The relationship between trade and poverty is inverted. Countries with higher proportions of global trade tend to have less of poverty. Conversely, countries which contribute the least to global trade have higher poverty rates. This shows the importance of good trade policies in reducing poverty rates and increasing prosperity. Also, this shows why there is intense competition for export markets even by countries that already control significant share of global trade. Little wonder trade facilitation has become an economic policy of great importance.
Development experts can’t agree more. Jim Yong Kim, the World Bank president, said in a recent statement that, “Trade is a critical component to ending poverty and boosting shared prosperity.” The foregoing therefore suggests that developing countries have to trade their way out of poverty. For African countries to reduce poverty, they must increase their share of global trade. But how to bring this about is anything but easy.
Trade Challenge
Sub Saharan Africa is reputed to be the least developed region of the world. The SSA region is also the least integrated into the global economy through trade. Since the 1960s, the share of sub Saharan Africa in international trade has become progressively smaller: less than 5% for all merchandise and 3% for agricultural products in 2010 (World Foundation for Agriculture and Rurality 2012). Trade within the SSA region is also dismal. Tariff and non-tariff barriers have been obstacles to intra-regional trade. Although the higher hurdles are non-tariff barriers, the ECOWAS goal of free movement of person and goods across member countries remains more of a wish than reality.
Exports from Africa are mainly mineral resources and agricultural produce. With very low industrial base, the commodities are exported to other regions of the world and returned later to the continent as costlier finished products. This trade pattern results in “jobless growth” in the exporting countries when the prices of the commodities are high in the international market. The jobs that are created and sustained during commodity boom are mainly in the countries that “refine” and turn the commodities to finished products through industrial activities.
But when prices of commodities are depressed, fiscal shocks are transmitted through the trade channel to the exporting countries, with severe human and economic implications. Apart from being pro-cyclical, trade in commodities is generally noted for volatility of current account positions and exertion of pressure on the exchange rate. The persistence of weak or negative growth in Europe and slower growth in China has dented economic growth in countries that depend very much on the export markets including Germany. But this does not build a case against active play in the export markets; it probably asserts the importance of domestic consumption as a cushion during a period of weaker exports.
Export Diversification
Having established the role of trade in reducing poverty on the one hand, and the deleterious effects of export of mainly primary products on the other, it therefore means that the way to reduce poverty in developing countries is through export diversification by boosting industrial activities. Gaining a mileage in export diversification does entail formalisation of informal trade. To achieve this, empowerment of small- and medium-scale enterprises (SMEs) is of utmost importance, both in itself and in gaining more share of global trade.
The key problem with informal trade is that it deprives policymakers of the major tool of policymaking, which is data. Informal trade usually takes place off the radar, making data gathering and processing virtually impossible. But policymakers need to know areas where it is important to scale up positive results in trade activities. Understanding the obstacles that confront informal sector operators will aid intervention and will eventually prepare the operators toward making due contribution to fiscal policy by coming under the tax net.
SME Incubation
Evidently, the Administration of President Goodluck Jonathan has identified the SME sector as critical for boosting economic growth and job creation. On its part, the Nigerian Export – Import Bank (NEXIM Bank) is aware of the potentials of Nigerian SMEs. They can leverage domestic consumption, using access to over 170 million population to harness opportunities in foreign markets. Accordingly, our interventions are now geared towards such firms that we believe are relatively well-structured to be able to stabilize their operations and then foray into external markets.
Several programmes under this Administration are incubating the SME segment for a major turnaround. In the traditional areas of providing infrastructure and electricity power, the country is seen to have made big leaps in policy formulation and execution, notwithstanding the milestones that are yet to be reached. Most recent perhaps is the launch of the N220 billion SME fund by the President in August, under the auspices of Central Bank of Nigeria. Specific programmes under the Agricultural Transformation Agenda, infrastructural development for ICT utilization, local content development in oil and gas, the programme of industrialisation as encapsulated in the National Enterprise Development Programme (NEDEP) and the Nigerian Industrial Revolution Programme (NIRP) all speak of the resolve of President Jonathan to use the instrumentality of state policy to mediate market performance and SME growth. On-going implementation of the programmes is concomitant with job creation, which is vital for eradication of extreme poverty.
Unmasking Poverty
Poverty eradication has once again climbed to the top of global development policy agenda. The World Bank and the International Monetary Fund (IMF) have announced twin programmes of ending extreme poverty and boosting shared prosperity by 2030. Feelers from post-2015 policy debates suggest that global development goals will focus on eradication of extreme poverty, going forward from next year. In the meantime, reports from some global institutions are making some important prescriptions on poverty reduction.
A recent publication by United Nations Conference on Trade and Development (UNCTAD) – Trade Policies, Household Welfare and Poverty Alleviation: Case Studies from the Virtual Institute Academic Network – strongly associates trade and poverty, offering policymakers insights on what it called “pro-poor trade policies.”
Another new literature which focuses on economic growth – a sine qua non for poverty reduction – reaffirms what we already know: that export diversification is the “gateway” to higher growth. To achieve export diversification however, Chris Papageorgiou, Lisa Kolovich and Sean Nolan, all of the IMF, identify manufacturing of high quality products as a necessity. They suggest therefore that the world has gone past the Chinese industrialization model of producing cheap and low quality products to unleash price competition in the export market. Accordingly, Chris and his colleagues listed human capital, infrastructure, institutional quality, financial deepening and proximity to markets as drivers of export diversification. These are very important recommendations which are familiar but which cannot be overemphasized. I will therefore run commentaries on them in the context of the Nigerian policy environment and readiness for trade as I conclude this piece.
Quality products: The Nigerian middle class and wealthy Nigerians are noted to be pretty sophisticated. As such, an industrial development model that manufactures cheap and inferior products would be mistargeted at Nigerians with means. Nowhere is this recognized more than in the cable manufacturing industry where Nigerian cables are noted for higher quality than some imported brands. Once known for exporting inferior products, China has been reforming its industrial policy to emphasize the manufacturing of high quality products. This is the direction Nigeria should go to ensure we can trade in the global market of today and not of yesterday.
Human capital: Within a practical framework, multi-level support for human capital development has been a key goal of this Administration. School enrolment has improved generally. Specific programmes have targeted areas that had lagged behind due to past neglect. Tertiary education is being strengthened to be able to absorb more university candidates. Another area that has benefited from government’s programme of industrial development is vocational education. For example, there are ongoing efforts to develop skills that will support growth in the power sector and automobile production and assembly plants. Also, the Subsidy Reinvestment and Empowerment Programme (SURE-P) embeds training for skill acquisitions in the areas of public works, including road construction and maintenance, railway rehabilitation and dredging.
Infrastructure: The foregoing already highlights the fact that the country is moving in the right direction with infrastructure development. The pace may be slow, but there is no doubt that we will attain a tipping point sooner than later. At that point, it will become more obvious to global investors that so-called infrastructure deficiency in Nigeria represents investment opportunities which are being harnessed. This is a key lesson we have taken from the implementation of the power sector reform.
Institutional quality: The truth is evident that Nigeria is building and strengthening its institutions again. As a constitutional democracy, the governance framework is stable and predictable. Market regulators do their jobs without the fear of any political backlash. This is what has helped to put in place a sustainable path for the turn-around of our financial market, since the introduction of reforms in 2004. NEXIM Bank itself is an institution that has been revamped as part of government decision to strengthen public sector institutions and support private sector actors.
Financial deepening: There is perhaps no other country or jurisdiction that has introduced more far-reaching reforms in its financial market than Nigeria over the past ten years. The proliferation of marginal banks has given way to stronger and sounder private sector financial institutions including “mega” banks. A poorly organized and unfunded pension system has given way for the contributory system that has exceeded N4.5 trillion ($24 billion) in pension asset. Yet regulation and innovation have continued to characterize the Nigerian financial system, including the capital market.
Proximity to markets: Nigeria is not just a place to set up a business. The country is a big and growing market. Investing in Nigeria is tantamount to connecting to a big market. Nevertheless, the country is also well-linked to the sub-regional markets by all popular means – road, sea and air – except by rail.
As the country continues to develop capacity for trade through economic diversification, it is expected that the poverty rate will continue to fall.
– Roberts Orya is Managing Director / Chief Executive Officer, Nigerian Export – Import Bank.
