In 2023, Nigeria’s new government came with a bold promise to confront the structural distortions that had held the economy back for decades. The government removed  fuel subsidies, unified the exchange rate and began dismantling longstanding distortions that economists had warned about for years.

These reforms were necessary. They were courageous and overdue.

Yet Nigeria still has one of the largest populations of poor people in Africa, with 39 million people below the national poverty line and 133 million living in multidimensional poverty. Food inflation has soared above 40 per cent, real incomes have fallen and job creation remains slow.

The reforms helped to stabilise some macroeconomic indicators, but they did not immediately improve the economic conditions of ordinary Nigerians.

This is the challenge Nigeria faces: reforms that are necessary for economic stability may not, on their own, be sufficient to reduce poverty.

According to Professor Banji Oyelaran-Oyeyinka, a Development Economist and Chairman, Foundation for Technology, Innovation and Development, two concepts from development economics help explain this situation: premature liberalisation and premature deindustrialisation.

Both concepts are important in understanding why poverty has persisted despite several rounds of economic reforms.

Nigeria’s situation is similar to the Catch-22 described in Joseph Heller’s novel. The country needs reforms to address its economic problems, but some of the reforms can worsen living conditions in the short term.

For example, the government needed to remove fuel subsidies to reduce pressure on public finances. However, the removal immediately contributed to higher transportation and living costs. Similarly, exchange rate unification was intended to correct distortions and improve the investment environment, but the resulting currency adjustment contributed to higher prices and reduced the purchasing power of wages.

This does not necessarily mean the reforms were wrong. Rather, Nigeria is trying to reform an economy that did not develop the productive foundations required to withstand liberalisation.

The first concept is premature liberalisation, which means opening an economy before it has developed the productive capacity to compete.

In the 1980s and 1990s, Nigeria adopted the World Bank and International Monetary Fund Structural Adjustment Programmes. The reforms included rapid tariff reductions, privatisation of state enterprises, currency devaluation, cuts in public spending and financial deregulation.

The theory was that freeing markets would encourage investment, competition and economic growth. However, Nigeria lacked many of the conditions required to make this work effectively. These included sufficient industrial capacity, technological capability, infrastructure, skilled labour and domestic capital formation.

The economy was opened to competition without first developing a strong productive base. The result was a decline in manufacturing, increased dependence on imports, falling real wages and rising poverty.

This is the essence of premature liberalisation: liberalising an economy before building the productive capacity required to benefit from that liberalisation.

The second concept is premature deindustrialisation. This occurs when a country’s manufacturing sector begins to decline before the country has reached a high level of income or fully industrialised.

European and East Asian economies followed a different path. They industrialised first and subsequently moved into more advanced services. Their agricultural sectors also became more productive, technology-driven and closely connected to industry.

These economies generally reached manufacturing contributions of around 20 to 30% of GDP and achieved higher levels of income before substantial deindustrialisation occurred.

Nigeria, by contrast, began to deindustrialise without first completing the process of industrialisation.

The symptoms are visible in the declining or stagnant contribution of manufacturing to GDP, limited industrial employment, the expansion of informal services and weak productivity growth.

Nigeria’s manufacturing sector has remained within roughly 7 to 10% of GDP for decades. Services have become dominant, but a significant proportion of those services are informal activities such as street trading, transport and petty retail. These activities provide livelihoods for millions of Nigerians, but they generally do not generate the level of productivity growth required to transform an economy.

Many African countries also began to deindustrialise at income levels that were far below those at which European and East Asian economies experienced similar transitions.

Nigeria therefore provides an important example of how premature liberalisation can contribute to premature deindustrialisation.

The Structural Adjustment Programmes created a chain of developments that continue to affect the economy. Rapid liberalisation increased exposure to imports, domestic manufacturing weakened, informal services expanded and the economy became increasingly dependent on commodities, particularly oil.

This has contributed to the persistence of poverty.

One major consequence was the loss of industrial jobs. Manufacturing jobs tend to be more productive and better paid than many informal jobs. As manufacturing declined, millions of workers were pushed into informal employment.

There was also a decline in state capacity. Cuts to public spending affected areas such as education, healthcare, infrastructure and agricultural extension services. This weakened the foundations needed for long-term productivity and human capital development.

Commodity dependence also remained a major problem. Nigeria became heavily dependent on oil, a sector that generates substantial government revenue but relatively few jobs compared with the size of the population.

Another problem is the weakness of domestic markets. When imports displace locally produced goods, foreign exchange is used to pay for products that could potentially be produced domestically. This weakens local production and makes the economy more vulnerable to external shocks.

The final problem is stagnant productivity. Informal services can provide income and employment, but they cannot by themselves generate the productivity growth needed to move large numbers of people out of poverty.

Nigeria therefore needs to break out of this cycle by building a production economy from the ground up. This must include the revitalisation of rural economies, because poverty reduction cannot be sustained without transforming the agricultural and rural sectors.

To be clear, Nigeria’s reforms were necessary. The reforms introduced in 2023 were bold. But they were only the beginning, and policymakers need to recognise this.

The reforms were applied to an economy that had already been structurally weakened by decades of premature liberalisation and premature deindustrialisation. The next phase must therefore focus on rebuilding productive capacity.

This requires a deliberate industrial policy, investment in infrastructure, reliable electricity, efficient transport networks and broadband connectivity. It also requires technological upgrading that can help micro and small businesses grow into medium-sized and large enterprises.

Nigeria must also provide strategic protection for emerging industries. This can be described as guided capitalism. The country should stop exporting raw agricultural products and minerals such as lithium and monazite without sufficient domestic processing.

The objective should be to develop industries that process these resources locally, create jobs and retain more value within the Nigerian economy.

Macroeconomic stability is important, but stability without production can result in stagnation.

The next phase of Nigeria’s economic reform must therefore move beyond stabilisation to structural transformation. This means building factories, developing supply chains, improving energy systems and strengthening technological capacity.

Nigeria needs to move from a consumption-driven economy towards a production economy. That is the path through which the country can begin to break the cycle that has kept millions of people in poverty.

The reforms will take time, but they must eventually produce more than macroeconomic stability. They must create the productive capacity, jobs and higher incomes needed to make economic reform translate into meaningful poverty reduction.

Professor Banji Oyelaran-Oyeyinka is a Development Economist and Chairman, Foundation for Technology, Innovation and Development.