Can better urbanization policies unlock faster economic growth and development in Nigeria?

At the moment the Nigerian state can’t guarantee competent pro-growth government throughout the country. Competently run pro-growth cities are the next best thing.

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I: Hyper-centralized stagnation vs multi-speed (urban) subnational development?

I recently developed an interest in (the history of) Nigeria’s manufacturing output and how policy might help accelerate growth in the sector (more on this in a future post). So far the one thing that keeps jumping at me is the extent to which large Nigerian cities are underperforming in their role as engines of rapid economic growth and development.

Despite their relatively large sizes, the available (albeit sparse) data reveal not processes of transformational urbanization but something akin to high-density ruralization. Informality is rampant. Firms stay small irrespective of their age. There is very little manufacturing (packaging imports doesn’t count). Urban planning is virtually absent. Policy coordination and manufacturing-enabling infrastructure are patchy. Overall, you have to really squint to find indications of productivity improvements.

Why is this the case? Writing over at The Africa Report, Chinedu George Nnawetanma presents the most likely answer — the overwhelming concentration of policy attention and investments in the political capital (Abuja) and commercial capital (Lagos) that leaves other large urban areas in the dust:

According to reports by the Nigerian Bureau of Statistics, 94.1% of all foreign investment inflow into Nigeria in 2023 went to Lagos and Abuja, with Lagos taking the lion’s share of 64.1% and Abuja accounting for 30%. This imbalance extends to other indicators like gross metropolitan product, household income, and human capital development, leading to a sustained flight of businesses and talent to Lagos and Abuja.

This skewed allocation of capital is particularly noteworthy in light of Nigeria’s distributed urbanization. Lagos (16.5m) may be huge, but it only comprises 13% of Nigeria’s urban population. The comparative figures on the largest city’s share of total urban populations in Angola (37%), Kenya (33%), Cote d’Ivoire (37%), and the African mean (26%) are considerably higher. Furthermore, Nigeria has at least 15 other cities with more than a million people (actual figures vary depending on source). 60 urban areas have more than 200,000 people.

An illustration of the economic importance of Nigeria’s main urban areas. Notice the dispersion of urbanization. Nigeria is unlike many low and middle income countries that tend to be totally dominated by their largest cities. Source: World Bank

Instead of putting all its proverbial eggs in two cities, Nigeria ought to be exploiting this distributed urbanization — a sort of diversified portfolio of styles of government, spatial linkages to rural areas, and sectoral specialization — to avoid the risks associated with over-reliance on Abuja and Lagos.

A hyper-centralized reliance on Lagos and Abuja is a recipe for stagnation. To avoid this fate, Nigeria should embrace a deliberate policy of enabling its other large cities become diversified nodes of growth, while also investing in the transportation and communications infrastructure to connect them. Both density and connectivity should be prioritized. To this end Nigeria’s major cities need better metropolitan government, better infrastructure, and better inter-city connectivity. The fact that Abuja and Lagos gobble up over 94% FDI signals a massive under-performance on these dimensions by the likes of Benin City, Ibadan, Kano, Port Harcourt, Kaduna, and Onitsha, and others.

So what are the fundamental drivers of the gap in infrastructure and administrative quality (and FDI flows) between Abuja and Lagos and other large Nigerian cities? Nnawetanma emphasizes two key factors:

Unlike Lagos and Abuja, many secondary cities struggle with inadequate transportation networks and essential utilities, making it difficult for businesses to operate efficiently in them.

Revenue generation and allocation add another layer of complexity to the mix. The overwhelming majority of Nigeria’s fiscal income comes from crude oil sales, which is then distributed among the federal, state and local governments through the Federation Account Allocation Committee (FAAC).

This is correct. Nigeria’s inability to benefit from its distributed urbanization is a function of two things. First, due to its reliance on oil rents and failure to collect taxes, the country runs a puny budget relative to the size of its economy and has historically failed to invest in both intra-city and inter-city infrastructure. Even Abuja and Lagos have significant infrastructure gaps. Second, Nigeria’s urban misgovernance reflects the elite bargains and institutions underpinning its federal structure. Its only two subnational units — States and Local Government Areas (LGAs) — mainly exist to distribute oil rents and not to promote growth and development. Very few states view promoting economic growth as a means to increasing their own revenue collections. Meanwhile, the vast majority of LGAs function as little more than patronage machines under the beck and call of governors who (unconstitutionally) control significant shares of LGA revenues. 

Consequently, poor service delivery is the norm in the LGAs. According to the latest Afrobarometer survey, 71.5% of respondents disapprove of their LGAs’ performance.

Importantly, the historical focus on rents at the state and LGA levels means that Nigeria lacks coherent metropolitan governments for its cities — they are instead agglomerations of typically uncoordinated LGAs (Lagos has 20). Notably, Abuja and Lagos are appreciably better run precisely because they have historically enjoyed better policy coordination at the metropolitan level — in addition to their favorable access to federal resources. The lesson here is that Nigeria must urgently introduce incorporated metropolitan governments in its major cities in order to unshackle them from the anti-growth politics of patronage.

This is not to presume that Nigeria’s incorporated cities will be perfectly run. Far from it. The point is that if Nigeria is to have a shot at sustained rapid growth it needs good enough urban government and pro-growth policymaking. Then the quality of government can co-evolve with improvements in economic performance. This approach would also explicitly embrace multi-speed urban development and be open to learning by doing. The fact of the matter is that Abuja and Lagos alone have not and cannot lift the rest of the country out of its low-productivity trap.

Looking at the big picture, focusing on cities makes a lot of policy sense. If policymakers in Abuja can’t guarantee investors (domestic and foreign) and workers an entire country firing on all cylinders, the next best thing would be to offer a spatially-diversified portfolio of interconnected and competently-run cities.

II: Making distributed urbanization work for faster growth in Nigeria

Proper cities are amazing engines of economic growth and development. Across the world urbanites do better on nearly every measure related to development compared to their rural counterparts. Overall, cities generate more than 80% of global GDP.

Rural areas tend to have much higher levels of multidimensional poverty than urban areas. Source: Our World in Data

However, despite the overall benefits of high-density living, not all cities are created equal. There are cities that function as centers of highly-productive non-agricultural employment; and then there are those that look and feel like densely-populated rural areas where low-productivity economic activities predominate.

Along these lines, Gollin, Jedwab and Vollrath (2016) distinguished between economies that create production cities versus those that spawn consumption cities. In the former (typically non-resource exporters), urbanization tends to be (strongly) positively correlated with the employment of labor in higher productivity jobs (like in manufacturing). In the latter category of countries (typically resource exporters), reliance on extractive rents means that urbanization tends to be very weakly correlated with either the GDP share of non-agricultural sectors or improvements in productivity. In other words, the agglomeration effects that we typically associate with high-density urbanization are more likely to exist in production cities than in consumer cities:

Even leaving aside agglomeration economies of cities, the differences in economic activity between consumer and producer cities may lead to slower growth in the former. We have widespread evidence that productivity growth in industrial sectors like manufacturing is consistently higher than in nontradables like education, health care, and personal services. By concentrating employment and production in such nontradables, consumer cities are bound to have lower productivity growth.

Nigerian cities largely belong in the category of consumption cities. The country is a petroleum exporter whose large urban areas are not designed or governed to function as high-performing production cities. Rather, they are hostages to the federal distributive bargain that underpins the country’s political stability but which has so far failed to catalyze rapid economic growth and development.

Figure compares the correlation between urbanization and non-agriculture share of GDP in resource vs non-resource countries. Nigeria is circled in yellow. Source: Gollin, Jedwab and Vollrath (2016)

How can Nigeria break out of the straitjacket of consumption cities? I would argue in favor of two reforms:

1) Improvements in urban administrative competence via the total emancipation of major cities from the chokehold of the dysfunctional politics in the states and fragmented LGAs.

The obvious way to improve urban administrative quality would be to establish incorporated cities — say the top 15 by population — that are self-governing, with elected mayors and councils, and enjoying substantial fiscal and policy autonomy. This process should be staggered in a way that allows for learning, with specific attention to the end goal of creating urban centers that are well-ordered engines of (industrial) growth and mass job creation.

The incorporated cities should, in particular, pay close attention to their respective informal sectors. The point shouldn’t be to criminalize informality as most “modernizing” cities do. Instead, deliberate policies of bridging the gap between formal and informal sectors should be deployed to escape the under-development trap of low-productivity informality in both the public and private sectors. Policy support for productivity increases and organizational efficiencies to lower the relative costs of food, housing, transportation, education, and healthcare should be a priority.

2) Targeted development of energy as well as communication and transportation infrastructure linking the top 15 major cities.

Well-functioning cities need lots of energy. Therefore, the Nigerian government should prioritize energy abundance at a reasonable cost in all the incorporated cities. In addition, it should urgently invest in transport and communication infrastructure within and across cities to facilitate the flow of goods, information, and people. The goal should be to build a network of highly-interconnected production cities. As Volrath observes:

[P]roducer cities are dependent on trade with other cities or countries [and] have more incentive to innovate to gain market share. Consumer cities, on the other hand, are more likely to rely on rent seeking — and therefore experience economic stagnation. Moreover, innovations in one producer city can spill over to other producer cities through supply chains (cheaper steel in Pittsburgh makes for cheaper cars in Detroit) — but anything that benefits a consumer city likely comes at the expense of another city or region (like higher rents for agricultural tenants). 

Along these lines, two very important infrastructure projects that ought to be prioritized by Nigeria and its development partners come to mind.

The first is the planned motorway linking Lagos to Calabar. Everyone talks about the Abidjan-Lagos corridor, when in fact it should be the Abidjan-Calabar corridor. Over the next 50 years the stretch from Abidjan to Calabar will comprise one giant urban corridor with enormous economic potential. But in order to realize its potential the corridor needs lots of infrastructure — roads, railways, ports, fast internet, water and sanitation, etc.

Which is why it is a shame that President Bola Tinubu’s administration appears hellbent to bungle a major road project linking Lagos to Calabar that promises to unlock significant economic activity in the wider southeastern Nigeria. The administration awarded the project to a politically-connected Lagos developer who most analysts suspect is only keen on building the Lagos leg of the road (the same firm is behind the Eko Atlantic City development). Given that they lack the funds of capacity to execute the entire project in a timely fashion, Tinubu and his ally shouldn’t hoard the rights to this very important contract. Instead, the project should be divided into bits and awarded to different contractors under a “Lagos-Calabar Corridor” overseer.

The proposed Lagos-Calabar Coastal Highway (orange). Source: FGN

The other project is Onne Port and connecting infrastructure to cities in the southeast. There is currently a push by governors in southeastern Nigeria to develop multiple river ports. This is a bad idea. The federal government ought to coordinate the region into expanding the capacity at Onne Port accompanied with road and rail links to major cities like Benin City, Onitsha, Port Harcourt, Calabar, and Abuja.

The point here is that merely having a port isn’t development. What matters is how much economic activity it’s able to handle. Once expanded, the large scale of operations would enable Onne Port to compete with Lagos, which currently handles about half of port traffic in Nigeria. In future, it might then make sense to build another port at Calabar that’s mainly focused on serving northern Nigeria.

Potential rail and logistics hubs in Southeast Nigeria. Source: Tonami Playman

It’s true that these projects are expensive, not to mention what it could take to upgrade intra-city infrastructure across Nigeria. The Lagos-Calabar road will cost $15b, while the parallel rail link was booked at $11.7b in 2021. Upgrading the Onne port and related logistical links to regional cities will add several billions of dollars in costs. However, with deliberate leadership these projects are doable. For example, back in 2011 when Ethiopia embarked on its Grand Renaissance dam the projected cost was a staggering 15% of GDP. And then they went ahead and built it. In Nigeria, that would be the equivalent of spending $58b at current output levels.

Given the stakes, there is absolutely no excuse for the lack of serious investments in infrastructure — whether funded by taxpayers or through reasonably priced PPPs.

III: Conclusion

Were Nigeria to adopt the deliberate urbanization policies suggested above, they’d certainly hear from the anti “urban bias” crowd. If that happened, policymakers would be in order to ignore them. Lest we forget, it is the fixation on urban bias in the 1980s that foreclosed on investments in serious urban policymaking and partially produced African states’ mostly chaotic and highly informal cities. In any case, the continent is increasingly majority urban. Therefore, policy must adjust to meet households in Nigeria and elsewhere where they work and live.

Finally, investing in production cities across the Continent will require high levels of fiscal discipline. Not enough people appreciate the fact that African countries are urbanizing at relatively lower levels of income — which means that most African cities simply lack the money to pay for investments in human capital and infrastructure to power highly-productive agglomeration. For perspective:

The nations of sub-Saharan Africa surpassed 40 percent urban share in 2010 at a GDP per capita of $1,481. For comparison, Latin America passed the 40 percent mark in 1950 at a GDP per capita of $2,500, while East Asia surpassed a 40 percent urban share in 2000 at a per capita GDP of $5,451.1 For reference, in 1900, per capita in Western Europe was at least twice that of sub-Saharan Africa today.

Under these conditions, and absent deliberate policy interventions and smart (and cost conscious) investments in infrastructure and human capital, urbanization will not create engines of growth and productivity improvements across the Continent. This is something that should worry African policymakers (and researchers) day and night.