The Need for Economic Diversification


Monday December 06, 2021 / 09:12 AM / by FDC Ltd / Header Image Credit:  Ticker Tape


Nigeria's economic fortunes are tied to the ups and downs of the market for oil, which accounts for more than half of the country's revenue. Nigeria's crude oil proceeds fell by 41.60% in the first quarter of 2021 to $6.48 billion (bn) from $11.1bn in the first quarter of 2020.6 Attempts to reduce Nigeria's reliance on oil have been defined by the mantra of "economic diversification". Despite various loans, reforms and policies, millions of Nigerians continue to remain impoverished. COVID-19 coupled with rising debt profiles, have brought the issue of diversification to a new level of urgency.


Due to the whims of the world crude oil market, an oil-based mono-economy like Nigeria cannot achieve economic stability. The relationship between the global oil market and the Nigerian economy means that whenever the oil market sneezes, Nigeria catches a cold. For instance, from 2010 to 2015, Nigeria's GDP grew at an average of 5.53% every year.8 However, in the aftermath of the oil shock in 2016, economic growth slowed and the economy went into an outright recession. Diversification helps to mitigate volatility and provides a more sustainable path for equitable growth and development. It is even more crucial now, given the slower global economy and the pressing need in many developing nations to boost revenue.


Economic diversification entails not just a transition away from reliance on a few commodities, but also structural transformation, as seen by improved productivity, growth, and development. It facilitates the diversification of factors of production, trade and revenue through various dimensions.9 Inadequate infrastructure, such as a lack of proper transportation and frequent power outages, makes it difficult for firms, particularly in the industrial sector, to thrive. Lack of infrastructure raises the cost of producing and processing products, potentially leading to a rise in commodity prices. Weak infrastructure also discourages foreign direct investment (FDI) because of the high prices of energy, water, and transportation dangers. Since gaining independence in 1963, Malaysia effectively diversified its economy from one dependent on agriculture and commodities to one based on robust manufacturing and service sectors.


The country has become a prominent exporter of electrical appliances, parts, and other commodities. Between the early 1980's and the late 1990's, Malaysia successfully implemented trade policies and kept its economy relatively open for both trade and capital inflows. Sectorial and fiscal policies also contributed to diversification. In addition, Malaysia also leveraged export promotions and import restriction strategies, fiscal incentives, and the provision of infrastructure and utilities. These strategies led to an increase in private investment in the country. Private investment's share of GDP rose to 31.8% in 1997 from 15.8% in 1985.10 In developing nations like Nigeria, FDI is a key engine of industrial expansion. Yet, the Nigerian government struggles attracting and keeping investors especially with the onset of COVID-19. FDI, as well as local private investment, should be encouraged in non-oil sectors. Incentives like tax holidays for foreign investors, export incentives and the provision of subsidized industrial lands would encourage investment inflows into the country. This can also be accomplished by improving infrastructure, enhancing security, developing free trade zones and warehouses for export-oriented companies and providing assurances that investment in Nigeria will be both beneficial and safe.


Nigeria has executed a number of import substitution strategies, including food import prohibitions, with little success. Various governments have imposed import prohibitions on various foods like rice and palm oil. Although production has increased, it has also resulted in limited supply and a rise in the prices of these commodities. Import restrictions should be implemented gradually, especially as the country lacks the production capacity to meet domestic demand. These measures should be combined with the promotion of industries that can replace the large number of manufactured goods imported from other countries. Malaysia has also invested in research and development to increase the productivity of agricultural products such as palm oil and rubber. Institutes such as the Malaysian Rubber Research Institute and the Malaysian Palm Oil Council were instrumental in increasing productivity and diversifying Malaysia's agricultural landscape.


Although Nigeria has similar organizations such as the Nigerian Institute for Oil Palm Research and the Agricultural Research Council of Nigeria, these institutions have not been effective in expanding production. The main reasons for these institutions' low efficacy are a lack of proper finance, a lack of critical inputs, and poor resource management. Emphasis should be placed on the development of training facilities, the provision of infrastructure, and the availability of adequate finance for these institutes to help boost agricultural production in the country. Diversification of the economy is critical in order to avoid becoming over-dependent on the oil industry as the mainstay and greatest contributor to government revenue.


The manufacturing, industrial, and agricultural sectors should be better funded and prepared to produce and contribute more to the economy. Economic diversification is critical for a country's long-term economic growth, but Nigeria remains overly reliant on its oil revenue, endangering its prospects for long-term stability. Diversification can be achieved by encouraging private investment, foreign investment, improving infrastructure, investing in research and development institutions and by improving productivity in the agricultural and manufacturing sectors. The diversification of the economy necessitates a long-term approach, with the end result visible over time. It requires concerted efforts to channel resources, particularly financial resources, and to develop successful structures. Also needed is an export-oriented industrialization strategy that combines macroeconomic and fiscal policies to attract FDI as well as human capital and infrastructure investments.

Proshare Nigeria Pvt. Ltd.


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