If Nigeria truly wants to industrialise, it must be export-oriented

The first and certainly most important step in any policy formulation is problem definition. Policies are solutions to problems, but unless the problem is properly defined, the policy adopted to solve it may fail. So, to get the right policy outcomes, you need the right policy, but in order to have the right policy, you need, first and foremost, to define the underlying problem and policy objective accurately. Unfortunately, in Nigeria, there is so much inaccurate definition of problems. One problem that has so often been misdefined, but which calls for clarity of definition and objective, is the clamour for economic diversification.

Virtually everyone now talks about the need to diversify the country’s economy. President Muhammadu Buhari said the diversification of the economy is urgent. His vice, Yemi Osinbajo, even said that Nigeria needs economic diversification and not political restructuring, to which some of us quickly riposted. Countless column inches have been devoted to discussion and analysis of Nigeria’s economic diversification. But what does this really mean? The economist John Williamson defines economic diversification as an act of investing in a variety of assets. The operative word is “variety”. Clearly, all the talk about Nigeria’s economic diversification suggests that the country is not engaged in a variety of economic activities.

But that’s a myth, and the World Bank even said so! In the Nigeria Economic Report (2014), the World Bank noted that, following the re-basing of Nigeria’s GDP, the country’s economy “is more diversified and complex” than previously documented. According to the bank, “The more diversified structure of Nigerian GDP and the sectoral growth rates imply a more complex story of GDP growth in Nigeria”. Manufacturing (especially food and beverages), telecommunication, real estate, construction and the entertainment industry have become important sources of growth, joining agriculture and oil and gas – the traditional sectors.

Of course, it’s true that, despite the diversification of Nigeria’s economy, the oil sector, which contributed just 15.8 percent of Nigeria’s GDP in 2014, accounts for over 90 percent of the country’s total exports and more than 80 percent of its foreign exchange earnings, thereby having a disproportionate influence on Nigeria’s macroeconomic and budgetary stability. Obviously, when a country is almost entirely dependent on revenues from just one export commodity, and the world price of that commodity dropped from $140 per barrel to under $50, and looks likely to stay low for the foreseeable future, desperate calls for diversification are inevitable, as is the case now in Nigeria. But what diversification?

For me, that’s the definitional problem. It would seem that when Nigerian leaders talk about economic diversification, they really mean the diversification of Nigeria’s export base. After all, that would be a logical solution to the over-dependence on oil export and the associated forex challenge. But if they are really talking about export diversification, then they should be more specific about the problem definition and policy objectives. The truth is that, from a policy perspective, economic diversification and export diversification are not necessarily the same. Although you can’t have export diversification without economic diversification, you can have the latter without the former! A country’s domestic economy may be fully diversified, and yet its export base may be shallow.

For instance, as I argued earlier, Nigeria’s economy is diversified, albeit the sectors are not operating to full productive capacities. But assuming that the diversification is deeper, both in terms of increased capacity utilisation and output performance, and even value addition, does it follow that Nigeria’s exports would become diversified? Of course, not! Export diversification would then depend on the level of export orientation of the industries and their ability to penetrate international markets, which would, in turn, depend on successful export promotion and whether the exporters can overcome trade logistics challenges as well as meet regulatory and quality standards in the overseas markets.

But the starting point is the proper definition of the problem and policy objective. Do you simply want to diversify your economy or do you also want to diversify your export base? Unfortunately, Nigerian policymakers are not clear what they want. For instance, some people talk about the need to industrialise and diversify Nigeria’s economy so that the country can become self-sufficient and substitute foreign imports with locally-made goods, thereby reducing the demand for foreign exchange and the pressure on the naira. At the same time, however, there is a lot of talk about promoting non-oil exports. For instance, Olusegun Awolowo, chief executive of the Nigerian Export Promotion Council (NEPC), has been travelling the length and breadth of this country to sensitise Nigerians about the NEPC’s “Zero to Export” programme, designed to encourage Nigerian producers to embrace exporting. Awolowo claimed that Nigeria has “over 100 globally export-ready commodities” waiting to be produced to diversify the country’s exports and widen its revenue base. Indeed, he projected that Nigeria can earn $100bn annually from non-oil exports!

So, then, Nigeria wants to pursue import-substitution and export-oriented industrialisation at the same time. The trouble is that the policies needed to achieve import-substitution industrialisation are quite different from, and contradictory to, those required to achieve export-oriented industrialisation, and if you try to pursue both objectives together, you end up with a complete policy failure, which, of course, is what happens when policymakers don’t accurately define the problem they want to solve and their policy objectives.

But the truth is that genuine industrialisation goes with export orientation, but is impossible with import substitution. If a country wants to industrialise simply to produce goods for the domestic market and shut out foreign goods, it would find itself reduced to low-skilled, low-technology and low-productivity “industrialisation”, and condemn its citizens to low-wage jobs, not to mention that it would risk the opprobrium of the international community. By contrast, there is a strong correlation between export-orientation and industrialisation. In his recent book, “Made in Africa: Learning to Compete in Industry”, Finn Tarp, a professor of Development Economics at the University of Copenhagen, emphasised the need for export orientation and competition, which help to raise industrial productivity, improve firm capabilities and facilitate exposure to innovation and technology.

Throughout history, countries that pursued export-oriented industrialisation achieved more sophisticated levels of industrial development than those that got themselves into the cul-de-sac of import-substitution. For instance, Britain’s industrial revolution in the 19th century was export-driven. The East Asian industrial miracles were export-led, with an aggressive export push. Every support that the East Asian countries gave to domestic companies was strictly linked to export performance.And, of course, China’s remarkable industrial development was accompanied by a “go global” strategy, with Chinese products penetrating every nook and cranny of the world. Coming nearer home in Africa, South Africa is the continent’s industrial powerhouse, but it was not always like that. South Africa pursued import-substitution industrialisation until the late 1980s, but it abandoned the failed policy in the 1990s and markedly shifted its policy towards export-orientation, with a massive trade liberalisation reform. And the results?In the 1970s and early 1980s, mining sector exports accounted for 65 percent of South Africa’s total exports, but manufacturing exports overtook mining during the 1990s, accounting for 53 percent of total exports by 2000.

Unfortunately, Nigeria has not moved away from the discredited import-substitution industrialisation policy, and today faces huge challenges to industrialisation and export-led growth. Nigeria’s industrialisation is still based on low-technology manufactures, with products that fall well short of the quality and packaging standards of most international markets. Even if Nigeria can produce products for international markets, there is a serious problem with export-orientation. Most Nigerian manufacturers simply want to produce for the domestic market, which is why they are uncompetitive, and have very low productivity potential. Surely, industries than can compete globally will thrive locally. Of course, Nigeria’s trade policy, which is characterised by high tariffs and pervasive use of import bans, fuels the anti-export bias that entrenches the low levels of export orientation. When you protect domestic producers from international competition, they have the incentive to produce only for the domestic market and shun the export market.

To be sure, Nigeria can’t industrialise, let alone diversify its export base, with high protection rates and low levels of export orientation. It certainly needs to focus on supply-side measures that can boost firm capabilities and export performance, such as skills, infrastructure, innovation and industrial clusters. The flexible exchange rate regime will also boost export performance. But, crucially, the government must stop protecting the import-competing industries that simply want to produce for the domestic market and start incentivising the export-oriented, traded, sectors, which represent the industrial future of Nigeria. There is too much talk about import-dependency and import-substitution, and far too little, if at all, about export-orientation. Yet, if Nigeria truly wants to industrialise and diversify its exports, it must change its worldview, and fully embrace export-orientation!

Olu Fasan