Agro-industrial processing: From consumption to production

Introduction: I speak to the topic: “From Consumption to Production: The Role of Special Ago-Industrial Processing Zones in Nigeria”. Let me begin with a quote from my book published in 2017 bearing this title: “From Consumption to Production”.

If a society spends one hundred dollars to manufacture a product within its borders, the money that is used to pay for materials, labor, and other costs moves through the economy as each recipient spends it. Due to this multiplier effect, a hundred dollars’ worth of primary production can add several hundred dollars to the Gross National Product (GNP) of that country. If money is spent in another country, circulation of that money is within the exporting country. This is the reason an industrialized product-exporting/commodity-importing country is wealthy and an undeveloped product-importing/commodity-exporting country is poor. (Emphasis Added)

Developed countries grow rich by selling capital-intensive (thus cheap) products for a high price and buying labor-intensive (thus expensive) products for a low price. This imbalance of trade expands the gap between rich and poor. The wealthy sell products to be consumed, not tools to produce. This maintains the monopolization of the tools of production, and assures a continued market for their product.

I submit that central to our economic growth crisis is the failure to achieve rapid industrialization; the mis-management of our investment in the acquisition of necessary capital stock. Capital stock is the plant, equipment, and other assets that help with production. The country’s investment portfolio will reveal huge amounts budgeted to purchase plants and equipment; for example, refineries, iron and steel, sugar refining, fertilizers and so on. What has also become clear is that unlike countries where rising capital stock has led to rising living standards and high productivity, we have remained a non-industrialized underdeveloped country.

Tied closely to industrialization, but not always connected in public discourse, is arguably the most challenging economic issues faced by the country currently: Balance of Payment and foreign exchange crises. What we see manifesting as shortage of foreign exchange and the precipitous decline of the national currency is in large part because we consume high-value products that we do not produce, and export low-value raw materials. Nigerians, especially urban elites, have developed an appetite for imports including expensive luxury goods such as automobiles, foreign drinks, and clothes, electronic and household consumer goods. For example, the country’s top imports are Refined Petroleum ($7.75Billion), Cars ($3.03Billion), Wheat ($2.15B), Packaged Medicaments ($1.38B), Telephones ($771M) and special purpose ships ($4 billion). In contrast, what does Nigeria export? Coconuts, cashews, cocoa beans, rough wood, petroleum gas, and crude petroleum that accounts for 70.8% of all its exports, among others.

Additionally, for a country to sustain economic progress, it must build infrastructure, acquire factory facilities for manufacturing. Such infrastructure includes bridges, railways, highways, power plants, dams, airports and others, which are intermediate, and capital goods. We manufacture almost none locally; all are imported. As demand grows for imports, the more the pressure on foreign exchange. Where does the dollar revenue come from? Crude oil and paltry raw materials export that is not near enough. We are in a situation of accelerating deficit size and where the balance has to be covered by foreign loans, the country then finds itself in an encircling debt crisis. There are two common sources of financing import bills; the first is to attract foreign capital, concessional loans or grants.

The second is to earn foreign exchange through export of goods and services, especially manufactured goods. No nation can survive an indefinite foreign exchange crisis. Therefore, the most effective strategy for rapid growth is to promote the sustained expansion of foreign exchange earnings through exports of manufactures. To overcome the BoP in the long run, and grow the economy at a fast rate, we must counter import expansion with faster export earnings. More precisely, export of processed and manufactured products. We have long shortchanged ourselves exporting raw materials that others use as basis for wealth generation.

I have brought the above into this discourse to establish the inescapable nexus of manufacturing capability and a nation’s balance of payment. The assured way that nations achieved growth in the long run is by either: (a) making its locally manufactured goods competitive in the external markets with attendant foreign exchange earnings (increasing the income elasticity of exports) and (b) making foreign goods less competitive and non-attractive to domestic consumers (decreasing the income elasticity of imports). Currently, Nigeria is not fulfilling either condition due to the weak domestic technological and industrial capabilities of local companies.
2.0 Reliance on Short Term Crude Export has stoked Balance of Payment Crisis

The pathology of oil-dependency and the periodic crash of oil prices transmit its impact through slow economic growth, constrained fiscal space and through direct effects on prices and activity for both importers and exporters. It channels its indirect effects via trade and other commodity markets; monetary and fiscal policy responses; and investment uncertainty. Through these channels, oil prices have immediate repercussions. For example, the damaging inflation Nigeria is experiencing began and increased steadily throughout 2020. It accelerated from 15.7% year-on-year in December to 17.3% in February 2021—its highest level since April 2017. According to the NBS, urban inflation rose to 19.09% and rural inflation hit 18.13% in June 2022. The surge in food prices persisted ever since the pandemic compounded by domestic security problems, the country’s lack of food security and was capped by the Ukraine-Russia War. Meanwhile the national currency weakens leading to foreign exchange restrictions. Nigeria has relied on the trading and export of crude petroleum and agricultural raw materials for decades. However, the reliance on the easy path, or “easy money”—has proven to be a disastrous strategy. Nigeria’s production and export structure has remained less diversified relative to comparators.

3.0 The Remarkable Rise of China as contrast to Nigeria
Forty-four years ago, China’s per capita income was only one-third of that of sub-Saharan Africa. Today, China is the world’s largest manufacturing powerhouse. It is a Production not a Consumption Nation. This is why China’s yearly exports $3.3 Trillion, 2021), mostly manufactures surpassed the combined GDP of all African nations ($2.7 Trillion, 2021).

It produces nearly 50% of the world’s major industrial goods, including crude steel (50% of global supply); cement (60% of the world’s production), coal (50% of the world’s production), vehicles (more than 25% of global supply) and industrial patent applications (about 150% of the U.S. level). China is also the world’s largest producer of ships, high-speed trains, robots, tunnels, bridges, highways, chemical fibers, machine tools, computers, and cellphones, among others.

The remarkable rise of China follows that of other successful Asian manufacturing powerhouses such as South Korea. Their growth evolution showed that economic growth happens on the back of expanded manufactured exports. Exports is prerequisite for a sustainable current account balance compatible with the fast rate of economic growth. The trends for primary commodity prices and their low-income elasticities of demand suggest that African countries, including Nigeria, will not achieve prosperity from export earnings from these goods as they have done for decades.

To be continued tomorrow
Professor Oyelaran-Oyeyinka, senior special adviser to the President on Industrialization, The African Development Bank, delivered this lecture titled, From Consumption to Production: ‘The Role of Special Agro-Industrial Processing Zones’ at the Assembly of Fellows for the Nigerian Academy of Engineering – Nigeria on September 8, 2022.