Last week, virtually every newspaper in Nigeria trumpeted the news that the economy grew at its highest rate in four years in 2019. BusinessDay’s headline read: “Nigeria’s economic growth surges to fastest since 2016”. For Bloomberg, it was “Nigeria’s economic growth at 4-year high”. But beyond those positive headlines, the story was nuanced. The growth was driven not by the real sectors but by oil and credit boost, which is not the kind of growth that would herald the much-needed transformation in the structure of the economy.
Yet, it’s somewhat understandable why the media loudly proclaimed the 2.27 percent growth rate, as reported by the National Bureau of Statistics (NBS). In 2016, for the first time in two decades, Nigeria’s economy went into recession, with a negative growth rate of -1.5 percent. But the economy later crawled out of recession and grew at 1.99 percent in 2018. So, the 2.27 percent achieved in 2019 suggests a steady, if slow, economic recovery, which is a positive development. Any growth is better than no growth!
But does the difference between 1.99 percent in 2018 and 2.27 percent in 2019 merit all the excitement? Certainly not, especially when you consider that the oil sector growth rate of 4.59 percent dwarfs that of the non-oil sector growth rate at 2.06 percent – in fact, manufacturing actually grew by a tiny 0.77 percent in 2019, while agriculture, despite the subsidies and protection it enjoys, doesn’t achieve any significant growth either. In light of President Buhari’s vow to diversify the economy away from the oil sector, there’s nothing exciting about the growth figures. So, what caught the media’s attention? Well, it was, it would seem, the fact that the 2.27 percent growth rate defied the IMF’s prediction of 2.1 percent and the World Bank’s projection of 2.0 percent . In that context, the 2.7 percent achieved last year took everyone by surprise. But growth, what growth?
I will come back to the problems with economic growth in Nigeria shortly; first, allow me, by way of context, to touch on the concept of growth. The truth is that economic growth matters. When Simon Kuznets created the concept in 1955, his argument was that growth would benefit everyone. The Kuznets’s theory is captured in the mantra: “Growth is a rising tide that lifts all boats”. But Robert Solow came up with the concept of “balanced growth path” and argued that this trajectory would only be achieved when all variables – output, incomes, profits, wages, capital, asset prices etc – progress at the same pace. When such balanced growth is achieved, Solow’s posited, every social group would benefit from growth.
But not everyone believes growth should be measured solely through the Gross Domestic Product (GDP), which is the sum of the value of all goods and services produced within a country’s territory. One recent criticism of the GDP came from David Pilling, the Africa Editor of the Financial Times, who wrote a well-acclaimed book entitled “The growth delusion: The wealth and well-being of nations”. Pilling’s argument is that the GDP is not measuring everything that matters, such as activities that are not monetised and things that really contribute to the wellbeing of people. Indeed, such concerns have led to the development of alternatives to the GDP, such as the Human Development Index (HDI), the Genuine Progress Indicators (GPI) and the Gross National Happiness (GNH).
Yet, notwithstanding the criticisms of the GDP, it is still the best available quantitative measure of how an economy is performing. And the assumption remains that if a country is experiencing a high GDP growth rate, which reflects the fact that its economy is expanding, then such a country should also be experiencing high levels of job creation and poverty reduction. But that’s not always true. It is quite possible for an economy to be growing and yet not lead to reductions in poverty and inequality. There is the phenomenon of “jobless growth”, where, despite a growing economy, people can’t get jobs or make ends meet.
Which brings us back to Nigeria. For if there is one country where the jobless growth phenomenon is prevalent, it is Nigeria! The World Bank identified this problem a few years ago in its 2014 Nigeria Economic Report. At that time, Nigeria’s economy was growing at about 7 percent, yet unemployment was very high, while the poverty rate was at more than 60 percent. The World Bank called it “the poverty/growth puzzle”, saying this posed two major economic questions: 1) “Why has the rapid economic growth in Nigeria not generated greater poverty reduction?” and 2) “How could the economy of the size and wealth of Nigeria have such high poverty rates?” The World Bank’s answer was that “the quality and quantity of the growth has proved insufficient to generate the productive jobs needed by a rapidly growing population”.
In her book “Reforming the Unreformable”, Dr Ngozi Okonjo-Iweala, two-time finance minister, highlighted the same problem. She noted that while the economy had been growing “at a respectable 7 percent average annual rate, it’s clear that it is not yet creating the number of jobs needed to absorb the youth”, adding that “the need to create jobs is the most important problem confronting the Nigerian economy now and for years to come.”
So, even when the economy was growing at 7 percent, it was a jobless growth. But the problem is not with the Kuznets’s theory: growth should benefit everyone. The problem is with the quantity, quality and spread of growth in Nigeria. In other words, economic growth in Nigeria fails the Solow’s balanced growth theory. The truth is that, apart from the fact that Nigeria’s economy is not growing fast enough (it needs to grow at about 8 or 9 percent annually), it is also not growing in the right sectors. The quality and spread of the growth matter.
The oil sector is currently over-privileged. It contributes less than 10 percent to the size of the economy, but accounts for over 85 percent of Nigeria’s foreign exchange and 70 percent of its revenue. Yet, in terms of job creation, it absorbs less than 5 percent of Nigeria’s labour force. That’s not surprising because the oil sector is capital, not labour intensive. The services sector, given its specialised nature and associated low productivity, is also not a major job-creating or poverty-reducing sector. The most productive sectors are the industrial and agricultural sectors. Yet, these are the most inefficient sectors in Nigeria.
But the reasons are obvious. The government pours money into the agricultural sector and protects it from international competition. As a result, it lacks the impetus to improve productivity, which drives growth. Similarly, the industrial sector is shielded from international competition, in addition to facing a multitude of supply-side constraints. Unsurprisingly, it suffers from huge productivity and competitiveness challenges, which inhibit its growth.
It is interesting that the sectors that dominate the Nigerian economy – agriculture (25.16 percent), industries (22.25 percent) and services (52.60 percent) – are all servicing the domestic market. In other words, they are not export-oriented. Yet, according to a World Bank study, “exporters on average are more productive, larger and pay higher wages than non-exporters”. In other words, sectors that export will experience higher productivity and growth than those that do not. But, despite the hype about promoting non-oil exports, Nigeria is not creating the conditions for building productive and export capacities in its industrial and agricultural sectors. Surely, Nigeria’s defensive approach to AfCFTA and other international trade agreements reflects its unwillingness to abandon import substitution for export orientation.
But Nigeria will continue to have meaningless economic growth unless its growth is underpinned by significant inflow of foreign direct investment and dynamic real sectors, with huge capacities to export goods and services. Yet, that won’t happen without macroeconomic stability and structural reforms that embrace trade and investment liberalisation – in other words, a competitive market economy!
