Nigeria is currently facing severe economic challenges, as indicated by several key indicators. The inflation rate, which stands at approximately 33.88% as of October 2024, is a result of persistent supply chain disruptions, fuel subsidy removal, budgetary constraints, and currency devaluation. The national unemployment rate, which hit 40% in 2023, particularly among the youth, underscores the profound structural difficulties within the labour sector. However, amidst these challenges, Nigeria’s manufacturing sector presents a ray of hope. With the right policies and investments, this sector can play a pivotal role in Nigeria’s economic revitalisation.
Meanwhile, the naira’s ongoing devaluation has exacerbated economic troubles, with its value plummeting from N365 per U.S. dollar in 2019 to nearly N1000 by late 2023 and further deteriorating to approximately N1740 by late 2024. This steep decline has escalated the cost of imports, placing immense pressure on businesses reliant on foreign supplies and straining consumer purchasing power.
Nigeria’s national debt rose from $83.88 billion in 2019 to over $91.3 billion in 2024, straining fiscal capacity and limiting investment in critical sectors. The economy remains heavily reliant on crude oil, which accounted for about 90% of export receipts from 2014 to 2024, making it vulnerable to global oil price fluctuations. The COVID-19 pandemic in 2020 caused a 50% drop in government revenue, exposing the risks of overreliance on oil. In Q4 2023, Nigeria faced a N1.41 trillion trade deficit due to low exports and high imports. Diversification is urgently needed to enhance economic resilience and growth prospects.
Learning from the past: Other nations that were in distress and the path they followed
China’s experience is a compelling case study for examining the economic transformation of nations that have faced challenges like Nigeria’s.
In 1978, China’s GDP per capita was approximately $340, while Nigeria’s Gross Domestic Product per capita stood at $532.22, reflecting a more prosperous economic condition in Nigeria then. However, recognising the need for change, Chinese leadership undertook several critical reforms that catalysed their economic growth:
- Opening up to the world: China embraced liberalisation, allowing greater integration into the global economy.
- Developing the private economy: The government fostered the growth of the private sector and actively encouraged industrialisation, leading to increased productivity and innovation.
- Establishing special economic zones: China created special economic zones dedicated to manufacturing, attracting domestic and foreign investments.
- Employment growth: Between 1980 and 1985, approximately 10 million young people found factory employment, significantly contributing to the workforce and economic output.
- Infrastructure development: China invested heavily in infrastructure, constructing high-speed railways and adding over 10,000 kilometres to its rail network, which enhanced connectivity and facilitated trade. Between 1980 and 2013, freight turnover and passenger traffic increased fivefold. Sevenfold.
- Tripling industrial output: From 1978 to 1988, China tripled its industrial output, demonstrating the effectiveness of its industrial policies.
- Gross Domestic Product per capita growth: China’s Gross Domestic Product per capita surged from $340 in 1978 to $9,732 in 2018, showcasing significant economic progress.
- Rise of global enterprises: The nation transformed from having no top global enterprises in 1978 to having 115 out of the top 500 global enterprises by 2018.
- Foreign investment: By 2018, more than 60,000 foreign-invested manufacturing enterprises had been established in China, reflecting the country’s attractiveness as an investment destination.
China’s strategic reforms and focus on industrialisation and global integration have positioned it as a leading global economy. Another success story of amazing transformation is the case of South Korea.
South Korea’s economic journey offers valuable insights into successful export-led growth strategies, particularly compared to Nigeria during similar periods.
In three decades (1960-1980), South Korea moved from a subsistence, agrarian economy to a modern industrial power.
In 1960, South Korea’s Gross Domestic Product per capita was approximately $100, while Nigeria’s was significantly higher at $291.06. By 1970, South Korea’s Gross Domestic Product per capita had risen to about $300, whereas Nigeria’s was $344.27, continuing to reflect a more prosperous economic condition for Nigeria at that time.
To transform its economy, South Korea implemented several key strategies:
- Export-led growth: In 1961, South Korea focused on boosting exports, particularly manufacturing and technology. A key strategy was the establishment of large industrial conglomerates and targeted export incentives.
- Economic liberalisation: The government introduced policies to liberalise the economy, encouraging foreign investment and fostering competition within domestic markets. South Korean policymakers developed a set of macroeconomic policies designed to influence the overall environment for industrial activities.
- Investment in education and technology: South Korea made substantial investments in education and technology, recognising the importance of a skilled workforce and innovative capabilities for sustaining economic growth.
- Infrastructure development: Between 1960 and 1970, most public funds were allocated to infrastructure projects, including highways, port facilities, electricity, railways, transportation in general, and communication. Between 1977 and 1980, the share of investment in infrastructure projects reached as high as 76% of total public sector investment.
- Power sector investment: The South Korean government invested significantly in the power sector. The Korea Electric Power Corporation deliberately expanded its generating capacity, which was vital for supporting industrial growth in the 1980s.
- Foreign exchange stability: A critical step taken by the leaders of South Korea during the economic reforms was establishing price-setting mechanisms for foreign exchange and interest rates.
Through these strategic initiatives, South Korea transitioned from a low-income economy to one of the world’s leading economies.
Lessons from China and South Korea
The economic transformations of China and South Korea provide vital lessons for Nigeria as it grapples with persistent economic challenges. Both countries successfully transitioned from developing to advanced economies through strategic policy reforms and a focus on industrialisation, particularly export-led growth. Nigeria can draw on these experiences to forge a path toward sustainable economic development. To appreciate the danger of dependence on a single export product, crude oil, let’s review sectoral contributions to GDP over time.
Sectoral contributions to Nigeria’s GDP
Over the past decade, Nigeria’s economy has faced significant sectoral imbalances, emphasising the need for diversification. The oil and gas sector, historically a major contributor, saw its share of Gross Domestic Product decline from 9% in 2013 to 7% by 2023, highlighting the volatility of an oil-dependent economy. In contrast, the services sector has expanded significantly, increasing its Gross Domestic Product contribution from 49% in 2013 to over 54% by 2023. Telecommunications, trade, and finance have driven this growth, establishing services as a key driver of economic activity.
The manufacturing sector, however, has experienced stagnation, with Gross Domestic Product contributions fluctuating between 8% and 10%. As of early 2024, its share had modestly increased to 9.98%, reflecting persistent structural challenges and untapped potential.
Diversification as a critical path
Diversification is essential for Nigeria’s sustained economic growth. Lessons from countries like China and South Korea underline the importance of reducing reliance on a mono-product economy. Economic diversification can help mitigate risks associated with oil price volatility and strengthen resilience to external shocks. By prioritising the manufacturing sector and focusing on value addition, Nigeria can transition from an extraction-based economy to one characterised by industrialisation and sustainable growth.
Export-driven manufacturing as means of spurring growth
Export-driven manufacturing can significantly stimulate economic growth, as seen in the case of South Korea. Export-driven manufacturing offers unique economic attributes that are not common with other sectors:
- Employment opportunities: The manufacturing sector is highly labour-absorbing and can create direct employment for machine operators, technicians, and engineers. The sector can also indirectly employ supply chain actors in other sectors of the economy, such as raw materials suppliers, logistics and transportation, farmers, miners, etc.
- Government revenue generation: Manufacturing helps expand the tax base (number of taxable people and entities) and tax returns as taxes are paid by manufacturers and workers, ultimately increasing the nation’s revenue.
- Economic diversification and reduced oil dependency: The manufacturing sector can potentially reduce the economy’s dependence on oil and insulate the economy from the distasteful fiscal/budgetary risks associated with adverse oil price shocks. Export-orientated manufacturing can strengthen economic resilience by alleviating vulnerabilities and promoting sustainable development.
- Stimulation of favourable trade balances: By promoting exports and meeting local product demand, the manufacturing sector can help reduce/eliminate persistent trade deficit problems and improve the nation’s trade balance, strengthening the economy’s competitiveness.
- Infrastructural and human capacity development: Developing the manufacturing sector requires significant investments (big push) to close infrastructural gaps. These investments are usually channelled into infrastructures like power supply, rail, transport infrastructure, communication networks, and other supporting facilities.
- The success of export-orientated manufacturing: As demonstrated by South Korea, export-driven manufacturing can achieve significantly higher growth rates than those dependent on import substitution.
Requirements for export-driven manufacturing
Nigeria can successfully replicate the “Korean” model if she is ready to do the work. It will require a clear vision, leadership, investment, and a change of trajectory. Some basics need to be in place for this model to work for us.
Development of export support infrastructure
A reliable and efficient infrastructure network is essential for the growth of export-orientated manufacturing. Key areas that require investment include an effective transportation network encompassing railways, roads, seaports, and airports. Additionally, developing electronic platforms to streamline export clearance at seaports and airports is crucial.
Access to financing for export-orientated manufacturing: For export-led manufacturing to flourish, affordable financing options must be readily available. No one can effectively compete in the manufacturing sector while borrowing at a 30% interest rate. As of November 2024, the CBN interest rate stood at 27.50%; when factoring in bank charges, the minimum borrowing interest rate reaches 30%.
Foreign exchange and monetary stability: Exchange rate stability is crucial for Nigerian manufacturers who rely heavily on foreign raw materials and machinery. The government must take all necessary measures to curb inflation and achieve foreign exchange stability, enabling manufacturers to gain confidence and invest in the economy.
Ease of doing business initiative: A supportive regulatory environment is essential for the manufacturing sector. In 2016, Nigeria established the Presidential Enabling Business Environment Council to reduce bureaucratic obstacles and enhance investor confidence. Although there has been some progress, significant regulatory and bureaucratic challenges persist. The government must address overlapping regulations, complex compliance requirements, excessive regulatory fees, frequent policy shifts, exchange rate volatility, and insecurity.
Market access and trade agreements: Nigeria must seek to establish trade agreements that facilitate access to international markets. Engaging in regional and global trade partnerships can open new avenues for Nigerian manufacturers, allowing them to export their products more efficiently. Additionally, the government should promote initiatives that help local manufacturers meet international quality standards and certifications.
Reliable and efficient power: Manufacturing processes depend heavily on electricity for machinery and production lines. The lack of a consistent and dependable power supply poses a significant challenge for manufacturing in Nigeria. In 2023, Singapore, with a population of 5.9 million, produced approximately 57 Terawatt hour of electricity, while Nigeria, with a population of 220 million, generated around 30 TWh. Singapore’s electricity output far exceeds Nigeria’s, raising concerns about Nigeria’s ability to compete as a manufacturing hub.
Incentives for investment in export-orientated manufacturing: Just as South Korea, Taiwan, and China have done at different times, Nigeria can introduce a range of incentives to promote export-driven manufacturing. Potential incentives could include export subsidies to lower production costs and manufacture-in-bond schemes allowing duty-free imports of specialised raw materials in export-orientated production. Additionally, establishing Export Processing Zones with tax incentives and favourable regulations tailored for export-focused manufacturing can further enhance this sector’s growth.
Final word
By adopting these strategies and learning from China’s and South Korea’s experiences, Nigeria can create a diversified, export-driven economy that promotes sustainable growth and prosperity.
Manufactured non-oil exports have proven to be a powerful tool for diversifying the economy and reducing Nigeria’s vulnerability to fluctuations in oil prices. However, to achieve significant export diversification through the manufacturing sector, it is essential to rethink current initiatives and realign existing frameworks.
This comprehensive approach must address the policy and regulatory environment, infrastructure, financing, required skillsets, innovation, market access, sustainability, environmental impact, and the broader economic and social implications. By doing so, Nigeria can position itself for a more resilient and prosperous future.
This is an excerpt from the keynote lecture delivered at the Annual General Meeting of the Manufacturers Association of Nigeria, Eastern Zone in Enugu on Thursday, November 28, 2024.