Choose Your Champions Wisely

The importance of domestic champions to economic development means it is very important to get them right

If you're Nigerian and even remotely aware of current events, you know that Aliko Dangote, Africa's richest man, has been freaking out over his $20 billion refinery megaproject. This flagship investment has hit turbulent waters recently, with Dangote voicing concerns about everything from the state oil company NNPC's failure to deliver promised crude oil, to soaring interest rates, importation of refined petrol, and an alleged conspiracy by the oil cabal to sabotage the refinery's success. The saga has sparked a flurry of accusations and counter-accusations between Dangote and industry regulators, drawing in press attention, national legislators, and even the presidency. Dangote appears to have secured a 'sweetheart deal' from the government for the sale of crude oil - the implications of which are once again brilliantly analyzed by Feyi.

This unfolding drama has elicited a spectrum of reactions and commentary. Some view it as yet another indictment of Nigeria's dismal business environment, highlighting the challenges that deter investments. If the government can stand by and let a $20 billion investment by a prominent Nigerian industrialist falter, then the message it sends is that no one is safe. However, I do not firmly agree that the Dangote episode is entirely indicative of the typically inhospitable business environment faced by the average enterprise. After all, the refinery was regularly promoted as an investment in the national interest, with former President Muhammadu Buhari present at its launch, and it was a frequent site of interest for the immediate past central bank governor. What appears to have changed for Dangote is the political landscape. Nonetheless, I concede that government interference remains a significant source of negative political distortion in this episode, a point that underscores a broader challenge as I have written in the past.

One strand of commentary I find particularly strange and misleading is that Dangote represents the quintessential domestic industrial champion whose success and status must be promoted and protected by the government at all costs. The underlying rationale for this view is that economic development hinges on local industrial giants who can make substantial investments, take significant risks, and employ many people. However, this argument often lacks substance beyond the desire for local champions and neglects the crucial qualifier that not all champions are the same. It is essential to differentiate between those who drive technological advancement and broader development goals versus those primarily seeking to dominate the domestic market.

Domestic industrial champions play a pivotal role in shaping the economic trajectory of a nation. Understanding the difference between champions that drive technological advancement, export growth, and broader development goals versus those that primarily seek to dominate the domestic market is critical. This distinction helps formulate appropriate policies and avoid pitfalls associated with market distortions and inefficiencies.

There is no doubt that many of the countries that have gone from poor to being rich in the last few decades have also produced domestic companies that have become global industrial giants. Some of the famous examples include Toyota, Sony, Samsung, Hyundai, and Huawei - to name a few. It is also true that some other countries that have not fared as well in terms of development also have large domestic firms. So, the mere presence of domestic large firms does not guarantee better development outcomes. Beyond that, it is also important to understand the context of the concept of industrial champions, and why they matter.

The framework for understanding champions can be found in the works of scholars like Alice Amsden, Dani Rodrik, Chalmers Johnson, Alan Krueger, and others. Two things to keep in mind. The first is that champions emerge and evolve as a result of government interventions usually through industrial policies. Secondly, the emergence of champions serves to fulfil national economic development goals, and not merely for nationalist identity reasons. For example, the emergence and success of Dangote was a result of a government-stated 'backwards-integration' policy for the cement industry. It is also clear that the policy has failed to achieve any development outcome, majorly because the government itself did not clearly state its goals, and failed to adjust the initial policy. Perhaps because it suffices for politicians and policymakers to merely have domestic cement manufacturers and nothing else matters. This is costly for the country and should call into question the political environment that allows it.

This brings us to a third important point. Promoting industrial champions by itself does not guarantee development outcomes.

Two Types of Champions

I will classify domestic industrial champions into two broad categories. Development-Oriented Champions and Market-Capturing Oligarchs. The first category of firms often emerges in environments where the government provides targeted support aimed at enhancing their competitiveness. They invest heavily in research and development (R&D), adopt cutting-edge technologies, and foster a culture of innovation. Examples include South Korea’s Samsung and Hyundai, which have become global leaders in technology and automotive industries respectively. These companies were initially nurtured by the government through policies such as favorable financing, export incentives, and protection from foreign competition.

The second category typically leverages political connections to gain favourable treatment, such as subsidies, tariffs, and regulatory advantages, which allow them to dominate the domestic market. Their primary goal is to maximize profits through market control rather than innovation. For example, certain Russian oligarchs have acquired vast wealth by gaining control over key industries during the privatization process of the 1990s. These oligarchs often rely on political patronage to maintain their market position, leading to significant inefficiencies and corruption.

Development-oriented champions contribute to economic development through several key mechanisms: technological upgrading, export growth, and infrastructure development. Companies like Samsung have invested heavily in R&D, leading to innovations in semiconductors, smartphones, and consumer electronics. Firms like Toyota have become global exporters, contributing significantly to Japan’s trade balance. The growth of these firms often necessitates and stimulates improvements in national infrastructure, such as transportation networks, communication systems, and energy supply, which benefit the wider economy.

In contrast, market-capturing oligarchs may hinder economic development by stifling competition, limiting innovation, and fostering political corruption. Their reliance on political connections can lead to widespread corruption, misallocation of resources, and regulatory capture that undermines economic development objectives and outcomes.

Choosing Champions

Promoting domestic industrial champions can be quite beneficial for countries. However, it is fraught with challenges and most efforts only rarely succeed. The political dynamics in most countries do not yield the necessary commitment, consistency, coherence, and discipline to make it succeed. Economist William Easterly famously warned on industrial policy that firms are more adept at picking governments than governments are at picking the right firms.

However, there are at least three things we can learn from the successes. The first is that support for domestic industrial champions is very strategic and goes well beyond creating local billionaires. Support is often targeted at high-growth industries with opportunities for domestic technological advancement, big export growth, and huge employment potential. Secondly, support is also strongly preconditioned to ensure domestic competition, and prevent monopolistic industry structures that are not innovative and only yield high profit margins for the participating firms. Thirdly, institutions and regulations are always improved over time to reduce corruption, waste, and opacity that may have been present when support started.

Conclusion

I have presented a somewhat simplified version of the concept of domestic champions. Yet, anyone familiar with Nigeria's political economy over the past two decades will easily recognise how the rise of Dangote's businesses and the entire domestic billionaire class fit into this concept. It is not development-oriented. Furthermore, there is no evidence that this status quo will change anytime soon. So, it is therefore baffling why scholars and former ministers, who should know better, tried to use the latest refinery drama to muddy the waters. Perhaps this is a thinking that is popular in Washington's development commentariat and think-tank circles.

I do not wish to see Dangote fail, and I acknowledge that Nigeria is a challenging place to do business. However, my wish is for political governance where the public support that people like him receive translates into meaningful and visible economic gains for the country. Nigeria is not South Korea, but regardless of differences in culture, politics, or history, orienting government support for domestic industrialists towards development should be the minimum condition.

Anyone who argues differently, citing India's Ambani as a comparison, is telling less than half the story.