Back to the basics: It’s all about productivity

Ogho Okiti | Wednesday, 04 October 2017 11:18am | opinion

The BusinessPost

There has been a spate of publications seeking to explain the connection between productivity and income growth or improved outcomes. The latest is the publication by McKinsey “Government Productivity: Unlocking the US $3.5 trillion opportunity”.

For the McKinsey research, the motivation is simple: in a global environment with declining government resources following declining appetite for increasing taxation, but confronted with increasing demands on government expenditure on education, health, and security, increasing productivity is key to increasing outcomes. The McKinsey report says that government across the globe need to “deepen their functional capabilities in finance, commercial, digital technology and data analytics areas”.

From Nigeria’s perspective, there are three related problems with public expenditure, and low productivity is just one of them. The poor productivity is exemplified by waste, corruption, and general inefficiency. Consequently, Nigerians do not receive fair value for government expenditure. The other related problems are (1) inadequate public expenditure, which accounts for less than 10% of the country’s GDP, when the global average is 34%, and (2) the structure of expenditure that prioritizes the comfort of political and civil service office holders over expenditure on health, education and security.

Broadening the debate slightly, especially from a poor country like Nigeria’s perspective, I reckon the recent spate of publications are motivated by two critical issues. First, from a rich country’s perspectives, they must continue to extract productivity gains in order to guarantee income growth. This is especially the case in the last decade, since the economic crisis of 2008 that income growth in most developed economies has stalled.

Secondly, from the perspective of developing economies, there are two unique dimensions. First, until comparable productivities grow, we will not be able to match current level of productivities in rich countries, unable to grow income, and thus remain poor. Second, productivities have underlined competitive dimensions, and thus lower productivity countries/companies cannot compete, nor grow their incomes, and thus remain poor.

So, there are so many ways of looking at productivity but the simplest is looking at it as getting more from less. This dynamic value creation is important, both from a business and country perspective. As would be expected, there are myriads of issues that drive and constrain productivity, and the study of productivity has therefore focused on how to continually innovate, improve methods and processes that drive income growth.

Time Economics, the consulting firm I work for, has been probing into some of these productivity related issues, and the factors that underline them. Recently, we concluded research work looking into the impact of the recent nSaira’s devaluation/depreciation - presaged the dramatic fall in oil prices - on key agriculture value chains in the Niger Delta. The value chains that we examined are those of palm oil, cassava, aquaculture, and poultry. The research was commissioned by the foundation for partnership initiative in the Niger Delta (PIND) and the Market Development in the Niger Delta (MADE) – See for the full report.

The impact of the devaluation on the agricultural value chains are based on the responses in the value chains that can be characterized as either income or substitution effects or a combination of both. The study found that the effects differ within and across the value chains, both in nature and depth. These followed the rise in prices of inputs and outputs within and across the value chains that followed devaluation of the naira and trade restriction policies of the Federal Government.

Oil palm and cassava value chains benefitted and observed positive responses following devaluation, compared to the aquaculture and poultry value chains. This is because both value chains had significant scope for domestic substitutions of previously imported related value chain products.

Back to our productivity analysis. While our study did not seek to understand productivity in the agriculture value chains in the Niger Delta, it reinforced two critical notions of productivity and income growth. The productivity gains arose from changes to trade policies, though that was triggered by fall in oil prices. But it reiterates the notion that policy can influence productivity gains. Indeed, one of the critical policy question that came from the study is the historical preference for a strong naira. While there are prevalent supply side issues of productivity that require extensive analysis and addressing, the historical preference for a strong naira reflects a confrontation policy that favors consumption and not investment and productivity growth.

The second, and more importantly, is that productivity gains are critical for income growth. Across the palm oil and cassava value chains, income grew following the productivity gains in the value chains. Ours was a small sample, and did not seek to understand productivity growth. But what it showed is that, following devaluation/depreciation, Niger Delta farmers experienced productivity gains (within the Nigerian economy) compared to their international competitors.

Following this study then, Niger Delta farmers and the broader Nigerian farmers would not have been able to compete, and therefore lend to increases in imports of agriculture products. In addition, because of the preference for a strong naira, every little productivity gain following devaluation is quickly reversed when oil price and inflation rise.

In conclusion, therefore, increases in productivity in Nigeria and in Africa will require work on both demand and supply side policies, but especially the supply side. Across agriculture, manufacturing, information technology, oil and gas, etc., we will not be able to deliver income growth for the average Nigerian person and business without raising productivity, and significantly in the medium to long term, especially when compared to the rest of the world.

I thank you.