Competitiveness, not diversification, and the role of government

Let us start from where we are. Following the significant fall in oil price in the last 20 months, the National Bureau of Statistics (NBS) has now released a trinity of disappointing data in a row, revealing shocks to growth, inflation and unemployment. As inflation rises, real wages are falling – showing declining productivity. A continuous and significant fall in oil prices has thus permeated throughout the economy and generated disastrous effects.

However, these dramatic consequences of the fall in oil price have overshadowed some interesting phenomena about the Nigerian economy. First, it has obscured the progress made in some key sectors of the economy, and the level of productivity in those industries. Second, it undermines these sectors, and it may take many years to recover the setback. Third, I do not think the productivity in sectors outside of oil dramatically changed between June 2014 and now, but that oil price changes exerts undue influence on the structure of the Nigerian economy.

After all, crude oil production accounts for only 11 percent of Gross Domestic Product (GDP). As it is no fluke that Nigeria is the 21^st largest economy in the world, and the largest economy in Africa, it thus means, “We actually produce something”. Contrary to what many understand and / or believe, Nigeria’s production base is vast, huge, and varied, and produces a large proportion of goods and services for the West African region. . In the construction industry, for instance, we produce cement, tiles, paints etc. In the clothing and shoe industries, we produce shoes of different kinds (or what do you think most Nigerians wear?) and make clothing materials of various kinds.

The economy is not doing badly, but we are very vulnerable to exogenous shocks. I have written about some of the measures required to deal with that, so that is not the focus of this piece. The focus of this piece is the poor understanding of how the government can turn broadly successful domestic industries to international ones. Essentially, how do we translate (add value) to those products that we produce with inputs from foreign countries, and sell them back into the market in another form?

Ask many Nigerians what makes our economy vulnerable to exogenous shocks. The answers are simple and fast – we need to diversify. But that calls to question – diversify what? While they mean diversify our exports, it is often, erroneously used interchangeably with production. But Nigeria’s production cannot be more diversified than it is. The problem is the failure to understand how to tip few products / industries that are almost there into international firms – raising product quality, adding desirable features, improving product technology, or boosting competition in industry segments, so they can start to “compete”.

It was Michael Porter who popularized the idea of international economic competitiveness. The World Economic Forum (WEF), in its Global Competitiveness Reports (GCR), which ranks countries in terms of international competitiveness, has since propagated the idea. Nonetheless, there is no broadly acceptable definition for national competitiveness, and some notable economists, led by Paul Krugman, have described such assessments and analysis as “meaningless”. However, for the sake of this piece – Nigeria will be considered competitive when the country’s exports are broad, diversified, and sustainable to meet our required imports.

To simplify further, the competitiveness I describe here can be described as the production of a “commodity” and / or service at the lowest possible price, at the quality acceptable to the market and consistent with global standards. It is about how we organise our production to ensure we produce what the world wants, at the quality it wants, and at the lowest price possible. We are able to sell crude oil because we are competitive in producing crude oil.

So, what is the role of government and what is being done wrong?

I struggle with two policy mindsets, and that is what is wrong with the approach of successive governments. First, the understanding of how Nigeria can develop still stem from the archaic and worn out theory that a country moves from being agrarian/resource rich to manufacturing and then services. However, while country development patterns can still be largely stratified, there are plenty evidences that the lines and pattern of production are very blurred in the modern economy. So, no country looks at whole industry but many segments within an industry and looks for comparative advantages within them. We do not need to follow the path others followed, and we do not need to start where others started. Indeed, we do not need to start anything, but strategically locate ourselves and firms where they can best explore the global opportunities in trade in goods and services.

Second, though the manner in which nations compete, the pattern of production, and the manner in which countries trade with each other has changed dramatically, our approach to policies still give the disturbing impression of the 1970s and 1980s, which was the era of the import substitution / export promotion dichotomy argument. It is why when we speak in terms of rice production, crude oil refinery, cement production etc, it is all in the context of reducing imports. However, there are many gains to firms being exposed to the international markets outside of foreign exchange earnings. That is where we expect our government to encourage and lead our firms to compete and operate. With this mindset, we will not be making folly statements about pencil production in 2018.

In conclusion, the gap between some international firms and their Nigerian counterparts in relation to product quality and relative productivity is not as wide as one may think. These are the firms the government should look out for across industries and tip into the next level. With serious thinking and hard work, we can stop being the proof that national prosperity is created, and not inherited.

Ogho Okiti