Let me express how honoured I am to have been invited as this year’s Guest Speaker for the Seminar Session of the 36th Kaduna International Trade Fair. This biennial trade fair has become the most important of its kind throughout our country, drawing the business community from far and wide to this vibrant city. Given the distinguished personalities who have preceded me in delivering these lectures and the calibre of the people here present, I feel it not only to be an honour but also a privilege.
Let me also express how delighted I am to be back in Kaduna, my own state capital – the city of my wonderful growing years. In those good old days, this city, with its central location and agreeable savannah climate, was the industrial heartland of northern Nigeria. We had a thriving textile industry, in addition to the refinery, the Peugeot assembly plant and a number of flourishing Phoenician and Greek mercantile houses.
Sadly, something went wrong along the way. Insecurity and strife became the order of the day. It was therefore no surprise that the investors took their capital and fled. The glory left our beloved city. But thanks to the efforts of succeeding governments and to the good work of organisations such as KADCCIMA, hope is being restored.
In this season of change and joyful expectation, it is my ardent conviction that Kaduna, insallah, will reclaim its lost glory and will become the prosperous metropolis that it once was.
My lecture is premised on three main propositions: the first is that production is very central to economic growth and welfare and ought therefore to be the primary focus of policy in the years ahead; secondly, it is my considered opinion that the best way to promote production is to calibrate the right mix between government and the market, a task in which the state should play the role of catalyst and driver of innovation while providing the right environment for business to flourish; and thirdly, I would like to submit that Nigeria is not necessarily in short supply of good policies, the real problem being that of effective implementation. I will therefore be an advocate for the new paradigm of ‘deliverology’ as propounded by the British policy scientist Michael Barber, Tony Blair’s former head of Prime Minister’s Delivery Unit.
My point of departure is that we need an “entrepreneurial state” that delivers on the classic responsibilities of the state – security, education, health and social services – but also drives the process of innovation that enables firms to invest in new sectors that can spur growth and structural transformation.
A British economist, Mariana Mazzucato, has argued that an entrepreneurial state is one that not only fixes markets but also helps create them by taking on the risks in leading innovation and creating new ventures. This approach is not argument to the return to the discredited practice of state capitalism; but, rather, a focus on joining with firms and markets to develop new ventures and cutting-edge innovations. She provides several examples from the United States and other economies where the state took on major risks in developing business opportunities that have become successful. Examples include the Internet, Google, Apple and other such high-tech businesses.
In economic theory, the concept of production refers to the process of deploying capital, labour, technology and entrepreneurship to produce goods and services. It is a well-established axiom in economic science that the level of welfare in a country is largely determined by its capacity to produce goods and services. Indeed, the concept of the Gross Domestic Product (GDP) which we use to measure macroeconomic growth is largely a measure of the rate of increase in domestic production. The concept of the production function is normally illustrated graphically and mathematically in terms of the relationship between the inputs deployed in the production process and the resulting output achieved.
The concept of production must be distinguished from that of productivity. The latter refers to the efficiency of production, expressed as the ratio of output to the inputs deployed in the production process. A familiar example is labour productivity, which is normally defined in terms of output per man-hour. Capital productivity, on the other hand, refers to ratio between the capital input deriving from the capital stock and the resultant output from each unit of capital.
Both labour and capital productivity are partial measures of productivity. The more comprehensive approach is that of total factor productivity (TFP). The latter refers to the productivity of all the factor inputs that go into the production of goods and services in a given economy.
Production is the foundation of national wealth, prosperity and power. Production and growth go together. Nations that produce would tend to increase in wealth and power. Labour productivity and, indeed, total factor productivity, accelerates growth and enhances wages and welfare. The gap between rich and poor nations is largely determined by their capacity to produce and the productivity of the various factors of production – capital, labour and technology.
Consider the case of the United States. Up to the time of the Declaration of Independence in 1776, per capita incomes stood at US$700 in today’s dollar purchasing power. However, with improvements in technology and innovation, with the increase in the acquisition of skills by American workers, there was a spectacular increase in productivity, leading to exponential growth in the economy and in the income of the average American.
The industrial revolution, as every schoolboy knows, began in early 19th century England. It then spread to France, continental Europe and North America. Economic historians have continued to debate the factors that led to this phenomenon that the Hungarian-American political economist Karl Polanyi termed “the Great Transformation”. First, there was a transformation in the way people thought about the world and man’s place in it. The Renaissance in Western Europe overthrew Aristotle and the Ptolemaic universe with a more rationalistic attitude and the cosmology of Copernicus and Galileo. The Enlightenment in the 18th century saw the emergence of the infinitesimal calculus by Isaac Newton in England and Gottfried Wilhelm Leibniz in Germany.
Men saw the world not as a natural and pre-ordained order of things, but as a garden to be cultivated – a universe to be remade in man’s image. The great scientific discoveries of the epoch went into improvements in long-distance transportation, in medicine and improved health and in manufacturing and industrial technology.
Karl Polanyi explained the institutional origins of the modern capitalist economy in terms of the emergence of the modern Westphalian juridical state that was coeval with the emergence of the modern market mechanism. In the medieval world, the Argonauts of the Chinese Empire and the great kingdoms of the Incas and Aztecs in the Americas and those of Africa operated their economies more on the basis of reciprocity than markets. Mercantilism generated wealth for a few merchants, but the bulk of the population were condemned to a life of penury.
In a Europe torn by war and sectarian strife, trade was a unifying and civilising impact on the nations and peoples of the Old Continent. With the development of the modern territorial state in Europe, the institution of the rule of law and property rights, the market emerged as the basic framework for commerce, domestic as well as international.
Daron Acemoglu, an economist at MIT, and James Robinson, a Harvard political scientist, have written a celebrated work, ‘Why Nations Fail: The Origins of Power, Prosperity and Poverty’, to explain why in our 21st century, some nations are prospering while others remain in the Middle Ages. The two scholars have argued that the explanation lies in political stability, the rule of law and effective public institutions within a framework of flourishing markets.
North and South Korea, for example, are the same people with the same history and cultural mindset. But they are poles apart in terms of livelihoods and life-chances. The North remains destitute because they made the wrong policy choices based on dictatorship and the absence of the rule of law. The South, on the other hand, is prosperous by virtue of having instituted good governance, the rule of law and incentives that reward enterprise and initiative.
The lessons of world development over the last half-century teach us that countries where ruling elites monopolise power and suffocate talent and initiative will soon be locked within the “vicious cycle” of poverty while those where they exercise power through accountable and responsible leadership based on the rule of law and the right mix of incentives will generate a “virtuous cycle” of growth and prosperity.
We cannot begin to discuss promotion of domestic production without reference to the concept of industrial policy. At a very broad level, industrial policy refers to shared development-oriented values between policy communities on the one hand, and the spectrum of what policies and institutions that enhance competitive advantage, on the other. The Princeton economist Dani Rodrik has led the paradigmatic resurgence in favour of ‘guided’ state intervention in macroeconomic management. He defines industrial policy as a mix of interventions “in favour of more dynamic activities generally, regardless of whether they are located within industry or manufacturing per se”.
For Rodrik, industrial policy encapsulates policies targeted at non-traditional agriculture and services in addition to trade and fiscal policies, incentives on manufactures and public subsidies as well as policies that promote such new sectors as tourism and call centres.
Successful industrial policy is said to comprise four key elements: (a) strategic capability, (b) regulatory effectiveness, (c) efficient delivery of services and (d) political autonomy of decision-makers.
The Norwegian economist, Erik Reinert, has noted that the world industrial powers have not been totally honest in pushing through policies in developing countries that they themselves never followed in the course of their development. According to him, “From Renaissance Italy to the modern Far East, development has been driven by a combination of government intervention, initial protectionism and strategically-timed introduction of free trade and investments… but advanced countries do not want less developed countries to follow that approach.”
Nigeria has had a plethora of policies for promoting domestic production. They range from the import-substitution policies of the 1960 and 1970s to the structural adjustment reforms of the 1980s and the more eclectic policies of the 1990s and 2000s. We would recall the National Economic Empowerment and Development Strategy (NEEDS) of the Obasanjo years, the Seven-Point Agenda of the Yar’Adua administration and the Transformation Agenda of the Goodluck Jonathan administration. Vision 2020 has been an ambitious long-term plan to place our country among the top 20 economies by the year 2020. Policies to promote industrial development have included financing packages for sectors such as textiles, automobiles, mining, SMEs and micro-enterprises. It is not necessary to go into the performance of these specific policies. What matters is to highlight the key challenges and the way forward. It is my humble submission that Nigeria is not in short supply of good policies. The devil is in the details and nitty-gritty of implementation.
Nigeria recently overtook South Africa as Africa’s leading economic powerhouse, with an estimated GDP of US$510 billion. It is a country with vast natural and human resource endowments, with a population of 176 million people. The country has potentially the largest consumer market on the continent. However, in spite of a substantial petrochemical sector, the economy is still predominantly agrarian. Its other potentials include a vibrant private sector, highly motivated entrepreneurs, vast and fertile agricultural lands, and an educated workforce. It produces and exports crude oil – the sixth-largest exporter in OPEC – and is also richly endowed with gas and solid minerals.
Notwithstanding the potentials, the country’s economic and social conditions have remained far below the minimum expectations of ordinary citizens. Some of the socio-economic indices, although much improved, still remain a long shot away from the internationally-agreed millennium development goals (MDGs) targets set for year-end 2015. It is estimated that half of the population live in absolute poverty, while life expectancy is 52 years. Nigeria has one of the highest infant and maternal mortality rates in the world, with an infant mortality of 84 per 1,000 live births. It also ranks 158 out of 177 on the Human Development Index. A large proportion of Nigerians have limited or no access to the most basic amenities such as clean drinking water, access to basic health and protection against communicable diseases, decent housing and sanitation, reliable transportation networks, physical security, and access to sustainable sources of livelihood.
Nigeria’s mineral endowments provide the potentials for a wide range of industries from steel to petrochemicals, glass, ceramics and other manufacturing sectors and related services. In spite of these potentials, the country’s industrial development remains rather weak. Some 70 percent of the Nigerian population are engaged in agriculture and retail trading, with manufacturing occupying only 10 percent of the adult working population. To further buttress the weakness of the manufacturing sector, a comparative overview of manufacturing value added as a percentage of GDP in a few selected emerging markets puts the country at an unimpressive 4 percent, in comparison to 19 percent for South Africa, 17.7 percent for Mexico, and 8 percent for Ghana.
The Nigerian economy continues to exhibit all the classic symptoms of the ‘rentier state’, defined as one in which the government “receives on a regular basis substantial amounts of external economic rent”. There is also the so-called “Dutch disease”, manifested in historically high exchange rates, enclave economies and a high inflation. Evidence of collapsed basic infrastructure and services and increased wide spread of poverty among Nigerians accentuate resource mismanagement in governance which became bane of the nation’s growth efforts.
The country’s industrial base also remains relatively underdeveloped. The sector is yet to take advantage of the available resources and the relative abundance of cheap labour due to high production costs, low levels of productivity that translate into low value added and low capacity utilization. The poor business climate and low levels of infrastructures also discourage foreign direct investment in the manufacturing sector. In the last few years, several foreign-owned manufacturing firms have relocated to our neighbouring ECOWAS countries, scared away by a harsh business environment, insecurity and epileptic power supply. The Nigerian business environment does not support wealth creation while the mindset of the ruling elites seems more oriented to consumption rather than productivity and genuine development.
The competitive structure of the economy is also weak, with all sorts of cartels and monopolies in refined petroleum distribution, cement production and market, rice and sugar importation, automobile spare parts, pharmaceuticals and truck haulage and luxury bus transportation.
Like in many other African countries, there is a massive cognitive dissonance between public policy formulation at the highest levels of government and the concrete realities on ground. In a situation where state capacity is weak and public institutions are largely ineffective, the prospects for implementation of industrial policy would remain daunting. Several challenges and constraints impede optimal industrial production in Nigeria. They range from poor leadership to corruption, inadequate policies to lack of incentives and the parlous state of physical infrastructures.
One of the biggest impediments to Nigeria’s development is the parlous state of its infrastructure sector. Although the current government has launched a new Infrastructure Master Plan, it is unclear how it is to be implemented or financed. A situation of limited power generation and weak distribution, along with a severe lack of transportation, raises the cost of business. By some estimates, the cost of power to the private sector is six or seven times the price paid by international competitors. Electricity generation, for example, hovers only slightly about 4,000MW compared to about 39,000MW in South Africa, with a population less than one-third of Nigeria’s. I have been reminded by an Asian colleague that the Korean automobile company Daewoo consumes more electricity than the entire Nigerian population.
Following the successful unbundling of the Power Holding Company (PHCN), the government is pursuing policies of least-cost generation while also aiming to ensure a good mix of fuel sources within a comprehensive energy policy. Particular emphasis is being placed on gas as a major input in the new thermal plants, given the abundant supply of the raw material within the country. Unfortunately, unrest in the Niger Delta has often blocked access to gas supplies. Another factor is the continuing flaring of gas within the petroleum sector, a problem that has persisted in spite of declared commitments to ending the phenomenon.
(Abridged version of a Special Guest Lecture delivered on the occasion of the 36th Kaduna International Trade Fair, International Trade Centre, Kaduna, Monday, 27th April, 2015).
Obadiah Mailafia
