Nigeria’s economy is overwhelmingly dependent on oil, which accounts for 81% of government revenue and more than 97% of export revenue1. Myopic policies pursued by successive military regimes in the last decades of the last century have devastated traditional agricultural economies and crippled growth in non-oil sectors. Consequently, Abuja’s growing oil wealth has coincided with a concomitant decline in human development indicators and a widening of the urban-rural divide. Massive economic imbalances have created a thriving informal sector that continues to support most of Nigeria’s 148 million people. Despite contributing over 40% of West Africa’s total GDP, Nigerians are among the poorest people in the world.
The fundamental problem of the Nigerian economy is its lack of diversification. Rather than investing oil revenues in cross-industry economic growth or poverty reduction, previous governments squandered national profits through unsustainable import dependency and corruption. The resulting fragility was evident over the last year as the global economic downturn severely impacted every aspect of Nigeria’s economy – from banking and foreign exchange reserves to the capital markets and mortgage sector. Reforms introduced since 1999 have produced encouraging results – most notably the revitalization of agriculture, which now accounts for 42% of GDP2. Although an estimated two-thirds of the population depends on it for their livelihood, Nigerian agriculture, like many other potentially high-growth sectors, remains a labor-intensive, low-productivity enterprise.
Curiously, Nigeria is better placed to develop a well-diversified economy than possibly any other country in West Africa. The wealth of natural resources, mineral deposits and fertile land it possesses is unrivaled, as is its sizeable workforce. As part of the government’s extensive reform program, there are already a number of initiatives to promote other sectors of the economy. The non-oil economy doubled growth to 7% between 2001 and 2006, an encouraging sign in view of Nigeria’s Vision 2020 target of accelerated growth and economic consolidation. Optimizing the use of resources and raw materials through the development of a mass base of interconnected businesses is central to this scheme of things.
Given past experiences and current realities, Nigeria’s resurgence is inseparable from small and medium-sized sector business expansion. SMEs have proven to be reliable agents of economic transformation in developing countries because of the wide range of benefits they bring – job creation, preservation of foreign exchange, optimal use of resources and equitable distribution of wealth. The most compelling benefit of all, however, is the interdependence between companies that support SMEs – a critical consideration in the context of Nigeria’s long-term ambitions.
Recent efforts by Abuja to promote a more connected corporate economy include:
* Strengthening of the financial sector with the 2004 bank consolidation program to improve access to credit for the private sector, particularly for small businesses.
* Privatization of large public entities in oil exploration and marketing, construction, mining and ports to encourage private participation and downstream business development.
* Reducing government spending and engaging in direct economic production through commercialization, divestment, and strategic mergers.
* Promote venture capital over debt through extensive tax breaks and financial incentives for foreign private equity investors in key areas.
* Increasing focus on traditional activities such as fishing, mining and farming, which have significant potential for business growth.
* Improving business skills and vocational training, notably by making entrepreneurship education compulsory at college level.
While it may be too early to discuss the extent of the success of these measures, it is clear that the Nigerian economy has not reached the level expected. This is impressively demonstrated by the fact that even after a decade of diverse reforms, more than half of all industrial raw materials and consumer goods are still imported. Non-oil exports remain marginal, while growth in potential boom sectors like tourism and textiles is sluggish. The vibrant economy based on rapid business development that Nigeria is desperately seeking is evidently unmatched.
Some of the biggest roadblocks to a more connected entrepreneurial economy are:
* Low productivity in small businesses due to the prevalence of outdated technology and business practices.
* Lack of socially relevant diversification models that optimize locally available resources and raw materials.
* Dominance of distinct industries with little or no back-links to the local economy.
* The existence of a vast and thriving informal sector that operates outside the realm of government regulation.
* Massive infrastructural deficiencies in power and transportation, severely hampering small business development.
* Entrenched popular attitudes against equity partnerships and the overriding insistence on debt financing.
* Poverty, social unrest and violence that stifle financial aspirations and hamper market innovation.
The challenge of economic diversification is not limited to developing countries. Wealthy nations have also been forced to develop creative strategies to reduce reliance on traditional sectors. A striking example is the oil-rich emirate of Saudi Arabia, which is well on the way to reinventing itself as a luxury travel destination. Norway, the world’s largest producer of crude oil after Saudi Arabia and Russia, has also expanded its economy from petrochemicals by developing successful supply and service industries. These examples serve to illustrate the increased diversification needs inherent in oil-dependent economies, regardless of their size.
According to a British Petroleum report, Nigeria’s oil reserves will run out before the end of 20303. Even if more reserves are explored in the coming years, the eventual decline in oil-driven economic power is beyond doubt. Nigeria’s future standing on the world stage, therefore, undoubtedly depends on the development of a thriving, diverse and interdependent business economy.