‘Government has no business in business’ is fallacious

If I had a kobo each time I heard the statement ‘Government has no business in business’, I would be very rich already. Typically, that statement is used in support of several arguments that appear logical on the surface but are absurd, at best. One of such arguments is that government should neither own nor run businesses. If that were true, then where would we put Saudi Aramco, which is 90% owned by the Saudi government.

Another of such absurd arguments is that government should allow the markets to run free. In an economy like Nigeria that still struggles with basic manufacturing, it is easy to see why the argument does not make sense. But an illustration will help drive home the point.

In 1960, the real GDP of South Korea was approximately $26 billion. That year, Nigeria’s real GDP was more than twice as large—about $65 billion. Twenty years later in 1980, both countries were at par: South Korea’s real GDP was $155 billion, and Nigeria’s was $159 billion. The year 1980 was however a turning point; from that point onwards, South Korea somehow took off and Nigeria literally stagnated. By 2022, the real GDP of South Korea was three times that of Nigeria: $1.74 trillion versus $535.34 billion. So, what happened?

Shortly after the Korean war ended in 1953, the government of South Korea decided to pursue a long-term vision of global industrial competitiveness in some sectors including electronics and automobiles. In particular, the Automotive Industry Promotion Law was passed in 1962. Under the law, it became illegal to import assembled automobiles. Simultaneously, the law enabled the pursuit of industry-specific tax incentives, protective import tariffs (including subsidies and tariff exemption on the importation of parts) and bespoke financing arrangements. This combination of instruments come under what we in the development studies community call industrial policy.

Within one year of passing the Automotive Industry Promotion Law, South Korea started to produce cars domestically. It happened in a small company named Shinjin which was heavily supported by the government. Although it produced just over 300 cars between 1963 and 1966, Shinjin went on to become South Korea’s largest automobile manufacturer by 1970.

This company eventually collapsed in 1982 but not before the policy has had a long-lasting impact on South Korea’s technological capabilities. The persistence and growth of other companies like Hyundai (founded in 1967) and Kia Motors (founded in 1971) are enough evidence that the industrial policy model of the Korean government worked. The failure of Shinjin was just a necessary sacrifice of technological learning.

What happened in South Korea is just one aspect of the phenomenon called structural transformation. It connotes the reallocation of resources from less productive economic sectors to other sectors that grow faster and have economy-wide impact. The means by which South Korea achieved structural transformation within a few decades is industrial policy. For a country like Nigeria, we can think of a shift of investments and employment from agriculture to manufacturing. Manufacturing is so critical that most economic experts regard it as the engine of economic growth. Without any gainsaying, developing a vibrant domestic manufacturing sector should be the focus of a country’s industrial policy.

By 1980, while Nigeria was gloating on oil and busy with the ill-fated Washington Consensus, South Korea had effectively achieved structural transformation. And thus began a change in national fortunes that we continue to observe today. The recent performance of South Korea’s automotive sector illustrates the sheer scale of what diligent industrial policy and a vibrant manufacturing sector can do for a country. For example, Hyundai’s revenue last year alone (a whopping $107.4 billion) was three times the whole GDP of South Korea in 1967. Simply put, if companies were countries, Hyundai today is as economically large as South Korea was 56 years ago. It is instructive to note that Nigeria’s GDP in 2022 was about $535 billion. Hyundai alone made 20% of that!

Structural transformation is historically acknowledged as a viable pathway to economic growth. Personally, I do not know of any alternative. Research has consistently shown a correlation between the degree of structural transformation and the level of per capita income in developing countries like Nigeria. In other words, the more people a country have working in highly productive sectors like manufacturing, the wealthier every individual in the country appears to be. In a 2016 report, the United Nations Economic Commission for Africa noted that, “no country, except a few states exceptionally rich in oil (e.g., Qatar, Kuwait, Brunei) or very small financial havens (e.g., Monaco, Liechtenstein), has achieved high and sustainable standards of living without developing a significant manufacturing sector”.

For this reason, manufacturing should be at the heart of Nigeria’s current economic growth strategies. National-level capabilities in manufacturing remain a formidable engine of growth and offer a seedbed for improvements in innovation, productivity, and welfare gains. The progress of literally every other economic sector relies on manufacturing progress. Unfortunately, if government let the markets run free, certain critical but highly risky sectors of the economy, especially manufacturing, are unlikely to ever grow. The bottom line is that it is a fallacious generalisation to claim that “Government has no business in business”. Government just needs to find out what its business is, and do it.
Egbetokun can be reached via: www.egbetokun.com

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