Imperatives Of Successful Diversification
Last week we considered the theoretical/policy foundations of economic diversification. We strenuously made the case for diversification as a matter of great urgency. Today, we conclude by considering the elements of successful of diversification. One of my faithful readers contacted me the other day, worrying why official rhetoric on diversification has never been backed by concrete deliverables. He referred me to Olusegun Obasanjo’s autobiography, My Watch, where the former President had made pious commitments to economic diversification as far back as the late seventies during his first incarnation. These ultimately came to naught. Over succeeding decades, an entire generation of leaders parroted the same empty rhetoric, with little or nothing to show for it.
Economists often refer to the phenomenon of ‘path-dependence’. It derives from the idiom of Newtonian mechanics, whereby a body is said to continue in a state of motion, until an equal and opposite force compels it to stop or change direction. Since the seventies, we in Nigeria continued on a path-dependent trajectory anchored on a rentier oil political economy. It was based on extracting rent from multinational oil companies; sitting in a jamboree everything within the FAAC, and distributing the funds among the three tiers of government based on an agreed formula. Nobody considered the fact that oil is a finite, depleting asset. There is also the fact that technological changes could lead to alternatives to hydrocarbons, driving down the price and eroding revenues accruable.
Economics has been termed ‘the dismal science’ for no unjustifiable reason. Explaining the world and explicating the forces underlying economic phenomena is one thing; knowing how to change the world is quite another. Over-quantification has led us into a dead alley, with nostrums that are sometimes not only wildly pernicious but plainly monstrous in their practical application.
When I was a young fellow of the National Institute for Policy and Strategic Studies, I was a member of a committee that was assigned the responsibility of developing a strategy to secure the Bakassi Peninsula. We came up with a detailed military plan that would require the eventual use of force. The senior military officers among us suddenly developed cold feet: they thought we were just killjoys out to ruin their prospects of securing plush assignments as military administrators and ministers. It is a universal doctrine of military science that war is far too important to be left to the generals. The same can be said of the economy – it is far too important to be left in the hands of mere economists. In either case, political guidance is paramount, in addition to sagacity and practical judgement. The best economists are those who understand their general equilibrium models as well as the political and institutional foundations for successful economic decision-making.
What does it take to implement a successful diversification strategy in today’s Nigeria?
To begin with, it is important to know what we are talking about. In this column last week, we made the point that the Nigerian economy is already relatively diversified. The issue, however, is the quality of that diversification. Petroleum still accounts for 95% of our foreign earnings and about 50% of government revenues. That is not good enough. To be meaningful, diversification has to reflect not only a well diversified local production base but also variegated high quality value-added products for local and world markets. Trade and product diversification is also vital, as is diversification of international trading partners. The idea is to ensure that we do not put all our eggs in one basket, as the old saying goes.
According to a recent study by the UN Economic Commission for Africa (UNECA), some of the more successful African diversifiers include Mauritius, Tunisia, Egypt, Botswana, Kenya and South Africa. In the context of the emerging economies, I believe there is a lot to learn from countries such as the Brazil, Malaysia, Mexico, Chile and the United Arab Emirates (UAE).
According the UNECA study, among the drivers of successful diversification are: (i) quality/magnitude of investment in infrastructures and key sectors; (ii) effective trade and industrial policies; (iii) dynamic growth performance in productivity and output; (iv) macroeconomic stability anchored on sound fiscal/monetary policies and improvements in key economic fundamentals such as interest rates, exchange rate, inflation and access to affordable credit for SMEs and the real sector; and (v) institutional variables such as good governance, enhanced national competitiveness, absence of conflict and an attractive environment for local business and international investors.
At the heart of any diversification is the provision of critical public goods such as physical infrastructures, in particular electricity, railways, roads, harbours and a high level of human capital and skills.
Mauritius is a small island nation in the Indian Ocean with a population of only 1.3 million people. But it has an impressive GDP of US$18 billion and a per capita income of US$11,000. The latter far outstrips Nigeria’s per capita income of US$2,500. Mauritius was largely dependent on sugar exports in the early years of its independence. However, they took bold steps by diversifying their economy through textiles and other manufactured products. They had to lay down a solid infrastructure base as well as effective industrial, trade and labour practices. Leadership and democratic stability were critical to their success. Today, Mauritius consistently ranks in first place in Africa in terms of national competitiveness. I visited the country a few years and was impressed with what I found. Democracy and the rule of law, purposeful leadership and stability have given this island nation a head-start in economic prosperity compared to Nigeria.
The only worry I had when I visited was the plight of the black citizens who the original indigenes that were swamped by the indentured labourers that were imported by the French and British colonialists from India. One of my mentors, the late Professor Moses Nwulia, did some of his major work on slavery, labour and capital accumulation in Mauritius. It opened my eyes to the serious problem of race and discrimination in Mauritius. When I visited the country I was able to see for myself the nature of the problem. I had tried to hold informal discussions with some of the black people, but I saw fright in their eyes as I had never seen before in the eyes of a conquered and oppressed people. Economic success aside, there is a serious problem of Apartheid in Mauritius which the whole civilised world has chosen to ignore.
With a population of over 200 million, and a total GDP of US$1.5 trillion, Brazil is a middle-income country with a GDP per capita of US$7,477. Remarkable for an emerging economy, Brazil hosted not only the World Cup but also, recently, the Olympic Games. Not too long ago, Brazil was dismissed by the German writer Stefan Zweig, as the country of ‘eternal potential’. Not anymore. For centuries, the country was held back a corrupt ruling class made up of oppressive latifundia land owners lording over an oppressed and dispossessed peasantry. The military also ruled with a heavy hand, denying the country the liberty and justice needed to flourish and bloom. Today, however, Brazil is a forward-looking, progressive nation. But, like Mauritius, race discrimination remains the perennial experience of black Brazilians who number almost 50% of the population.
The foundations of Brazilian transformation were anchored on the restoration of democracy and the rule of law and in development of sectors such as steel, automobiles, pharmaceutics and agribusiness. During the years of President Fernando Cardoso, Brazil restructured the foundations of its economic and social system. Cardoso, a brilliant professor of economic sociology, was brave enough to address subjects that were considered taboo in respectable Brazilian society: racial discrimination against the black people and the Amazonian Indians and poverty in the sprawling urban favelas. Cardoso was humble enough to concede that he did not understand technical economics enough to do it alone. He enlisted the help of top-class economists in revamping monetary and fiscal policies, implement industrial reforms and rejuvenate the momentum for growth.
Building on those foundations, Cardoso’s successor Lula da Silva implemented successful social reforms to redress prevailing inequities through the Zero-Hunger Programme and the Bolsa Familia social transfers that, within a decade, lifted more than 20 million Brazilians out of poverty and destitution. There was a commitment to science and innovation – to using local skills and local knowledge systems to make innovative products for local and world markets. There are still many challenges in Brazil, but the country is well on its way to joining the ranks of prosperous economies.
The story of Malaysia is equally impressive. This Asian, predominantly Muslim nation of 31 million people has a GDP almost double that of Nigeria’s, at US$800 billion. It is a prosperous high-income country with a GDP per capita of US$25 billion. For several decades Malaysia was prominently an oil and commodity exporting nation. They took bold steps to diversify their economy under the visionary leadership of prime minister Mahathir Mohammed. Mahathir was a rather temperamental leader who was not afraid to pick quarrels with the IMF and World Bank when he believed they were wrong. At a time when they discourage economic planning, he embraced it. During the Asian financial crisis in the late nineties, the Malaysian Ringgit suffered a precipitous fall against the dollar. Mahathir blamed speculators such as George Soros and the Washington institutions’ gospel of unbridled liberalisation. He proceeded to curb such speculations while putting a lid on wholesale capital account liberalisation. Today, the world community of economists are agreed that he was right.
Malaysia showed a capacity for independent thinking, innovation and deployment of knowledge capital to tackling some of their arduous challenges. Malaysia is today a world leader in ICT, petrochemicals and other strategic sectors. Petronas, the country’s national oil giant, was restructured to operate on strictly commercial principles. The country today is prosperous economy with a diversified base covering electrical/electronic products, medical/pharmaceutics, metals, machinery, food-processing, health and tourism, logistics and business services. All these were achieved through focused leadership, an effective bureaucracy, aggressive trade and industrial policies, innovation and creativity.
The final example that comes to mind is Gulf nation of UAE. It is a confederation of seven emirates, namely, Abu Dhabi (which is also the capital), Dubai, Ajman, Fujairah, Ras al-Khaimah, Sharjah, and Umm al-Quwain. The most well-known of these Emirates are Dubai and Abu Dhabi. I have been a regular visitor to Dubai, and like many visitors, I continue to marvel at the vision and wisdom that has seen this Emirate grow from a desert backwater based on exporting pearls to a diversified prosperous high-income country. The UAE has a total population of 5.7 million, if you exclude over 3 million immigrant workers. It has a GDP of US$647 billion, way ahead of Nigeria’s. Its per capita GDP of US$67,616, far outstrips that of the United States which stands at US$57,220.
How did the UAE attain these enviable heights?
First, it was through the vision of its late paramount ruler and President, Sheikh Zayd bin Sultan al Nahyan, who passed away in November 2004. During the late seventies the country discovered oil and became one of the biggest of the Gulf oil exporters. From early 1990s, Sheikh Zayd gave marching orders to his economic planners that he wanted his henceforth country must accelerate diversification away from oil. He set the target of 50% dependence on oil for local and foreign earnings.
Dubai took the lead among the Emirates, thanks to the equally bold and visionary leadership of its Prime Minister Sheikh Rashid bin Saeed Maktoum. Sheikh Rashid has been something of a philosopher-king; a poet-prime minister who sees no limits to what human thought, creativity and vision can accomplish. He famously declared that, “Innovation is what defines our status among nations and the value we add to the world around us”. Mark his words carefully: he did not harp on how much oil or gas or commodities lay buried under the soil of his native land; rather, he underlined the role of creativity and innovation as the foundation of his country’s economic success and status among the nations.
What are the lessons for Nigeria in terms of how to implement a successful diversification drive?
I believe that, this time, it is different. Low oil prices will become the ‘new normal’ for a long time to come. We have no choice but to place the new agenda of diversification at the heart of our national economic policy. For a country the size of ours, with more than 17o million, we have little or no option but to diversify. But we must eschew the empty rhetoric of the past. We must move on boldly to implement a new vision anchored on agriculture-based mass industrialisation. Either Nigeria will become an advanced industrial-technological state or we would be nothing. The path we are treading right now can only lead to greater immiserisation and inevitable socio-economic implosion.
We must industrialise or die!
Going forward, successful diversification in our context will require visionary and bold leadership; creative and original thinking; the forging of a national consensus on the way forward for our country; a coherent development strategy anchored on agriculture-led mass industrialisation; a framework for implementation with a concise blueprint and a systematic roadmap with timelines, effective monitoring and evaluation with measurable indicators, with rigorous follow-up and feedback.
I get worried when I hear people mentioning agriculture as the path to diversification. That will take us nowhere. We need an integrated approach, linking agriculture to agribusiness, food processing and SMEs. We also must leverage on our considerable endowments in solid minerals, linking these to manufacturing, steel, metals, machine tools and precision engineering. Diversification must never mean jettisoning the petroleum sector. We need to learn from Saudi Aramco and from Petronas of Malaysia and Petrobras of Brazil that have been restructured as forward-looking world class energy organisations. The NNPC as currently constituted is a Byzantine cash cow that is totally unsustainable. We also need to go big on petrochemicals and LNG, linking these to power, manufacturing and other sectors, with an eye to domestic and world markets. We also need a robust infrastructure base. We need railways, railways, railways.
Nigeria’s diversification must be must be founded on seven solid pillars: first, enhancing the quality of governance, leadership and core public institution, including reform of the civil service; secondly, fixing the energy deficit and the parlous physical infrastructures; placing the private sector at the heart of the economy as the engine and locomotive of growth; thirdly, harnessing our best talents in the service of scientific research, technology and innovation, with strong linkages to industry for production of high value-added products for domestic and world markets; and fourth, upscaling our education system, skills and training, with strong emphasis on science, technology, engineering and mathematics (STEM) instead of the current egregious dominance of humanities and social sciences.
It goes without saying that social order and harmony constitute the fundamental bedrock of economic progress. This goes hand-in-hand with macroeconomic stability and improvement of economic fundamentals such as low interest rates, a stable naira that is progressively a semi-convertible international trading currency, progressive industrial and trade policies, and forging bold regional and international trading partnerships that hook us into the integrated global marketplace.
To echo the words of the Greek mathematician, scientist and philosopher Archimedes, give me a place to stand, and I will move the earth!
OBADIAH MAILAFIA