Guest Post: Economic Management in Nigeria Post May 2015

 

The outcome of Nigeria’s March 28 2015 polls has significant consequences for Africa’s largest economy. The pace and quality of economic reforms, never sterling, have become patently mediocre under President Goodluck Jonathan. Pervasive perception of the Government’s incompetence and corruption has fed widespread disaffection. With the fall in international oil prices through which the country earns 95% of its foreign exchange and 70% of its revenues, the state’s capability to support consumption and growth is severely curtailed. More than ever, Nigeria needs to initiate and credibly implement economic and institutional reforms that will attract a scale of investment and unlock the quantum of growth sufficient to establish it as a diversified middle-income economy. This will have salubrious political effect as Nigeria’s economic policy weaknesses are closely related to the incapacities that threaten the Nigerian state.

Bye Bye to Goodluck?

The most credible opinion polls have either projected an election too close to call (e.g. ANAP Foundation’s) or clear victory for General Muhammad Buhari, candidate of the opposition All Progressive Congress (Eurasia’s). A Buhari win is potentially better for reforms and growth in Nigeria. The Jonathan administration will be unable to muster the institutional energy, discipline and coherence required to implement critical but controversial reforms (such as trimming and paying the civil service better). Intensified political opposition to a re-elected President Jonathan administration will transform the credibility gap it suffers to near illegitimacy, further rendering it unable to overcome the social opposition to reforms (which it has often managed in a shambolic manner).

Nonetheless, it cannot be taken for granted that a General Buhari Government automatically will launch Nigeria on the path of economic, institutional and political reform. The All Progress Congress (APC) has not shared any coherent economic policy plan that would enable Nigerians and investors predict the direction of economic policy after a likely APC victory on March 28. Predictions have to be based on an analysis of Nigeria’s political economy, especially historic and recent patterns of interactions between ethnic identity politics and economic policy.

Nigeria’s politics have bred poverty, waste and corruption principally because of poor policy choices that have favoured consumption over investment and ineffective state interventions over market provision. Nigerian political elites have been able to continue with these ruinous policy choices because of the absence of strong pro-reform domestic constituencies and modes of political mobilization centered on ethnic and religious identities rather than economic interests. The politics of the 2015 elections have not been different. Supporters’ (as well as some analysts’) expectations of improved governance and economic performance under Buhari rest exclusively on his (personal) probity. This emphasis on personal character is superficial given the fact the most consequential forms of corruption and Nigeria’s persistent failure to fulfill its economic potential have been rooted in poor policy and institutional choices.   General Buhari’s ability to turn Nigeria around should be judged more on the possibility of decisively altering the course of policy.

Awoism Federalised

The Eurasia Group Nigerian elections forecast notes a “vast policy gap” between the “pro-business” and “pro-liberalisation” southwestern wing of the APC and the more “statist and nationalist orientation” of the northern politicians around General Buhari and predicts that “the ascendant” southwesterners will dominate economic policy in an APC Federal Government. The Eurasia forecast underestimates the significance of the fact that social policies such as conditional cash transfers, rooted in Awoist “progressive” Yoruba politics, constitute the central economic platform of the APC manifesto. The lack of attention to urgent investment-stimulating and jobs-creating reforms is as worrying as the macroeconomic threat social welfarism pose in a world of half-price oil. The welfarist policies are likely to be partly pursued despite their onerous costs. They are partly principled beliefs and partly an electoral policy (rather than a coherent or sustainable development strategy) for Awoist political parties. The Princeton economic historian Atul Kohli wrote of the Action Group’s universal education policies of the post independence period “scarce resources were thus utilized ineffectively, mainly to satisfy the short-term political needs of the emerging leadership” (emphasis added). (Action Group’s welfarism was much more affordable as the cocoa export earnings of the Western Region, was four and seven times the earnings of the Eastern and Northern regions respectively). The utter silence over the frittering of about $ 5 billion of Nigeria’s foreign exchange reserves in futile defense of the Naira seems another evidence of the APC’s lack of policy capacity and/or the distance between its economic advisers and the more influential politicians.

The “pro-business” orientation of the dominant southwestern wing of the APC appears completely virtuous only when compared to the party’s Northern wing. The Peoples’ Democratic Party also isn’t anti-business but has been far from been a consistent promoter of free or transparent markets. The “pro-business” orientation is most clearly expressed as a procurement system which has also been a means to finance the party and for its leaders to dominate regional politics. This is also much in keeping with the Awoist tradition. This system somewhat benefits from more effective central control in APC Lagos than PDP Abuja. The way it is adapted to function at the federal level has substantial implications for infrastructure procurement, including through public-private partnerships and strategies to expand or create key industries. Will APC economic strategy aim to attract investments from international capital or will it favour indigenous crony capitalists? What will happen to policies such as the nepotism-riddled “land allocation” system and import waivers which largely have bled the treasury and failed to expand industries and create jobs?

There will be actors on both wings of the APC who will promote corruption-prone industrial policy and subsidies, falsely arguing that under General Buhari, the Government will have the discipline to implement them productively. As a military ruler, General Buhari’s instincts were clearly statist; his total lack of interest in and understanding of the economy has shone through four presidential campaigns. He will be far from being a competent umpire of squabbles over economic policy in the cabinet. Advocates of statist interventions and subsidies are likely to be more successful in getting General Buhari to back them.  The position of would-be reformers already is weakened, but not fatally or conclusively, because the party has not committed itself to or stated its positions on crucial economic policy issues during the campaign. One of the early signs of whether Buhari Government will represent inter-elite distributional politics as usual would be if it appoints the “constitutional” 36-person Federal Cabinet.

A New Kind of Coalition

The rollback of reforms by former President Yaradua’s government was presaged by an extraordinary declaration by its powerful secretary Baba-Gana Kingibe that “reforms are dead”. This was widely interpreted as an ethnic reaction against reforms under former President Obasanjo that had seen Northerners excluded in the acquisition of valuable state assets and licenses. But it seems more plausible that Yaradua’s advisers merely aligned to his ideological proclivities. He had been an avid Marxist in his lecturing days and later member of the socialist Peoples’ Redemption Party. (Aliyu Dangote, a Northerner whose business had been boosted by the Obasanjo Government’s patronage, was one of the major beneficiaries of the oil refineries sale that became the first targets of Yaradua’s strike against reforms).

While Buhari certainly isn’t an advocate of the free-market, he is unlikely to burden his Government with Marxist baggage like Yaradua. He will lack the political capacity to carve out a Northern anti-reform “kitchen cabinet”. A Buhari-led APC Government will have unique features for a Nigerian Federal Government which will confer more advantages than liabilities. Historically, successful Federal parties have been founded, crafted or controlled by politically dominant conservative Northerners who coopted bigwigs from other regions to help them secure enough votes to win federal elections. The only common purpose of these coalitions was to win power and keep it by sharing government positions and associated material resources as fairly as possible. Ruling party coalitions were not only unable to develop an economic strategy or development vision, they also lacked the capacity to execute policy no matter how poorly defined.

No doubt, power rather than policy solutions to Nigeria’s myriad economic and social problems have also been the primary preoccupation of APC coalition building. And the pursuit of wealth will continue to be a significant part of Nigeria’s political culture under an APC Government (General Buhari’s aides accused accomplished policy wonks who joined his 2011 campaign of wanting to hijack the Buhari brand they had been nurturing after “chopping” in the PDP). But an APC Federal Government will be politically resilient and have the confidence and capacity to implement those reforms it choses to initiate. It will enjoy the support of the politically powerful North, opposition from whom diminished considerably the political capital President Jonathan (would have) required to pursue reforms consistently. The APC’s southwestern bulwark and the region’s vigorous media will complement the Government’s northern support. Key political appointees will be less of overly independent ethnic power brokers or nominees of regional godfathers rewarded for participating in a successful electoral coalition and more of party people anchored in defined authority structures and hence more easily marshaled to execute policy.

General Buhari will not be an all-powerful president (like President Obasanjo) or be compelled to disruptively subdue opposition within the party (like President Jonathan). The influence the leaders of the southwestern wing of the APC will seek to exert on the Buhari Government will be overt, legitimate and institutional as opposed to the hold President Obasanjo unrealistically sought singly to exercise on successive regimes from his Otta farm. Policy decisions under an APC Federal Government is thus unlikely to be subjected to the whims of the President (or that of individual free-agent Ministers) and will thus be more sustainable. Squabbles within the ruling party, often ethnic-centered, though highly detrimental to the definition and implementation of economic policy, have been over power rather than policy itself. Nigeria is likely to get a breather from power squabbles at least for four years should the APC win the elections. The personal relationships forged as well as the understandings reached during four years of negotiating a (failed and then  successful) merger will be useful in averting disagreements (over the gains of power) strong enough to fracture the APC into its ethnic constituents. It would greatly help to formulate a semi-formal system of procurement, especially of private investment in and operation of public infrastructure, which meets the expectations of both APC wings and deepens Nigerian capitalism while not overburdening the populace.  Such must also be clean enough to attract international capital. President Jonathan’s power sector privatization has fallen short of many of these criteria.

There will also be the question of what a Buhari government has to deliver for the Northern talakawa that constitute his core political base and also Nigeria’s poorest citizens.  Any sustainable improvement to their plight will come through leaps in the quality of basic education, healthcare and agricultural extension services and security, stuff that can only be delivered through steady improvement in state capacities rather than a splurge on infrastructure or cash transfers.

The APC has touted General Buhari’s incorruptibility rather than advance a clear economic strategy and agenda for institutional reform. If it wins the March 28 elections, it will enjoy a short honeymoon within which it quickly needs to establish its reform credentials before investors and a reputation for competence and trustworthiness before Nigerians. This has to substantially supplant its welfarist plans. It could succeed if it exploits its political heft in appointing competent professionals (who can be found amongst people close to both the Buhari and the southwestern wings of the party) rather than reward regional political bigwigs with ministerial and other important appointments. This will be the decisive test of General Buhari’s incorruptibility. His Government needs to quickly package key reforms and clearly explain to Nigerians why they are critical to the goal of changing Nigeria from a corrupt and poverty-ridden country into a fairer and progressively richer society with a more competent and honest government. To have any chance of fulfilling even some of the aspirations of its teeming supporters, he must first and quickly let down the party men of various ranks who will be angling for gains of Nigerian politics as usual.

 

Dr. Agboluaje is a Lagos-based strategic communications and policy consultant

 

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Did Dahiru Mangal Kill The Nigerian Textile Industry?

In the mid-1980s Nigeria had 175 textile mills. Over the quarter-century that followed, all but 25 shut down. Many of those that have struggled on do so only at a fraction of their capacity. Of the 350,000 people the industry employed in its heyday, making it comfortably Nigeria’s most important manufacturing sector, all but 25,000 have lost their jobs. Imports comprise 85 per cent of the market, despite the fact that importing textiles is illegal. The World Bank has estimated that textiles smuggled into Nigeria through Benin are worth $2.2bn a year, compared with local Nigerian production that has shrivelled to $40m annually. A team of experts working for the United Nations concluded in 2009, “The Nigerian textile industry is on the verge of a total collapse.” Given the power crisis, the near-impassable state of Nigeria’s roads and the deluge of counterfeit clothes, it is a wonder that the industry kept going as long as it did.

The knock-on effects of this collapse are hard to quantify but they ripple far into the Nigerian economy, especially in the north. About half of the million farmers who used to grow cotton to supply textile mills no longer do so, although some have switched to other crops. Formal jobs in Nigeria are scarce and precious. Each textile employee supports maybe half-a-dozen relatives. It is safe to say that the destruction of the Nigerian textile industry has blighted millions of lives.

I am currently reading Tom Burgis’ The Looting Machine from where I have taken the quote above. (Actually, the quote above is from an excerpt of the book published recently in the FT. Find it here). The author spent 9 years across Africa as a reporter and this book is the result of the things he learnt. So far, it’s quite a remarkable, if terribly depressing, read.

It is one thing for a country to lose an industry making say, compact disc players – at least you can say that technology rendered that product almost completely obsolete and killed demand for it along with the industry. But why lose a textile industry? It’s not as if clothes have gone out of fashion – the market is worth $2.2bn of illegal imports yearly!

Even more annoyingly, the textile industry remains one of the most labour intensive in the world today. It is also not very capital-intensive compared to other industries – an American study from some years ago estimated that oil and gas companies spend $3.2m per employee in terms of investments. In comparison, the textile industry spends around $13,000 per employee.

Markets are not easy to form. Jobs are not easy to create (they are costs). Who lets such an industry go to waste? There’s more:

And there was something that had accelerated the mill hands’ consignment to the trash can of globalisation. Shuffling their feet and looking warily around for anyone who might be eavesdropping, the men murmured a single word: “Mangal.”

I used to hear the name Dahiru Mangal especially during the Yar’Adua administration but the full-scale of his economic destruction only came to me while reading this book. To put it in Nigerian parlance – he is into smuggling. He denies this of course, saying he merely provides a logistics services.

In the shadier corners of the workshop of the world Mangal found the perfect business partners. “The Chinese attacked at the heart of the industry: the wax-print and African-print segment,” a consultant who has spent years investigating — and trying to reverse — the slow death of Nigerian textiles explained to me. During the 1990s Chinese factories began copying west African designs and opening their own distribution branches in the region. “This is 100 per cent illicit — but the locals do the smuggling,” the consultant went on. There are, he said, 16 factories in China dedicated to churning out textiles with a “Made in Nigeria” badge sewn into them. For a time the Chinese material was of a much lower quality than Nigerian originals, but that gap narrowed as Chinese standards rose. The Chinese began to take control of the market, in league with Nigerian vendors. Mangal acts as the facilitator, the conduit between manufacturer and distributor, managing a shadow economy that includes the border authorities and his political allies. Like many others who profit from the “resource curse”, he plies the hidden byways of the globalised economy.

From his base in Katsina, Mangal arranges the import of food, fuel and anything his wealthy Nigerian clients might desire. But the staple of his operation is the textiles that have helped kill off the local industry. The details of the alleged smuggling operation are drawn from interviews with northern Nigeria politicians, officials, businessmen and textiles consultants in Abuja, Katsina, Kano and Kaduna between 2009 and 2013. Mangal is said to charge a flat fee of N2m (about $13,000) per cargo, plus the cost of goods. In 2008 Mangal was estimated to be bringing about 100 40ft shipping containers across the frontier each month.

Mangal goes to China to buy materials, pays workers, produces clothes, puts them in a container, ships them to a neighbouring country, bribes customs officials, smuggles them across the Nigerian border and still gets it to the Nigerian customer at much cheaper prices than something produced on their doorstep. It’s a different thing when someone brings in something not produced in the country like iPhones. But to be so comprehensively attacked and destroyed at your own game in this way is quite sad and worth reflecting on.

***

The story of why this happened is fairly simple to understand. The knee jerk answer is always to blame epileptic power supply. It definitely does not help to have rubbish electricity but it cannot be the only reason. The author goes on to explain:

Dutch Disease is a pandemic whose symptoms, in many cases, include poverty and oppression. The disease enters a country through its currency. The dollars that pay for exported hydrocarbons, minerals, ores and gems push up the value of the local currency. Imports become cheaper relative to locally made products, undercutting homegrown enterprises. Arable land lies fallow as local farmers find that imported fare has displaced their produce. For countries that have started to industrialise, the process goes into reverse; those that aspire to industrialise are stymied. Processing natural commodities can multiply their value four hundredfold but, lacking industrial capacity, Africa’s resource states watch their oil and minerals sail away in raw form for that value to accrue elsewhere.

Once the oil money starts to enter a country, the local currency comes under pressure and starts to appreciate. Note, this does not mean that currency’s value visibly rises from say N2 to $1 to N1.50 to $1. Instead, the currency is always trading above its real value. So even if the exchange rate is N150 to $1, it might be the that the real value is actually N200 to $1.

Using those numbers, imagine that it costs $5 to make a t-shirt in China. It can sell for N750 in Nigeria at the overvalued exchange rate. But in reality, if the exchange rate was at its real level, it should sell for N1,000 which will obviously make it less competitive in the local market. Naturally, the Naira should be at its real level to at least make it harder for cheap imports to gain a foothold in the market. It also means that if Nigerian textile makers decide to export their products, they will get more Naira for it. This is obviously good as the local market is protected against cheap imports while making exports attractive at the same time.

But those dollars flowing into the economy from oil sales make it very hard to keep the currency at its real level or even undervalued. When the dollars come in, they need to be turned into Naira to be useful. Fighting this pressure on the Naira is by no means easy but neither is it impossible.

***

Everyone has heard of the famous Norwegian Sovereign Wealth Fund now worth almost $900bn. Here’s how the fund describes its life’s ambition:

The ministry regularly transfers petroleum revenue to the fund. The capital is invested abroad, to avoid overheating the Norwegian economy and to shield it from the effects of oil price fluctuations

Yorubas says that if you are not going to eat something, you shouldn’t bring it near your nose. If you don’t want the disease that this kind of money brings into an economy, best thing is to park it abroad.

You will agree that this is completely out of the question for Nigeria right now. We are so addicted to oil that grown men will burst into tears if their monthly allocation from the Federal Government is reduced. Worse, few states have any clue what to do to develop an economy that can pay its way via taxes as a recent CBN report showed – in aggregate, internally generated revenue across the states did not increase between 2013 and 2014.

But there is another way perhaps.

At any point during the last decade or so, it would have been impossible to go a few months without hearing the United States complain about China deliberately keeping its currency undervalued. Here’s a random Bloomberg story from 2010 as an example:

The U.S. pledged to monitor China’s “undervalued” yuan in the next three months for signs that Asia’s fastest-growing market is living up to its commitments to help rebalance the global economy.

China took a “significant step” last month when it ended its peg to the dollar and allowed markets to drive the currency higher, the Treasury Department said yesterday. The report, initially due April 15, concluded that no major U.S. trading partner manipulated its currency and said it’s not yet clear whether China’s policy shift will correct the yuan’s undervaluation. The Treasury promised another review in October.

“What matters is how far and how fast the renminbi appreciates,” Treasury Secretary Timothy F. Geithner said, using another name for China’s currency. “We will closely and regularly monitor the appreciation of the renminbi and will continue to work towards expanded U.S. export opportunities in China that support employment in the United States, in close consultation with Congress.”

 China sells a lot of stuff around the world and in America especially. They earn a lot of dollars from doing this. In theory, the effect should be the same i.e. as those dollars make their way back into the Chinese economy, the Yuan will start to rise which then reduces the competitiveness of their products against American producers. So how does China stop this from happening? From the same article:

China’s reserves rose to a record $2.447 trillion in the first quarter of 2010, according to the People’s Bank of China. Holdings jumped $22.5 billion in March, after gaining $9.4 billion in February and $16 billion in January, data posted on the central bank’s website in April showed.

They are doing pretty much the same thing the Norwegians are doing – re-routing the dollars into their reserves instead of the local economy and thereby keeping manufacturers and exporters competitive.

***

To paraphrase Winston Churchill – You can always count on Nigerians to do the right thing – after they have tried everything else. According to the book, Obasanjo dispatched Nasir El-Rufai  to try to stop Mangal’s smuggling. Mangal claimed he was merely providing a logistics service for people (illegally) importing clothes. Nothing came of it.

The next thing to do of course was to provide ‘intervention funds’ for the industry. Just before leaving office in 2007, Obasanjo ‘launched’ a N70bn Textile Development Fund. This was meant to revive the industry and create the usual 1 billion jobs bla bla. President Yar’Adua didn’t scrap or probe the fund (perhaps because it was merely launched under Obasanjo) but went ahead with it. He ‘appealed’ to Nigerians to be ‘patriotic’ and buy local textile as those industries were suffering due to ‘lack of demand’. He then went on to increase the size of the fund by an extra N30bn to N100bn.

In 2002, Obasanjo banned the import of textiles. By 2010, Goodluck Jonathan’s government decided it had had enough and lifted the ban. Clearly it hadn’t worked (except you were Mangal of course) and Aganga announced at the time that it was only encouraging corruption so the ban was to be replaced by tariffs.

Goodluck Jonathan continued with the Textile Development Fund and as at February 2013, 38 companies had benefited from the fund saving a massive 8,000 jobs and creating 5,000 new ones as a result. By the end of last year, the fund had disbursed N60bn in total and had even been renamed National Cotton Textile and Garment Policy (Aganga likes calling things ‘policy’). Of course, the military and government agencies were ‘directed’ to purchase made in Nigeria fabric as usual. Naturally, those who managed to benefit from the loan hailed the policy as the best thing to happen to textile in Nigeria, ever.

[As an aside, I often wonder how come an industry that has collapsed and isn’t producing anything still manages to have an association or something. What do they do in the meantime while waiting for government to bail them out?]

***

This is all very sad indeed. The funds have apparently been converted into equity by the government which means the industry does not have to worry too much about crippling interest rates. Yet, N60bn has been thrown at the problem to save 8,000 jobs.

The first and obvious lesson here is that prevention is better than cure – one shouldn’t really wait for an industry to die before then attempting to ‘revive’ it. Once those jobs go, bringing them back is very hard even when you have the sharpest policy makers running things (we don’t). No serious country should allow a guy like Mangal lay waste to a whole industry and livelihoods without so much as a response. Of all the things that damaged the textile industry, Mangal was almost certainly the easiest to deal with – just make it uneconomical for him to ship stuff halfway around the world and still make a profit.

Everything has now been tried – banning, unbanning, intervention funds, tariffs, mandating government purchase – without much success.

If the aim of what China and Norway have been doing is to stop their currencies from appreciating, then it becomes fairly obvious that keeping manufacturing competitive in Nigeria is as much a monetary policy issue as it is a fiscal policy one. What to do becomes fairly obvious.

But me I don’t want you people’s wahala so it is not from my mouth you will hear that the Naira needs to be deva…oh look at this big red elephant!

FF

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