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Local Content Policies and Backward Integration in Nigeria

Prior to the recent recession, Nigeria experienced rapid but low-quality growth for a decade. This was accompanied by limited structural change and little economic transformation. The share of manufacturing in Nigeria’s gross domestic product (GDP) is low relative to comparator countries and the country’s heavy reliance on oil and gas exports has meant little attention has been paid to developing the manufacturing sector or diversifying into more complex products. Many of Nigeria’s manufacturing firms are inward-looking, inefficient and uncompetitive, and levels of capacity utilisation in the sector tend to be low, even in prominent industries such as beverages, textiles, cement and tobacco manufacturing. Boosting backward linkages could facilitate higher value-added in processing and manufacturing activities in Nigeria. If done well, this could have positive effects in terms of stimulating economic development; promoting the development of local industries; creating economic linkages; building local capacity, capabilities and technologies; developing skills within the workforce; boosting employment; and minimising capital flight. Getting backward linkage policies right relies on a good understanding of the economics of local content. Theory suggests that addressing ‘coordination failures’ is important; this requires facilitating greater dialogue by actors in each value chain and agreeing on, and enforcing, mutual commitments. Similarly, positive ‘externalities’ can be exploited, for example by incentivising training by the private sector or the building of infrastructure with both public and private uses. Similarly, dynamic learning, leading to quality improvements and cost reductions, can be encouraged through targeted and strictly time-bound support. Such approaches are more likely to be effective than protection aimed at shifting the allocation of domestic resources toward currently less efficient parts of the value chain.

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