Lessons in incentives and economic diversification

Following the crash in the price of crude oil and the deleterious effect it has foisted on the Nigerian economy, almost every Nigerian has joined in the clarion call for the diversification of the economy. Naturally, everyone ranging from lay men to economic experts and from business men to top government officials has his own recipe for achieving the urgent goal of economic diversification. While top government officials are almost shouting themselves hoarse on the need for Nigerians to go back to agriculture, business men like Aliko Dangote are of the opinion that diversification of the manufacturing base of the country is the way to go.

Instructively, this would not be the first time that Nigeria is facing the imperative of economic diversification. A number of past administrations have attempted to drive diversification through a welter of policies and programmes such as Operation Feed the Nation (OFN), Green Revolution, and Structural Adjustment Programme (SAP). The extent of the success of these programmes can be best deciphered from the fact that many years after, Nigeria is still at a point where almost everyone agrees that there is an urgent need for diversification.

One reason why Nigeria has always been running in circles with regard to the issue of economic diversification is the absence of a clear focus as to what it takes to really achieve it on a sustainable basis. Recent events as well as statements by those at the vanguard of the diversification campaign tend to indicate that we have not overcome that problem yet. There appears to be a fixation on the part of government that its sole responsibility in galvanizing investments into agriculture and indeed other sectors of the economy to achieve diversification is to provide a level playing field. At best, some government officials have spoken about creating an enabling environment in relevant sectors to drive investment, by which they mean emplacement of relevant infrastructure. While that is good, it takes much more to achieve sustainable economic diversification.

The fact about diversification is that no investor puts his money into a sector where he is not guaranteed a fair return on investment. Even those who have only their labour to invest, there must be some guarantee that he would get something worthwhile for his effort. This is where the issue of incentives comes in as a factor that drives diversification.

Business mogul, Aliko Dangote, spoke on this very issue during the recent Annual General Meeting of the Manufacturers Association of Nigeria (MAN) when he challenged the Federal Government to “demonstrate seriousness and sincerity in its declared drive to revive the agricultural sector” by coming up with a “comprehensive package of incentives and reliefs that address the issues of high entry cost, absence of low interest funding, long gestation periods, access to land, availability and cost of imported inputs and absence of guaranteed commodity prices”.

As stated earlier, no one goes into a venture unless he is convinced that he would get returns that are worth his while. If people are not going into agriculture or any other sector, it only means that they do not see any real benefit in such a venture. To get them to go into such a sector, there must be a deliberate attempt to put a system of incentives in place to attract and sustain investments in that sector. The failure to do this conscientiously and consistently over time is what has led to the often repeated assumption that it is laziness on the part of Nigerian youth that has made them not to go back to till the land in the face of mounting unemployment.

Examples abound in this country of how at various levels regimes of incentives helped to galvanize youth into certain ventures that were thought infra dig for most young people. But one would suffice here. Prior to the mid-1980s, most young persons in the south-south geopolitical zone of Nigeria were only aware that rubber trees were cash crops through their social study lessons in schools. When the elders told stories of how they saw themselves through school with funds raised from tapping rubber, such stories sounded like fairy tales to the young ones, as most of them, had not seen anyone in real life tapping any of the rubber trees around. For them, the remaining rubber plantations were the relics of a past that had no direct bearing on the present. Then something happened. By 1987/88, we began to see some activities in the hitherto desolate rubber plantations. Before long, young men and women started returning from the cities where they had been wasting away in the hope of getting the ever elusive white-collar jobs and were taking to rubber tapping, defying the horrible stench of fermented latex.

What happened, what led to the revolution that attracted young men and women back to the rubber plantations in the mid-1980s to the mid-1990s? It was simply the incentivization of the production of natural rubber through price increase. The story of how the incentive came about has it that a certain Malaysian company in the natural rubber trade had cut down its old rubber trees having developed an improved breed of rubber trees which would take 10 years to mature for tapping. Keen on maintaining its market while waiting for its young rubber trees to grow to maturity, it sent its experts to Nigeria to find out if it could make up for its production shortfall with supplies from Nigeria. What the Malaysian company discovered was that Nigeria still had some of its rubber plantations standing and that the only challenge was that they were not being tapped.

To overcome that challenge, they simply came into the market and pumped money into it such that within a very short period of time, a kilogram of latex sheet rose from less than 50 kobo to over N3.50. What this meant was that rubber tapping was suddenly transformed into a viable business. Soon many young men and women began to go into rubber tapping upon realizing that they could make a decent N10 to N15 per day (which was much at that time) rather than hang around in cities looking for jobs that were not there. Some very enterprising ones actually went ahead to lease large rubber plantations which they got other young men to tap for them on a daily pay basis and everyone was smiling to the bank. However, the boom burst sometime in the mid-90s when the Malaysians left upon the maturation of their improved rubber breed after 10 years.

The point being made here is that the right incentive attracted the right response from the youth to create the rubber boom of that era. Had it been sustained, we would still have a diversified local economy in the south-south where the nation would be earning some pretty decent foreign exchange revenue from natural rubber. The ultimate lesson from that episode is that economic diversification is not achieved by merely pontificating about its benefit to the nation without any conscious attempt at introducing specific incentives to attract investment into those strategic sectors you desire the economy to grow.
Alex Okumo (alexokumo@yahoo.com), a journalist and public affairs analyst, sent this piece from Abuja.