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Growth and Economic Transfor Copyright c African Development Bank Group 2019 Rights and Permissions This document may be ordered from: All rights reserved. African Development Bank The text and data in this publication may be reproduced Nigeria Country Department as long as the source is cited. Reproduction for Plot 1521, Cadastral Zone A0 commercial purposes is forbidden. Off Memorial Close Central Business District Abuja, Nigeria Legal Disclaimer This study was prepared as part of analytical work to Phone (Standard): (+234) 9 700 2092 underpin preparation of the Country Strategy Paper (+234) 9 700 2095 (CSP) 2020-2024 for Nigeria. The study was led by Chuku Chuku and Anthony Simpasa with input from a Email: [email protected] team of staff from the Nigeria Country Department. Cover design, typesetting, interior design The views expressed herein are entirely those of the and production: KeyKoncepts Nigeria Limited authors and do not necessarily reflect the official position of the African Development Bank, its Boards of Directors, or the countries they represent. Growth and Economic Transformation Options for Nigeria: i An Assessment Using Growth, Identification and Facilitation Framework Preface For nearly two decades until the 2016 economic recession, Nigeria’s economy grew at average of more than 6 percent per annum. However, this growth has not been transformational as evidenced by a steady rise in unemployment and slow progress in poverty reduction. Effectively therefore, Nigeria has experienced a jobless growth. This reflects structural deficiencies of the economy, which is largely anchored on the oil sector. The federal government has initiated some policy measures aimed at transforming the economy and diversifying exports from oil and gas into sectors that have potential to create jobs. Understanding the key drivers of economic growth is essential to drafting policy to achieve the objective of economic transformation.The Bank initiated a series of studies to provide to the preparation of the Country Strategy Paper 2020-2024 for Nigeria and to anchor policy dialogue in the country. As part of this exercise, this study, an inter-departmental collaboration involving the Nigeria Country Department, Country Economics Department, and the Macroeconomic Policy, Forecasting and Research Department, assesses different options for stimulating growth and transformation of the Nigerian economy. The study applies the Growth Identification and Facilitation Framework (GIFF) in the context of the New Structuralist Economics. Using the GIFF, the study assesses how Nigeria’s economic growth can be achieved through diversification, technological innovation, infrastructure provision, institutional reforms, industrial upgrading, and the removal of other constraints. Five key sectors/products have been identified as presenting opportunities for export and economic diversification. These are milled rice, palm oil and its fractions; apparel and footwear; radio and television receivers; and, motorcycles, tricycles, and motor vehicle parts. Stimulating growth in these sectors requires prudent utilisation of revenues from the country’s abundant natural resource endowments to invest in human capital and physical infrastructure as well as leveraging technological innovation to drive agro-led industrialization and upgrading in light manufacturing industries. Agro-industrialization and light manufacturing provide forward and backward inter-sectoral linkages and have the ability to absorb a large part of the labour force. Focussing on this approach will move the economy up the agricultural value chain, especially in the key identified sub-sectors. Improving institutional governmence and better coordination across different agencies of government will be key to effective policy implementation needed to unlock private sector investment. Ebrima FAAL Senior Director Nigeria Country Department Growth and Economic Transformation Options for Nigeria: ii An Assessment Using Growth, Identification and Facilitation Framework Contents Preface ii Table of Contents iii List of Figures iv List of Tables iv Executive Summary v 1 Growth and Economic Transformation Options for Nigeria 1.1 Introduction 1 2 Recent Economic and Social Developments in Nigeria 2.1 Drivers of growth 6 2.2 Inflation and exchange rate dynamics 7 2.3 External sector developments 7 2.4 Poverty and unemployment 10 3 Factor Endowments in Nigeria: Labour, Natural Capital, and Physical Capital 3.1 The human capital endowment 14 3.2 Physical capital endowment 15 3.3 Natural capital endowment 17 4 A chronology of Industrial and Related Policy Strategies in Nigeria 20 5 Applying the Growth Identification and Facilitation Framework to Nigeria 26 5.1 Steps in GIFF 26 5.2 Unveiling Nigeria’s latent comparative advantage 28 5.2.1 Selecting benchmark countries 28 5.2.2 Identifying sectors with potential for growth 29 5.3 Nigeria’s resource-led transformation 34 5.4 Actionable policy implications 36 5.4.1 Broad policy implications 36 5.4.2 Getting granular: addressing binding constraints to structural transformation 37 6 Conclusion 40 Bibliography 41 Appendix 43 Growth and Economic Transformation Options for Nigeria: iii An Assessment Using Growth, Identification and Facilitation Framework List of Figures Figure 1: Nigeria’s GDP growth 2000-2018 (percentage p.a.) 6 Figure 2: Change in oil output production (percentage p.a) 6 Figure 3: Sectoral composition of GDP (percentage) 6 Figure 4: Sectoral contribution to real GDP growth (percentage) 7 Figure 5: Evolution of consumer price inflation in Nigeria (percentage per annum) 7 Figure 6: Terms of trade and exchange rate movements (annual percentage change) 7 Figure 7: Current account position 8 Figure 8: Product composition of imports (percentage) 9 Figure 9: Destination of Nigeria’s total exports by 6-digit HS code, 2017 9 Figure 10: Origin of Nigeria’s total imports by 6-digit HS code, 2017 9 Figure 11: Nigeria’s poverty headcount, 2009/10 (percentage of the total population) 10 Figure 12: Household livelihood types by type of economic activity (left panel); Unemployment by geopolitical zone (right panel); 2018, Qtr3 11 Figure 13: Africa infrastructure development index, selected countries (period average 2003-2018) 16 Figure 14: Natural capital rents (percentage of GDP) 17 Figure 15: Schematic representation in the application of the GIFF 26 Figure 16: Production and exports of palm oil and its fractions 30 Figure 17: Structure of Nigeria’s merchandise exports (percentage of total) 35 Figure 18: OPEC net real oil export revenues, period average (US$ billion) 35 Figure 19: Manufacturing exports (percentage of merchandise exports), 2010-2016 35 Figure 20: Long-term financing needs, US$ billion 36 List of Tables Table 1: Population density per square kilometre and age dependency ratio, 2016 14 Table 2: Physical capital stock and investments in Nigeria 15 Table 3: Potential comparator countries with Nigeria based on GDP differentials in 2016 29 Table 4: Tradable sectors with high potential for global market penetration 32 Appendixes Table A.1 Breakdown of Nigeria’s population by state, 2010-2016 43 Table A.2 Identifying sectors for growth: Key exports of Indonesia 44 Table A.3 Identifying sectors for growth: Key exports of China 45 Table A.4 Identifying sectors for growth: Key exports of India 56 Growth and Economic Transformation Options for Nigeria: iv An Assessment Using Growth, Identification and Facilitation Framework Executive Summary Until the recession of 2016, Nigeria had transformation in high-skilled industries. Economic experienced sustained growth rates averaging transformation, and particularly industrialization in 6.8 percent per annum for about two decades. Nigeria, will require investing in human capital and The main concern, however, is that this growth building skills in critical areas to meet the needs of has not been sustainable and inclusive nor has industry. Second, to reverse the trend of capital it generated new and good quality jobs. Instead, shallowing, the physical capital stock needs to it has been driven by the increase in domestic grow at a minimum average of 8 percent per consumption, mostly by imported goods and annum for 10 successive years. production of oil and gas. This situation of the Nigerian economy was partly the cause of the Third, there are five key tradable sectors in which recession in 2016. Given the current challenges Nigeria can exploit its comparative advantage facing the country, the Nigerian government to expand its export market: milled rice; palm launched the Economic Recovery and Growth oil and its fractions; apparel and footwear; radio Plan (ERGP), a medium-term plan for 2017-2020. and television receivers; and, lastly, motorcycles, The plan focusses on implementation; outlines tricycles, and motor parts. government initiatives for accelerating growth; builds on existing sectoral strategies; and seeks to Finally, two far-reaching policy implications foster collaboration between the sub-component emerge from the analysis. First, an agro-led units of government and the private sector. industrialization strategy appears to be the easiest and fastest way to achieve accelerated This paper seeks to establish a practical case for growth and reduce unemployment because of its structural transformation of the Nigerian economy ability to absorb a large part of the labour force by taking into account the country’s endowment and provide both forward and backward inter- structure and its latent comparative advantages, sectoral linkages. This
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