By Naji P Makarem, on 5 July 2016
Why is unemployment and poverty rising in Nigeria, despite over a decade of robust economic growth? According to new research from, Naji P. Makarem, the organized private sector (OPS) has the opportunity to leverage its clout and political influence for urban governance. To do so however, it must strengthen its urban organizational capacity and shift its political attention beyond pure-efficiency to broader conceptions of functional urban agglomerations. A failure to do so risks locking Nigeria into a ‘low-productivity trap’, long after it has overcome its chronic ‘efficiency-crisis’.
Since its independence in 1960 Nigeria has been struggling to industrialize and diversify its economy away from low-productivity agricultural employment and dependence on Oil & Gas export revenues. It has adopted numerous government strategies from import substitution to market liberalization; yet the economy continues to be highly dependent on oil reserves and imports of food and consumer goods from abroad.
It is estimated that 70% of households are currently living on less than $2 a day and a similar proportion is employed in the informal economy. Impressive GDP growth and considerable diversification into new sectors such as ICT, Real Estate and Professional, Scientific and Technical services over the past decade have failed to translate into sufficient employment generation, with unemployment rising significantly over the period to well above 20 percent according to government figures.
Jobless growth over the past decade can be attributed to two aspects of Nigeria’s industrial structure: About a third of the growth in output since 1990 has been driven by Oil & Gas, ICT and Real Estate, which together employ a mere 1.4% of formal sector workers. These are highly productive sectors with considerable impact on employment within the cities where they are concentrated, such as Lagos, but they do not generate sufficient employment to absorb Nigeria’s growing labour market.
On the other hand, manufacturing, which suffers from low productivity even compared to countries within the same development club, such as Kenya, India and South Africa, has contributed a mere 5% to GDP growth since 1990. Today Nigerians import the vast majority of the products they consume. They also import the machinery and high value inputs of the few products which they do produce, such as foam, steel pipes and pharmaceutical products. If Nigerians produced more and imported less (or developed favourable terms of trade) more of the money going into tills and ending up in the pockets of investors, entrepreneurs and workers abroad could be going to Nigerian workers, investors, entrepreneurs and the government. Tradable industries in general, and the manufacturing sector in particular, offer Nigerians the opportunity of generating employment, income and public revenues, which are all necessary for poverty reduction.
Nigeria’s 55 year struggle to boost its tradable industry is hampered by the country’s chronic ‘low-efficiency’ trap. Consider the following thought experiment to illustrate: take a successful exporting firm in China and place it and its managers and employees in Nigeria. It would not operate anywhere near as efficiently. Here’s why: In Nigeria the same firm would struggle to find serviced industrial land, having to build or fix its own slip roads, dig its own bore hole to access water, build its own sewers system, run its operations on costly diesel generators and hope the land it acquired is not claimed by somebody else, it would have to contend with often negotiated and opaque duplicity of taxes, inconsistent government regulations, a user-unfriendly bureaucracy, competition from counterfeit products produced locally or that enter the market illegally through poorly regulated international borders, an unreliable judiciary, poor quality roads connecting cities across the country with multiple check-points for informal bribes, slow clearing of imported intermediate goods at ports, tariffs on imported inputs which are not locally available, the risk of arbitrary increases in import tariffs for dubious reasons, double-digit interest rates and precarious access to finance and foreign exchange (Although this month, June 2016, the government floated the exchange rate).
These dysfunctional aspects of the business climate are well known and well researched by the World Bank’s ‘Doing Business’ reports which in 2016 ranks Nigeria 169 out of 189 countries in terms of ease of doing business. They are substantiated by our 77 interviews with business and civic leaders in Lagos, Kano and Port Harcourt, as part of DPU research for a DFID-funded project called Urbanization Research Nigeria (URN).
Yet the dysfunctionality of Nigeria’s economic development context runs much deeper than these ‘efficiency-related’ aspects of its urban and national contexts. Economic development theory highlights agglomeration economies, the home market effect (local demand) and productivity drivers as engines of industrial development and productivity growth, the essential conditions for income growth and quality jobs. Efficiency, while extremely important especially in contexts of cost-based competition, is just one of many development drivers urban regions and countries produce, and which firms draw on to compete.
The question is how can Nigeria break out of its chronic ‘low-efficiency trap’? While conventional wisdom would point to the need for good governance, this is not very useful advice in and of its own (it’s too obvious). Our research takes a different approach. Drawing from economic sociology, we argue that business-civic leadership has the potential of influencing policy and governance. Moreover, the perceptions and world views of the business community and business civic leadership can shape the formal institutions that govern them (see Figure 1). So we investigate the degree to which the private sector in Nigeria is organized, and the scope of their political attention.
Our research found the Nigerian business community, from small to large firms across different industries, to be highly organized. The peak business association which has been gaining power and influence since independence is the Manufacturing Association of Nigeria – MAN. The political attention of the organized private sector (OPS) focuses almost exclusively on efficiency-related aspects of the business climate. However, they overlook aspects of the urban context related to agglomeration economies and non-efficiency related productivity drivers; both indispensable features of functional cities for people and businesses.
These overlooked urban features include access to affordable, secure and serviced housing which are essential for human capital development; public transport which is indispensable for worker access to work places; education and skills development which are essential for human capital development and innovation; public R&D in related industries to support knowledge creation; firm- and industry-level support strategies for facilitating coordination and knowledge sharing; public space and cultural amenities to enable interaction, identity formation and innovation; and initiatives designed to bridge fragmented communities and develop appropriate and widely shared perceptions and world views in pursuit of social capital.
A failure to focus political attention on investing in functional cities risks locking Nigeria into a ‘low-productivity trap’, long after it has overcome its chronic ‘efficiency-crisis’.
This is a Blog about a recently submitted URN report to DFID. It will be publicly disseminated soon.