Manufacturing development and government support

The East Asian miracles of the 1990s, and the earlier economic transformation of South Korea, were built upon several pillars. Heavy public investment in education and the infrastructure were core elements of the process although for this column we will focus on the development of manufacturing. The most impressive story is probably that of South Korea, which fought a debilitating war in the early 1950s, was admitted to membership of the OECD in 1996 and has become the eleventh largest economy in the world in terms of nominal GDP.

The recent Manufacturing Sector Survey in Nigeria argues that African economies migrated directly from the primary to the tertiary stage without undergoing industrialization. (We have to point out the exception of South Africa, which made the journey through the secondary stage for what are termed legacy factors.) The survey, a joint effort by the Centre for the Study of the Economies of Africa and Nigeria’s own NOI Polls, notes that these economies struggle to compete in international markets.

We assume that industrialization is desirable per se because of the impact on job and wealth creation, skills acquisition and urbanization. Progress has been negligible, however. We recall writing and editing Africa country studies for UNIDO in the mid-1980s, in which the way forward was identified as the processing of domestic raw materials, the building of value chains and import substitution. This latest survey has a similar message, albeit strengthened by a series of recommendations.

Among the responses of the 205 companies surveyed, two may be surprising. Given the consensus in analysis of the fx market, we thought that more than 52 per cent of companies would see themselves as highly import dependent. If we bought into the prevailing criticism of the Buhari administration that it is moving too slowly and perhaps in the wrong direction, we would not have expected to find that 75 per cent of companies looked forward to a better business environment next year.

Before we turn to the recommendations, we note one marked regional variation in the responses. (The survey covers all six geopolitical zones, with weightings ranging from 12 to 22 percent.) In the south west, only 8 per cent of companies reported installed capacity utilization less than 60 per cent (compared with an average of 45 per cent across the survey); just 35 per cent felt that the business environment was not supportive; and 94 per cent saw better times ahead next year.

The south west was therefore performing better, and more optimistic for the near term than the other zones. By way of explanation, we suggest that it is closer to the business hub of the country (and the main ports), it is not overly dependent on contracts from the government and it is better placed than the other zones to secure the necessary skills for its operations. We could add the relatively high income levels of consumers on its doorstep.

The two most promising recommendations call for support from the government. The survey proposes a strategic fx window for manufacturing. Its authors will be pleased that the CBN responded with a circular on 22 August directing authorized dealers to allocate at least 60 per cent of all their fx purchases to end-users importing raw materials, plant and machinery.

The survey also calls for the reform of public finance institutions to improve access to credit. This is also work in progress, although it could be greatly extended. The Bank of Industry is specifically mentioned, and is on the case. Jointly with another public agency, last month it launched a US$100m fund to boost local content, will charge a fixed 8 per cent interest rate and will offer tenors out to ten years. The CBN has set up several credit schemes for sectors including manufacturing with single-digit rates, and has indicated that it is ready to expand its balance sheet further. The survey is calling for more of the same.

We hear objections that the authorities are straying from the principles of free trade, not that, to our knowledge, it ever embraced them. The CBN circulars on fx allocation and on the 41 import items ineligible for fx from market sources are good examples. Our pragmatic take would be that the FGN should develop its industrial policy with incentives and loans for nascent domestic businesses. It will soon learn if its policies are not popular with the stakeholders it is looking to assist. In this context we note the law passed this month by the Kenyan parliament to put limits on banks’ lending and deposit rates. It is clearly popular with the electorate, which feels that the banks make very large profits from fat spreads (which incidentally are comparable to Nigeria’s). The central bank governor, while sharing the public view on banks’ charges, has questioned the parliament (and president’s) approach, and pointed out the risk that banks will cut back their loan books.

East Asian governments did not shy away from favouring domestic manufacturing with tailor-made tariffs and other incentives, and subsidized loans. While the international consensus in policymaking has since moved in the opposite direction, the FGN should pursue its industrial policy. If it has made one step too many, it will quickly find out.

Gregory Kronsten