- Dateline – London
Tunde Obadina
NIGERIANS born in the 21st century will ask how their country went from being wealthier than China until the mid-1990s to becoming poorer and home to the world’s largest number of people living in extreme poverty. When Asia’s most populous nation embarked on liberalisation reforms in 1979, its GDP per capita was five times less than Nigeria’s. By 1993, it had overtaken Nigeria and today is nearly five times wealthier and a global economic powerhouse.
Some analysts will explain the divergence by arguing that corruption crippled Nigeria’s progress. But this is a simplistic view. In the early years of China’s economic transformation, its ruling elites were not much less inclined to abuse public power for private gains. For instance, in Transparency International’s 1997 Corruption Index, Nigeria ranked the most corrupt out of the 54 countries surveyed, but China was only a little better at 50th place.
The differences in the economic experience of Africa’s and Asia’s most populous nations were not the varying levels of honesty of their ruling elites but their understanding of economics, particularly the role of monetary policy and price signals in wealth creation.
After decades of failed attempts to grow China’s economy through central planning and in isolation from the rest of the world, the ruling communist party realised that development requires large amounts of foreign capital, especially machines, equipment and tools and knowledge. They also realised that the most crucial form of capital is money. Though it cannot directly produce anything, money can buy all the inputs of production.
China’s leaders knew that foreigners, especially materialist western capitalists, were not about to provide capital out of the goodness of their hearts. Reliance on aid was not an option. The country had to trade for what it needed.
The answer was to promote exports. The state pursued policies to facilitate and reward domestic companies to do business abroad. It encouraged them with subsidies, tax and tariff concessions and export credits. The most important strategy used to help Chinese companies to penetrate global markets was managing the nation’s currency, the renminbi, to limit or halt its appreciation.
By undervaluing the currency, the government made Chinese goods cheaper and more attractive than those of other nations. China’s strength was in its ability to produce low-cost goods by exploiting its abundant supply of cheap labour. Western importers and investors flocked to the country despite its communist ideology because they got more value for their money compared with other markets. This advantage was mainly because of China’s currency policy and other financial support given to the export sector.
In contrast to China’s policy of subsiding export businesses, government monetary policy in Nigeria taxed them. Following the import-substitution industrialisation theory, the Nigerian state has endeavoured to channel resources to firms producing for domestic consumption, supposedly to reduce reliance on imports. The state also maintained an overvalued national currency, the naira, ostensibly to direct cheap hard currencies to local industries producing for domestic consumption.
While exporters and foreign investors in China received more Yuan for foreign currencies sold to regulated banks than they would without government intervention, in Nigeria exporters and investors received fewer naira for their hard currencies than obtainable in the free market.
The government’s currency system effectively taxes exporters and other earners of foreign exchange to subside imports for so-called import substitution businesses that generate no foreign exchange.
The result was the consumption of scarce foreign capital without being used productively to generate more capital. Successive governments have paid lip service to diversifying Nigeria’s export trade away from dependence on oil sales, but their monetary policy has discriminated against exporters. Even the oil sector, the primary dollar earner, has suffered decades of government underinvestment, leading to the current decline in Nigeria’s oil production capacity.
Nigeria’s endeavour at industrialisation over the past half century is a story of the collapse of most of the import-substitution companies fed with subsidized foreign exchange. Their demise was not simply because of poor management, but mainly insufficient supplies of foreign exchange to import essential capital goods. Most of these industries, including textiles, automobiles, and pharmaceuticals, were highly reliant on imported capital inputs.
That a low-technology society like Nigeria can industrialise and be self-sufficient is a fallacy. Whichever party wins the 2023 elections should urgently shift the direction of government monetary policy away from stifling exports and reducing foreign exchange inflows. Nigeria’s powerful rent-seeking elites will resist the reforms, including the floating of the naira and ending unproductive subsidies.
