COLUMNS - 26 APR 2018

Should Nigeria Invest in People or Infrastructure?

Should Nigeria Invest in People or Infrastructure?
Investing in human capital would mean investing in education, but that may not be the best route for Nigeria.

Earlier this year, Bill Gates suggested that Nigeria does not invest enough in people, i.e. in health and education. A look at Nigeria's Human Development Index backs up his claim; we rank 152 out of 188 countries, behind Ghana (139) and South Africa (119). The expected years of schooling for the average child is ten years, and adult life expectancy is 53 years, almost a decade below the average in low-income countries. Given that education and health expenditure represent only 7% and 4% of the proposed 2018 federal budget, it is hard to disagree with Gates' assessment.

The world's 2nd richest man suggested that Nigeria's focus on infrastructure came at the cost of human capital. But the infrastructure picture is equally gloomy. Each year, the average South African enjoys 35 times as much electricity as a Nigerian, and the density of Nigeria's road network is one-ninth of India's. Infrastructure stock is less than 25% of GDP, far below international benchmarks of 70 percent; yet, public investment in infrastructure from 2007 and 2017 was about 3.6% of GDP, lower than the African average of 4.3%.

Taken together, it appears that Nigeria's problem is not one of misplaced priorities. The government has not been over-investing in physical capital at the expense of human capital; it has been under-investing in both. We need to improve both, but scarce resources force us to choose one (project) over another. On what basis should we make this choice?

We can examine how physical and human capital investments stack up in terms of speed and feasibility, level of government intervention needed, and economic growth potential.

 

Fiscally Feasible

When choosing between investment options, a reasonable question to ask would be: what can we afford and how long will it take? 

Projects that achieve fiscal sustainability in a short period are less likely to be abandoned due to political or economic changes. On this measure, investments in education and health are more attractive. A UNESCO report suggested that Nigeria needs $12 billion each year to achieve full primary enrollment and completion within eight years. A nd at an annual cost of $930 million, we could have saved about 1.8 million lives between 2012 and 2015 by making Maternal Newborn and Child Health commodities available. 

Meanwhile, the African Development Bank's (AfDB) comprehensive plan to close and maintain Nigeria's infrastructure gap in power, transport, water and ICT over a 10-year period would cost $51 billion each year. Considering the proposed 2018 Budget is just $28 billion, it may make more sense to target the advancements we could make in health and education with far less spending. 

You could argue that the infrastructure plan indirectly yields the same benefits, and could increase GDP per capita by 42% by raising the average standard of living. But if the purpose of economic growth is to improve people's lives, why not try to achieve that directly if it is within reach?

 

In Need of Intervention

Another approach would be to suggest that we prioritise projects that would be difficult to execute without government intervention. Infrastructure investment wins out on this measure. It is much more efficient for the government to provide power and transport infrastructure. As Nigerians have found, private solutions to basic infrastructure – generators for power, private boreholes, etc. – are grossly inefficient and make it harder for businesses to compete internationally. 

The same cannot be said for education and health services. Even without significant government support, NGOs have made notable strides in the health sector. For example, the Global Polio Eradication Initiative successfully helped eradicate polio in Nigeria despite limited financial support from the government. Besides, free markets can provide useful substitutes for publicly funded schools and hospitals, provided that people can afford them. Private provision is unlikely to be socially optimal, but if the government's physical capital investments sufficiently boost business growth and employment, the economy would become wealthy enough to support more public funding of these sectors.

However, this analysis ignores the reality that government intervention is not always welfare-improving. Measures of public investment efficiency suggest that given the funds already invested, the quantity and quality of infrastructure should be 39% and 87% higher, respectively. Maybe the Nigerian government is not Nigeria's best bet for building infrastructure. Well-structured Public-Private Partnerships (PPP) could provide higher infrastructure investment efficiency, and at the same time, free up government resources for other areas. For example, PPPs could be used for the transport and energy sectors, while the government focuses on water and sanitation services that have both economic and health benefits, but are typically difficult to provide privately.

 

Growth Guaranteed?

Ultimately, Nigeria's investment priorities will depend on which kind of economic growth we want to pursue: one driven by manufacturing or one sustained by services. Historically, a manufacturing-led strategy requires large infrastructure investments to sustain a competitive industrial base.

But manufacturing is not the only way to grow. In recent years, international trade in services has grown significantly, and for emerging economies like India and the Philippines, services make up over 25% of total exports. However, a services-led strategy requires a more skilled labour force. As technology becomes more important in the global economy, a forward-looking approach would dictate that investing in a skilled workforce would better prepare Nigeria for future growth opportunities. 

Nonetheless, building a highly skilled workforce without improving infrastructure would backfire in the short-term. If Nigeria is able to train its workforce but is unable offer well-paying opportunities, people will emigrate to other countries. And while a highly skilled diaspora is useful, what is the point of investing in human capital just to see your citizens go abroad?

Considering these factors, investing in infrastructure seems a safer bet. Manufacturing-led development has been successful in other countries and simply requires the government to execute effectively. However, human capital investments can provide something that physical capital cannot guarantee – growth that actually betters people's lives. And isn't that we really want to do? 

Follow this Writer on Twitter @Ebehi_Iyoha. Subscribe to read more articles here.

Ebehi Iyoha

Ebehi Iyoha

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