We all know what Nigeria needs to do to move from its current impoverished (sub?) Third world status to its rightful place in the new millennium. Don't we?

We all know that Nigeria needs to become more productive so that it can compete on the international market for good and services, preferably becoming a net exporter in a few well diversified high value-added sectors; which would help it achieve the kind of dynamic growth necessary for speedy poverty alleviation. Right?

The above statement must be correct. Its got all the right words; growth, productivity, competition, exports etc. And it makes sense, right? As is often the case with sound bite-ready credos; they end up being used as bits of popular wisdom with the assumption that what they mean is readily and widely understood and soon - like Chinese whispers - they emerge distorted at the other end of public discourse with plain
silly rhetoric (and sometimes policy) wrapped around them.

First, lets try answering some silly questions that have obvious answers.

Silly Question 1: Why does Nigeria need to increase its productivity?

To compete effectively on international markets, right? Wrong!!! Nigeria's productivity growth affects the Nigerian standard of living - by virtue of its effect on the quantity and quality of goods produced in Nigeria - irrespective of whether there are other countries producing competing goods. If Nigeria was the only country in the world (or more likely if it shut its borders to international trade), a low domestic productivity
growth rate would still translate to a lower than possible standard of living.

But surely trade exacerbates things; a country with productivity growth lower than that of its trading partners will either have to allow a slow down or decline in its wage growth or see its currency lose value. One or a combination of these must happen to ensure that the country's products remain competitive on the international market. And won't a decrease in wages or a lower exchange rate (especially in an import dependent country
like Nigeria) translate to a lower standard of living? Not necessarily. The higher relative growth rate of foreign productivity that precipitated the declining local currency/decreasing wage growth also results in lower prices of foreign goods. So where there aren't distorting trade policies, the net terms of trade between the country and its trading partners remains the same, and so does its standard of living (at a level proportional to the level of domestic productivity growth).

Okay, so the reason Nigeria needs to increase its domestic productivity growth is to increase its living standards and not to compete. It still is a fact that productivity growth needs to be increased; why becomes academic, no? One would wish so, but say in reaction to the steep drop in Nigeria's productivity growth rate relative to its trading partners and to enable Nigerian products compete, Uncle Sege (that's President
Obasanjo to you) slaps quotas or higher tariffs on the importation of foreign goods thus constraining the impact of their lower prices on the real purchasing power of Nigerian consumers. Nigeria would then have shut out the means by which the consequences of its productivity decline (and hence a further drop in living standards) could have been mitigated. This scenario easily follows on from a view that makes competing on
international markets an end in itself (and can be seen in current government policy towards the cement industry in Nigeria). Read my lips: Higher productivity growth translates to higher living standards, period.

Silly Question 2: How then does Nigeria increase the productivity of its resources? 

Yes, a country can link its producers directly to the end consumers of the country's products, reform its banking sector, improve education etc. but lets try and answer the question first on a macro level, and while we are at it pitch in like everyone else with suggestions towards tackling the problems.

There are three main ways a country can increase the productivity of its resources: it can raise the quantity and quality of its business capital investment; it can improve the public capital that enables the private economy; it can improve the quality of its human capital. To ensure that the solutions proposed offer more than intuitiveness, lets look at each one of these sources of productivity growth and try and answer the question by
inferring how Nigeria triggered its productivity decline.

Business investment
By definition, private investment equals the sum of three sources of saving: private saving, government saving (or budget surpluses) and net inflows of capital from other countries. Any attempt to increase the quantity and quality of business investment must include attempts to improve the quantity and quality of one or more of these three sources of saving.

It is no wonder then that private investment has been in steep decline. Successive governments have presided over increasingly huge deficits driven by corruption, fiscal indiscipline and low tax collection; the high inflation of the 90s, a banking sector in dire need of reform, and the crowding out of investment opportunities by the government's large borrowing needs created significant disincentives to private saving; and of course, years of pariah statehood coupled with a fragile political environment took care of any remaining hope of net capital inflows.

The hand-over to democratic rule and the consequent return of Nigeria into the international community are both very encouraging, but ethnic and religious tension and crises still inflict a large hidden economic cost in constraining capital inflows. Also, though the present government has made several visible and symbolic moves towards transparency and a clampdown on corruption, a framework of systems and processes
that embody this desired level of transparency still needs to be built and reinforced across government departments. The banking sector is still in need of reform and could use a healthy dose of competition (unfortunately pleading with banks to lower lending rates/raise deposit rates won't quite hack it, if due to inefficient practices their cost of capital remains prohibitively high). The collection of tax revenue remains a huge priority for government. So does the development of depth to the capital markets (a la privatization, loosening listing requirements, state & municipal securities issues etc.).

Public Capital
Public capital fared even worse. The deficit laden federal government was too broke to sustain any long-term capital spending on infrastructural projects. Public expenditure was grossly distorted and inefficiently mobilised due in no small part to the lack of transparency and across-the-board corruption, the cumbersome and highly political revenue-allocation mechanisms employed by the federal government and the crushing weight of servicing the country's debt.

The debate on restructuring is not only a political issue but also an economic one. The frictional cost of mobilising resources this way is too high. The debate on debt forgiveness of course rages on and though it stretches the imagination somewhat to see Nigeria making a credible case for membership of the HIPC (Highly Indebted Poor Countries), the country does need a significant mixture of debt restructuring and debt forgiveness to ease the burden of debt servicing.

Human Capital
Finally, human capital and probably the "cruellest blow of all". The tragic disinvestment in education and the brain drain phenomenon - both which surged in the late 80s through the 90s - are now showing up in the country's productivity growth rate (or lack of). The collapse in the quality of education and access to education has probably the most far reaching consequence and is likely the most difficult to reverse. Universal
Primary Education (UPE) is a start to addressing the problem of access to basic education but far more is needed to address problems with the quality of education, school-leaver/graduate illiteracy and little feedback of business needs into the educational curriculum amongst others.

Incentives need to be provided to promote private investment in education e.g.. tax credits for training and R&D, restructuring of institutions of higher learning to allow faculty/departmental endowments, privatisation of some universities and stimulating the concentration of business around institutions of higher learning through the creation of business parks with subsidised rent, tax incentives and excellent infrastructure. Solutions to school-leaver/graduate illiteracy must be sought and ways of retraining and reskilling school leavers and graduates explored e.g.. establishing local training and enterprise centres, disbursement of training vouchers (means tested hopefully). The issue of brain drain cannot be ignored. Nigeria has a wealth of human and intellectual capital outside its borders (yours truly included) which it should court. Pushing entrepreneurial initiatives aimed at Nigerians abroad through the various chambers of commerce and linking local R&D efforts with research fellowships at universities abroad are but two of several incentives that may be pursued.

Of course there is a plethora of good ideas but a focus on the larger picture must be retained; private investment, public capital, human capital.

Silly Question 3: But what then about stimulating demand?

Well, what about it. IMHO, Nigeria's economic issues are mainly supply-side not demand-driven. The potential capacity within the economy has shrunk tremendously and needs to be expanded and this takes us back to productivity growth. I am not saying there is no place for demand stimulation but it is not going to take an awful lot of unemployed resources (people and machinery) to take up the slack of the current economic capacity and beyond - and begin the old inflationary drum roll. In other words, Nigeria is NOT in a business cycle slump or recession and simply expanding the money supply by raising civil service wages or reducing banks' liquidity ratio alone  is NOT going to jump start the economy. Expanding economic capacity through productivity growth is the key.

Last Silly Question (promise): Still, Nigeria's recovery needs to be export driven, right?

Put it this way, why does a country export? So that it can pay for its imports. Yes, Nigeria needs to export to keep its growth non-inflationary and generate income to spend sensibly in capacity expansion but exports are a means not an end and Nigeria must make sure that in a bid to promote exports it does not shoot itself in the foot (as I noted earlier re. the cement industry). Another irrefutable economics equality that puts this in perspective:

                   Savings - Investment = Export - Imports

Can't argue with that.

As for selecting high value-added sectors and strategic trade, that deserves an article on its own. Not that the idea has no merit but the notion - as mooted by a few economic luminaries - that simply building and protecting home grown high value-added industries,  throwing a lot of money at them and voila we'll soon have a Bangalore-on-steroids on our hands is a bit of an oversimplification.

So, what's this all been about
Often times we get used to hearing and saying some words over and over again that we run the risk of forgetting what they mean. As we fall all over ourselves (as good, patriotic, well-meaning Nigerians) to articulate answers to the problems that have so easily beset us, let us every now and then pause and do a reality check on these words and phrases that we all know make absolute sense.

Many of the thoughts expressed in this article are covered extensively in Paul Krugman's very readable and very comprehensive lynching of policy entrepreneurs, Peddling Prosperity. I thoroughly recommend it.
 


The author Olu Oni is an Assistant Vice President at Chase Manhattan Bank in New York and a principal in www.intellectualcapitalinc.com, a private internet idea lab.

homepage: http://members.home.net/onis

Transmitted: January 2000