Nigeria’s economy is heavily dependent on oil, which accounts for 81% of government revenue and over 97% of export earnings1. The myopic policies applied by successive military regimes in the last decades of the last century devastated the traditional agrarian economy and paralyzed the growth of the non-oil sectors. Consequently, Abuja’s growing oil wealth was matched by a simultaneous decline in human development indicators and widening urban-rural gaps. Massive imbalances in the economy have spawned a thriving informal sector that continues to support the majority of Nigeria’s 148 million people. Although they contribute more than 40% of West Africa’s combined GDP, Nigerians are among the poorest people on the planet.
The fundamental problem with the Nigerian economy is its inability to diversify. Instead of investing oil revenues in multi-sector economic growth or poverty alleviation, previous governments squandered national gains through unsustainable reliance on imports and corruption. The resulting fragility has been clearly evident over the past year, as the global economic downturn severely affected all aspects of the Nigerian economy, from banking and foreign exchange reserves to the capital markets and mortgage sector. The reforms introduced since 1999 have produced encouraging results, especially the reactivation of agriculture, which now contributes 42% of GDP2. However, while an estimated two-thirds of the population depends on it for their main livelihood, Nigerian agriculture, like many other potentially high-growth sectors, remains a low-productivity, labor-intensive operation.
Interestingly, Nigeria is better placed to develop a well-diversified economy than possibly any other West African country. The abundance of natural resources, mineral deposits and fertile land it enjoys is unrivaled, as is its significant pool of human resources. There are already a number of initiatives dedicated to promoting other sectors of the economy as part of the government’s broad reform program. The non-oil economy experienced double growth at 7% between 2001 and 2006, an encouraging sign in view of Nigeria’s Vision 2020 goal of accelerated growth and economic consolidation. Optimizing the use of resources and raw materials by developing a massive base of interrelated enterprises is central to this scheme of things.
Given past experiences and present realities, Nigeria’s resurgence is inextricably linked to business expansion in the small and medium-sized business sector. SMEs have proven to be reliable vehicles of economic transformation throughout the developing world due to the wide scope of their benefits: employment generation, foreign exchange conservation, optimal use of resources and equitable distribution of wealth. The most compelling benefit of all, however, is the interdependence between businesses that foster SMEs, a critical consideration in the context of Nigeria’s long-term ambition.
Recent Abuja efforts to promote a more networked business economy include:
* Strengthen the financial sector with the 2004 bank consolidation program to improve access to credit for the private sector, specifically, small businesses.
* Privatize the main public sector entities in the production and marketing of oil, construction, mining and ports to promote private participation and the development of downstream companies.
* Reduction of public spending and participation in direct economic production through commercialization, divestment and strategic mergers.
* Stimulate venture capital on debt by providing broad tax breaks and financial incentives to foreign private equity investors in key areas.
* Focus increasingly on traditional activities such as fishing, mining and agriculture, which have considerable potential for business growth.
* Improve business skills and professional training, especially by making business education compulsory at the university level.
While it may be too soon to discuss how successful these measures have been, it is clear that the Nigerian economy has not diversified to the expected levels. This is convincingly confirmed by the fact that even after a decade of multiple reforms, more than half of all industrial raw materials and consumer goods continue to be imported. Non-oil exports remain marginal, while growth in potentially booming sectors such as tourism and textiles is slow. The dynamic economy based on rapid business development for which Nigeria is desperate remains to be achieved.
Some of the main obstacles on the way to a more interrelated business economy are:
* Low productivity in small-scale operations due to the widespread prevalence of outdated technologies and business practices.
* Lack of socially relevant diversification models that optimize locally available resources and raw materials.
* Predominance of independent industries with few or no links to the local economy.
* The presence of a huge and prosperous informal sector that operates outside the domain of government regulation.
* Massive infrastructure deficiencies in energy and transportation that severely impede the evolution of small businesses.
* Ingrained popular mentality against the capital company and the prevailing insistence on debt financing.
* Poverty, social unrest and violence that stifle financial aspirations and blight market innovation.
The challenge of economic diversification is not limited to the developing world. Prosperous nations have also been forced to come up with creative policies designed to reduce reliance on traditional sectors. The oil-rich emirate of Saudi Arabia, which is on its way to reinventing itself as a luxury tourist destination, is a striking example. Norway, the world’s top crude producer after Saudi Arabia and Russia, has also expanded its economy away from petrochemicals by establishing successful supply and service industries. These examples serve to highlight the heightened imperative for diversification that underpins oil-dependent economies, regardless of their size.
If a report from British Petroleum is to be believed, Nigeria’s oil reserves will be depleted before the end of 20303. Even if more reserves are explored in the coming years, the eventual decline in oil-driven economic power is certain. Therefore, Nigeria’s future position on the world stage is unquestionably dependent on the development of a flourishing, multifaceted and interdependent business economy.