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Nigeria: Revitalising Manufacturing Hub of Africa – Role of Public Policy

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The Ford Foundation, TBWA and C&F Porter Novelli, in partnership with Nnewi Chamber of Commerce have begun a great and necessary initiative by sponsoring and organizing the first Nnewi Investment Summit to develop a pathway to the revitalization of Nnewi a major manufacturing hub in Nigeria and Africa. I am honored to have been asked to serve as the Keynote Speaker for this event.

Although I happen to be a “son of the soil” as an indigene of Nnewi, I was just as impressed by the sponsors/organizers of this summit, the Representative of the Presidency, Dr. Jumoke Oduwole, Special Adviser to the President on Ease on Doing Business, and the representatives of the Anambra State Government, by the creativity and drive of Nnewi manufacturers – against all odds, I must say – as we visited and toured various factories yesterday, the first day of this event.

Nnewi has been a famous commercial town since the 1920s, mainly for the generations of the lorry/bus transportation business (Ojukwu Transport, Ekene Dilichukwu, Chidi Ebere, Ekesons Transport, etc) and the auto and motorcycle spare parts trade. Nnewi indigenes also have a strong reputation for shrewdness and business savvy. Hence the popular phrase in Eastern Nigerian society: “Nnewi sense”.

In the 1970s and 1980s Nnewi businessmen began a process of backward integration- a shift from trade, mainly in motorcycle and auto spare parts, into industrial manufacturing. While this was partly forward-looking business sense, it was also a response to government policy challenges, especially politically-associated difficulties with access to foreign exchange for importation in the early 1980s when oil prices were depressed and Nigeria’s economy was still largely a statist, “command” one. (The situation today with forex access should leave us with a sense of deja vu, but I’ll get to that later on!)

Four decades later, alas, the promise and potential of manufacturing in Nnewi-Africa’s Taiwan- has not been fulfilled. Several industries are still standing, notably Innoson Vehicle Manufacturing (IVM), Cutix Plc (electric cables and electric switch gears), Ibeto Group (synthetic marble, brake pads and linings), Intercontinental Feed Mills (animal feed), Tummy Tummy (noodles), Chicason Industries and Ngobros Industries. But many other industries have shut down. Several manufacturers have resorted to importation, mainly from China, in order to survive as going concerns. These stresses are largely due to macroeconomic headwinds, crony-capitalist favoritism by successive Nigerian governments, and the absence of a policy-prioritization of Nnewi’s manufacturing potential.

Why Manufacturing (Still) Matters

Nigeria has made the consistent policy error of focusing largely on economic growth, but not enough effort has been made to achieve real human development and structural economic transformation. These are three different but interrelated concepts, and all three of them- economic growth, human development, and structural transformation- are necessary to achieve broad-based national prosperity.

Economic growth is the annual growth of the gross domestic product (GDP), the total sum of goods and services produced in a country in a given year. Human development is measured by factors such as access to quality healthcare, education and human capital (skills), availability of potable drinking water, and average life expectancy. Structural economic transformation means the diversification of an economy away from reliance on subsistence agriculture and raw natural resources such as crude oil and minerals to one in which complex, value added manufacturing and competitive export of such products makes a significant contribution to national output and to global manufacturing.

Africa has 70% of the world’s strategic minerals but contributes only 1% of global manufacturing. More than 50% of world trade is based on manufactured products, while just 7% is based on agriculture. The strength of manufacturing as a component of the economy is measured partly by the ratio of manufacturing to GDP, but also by the quantum of economic output of whatever manufacturing takes place in a given economy, the nature of other economic activities that contribute to GDP (e.g. services, tourism and others), and by the percentage of global manufacturing such national manufacturing constitutes.

Nigeria has a manufacturing to GDP ratio of only 10%, despite the efforts by the government to support manufacturing- which has been largely ineffective for reasons we will discuss shortly. This is a low score in our national context because agriculture makes up about 30% of GDP. Our agriculture is mostly subsistence agriculture and not innovation and value-added agriculture. Besides, Nigeria’s contribution to global manufacturing is statistically non-existent. It would have been for better if our manufacturing made up 30% of our GDP and agriculture made up 10%.

China is the world’s leader in manufacturing output ($2 trillion as of 2015 statistics), with manufacturing making up 27% of the country’s overall national output, and China has 20% of global manufacturing. The United States, with a manufacturing output of $1.8trillion, has manufacturing as 12% of its total national output, and that 12% of its national output is 18% of global manufacturing. South Korea, with $372 in manufacturing output (roughly Nigeria’s TOTAL GDP!) has that manufacturing output as 29% of its total economic output and 4% of global manufacturing.

Manufacturing matters. It has mattered for centuries of global economic history. It will continue to matter even with the rise of digital economies. We can therefore ignore the conventional wisdom that African countries should now skip aspiring to industrialization (on the assumption that its relative importance is declining) and jump to the “post-industrial” economy. Speaking realistically, we are not yet competing with the already most-industrialized countries, but rather are seeking to build a sustainable and sophisticated industrial economy relative to our current stages of growth. In that context we must has an industrial economy before we can have a post-industrial one. We therefore need effective industrial policy to promote manufacturing in places such as Nnewi. A populous country like Nigeria, with millions of jobless youth, also cannot afford not to have a strong manufacturing component in its economy; with special attention to the efficient productivity of labour.

As Mordi Englama and Adebusuyi have argued in “The Changing Structure of the Nigerian Economy (2010); “Industrialization tends to propel economic growth and quicken the achievement of structural transformation and diversification of economies. It enables a country utilize fully its factor endowments [labour, land, capital] and to depend less on the external sector for its growth and subsistence. Through industrial development, an economy gains the versatility and resilience that would enable it raise the standards of its people and cope with internal stress and strains.”

There is a general debate today about the pros and cons of industrial policy- government intervention in an organized manner to guide the economy by supporting investment in manufacturing and in targeted industries. Governments tend to utilize taxes, subsidies and investment incentives to do so.

Several industrialized countries in Europe and Asia, such as Germany, France, Sweden and Japan, as well as the “Tiger” economies of South Korea, Singapore and Taiwan made use of industrial policy. Despite frequent market failures and concerns today in some western intellectual circles about how compatible industrial policy can be with the ideological “purity” of market capitalism, industrial policy broadly worked for the western economies at a certain stage of their growth. Nigeria should be cautious about policy arguments by some Western economists to “Kick away the ladder” (to borrow the Cambridge university economist Ha-jun-Chang’s famous phrase) after climbing with it. There is no question my mind that Nigeria needs an effective industrial policy, and a comprehensive one.

Public Policy Mis-Steps and Nnewi’s Industrial Decline

Against the backdrop of the arguments above, I believe that Nigerian government policy and its inadequacies have affected Nnewi negatively as a manufacturing hub in the following ways. In discussing these policy missteps that require correction, we should divide this matter into, first, those that are predominantly political in nature, and second, those that are more of a failure of the technical public policy.

Political Factors

Manufacturing in Nnewi has suffered from Nigeria’s constitutional structure as a “federation” that is in reality more unitary than federal. Power and decision-making (including economic decision making) in the federal government under the 1999 constitution is over-centralized. It has therefore sucked up policy space for states in terms of potential policy approaches to manufacturing. Our constitutional structure also has led to politically-driven economic policy that focuses on the sharing of oil rents and created commodity dependency rather than a policy focus on creating a productive economy driven by manufacturing. Industrial policy, to the extent it exists, is thus half-hearted in reality- lots of lip service but little success in economic diversification over several decades.

The Land Use Act, while serving as exception to extreme centralization of economic decision-making power because it vests authority for land in state governors, nevertheless remains a complicating factor because it still vests all land in the hands of the government. This limits the efficient use of a major factor of production – land- by the private sector. There has been a tendency by the state governments to encourage the use of land for agriculture, less so for manufacturing.

Nnewi’s manufacturing has in the past been neglected by the federal government, and even state governments. But economic decisions that affect the viability of manufacturing, in particular rail and ports infrastructure, and the possibility of creating economic zones, are in Abuja’s hands. The federal government has consistently focused almost exclusively on Lagos in this context e.g. the creation of the Lekki Free Trade Zone, ports policy etc, and by-passed Nnewi, Africa’s Taiwan. There is, as well, room for greater patronage of Nnewi manufacturers such as Innoson Vehicle Manufacturing by both the federal governments and state governments in Nnewi.

Some manufacturers appear to be more loved and favoured by the federal government than others. This has resulted in a crony-capitalist approach to industrial policy in which waivers and access to foreign exchange in the past were given to specific business corporations rather than general policies for specific sectors, which would create a more level playing field. This is a politically induced policy failure. Nnewi manufacturers have been “political orphans” for far too long.

Policy Perspectives

There has been a generalised failure in public policy that affects prospects for the manufacturing industry in Nigeria generally, and in Nnewi in particular. That failure is the tendency to make economic policy in silos rather than in a comprehensive, joined up manner that considers linkages between various parts of the economy such as trade and fiscal policy, and infrastructure provision. Economic policy-making in Nigeria is also often ad hoc in its approach, and lacks philosophical and intellectual depth, realistic measurable targets, and effective monitoring and evaluation capacity.

Nigerian economic management places a misplaced priority on attracting foreign investment instead of supporting local investors such as Nnewi manufacturers. The benefits realised through foreign investment in Nigeria, however, have not been structural and thus not optimal. Our investment environment lacks structural location factors such as adequate infrastructure and skills. Our environment is also marked by high levels of political risk, insecurity, and weak rule of law.

A policy focus on import substitution, represented by “banns” on forex allocation for import, and protectionism that lacks strategic focus and is haphazardly implemented, has prevented Nigeria from building a competitive manufacturing export sector. It has more often than not created virtual monopolies for favored businessmen and women and their companies.

Closely coupled with this is the fundamental matter of how the naira and its value are managed in relation to foreign currencies. As things stand today, the subsidies on the value of the naira by the Central Bank of Nigeria’s “pump-action” injections of forex into the forex market (which has steeply deeply depleted Nigeria’s external reserves) will only continue to encourage an import-dependent economy rather than a competitive, manufactured goods export one that would favour Nnewi manufacturers amongst others. This keeps the forex market on steroids. The performance of that market is therefore artificial, just like that of an athlete taking performance enhancing drugs. This policy focus is misplaced, because it directly feeds into the structural imbalance of our national economy. Where the middle class can purchase relatively cheap dollars to train their children in schools abroad, there is little incentive for this class – which is where many of the policy-makers belong – to fix Nigeria’s educational system at home.

Observations from Other Economies

There are five factors that drive successful manufacturing economies. These are (a) Innovation, based on research and development (R&D); (b) Costs; (c) Investments in skilled workforces; (d) infrastructure; and (e) Industrial Financing.

Innovation: innovation is the secret of wealth of nations. The discovery of new inventions that improve the quality of life and new ways of doing things that are more efficient, coupled with the mass productions of inventions, is what has created the wealth of the industrialized world. Fortunately, Nnewi is well known for innovation in certain areas, especially in the area of vehicle parts. But this attribute has not been harnessed through systematic research and development by manufacturing companies in Nnewi because they struggle with an oppressive macroeconomic environment. It also requires stronger protections for intellectual property.

Costs: the efficiency of production or otherwise makes a fundamental difference to the profitability of manufacturing companies. While much of the costs in manufacturing in Nnewi come from weak infrastructure environments (in particular, electricity), a focus on a use of innovation and production- process efficiencies can help reduce costs

Workforce investments: manufacturing companies in competitive economies invest heavily in the technical capabilities of their workforce. This creates a competitive edge because skilled workforces increase the productivity of labour for any organization. Constant training of the workforce is therefore imperative.

Infrastructure: infrastructure support contributes directly to efficient production. This is a major cost factor that affects the viability of manufacturing in Nnewi.

Industrial financing: industrialisation in East Asia was boosted by favourable financing subsidies linked with appropriate control measures such as proof of valid export orders before companies could benefit from subsidized finance.

China

China’s industrialization began in the 1950s, following the establishment of Communist China in 1949. It was driven by state policy in its various phases. First, the Great Leap Forward driven by Mao Zedong. Six thousand advisors were brought into China from the Soviet Union to oversee 156 industrial projects. The explicit policy goal was to shift from an agrarian economy to agriculturization, and then industrialization. Although the Great Leap Forward was considered a failure because of large-scale famine, the members of Chinese employed in agriculture dropped, while those employed by industry grew.

In 1978, a decision by the central working committee of the Chinese Communist Party under the leadership of Deng Xiaoping began a cautious shift to capitalist production. The focus was on export expansion. Economic Development Zones were established in 14 of the largest coastal cities. Foreign capital was allowed into the country in 1977, and price controls were removed in the mid-80s. Today, China is the world’s leading manufacturer and the second largest economy.

South Korea

In the early 1960s the South Korean government adopted an outward-looking strategy with labour intensive manufactured exports in which the country had competitive advantage. There was a six-year Heavy and Chemical Industries (HCI) policy push to move into steel, non-ferrous metals and petrochemicals processing. This policy was supported by subsidies on inputs and discounted credit to participating firms, but not by outright protectionism such as import bans. South Korea’s chaebols, supported by government policy, created a supply chain economy for their smaller supplies. These smaller companies thrive because of the large conglomerates.

Ethiopia

The Ethiopian government’s economic management is based on a very conscious focus on industrial policy. Ethiopia has a conscious strategy to become an industrialized country and Africa’s manufacturing hub. Ethiopian strategy is based on agriculture-led industrialization, similar to China, in which the country leverages its agrarian economy into industrialization beginning with agriculture-based value-added manufacturing. The policy is also heavily export-market driven. Ethiopia’s infrastructure plan prioritizes road and other infrastructure construction to serve its industrial production economic zones. The country is also investing heavily in workforce skill development. Ethiopia’s industrialisation has faced significant challenges, but nonetheless is making progress when we consider the fact that industrialization takes time.

Lessons Learned

– A strong manufacturing economy requires competent government policy intervention, even if driven by the private sector.

– These policy interventions must be targeted, executed in phases and economic outcomes must be constantly monitored. As noted above, industrialization that changes the structure of a national economy takes time, practically 15-20 years at the very minimum. But the benefits are long-lasting because successful industrialization will break the back of poverty. South Korea has been one of the fastest countries to achieve this outcome. It takes more than statements of intentions to create a successful manufacturing hub. And the private sector alone cannot achieve it.