Successful diversification of an economy requires proper planning – and learning from previous mistakes, says Dr Othman Cole of Cambridge Judge Business School.
Dr Othman Cole
Diversification is the basis of a stable economy. But countries rich in natural resources can grow complacent, and this often breeds long-term trouble.
A Cambridge Judge academic has taken a close look at Nigeria – which botched an earlier attempt to diversify – and offers suggestions on how the country might get it right the second time around. The key, says Dr Othman Cole, is to strengthen infrastructure and institutions, including proper government regulation of the private sector.
Nigeria is the 10th largest producer of oil in the world with an estimated 36 billion barrels in its reserves. But declining oil prices are putting increasing pressure on the economy to diversify into steel production and other sectors as quickly as possible.
If this sounds familiar, it is: Nigeria has been here before.
At the height of the oil boom in the 1970s, the value of its resources alone was almost double the country’s previous GDP. Yet, today, 80 per cent of its people live on less than two US dollars a day; more than half do not have sustainable access to clean water; the average life expectancy is just 46; and one in five children dies before the age of five.
So how did it get to this point? “Nigeria is the classic case of the ‘resource curse’,” says Cole, Senior Faculty in Management Practice and Deputy Director of Cambridge Judge’s Executive MBA programme. “The over-reliance on a plentiful, non-renewable resource, combined with a series of unstable governments and therefore a lack of confidence from investors, often results in a country’s inability to diversify – and stability and diversification underpin all successful economies.”
So what can Nigeria learn from the failures of its earlier diversification effort?
“Diversification did not work because of three factors,” Cole says. “There was not a sufficient pool of skilled competent salaried managers because the oil money had only just started to trickle into education. There was also a lack of strong, experienced companies with the ‘broad shoulders’ to carry the weight of industrialisation, and at the top, the state was weak and incapable of directing the private sector.”
A recent study by Cole cites the Nigerian government’s attempt to diversify into the steel industry, via Russian investment in the huge Ajoakuta steel plant. “But it was in the middle of the country – far away from fuel or ore supplies – so transport links were needed. And that turned out to be impractical and cost billions of dollars,” Cole says. “The feasibility report on Ajoakuta was 21 volumes long and, as far as I am aware, was never translated from Russian, suggesting that few in Nigeria actually read it. The total cost of building and running Ajoakuta, and another planned steel plant at Delta, was put at around $13.8bn. And it was doomed from the start.”
His research compares Nigeria with Angola, another African state blessed with resources of not only oil, but minerals – it is the world’s fifth largest producer of diamonds. Angola, too, failed to use its resources effectively, largely because of the civil war that raged there for nearly three decades.
Instability of the state is a key factor, says Cole; Nigeria’s succession of military coups and resultant corruption undermined any consistency in state policy. But it doesn’t explain why neither country has flourished even in peaceful times. Angola’s war ended in 2002, yet its divide between rich and poor is the most pronounced in Africa and its life expectancy and infant mortality rates are chillingly similar to Nigeria’s.
“Now these governments are stable, they need to look at strengthening the infrastructure within their countries,” says Cole. “They need to look inwards, strengthen institutions, work for a robust regulatory relationship between the state and the private sector.”
He also says they need to beware a complacency that often comes with sizable natural resources. “Korea and Taiwan are resource-deficient but have extremely strong economies because they had to be competitive with their manufacturing exports on the international market at an earlier stage. That’s not true of countries with sizable natural resources and significant domestic markets that are often protected from international competition.”
And an international approach could also provide a solution, says Cole. “With stable governments in these two countries, now there is an opportunity for Western oil companies – and Western governments – to work with African governments to find innovative solutions. It’s not just about the money for the oil, it’s about imagination to help these nations to achieve sustainable economic diversification.
Innovative solutions and partnerships have already proved the resource curse is not inevitable.
A discovery of diamonds in Botswana in the late 1960s made it consistently the fastest-growing economy in the world over the subsequent 20 years – not because of the resource, but because of how the government dealt with that discovery. Its first two presidents following independence from Britain in 1966, Seretse Khama and Ketumile Masire, formed a 50/50 partnership with diamond company De Beers and ploughed the revenue at home into education, hospitals and social services and into investments abroad. The country needed roads, but so did De Beers to move the diamonds. It needed a healthy local work force, so invested in health schemes to combat diseases such as HIV.
“It’s about imagination,” says Cole, adding that smaller-scale support services for big industries like oil and gas can help build new platforms that can grow independently from the natural resources – “and finally beat the resource curse.”