NIGERIA'S FREE MARKET AND HER FREE FALL FROM INDUSTRIALIZATION - TRADE AND INDUSTRIAL STRATEGIES FOR A QUANTUM LEAP
Is Nigeria’s free market responsible for her free fall from industrialization? It is a question that this article will seek to address in part. The truth, however, is that we are drifting farther away from industrialization. I’m typing this article on an HP laptop assembled somewhere in Asia. The laptop is running on an Operating System designed by the American company, Microsoft. There are also some other installed application software designed in countries such as USA, UK, Canada, India and China, all running on my laptop. The pair of shoes, trouser, shirt and wrist watch I’m wearing were all proudly made in different parts of Europe. Lest I forget, I ate wheat bread this morning, I’m sure the wheat was imported; I even picked my teeth this morning after eating, with a tooth pick not made in Nigeria (yes, that tiny piece of wood sharpened at both ends was imported); drove to work in a car made somewhere in Asia; even the fuel in my car was imported. More than 70% of my income is spent on foreign goods; enriching their economy at the expense of ours. Would you blame me or other Nigerians alike for not patronizing made in Nigeria goods? Of course not – when you give any buyer freedom to choose, he’ll most certainly choose what is available, that is of good price and of good quality. Our markets are flooded with lots of products and alternatives, most of which were not made in Nigeria, so the buyers are left with little or no choice. Free Market! But, it’s not free. In fact, it’s proved very expensive. We have paid with the life of our industries.
Rewind to the Nigeria of the 80s, when I was in primary school. My father was a school Principal and we had two Peugeot cars – a 504 salon and a station wagon, that took us to and fro school just across the road. Those cars were assembled in Nigeria by Peugeot Automobile Nigeria (PAN), and powered by Petrol refined in Nigeria. For every car bought, the proceeds trickled down several homes – from the craftsmen to the technicians, technologists, engineers, sales representatives and managers. In those assembly lines, we had indigenous painters, welders, fitters, auto-electricians, etc. Back then, one of my uncles drove a Volkswagen Beetle also assembled in Nigeria. Government institutions and offices ensured that only vehicles assembled in Nigeria were procured. That explains why Peugeot was almost synonymous with government officials. As a primary school pupil, my school uniform was made from Nigerian textiles; my belt, sandals, bags, pencil, etc, where all made in Nigeria. I need not remind you of the positive implications to the Nigerian economy. Think of the many Nigerians that worked in the production line of the assembly plants; the many families that benefitted from the textile mills; and the income earned by the nation. Now, that is supposed to be what we should call our humble beginning from which we were supposed to have made steady progress. Today, we are experiencing a free fall, a steep decline; the industries have closed shops, jobs have been lost, leaving the economy solely dependent on crude oil. I’m not going to do an inquest into what happened, I’ll rather dwell on the way forward.
To accelerate the pace of industrialization, the government must put in place certain deliberate policies. Policies that promote enterprise creation, engender their growth and provoke innovation through the creation and application of science and technology. There are several ways this can be done, but we will concentrate more on trade policies and protectionist strategies of government. There is hardly any country, that is now industrialized, that did not at some point enact infant industry protection policies or other protectionist strategies. From UK to USA, Malaysia to China, these countries have at one time or the other enacted policies that offered some form of trade restriction and infant industry protection until such industries were strong enough to compete with international competitors before the market is wholly liberalized. George Friedrich List (1856) once said that: "Political economy, in matters of international commerce, must draw its lessons from experience." Therefore, in proffering a solution, we will have to draw our lessons from the experience of other industrialized nations. First we look at the early industrialized countries and later we x-ray the late “industrializers”. Join me as we take a quick trip around the world.
Let’s start on the Prime Meridian with our colonial masters, the Great Britain. It is true that the industrial revolution aided the rapid industrialization of the Great Britain. It is also true that other factors such as development of infrastructure, capital accumulation, scientific advancement, institutional development, reduction of interest rates and the availability of credit lines from institutions such as the Bank of England, etc all contributed to the rapid industrialization of Great Britain. However, the deliberate introduction of restrictive policies by the government towards protecting infant industries in the country, that could not compete with their foreign counterparts also played a great role. It is also noteworthy to mention that their protection strategies were selective. Thus they had policies that protected textiles (wool, cotton and silk), metals, ship building, and fisheries. A specific example was the prohibition of importation (or consumption) of silk and cotton from India, which at that time had comparative advantages in that sector over Great Britain. Other policies such as the Act of Navigation in 1651, whose aim was to protect the ship building industry, the Corn Bounty Act of 1614 and the Corn Law of 1815 (aim was to protect the agricultural sector), are examples of infant industry protection. It took Great Britain almost two centuries to completely liberalize their market; by then their industries were fully grown and mature to battle and compete with their competitors across the globe. Today, Team GB is out there preaching that you open up your economy so they can push in their finished products.
Let’s move across the Atlantic and find out how Uncle Sam did his. Today, the United States is seen as a strong advocate of free market, but it was never the case back then when they were on the path to industrialization. The government at several times, either directly or indirectly put in place policies that protected infant industries. As early as 1789, the United States deliberately imposed duties on 38 items, obviously to protect the local industries. Several other tariff acts were subsequently passed, most of which imposed import duties on certain other commodities and outright ban of exportation of certain others to protect infant industries. Industries such as textiles, glass, iron, etc were beneficiaries to this policy. A particular example was in 1875 when tariffs of manufactured goods were about 250% more than their counter parts in Europe. It is noteworthy to mention that the government also promoted industrialization through direct investment in infrastructure, encouragement of technological innovation, funding and direct involvement in Research and Development, etc. When the American industries were mature and strong enough to face robust international competition, then they relaxed the protectionist policies. Today, Uncle Sam is out there preaching liberalization and free trade - Open your gates wide so they can flood your country with their finished product
Let’s move to the continent of Asia, destination Malaysia. Malaysia, a country that got independence from Britain just about three years before Nigeria’s, has risen from a country known to be a supplier of raw materials to industrialized countries to one that exports finished and processed products. They were known to be exporters of primary products such as tin, rubber, palm oil (which they got the seedlings from Nigeria), timber, etc. However, following a series of deliberate policies from the government, the country has become industrialized, with a range of export-oriented manufacturing industries. By 1990, 30% of exports consisted of manufactured goods ranging from electrical and electronics products, rubber products, textiles, etc. We all know the story of how Malaysia came to Nigeria less than 4 decades ago to take palm seedlings, today that country produces more than 30 finished products from that same palm tree. Now, how did they achieve this? Malaysia’s main policy thrust was built around creating incentives for Foreign Direct Investment, while ensuring domestic participation. The Import Substitution (IS) strategy led to the Pioneer Ordinance plan of 1958 with incentives such as a 5 year tax holiday to companies that came to invest in Malaysia. Other legislations such as Investment Incentives Act of 1968, Free Trade Zone Act of 1971, and the Promotion of Incentives Act of 1986 were also crucial in the promotion of Foreign Direct Investment. Thus, more than half the capital invested in Malaysia came from offshore. The Malaysian authorities saw the need to encourage heavy industries and this led to the setting up of the Heavy Industries Corporation of Malaysia (HICOM), a public sector company put together in 1980 to partner foreign companies to set up industries in sectors such as machinery and equipment, petrochemicals, iron, steel, building materials, etc. In less than a decade, of the 867 corporate enterprises in the country, over a third of them were involved in manufacturing. In 1990, the Malaysian government came up with an economic blue print tagged Vision 2020 with a view to making Malaysia a developed and industrialized country by the year 2020. In summary, Malaysia is one country who has ensured economic prosperity and a steady growth in industrialization as a result of carefully thought out policies and strategies. The result is there for all to see: Malaysia’s manufacturing sector accounts for about 30% of the country’s GDP and 76% of its exports. Impressive, if you need my opinion!
Still in the Asian continent, there are lots of examples to draw from. For example, the Korean government at the inception of the first five-year Economic Development plan in 1962, adopted export promotion strategies as against Import Substitution (IS) policy. Various incentives were put in place to support exporting firms. Such incentives included relaxed tax regimes and favourable treatment in credit allocation. The Korean government also adopted policies that will protect the Heavy Industries and the Chemical Industries. Singapore offers us another case study. Upon separation from Malaysia, the country swiftly shifted to an export-driven industrialization policy, reducing trade barriers and actively seeking FDI. The result was that between 1965 and 1979, Singapore had an average growth rate of 10%. By 2004, that nation that got her independence 5 years after Nigeria, became the 15th largest trading nation in the world. Singapore is classified among the New Industrialized States (NIS), which essentially, are countries that went through rapid industrialization between 1960 and 1e980. Within this period, through their deliberate trade policies and successes with FDI, the country was able to attract technology transfers from the developed world. The country has since grown to have a vibrant manufacturing sector, contributing 28% to the GDP and providing employment to 21.6% of the workforce as at 1999.
Now back to Nigeria. According to the National Bureau of statistics, the manufacturing sector only contributed 3.51% to the GDP for the 3rd quarter of 2011. This is quite pathetic for a nation that got her independence 52 years ago. If the sector contributes only 3.51% to the GDP, then you can imagine what little contribution, if there is any, it makes to the foreign income coffers. I bet, negligible! But, we can start a process to halt the free fall. Let me start by saying that although I did not intend to discuss infrastructural development, it will be a disservice to do an article on industrialization without discussing the need for infrastructural development. Infrastructure (Power, Roads, Rail, etc) remains the back bone of any quest for industrialization. It is the foundation upon which industrialization thrives. Thus, whatever policies I recommend here will be futile if the government does not build good roads, ensure efficient rail system, fix power system, ensure the ports are efficient, encourage Research and Development, build good schools, ensure peace and security, etc. That said, let’s proceed.
We have looked at several policies in this journey - from import substitution policies to Export-Oriented Industrialization. However, it's good to classify these under two headings: Policies that initiate industrialization and those that ensures the continuation of the process after the country has reached an appreciable growth extent. Due to our highly deplorable and despicable state, we shall dwell more on the former than the latter since we fall in that category. Now, we need to note some certain basic truths that will help guide our policy formulation:
(1) The pressure of globalization and influence of Organizations such as WTO, World Bank and IMF will not give us the luxury of the time and space enjoyed by the other countries we have reviewed. We must therefore build momentum and resilience to withstand such resistance when they come.
(2) Our studies have also revealed that the time taken to industrialize has reduced overtime as "developing" countries has leveraged on technological advancements elsewhere to fast track their pace of industrialization. Therefore whatever policies to be enforced must seek to take advantage of such technological advancements elsewhere to ensure an even faster pace of growth. We cannot industrialize in isolation!
(3) The above policies that seemed to have worked effectively will not necessarily give us same level of effectiveness because of our peculiar terrain and unique circumstances. We have to evolve our own success formula just like they did theirs.
Now let’s start by looking at the present trade and industrial policies, most of which were highlighted in the President’s budget speech 2012.
a) Liberalization and privatization of the power sector to attract private and foreign investors.
b) The set up of the Nigeria Bulk Electricity Trading Plc (NBET) - the Federal Government's agent in power purchase agreement, is expected to provide guarantees to boost investor confidence in power generation.
c) In collaboration with other development partners, government will provide a credit risk management initiative to provide Partial Risk Guarantees (PRG) to private investors in respect of payment.
d) Government has provided further incentive for the power sector by ensuring power equipment and machinery enjoy zero import duty.
e) The proposed liberalization of the downstream sector of the petroleum industry
f) Removal of unnecessary bureaucracies at the ports
g) Facilitation of access to credit by agriculturists through the sharing of risk with the banking sector by guaranteeing 70% of the principal of all loans made for the supply of seeds and fertilizers.
h) Subsidization of interest rate on agricultural loans to bring it down from 15% to 7%.
i) Zero import duty on agricultural machinery like tractors, etc
j) Zero import duty for all equipment for high quality cassava flour and composite flour blending. Also, a tax incentive of a 12% rebate will be given to bakeries that comply with the mandate to replace wheat flour with high quality cassava flour.
k) To boost consumption of local alternatives, the following measures were put in place: wheat flour to attract a levy of 65% to bring the effective duty to 100%; wheat grain to attract a levy of 15% to bring the effective duty to 20%; Brown rice to attract a levy of 25% to bring the effective duty to 30%; imported polished rice will attract a levy of 40% to bring the effective duty to 50% which will be further increased to 100% effective 31st December 2012.
l) Also, in 2010 the CBN announced a bail out of N500 Billion for the industry sector, allowing a single obligor to assess as much as N1 Billion Naira.
In principle, the above policies are quite laudable, especially for the Agricultural and Power Sector. However, history shows most of our problems has always been as a result of poor implementation. Already, there have been lots of complaints that the conditions to access the various credit lines are quite impractical and unfriendly. We eagerly await the proper implementation of these. Also, the above only seems to address only agriculture and power sectors respectively. Little was done in other areas to boost industrialization. I have summarized my own recommendations below:
1. At some stage, we must adopt Import Substitution (IS), focus on labour intensive industries as against capital intensive industries. Policies must be such that discourage industry from dependency on capital goods importation, and encourage local production of capital goods.
2. We must intensify efforts to attract Foreign Direct Investment in the manufacturing sector. We need to leverage on the technological advancement of the developed world by giving incentives for technology transfer. However, I will not fail to mention that while FDI-based industrialization can be a short cut, it is however not a panacea for industrialization and does not completely tackle the national challenge of industrialization. It is however a safe and fast way to jump start industrialization.
3. Manufacturers must also ensure that at no time should the quality of finished products be compromised. Institutions like the Standard Organization of Nigeria (SON) must be empowered to ensure compliance to standards. Nobody is going to patronize a sub-standard product all because of patriotism. We must ensure that we give our people value for their money to boost their confidence in made in Nigeria goods.
4. Liberalization of the downstream sector of the petroleum industry. This will encourage the set up of more refineries, petrochemical plants, provide more jobs and save the country what hitherto was paid to offshore companies for importation of refined products.
5. Encourage industries such as automobile companies to set up assembly plants. This can be achieved through provision of tax holidays for the companies that comply; patronizing of vehicles assembled in Nigeria; and increase import duties to cars not assembled in Nigeria. Kia, Hyundai, Honda, Toyota and others sell hundreds of thousands of brand new cars to Nigerians every year. I do not see any reason why we cannot get them to set up assembly plants in Nigeria instead of dumping the finished products on us and transferring all of the proceeds and profits to their home countries. If the government could get PAN and Volkswagen to do this in the 70s and 80s, I believe we can do it with more success. HP, Dell, Compaq and others export millions of computers and other ICT infrastructures to Nigeria annually. I do not see any reason why we cannot get them to set up assembly plants in Nigeria. After all, most of these products are of American origin but assembled somewhere in Asia for onward shipment to Nigeria. We can make the conditions as attractive as the Asians did to incentivize the set up of the assembly plants here. Nokia, Research in Motion (RIM), Samsung, Sony Ericsson and others sell millions of phones to Nigerians annually. I do not see any reason why we cannot get them to set up assembly plants in Nigeria.
6. Government remains a big consumer; therefore they must take the lead in patronizing locally made goods. For example, we have local computer brands (assembled in Nigeria), government should make it mandatory for all Ministries, Departments and Agencies of government to patronize them. This will encourage more investors for that industry.
7. There are also other ways to boost industrialization such as the reduction in interest rate with the resultant effect of stimulating investment. The loans for the manufacturing sector announced by government must be made accessible so that industries can make use of it.
8. We must also imbibe the culture of patronizing our local products. It will not make you any less sophisticated than you intend to be if you patronize a made in Nigeria product. You can still wear that Nigerian fabric, with a made in Nigerian slippers and a Rolex watch, it won’t make you look any less classy.
9. Government should out rightly ban certain products. For example, I do not see any reason why tooth picks will still find a way across our border posts. If we cannot produce them locally, then we don’t deserve to have our teeth “picked”. Let the trapped particle in your teeth remain there, by the time it causes you some discomfort, then we’ll have no choice than to become creative and innovative.
Written By Robinson Tombari Sibe