To start with, it is important to understand the meaning of the terms – comparative advantage and competitive advantage. In simple terms, comparative advantage suggests that a country like Nigeria should specialize in the production of goods where it has the lowest cost of production relative to its neighbours. On the other hand, competitive advantage suggests that a country should look beyond low-cost goods to goods with market potentials – that is goods that can command significant export revenues based on prevailing demand trends.
Nigeria is a service-driven economy in terms of contribution to growth and GDP. However, relating to export earnings and fiscal revenue, the Nigerian economy depends absolutely on oil. The Nigerian government depends on oil for 60% of its revenue and 90% of its foreign exchange. The pertinent question here is: should Nigeria continue to produce oil as its main export produce based on comparative advantage and competitive advantage?
The Nigeria National Petroleum Corporation (NNPC) noted in February 2019 that is costs Nigeria an average of $15 – $17 to produce a barrel of crude oil. This is much lower than its peers like Saudi Arabia with a marginal cost of $8 – $9. Referencing Rystad Energy’s publication in 2016, Nigeria is cost inefficient when compared to other major oil producers like Saudi Arabia, Russia, Iran and Iraq. Enmeshed within this relative cost disadvantage is the poor state of Nigeria’s upstream infrastructure. For instance, Nigeria currently owns four refineries, but it still imports refined crude for export. The immediate consequence of this is low profit as the landing cost of imported refined crude takes up most of the profit.
The misconception with oil is that it has a higher revenue generation potential, but this is no longer the norm in the global oil market. With the emergence of renewable energies and products utilizing these energies e.g. electric cars, the demand for oil has been severely pruned. In short, oil has lost some of its competitive advantage. In fact, comparative advantage is now redefined in terms of relative low cost of production, product quality and price stability. It suffices that Nigeria should redirect its production focus from oil on both grounds of competitive advantage and comparative advantage.
Where does global competitive advantage lie? It lies with technology and data. Unarguably, Nigeria is not technologically advanced, but it can adopt a peer learning mechanism from advanced economies and develop copious technologies that can form the bulk of its export. This is a model that was adopted in China prior to its emergence as a global technology leader.
With technology as Nigeria’s export focus, sustainability of revenue is ensured since the former is bound to persist for a longer while. The paradigm shift from crude and mechanical processes to technological and data-oriented processes in agriculture, manufacturing and service industry supports the need to gradually tilt Nigeria’s production and international trade towards technologically advanced products.
What needs to be done? Education and research are the stronghold for technology. This means more private and budgetary investment in science education and research at all levels. Research practice across all sectors must be deregulated to allow for private sector investment. Technology is expensive to produce; therefore, financial support must be provided for budding entrepreneurs in the field. Lastly, technology is not a short-term development, and this means a road map must be designed to lay the ground for its take off.
Co-written by Sarumi Daniel and Michael Ogunremi
Sarumi is a data visualization enthusiast and has interned with KPMG Australia