The Path to Inclusive Growth

Guest Columnist: Kingsley Moghalu

I am a sucker for clarity of thought, and especially conceptual clarity, which has important implications for public policy. Clarity in the way we understand things matters for public policy because the policy space determines our wealth or poverty as a nation. If we understand concepts, issues and challenges clearly and accurately, we are more likely to act in ways that actually address these challenges effectively. Provided, of course, that we have the political will. And provided, in addition, that ideology does not impose blinkers on our ability to think and act on a rational and pragmatic basis. Muddled thinking and hazy understandings, when inflicted on economic policy, can keep a nation poor when it has no business in the poverty leagues.

Thus it is important, especially for Nigeria as Africa’s largest economy and most populous country, to apply wisdom and understanding to its economic future and avoid the policy mistakes of the past. We can easily make the same mistakes over the subject of inclusive growth, the absence of which is understood to be at the heart of our development dilemma. One can already see how this can happen, with our thinking and rhetoric veering off decidedly into “inequality” and social protection, all of which are nevertheless valid issues in their own right.

It is easy for a discussion about inclusive growth to become one about income inequality. The latter is the phenomenon in which wealthy industrial societies have become increasingly unequal in terms of income, wages and wealth as a result of the unequal dividends of capitalist success. It is the famous “1 per cent” problem, a cause celebre of contemporary economics and public policy in the West. The combined wealth of the richest 1 per cent eclipses that of the remaining 99 per cent.

The 1 per cent problem reflects the limits of capitalist philosophy. In response, several western governments and policy thinkers have tinkered with different ideas about “redistribution” of wealth. But this is not the real challenge of inclusive growth developing countries like Nigeria face. Our economy, after a sustained GDP average growth of 5-7 per cent, reduced sharply to 2.8 per cent in 2015 following the oil price crash, and is now headed into recession with growth of 0.4 per cent in the first quarter of 2016. Like many other countries that have been poster children of the “Africa Rising” story, Nigeria ranks very low on the United Nations Development Programme’s Human Development Index at 152 out of 187 countries. Our GDP per capita is $3,000. The “unequal” 99 per cent in the industrialized world enjoy the basics of electricity, clean water and good transport infrastructure, but are nevertheless worried at how phenomenally wealthy the 1 per cent have become. We have a very different, and foundational problem in Nigeria.

The term “inclusive growth” has become a buzzword of development economics and political economy. As the UNDP so pithily puts it, “when you ask five economists to define the subject, you will likely end up with six answers”. But it is clear that inclusive growth is growth that is broad-based across different segments of the society and sectors of the economy. It will include a large part of the country’s labour force and create productive employment. Inclusive economic growth emphasizes equality of opportunity in terms of access to markets, employment, resources, and a regulatory environment that provides a level playing field. While it is one in which the poor are not left out or left behind, it seeks that outcome by creating productive employment and a steady increase in the productivity of labour, which is what creates wealth, in raising the income levels of excluded groups. This is different from direct income redistribution

Inclusive growth is Nigeria’s central economic challenge. Market-led economic growth is the dominant paradigm of economies in the world today, and rightly so because it has been the most effective path to reducing poverty, creating wealth, and achieving transformation. But its Achilles heel is always this nagging question of growth that excludes large numbers who do not have access to the opportunity for productive employment and entrepreneurship.
This matters for two reasons. First, non-inclusive growth, especially in countries such as ours that have not even taken off on a trajectory of production-driven growth, cannot achieve real development and transformation. Western countries can grapple with the 1 per cent problem, but their economies have long been structurally sound. These economies are based on innovation, industrial production, and the exports of competitive goods, and thus create jobs. Second, non-inclusive growth builds up a bottleneck of exclusion that, long term, destabilizes the security and sustainability of the social order. Again, this is why, despite the importance of social safety nets in every society, exhaustive transfers to the unemployed, rather than creating jobs for them, cannot solve the problem. Without creating a broad-based pattern of growth based on productive employment that grows both the GDP and the GDP per capita, exhaustive transfers may have populist appeal but will not be sustainable.

How can we create inclusive growth in Nigeria? The answer lies in a combination of approaches that includes (a) conceptual clarity as a point of departure, (b) rural-based economic growth, (c) infrastructure provision, (d) creating a social contract, (e) the role of business, (f) human capital development, (g) economic diversification, (h) financial inclusion, and (i) effective political leadership. We have already dealt with conceptual clarity. Orthodox definitions of economic transformation emphasize urban-based economic production, creating an “urban bias” in classical economic thinking. But, especially in a populous country such as ours, we need to begin to develop rural based economies. Cities such as Lagos, Kano Aba and Onitsha are choked. Economic activity is trapped in these cities, but 53 per cent of our population live in rural areas. Decentralized economic growth, especially based on value-added agriculture and industrial manufacturing, will create more jobs and boost inclusion.

The role of infrastructure in creating inclusive growth is obvious. This is what creates equality of access to markets and productive opportunities, and it will also create a “pull” factor for decentralized economic activity. Developing human capital through educational policy that is geared to innovation and technical skills is necessary to increase the productivity of labour, which is the critical component of inclusive growth. This requires a very conscious policy that prioritizes science and technology for the next 20 years in Nigeria. The benefits of a liberal arts education notwithstanding, it is clear that education policy in Nigeria must make certain conscious choices if we are to achieve a “quantum leap” of inclusive growth. That choice must be one in favour of technical and vocational skills at this time.

We have talked ourselves hoarse about the need to diversity Nigeria’s economy. But inclusive growth will not be achieved by merely diversifying into low-productivity agriculture in the 21st century or mining and exporting raw solid minerals. The latter will simply create another channel of commodity dependency, and is not the model on which the true wealth of nations is based. Real diversification means a value chain of industrialization and value addition in a number of industries, whether based initially on agricultural or mineral resources, or, additionally, beyond natural resources to create other competitive goods for export. This means, in the area of solid minerals, that we need to be far-sighted and require value-addition (beneficiation) to any solid mineral mined in Nigeria before its export prior to granting mining licenses to investors. That is what creates jobs. True diversification of economies across sectors requires a strategy to achieve economic complexity (a subject I will address in more detail another day). Achieving inclusive growth in this manner also requires political will to overcome the corruption and patronage systems that are frequently linked to natural resources.

Nigeria needs to create a social contract between the state and its citizens. This involves, primarily, the obligations of citizens (such as paying taxes) in exchange for the protection of life and limb, civil liberties and its limits, as well as the sustainable provision of basic infrastructure and social safety nets by the state. This gives citizens a sense of belonging, with mutual accountabilities between the government and the governed. One way to achieve this is to bring the millions in Nigeria’s informal economy into the formal sector, including by making innovative use of the ubiquitous mobile telephones that are owned by 140 million Nigerians.

This is linked to financial inclusion. Inadequate access to finance plagues Nigeria’s small and medium enterprises, resulting in the oxymoron of capitalism without capital. It is not enough to strengthen the role of development banks, though that is essential. Beyond this, more private sector regional banks in geopolitical zones should be encouraged as a matter of policy, so that finance is located closer to rural and semi-rural populations as well as the urban small businesses. It is shocking that, as a recent report of the Nigerian Bureau of Statistics revealed, 77 per cent of bank credit in Nigeria in 2015 went to Lagos alone. That’s just one of the 36 states, and only 10 per cent of Nigeria’s population. This is extreme financial exclusion, a model that cannot build or sustain an inclusive growth economy. The role of the private sector more broadly is similarly critical. Business will play a driving role in inclusive growth if the power of competition, privatization and deregulation is unleashed in a manner that avoids abusive crony capitalism.

Finally, Nigeria will not achieve real inclusive growth without inclusive governance. We will continue to suffer instability and be distracted from strategic economic transformation if the foundational elements of political inclusion for Nigeria’s diverse citizenry are not addressed sincerely and effectively. The federal government today came to office in an election in which the opposition defeated an incumbent president. This gives it a unique opportunity to begin to truly heal Nigeria’s wounds. A political re-engineering of our nationhood and our economy by revisiting a constitutional structure that traps us in a vicious circle of underdevelopment, will provide the foundation for real economic transformation.

• Professor Moghalu, a former Deputy Governor of the Central Bank of Nigeria (CBN), is a Senior Fellow in the Council on Emerging Market Enterprises at The Fletcher School of Law and Diplomacy at Tufts University, USA