Tuesday, August 04, 2015 11:55 AM / ARM Research
In today’s cut-out from the ARM Research core strategy document – Nigeria Strategy Report, we review recently released NBS data on labour productivity and unemployment and draw out salient implications for trend GDP growth in our feature report.
Growing GDP; declining productivity: a Nigerian paradox
Although GDP growth has been high and stable in recent years, save for Q1 15 growth slowdown to 3.96% YoY, rising unemployment and slowing labour productivity have posed major limitations to economic growth sustenance in Nigeria. Worse still, recent NBS releases paint an even grimmer picture for productivity; as despite GDP growth of 6.22% YoY in 2014, labour productivity – as measured by GDP per labour hours worked – contracted 30bps YoY to $3.77 (vs. an average of $15 and $11.2 for select frontier and emerging market countries) over the period. In addition, Q1 15’s 2.4% decline, relative to the average over the four quarters of 2014, dampens hopes of a possible rebound in the near term.
Figure 1: YoY Growth in labour force, productivity and GDP
Furthermore, whilst Nigerian productivity per person employed towers above those of some African nations such as Zambia and Malawi, it lags those of South Africa, Egypt, Tunisia, Morocco, Algeria, and Angola. Additionally, despite having a slightly quicker growth rate between 2011 and 2014, Nigeria’s productivity remained ~ 3 times smaller than the average for countries whose economies are of similar size to Nigeria using most recent estimates of The Conference Board . Put differently, compared to these select nations, the sizes of Nigerian GDP over the years have failed to adequately compensate for the large number of persons engaged in work.
Figure 2: Historical labour productivity per employed person ($)
The reason for this is not farfetched. NBS’ report suggests that nearly half of Nigerian output is driven by low skilled employment and underemployment, with 84% of Nigeria’s labour force population contributing ~48% of output, suffering significant skills deficiency. In further evidence, NBS also points out that only ~ 11% of Nigeria’s labour force population has post secondary school education. Indeed, the challenges facing not only education (in terms of quality and availability) but also power and infrastructure are well documented, manifesting in the acute lack of science and technological capabilities (and possibly even average financial savvy). This is exacerbated by the prevailing labour skills vs. labour market requirements mismatch as well as an excess supply of labour that stokes high unemployment and forces a number of persons into low wage/low skilled subsistence jobs. Unsurprisingly, using the alternative GDP per capita approach to labour productivity, National Productivity Centre (NPC) reports that Nigeria’s level of productivity of $3184.6 in 2014 was far below target level of $5,370, corroborating the general trend from NBS’ numbers.
Incidentally, the poor productivity number also manifests as an even bigger paradox when overlaid with the structure of the economy. Nigeria’s rebased GDP series attributes average weights of 35.7%, 12.8%, and 51.5% weights to primary, secondary, and tertiary class output. Specifically, given large weight of services in the nation’s GDP basket, the mismatch between low productivity and a largely tertiary economy—as implied by Services’ domination—is in stark contradiction to the directly proportional relationships between productivity and economic development stage in most countries. In particular, though Nigeria ranks amongst nations with tertiary production of more than 50% of GDP, The Conference Board annual data suggest that its productivity – measured in terms of GDP per persons employed – remains significantly lower compared to most emerging market counterparts (See figure 35 above).
New definitions, same old problem as unemployment rate accelerates to 7.5% Aside the productivity numbers, the NBS also released new set of data for unemployment which even if they don’t raise as many questions reinforce those that already arise from the productivity data. Until Q4 14, Nigeria’s labour force classification methodology, which categorized people working below 40 hours per week as economically unemployed, ran contrary to International Labour Organisation’s definitions and was reportedly both outdated and unreflective of actual economic realities. This prompted NBS to revise definitions and methodology for computing labour force statistics. the latest numbers indicate 0.69% QoQ increase in Nigeria’s labour force to 73.4 million in Q1 15, corresponding to new entry of ~ 0.5 million economically active and willing persons into the market. Despite shrinking government involvement since advent of oil price plummet in Q3 14, further analysis still revealed a 0.88% QoQ growth in the number of persons in full employment (i.e. working at least 40 hours a week) to 55.7 million. At the other end, whilst the number of underemployed persons (i.e. those working between 20 to 39 hours a week or have skills or competencies that are grossly underutilized) was 6.46% lower QoQ at 12.2 million, the number of unemployed persons surged 18.43% QoQ to 5.5 million – leaving underemployment and unemployment rates at 16.6% and 7.5% respectively (vs. 17.9% and 6.4% in Q4 14).
Figure 3: Composition of labour force Q1 15
According to NBS, the greater increase in unemployed population (i.e. ~ +0.9 million persons) relative to the aforementioned number of new entrants into the labour market is indicative of some job loss to hitherto underemployed and/or fully employed persons in the labour market. Save for outright job loss for some of the former – underemployed persons, NBS noted that a few persons in the category saw their weekly job hours trimmed down to below 20 hours per week – making them effectively unemployed by definition.
Table 1: NBS labour force classification
New numbers frame economic challenges in newer perspective
The overall theme of under-enabled labour force fits into the already established outcomes from the poor productivity numbers, and importantly the role of weaker output from lower quality labour in delivering that result. The causative factors we earlier adduced on the skill, infrastructure, and power fronts are easily reinforced by extending the comparison of Nigeria’s economy with those of other countries along the lines of the parameters already explored. In resolving the above paradox, we note that relative to most nations with contribution of services to GDP of ~50% and above, such as. South Africa, Tunisia, and Egypt, Nigeria boasts a relatively weaker secondary output segment of the economy; a weakness that has persisted over the years. To put it another way, the new numbers reinforce an old surmise that the entire value adding segment of Nigeria’s economy which should serve as the bridge between raw inputs (primary) and final output (tertiary) is hardly existent. This, as we had always highlighted, is also indicative of the real loss from stunting of sectors like manufacturing. In particular, inadequate power, requisite technical knowhow and infrastructure have frustrated manufacturing activities in Nigeria over the years.
Figure 4: Composition of GDP 2014
Incidentally, the issue may not just be the gaps in the existing structure but also in what could be the lost potential. For instance, CBN noted that labour productivity in agriculture continues to be held back by slow technical progress, with over 50% of the population using rudimentary technology and operating at the subsistence level. To our point, the question is whether the demands of an industry that refined the raw inputs—if such existed domestically—have necessarily forced an upgrade on the quality and quantity of agricultural produce, and by extension, the adoption of the technology to meet those new standards. Similar questions might apply to how functional industries could have forced a more in-depth look at the exploration/mining of other minerals, especially now that oil’s problems continues to wreck havoc on state and federal finances. These are the possibilities that make it seem the real loss from the historical stunting of sectors like manufacturing might not be fully appreciated.
One other inference relates to answering the question of whether currently slowing GDP growth rate, amidst significant macro headwinds, would stoke further productivity concerns going forward. Whilst current challenges suggest that scenario quite plausible, we feel this necessarily ought not to be so. To turn the paradox on its head, how did Services become this big and contribute so much even when the economic base is not so developed? Noting that the obvious answer to that is the significant boost from telecoms and financial services the implication is encouraging development in other segments and the concomitant services that could be built on those new bases, could totally breathe new life into an economy that seems ready to wilt post-rebasing. In other words, restoring the value-adding phase could impact both primary and secondary output such that there’s a mutually reinforcing cycle that could boost overall output growth, (and) potential GDP—with the existing gap suggesting that even the years of prior ‘rapid’ growth still represented some serious underperformance, relative to potential.
For policy makers, the scenario clearly underscores where the focus and direction will be. On one hand, the foregoing documentation of some traction with reforms, and signs that this could accelerate, amidst fledgling improvement in manufacturing and power, suggests that some of the necessary readjustment is already happening. On the other, the ravaged landscape in the subsequent economic review suggests that, in terms of protecting against shocks, the road ahead is still long. Perhaps the real benefit from the NBS’ new numbers is to reinforce the drive of economic managers to make the necessary push.
Figure 5: Historical growth rates of labour force categories
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