As one might expect, there is much discussion of the resource curse in the Nigerian context and more generally, and various approaches have been developed to help countries such as Nigeria better manage their oil revenues.13 So in preparing for a talk to Nigerian business leaders in Lagos in late 2010, I found myself wondering if that's what would be most useful to talk about. An alternative was suggested by a contemporaneous quote from President Goodluck Jonathan: “The larger economy is the non-oil and gas and the future belongs to that.”14 So I decided that my “Nigeria in World 3.0” talk would focus on nonoil exports.
The distinction between oil and nonoil exports turns out to matter a great deal when remapping the world in proportion to Nigeria's exports to individual countries. When one looks at total exports, as mapped in the top panel of figure 13-2, what stands out is a relatively balanced map of the world with some proximity effects that tip trade toward Europe. But the bottom panel of figure 13-2 resizes countries to focus on Nigeria's nonoil exports and reveals a pattern in which Europe looks even more dominant than before, the Americas are shrunken shadows of themselves, and Africa continues to be significantly smaller than Europe.
What aspects of the CAGE framework do Nigeria's nonoil exports embody? The relatively low weight for Africa—compared to how large within-region trade would loom in most parts of the world—reflects the fact that, although Africa is much closer on geographic and other CAGE dimensions, the small size of the local market plus the unexploited potential associated with poor infrastructure, as noted earlier in this book, combine to reduce trade volumes. Nigeria's regional trade is also depressed by the fact that it is a former English colony surrounded by former French colonies who share a common currency, the CFA franc.15
Another attribute of Nigeria's trade that stands out in figure 13-2 is the heavy focus of Nigeria's nonoil exports on continental Europe. This is somewhat surprising because a CAGE-based estimate indicates that the United States and the United Kingdom should in fact be Nigeria's two largest trading partners. Relative geographic proximity helps explain Nigeria's trade with continental Europe, but is not sufficient to account for its weight. Rather, it seems there are other effects, most likely related to trade patterns in specific commodities that are among Nigeria's more developed nonoil exports. Leather exports to Italy and cocoa exports to the Netherlands alone accounted for 22 percent of Nigeria's nonoil exports in 2007.16
Figure 13-2: Nigeria's total exports (top) and nonoil exports (bottom), 2008
Sources: Generated based on data from United Nation Commodity Trade Database (Comtrade) (top panel) and Nigerian Export Promotion Council based on data from Cobalt International Services Returns (bottom panel).
Thinking about where else Nigeria might compete, one area of potential focus is the United States and United Kingdom, where, in addition to CAGE commonalities, there are many highly educated Nigerians.17 A second potential focus might be large developing markets. These ultimately show up in quantitative CAGE analysis as the markets that look most attractive in terms of absolute growth potential after adjusting for the impact of CAGE differences from Nigeria's perspective.
The big wild card from the Nigerian perspective is regional trade. It is worth noting that trade with Nigeria's neighbors is underestimated because much of it is informal.18 However, these are very poor and fragmented markets, and in some sense, Nigeria faces a choice about the extent to which it really is willing to take the lead role in fomenting further regional integration under the Economic Community of West African States (ECOWAS) or other auspices, as opposed to simply sitting back, content in the knowledge that it has the region's largest market, and therefore needs regional integration less than smaller countries do.
In terms of how to compete, it is fairly clear that most of Nigeria's nonoil exports—rubber, sesame oil, and cashew nuts along with leather and cocoa—as well as oil, of course, are traditional commodities in which international competition is driven by arbitrage. Especially given the volatility of exports from year to year, the challenges in these categories are to deepen and solidify bases of arbitrage, build longer-term relationships with buyers, and ideally migrate price bands upward. Such arbitrage strategies are often appropriate for exports to developed markets.
But regional markets offer Nigeria the opportunity—if it decides to make them a major focus—to use the scale of its domestic market as a vehicle for penetrating new markets on the basis of aggregation rather than arbitrage. Aggregation suits Nigerian companies because its smaller neighbors have less internal scale, and it offers potential for growth not just in traditional manufacturing categories but also in new categories. For instance, the market for Nollywood videos and Nigerian music in the region is potentially huge, even though its development has so far been held back by lack of distribution arrangements, piracy problems, and poor transport. Regional markets would also require some degree of adaption to requirements of other countries, consistent with the finding that among Nigerian firms, those that adapted their products and promotion strategies to foreign markets achieved better export performance.19
In addition to rethinking where to compete and how to compete, Nigeria faces generalized imperatives to reduce the effects of distance, particularly administrative and geographic distance since it scores poorly on indices of ease of doing business and faces particular problems relative to openness. According to a World Bank report, “Cross border procedures increase import costs for firms in Nigeria by 45 percent on average. Some enterprise managers noted that they must spend between 30–50 percent of their time on procedures alone.”20 Nigeria ranks 126th out of 139 countries in terms of “burden of customs procedures.”21 It takes 53 days to clear goods from Lagos ports, and, according to a World Economic Forum report, “it is estimated that a reduction of ‘factory-to-ship’ time from 41 days to 27 could increase exports from Nigeria by almost 15 percent.”22 To grow regional trade, road links and land borders also need to be improved.
Finally, it is important to remember internal as well as external distance. Nigeria, with more than 250 ethnic groups, scores in the top decile of countries in terms of ethnic and linguistic fragmentation.23 Internal communications are poor, religious divides are pronounced, particularly between north and south, and agricultural wages in the south can be as much as 50 to 100 percent higher than in the north.24 Regional fragmentation is also evident in the structure of Nigerian manufacturing, with many firms failing to achieve the scale economies that Nigeria's national market could at least theoretically support. So the challenge of helping Nigeria grow beyond oil is not just a matter of fitting Nigeria better into World 3.0; it also involves knitting Nigeria together.
U.S.–Chinese Uncertainties
The same broad approach that applied across the Andorran and Nigerian economies can, with some modification, be used to analyze the relationship between the United States and China. U.S.-Canadian trade is 50 percent larger than U.S.-Chinese trade but is subject to the least CAGE distance and conflict among major trading country pairs, while U.S.-Chinese trade suffers the most.
These economies were earlier seen as more complementary: “Chimerica,” as described in chapter 8. Trade and investment soared, with U.S.-Chinese bilateral trade reaching nearly seven times what a gravity-based model would predict from the U.S. perspective. But surging flows brought huge trade imbalances and debt obligations, which made both sides vulnerable to the other's hostile moves. They are now anxious creditor and too-big-to-fail debtor.
The anxiety around this major creditor-debtor relationship and the difficulties of sustaining cooperation between the United States and China are compounded by deep differences and distances between them. As described in chapter 8, the two economies start with opposing superordinate goals and economic structure. China has a long time horizon; it needs to build up its capital stock rapidly and create 12–15 million new jobs annually and grow at least 8 percent per year. The United States has much more capital per person but also an apparently sh
orter time horizon and extensive entitlements, leading to shortfalls in savings. Connecting these two economies simply reinforces their divergent growth trajectories and unbalances trade and capital flows. A neoclassical solution would include rises in China's currency value and interest rates and in the United States' saving and taxation rates, but China sees this as capitulation while the United States sees its medicine as politically unacceptable. Both naturally value their domestic agendas over international balance, so the structural mismatch remains in place.
The noneconomic dimensions of the CAGE framework also add to the tensions between the two countries. Culturally, for instance, both countries have traditionally approached the world with exalted views of their own standing. The United States has long seen itself as an exceptional nation that, as Abraham Lincoln put it, offers humanity its “last best hope on earth.”25 China, over its much longer history, has almost equated adopting Chinese culture with being civilized itself, referring to itself as the Middle Kingdom, as in the center of the universe. The natural position of foreigners/barbarians, of course, was to pay tribute to China. And the outsiders that did conquer China adopted China's culture, not the other way around.
Administratively, of course, there is the obvious distinction between multiparty democracy and single-party rule. Chinese leaders regard this aspect of their governance as an internal matter, but that view runs up against Americans' pride in being a “beacon of democracy,” which makes it difficult for them to hold any country without it in high esteem. The major disagreements around the award of the Nobel Peace Prize for 2010 to Liu Xiaobo illustrate how deep these divisions run. Additionally, the fact that China's ruling party is called Communist also conjures up unproductive cold war associations.
There are geographic tensions as well between an increasingly urban China, with massive populations concentrated in megacities, and a mainly suburban United States. This difference alone implies distinct approaches to environmental protection and energy policy as well as different patterns of competitiveness—for example, China's relative strength in urban transit and high-speed rail. Furthermore, China's higher population density and very intensive use of agricultural land fuel tension over territorial disputes.
Economically, trade and capital imbalances are far from the only source of tension between the two countries. As I write this, a Harvard Business Review article I wrote with Thomas Hout has just come out describing the technology squeeze to which the Chinese government appeared to be subjecting multinationals.26 And I have at hand an issue of The Economist with the cover “Buying Up the World: The Coming Wave of Chinese Takeovers.”27 Given the historical record as well as the size of China's foreign exchange reserves, this seems unlikely to go entirely smoothly. And envy—on the U.S. side, of being overtaken by the Chinese economy in terms of total size and, on the Chinese side, of the U.S. continuing to be much richer per person—doesn't help.
To attach some numbers to these CAGE differences, recall that Canada ranked as the closest country to the United States along multiple dimensions, as described in chapter 3. China, in stark contrast, ranks 155th out of 163 countries analyzed in a CAGE-based model. Not only is Beijing twenty times farther from New York than Toronto, but the United States and China don't share any of the main commonalities that made the U.S.-Canadian relationship so close: language, land border, trade bloc, colonizer, and legal origin. China and the United States are about as distant as any country pair you could select, and certainly the most distant among countries that are so deeply intertwined.
The stakes involved in getting these two countries to cooperate couldn't be higher, and the differences and tensions involved make perfect harmony an unrealistic aspiration. What can we say from a more realistic World 3.0 perspective to help improve the probability of cooperation? One basic lesson is that since distance isn't collapsing all around us, we can choose where to compete, and perhaps more importantly, where not to compete. Recognize spheres of influence, particularly China's reassertion of its regional position in Mongolia (sometimes referred to as “Minegolia”), Siberia, and Central Asia.28 And more broadly, accurately size up the problem by recognizing that competition between China and the United States extends to “third” countries all around the world. China's activities in Africa have attracted the most attention, but its expanding economic relations with Latin America might serve as a reminder for the United States not to neglect its own neighbors.
Trade patterns are a seldom-noted indicator of China's rise—but an obvious one in an era when many leaders insist that foreign policy is primarily about economics. For a visualization, think of adapting the rooted maps of the previous two sections to a situation in which countries around the world have to be looked at from two perspectives rather than just one—and overlaying those perspectives. That, roughly, was the process used to generate the maps in figure 13-3, which characterize countries in terms of whether they traded more or much more (more than twice as much) with China or with the United States in 2000 (the top panel) and 2009 (the bottom panel).
To summarize, in 2000, the United States was a larger trading partner than China for roughly 90 percent of countries around the world. But by 2009, trade with the United States exceeded trade with China for only about half of the world's countries. According to a rough projection reflecting only differences in GDP growth, China's trade will exceed that of the United States with 70 to 80 percent of countries in 2030.29 Consider, as an example, India, where the United States is seeking to strengthen relations, partly to bolster a democratic counterweight to China. In 2009, India's trade with China overtook its trade with the United States, and India could trade more than twice as much with China than the United States in 2030.30
The maps and projections start to raise broader issues around where to play, particularly for the United States. For example, will it consciously try to cultivate relationships with India, Southeast Asian countries, South Korea, and Japan as a way of offsetting the gravitational pull of the severalfold greater trade those countries will likely engage in with China? And if so, how will China respond? It is easy to imagine the answers to those questions being fundamental to the global balance of power in 2030.
In terms of how to play rather than where, it is worth noting that United States and Western multinationals seem to be counting on their traditional aggregation advantages, particularly in R&D and marketing, and that the Chinese challengers, traditionally arbitrageurs, are trying to leverage the explosive growth of the Chinese market into making China the origination point for the world's most advanced technologies—that is, to wrest the aggregation advantage in R&D away from established multinationals. No wonder the technology squeeze by the Chinese is such big news.
Given the small-numbers character of the U.S.-Chinese interaction, one can think further about how to play in ways that improve the like- lihood of cooperation by applying the logic of game theory. Model the interactions between the United States and China as a repeated prisoner's dilemma in which each player has a choice at each decision point about whether to cooperate with the other or cheat. The two do best collectively if they both choose to cooperate, but each has an incentive to cheat on that outcome, challenging its sustainability. In the one-shot prisoner's dilemma, there is no way around the basic problem: (cheat, cheat) ends up being the equilibrium, even though it is also the worst possible outcome. But (cooperate, cooperate) can be sustained as an outcome in the repeated prisoner's dilemma, and computer tournaments between different types of strategies identify some of the attributes of strategies most likely to sustain cooperation:31
Figure 13-3: U.S. versus China trade in 2000 and 2009
Note: U.S. dominant means that U.S. trade is more than double China's with a given country. U.S. preponderant means that U.S. trade with a country exceeds China's but is less than double China's. China preponderant and China dominant are based on parallel definitions.
Sources: Generated based on data from United Nation Commodity Trade Databa
se (Comtrade) using bilateral trade values reported by U.S. and China.
Niceness: Don't cheat before the other player does; such attempts to capture gains up front usually backfire by provoking damaging cycles of retaliation.
Retaliation: Retaliate at least some of the time if the other player cheats, or you will be exploited.
Forgiveness: Avoid retaliating at least some of the time when the other player cheats (or appears to cheat) to avoid long cycles of revenge.
Nonenvy: Focus on maximizing your own gains instead of worrying about whether you are gaining more or less than the other player.
To these principles for managing a repeated prisoner's dilemma productively, one might add recognition of genuine differences in perceptions and interests (rather than assuming that something makes sense for them because it makes sense for us), proportionate rather than disproportionate responses, a willingness to make trade-offs across issues instead of putting one above all else, and improvements in information flows in order to minimize miscommunication and ideally help build mutual confidence.
That last point leads, naturally, in the direction of thinking about how reducing external and internal distance might also help foster cooperation. Improving external connectivity could help in several different ways. The United States, in particular, has some catching up to do in learning about China. As Singapore foreign minister George Yeo keeps reminding Western audiences, the Chinese know much more about the West than Westerners know about China. Americans have been distracted because of the need to focus on multiple countries, while the Chinese could simply focus on the United States. Democracy also makes this task harder, because the electorate itself, or at least politicians in both major parties, need to do the learning rather than a stable set of specialists ensconced in Beijing.
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