What would a post-oil Nigeria look like? Nigeria has been an unproductive petro-state for so long that like former presidential candidate Olasubomi Okeowo, many are beginning to wonder, “What can Nigeria possibly produce?” But that is the wrong question. Nigeria already produces many things besides oil - oil accounts for less than 10% of Nigeria’s GDP. The more relevant question is “What else can Nigeria produce productively?” And until the non-oil sector produces an answer to this, we will continue to be cursed by oil.
Why Productivity is Important
In Part I, we made the point that the Nigerian economy's dependence on oil stems from its large share of government revenue and exports. Therefore, to reduce this dependence, the non-oil sectors of the economy will have to provide increased government and export revenue. One way to boost the non-oil sectors' contributions is to make them more productive.
Nigeria's tax to GDP ratio of 6%, which is among the lowest in the world, partly explains why its non-oil government revenue is so paltry. One of the reasons for this is a high rate of tax avoidance in the country - only 14 million people out of Nigeria's labour force of over 80 million pay taxes. Tax evaders can get away with not paying taxes because by and large, the government does not care. It's much easier to collect oil royalties.
Another reason for Nigeria's low tax to GDP ratio is that much of the nation's economic activity is so unproductive that it does not generate enough wages or profits that taxes can be levied. 41% of Nigeria's economic activity occurs in the informal sector, and although this is an imperfect proxy, it indicates how unproductive Nigeria's businesses are. Studies show that a large informal sector is a drag on productivity and typically depresses wages. This is on top of the informal sector's obvious ability to avoid taxes.
How Can Nigeria Become More Productive?
Increasing productivity will require the Nigerian economy to make better use of its inputs like labour. Due to decades of underinvestment in human capital, labour productivity in Nigeria is extremely low by international standards. This is no surprise considering that there are approximately 10.5 million out of school children in Nigeria, and even those who are in school often receive a substandard education. Add this to the little attention the government pays to a healthy workforce.
Nigeria’s physical capital is among the worst in the world. Nigeria ranks 127th and 136th out of 137 countries for quality of roads and electricity respectively. And past budgets show why this is the case. Between 2010 and 2017, capital expenditure was never higher than 23% of the total budget.
For Nigeria to increase its productivity, it will have to allocate its resources better than it has done in the past. Rather than directing the majority of its resources towards its bloated civil service, the government must invest in educating its labour force and improving their health; it must supply them with electricity to enable them to produce goods and services, and build roads and railways that will transport them and the goods they produce efficiently.
Hope for Nigeria
Nigeria has many advantages that leave it well-placed to thrive in a post-oil world. Surprisingly, one of Nigeria’s major advantages going into a post-oil world is oil – Nigeria’s oil wealth, if managed properly, can be invested in increasing productivity. Oil-rich countries such as Norway and the UAE have used their oil wealth to develop other thriving economic sectors.
Another is natural gas. As the world aims to reduce its oil consumption, gas – which is less polluting than oil – is expected to be a “bridge” between oil and cleaner sources of energy. Nigeria has the 10th highest proved reserves of natural gas in the world, and with the prospect of peak oil demand looming, natural gas revenues could also serve as a bridge between oil-driven growth and productivity-driven growth. However, there is a risk that gas will become the new oil. One way to avoid this would be to set aside most of the revenues from gas in a sovereign wealth fund.
But Nigeria’s biggest advantage is its rumoured 180 million citizens. With labour costs rising in the major manufacturing centres in Asia, Nigeria’s large, young, and rapidly growing population means that if it can fix its infrastructure issues and adequately train its labour force, it could become the world’s next manufacturing centre.
However, this would not be a sustainable way to grow Nigeria's economy either. Given recent advances in robotics, additive manufacturing, and artificial intelligence, Nigeria's labour-cost advantage in manufacturing will become less important in future. But this will not diminish the importance of a well-educated labour force - instead, it is likely to increase it. As new technologies are reshaping the global economy, a highly educated and innovative labour force will be needed to create and operate these technologies, and provide the services that the world's people will need.
Development is about choices. Nigeria has chosen to spend wastefully in the past; if it is to survive in the coming post-oil future, it cannot afford to do so in the future.