“Build a better mousetrap”, the saying goes, “and the world will beat a path to your door”. The phrase is a metaphor for the power of self-awareness and self-improvement, whether by a nation or an individual. What it tells us is that a nation is the master of its own fate. If a nation builds a great reputation for itself, if it produces high-quality goods and services, if it makes itself irresistibly attractive and welcoming to others, the world would pay attention and be drawn unto it. On the other hand, a nation that fails to create the right incentives to draw the world to itself would be ignored. That, for me, is Nigeria’s predicament: it is simply not doing enough to attract the world’s attention and patronage!
Embarrassingly, Nigeria has just lost its much trumpeted position as Africa’s largest economy. Furthermore, despite floating its currency, Nigeria is not attracting foreign investors. A flexible exchange rate should, after all, attract foreign money into the country. Yet, not even the ephemeral portfolio investors, let alone the longer-term investors, are showing sufficient interest in Nigeria. Reports say they are turning a deaf ear to Nigeria’s entreaties. It won’t be surprising if President Muhammadu Buhari, who half-heartedly agreed to the naira flotation, is now having a buyer’s remorse! But that would be a misreading of the situation. The introduction of the new forex regime was not a mistake, and there is an absolute necessity to stay the course, while addressing the underlying issues.
The truth is that a flexible exchange rate regime is an irreducible minimum condition or, to use a legal term, a condition precedent for any market-based economy. A country can’t even begin to talk about attracting foreign investors or making its economy business-friendly without a competitive exchange rate. It is a desideratum! But, as I also argued in a recent column, exchange rate flexibility is not the silver bullet, or a magical solution, to Nigeria’s economic woes. One way of explaining this puzzle is through the Fredrick Herzberg’s Motivation-Hygiene Theory. According to this theory, hygiene factors are those which can demotivate or cause dissatisfaction, while motivation factors are those that can bring satisfaction. Now, if you remedy the causes of dissatisfaction that will not necessarily create satisfaction. To motivate people, you need first to eliminate causes of dissatisfaction and then create conditions for satisfaction. Obviously, the fixed and distortionary exchange rate regime was a major cause of dissatisfaction to investors, and only its elimination would ensure they are no longer dissatisfied. But, as Herzberg would argue, eliminating the cause of dissatisfaction by floating the naira would not necessarily create investor satisfaction. The government still needs to create conditions of satisfaction.
Here then is the point. Despite the flotation of the naira, which, presumably, has removed a major cause of dissatisfaction to investors, the government has failed to create conditions of satisfaction sufficient enough to get investors flocking to the country with their money! This is due to a failure to understand what shapes market or investor behaviour. An investor looking for where to invest his money is not behaving, as Adam Smith pointed out, as a benevolent actor, but rather as a self-interested, utility-maximising, one, who reacts to changes in the net benefits of the various alternatives available to him. For that investor, a competitive exchange rate regime is a given; without it a country is not even on his radar as an investment destination.
Assuming a flexible exchange rate regime is in place, the potential investor could then consider the suitability of the country on the basis of other critical pull or push factors. How easy is it to do business in the country? What is the state of the infrastructure? What is the country’s reputation globally on critical factors, such as safety and security, corruption and government effectiveness? How stable is its politics? Is the government committed to economic openness and reform? If so, how credible is the commitment? Note that markets and investors react of political signals. They pick up the statements and body language of the political leaders. For example, when a president disparages the private sector and economic experts, as President Buhari has done, the markets and investors pick up negative signals about government intentions. Which is why in serious economies, presidents, finance ministers, central bank governors and other influential economic policymakers are very circumspect in their statements to avoid sending the wrong signals to investors and market operators.
Now, let’s be clear, despite its challenges, Nigeria has always managed to attract some foreign investment, notably in the oil and gas sector, and was, in fact, until recently, the largest investment destination in Africa. But only the complacent will gloat about this. For Nigeria is by no means an investment-driven country. It is a resource-based and low-technology economy, with virtually nothing in terms of foreign direct investment to transform it into an export-oriented, high- or even medium- technology, industrial economy. Yet if Nigeria wants to be an economic power, it needs a large number of high-value investors to see it as a natural investment destination, and one of the best places to do business in the world. Unfortunately, Nigeria has more push-factors repelling risk-averse investors than pull-factors attracting them.
Think of any global league table –corruption perception index, government effectiveness index, global competitiveness index, global innovation/productivity index, human development index, World Bank’s Ease of Doing Business index, name it – Nigeria is languishing at the bottom. Indeed, to cap it all, the Reputation Institute listed Nigeria in its 2016 Country RepTrak index among the 16 countries with the worst reputation in the world! It is difficult to see how a country that is not seriously addressing these acute institutional and governance challenges can be taken seriously by the rest of the world, let alone by instinctively cautious investors.
Reputation is, of course, also linked to a country’s ability to attract visitors and tourists, another major source of foreign exchange earnings. It is not surprising that the countries with the best reputation in the world, according to the Reputation Institute’s Country RepTrak index, are among the most visited countries, including France, Spain, the UK and Germany. Across the world, international trade in tourism has grown spectacularly. In the UK, the tourism industry contributed nearly £60 billion to the GDP in 2014.As I took my visiting parents-in law on a panoramic tour of London last week, including guided tours of the magnificent St Paul’s Cathedral and Buckingham Palace, and a river cruise on the Thames, I was struck by how the UK has become a great place for people around the world to visit. The scene at the Changing of the Guard at Buckingham Palace was spectacular, with thousands of tourists gathered around the park to see the colourful event. It’s no surprise there were 36 million visits to the UK in 2015.
But what is surprising is that although Nigeria has great tourism potential, with significant cultural assets and rich natural beauty, including historical sites, and should be attracting tourists and visitors from around the world, yet the country attracts virtually no foreign leisure travellers. I wrote last week about the need for Nigeria to embrace export orientation, but this is not just about exporting goods and services abroad, it is also about exports from the tourism sector at home, which is part of the export trade. But, according to the World Travel and Tourism Council (WTTC) 2014 country report, Nigeria ranked 178th globally in terms of the tourism sector’s size relating to its GDP. This poor performance is, of course, understandable considering that, according the World Economic Forum’s “Travel and Tourism Competitiveness Report 2013”, Nigeria ranked 127th out of 140 countries.
The Director-General of the Nigerian Tourism Development Corporate (NTDC), the distinctively visible and ubiquitous Sally Mbanefo is doing a great job trying to raise the profile of tourism in Nigeria, like Olusegun Awolowo, head of the Nigerian Export Promotion Council, is doing with the promotion of non-oil exports. But they both face structural challenges. Nigeria has a terrible reputation abroad and is institutionally weak at home. Yet, the country has great potential. Surely, if Nigeria wants the world to beat a path to its door, it must start building a better mousetrap! It must look at those global indexes and move itself from the bottom to at least middle rankings.
– Businessday
