Devaluation is de rigeur these days. Everyone from the President down to the man on the street has strong opinions about whether or not Nigeria should devalue its currency in line with the new reality of low oil prices.
Those who oppose devaluation usually have one major reason — Nigeria is an import dependent country. This means, the logic goes, if Nigeria devalues its currency, it will only increase the pain on the ‘common man’ and increase the cost of living. Leave aside the dubious claim that the ‘common man’ in Nigeria is reliant on imports, the rest of the claim is difficult to counter as it has become an article of faith. As Justice Oliver Wendel Holmes once said ‘a good catchphrase can stop people thinking for 50 years’. The claim that Nigeria is an import dependent country is now a closed-loop argument that suggests it is the way God, in his infinite wisdom, made Nigerians.
But the problem that needs to be solved will not go away simply by sloganeering. The obvious benefit of devaluation is that it makes the business of exporting things much more attractive. The only thing that Nigeria really exports is crude oil, which is what led the country into the mess that it currently finds itself. So the solution is to export more of other things. But what do we export? And how do we get to the point where we can export those things? None of these questions are easy to answer in a practical manner. But something being difficult is not the same thing as that thing being impossible.
So here’s a rough idea of what Nigeria can do in the short to medium term to point the structure of its economy in a different direction.
Let’s start with a couple of charts taken from a report by The WorldSteel Association:
To put the above percentages in actual tonnage, here’s another chart:
It’s clear to see that China now produces half of all the steel in the world. Unfortunately, I can’t find figures from 2001 which would have shown the remarkable rise of China in steel production even more clearly. But even from 2004, you can see the unmistakable progress they’ve made.
But how did they manage this? A story from 2002 might help us understand:
ZHANGJIAGANG, Jiangsu: The most important parts of a German steel mill are being transported from Dortmund in Germany’s Nordrhein-Westfalen to Zhangjiagang, a port city along the Yangtze River in East China’s Jiangsu Province.
Believe it or not, Zhangjiagang-based Jiangsu Shagang Group bought the entire steel mill in Dortmund from Thyssen Krupp Stahl AG.
About 80 thousand tons of the most useful parts are being sent to Zhangjiagang to rebuild a production line which will have an output capacity of 2 million tons of high-quality hot-rolled steel per year.
The project, which involves dismantling and relocating 250 thousand tons of equipment in total, is one of the biggest of its kind anywhere in the world. In order to dismantal all of it they are going to use an equipment rental company.
The disassembly of the whole Dortmund steel mill has been split into several segments. The complete dismantling is being handled in accordance with German laws and regulations by Chinese experts, who are also in charge of the recommissioning in China. The work is scheduled for completion in December 2003.
According to Zhang Qingping, project director for Shagang, their workers began to break earth for the production line in Zhangjiagan on December 28, 2001.
Thus far, almost 90 per cent of the Dortmund facilities earmarked for use have been dismantled, and about 50 per cent of the needed facilities have already been sent to Shagang by boat. More than 50 per cent of the facilities that won’t be reused will be melted down and sold as scrap in Germany.
The FT journalist, James Kynge, described this story in his 2009 book China Shakes The World:
This is copying on another level. It is not the usual ‘fact finding’ tours we like to do in Nigeria that end up as a jamboree for government officials. They didn’t just copy the technology — they uprooted it wholesale from Germany and planted it in China. No time.
Why did they do it this way? Hear what the project director had to say:
Experts estimate that the reuse of the German facilities has saved almost 40 to 50 per cent in investment costs and has greatly increased the technological capacity of Shagang, which can be used as a reference by other steel companies in the country.
“The whole investment for this production line is 12 billion yuan (US$1.45 billion), including the 200 million yuan (US$24 million) we spent to buy the Dortmund steel mill, 100 million yuan (US$12 million) for transportation, and more than 10 billion yuan (US$1.2 billion) for the reconstruction and the 1.3 square kilometres of land we bought for the factory buildings,” Zhang said.
“We would have spent more than double that whole investment if we had totally depended on our own strength to build such a production line,” he said
That last line is quite important. The humility to understand what you’re good at and what you’re not so good at allows you to copy properly. This pattern of Chinese copying is evident in almost every major technology they have been able to develop over the years. Given the repeated failures of Chinese dairy farmers to produce milk that can assuage the fears of Chinese parents, Chinese companies have started buying dairy farms from Europe with the active encouragement of the Chinese government. (They are buying in New Zealand as well).
There could be considerable upside for Chinese companies in tapping international know-how.
“Milk farmers in China don’t have a very developed tradition, training and helping them would take very long and cost a lot,” Mr. Zhang said in fluent French in January, when a ceremony was held to lay the cornerstone of the Carhaix site.
You can bet that in the next decade or so, they will probably be exporting dairy to Nigeria or some other such country. Indeed, they are currently building the world’s largest dairy farm with a staggering 100,000 cows.
What To Copy And Where To Copy From
The above examples show how we should not just be restricted to copying ideas. The way the world is now, you can copy the ideas and the physical representations of those ideas too. You can buy technology and transport it wholesale to your country. The obvious benefit is that it’s much faster to do things this way.
It turns out that the same China is now suffering from serious overcapacity in a lot of industries as it marches inevitably towards being more of a service economy. The same steel industry which grew so rapidly over a decade is now suffering from serious overcapacity:
The world’s biggest producers of iron ore have a problem, and it lies in the steel that has already gone into China’s cars, bridges and skyscrapers.
Over the past decade, China has accumulated more steel than any other economy in the world. And because steel can be endlessly recycled, the country’s steelmakers are likely to turn increasingly to scrap instead of the iron ore mined by the likes of BHP Billiton Ltd., Rio Tinto PLC and Anglo American PLC.
On Tuesday, BHP Billiton, the world’s biggest miner, lowered its long-run forecast for peak China steel demand to between 935 million and 985 million metric tons from one billion to 1.1 billion tons. China’s annual production is currently at about 800 million tons.
This historic glut of Chinese steel, and concerns over the country’s economic prospects, have hurt prices for iron ore, the biggest ingredient in steelmaking. The commodity has fallen to roughly $50 a ton from $190 a metric ton in 2011, squeezing the profits — and share prices — of the world’s biggest mining companies. The S&P mining index has declined to 18.33 from above 70 over that stretch.
China accumulated so much steel so rapidly that the total amount of steel in the economy and available for recycling now stands far beyond the level that would be typical for an economy its size, at around five tons per capita, according to analysis by Morningstar Inc
If you think it’s a strange idea to buy steel factories from China, well, it is already happening:
One surprisingly popular option is to bid China goodbye. In November, Hebei Iron & Steel Co Ltd, a provincial-owned company and China’s largest steelmaker by production, announced that it was moving 5 million tons of its annual production — roughly 11 percent of the 45 million tons of steel it makes every year — to South Africa. According to press reports, it won’t be going abroad alone. By 2023, Hebei Province — China’s most polluted province — plans to export 20 million tons of steel, 30 million tons of cement and 10 million weight boxes of glass capacity (a weight box equals roughly 50 kilograms) to points still not named.
You might say you don’t want the pollution that comes with heavy industry. You might have a point in saying so. However, life is about trade-offs — what are you happy to give up for what you want?
I know Alhaji Putin has managed to convince Nigeria that it is ‘self-sufficient’ in cement production. But it is worth noting that ‘self-sufficiency’ at N1,500 per bag is very different from ‘self-sufficiency’ at N600 per bag which is obtainable in China and other places. The New York Times recently ran a story about idle cement plants in China that concluded with the following paragraph:
Wang Xiaohu has not completely given up hope. Over the years, Mr. Wang, a 40-year-old businessman, put 20 million renminbi, or $3.1 million, into Changzhi Ruili Building Materials Ltd., which can produce 300,000 metric tons of cement annually. But now the factory site is watched over by a lone, elderly security guard in an ill-fitting uniform. Mr. Wang was forced to idle the plant about 18 months ago, laying off nearly all of his 100 employees.
Mr. Wang, though, has refused to liquidate the factory. Instead, he maintains the machinery, waiting for the day when the economy revives and he can produce cement once again — a day that even he acknowledges may never come. “Many of the small and medium cement plants here are like this,” Mr. Wang says. “The chances are slim that they will ever reopen.”
Mr Wang is waiting for a phone call from Nigeria. Or maybe not.
Perhaps we don’t want this type of stuff? So what about agriculture which we seem to have decided is the way forward for Nigeria?:
The feed industry has excess capacity. Feed industry output went down in 2013 and fell again in the first half of 2014 after posting annual growth of 8%-10% for years. A June 2014 article said, “Some people thought there was excess capacity in the feed industry as early as 2008, but with the passage of time the excess capacity problem has intensified.” China’s feed industry association said there were over 10,000 feed enterprises in China in 2013. The number isexpected to fall to 9000 this year. The article estimates that five of the top feed manufacturers are utilizing about 50 percent of their production capacity. Lysine, a feed additive made from corn, is said to have 2.3 million metric tons of production capacity, nearly three times the actual demand.The chairman of China’s largest feed company says the market is saturated and competition is fierce. He says margins are continually squeezed by rising wages and fringe benefits, increasing food safety requirements, and demands for new product development.
Yes, it’s true that Nigeria has Flour Mills Nigeria Plc. However, if we want to add some extra production:
As flour-milling expanded over the years, excess capacity became more and more of a problem, concluded a report by Henan Province’s statistics bureau earlier this year. In June, Henan’s flour-milling capacity utilization was estimated at 46 percent and just 18 percent for small and medium mills.Economy Daily reported that the flour industry’s capacity had doubled in five years while wheat production rose only 20 percent, creating a serious excess capacity problem.
We also like to complain that we produce so much tomato yet import tomato paste. Well…
A 2013 research report proclaimed that China’s tomato paste and apple juice industries have serious excess capacity problems. Tomato sauce capacity utilization was estimated at one-third in 2012. Both products come from remote areas of western China and nearly all the products are exported since there is minimal domestic demand. They are generic products that came to dominate the market because they were cheap. Exports were pummeled by the world recession in 2008–09 and with Chinese costs rising, poor quality and substitutes available from other countries, they are losing competitivenes
Remember that the challenge here is not just to produce for the Nigerian market. The point of devaluation is to make exporting more attractive. So increasing flour production is not a threat to Flour Mills Plc. Neither is more tomato production a threat to Alhaji’s new adventure. To replace the dollars lost from the collapse in oil prices, Nigeria needs to export more things that are not crude oil.
Human Capital Nko?
Now here’s the part that might prove challenging. To make this all work, you need to import the human capital as well. Nigerians are proud people so this is bound to run into opposition very quickly. ‘Is it not to operate machine?’ is one of the things people are likely to say. Also, the idea of importing foreigners along with technology and equipment will give ammunition to those who are likely to say the government is spending money creating jobs for foreigners.
Yet this is something that countries have done for hundreds of years. Given that the challenge is to get production happening within the borders of Nigeria, objecting to who is doing the production will be pointless.
To use an example from the 19th Century — Argentina is known to have some of the best soil in the world. The soil was so good it was said that the root of a plant could go 15 feet deep into the ground without hitting rocks. But this good soil was only half the story because Argentina was still importing wheat in the middle of the 19th Century. From a cultural perspective, that soil was almost meaningless to Argentines who were not prepared to engage with it. So the then Argentine government sent people to Europe to recruit Volga Germans to farm the land in Argentina, offering them attractive packages. Earlier, in the 18th Century, Catherine The Great had recruited these Germans to the Volga Valley region in Russia. 100 years later, legislation changed which effectively removed all the things which brought them to Russia in the first place.
These Germans moved to Argentina and established what is now known as Argentina’s wheat belt. Indeed, it can be taken for granted that Argentina is now a major wheat exporter and has been doing so for many years in spite of their government’s crazy policies. Today, it is Argentines exporting wheat — no one cares if it is the descendants of Volga Germans.
Or we can use the example of the farmers who were chased out of Zimbabwe by Robert Mugabe. I’m told very reliably that the ones who went to Kwara quadrupled the cassava production in their first year even though they had never planted cassava before.
A few days ago, Al Jazeera ran a story about the Zimbabwean farmers who spilled into Mozambique following the purge by Mugabe. Some of them left with only the shirts on their back. Nevertheless:
The farmers’ arrival has been good news to locals in this part of Mozambique. The once sleepy villages that had no jobs to offer youth have started to thrive. These two farmers together employ close to 200 local men, most of whom had previously been unemployed.
History is replete with such stories. It was the Jews and Huguenots (fleeing persecution elsewhere) who taught the British everything they know about finance. London is the world’s financial capital today. Human capital is a fundamental ingredient in the mix which is why Cubans who escaped from Castro in Cuba with nothing but the clothes they wore quickly became the one of the richest Latino groups in America.
The Challenge And A Working Example
Nigeria is not an easy place to do anything. Copying things from somewhere and trying to implement them in Nigeria is fraught with challenges. The biggest challenge is Nigerians themselves — inexplicably, people often work assiduously to frustrate their own interests.
But there are recent successes where Nigeria has copied things successfully. The first one is Pension reforms which Nigeria copied wholesale from Chile(some people even say the original pension act in 2004 forgot to replace Chile with Nigeria in parts of the document):
Nigeria adopted the Chilean model with compulsory contributions by employers and employees. After the reform, pension fund assets jumped from $1.77bn in 2006 to $8.67bn in 2009, according to BGL Group, and registered contributors rose from 932,435 to 3.9m. At the end of September 2012, PenCom, the national insurance commission of Nigeria, put pension assets at $18.6bn and registered contributors at 5.3m.
It’s by no means perfect yet but before the reforms in 2004, Nigerian pension assets were in a deficit of around N2trn. As at December 2014, pension assets in Nigeria were N4.6trn. Not bad at all even though there’s still a long way to go.
But there is an even better example that is not just policy:
Founded in 2006, GZI opened West Africa’s first can manufacturing plant in Ogun State, Nigeria, with a capacity of 600 million cans per annum. Since launch, the plant has more than doubled its production levels and now produces more than 1.2 billion cans per year. GZI’s 150,000 square feet factory is world-class, with state-of-the-art equipment sourced from Europe and the United States. The Company employs approximately 200 personnel, including Nigerian and expatriate staff. The majority of the technical staff members have gained world-class skills from GZI’s training programme in Brazil, at a plant belonging to Rexam PLC — GZI’s technology provider and the world’s largest can manufacturer
What the above does not say is that, I’m told, the plant was pretty much bought from Brazil. Some Nigerians were sent to Brazil in advance of bringing the technology home and some Brazilians also came back with it. Today, GZI is confident enough to expand across Africa.
If it was easy to copy, everyone would be doing it. It is not easy and requires various skills of understanding your own market, humility, receptiveness to new ideas and, of course, hard work. There is no reason to look down on it. Singapore was particularly skilled at copying things from all over the world and no one can say Lee Kuan Yew had nothing in his head. Furthermore, Singapore itself is now a place where people go to copy things from.
‘Twas ever thus. The story of human progress.
How will this wave of global copying be funded? There are no easy answers, but this is what the Bank of Industry is supposed to be for. Much of the Chinese foreign purchases have been funded by one of the government controlled banks. How do we ensure those who get funded don’t turn into local monopolies and then instead of growing to export, they start making noise and getting the government to ban things for them? This one too is difficult, but a way to guard against it might be to make exporting within a given time frame a condition of any kind of government funding. Without putting such safeguards in place, it will quickly turn into a fool’s errand. Recall FF’s Law of Cabals which states that ‘where 2 or 3 Nigerian businessmen are gathered, a cabal is soon formed’.
Simply repeating that Nigeria is an import dependent economy is no longer enough. Wishing that the economy will somehow diversify itself is not the behaviour of serious people. The current fiscal challenge as a result of the collapse in oil prices ought to be a teachable moment for Nigeria. But it is not the first time oil prices have crashed and there is no evidence that anything was learnt the last time it happened.
So when is the best time to start this?