Bold pro-growth reforms, larger competitive companies needed
With its current rate of growth of two percent per year, Nigeria cannot achieve upper middle-income status in 50 years – low- and lower middle-income economies that have attained that status grew at 3.5 percent on average over the same period, according to McKinsey, a consultancy. Nigeria has achieved such growth in the past: in the last 50 years (1968-2018) annual average economic growth was 4.2 percent.
McKinsey compares Nigeria with 18 “outperformers” i.e. “emerging countries who have been able to generate growth and raise prosperity, through poverty alleviation and the emergence of a new wave of middle and affluent classes.” Some of these outperformers are Malaysia, China, South Korea, Indonesia, India and Vietnam, countries whose rapid economic growth stories Nigeria was expected to emulate and popularised by the acronyms Bric, Next 11 and Mint. The McKinsey list includes recent outperformers like Ethiopia, Cambodia, Kazakhstan and Uzbekistan, their economies have performed better than that of Nigeria despite great expectations.
For Nigeria to join the league of outperformers its growth must be less volatile (i.e. diversified and less dependent on oil). And it must replicate reforms such as those in telecommunications, banking and pension that led to its most prosperous years between 2000 and 2015.
Reforms in the telecommunications sector helped diversify the economy. Today the information communications technology sector is thriving. Nigeria has the highest number of internet users and mobile phone subscribers in Africa, and globally, the seventh and eighth respectively. Tech start-ups in Nigeria, especially fintechs, have attracted foreign investors.
A pro-growth reform agenda and an increase in the number of large and highly competitive companies are the “ingredients” Nigeria needs to outperform.
Outperforming countries invest in talent and infrastructure which attract investment. They are connected to regional and global value chains. They also promote competition which boosts productivity. An increase in wages and better financial performance of companies increases domestic consumption and demand for production. In such a conducive investment and business friendly situation, companies are more likely to expand and multiply which contributes to output and tax revenues.
Nigeria has everything it takes to become an outperformer, but it is punching way below its potential. For example, its 90 million strong labour force is young and growing but most are either unemployed or underemployed and unproductive.
There are not enough big companies in the country to keep youths busy. There is not enough electricity to keep factories running; huge gas reserves to generate power remain unexploited. There are not enough good roads connecting factories to farms, suppliers and consumers. Agriculture which accounts for about 20 percent of what we produce, employs millions and holds a lot of promise for Nigeria is stunted by outdated farm practices and low yields. Even though more hectares of land are been cultivated, the amount of tomatoes, rice and cassava per hectare has not increased.
On average, economic growth has been negative since 2014. And the private sector which grew during the first two decades of the 21st century and drove the momentum has failed to recover since the recession in 2014. The state of the economy has discouraged foreign and domestic investors; exports as a percentage of GDP has slowed down and banks, until they were arm twisted by the central bank, preferred to buy risk-free government debt than give loans to the private sector.
McKinsey lists “eight big bets” that could see a $447 billion increase in productivity and 560,000 fewer households in poverty in Nigeria by 2030: a competent bureaucracy, “drastically” improved human capital, centres of competitiveness, digital transformation, more skilled and educated women, investments in oil and gas and petrochemicals, agricultural transformation and improved infrastructure.