Between 2010 and 2014, the Nigerian economy grew at an average rate of 6% each year. As a result, the economy won many admirers and was recognised as one of the fastest growing in the world. Yet when oil prices fell in 2014, the economy contracted and eventually spiralled into a recession by 2016. The pace and extent of Nigeria's economic deterioration in just two years raise deep questions about the nature of the growth that preceded it. The lessons we learn would be instructive in pursuing and managing future growth.
The first and most obvious lesson is that we need to be more nuanced with our views of economic growth. As this article reminds us, how economies grow matters. Even as the 5-year growth period from 2010 to 2014 was universally hailed, not enough attention was paid to its drivers. This looks foolish in retrospect as we know that Nigeria's growth was largely driven by high oil prices. The surge in oil prices at the start of the decade proved an economic boon for a country overly reliant on oil exports, with both current account and fiscal balances strengthening during the period.
But as is characteristic of growth driven by extractives, there was little impact on unemployment and poverty – in fact, unemployment rose during this period. Ultimately, such growth was doomed to falter at some point, and the crash in oil prices revealed the economic fault lines that had previously been covered up.
The second lesson derives from the first: African countries have belatedly acknowledged that sustainable development cannot be achieved through an extractive industry-led economic agenda. Evidence from commodity exporting countries highlights the vulnerability of these countries to boom and bust cycles triggered by fluctuations in global commodity prices. In short, Nigeria must free itself from Dutch Disease. Crucially, the effect of this could be most pronounced in governance. In addition to its limited impact on poverty and unemployment, resource rents reduce the incentives for government to develop other sectors of the economy and to strengthen local tax systems. With tax revenues barely 6% of GDP, it is not surprising that in the absence of easy oil money, Nigeria struggles to provide basic services.
So what economic agenda is needed to achieve sustainable and inclusive growth? Countries can choose from a plethora of options; the varying successes of the United States, China, and Scandinavian economies demonstrating that there is no magic formula. What is clear is that deeper economic diversification is needed in Nigeria. The Oil & Gas sector is less than 10% of national output but is of greater strategic importance, well demonstrated by the recession in 2016. To balance this, high-growth sectors like manufacturing and agriculture are obvious priorities.
Manufacturing, for instance, is described by many economists as the 'learning centre' of capitalism because of its ability to develop productive inputs which are highly critical to the productivity growth of other sectors. Agricultural productivity growth, for example, is more difficult in the absence of a strong manufacturing industry which produces machinery, fertilisers, etc. Besides, because the manufacturing sector produces physical and non-perishable goods, it has higher tradability than agriculture and services. This feature is essential as it enables an economy to build its resilience to external shocks. Manufacturing is, therefore, one sector which should be a priority for the Nigerian government because of its multiplier effect on the rest of the economy.
The third lesson is that trickle down economics does not work, more so within the context of natural resource dependence; governments need to take active steps to ensure that the benefits of growth are more broadly shared. Redistributive policies such as tax exemptions for low-income earners and robust social welfare schemes go a long way to ensuring that economic prosperity is beneficial to all. Policymakers need to take this very seriously because when people feel excluded from the gains of growth, it fosters resentment, breeds discontent and increases social tension. The recent backlash against globalisation in nominally wealthy nations is a sign of how social and political norms can quickly shatter in the face of inequality of opportunity and increasing disenfranchisement.
Going by the recently launched Economic Recovery and Growth Plan (ERGP), the government may have internalised some of these lessons already. The focus on six priority sectors leads the charge on further economic diversification, but the emphasis on growth policy enablers and cross-sector strategies is particularly exciting. Moreover, we will not be abandoning the oil industry as paradoxically, we need oil to move out of oil. In this regard, the recent passage of the Petroleum Industry Governance Bill (PIGB) is also laudable as it should encourage much-needed investment into the industry; nonetheless, there is need to expedite the passage of the entire Petroleum Industry Bill to entrench the more commercial aspects of the proposed reforms.
Admittedly, none of the lessons or recommendations here is entirely new. What would be new is the willingness to apply them. Meanwhile, we have had many national and sectoral plans in the past but where the rubber meets the road has always been in the area of implementation. The challenge for this government is how to bring these plans to life and bring about economic growth that is meaningful to and inclusive of all Nigerians. Do this, and it would be a lesson well learned.