Frontier economies like Nigeria are said to have enormous potential. We hear that a lot. We hear it so often; should we take it for granted? Remaining in potency to catch-up, failing to converge, like emerging economies have done with developed economies, is to condemn Nigeria to perpetual backwardness.
Backwardness has its advantages. Despite China’s slowing growth down (at 7.8 percent?) Justin Lin, former chief economist at the World Bank, reckons China has “the advantage of backwardness”. That is, sufficient room to catch-up or converge. China’s adoption and adaptation of technology and unconventional economic policies have enabled it to achieve unprecedented growth. China now wants to step-up the quality of its growth.
Without a doubt, Nigeria’s economy has made progress; few have felt it, though. Not many of us have boarded the train or elevator of fast growing sectors of the economy. What will it take for a bigger portion of Nigeria to move forward, further and faster? Can we catch-up with the Brics: Brazil, Russia, India and China? It depends.
It depends on what Kingsley Moghalu, deputy governor of the Central Bank, calls “psychological infrastructure”. It depends on our ability to absorb ideas and knowledge and map out how we intend to catch-up. It depends on building capabilities to adopt and adapt technologies to gradually bridge the distance to the frontier. To be sure, slow growth in developed economies will not cause frontier and emerging economies to leap frog developed economies.
Besides, developed economies are growing again. And they continue to innovate, to attract the best talent in the world, through their immigration policies, and thus renew themselves. In short, as Dani Rodrik, an economist, succinctly puts it “convergence is anything but automatic”.
Take the US and the invention of hydraulic fracturing (fracking), the technology used to fracture shale rocks to release the oil and gas trapped within. The story of George Mitchell, the man who invented fracking, is the typical American Dream. Mitchell was the son of immigrant parents. His relentless resilience, entrepreneurialism and gamblers’ instinct made him successful in a country with institutions that provide enablers and support enterprise.
Out of Nigeria, human and financial capital has been flown or shipped abroad, willingly and illicitly. As you read this, the US and the UK are battling for immigration policies that will make them remain the lodestones of global talent. Silicon Valley, Silicon Alley and Silicon Roundabout, in California, New York and London respectively, rely on clusters of brainy people. In Nigeria, of late, innovation and entrepreneurship are being accelerated through public-private initiatives like Information Technology Developers Entrepreneurship Accelerator (iDEA). But skills, power, finance and corruption are speed bumps. Attracting funds for new ideas is crucial for innovating successfully.
The quality of Nigeria’s growth, the economy’s performance, still depends on how much crude oil can be extracted and sold, subject to conditions that aren’t within the country’s control.
Opec, the cartel Nigeria belongs to, has admitted that shale gas will erode demand for crude oil in 2014. “Softer prices” will affect Nigeria’s budget since Nigeria’s sweet crude competes directly with shale oil because they share similar qualities.
A global oversupply of 1.5 million barrels a day is major threat to Nigeria that produced 1.95 million barrels in July. Nigerian oil minister Diezani Alison-Madueke has identified shale oil “as one of the most serious threats for African producers”.
The shale revolution is remapping global oil trade and geopolitics. OPEC produces about 30 percent of global oil. Three-fifths of oil is consumed by cars. But technology: lighter and stronger car parts because of stiff environmental regulations in Europe and shale gas in the US are changing the source of fuel and consumption of energy.
Production of unconventional oil is rising; shale now accounts for 30 percent of US energy supply, from 1 percent in 2000, making the US a net exporter. George Osborne, the UK’s chancellor, wants “Britain to be a leader of the shale gas revolution” through tax incentives.
Shale gas in the US has increased global reserves from 50 to 200 years and the gas is likely to be used by generating and petrochemical companies, lorries, buses, and haulage trucks. Transportation, along with manufacturing, is growing again in the US.
“Big Gas” companies are emerging, too. They are based in the US, focused on oil wells in the US drilling for higher-margin returns – the current financial performance of international oil companies (IOCs) reflects growing influence of shale boom.
Shell and ExxonMobil, two of the biggest oil majors in Nigeria, joined the shale wagon late in the game. Their emphasis had been on exploration and refining crude oil in politically demanding places like Nigeria. Delayed by debates, the petroleum industry bill (PIB) is holding back investments in Nigeria’s untapped ultra deepwater. Electricity like petro-chemicals, light manufacturing and agro-allied industries can benefit from a strategic use of Nigeria’s gas reserves.
To catch-up, what you trade, whether goods or services, matters. So do policy, institutions, macroeconomic stability. To go beyond macroeconomic stability, to diversify and restructure the economy and to increase productivity Nigeria has to capture the gains from “automatic-convergence” industries. Dani Rodrik reckons that “Once an economy gets to produce electric generators, say, or motor vehicles labour productivity in that industry is placed on an automatic upward trajectory.”
We need to formalize markets, to industrialise agriculture, to jump start the electricity industry and light manufacturing of car and turbine parts, to produce leather shoes, plastics, pharmaceuticals and fertilizers.
These domestic job-generators require the sort of unconventional policies that the CBN has pioneered – development finance institutions (DFIs), for say, Micro, Small and Medium Enterprises (MSME), intervention funds, Nigerian Incentive-based Risk Sharing System for Agricultural Lending (NIRSAL) etc. But these policies are not easy to manage, for informational and political reasons. How does CBN know where to intervene, how does the apex bank stop rent-seekers from capturing the benefits of its interventions?
Oil, a commodity that Nigeria is overly dependent on, makes it hard to allocate resources into more productive sectors. Though it has spurred growth, poor economic management from this highly profitable sector has retarded productive employment. Unemployment and poverty are evidence that there are no genuine growth generators.
If there were, entrepreneurs, capital and job seekers would be moving into these sectors. To be fair, policies targeted at agro-allied sectors eg, rice milling, poultry and fast moving consumer goods (FMCGs) like noodles, pasta, sugar, cement, and beverages are generating benefits. Newly introduced tariffs on sugar, farm equipment, wheat and rice are expected to boost productivity.
Even so, few people see prospective job-generating sectors. Nigeria’s massive and stubbornly difficult to measure informal sector further masks the prospects. Perhaps a functioning electricity market will spur job-generators. To drive this growth, the oil industry needs to be reformed.
But the Nigeria National Petroleum Company (NNPC), the state-owned oil company, is as opaque as the crude oil that is pumped on its behalf. Trillions of naira disappears into thin air like flared gas.
The tortuous reform of the electricity industry, a classic example of buying off beneficiaries of the status quo, has shown that savvy politics and economics can deliver an industry from rent-seeking principalities and powers.
By: Tayo Fagbule
