It’s the productivity, stupid
Long-team real economic growth and prosperity are driven by increases in the number of workers and hours worked, and increases in output per hour. The first is determined by demography and the labour participation rate. The second, known as labour productivity, depends on improvements in the quality of labour, capital per worker, and total factor productivity (TFP).
Labour quality reflects worker characteristics such as skills, knowledge and experience. Capital stock is the land, buildings, machinery, and equipment workers have at their disposal. An increase in capital stock each worker has, capital deepening, also boosts output per hour.
TFP determines the amount of output that can be produced from a given amount of capital and labour. The growth of TFP results from efficiency improvements, with fewer inputs needed for a given output as well as technology and innovation as more output is achieved from a given input.
Institutions and infrastructure play important roles in underpinning technology, innovation, efficiency improvements and ultimately, TFP. Better institutions and infrastructure enable businesses to operate more cost-effectively and efficiently by providing easy access to markets for their inputs and products, managing their inventories with better logistics and information, and transporting their goods.
What then are the trends of labour and total factor productivity in Nigeria?
According to the Conference Board, which publishes productivity data on 122 nations, labour productivity in Nigeria is about 16 per cent of that of the USA. Labour productivity grew on average by 5.5 per cent during 1999-2006, but slowed down to 3.6 per cent in 2007-2012. It dipped to 1.6 per cent in 2012 before climbing to 2.7 per cent and 3.8 per cent in 2013 and 2014.
Total factor productivity actually performed worse than both GDP growth and labour productivity growth. From 4.3 per cent during 1999-2006, TFP growth slowed to -2.2 per cent in 2007-2012, registering -5.1 per cent, -4.4 per cent, and -2.5 per cent in 2012, 2013, and 2014 respectively.
The reasons for the negative total productivity growth in Nigeria are not mysterious. According to the World Economic Forum’s Global Competitiveness Report, Nigeria ranks below its peers on factors such as efficiency enhancers, technological readiness, innovation, institutions, and infrastructure. Yet infrastructure, especially electricity supply and transportation, is regarded as the most problematic factor for doing business.
There is also a strong positive link between differences in TFP and changes in relative prices. Relative productivity differentials between poor and rich countries are greatest in tradable sectors, which explains why real exchange rate is 5 times higher in poor countries (Schmitt-Grohe & Martin Uribe, International Macroeconomics, Columbia University, 2014).
Productivity is generally higher in tradable manufacturing relative to other sectors, but labour and total factors in tradable sectors in Nigeria and other African countries are less productive than in developed countries. On the other hand, Nigeria’s large service sector is labour intensive, mostly non-tradable, and less productive.
Productivity, not devaluation, is what drives long-term sustainable prosperity; export competitiveness; real economic growth and even the real purchasing power and real exchange rate. What has prevented depreciation of the naira from N1 to N200 against the dollar in three decades in achieving these goals by changing relative prices is the combination of non-price factors of fiscal malfeasance, institutional, structural, and infrastructural constraints.
Without addressing those long-term constraints with long-term policy instruments including the budget, fiscal policy, industrial policy and structural reforms, devaluing the naira to N10, 000 to the dollar would not achieve the ultimate goals.
• Dr. Oshikoya, an economist,and a chartered banker, is CEO of Nextnomics Advisory
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