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Saturday, September 23, 2023

Growing the economy of Nigerian states to achieve their true potential

Nigeria, 60 years after independence, is at a crossroad and the economy needs urgent reforms. With oil and gas which accounts for about 10% of Nigeria GDP, 50% of government revenues and over 90% of export earnings with crude oil trading at less than $40. Now more than ever we need to reverse this overdependence on oil.

Muhammadu Buhari
President Muhammadu Buhari of Nigeria

With GDP growth of about 1.87% (year-on-year) with COVID-19 outbreak this is expected to fall further, and a population of over 180 million that has a growth rate of 2.59%, the Nigeria economy is not growing fast enough to create jobs that will carter for its teeming population. This is further evident in the poverty rate of 40.1% from the latest statistic from the Nigeria Bureau of Statistics (NBS). Proves that four in every 10 Nigerian is living below the poverty line.

To stop this trend from worsening further, the country needs policies that will drive the job creation and unleash the potential of Nigerians and can take more people out of poverty. And such policies should advocate greater fiscal federalism with states taking on more responsibility that will drive business growth, this would include the creation of industrial clusters in the states and the states adopting the Michael Portal Diamond model to implement policies that would enable them to create thriving enterprises within their states.

No state in Nigeria is not viable as a stand-alone entity with the resources that abound within them both human and natural that can be tapped into. Fiscal federalism creates an incentive for states to take up the responsibilities for wealth creation rather than wait for monthly hand-outs from Abuja.

Fiscal Federalism some may argue that if allowed given our experience of the civil war, that some states, given control over resources within their boundaries, may become so powerful and seek to secede from the union. However, if we are deliberate in ensuring that a high level of integration occurs within the country this will not be a problem. We would be looking at instances where even though oil is mined in the south-south it is refined in the north-west ensuring that the benefit of crude oil endowment is felt in the north-west and that as a country we add value to our natural resources before we export same, therefore creating wealth for our countrymen.

To achieve their mandate within the fiscal federalism structure which will include business attraction, retention and growth, and new business formation (Entrepreneurship) states will have to create industrial clusters within their states that will enable them to be productive and reduce their dependence on the centre.

According to Timothy Faley, the “Future of industrial cluster design methodology”, industrial clusters are the geographical aggregation of interconnected business and associated institution.

The impact of industry clusters was laid out in Michael E. Porter’s 1990 book The Competitive Advantage of Nations (Porter, 1990). Porter proposed that “Nations (states) are most likely to succeed in industries or industry segments where the national “diamond” is the most favourable.”

The four interrelated components of Porter’s diamond include 1. Factors Condition, 2. Strategy, Structure and Rivalry, 3. Demand Conditions, and 4. Related and Supporting Industries. Each will be subsequently discussed.

Factor Condition

Factors are what economists refer to as “factors of production”. These factors can be “basic” or “advanced” depending on their degree of specialisation. For the advance factor, this is not inherited but are created and the expectation is that states are best suited to drive this. States will be expected to drive the development of a skilled workforce and knowledge through investment in education. They are expected to create a conducive environment to attract capital and build the necessary infrastructure to ensure that business thrives in the state. A state can also have “disadvantaged” factors or a lack of basic factors (ex. reliable electrical system). The five broad factor categories include Human Resources, Physical Resources, Knowledge Resources, Capital Resources, and Infrastructure. Infrastructure can range from transportation systems to quality of life affecters.

Demand Conditions

This component addresses the state’s ability to access the demand, which may be local and/or global. Given the kickoff of Africa Continental Free Trade Agreement (AfCFTA) the African continental market with a population of over 1.3 billion has a size that can drive demand. If Nigeria states can complement each other they will be able to capture a lot of this demand. Take a case in hand of Abia State as a hub of the fashion business, with a state like Katsina supplying the raw material (such as hide and skin from cattle) for this industry. Combining this with the state’s factors position reflects how the state’s supply potential aligns with the total demand.

Related and Supporting Industries

This component of Porter’s Diamond addresses the entire local system. It provides insights as to the degree the firms and associated institutions are complementary. This component, combined with the factors component, yields insight as to the conduciveness of the local environment to support a specific industry cluster.

Strategy, Structure and Rivalry

This component includes the firm’s aspiration. Do they have global intent or are they satisfied serving the local market? This component also addresses the rivalry among the firms. Firms that leverage similar factors can be rivalrous, if serving the same market, or complementary if serving different markets. A healthy mix of both, according to Porter, spurs innovation and growth. Combining this with the factors component reflects how the states can compete globally.

In addition to this are the roles to be played by two additional factors which are government policy and chance. Government policy influence/create and upgrade factors such as education and training, the government could serve as demand for initial products from the local firm. The chance factor includes oil shock and the COVID-19 pandemic which has presented an opportunity for us to look inward.

In conclusion, the best time to plant the seed of Nigeria industrial revolution was 60 years ago, the second-best time is now, we need to get every state in Nigeria working at full capacity as a catalyst of growth, with healthy competition among states on how best to push the frontier of Nigeria industrialisation for the benefit of our citizens. Rather than only Abuja working for Nigerians, we need to leverage the uniqueness of each state with a vision of not exporting any item until we have added value to it.

By Michael C. Abah (Accountant, Banker, IT Professional; macabah2002@yahoo.com)

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