Overcoming binding constraints to competitive manufacturing for intra-regional trade

Chief Odutola, a former President of the Manufacturers Association of Nigeria, was a colossus in the industry. He established Nigeria’s first industrial manufacturing company, Odutola Tyre and Rubber Company, which manufactured treaded rubber tyres, among several companies and industries. He gave pride to “Made in Nigeria” products. Chief Odutola was a visionary. It is amazing […]

Overcoming binding constraints to competitive manufacturing for intra-regional trade
Overcoming binding constraints to competitive manufacturing for intra-regional trade

Chief Odutola, a former President of the Manufacturers Association of Nigeria, was a colossus in the industry. He established Nigeria’s first industrial manufacturing company, Odutola Tyre and Rubber Company, which manufactured treaded rubber tyres, among several companies and industries.

He gave pride to “Made in Nigeria” products.

Chief Odutola was a visionary. It is amazing that that the reforms he called for as President of the Manufacturers Association of Nigeria (MAN), in 1971, are the very same things bedeviling the Nigeria’s manufacturing industry today, five decades after.

He foresaw the inherent dangers of Nigeria abandoning the manufacturing sector after the discovery of oil, and said “oil will finish, while industry will not.”

For decades, Africa’s development trajectory has been based on the export of raw materials and natural resources. The continent has abundant natural resources, oil, gas, minerals, metals, agricultural and forest products, and the blue economy.

Estimated at $30 trillion in potential wealth, Africa’s natural resources are enough to make it one of the wealthiest places on earth (Craig Arnold, 2019. How to Turn Africa manufacturing into a high tech powerhouse. World Economic Forum). But tragically and ironically, Africa’s massive natural resources have not translated into wealth.

The reason is simple: a dependency on the export of raw commodities, with very little or no value addition. Put in a stark way: lack of industrial manufacturing. African countries export natural resources and import manufactured products.

Read Also: Processed products will boost Nigeria’s export, create jobs – Adebayo

It is a race to the bottom, where the only assured commonality, in the face of limited industrial manufacturing, is rising poverty, export of jobs, vicissitudes of volatility of commodity prices, and import dependency.

Hard-earned foreign exchange is used to support a high propensity for imported goods, machinery, equipment and raw materials, to support industries.

The low level of industrial manufacturing is at the core of the slow structural transformation of African economies, with dominance of primary sectors. The situation has also been partly perpetuated by the escalation of tariffs on exports of manufactured goods from Africa. For example, export of raw materials attract very low tariffs, but value added products from Africa face steep tariffs.

To be a manufacturer in Nigeria is not an easy business. You succeed not because of the ease of doing business, but by surmounting several constraints that limit industrial manufacturing

The economic and wealth divergence between wealthy developed and low income developing countries derives from their differential levels of industrial manufacturing. Wealthy nations export value added manufactured products, while poor or low income nations export commodities with little or no value addition. Low income countries are perpetually at the mercy of price volatility, throwing their economies into perennial swings.

Take the case of agriculture. While the price of cotton will always fall, not so the prices for apparels and textiles. While the price of cocoa will always fall, not so the prices of chocolate. While the prices of coffee beans will fall, not the price of brewed coffee.

No wonder, Africa’s share of the global value chain is a miserly 1.9%, leaving a continent of 1.3 billion people and their economies stuck at the bottom of global value chains.

Africa should therefore wake up and smell the proverbial coffee, and industrialize. That’s why at the African Development Bank, “Industrialize Africa” is one of our High 5 priorities. There is an urgent need for Africa to rapidly diversify its economies, and add value to everything that it produces. Exporting raw materials only leads to vulnerabilities and no nation or region has succeeded by simply exporting raw materials.

While for decades the share of manufacturing in Nigeria’s GDP, has hovered around 7%, the nation has not been able to extricate itself from the comatose of its industrial manufacturing sector to unleash the fulness of its potential.

The performance of the manufacturing sector in the past five years have been poor. Between 2015-2017, the sector declined by -1.5%, -4.3% and -0.2%.

This is in sharp contrast to the dynamic and rapid performance of manufacturing in Asian countries, such as Singapore, Malaysia and China.

While Asian countries have focused on the export of manufactured products, Nigeria’s approach has been on import substitution. The manufacturing sector of Nigeria represents only 3% of total revenues from exports, but accounts for 50% of imports in the country. Instead of being forward looking in expanding the share of the manufactured goods in its total export revenue, Nigeria focuses on the model of import substitution.

Import substitution, while important, is a very restrictive vision. It looks towards survival, instead of looking to create wealth through greater export market and value diversification. The end result is a manufacturing sector that cannot develop nor compete globally, but limits itself to “survival mode, not a “global manufacturing growth mode”.

Nigeria must have a greater ambition for its manufacturing sector, by integrating and rapidly moving up global and regional value chains in areas of comparative advantage; by and by driving greater specialization and competitiveness. A well-developed and policy-enabled manufacturing sector, with an export orientation will spur greater innovation, industrial policies for export market development, and structural transformation of the economy.

Instead of being consumed with the conservation of foreign exchange, the focus would shift to expanding foreign exchange through enhanced export value diversification.

We should be proactive, not reactive.

Let us take the example of Vietnam, a nation at war for twenty years, from the American War, to the Second Indochina War. Despite its challenges, it quickly mimicked successful Asian countries such as South Korea by pushing into relatively complex product categories, and horizontal diversification with the processing of agricultural products.

Vietnam’s exports in 2020 were very well diversified, with electrical machinery and equipment earning it $153 billion; machinery including computers, $23.9 billion; Footwear $23.8 billion; clothing and accessories $15.5 billion, among others. In total, Vietnam’s exports in 2020 was $348 billion.

Malaysia achieved vertical diversification from its agricultural base, of rubber and palm oil, investing heavily in high tech sectors such as electronics. In 2020, its biggest exports by value were in electronic integrated circuits, refined petroleum oils, palm oil, vulcanized rubber and accessories, and solar power diodes or semi-conductors.

Malaysia’s export values in 2020 depended on electrical machinery and equipment $86.6 billion; mineral fuels including oil $25.5 billion; machinery, including computers $20.2 billion; animal, vegetable oils, waxes $13.5 billion; and rubber and rubber articles $11.2 billion, among others. In total Malaysia’s export in 2020 was valued at $234 billion.

By contrast, Nigeria’s exports in 2020 were dominated by mineral fuels, including oil valued at $29.7 billion, which accounted for 89 percent of the exports. Nigeria’s total export value was a mere $33.5 billion. That dollar amount represents a -3.6% decrease since 2016 and a drop of -37.5% in 2019 to 2020. Interestingly, Nigeria’s imports were dominated by machinery, including computers, mineral fuels including oil, vehicles, electrical machinery and equipment, pharmaceuticals, plastics etc.

By contrast, most of these imports are what Vietnam and Malaysia export in abundance. And worse, Nigeria imports mineral fuels, which it should be producing as a leading crude oil exporting nation. It exports crude, it imports refined products — a befuddling irony.

So, what is the take home message here? While Nigeria’s export basket has hardly changed, Malaysia and Vietnam have used aggressive horizontal and vertical industrial manufacturing diversification to move from low-value products to high-value market products. The result is seen in the comparative wealth of the three countries.

While export value per capita is $7,100 for Malaysia and $3,600 for Vietnam, it is only $160 for Nigeria. While Malaysia and Vietnam moved to “global manufacturing growth” creating massive wealth and jobs for themselves, Nigeria remains in a “survival” mode, still unable to substitute the imports of its petroleum products, while being one of the largest exporters of crude oil.

Today, capacity utilization of factories hovers around 40 percent compared to a desired 70 percent. The reality, in view of several challenges facing the industrial manufacturing sector, is that firms are moving to neighbouring countries, where there is greater macroeconomic stability, enabling environments, and a much better ease of doing business.

To be a manufacturer in Nigeria is not an easy business. You succeed not because of the ease of doing business, but by surmounting several constraints that limit industrial manufacturing.

Today, the major challenge facing Nigeria’s manufacturing is the very high cost and unreliability of electricity supplies. Load shedding and the inconsistent availability of electrical power, have resulted in high and uncompetitive manufacturing costs.

Most Nigerian manufacturing companies self-provide their own energy, with a high dependence on generators, diesel and heavy fuel oil. Their emissions contributions, make them brown industries, not green industries.

It has been estimated by the IMF that Nigeria loses $29 billion annually, 5.8 percent of its GDP, due to a lack of reliable power supply. Also, that Nigerians spend $14 billion per year on generators and fuel.

A lack of electricity is killing Nigerian industries, something Chief Odutola was concerned about in 1971. According to the Manufacturers Association of Nigeria, industries spent N93.1 billion on alternative energy in 2018, 47 years after Odutola. Today, no business can survive in Nigeria without generators. Consequently, the abnormal has become normal.

Travelling on a road one day in Lagos, I saw an advertisement on a billboard, which caught my attention. It was advertising generators, with the bold statement “we are the nation’s number one reliable power supplier!”

Compare that with the situation of South Korea which has diversified its exports into high-value manufacturing. On a trip to South Korea few years ago, I visited the Korea Electric Power Corporation (KEPCO). While being briefed, I was told that the country experiences only 2 minutes of power outage. Not sure I heard correctly, I asked whether they meant 2 minutes per hour, 2 minutes per day, 2 minutes per week or month. The response was quick and resolute: 2 minutes per year.

How then can Nigeria compete with Korea?

Unless Nigeria decisively tackles its energy deficiency and reliability, its industries will remain uncompetitive. There should be massive investments in variable energy mixes, including gas, hydropower resources and large scale solar systems to ensure stable baseload power for industries, , to direct power preferentially to industries, and to support industrial mini-grids to concentrate power in industrial zones.

Excerpts of a lecture by Dr. Adesina, president, African Development Bank Group at the Adeola Odutola Lecture during the Manufacturers Association of Nigeria Annual Meeting of October 26, 2021, Abuja, Nigeria.