Nigeria: Dutch disease, and a free fall economy

This blog is not about president Buhari, it’s about resourcing and managing public goods in Nigeria.  I’m now used to this disclaimer whenever I comment on salient economic issues in Nigeria, because certain set of people who used to appreciate my write ups under the administrations of Obasanjo, Yar’adua, and Jonathan as enriching intellectual contributions, now view them from an ethnic posturing, given my Igbo background. So, it’s now necessary to append a disclaimer, to clarify that I’m no way a Buhari fan, but my criticisms are nowhere due to my ethnicity. For me, Buhari is part of the problem, not the solution. Military regimes, Buhari’s inclusive raped Nigeria of hope and stability.

Let me start as a lay person would on this topic. The idea of Dutch disease is the negative impact on an economy of anything that gives rise to a sharp inflow of foreign currency, such as the discovery of large oil reserves. The currency inflows lead to currency appreciation, making the other products less price competitive on the export market.

Elsewhere there have been calls to diversify the Nigerian economy to overcome such effects. I submit that the Nigerian economy was long diversified. What it hasn’t done consistently is institutionalising prudent management of resources, and adopting an enterprising state model, which is a no brainer for a one-sector economy like Nigeria. A one-sector economy is one that earns the bulk of its revenue funding from one sector. It doesn’t mean it’s not diversified, it just means that the other sectors are not competitive enough. You would need to invest heavily in these other sectors to move away from a one-sector economy.

The term Dutch disease was first coined in by the Economist group, publishers of the economist magazine in 1977 to explain the decline of the manufacturing sector in the Netherlands, after the discovery of the 1959 large Groningen natural gas reserve, which resulted in the nation’s other exports becoming more expensive and less competitive in the international market.

From a development perspective, Dutch disease is the apparent causal relationship between the increase in the economic development of a specific sector and a decline in other sectors of the economy. The putative mechanism is that as revenues increase in the growing sector, the given nation’s currency appreciates compared to currencies of other nations; manifest in the exchange rate.

This was the case with Nigeria, during the 1970s oil boom. Even the naira was stronger than the dollar. As oil brought an unimaginable size of rent, Murtala Mohammed and those that followed him began a spending spree, creating ginormous projects, and borrowing billions of dollars to finanace them, projecting more oil revenues to pay back quickly. Such a grand scale of borrowing proved dismal for a one-sector economy.

So as the world oil prices nosedived in the 80s, solution would have been a sound economic and monetary policy to address the fall through, rather Nigeria was unlucky, as the army jumped on the bandwagon of leadership with coups and counter coups diverting attention from the real issues.

For example, under Babangida, domestic inflation became so high that even basic food stuffs were unaffordable; but he invested in building an elite city Abuja, which was at the time very unnecessary. At the point that Nigeria owed debts in all corners of the world, and was advised by both the World Bank and IMF to cut their excesses.

The thing is whether it was structural adjustment programme, green revolution or war against indiscipline. The army were not trained to manage economy. They lacked the competency to make a cumulative sustainable progress both in political governance and economic management. They may achieve instantaneous wins, like any ‘woof woof, will bark, but economic management is neither reactive nor an instantaneous project.

I do in many ways sympathise with President Buhari, as he remembers the good old days of Nigeria, and he dreams of rematching it, and ‘make the dollar equals one Naira’ forgetting it’s no more ‘uhuru’.

Dutch disease is not only in reference to natural resource discovery; it can also refer to “any development that results in a large inflow of foreign currency, e.g. diaspora remittances, surge in natural resource prices, foreign assistance, and/or foreign direct investment. These are all counterproductive to growing strong domestic base, if no smart policy isn’t pursued.

Closing up Nigeria’s economic potholes should have started in the 70s. It’s not impossible today, but to do that in the 21st century, you would need astute and selfless technocrats to manage state resource, not career politicians, who are bent to steal everything penny they see in the treasury, or the army for that matter. You also need to plan and keep ‘bettering’ as you go along.

It’s important to note that Nigeria’s economy did not start free falling today. If the last 15 or 16 years of civilian rule have been tumultuous, current fiscal ‘wrestlemaniac’ isn’t the way forward. In fact, it is dangerous. Nigeria should let market work for itself.

Nigeria’s government does not have the prerogative of ‘holding the knife and yam at the same time’. While Nigeria has got the yam, it does not own the knife to slice it, unfortunately. The international market has numerous players, even with stronger influence and interest. Nigeria can only rely on two possibilities for growth. One is prudent resource management and the other is enterprise state model.

The framework for prudent resource management is about savings and investment given current resource realities. Best practice would be the Norwegian model, where specific percentage of oil revenue are invested in other sectors, e.g. fish farming and renewables. So that Norway is not only the highest fish exporting country in the world, but it has transformed itself as leader in the renewables sector.

The so called ‘trash to cash’ model has transformed waste energy as a high value commodity through incineration technology. The UK alone paid millions for thousands of tonnes of household waste to be sent to Norway, while Norway incinerate and convert them to instant reusable energy, which they sell to earn more money. Smart, isn’t it? This is what is referred to as prudence resource management.

Prudent resource management is far from the fire brigade approach in Nigeria, where it’s all about resource sharing, and consumption, not savings and investment. It’s no brainer that development has always been modelled behind resources accumulation, savings, and investment, and best practices abound across the globe.

The other possibility for Nigeria is what I’ve referred to as enterprise state model. This is necessary in tackling the infrastructure and public services challenge facing Nigeria. An enterprising state model entails exploiting the opportunities available to government to address social problems, while maximising the income potential. Many countries in the world own high value enterprises, but why can’t government of Nigeria or the state governments for example use some part of the revenue allocation they receive monthly to build industries, factories, recreation businesses, etc?

What is wrong with federal or state governments owning a cement factory, or farms across the country, generating extra income to run the affairs of state? With the level of resource controlled by federal government in Nigeria, it can really exploit new income streams by running businesses in parallel with private sector, particularly at the current state of things. Perhaps these businesses can go into private buy outs in the long run, when there are no more restrictive factors.

The people and government in Nigeria must recognise that present realities are not only disturbing, they are dangerous. The over reliance on oil for dollar needs is unsustainable. It might just mean that the free fall has arrived, if we continue with this lip service.

Image | Posted on by | Leave a comment

Towards the development of an industry cluster in Aba – steps for an easy win

Recent calls for the Federal Government of Nigeria to support the establishment of an industry cluster in Aba, is by no means out of place. Aba is a model metropolis, boosting arrays of opportunity, untapped talents and economic potentials. There are many reasons to be upbeat for an industry cluster in Aba. We know that industry clusters fuel economic growth, firms located in clusters are potentially more productive compared to other firms because of the agglomeration advantages ( e.g. networks, knowledge spillovers, human capital mobility, etc). Also, Aba has a municipality advantage, ranging from increased property and asset values, increased revenue generating capacity, and skilled work force.

Since it was first proposed in the1990s by Harvard professor, Michael Porter, governments across the globe have turned to cluster initiatives to stimulate urban economic growth. This is because a standard cluster economy models a synergy, a dynamic relationship, and a network between not only the businesses that make up the cluster, but also the successful partnering of interest groups and stakeholders – governments, research hubs, enterprise agencies, and the investor community for the purpose of wealth creation.

Nigeria needs to be doing sometime to attract investors, and a cluster is one of such magnates. In this article, I look at the benefits, and challenges of developing an industry cluster, and propose specific conditions necessary for establishing one in Aba.

Development experts view industry cluster as a converge of collaborating similar and related firm groups in a defined geographic area, usually to share common markets, technologies and worker skill needs. Two factors come to mind, when thinking about how cluster benefits an economy, particularly in the case of Aba.

First, industry clusters have the potential to motivate a start-up revolution by encouraging new generation of entrepreneurs to develop a taste for owning their own business, thus growing the national economy.

Second is the idea of serendipity economy, which offers a new lens in the way we view economic development. Urban centres where talents converge do not only give a facelift to place, but the cross-pollination of talent and innovation in hub proximity has now become an ideal strategy for sustainable regional economic growth. Enterprise hubs are established to support innovation generation. Innovation generation in itself is the most valuable asset of the future.

Aba, therefore, is more than a start-up ecosystem. Aba’s economic potential has to be rightly placed. The city had once been, and could even further become ‘a congregate of innovation’ and a hub for enterprise in Nigeria.

The benefits of industry clusters illustrate why place still matters in the global economy. However, experience shows that establishing one comes with more challenges. For example, lack of investment funding is a major stumbling block for regions aiming to leverage the agglomeration advantage of clusters, as industry clusters do not only survive by public goodwill.

And, while cluster initiatives can potentially transform local economies, investors often see such as high risk propositions, except where there is willingness for public private partnership (PPP).
Further, local communities may challenge the idea of siting clusters close to their area, and may campaign vehemently to frustrate the idea, or might even refuse to make land available, even when investors are ready to take the risk.

It’s also true that industry practitioners may not want to move from their ‘current’ location to a new cluster site, if the plan is to develop the cluster in a new location. They tend to altruistically connect with place, notwithstanding commercial disadvantage.

Worse still, the dynamics of local politics can play against a cluster initiative, particularly, if the ruling party does not command clear majority in parliament, or do not belong to mainstream power. In such case, politicians may deliberately work to stomper cluster projects to score points. The role of government is to provide a safe passage, to assuage the various competing interests, and to seek united effort.

With years of experience in delivering cluster projects, backed by international evidence, five important steps can be taken to establish an industry cluster in Aba, and to attract the right investors and stakeholders to the initiative.

One, while annotated evidence suggests an industrial cluster may suit a city like Aba, a thorough understanding and analysis of the local economy, structure, opportunities, current situation and foreseen challenges is crucial. Any investor being approached would want to see a concise and clear print of opportunities and challenges. But also such document would help target the wealth creating sectors, and prioritise support where it is most needed.

Two, the cluster concept represents a new way of thinking about how an economy is grown, and signifies new roles for government and business. But emerging clusters are technology driven in terms of functionality. They do less with manpower. Hence, a cluster project must be supported with an innovation centre, strong intellectual capital, and state of the art technology.

Three, for a cluster initiative to gain quick wins, it must have the right human resources. As often said, the people that lead a cluster initiative are as good and enterprising as the project itself. Aba can learn from the City of Edinburgh in this area. The city’s industry clusters now has over £4billion turnover , combining successes with the Interspace group, Edinburgh Science Triangle, Bioquarters, and new developments in Leith Creative Exchange. None of these would have been possible without the right people in charge.

For example do they have the capacity, broad knowledge, and contacts, to attract the right investors? To identify and negotiate financing rounds, etc. These are factors that must be carefully weighed. A cluster development team are no political appointees; they are a syndicate of experts with exceptional competency in cluster development and management. They create the plan, raise the funds and deliver the project. The new Abia State Economic Advancement Team (ABSEAT) should at least have people with some of these capacities, even in advisory role.

Four, while an industry cluster can be a ready-made proposition that appeals to international investors, it has to literally make a bold statement for investors to take it seriously. If there is no agreement for a broad shaped future, obviously the cluster will find it difficult to attract the right investors. Usually industry clusters have long term goals, and investors would want to know from the onset how long it will take to turn their investments into profit. This is where an experienced cluster development and management consortium comes handy.

Five, and perhaps the most crucial in establishing an industry cluster, is separating the cluster initiative from political influence. Setting up an industry cluster as an independent enterprise is ideal to facilitate self-funding, but also to allow the project to get on. Quite clearly, government’s role is to provide the enabling environment and initial funds to get the project up to a good start. The longer term plan should see public finance play less role in funding such initiative.

It is absolutely true that Abia State will need capacity to deliver a world class industry cluster in Aba, which can be further enhanced by support from the Federal Government of Nigeria. Since the coming of the new government, a lot of goodwill now exists both from experts in Diasporas and those at home. Abia State needs to tap into this goodwill, to develop a financial package for an industry cluster in Aba.

(Iyke Ikegwuonu is a development expert in Edinburgh Scotland, and has supported development of some of the leading global industry cluster projects. Follow me on Twitter @yekaka)

Posted in Uncategorized | 1 Comment