is the New Economy? By Chukwuma Charles Soludo



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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.
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