President Jonathan’s Economic Strategy , By Bernard Okumagba



BERNARD OKUMAGBA (1) compressed resizedOne of the serious challenges the Nigerian economy has faced over the years is creating and exploiting linkages in the economy to maximize employment and economic output. The country is still largely a primary products producer and still depends on imports for our consumer goods. Our tragedy of this absence of linkage is best seen in the petroleum sector where, in spite of our huge oil and gas reserves, we are still a net importer of petroleum products. So, the benefit of our endowment is only seen in the petrodollars we receive from the export of oil and gas.

The entire value chain between oil and gas extraction and final products is so massive that we virtually lose out in the value added in terms of employment and industrial growth. Even in oil extraction, until the Local Content Development Act of 2010 was passed, foreign firms handled much of the services in the oil industry. The same problem is seen in the agriculture sector where harvest waste on account of insufficient storage and processing facilities.

In many ways, it is not just a Nigerian tragedy; it is a serious problem across much of the developing world. Cocoa is the mainstay of the economy of Cote d’Ivoire. The country produces about one-third of the world’s cocoa, according to figures from the Food and Agricultural Organisation; another one-third is produced by other countries in West Africa, yet there is negligible value added in processing. All the processing is done in foreign countries, and the finished product comes back more expensive.

 

In the last three years, a robust attempt has been made by the federal government under President Goodluck Jonathan to curb huge bills spent on food and auto imports. A report in The Vanguard newspaper of February 17, 2014 quotes the Director-General of the National Automotive Council as claiming that Nigeria spent N1.2 trillion in 2013 on the importation of cars, trucks, spare parts and tyres. Up until 2012, according to the Agriculture minister, Nigeria spent an average of $11 billion on food imports annually. The imperative to aggressively tackle local production and reduce imports was therefore clearly defined.

 

Nigeria is better placed than most countries on the African continent to create strong value-added outlets for its primary products. This is because the country has a huge population, skilled human resources and an entrepreneurial business class. To talk of Nigeria’s population advantages is to state the obvious; another commonplace is our propensity to consume. Both are key ingredients in building the demand for consumer goods. However, for a long time, the policies to harness, or force, local production of consumer goods has not been followed-through. Policies have been fashioned to push local production but for whatever reasons they failed to gain traction. There seems to be an attempt this time around to build the policy template for local capacity not just in areas we have comparative advantage such as in Agricultural production but in industrial goods.

 

A bold project to address food production from the Federal Ministry of Agriculture has been fashioned over the last three years to reduce Nigeria’s huge food import bills by encouraging local production. Fiscal policy and agricultural incentives have been directed to curtail import and encourage local production of food such as rice. This has been hailed in some quarters. On the industrial scene, a policy to encourage local car assembly plants is receiving attention from carmakers. What the Jonathan government is doing is not reinventing the wheel; it has been tried and exploited in several developing economies to great success. China, India, Singapore and some others have created policies to encourage local production and thereby create scale and multiplier economies and build the basis for industrial growth. Many of these countries have done well, especially the ones with a huge population.

 

Nigeria has travelled this road of import-substitution before. Beginning from the national development plans of the 1970s, there was a realization that industrial development needed a push, through policies that encouraged local production. The setting up of assembly plants, steel companies and a few other companies by the governments then was informed by this thinking but, sadly, these companies did not succeed and they were either privatized or liquidated. Part of the reason for this failure was inconsistency in fiscal policy from the late 1980s to recently. Another is the transition the economy has taken in the last three decades, which saw mixed fortunes in unemployment and economic growth. Today the economy is not totally out of the words but there are some new growth sectors, like telecommunications, even if the economy is still underperforming in some other sectors.

 

There is a reason to believe that positive economic numbers are coming back, thereby encouraging the federal government to seize the moment. Most banks today have robust consumer loan departments, encouraging people to take facilities for vehicle purchases, among others. What is more important is that the new enterprises are private sector driven. The ability to drive policy to support private sector is key to long – term sustainable economic growth. The linkage between the auto industry and road transport is potentially huge given the significant road haulage in Nigeria.

 

Today, the efforts of the Nnewi-based Innoson Motors, ASD Motors in Kaduna and Stallion Motors in Lagos, among others, are like small drops in the ocean but they may be the beginning of a renewed effort at growing an automobile sector to service the transport sector and household consumers. The next important thing to do, almost immediately, is to get the support industries for them. A successful automobile company needs marketing and service outlets. Many of these players are investing so much in facilities. But there is scant linkage with dealers and maintenance outlets. They lack the capacity to drive those investments and create incentives for the dealers. To create a successful linkage, Government must play a role, with incentives and policies that will help sustain and grow the new auto policy, among others. Hopefully, these policies would translate into sustainable economic benefits. But the challenge is how to sustain the policies to generate sustainable positive outcomes in creating employment, building local capacity and reducing foreign exchange outflows. The key, essentially, will be the capacity to ingrain policies in our development DNA such that they can transcend election cycles and governments.

 

The Jonathan administration aims to encourage the local car assembly plants to gain traction with a protective fiscal policy that places a high import duty on imported vehicles. With duties as high as 70 per cent in some cases, local merchants are understandably worried that they may lose out and, indeed, several car dealers are saying so. This calls for planning because all economic actors are important.

As new policies on import-substitution evolve, the challenge will be how to reduce the negative impact on economic actors who will suffer from the policy change and are willing to transit to the new order. In the auto industry, for instance, an effort in this direction needs to be coordinated by Government to identify all the linkages – suppliers, distributors and maintenance people – and direct effort toward a coordinating growth of the budding industry. It is important that consumers know they can get parts and services for the cars, so that they can be assured of maintenance of the vehicles. Most of the vehicle models being made are not popular and may not have parts readily available for buyers. They also need to have trained auto mechanics to handle them. It is not clear if the manufacturers have the capacity to invest and address these issues. Government can work with producers and dealers in these regards by providing incentives that can help redirect economic activity toward the new products. If that is not done, a combination of smuggling, inadequate marketing support infrastructure and sabotage may snuff out the dream.

In the end, for economic linkages to work and deliver results, Government agencies must play a central role by guiding economic interest groups to work in a desirable direction.

 

 

Chief Bernard Okumagba is a former  Delta State Commissioner for Finance                               

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