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Moving Nigeria from poverty to wealth: Why faster growth rates matter - BUSINESSDAY

JUNE 24, 2019

By LOLADE AKINMURELE

Nigeria’s economy would probably expand 2.5 percent in 2019, according to consensus estimates. The Federal Government expects growth will be even stronger going by its 2.7 percent target.

However, both estimates are hardly enough to cheer because it means the economy will grow at a rate too little to absorb a rapidly growing population this year, for the fifth year in a row.

Nigeria’s average annual population growth rate of 2.6 percent means on average some 5.2 million Nigerians are born every year or 14,246 daily, each one needing hard and soft infrastructure from power to education and healthcare.

Economic growth in the region of 2 percent is hardly enough to cater to those needs, paving the way for more Nigerians to slip below the poverty line.

Nigerians are already growing poor at an alarming rate as the steady decline in average incomes or GDP per capita (calculated by dividing total economic output by population) since 2015 shows.

Shrinking GDP per capita means the economy is not growing fast enough to create economic opportunities like jobs for its people and that is a recipe for poverty.

The decline in GDP per capita was sparked by the lengthy collapse in oil prices which curbed economic growth in Africa’s largest oil producer, even as population grew unabated.

Although oil prices have somewhat recovered, average incomes are still tipped to fall this year and in the subsequent years through 2022, according to the IMF. That means Nigerians will get even poorer with time despite the meteoric rise in poverty rate.

In 2018, the Brookings Institution published a report that said Nigeria had beat India to become the poverty capital of the world, despite being less than a quarter of India’s population. Nigeria wrested the crown from India by having a little short of 100 million people living below the poverty line.

To put the numbers in context, that’s only 10 percent short of the population of Ethiopia, Africa’s second-most populous country, and is equal to the population of South Africa (the 6th most populous in Africa) and Kenya (7th) combined.

It also means if Nigeria’s poor people came together to form a nation, it would be the fourth most populous nation in Africa.

The large number of Nigeria’s poor people and the threat of a socio-economic implosion make poverty reduction a key target for Nigerian policymakers, who have their work cut out, as they must seek to achieve economic growth of around 7 percent.

Some can argue that a socio-economic implosion is already happening, given the rising crime rate and kidnapping in the country.

This makes it all the more imperative for Nigeria to act quickly by borrowing a leaf from the playbook of countries that have succeeded in reducing poverty and averting a socio-economic crisis.

There’s no scarcity of country case studies pointing the way for how Nigeria can curtail rampant poverty.

The common thread in all those case studies is that economic growth is the most powerful instrument for reducing poverty and improving the quality of life in developing countries.

Growth can generate virtuous circles of prosperity and opportunity. Strong growth and employment opportunities improve incentives for parents to invest in their children’s education by sending them to school. This may lead to the emergence of a strong and growing group of entrepreneurs, which should generate pressure for improved governance. Strong economic growth therefore advances human development, which, in turn, promotes economic growth.

It is why a successful strategy of poverty reduction must have at its core measures to promote rapid and sustained economic growth. Asian countries provide overwhelming evidence of that.

Take China, which has contributed over 70 percent of the poverty reduced across the world, according to the United Nations, making itself a country with the most people lifted out of poverty globally.

According to the $1.9 poverty line, from 1981 to 2015, China lifted 850 million people out of poverty, with the percentage of people living in extreme poverty falling from 88 percent to 0.7 percent.

Since the start of far-reaching economic reforms in the late 1970s, growth has fuelled a remarkable increase in per-capita income.

China’s per capita income has increased fivefold between 1990 and 2000, from $200 to $1,000. Between 2000 and 2010, per capita income also rose by the same rate, from $1,000 to $5,000, moving China into the ranks of middle-income countries, a target Nigeria’s Vice President Yemi Osinbajo says he has set for Nigeria.

Beijing’s success was delivered by reforms that were a combination of a rapidly expanding labour market, driven by a protracted period of economic growth, and a series of government transfers such as an urban subsidy, and the introduction of a rural pension.

The whole reform programme is often referred to in brief as the “open door policy”. True to the name of the reform programme, China pursued trade liberalisation and opened up to foreign direct investment. It also improved its human capital, opened up to foreign trade and investment, and created a better investment climate for the private sector.

The Chinese government also worked hard to reduce the inequality of health and education outcomes. The Chinese government shifted its policy in recent years to encourage urban migration, fund education, health, and transportation infrastructure for poor areas and poor households.

China’s poverty reduction also involved reforming land laws and allowing farmers, who formed the bulk of its poor people, to keep more of their profits.

In November 2013, the World Bank and China launched a knowledge hub to spread knowledge of China’s successes in reducing poverty both at home and in other countries.

It is a virtual platform with seminars and studies held in various places.

“Demand is growing among other developing countries to learn from this (China) remarkable progress,” former World Bank Group president Jim Yong-kim said at the time.

Today, the knowledge hub has helped other Asian countries reduce poverty. One such example is India.

If Nigeria were to embrace the idea of using economic growth as a tool to get 100 million people, about half of the country’s population, out of poverty, 10 economists polled in a BusinessDay survey say the government must aim to at least double GDP per capita.

The economists also said the government’s target of 2.7 percent growth in 2019 is too little an ambition for Nigeria if it will pull large swaths of its people from poverty.

If Africa’s largest economy were to expand 3.5 percent annually, it would take another 100 years to double GDP per capita and make a considerable dent on the lives of the poor.

This is why economists say the country should be growing at between 6-7 percent to stand a chance of improving the living standards of its people.

Nigeria’s reliance on government spending in form of social intervention programmes is hardly the way to go in growing GDP per capita.

The entire government budget for the three levels of government (federal, state and local government) is less than 10 percent of GDP, clearly showing the limitations of government-sponsored welfare programmes in growing GDP per capita and reducing poverty.

The economists took turns to share how Nigeria can achieve 7 percent GDP growth.

“To grow GDP 6-8 percent per annum – required for reducing poverty and unemployment – demands investment; in fact, about 26-28 percent of GDP needs to be invested per year to grow 6-6 percent, meaning we need total investment of about N35 trillion-N40 trillion a year,” said Andrew S. Nevin, chief economist at global consulting firm, PricewaterhouseCoopers (PwC).

“We currently do not have enough domestic savings for this – we only have about half the investment required, which means we need foreign investment – both FDI and FPI, as PwC has discussed extensively over the past few years,” Nevin said.

“However, I think we have more domestic capital than we think given that Nigeria has about N170 trillion in dead capital predominantly in real estate,” he said.

Dead capital refers to assets that cannot be easily transferred, where title is uncertain and so cannot be converted to their most valuable social and economic use. They cannot be used as collateral and so prevents investment in other businesses.

Learning from China would mean the Nigerian government unlocks this enormous capital to boost economic growth.

N170 trillion is larger than Nigeria’s 2018 GDP and is nearly the size of South Africa and Ghana combined. This gives ample insight into how impactful unlocking these trapped assets could be for Nigeria.

For Charles Robertson, chief economist at Renaissance Capital, Nigeria can get real per capita GDP growth up to 4-6 percent – which implies headline GDP growth of 7-9 percent – by a doubling of the oil price or industrialisation. The risks of relying on oil, as Nigeria learnt when it slipped into recession in 2016 when prices fell, makes the latter suggestion by Robertson more tenable.

To achieve industrialisation, Roberston says Nigeria must raise adult literacy from 60 percent to 80 percent which can happen from 2024 onwards.

“An adult literacy campaign could accelerate this, copying what the super poor war-torn state of South Korea did in the 1950s,” Robertson said.

Nigeria must also treble electricity consumption and double the investment rate to GDP from 13 percent to 26 percent.

“To double the investment rate, embrace reforms such as removing the fuel subsidy, boosting domestic savings and encouraging foreign direct investment. The government must also bring down interest rates which will probably require a smaller deficit and higher taxes,” Robertson added.

 

LOLADE AKINMURELE



Moving Nigeria from poverty to wealth: Why faster growth rates matter - BUSINESSDAY

JUNE 24, 2019

By LOLADE AKINMURELE



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