Nigeria has had a tumultuous history, marked by decades of virulent political and civil strife since its independence in 1960. The oil boom of the 1970s brought windfall profits to the emerging state, but corruption and mismanagement ruined economic indicators and turned the vast majority of its population indigent. A reform process launched after the first democratically elected government came to power in 1999 is beginning to show results, but hardly of the nature or scale that would reassure a country desperate to shed its Third World heritage.
At a basic level, Nigeria’s prolonged economic stagnation and persistent failure to enforce corrective policies has spawned a thriving informal economy: the set of financial and commercial activities that operate outside of government control, taxing and contributing to the country’s GDP. . It includes everything from backyard employment and self-help finance to street vending and unregulated manufacturing. Nigeria’s vast informal economy of financial products, services and services was born out of necessity, but is now estimated to contribute up to 65% of today’s Gross National Product. Even with a significant readjustment of the percentage, there is no debate that the state is losing millions in internally generated revenue (IGR) due to activity in the unorganized sector. IGR, or internal revenue, refers to state revenue from levies and taxes. Although current figures for Nigeria’s federal IGR are not available, it has traditionally been diminutive relative to the country’s oil revenues, which account for 85% of state revenue.
Across the African continent in general and especially in Nigeria, the informal sector no longer plays a supporting role but rather leads the official economies in terms of sustaining livelihoods and creating new jobs. The current Nigerian government accepts that more than 90% of all new jobs are being created by this unorganized sector. Indeed, the Lagos report goes a long way to demonstrating that, albeit unconsciously, Nigeria is vitally dependent on its informal economy. Furthermore, it needs to cultivate this sector and bring it under the tax regime if it wants to achieve its long-term macroeconomic goals. Therefore, Nigeria’s informal economy is critical for two reasons: in terms of untapped income and, more importantly, as a driving force behind rapid business development for sustainable economic growth. This is what the government can do to gradually subsume the informal economy under its jurisdiction:
* Design an innovative policy to bring unorganized activities into the official arena through a system of tax breaks, tax breaks and financing aimed at both existing and emerging unregulated businesses.
* Expedite fiscal and commercial regulations for their universal applicability; Crack down on systemic corruption through tough penalties.
* Promote a credit environment favorable to the realities of small businesses. The government’s effort should be focused on promoting lending through equity, not debt, because Nigeria’s informal economy consists mainly of high-risk property businesses.
* Improve productivity in small businesses by developing infrastructure and removing trade and administrative barriers. Enhance technical support and capacity building assistance to help existing and emerging entrepreneurs.
* Transform education at the vocational and skills level to create a dynamic workforce base that is equipped to meet business challenges. Create complementary programs for relevant technological and computer education.
Spain provides an excellent example of how it can be done well. Throughout the 1990s, the Spanish government pursued a radical reform program, easing corporate taxes and regularizing labor laws. The results were a drastic 40% drop in the unemployment rate over a six-year period, fueled by massive job opportunities in the informal sector. Even as tax rates were slashed, the government increased revenue collected from small businesses by more than 75% by bringing more of them under regulation.
Although Nigeria has been the continent’s second-largest economy after South Africa for years, independent researchers have long pointed out that the ranking is unrealistic in the sense that it does not take into account Nigeria’s large parallel economy. The theory may not be improbable, but it is almost impossible to prove because there is not enough data relevant to Nigeria. However, there is no doubt that the country’s future position in world affairs depends heavily on the development and formalization of its huge informal economy. In terms of attitude, what it requires above all is the suspension of conventional perceptions regarding the unorganized sector, that is, a paradigm shift in the perspective and execution of economic policy.
Nigeria’s economic reform process that began in 2001 has seen concrete steps aimed at boosting the private sector:
* In 2004, a bank consolidation program began to strengthen financial institutions and improve access to credit for the private sector.
* The rapid disinvestment in large companies began with the privatization of mining, communication and oil marketing corporations.
* The government deregulated oil prices in 2007 and applied the national Fiscal Responsibility bill and the Public Procurement bill.
Some of these measures have produced tangible results, reducing inflation and increasing international foreign exchange reserves. However, its long-term effects have yet to be observed or examined.
In December 2008, the government of President Umaru Yar’Adua submitted budget proposals for the withdrawal of $200 million in trust funds from the African Development Bank to issue 10-year government bonds. The move was part of the Treasury’s efforts to plug a substantial budget deficit that amounts to nearly 4% of GDP. Unfortunately, short-term measures like this otherwise unremarkable decision have defined Nigerian economic policy for more than half a century. What it needs to shed its Third World credentials is a unified and innovative strategy that reverses its excessive dependence on oil and actively seeks to formalize its informal economy.
Specifically, Nigeria needs to find practical steps to turn its traditional survival practices into entrepreneurial enterprises that bring in income, create more jobs and provide innovative products and solutions. Several Abuja policy directives in recent years have sought to reform the old economy to ostensibly promote small businesses and sow an entrepreneurial revolution. In addition to its obvious contributions in terms of employment and income generation, Nigeria’s informal economy is responsible for a number of positive effects:
* Allows for a productive outlet for a large population of Nigerians who are self-employed by choice or necessity.
* Creates economic competition and promotes innovative business practices relevant to local realities.
* Most importantly, it mobilizes Nigeria’s significant pool of human resources that would otherwise go unused or, worse, misused.
In the Nigerian context, formalizing the informal economy is synonymous with business development and long-term macroeconomic growth. An effort of this magnitude requires both creative innovation in policy design and motivated implementation. In light of the country’s troubled past, his government would also do well to build a popular consensus on important issues before attempting to enforce radical laws. Far-reaching change, however, will only come when it is realized that tapping into the informal economy is key to resolving the age-old paradox of Nigeria: a country of enormous resources with extreme poverty.