So over the next couple of weeks, I shall be doing a series on economic diversification. I feel this is imperative as this has dominated the discourse on the Nigerian economy since it plunged into a recession. More so, with the recently released Economic Recovery and Growth Plan, I think that a basic understanding of economic diversification and its implications would enable us have a more nuanced understanding of this medium term plan.
So what is Economic diversification?
I think this definition perfectly captures what is meant by economic diversification or a diversified economy
“A diversified economy is an economy that has a number of different revenue streams and provides nations with the ability for sustainable growth because there is not a reliance on one particular type of revenue. This diversification provides nations with the security and reliability that they need so that if one economic revenue stream should fail, the nation knows that they have several other options for revenue”
The quintessential example of this is the US economy, the US is arguably the world’s leading economy in technology, manufacturing, fashion, entertainment, financial services etc. They are so good that they export all of these services to other countries and earn revenue from it, so really at any point in time, the economy is not entirely dependent on any one sector. If the technology industry suffers a set-back, they can easily rely on revenues derived from the other sectors vice versa.
At the other extreme, you have Nigeria which is virtually dependent on the revenue derived from the sale of crude oil. Oil accounts for over 90% of export revenue and over 60% of government revenue. It is important to say that Nigeria’s GDP (Gross Domestic Product) is actually diversified. That is the number of goods and services produced in the economy actually comprises of other goods besides oil, in fact oil accounts for only about 8 % of Nigeria’s GDP.
But the problem is that the other 92% of economic activities which comprise our GDP do not provide as much value as oil, that is, you cannot export them and get the same revenue as when you do oil. This explains why even though oil account for only 8% of the GDP, it accounts for over 90% of our export earnings. So the real challenge here is two – fold: How do we diversify our export base? How do we increase the value of our non – oil exports so that they provide as much revenue as oil does (or used to) ?
So I hope we understand the fundamental issue and I hope we also see how much of a challenge we have on our hands. Manufacturing products for exports is not child’s play. I mean just imagine competing with goods manufactured in China or in the US, you are talking about innovative products with competitive prices and quality. But the innovativeness, price and quality of these goods are only outcomes of the economic structure and activities in these countries, so for us in Nigeria, the relevant part to our diversification discourse is the inputs which accounts for these outcomes. The US for instance spends a humongous sum on Research and Development (R& D), Science, Technology, Engineering and Math (STEM) education, infrastructure etc. While the government sets broad economic goals, their intervention is limited as the private sector is the engine of economic growth. They create an enabling environment for the private sector which ensures that their innovation and creativity are exploited to the maximum. In some instances, government even subsidises certain industries in order to accelerate their growth and development. But its not all good behaviour though, sometimes, especially in the early stages of their development, they engage in industrial espionage and today they ensure that multilateral and bilateral trade agreements are often tilted towards their favour. All of these enhance the competitiveness of their products and their ability to play in the global exports markets.
But before we even start discussing how Nigeria can increase its non – oil exports, I feel it is important to understand how and when we got here, what accounts for our economic structure – this shall be the focus of the next post in this series.
Other things that shall be discussed in this series include the natural resource curse, export diversification strategies and case studies of how other resource countries that have managed to develop were able to do so.
I am excited about this series and all the new things I hope to learn along the way! I am positive you will feel the same way too.