The lexicon of the lay person in economic matters is subject to additions from discussions in the general populace. Some words and terms used regularly by the general populace tend to have confusing origins, however they are understood in the context employed by the user and with the audience. The emergence of “Jollof music” has given the Nigerian people priceless linguistic nuggets like Limpopo and Skelewu. What these words mean is really left to one’s imagination since the members of the audience bop their heads nonetheless. These occasional additions to the language are assumed generally entertaining, benign and sometimes welcome. However, economic diversification, a more malign phrase, should no longer exist in the lexicon.
What does economic diversification mean? In a few words, many things to different people! Whenever I hear that expression with regard to the state of the Nigerian economy, I always stop the speaker and ask them to explain what they mean. In most cases of this request to the speaker, the responses end up nowhere near diversification or economics. I thought it best I address what’s wrong with the continued use of this term before it becomes permanently enshrined in everyday language.
What is considered an economy or economic system? In a few dictionaries, an economy is that of a process or system where goods and services are produced, sold and bought within a region. What is the best measure of an economic system? According to the US Bureau of Economic Analysis (BEA), the Gross Domestic Product is a prominent measure of an economy’s output over a period of time. GDP is one summary measure and other measures do abound since it only considers a limited number of variables.
In effect, when “economic diversification” is mentioned in discourse, it indirectly tells the listener or audience to diversify, spread out the constituents of GDP or economic activity. The natural follow-up question to diversification of GDP is whether the Nigerian GDP or economic activity is adequately diversified.
In the “Q3 2015” GDP report released by the National Bureau of Statistics, Nigeria’s GDP was 26 percent agriculture, 23 percent industrial activity and 51 percent services. According to the users of this term, perhaps GDP contributions per sector should be targeted at a third a piece. Viewing Nigeria’s GDP in isolation of other countries’ leads to a misleading conclusion. For balance, the UK’s GDP in 2014 had agriculture contributing only 0.6 percent; however, services contributed 78 percent. South Africa has a similar GDP composition to the UK where agriculture contributes 2 percent to GDP and services sector contributes 69 percent. The high concentration of services in GDP contribution is common among the developed countries. Should Nigeria really diversify by cutting back on services growth to industrialise and grow agriculture?
An alternative discussion point attached to the Nigerian meaning of economic diversification is the diversification of government revenue sources. According to the Tax Foundation, OECD country governments raise the bulk of their revenue from consumption taxes. In effect, 98 percent of government revenue is from different forms of taxes and only 2 percent is generated from other sources like asset sales. In 2014, according to the Nigerian Budget Office, 57 percent of government budgeted revenue was from crude oil-related activities and the other 43 percent from taxes. Under this scenario, there is clearly a skew in the sources of government revenue. Should government revenue be diversified away from the 57 percent from oil? Surely the skew should be amended such that, as in the case of OECD countries, 98 percent of government revenue should emerge from taxes. Where is the diversification there? That’s more like concentration.
NBS data shows that 80 percent of Nigeria’s export proceeds were generated from the sale of crude oil-related products. The ratio is highly skewed in favour of crude oil and exposes the country to the vagaries and volatility in the price of the commodity in the international market. For the lay, a single commodity contributing 80 percent of export proceeds for a nation is bad. However, for most trade problems, markets do exist with solutions. Mexico is a leading participant in the management of commodity price risk. In effect there already exists a market solution for this skew in export proceeds. Should the country diversify the source of export proceeds? Perhaps, but with innovative financing, that really isn’t a problem.
In line with Adam Smith’s wisdom of not engaging the mercantilists but laying the framework for modern capitalism, it’s best discussions around the economy be geared at development and growth as opposed to diversification. Development is the word to focus on. One would expect that development would ensure that resources are directed and utilized in sectors that deliver real economic benefit to the general populace. Discussions around economic development are more robust as they involve conversations about life expectancy, literacy and poverty rates. Economic diversification as a focal point is needlessly parochial for a developing country.
‘Dayo Oduwole
