Nigeria's Economic Diversification: A matter of Existential importance

"Diversify the economy" is a common phrase in Nigeria's national discourse. It is both the promised goal of every government in office and the request of citizens who understand a simple fact they don't need to be economists to grasp: that Nigeria is a mono-product economy that relies on crude oil revenues for 70% of its overall government revenues and 90% of its foreign exchange earnings.

As with many petrostates, crude oil has come to define Nigeria over the past 50 years. It is the small god Nigeria's governments worship, as its price determines the fiscal health of the country and the "black gold" is seen as the glue that binds together the county's political elite and its disparate interest groups. Oil has created a crony capitalist economy of rent-seekers, stupendously wealthy individuals in Nigeria's rising sea of poverty, in which 100 million Nigerians now live in extreme poverty — the highest numbers in the world — and giving the country the dubious distinction of the "poverty capital" of the world.

Without achieving economic diversification in reality — instead of endless rhetoric about it — Nigeria has very little realistic hope of lifting its teeming millions of the poor out of poverty. Our country would have, in effect, very little hope of escaping a poverty trap in which, with a population of 200 million and counting, and the future moving toward renewable energy, unstable oil rents simply cannot "carry" Nigeria's economy. Already, the country is borrowing externally at frightening levels as a result of the inability of our government to diversify the economy. Economic diversification is therefore not an option, but a matter of existential importance.

Economic diversification is the process of shifting economies away from a reliance on one or a few products such as natural resources or agricultural products toward the production and export of a wider range of value-added products manufactured and traded competitively. Diversification is achieved through a combination of expanding the production value chain in already existing sectors (e.g., agribusiness manufacturing or refining and exporting petroleum products) and expanding into new sectors based on market opportunities or state-driven industrial policy.

Economic diversification is a fundamental requirement for real development, in the form of a trajectory that includes (a) human development (basic quality of life indices such as potable water, healthcare, nutrition, life expectancy), (b) economic growth, by which we mean an increase in the market value of the goods and services an economy produces over given periods, and (c) structural transformation — achieved when the productive structure of an economy has become more sophisticated, diversified, and resilient. Agriculture in this scenario plays a vastly reduced role in the overall economy. The structural transformation of a national economy cannot be achieved without a true diversification of its value-added production.

There are three main types of economic diversification. The first is GDP diversification, in which the sectors that contribute to the GDP become diversified. This has happened to a significant extent in Nigeria, with the oil and gas sector having shrunk as a percentage of the GDP from about 35% to 10% over the past three decades, and agriculture, industry, and services rising in their contributions to 22%, 23%, and 54% of the GDP, respectively.

The second type, far more important than the first, is trade export diversification — the diversity of the products a country exports and how much of that export base is value-added manufacturing. One way to refer to this is as the level of "economic complexity" an economy has achieved. (This means that, in an economic sense, a shift by Nigeria toward exporting cashew nuts or yam tubers is not a "diversification" of the economy in a structural sense).

Economic complexity is the ability of an economic system to produce and export complex products with unique knowledge and insight, and competitively, into international markets. This ability is determined largely by know-how, or "productive knowledge" (PK). Countries that diversify their know-how, such as India, Turkey, and the Philippines, are able to develop productive capacity that enables them to enter new sectors and achieve sustained growth in the years ahead.

The third aspect of economic diversification is fiscal diversification. It involves the expansion of government fiscal revenue sources and how targeted government spending can help stimulate broad economic transformation through investments in specific industries.