macroafricaintel | African SEZs & GVCs in the age of automation (3)

By Rafiq Raji, PhD
Twitter: @DrRafiqRaji

I write a monthly research paper series for NTU-SBF Centre for African Studies at Nanyang Business School in Singapore. The following is the third and final part of the highlights of the issue published in June 2019.

Way forward
China, India and other Asian countries are already entrenched in global value chains. Automation might have completely diminished the opportunity for the migration of labour-intensive manufacturing to Africa by the time the continent deals with its competitiveness challenges. Thus, over time, there would increasingly be less scope for African SEZs to participate in GVCs. All is not lost, however. Domestic markets would still be able to accommodate some types of manufactured goods.8 The most attractive sectors are ideally “consumer-facing” and “infrastructure-related”.12 With a projected revenue increase of $122 billion over the next decade, agro-processing is one.12 Cement production and clothing and footwear, with projected revenue increases of $72 billion and $27 billion over the next decade respectively, are also thought to be attractive.12 Automobiles and consumer goods are promising manufacturing subsectors as well.11 And depending on the ambitions of the manufacturers and prevailing trade dynamics, these ventures could be extended region-wide or across the continent. Thus, the primary objective of African SEZs should now be to engender intra-African trade.17 They could also be used as reform labs, like China and closer to home, Mauritius, have done.17 Clearly, local firms would be crucial to such a strategic re-orientation. African SEZs should thus see local firms as their primary targets.

Use SEZs as reform labs
The concept of an “Early Reform Zone” (ERZ) is proposed.8 ERZs are designed to be oases of sanity in typically dysfunctional economies. So, whereas firms in the broader economy might suffer from a lack of quality infrastructure, red tape, and myriad challenges, ERZs circumvent all these. The so called “second-generation” SEZs differ from the first-generation ones along the following lines. They are not subsidized, thus not as capital-intensive as their forebears.8 And since they are literally designed to be permanent, there is no time pressure.8 Another key distinction of ERZs is speed. ERZs almost momentarily create the conditions for firms to be globally competitive within a specific geographic area in an otherwise distorted economy.8

Build strong linkages with the local economy
As opposed to the current practice of targeting foreign investment, African SEZs should increasingly look towards domestic firms. It is not a novel idea. Local firms have over time come to dominate SEZs in Malaysia, Korea, and Mauritius.17 It has also recently been observed to be the case in China.17 Emerging Asian countries like Bangladesh and Vietnam are also beginning to record a higher level of participation by local investors in their respective special economic zones.17 This has not been found to be the case in many African countries, at least not materially as yet.13 It explains their underperformance in part. Foreign firms can be fickle.5 And once they leave, without having already been integrated with local firms, with the expected attendant knowledge and technology transfer, they depart with the envisaged advantages of attracting them in the first place.

Nonetheless, African SEZs have primarily been designed to be “enclaves” for foreign investors.15 In light of evidence, in East Asia, for instance, that show a strong correlation between SEZ performance and linkages to the local economy, African zones would be well-advised to do the same.15 This could be done through deliberate local content policies by governments. Joint ventures with local firms are also another way to achieve this.15 That said, the ease of collaboration between foreign and domestic firms has been found to be dependent on sector dynamics.14 In other words, local firms might be better collaborators and participants in the value chain of a less complicated sector like agriculture but not in ones that require greater technological know-how, for instance.14

Plug into intra-African GVCs
Automation and Industry 4.0 suggest Africa’s place in global value chains, not remarkable at the moment in any case, may be non-existent if and when it finally gets its act together. This is because GVCs themselves might have become obsolete by then, with production and consumption becoming domestic or regional.10 In any case, there is already an opportunity to develop regional GVCs via the respective regional customs unions on the continent. And with the African Continental Free Trade Agreement (AfCFTA) now to be operationalized, there is a broader continental opportunity.

References
See parts (1) & (2)

macroafricaintel | African SEZs & GVCs in the age of automation (2)

By Rafiq Raji, PhD
Twitter: @DrRafiqRaji

I write a research paper series for NTU-SBF Centre for African Studies at Nanyang Business School in Singapore. The following is the second part of the highlights of the issue published in June 2019.

2.0       Why have African SEZs underperformed?

Indicators of physical & institutional infrastructure in SEZs
  Average Africa sample Average non-Africa sample
Power outages (in hours downtime):
Within SEZ 44 4
Outside SEZ 95 46
Import customs clearance times (in days)
Within SEZ 7.1 3.4
Outside SEZ 10.3 11.0

Source: Newman et al. (2016)7, Farole (2011)17

Factors identified for the poor record of SEZs in Africa thus far relate to “problems with infrastructure, local management, policies and incentives, location, design and maintenance, and promotion.” 3,4 Poorly-skilled labour has also been identified as a constraint.9 Still, it is important to point out that while African SEZs have been underwhelming, there are a few exceptions.17 Mauritius is one.17 Kenya, Madagascar and Lesotho have been somewhat impressive as well.17 Undoubtedly, however, African industrial parks have underperformed relative to their Asian counterparts.17 One reason why is that the manufacture-to-export Chinese model that East Asian countries replicated successfully, which African countries have been trying to replicate, may soon become obsolete.20 Because even as SEZs are a way to circumvent the many trade constraints that African countries face, they may still not be able to match the current advantages of already entrenched Asian players early enough; before automation likely closes the window.

Studies find African SEZs to be relatively more expensive to develop.17 Weak linkages between African SEZs and local economies have also been observed.17 Job creation objectives have been somewhat elusive as well.17 Because even as incremental job creation on the back of these zones has been observed, the jobs tend to be low-skilled ones. And even those have not been on the scale expected or seen in better performing Asian ones.13,17 Consequently, the realisation of the immense potential of African SEZs to become major beneficiaries of labour-intensive manufacturing foreign direct investment (FDI), from China especially, is increasingly doubtful.17 The continent’s continued, or in some cases, marginally improved, but still relatively lower levels of competitiveness and harsh investment and business climate are attributed.17

Market size vs. Competitiveness of Africa’s 10 largest manufacturing countries
  Large market Small market
High competitiveness Egypt, South Africa, Morocco Tunisia, Kenya, Cote d’Ivoire, Ghana
Low competitiveness Nigeria Zambia, DR Congo

Source: Signe (2018)12

True, infrastructure and trade facilitation are reportedly better for firms inside African SEZs than for those outside them.17 Even so, they have been observed to be below international standards.17 For example, reported average downtime in production due to power cuts or shortages of about 44 hours per month is way too high when that for non-African SEZs of 4 hours per month is countenanced.17 Also, clearance of goods at ports take longer relative to non-African SEZs.15,17 Against this backdrop, it is not too difficult to see how firms in African SEZs might be ill-equipped to compete in a fiercely competitive global trade environment that is already within the tight grips of “factory Asia”.17 That said, a number of African countries like Egypt, South Africa and Morocco, which have large markets and high competitiveness, can still compete favourably with their Asian counterparts.12

Relatively new Chinese-backed SEZs in Ethiopia, Egypt, Mauritius, Nigeria and Zambia, initiated in the early 2000s, have a decent chance of succeeding as well.13 Companies in China’s own successful SEZs are behind the African operations, for instance: Tianjin TEDA in Egypt, Nanjing Jiangning Development Zone in Lekki, Nigeria, and the Suzhou Zhangjiagang Free Trade Zone in Ethiopia.3 There are also self-interested reasons why their probability of success is relatively high. Chinese motivations for developing them include the creation of demand for their machinery and equipment, to take advantage of preferential African trade agreements with America and Europe, and to gradually wean China off low value-added labour intensive manufacturing.16

References

  1. Lopes, C. (2013, June 28). Global Value Chains: Africa, the factory floor of the world? [Blog post]. Retrieved from https://www.uneca.org/es-blog/global-value-chains-africa-factory-floor-world
  1. Saleman, Y. & Jordan, L. (2014). The implementation of industrial parks: Some lessons learned in India (Policy Research Working Paper No. 6799). Washington DC: World Bank. Retrieved from https://www.openknowledge.worldbank.org/handle/10986/17282
  1. Brautigam, D. & Xiaoyang, T. (2011). African Shenzhen: China’s special economic zones in Africa, Journal of Modern African Studies, 49 (1), 27-54. Retrieved from http://urban-africa-china.angonet.org/sites/default/files/resource_files/african-shenzhen-china-s-special-economic-zones-in-africa.pdf
  1. Cling, J.P. & Letilly, G. (2001). Export processing zones: A threatened instrument for global economy insertion? (Working Paper No. DT/2001/17). France: Developpement et insertion internationale. Retrieved from http://en.dial.ird.fr/content/download/49138/377726/version/1/file/2001-17.pdf
  1. Ramdoo, I. (2015). Industrial policies in a changing world: What prospects for low-income countries? Geneva: The E15 Initiative. Retrieved from http://e15initiative.org/wp-content/uploads/2015/09/E15-Industrial-Policy-Ramdoo-Final.pdf
  1. Newman, C., Page, J., Rand, J., Shimeles, A., Soderbom, M. & Tarp, F. (Eds.). (2016). Manufacturing Transformation: Comparative studies of industrial development in Africa and Emerging Asia. (1st ed.). Oxford: O.U.P. Retrieved from https://oapen.org/download?type=document&docid=612770
  1. Newman, C., Page, J., Rand, J., Shimeles, A., Soderbom, M. & Tarp, F. (2016). Can Africa Industrialize? In C. Newman, J. Page, J. Rand, A. Shimeles, M. Soderbom, & F. Tarp (Ed.), Manufacturing Transformation: Comparative studies of industrial development in Africa and Emerging Asia (1st ed., pp. 257-276). Oxford: O.U.P. Retrieved from https://oapen.org/download?type=document&docid=612770
  1. Auty, R. (2011). Early Reform Zones: Catalysts for Dynamic Market Economies in Africa. In T. Farole & G. Akinci (Ed.), Special Economic Zones: Progress, Emerging Challenges, and Future Directions (pp. 207-226). Washington DC: World Bank. Retrieved from http://documents.worldbank.org/curated/en/752011468203980987/pdf/638440PUB0Exto00Box0361527B0PUBLIC0.pdf
  1. Ansu, Y., McMillan, M., Page, J., & Willem te Velde, D. (2016, March). Promoting manufacturing in Africa. Paper presented at the African Transformation Forum 2016, Kigali, Rwanda. Retrieved from https://set.odi.org/wp-content/uploads/2016/03/SET-ACET-ATF-Manufacturing-Paper.pdf
  1. Cilliers, J. (2018). Made in Africa: Manufacturing and the fourth industrial revolution (Africa in the World Report No. 8). Pretoria: Institute for Security Studies. Retrieved from https://issafrica.s3.amazonaws.com/site/uploads/aitwr-8.pdf
  1. Balchin, N., Gelb, S. Kennan, J., Martin, H., Willem te Velde, D., & Williams, C. (2016). Developing export-based manufacturing in Sub-Saharan Africa. London: Overseas Development Institute. Retrieved from https://set.odi.org/wp-content/uploads/2016/04/Export-Based-Manufacturing-in-Africa_Full-paper.pdf
  1. Signe, L. (2018). The potential of manufacturing and industrialization in Africa: Trends, opportunities and strategies. Washington DC: Brookings Institution. Retrieved from https://www.brookings.edu/wp-content/uploads/2018/09/Manufacturing-and-Industrialization-in-Africa-Signe-20180921.pdf
  1. Newman, C. & Page, J.M. (2017). Industrial clusters: The case for Special Economic Zones in Africa, (WIDER Working Paper No. 2017/15). Helsinki: United Nations University World Institute for Development Economics Research. Retrieved from https://www.wider.unu.edu/sites/default/files/wp2017-15.pdf
  1. Cusolito, A.P., Safadi, R. & Taglioni, D. (2016). Inclusive Global Value Chains: Policy options for small and medium enterprises and low-income countries. Washington DC: World Bank/OECD. Retrieved from https://openknowledge.worldbank.org/bitstream/handle/10986/24910/9781464808425.pdf?sequence=2
  1. Douglas, Z.Z. (2016). Special Economic Zones: Lessons from the global experience. (PEDL Synthesis Paper Series No. 1). Retrieved from https://assets.publishing.service.gov.uk/media/586f9727e5274a130700012d/PEDL_Synthesis_Paper_Piece_No_1.pdf
  1. Brautigam, D. & Tang, X. (2014). “Going Global in Groups”: Structural transformation and China’s special economic zones overseas, World Development, 63, 78-91. Retrieved from https://daneshyari.com/article/preview/991355.pdf
  1. Farole, T. (2011). Special Economic Zones in Africa: Comparing performance and learning from global perspectives. Washington DC: World Bank. Retrieved from http://documents.worldbank.org/curated/en/996871468008466349/pdf/600590PUB0ID181onomic09780821386385.pdf
  1. Farole, T. & Akinci, G. (Eds.). (2011). Special Economic Zones: Progress, Emerging Challenges, and Future Directions. Washington DC: World Bank. Retrieved from http://documents.worldbank.org/curated/en/752011468203980987/pdf/638440PUB0Exto00Box0361527B0PUBLIC0.pdf
  1. Dollar, D. (2018, January 19). Foresight Africa viewpoint – African economies and global value chains [Blog post]. Retrieved from https://www.brookings.edu/blog/africa-in-focus/2018/01/19/foresight-africa-viewpoint-african-economies-and-global-value-chains/
  1. Hallward-Driemeier, M. & Nayyar, G. (2018). Is automation undermining Africa’s industrialization prospects? In B.S. Coulibaly (Ed.), Foresight Africa – Top priorities for the continent in 2018 (pp. 70-71). Washington DC: Brookings Institution. Retrieved from https://www.brookings.edu/wp-content/uploads/2018/01/foresight-2018_full_web_final2.pdf

macroafricaintel | African SEZs & GVCs in the age of automation (1)

By Rafiq Raji, PhD
Twitter: @DrRafiqRaji

I write a monthly research paper series for NTU-SBF Centre for African Studies at Nanyang Business School in Singapore. The following is the first part of the highlights of the issue published in June 2019.

Introduction
Is the African industrialisation dream via special economic zones (SEZs) and global value chains (GVCs) still feasible? SEZs are “demarcated geographic areas contained within a country’s national boundaries where the rules of business are different from those that prevail in the national territory.”18 Key success factors for SEZs are cheap labour, large domestic markets, proximity to inputs, and high quality infrastructure.17 Strong institutions and leadership are also considered crucial.13 The attraction of industrial parks lies in how they enable “delivery-constrained governments” to provide infrastructure needed for industrial development within a “geographically limited space”; something they would not be able to do otherwise.2 Incidentally, almost all African governments could be considered delivery-constrained.

GVCs involve production over borders – one or more – and now account for two-thirds of global trade.19 China’s phenomenal industrial revolution was on the back of SEZs and GVCs. When wages in China started to rise, in tandem with the authorities’ desire for higher value-added manufacturing, labour-intensive GVCs moved to neighbouring but less developed Asian countries. Vietnam and Bangladesh account for much of this movement.19 However, some African countries, especially Ethiopia, have been beneficiaries.19 And like China, these countries have been able to participate in GVCs via SEZs. SEZs are not without some controversy. Tax concessions to special economic zones deprive governments of revenue, for instance. And it is yet to be proven that there would not have been development in the absence of these special zones in some cases.2 Still, it is generally agreed that they have been a success in China and emerging Asian countries like Vietnam and Bangladesh.2,13,17

African SEZs have not been similarly successful.1,2,3,6,7,17 Bad luck and bad policy have been attributed by some for why.6,7 Mauritius led the way on SEZs in Sub-Saharan Africa when it set one up in 1971.3 Since then, many African countries have developed “various forms of special economic zones (SEZs)”, ranging from “export processing zones (EPZ), free trade zones (FTZ), and industrial parks.” With a few exceptions, their performance has thus far not been encouraging.3

The World Bank categorises the implementation failures of industrial parks into four. The parks may not be built eventually. If they are built, they could enjoy little custom. In the third category, they could be built and highly subscribed but not yield the expected “cluster effects”. For the fourth category, they could be built, enjoy great custom, produce cluster effects, but have “negative spillovers” and “crowding out” effects. In other words, if successful, they could weigh on “investment climate outside the park”. Still, “park and zone programs continue to proliferate, and many continue to under-deliver.”2

Industry 4.0 labour saving technologies – “the Internet of Things, advanced robotics, and 3D printing” – are reducing the differentiation role of wages in the production process.20 Consequently, Africa’s relatively cheap labour, or that of any other jurisdiction for that matter, may cease to be an advantage over time.20 This is because industry may have advanced beyond the need of much labour by the time emerging Asian countries – which in tandem with China currently dominate labour-intensive GVCs – mature.

FDI into African manufacturing (2016)
Country Investment ($ bln) Market share Investment projects
China 36.1 38.4% 66
United Arab Emirates 11.0 11.7 35
Italy 4.0 4.3% 20
United States 3.6 3.9% 91
Japan 3.1 3.3% 27
United Kingdom 2.4 2.5% 41
France 2.1 2.2% 81

Source: Ernst & Young; Signe (2018)12

Nonetheless, some remain optimistic that African countries would be beneficiaries of the about 100 million labour-intensive manufacturing jobs expected to exit China to lower cost jurisdictions by 2030.12 And there is evidence of increased Chinese foreign direct investment (FDI) into African manufacturing.12 In 2016, China invested in 66 African manufacturing investment projects worth $36 billion. With a 38 percent market share, China is the lead foreign investor in African manufacturing.12 Only a year before, the highest manufacturing FDI into Africa came from the United States.12 Still, labour-intensive GVCs are increasingly facing disruption from automation. In light of this, what must African SEZs do to remain relevant to their countries’ goal of industrialisation? Firstly, the paper examines why African SEZs have performed below expectations. Thereafter, it addresses the question.

References

  1. Lopes, C. (2013, June 28). Global Value Chains: Africa, the factory floor of the world? [Blog post]. Retrieved from https://www.uneca.org/es-blog/global-value-chains-africa-factory-floor-world
  1. Saleman, Y. & Jordan, L. (2014). The implementation of industrial parks: Some lessons learned in India (Policy Research Working Paper No. 6799). Washington DC: World Bank. Retrieved from https://www.openknowledge.worldbank.org/handle/10986/17282
  1. Brautigam, D. & Xiaoyang, T. (2011). African Shenzhen: China’s special economic zones in Africa, Journal of Modern African Studies, 49 (1), 27-54. Retrieved from http://urban-africa-china.angonet.org/sites/default/files/resource_files/african-shenzhen-china-s-special-economic-zones-in-africa.pdf
  1. Cling, J.P. & Letilly, G. (2001). Export processing zones: A threatened instrument for global economy insertion? (Working Paper No. DT/2001/17). France: Developpement et insertion internationale. Retrieved from http://en.dial.ird.fr/content/download/49138/377726/version/1/file/2001-17.pdf
  1. Ramdoo, I. (2015). Industrial policies in a changing world: What prospects for low-income countries? Geneva: The E15 Initiative. Retrieved from http://e15initiative.org/wp-content/uploads/2015/09/E15-Industrial-Policy-Ramdoo-Final.pdf
  1. Newman, C., Page, J., Rand, J., Shimeles, A., Soderbom, M. & Tarp, F. (Eds.). (2016). Manufacturing Transformation: Comparative studies of industrial development in Africa and Emerging Asia. (1st ed.). Oxford: O.U.P. Retrieved from https://oapen.org/download?type=document&docid=612770
  1. Newman, C., Page, J., Rand, J., Shimeles, A., Soderbom, M. & Tarp, F. (2016). Can Africa Industrialize? In C. Newman, J. Page, J. Rand, A. Shimeles, M. Soderbom, & F. Tarp (Ed.), Manufacturing Transformation: Comparative studies of industrial development in Africa and Emerging Asia (1st ed., pp. 257-276). Oxford: O.U.P. Retrieved from https://oapen.org/download?type=document&docid=612770
  1. Auty, R. (2011). Early Reform Zones: Catalysts for Dynamic Market Economies in Africa. In T. Farole & G. Akinci (Ed.), Special Economic Zones: Progress, Emerging Challenges, and Future Directions (pp. 207-226). Washington DC: World Bank. Retrieved from http://documents.worldbank.org/curated/en/752011468203980987/pdf/638440PUB0Exto00Box0361527B0PUBLIC0.pdf
  1. Ansu, Y., McMillan, M., Page, J., & Willem te Velde, D. (2016, March). Promoting manufacturing in Africa. Paper presented at the African Transformation Forum 2016, Kigali, Rwanda. Retrieved from https://set.odi.org/wp-content/uploads/2016/03/SET-ACET-ATF-Manufacturing-Paper.pdf
  1. Cilliers, J. (2018). Made in Africa: Manufacturing and the fourth industrial revolution (Africa in the World Report No. 8). Pretoria: Institute for Security Studies. Retrieved from https://issafrica.s3.amazonaws.com/site/uploads/aitwr-8.pdf
  1. Balchin, N., Gelb, S. Kennan, J., Martin, H., Willem te Velde, D., & Williams, C. (2016). Developing export-based manufacturing in Sub-Saharan Africa. London: Overseas Development Institute. Retrieved from https://set.odi.org/wp-content/uploads/2016/04/Export-Based-Manufacturing-in-Africa_Full-paper.pdf
  1. Signe, L. (2018). The potential of manufacturing and industrialization in Africa: Trends, opportunities and strategies. Washington DC: Brookings Institution. Retrieved from https://www.brookings.edu/wp-content/uploads/2018/09/Manufacturing-and-Industrialization-in-Africa-Signe-20180921.pdf
  1. Newman, C. & Page, J.M. (2017). Industrial clusters: The case for Special Economic Zones in Africa, (WIDER Working Paper No. 2017/15). Helsinki: United Nations University World Institute for Development Economics Research. Retrieved from https://www.wider.unu.edu/sites/default/files/wp2017-15.pdf
  1. Cusolito, A.P., Safadi, R. & Taglioni, D. (2016). Inclusive Global Value Chains: Policy options for small and medium enterprises and low-income countries. Washington DC: World Bank/OECD. Retrieved from https://openknowledge.worldbank.org/bitstream/handle/10986/24910/9781464808425.pdf?sequence=2
  1. Douglas, Z.Z. (2016). Special Economic Zones: Lessons from the global experience. (PEDL Synthesis Paper Series No. 1). Retrieved from https://assets.publishing.service.gov.uk/media/586f9727e5274a130700012d/PEDL_Synthesis_Paper_Piece_No_1.pdf
  1. Brautigam, D. & Tang, X. (2014). “Going Global in Groups”: Structural transformation and China’s special economic zones overseas, World Development, 63, 78-91. Retrieved from https://daneshyari.com/article/preview/991355.pdf
  1. Farole, T. (2011). Special Economic Zones in Africa: Comparing performance and learning from global perspectives. Washington DC: World Bank. Retrieved from http://documents.worldbank.org/curated/en/996871468008466349/pdf/600590PUB0ID181onomic09780821386385.pdf
  1. Farole, T. & Akinci, G. (Eds.). (2011). Special Economic Zones: Progress, Emerging Challenges, and Future Directions. Washington DC: World Bank. Retrieved from http://documents.worldbank.org/curated/en/752011468203980987/pdf/638440PUB0Exto00Box0361527B0PUBLIC0.pdf
  1. Dollar, D. (2018, January 19). Foresight Africa viewpoint – African economies and global value chains [Blog post]. Retrieved from https://www.brookings.edu/blog/africa-in-focus/2018/01/19/foresight-africa-viewpoint-african-economies-and-global-value-chains/
  1. Hallward-Driemeier, M. & Nayyar, G. (2018). Is automation undermining Africa’s industrialization prospects? In B.S. Coulibaly (Ed.), Foresight Africa – Top priorities for the continent in 2018 (pp. 70-71). Washington DC: Brookings Institution. Retrieved from https://www.brookings.edu/wp-content/uploads/2018/01/foresight-2018_full_web_final2.pdf

macroafricaintel | Jobs, jobs, jobs (5)

By Rafiq Raji, PhD
Twitter: @DrRafiqRaji

I was the keynote speaker at an economic dialogue on Nigeria organised by Konrad Adenauer Stiftung (KAS) and the Delegation of German Industry and Commerce in Nigeria (AHK) on 23 May 2019. Titled “Road to Economic Development: Challenges and Opportunities”, the dialogue was aimed at shaping the priorities of the incoming second administration of President Muhammadu Buhari. The following is the final and fifth part of the highlights of my speech.

Take a charge on bank deposits to raise revenue
For the authorities, the most pressing matter is revenue. When there has been a boom in the economy, it was largely because crude oil prices were high. I doubt very much that it was crude oil itself that caused the boom, though. After all, oil is just about 10 percent of GDP. My reckoning is that a buoyant public purse and consequent free-spending government tend to inspire confidence all around. In other words, when the government is “happy”, it tends to be contagious. As oil prices are volatile, the weight of that purse varies with the times. Thus, there is a need for it to be reliant on more stable sources of revenue. In other words, we need the government to be “happy” most of the time.

Nigerians in formal employment are already taxed automatically. Those in the informal economy are not. And while even those Nigerians would not mind paying taxes, there is a lot that discourages them. Taxing consumption via value added tax (VAT) tends to be an effective way to bring as many people as possible into the tax net. At 5 percent, Nigeria’s VAT rate is relatively low. (Kenya’s is 16 percent.) So, the Nigerian government could certainly increase the VAT rate. Judging from the recent public reaction to a “testing of the waters” of sorts about such a move, however, it may not be ideal at this time.

There is another way. Nigerian banks currently charge all their customers, without exception, an account maintenance charge. And in spite of the complaints, they have by and large been able to get away with it. So, what stops a government, which has authority over the banks, and is probably more deserving of such a charge, from doing the same? In other words, the Central Bank of Nigeria could simply deduct a percentage of banks’ deposits (US$82 billion in 2018) as a “patriotic tax”; 5% should probably do the trick.

It would certainly be more efficient and palatable than increasing the VAT rate. The key thing here is that you are not going to be chasing anyone to get revenue. You simply tax the deposits of all Nigerians with a bank account the way banks already “tax” them via an account maintenance charge. When you add the US$4 billion from a potential 5 percent charge on bank deposits to about US$26 billion (2018) revenue the government already gets from oil, we could easily have a deficit-free budget this year and years to come.

Unify the exchange rate to attract investment
Growth is at an anaemic 2 percent. Such is the pessimistic outlook that an economy that not too long ago ran at a rate of more than 5 percent is now only expected up by about 2.5 percent in about three years or so. And considering that population growth is about 2.5 percent or more, this level of growth would still not be adequate to deal with the problems that we have. Most experts agree we would be able to accelerate the current tepid growth by attracting more investment; which is currently quite low at 13 percent of GDP. (Ethiopia’s is 38 percent of GDP.) A major impediment is our multiple exchange rate regime, however. Thus, a unified market-driven exchange rate would be ideal at this time.

Authorities on track; try harder
To be fair, the authorities are already doing some of these things (see earlier published parts 1-4 of the column). Still, we need to put pressure on them to do the following urgently. Raise power tariffs, raise VAT or take a direct charge on bank deposits, remove fuel subsidies, unify the exchange rate, list the state oil firm on the stock exchange. And for ongoing infrastructure projects, like rail and roads, a higher priority should be placed on those that connect key trade infrastructure; the Lagos sea port, for instance.

And considering there is increasing interest in Nigeria’s digitial economy by global tech firms, there should be a deliberate drive by the government to attract more tech foreign direct investment (FDI). Also, action should be afoot to build the relevant pipeline infrastructure that the soon-to-be-completed Dangote oil refinery would need to transport its output across the country. That way, it would not create another traffic gridlocked area in another part of Lagos, the commercial capital; where incidentally, another port is being built. These are simple and practical things that can be done now to improve our lives.

macroafricaintel | Jobs, jobs, jobs (4)

By Rafiq Raji, PhD
Twitter: @DrRafiqRaji

I was the keynote speaker at an economic dialogue on Nigeria organised by Konrad Adenauer Stiftung (KAS) and the Delegation of German Industry and Commerce in Nigeria (AHK) on 23 May 2019. Titled “Road to Economic Development: Challenges and Opportunities”, the dialogue was aimed at shaping the priorities of the incoming second administration of President Muhammadu Buhari. The following is the penultimate and fourth part of the highlights of my speech.

Scale-up the digital economy
The importance of the internet for job creation cannot be overemphasized. Making data, which 116 million Nigerian internet users (about 60% of the population) currently buy expensively, cheap or available for free at ubiquitous wifi hotspots is a simple way by which the authorities could easily scale-up the digital economy. The ministries and parastatals of the federal, state and local governments should all have free wifi hotspots at their various buildings and locations. Instead of sometimes meaningless and self-serving corporate social responsibility initiatives by the private sector, companies could instead make free wifi hotspots available to the extent they could across the country.

If the labour ministry is tasked in tandem with a massive public media campaign on where to find opportunities for digital skills acquisition and abundant digital economy jobs and opportunities to apply them to afterwards, many young Nigerians, who currently engage in fraudulent digital economic activities (“Yahoo, yahoo”, in local parlance) could be diverted towards positive and value-adding activities in the digital economy.

Recent research by Jonas Hjort and Jonas Poulsen in the American Economic Review, a highly rated academic journal, titled “The arrival of fast internet and employment in Africa” show how the arrival of submarine cables to various African countries increased employment and productivity. There were new firm entries into South Africa, for instance. And because fast internet infrastructure enabled firms to sell their wares abroad much easily, exports increased. And in Ethiopia, improved firm-level productivity was observed. This is not surprising considering employees were able to get real-time on-the-job training without having to travel abroad and so on. And these are just examples of how the internet enhanced local legacy industries.

But tech and the internet are also creating new industries that could very well help Nigeria and other African countries to leapfrog easily into services. In this regard, the experience of India is instructive. Of course, the downside to this is that the services sector tend not to be as labour-intensive as manufacturing. But put together with the suggestions for building our industrial base, the combined effort could easily reduce the employment rate by more than half.

Nigeria could easily be a talent factory; tech talent, especially. One of the abundant resources we are endowed with as a country is people. Intelligent people. And it is the one thing that does not require too much hard infrastructure to develop for what is an increasingly global digital economy.

How do I mean? You may wonder about the poor quality of our educational institutions, for instance. True, that is a constraint. But increasingly less so. How so? Anyone who genuinely desires a good education can avail themselves of abundant resources online. It then means that the priority of government should be to ensure that basic education at the primary level, is of high quality, available and compulsory for everyone. As most Nigerians already know how to use a smartphone, regardless of their education level, it is relatively easy for them to get assess to these online educational resources, if they choose to.

What if they cannot afford data to browse the internet? That is where government comes in. Whereas in the past, the poor went to the library to avail themselves of educational resources, the internet is now where they would be able to similarly do so in today’s didgital economy. So the authorities should make available free internet/wifi/hotspots across the country for the poor to go to for such purposes.

There should probably also be an aggressive awareness campaign to inform youths about the numerous opportunities on the internet for education, skill acquisition and indeed jobs. Perhaps a second initiative should be to do something about making data cheaper or free. For instance, it is probably more optimal to invest in free wifi spots than libraries at this time.

As you are well aware, a sizeable portion of Nigerians now have smartphones; purchased brand new or used. The current numbers range from 25-40 million smartphone users. One forecast (Statista) I am privy to suggests there could be more than 140 million smartphone users in another 5 years. If a diligent citizen has a smartphone, and the knowledge on where to find productive resources on the internet, surely such a diligent citizen should not be handicapped by not being able to afford data to browse the internet.

These are relatively easy things to do. Raise power tariffs, create free wifi spots anywhere and everywhere. Together with an imminent boom in the petrochemicals sector via the Dangote et al. refinery, we could be telling a very different but very positive story in just about three years from now.

macroafricaintel | Jobs, jobs, jobs (3)

By Rafiq Raji, PhD
Twitter: @DrRafiqRaji

I was the keynote speaker at an economic dialogue on Nigeria organised by Konrad Adenauer Stiftung (KAS) and the Delegation of German Industry and Commerce in Nigeria (AHK) on 23 May 2019. Titled “Road to Economic Development: Challenges and Opportunities”, the dialogue was aimed at shaping the priorities of the incoming second administration of President Muhammadu Buhari. The following is the third part of the highlights of my speech.

What is to be done in the immediate term? Power and data. Any diligent Nigerian can be gainfully employed if he or she has access to electricity and internet data that are readily available, reliable and cheap. If the authorities want to create jobs, power and data should be like air for the citizenry: almost free for the poor. Thus, the government should do the following right away.

Raise power tariffs
Power is expensive” is a better narrative than “there is no power”. At about 4,000MW on average, Nigeria’s current power generation level is about 10 percent of South Africa’s 50,000MW (rounded for simplicity). Despite this deficiency and myriad others, Nigeria’s 2018 gross domestic product (GDP) of $397 billion puts it ahead of South Africa’s more advanced $368 billion economy.

Imagine how much bigger Africa’s biggest economy could become if it were able to ramp up its power generation to South Africa’s current level. However, that would only be possible if the Nigerian government allows the electricity business to be a lucrative one for private actors. It should allow power firms set their own tariffs for an extended period; akin to the typical concession periods of 20-30 years. That is, a time long enough for profit-seeking agents of the economy, domestic and foreign, to see investing in the power sector as a huge opportunity. The price-setting process could still be coordinated by the electricity industry regulator, of course. But it should be one that makes power executives leave the room with a smile on their faces. What about the poor?

There are currently 5 major power tariff classes; namely: residential, commercial, industrial, special and street lights. We know where the rich live. And we know how much they currently spend on generators and diesel. They wouldn’t mind higher tariffs if you can guarantee them 24-hour power supply. Businesses won’t mind, either. Charge businesses and the rich with tariffs high enough to subsidise the poor.

I do not need to elaborate on how constant, reliable and abundant power would engender economic activity. Because if power is regular and cheap for the poor, aritisans can earn a living. And if power is abundant because it is a lucrative business, manufacturers would produce more and hire more. It is a virtuous cycle.

Scale-up legacy & budding economies
The mainstream view about manufacturing foreign direct investment (FDI) migrating from China and elsewhere, where wages are rising, to African countries where wages are relatively low, is increasingly unlikely. The informed view is that wages are not low enough in many African countries to compensate for inefficiencies like poor infrastructure, unskilled or semi-skilled labour and consequent low productivity.

In other words, as labour-intensive manufacturing has been migrating from China to emerging Asian countries like Vietnam, where wages are also now rising, the expected next transition to lower wage jurisdictions in Africa might be a pipe dream. And in any case, in the unlikely scenario that this changes, automation might have become so widespread that the thesis would have become irrelevant or untenable.

So should African countries give up on industrialisation? Not necessarily. African manufacturers could aim to cater for domestic consumption. And with the African Continental Free Trade Agreement (AfCFTA) in force by end-May, they could also aim to serve the continent. So, fast moving consumer goods, cement, petrochemicals, and so on, are industries that could still be developed. Yes, you guessed it. Nigeria should sign the AfCFTA right away.

Aliko Dangote, Africa’s richest man, is a good example of what is currently feasible. If you look at his portfolio of manufacturing endeavours, which mirror the aforementioned, it is only cement that he is probably able to export currently. And it is largely to neighbouring African countries. Dangote’s soon to be completed crude oil refinery in Lagos would probably also enable him export fuel and petrochemicals; likely to other African countries as well. These are the types of manufacturing that could now be reasonably hoped for. In other words, Dangote’s industrial endeavours already exemplify Nigeria’s currently feasible or optimal manufacturing possibilities frontier. So, the authorities should enable more Dangotes.

Put simply, our industrial development goal as a country should no longer be to be part of global value chains (GVCs) as being advocated by mainstream experts. This is because recent and likely future trends of nationalism and automation would likely make current GVCs not very “global” pretty soon.

In the Nigerian case, the agricultural value chain, from the farm to the factory gate, is still viable and would accommodate a lot of jobs. Nigeria could also begin to develop new industries. With lithium, a key input for batteries of electric vehicles (EVs), which Nigeria has in abundance in the northcentral state of Nassarawa, the authorities could certainly aim to make Nigeria an intergral part of the battery segment of the global EV value chain.

The movie industry (or Nollywood), which reportedly already employs more than 1 million people, could also be scaled-up. Other sectors of the entertainment industry probably employ just as much. And certainly, stronger intellectual property laws and enforcement could easily double that number; talk less of other more substantive measures. Of course, it is important to mention that Nigerian banks are already doing their bit to enhance the creative industry; with affordable loan facilities, for instance. What needs to be done is to find ways to scale-up that effort as well.

macroafricaintel | Jobs, jobs, jobs (2)

By Rafiq Raji, PhD
Twitter: @DrRafiqRaji

I was the keynote speaker at an economic dialogue on Nigeria organised by Konrad Adenauer Stiftung (KAS) and the Delegation of German Industry and Commerce in Nigeria (AHK) on 23 May 2019. Titled “Road to Economic Development: Challenges and Opportunities”, the dialogue was aimed at shaping the priorities of the incoming second administration of President Muhammadu Buhari. The following is the 2nd part of my speech. I also include some of the points raised by other participants.

Happy people, good government
In a matrix I presented at the dialogue, I identified the key issues the average Nigerian would consider to be “development”. A happy people have jobs, enjoy good infrastructure and live in security. A good government is elected through a credible political process. And because corruption is frowned upon, a good government uses the revenue it earns to provide or facilitate what would make its people happy: jobs, infrastructure and security.

On the panel at the KAS economic dialogue, security was the number one priority for Dr Obadiah Mailafia, a presidential candidate in the 2019 elections. He related a story of the harrowing experience of a relative of his in violent clashes in his area of the north to justify this. Dr Mailafia also asserted the need for every Nigerian to be registered with the authorities. In other words, every Nigerian should have a national identity card.

For Olaf Schmuser of Commerzbank, the government spend on debt servicing was a major source of concern. In addition to highlighting the need to address the problem of power shortages, her forte, Onyeche Tifase of Siemens asserted the need to develop the country’s human capital; especially in light of our increasingly digitalised world and how information technology has democratised access, thus allowing Nigerians and indeed other Africans to be active participants. The cultural constraint on development was also an issue that resonated with her; albeit she reckons a shift in mindset towards one of excellence in our part of the world is inevitable.

To achieve the things that would make the people happy, that is, jobs, infrastructure and security, a country must be able to attract investment. And for the state to do its part to bring this about, it must have the capacity to do so. Simply put, the two things needed to make the people happy and the government good, are investment and state capacity.

Underpinning whether all these would be achieved in Nigeria, or in fact any other country, however, is culture. Incidentally, the culture of Germany, the sponsoring country of the economic dialogue, is an excellent example of how a society’s culture is germane to development.

Germany has a culture of excellence, precision and persistence. Such is its culture’s knack for precision that there are no two words in the German language for anything, one Nigerian employee of its consulate in Lagos tells me at the dialogue. Unfortunately, our culture cannot be similarly praised in regard of these values. And because culture is the foundation of everything else, which I show in my matrix by putting it at the bottom, it can be attributed for why Nigeria continues to flounder.

In fact, I am convinced that the ongoing exodus of middle-class Nigerians to Canada and elsewhere abroad, is motivated not only by a desire for a better education for their children, but also to inoculate them against some of our bad cultural practices. True, they do not entirely escape it even while abroad. But they are better able to make informed choices with relatively little or no costs.

That said, what is to be done in the immediate term?