Explaining African Economic Growth Performance:
The Case of Nigeria
Chapter 18 of volume 2
by
Professor Milton A. Iyoha
Department of Economics
University of Benin
Nigeria
and
Dickson E. Oriakhi, Ph. D
Department of Economics
University of Benin
Nigeria
NigeriaChapter 18
Contents
1. Introduction and Overview
1.1 Political Background
1.2 Economic Outcomes
2. Macroeconomic Policy, Debt Management and Growth, 1960-2000
2.1 Macroeconomic Policy 1960-2000
2.2 Debt Management 1960-2000
3. Explaining Growth Performance: 1960-1986
3.1 Trade and Commercial Policy
3.2 Agriculture and Agricultural Policy
3.3 Market Institutions
The Financial Market
The Labour Market
The Land Market
The Foreign Exchange Market
3.5 Political Economy and Governance
4. Explaining Growth Performance: 1987-2000
4.1 Performance of the Manufacturing Sector
4.2 Trade and Commercial Policy
4.3 Agricultural Policy
4.4 Market Institutions
The Financial Market
The Labour Market
Traded Goods Markets
The Foreign Exchange Market
4.5 Political Economy and Governance
5. Concluding Remarks
References
List of Tables
Table 1: Executive Transitions in Nigeria.
Table 2: Level and Growth Rate of Real Per Capita Income.
Table 3: Investment and its Components.
Table 4: Regional Bias in Oil Revenue Allocation.
List of Figures
Figure 1: Real GDP Per Capita, 1960-2000.
Figure 2: Investment as a Share of GDP.
Figure 3: Real World Price of Oil.
Figure 4:Resource Rents in Resource-Rich Countries.
Figure 5: Official Exchange Rate and Black Market Premium 1960-2004.
NigeriaChapter 18 page 1
1. Introduction and Overview
Nigeria’s economic performance since Independence in 1960 has been decidedly unimpressive. It is estimated that Nigeria received over US$228 billion from oil exports between 1981 and 1999 (Udeh, 2000), and yet the number of Nigerians living in abject poverty – subsisting on less than $1 a day – more than doubled between 1970 and 2000, and the proportion of the population living in poverty rose from 36% to 70% over the same period. At official exchange rates, Nigeria’s per capita income of US$260 in 2000 was precisely one-third of its level in 1980 (see World Bank 2005). Meanwhile, Nigeria’s external debt rose almost continuously, as did the share of its GDP owed annually in debt service.
Nigeria’s story is one of missed opportunities and, more specifically, of misspent natural resource rents. Corruption is an important part of the story, as is a pervasive lack of transparency and accountability in governance. Above all, serious mistakes have been made in macroeconomic management, notably including a Dutch-disease-generating syndrome in which policymakers erroneously treated favorable but transitory oil shocks as permanent. We argue in this chapter that Nigeria’s failure to harness its resource rents resulted mainly from distributional struggles between ethno-regional interests, and that imprudent macroeconomic policies in particular were motivated by the single-minded attempt by political leaders to transfer resources from the Southern to the Northern part of the country. We begin with a brief political background before turning to an analysis of policy regimes and growth performance.
1.1 Political Background
The Protectorate of Northern Nigeria was formed in 1900, with Lord Lugard as High Commissioner. Six years later the British Colonial Office combined the colony and Protectorate of Southern Nigeria as a separate protectorate. According to Bevan, et al (1999, p.10), Lord Lugard favoured the aristocratic society of the North, to the degree that the British became not only agents of development but also defenders of a stagnant feudal structure there. Amalgamation of the two protectorates took place in 1914 and was driven in part by the British desire to create a single, economically viable political entity. The Northern and Southern regions continued to be administered separately, but from an early date, British colonial policy presumed that resources would flow from the more advantaged coastal regions to the poorer Northern interior.
The construction of Nigeria culminated, late in the colonial period, in a 3-way federation of Northern, Western, and Eastern regions, under the 1954 Lytelton constitution. While the Federal structure accommodated what were by that time undeniable ethno-regional political divisions, these in turn were largely a creation of British colonialism: people saw themselves in ethnic terms because the British had insisted on seeing them in that way. As noted by Suberu (2001, p.2) “British-created Nigeria was and remains one of the most ethnically diverse countries in the world and perhaps the most deeply divided of all the countries in the course of the European occupation of Africa.” Regional polarization gave rise to distributional conflict well before the transition to Independence, and a focus on redistribution rather than production was later to intensify as the country’s state governments multiplied in number and ethnic nationalities struggled for the centre’s abundant resources and power.
The major ethno-regional groups united as independence approached, spurred on by a common desire to get the colonialists out of the country. But sharp lines of polarization were apparent, especially between the Hausa-Fulani, Yoruba, and Igbo ethnic groups that dominated the Northern, Western, and Eastern regions, respectively. These rivalries crystallized into bitter political struggles under the combined impact of economic competition and electoral mobilization. The adoption of a Federal structure at Independence therefore represented an institutional response both to the administrative autonomy and political salience of Nigeria’s existing regions and to their explosive demographic configuration, which pitted three major nationalities in fierce competition over economic resources and political power (Suberu, 2001).
During the first six years of Independence (1960-1966), regional tensions pushed the country into chaos. Political stability was undermined when the Federal Government, dominated by the numerically superior North, intervened in elections in the West, and then again when the North and West formed an alliance to benefit from the oil-rich Eastern region. The latter development led to two military coups in 1966 and culminated in the secession of the Eastern region in 1967 and its forcible reintegration after three years of civil war (Bevan et al., 1992, p.7).
Perhaps the most dramatic expression of regional conflict in Nigeria is the domination of non-elected Northern military officers, who have held the Presidency for nearly 90 percent of the period between 1967 and 2000 (Table 1 shows the history of executive transitions in Nigeria). Most recently, the country’s 1993 transition to multi-party democracy was aborted by the ruling military government when Moshood Abiola, a Yoruba politician, clearly won national multi-party elections. Chief Ernest Shonekan, a Yoruba, was installed as the head of the Interim National Government, but before this government could establish itself another Northerner, General Sani Abacha, took over as the head of a new military administration. Only with the death of Abacha in 1998 and the accession to power of General Adbulsalami Abubakar, another Northerner, was the groundwork laid for the transition, in May 1999, to an elected civilian administration headed by Chief Olusegun Obasanjo, a Yoruba and retired General.
***Table 1. Executive Transitions in Nigeria.
Relying on the communiqué of a major national conference on Nigerian Federalism, Suberu (2001, 9) concluded that Nigeria’s Federal system was perched precariously on a “weak productive base” due to the preoccupation of local, religious and ethno-regional interests with redistributing a shrinking national cake rather than producing a bigger one. Ethno-regional conflict continues to express itself in a wide variety of ways, including ongoing debates over the rules for intergovernmental sharing of revenues; calls for further subdivision (or amalgamation) of the thirty-six state structure[1]; popular repudiation of population census figures which appear to favour particular sections of the country; and debates over the “Federal character principle” which constitutionally mandates the equitable representation of states in federal public services and institutions. A common feature of these struggles is the tension they bring out between politically-motivated redistribution and economic efficiency. Several reasons have been adduced, for example, for requiring roughly proportional representation of states in some important political positions and in recruitment into the senior echelons of the Federal Civil Service: a leading one is the relative educational backwardness of the northern part of the Nigerian Federation.[2] However, while this imbalance provided an equity rationale for educational investment in the North, the argument for proportional recruitment seems clearly weaker given its potentially discouraging effect both on bureaucratic efficiency and on educational investment within Nigeria as a whole. As this example suggests, distributional conflict has acted over time to reduce the drive for growth and development of the Nigerian economy, both directly, via the misallocation of existing resources (and their wastage via court cases, work stoppages, and ethnic clashes), and indirectly, via the undermining of incentives for productive new investment.
1.2 Economic Outcomes
Nigeria’s long-run growth performance has been extremely poor. For the full 1960-2000 period, real income per capita grew at only0.43 percent per annum at constant domestic prices, and in PPP-adjusted terms average income actually fell (Figure 1). The importance of economic growth for poverty reduction has been established by numerous empirical studies and has recently been underscored by the phenomenal progress of China and other countries in East Asia and Pacific region.[3] In Nigeria, the consequence of long-run stagnation in average income was a sharp cumulative increase in poverty, both in terms of absolute numbers and as a share of the overall population.
As indicated in Figure 1 and Table 2, Nigeria’s long-run stagnation has occurred in a context of acute short-to medium-run volatility. Nigeria was a poor country at independence in 1960, with a per capita income in constant 2000 U.S. dollars of less than $250 at official exchange rates (about $1000 in PPP-adjusted terms). Real per capita income rose impressively between 1960 and the mid-1970s, with the exception of a brief but sharp interruption immediately before and during the civil war of 1967-70. In the mid-1970s, income fluctuated with little overall trend, but thenit plummeted in 1981 with the onset of an acute economic crisis. Between 1981 and 1984, real output fell at an annual average rate of nearly 6 percent. The Structural Adjustment program adopted in 1986 brought about temporary relief, with real growth averaging over 5 percent per annum between 1988 and 1990. The 1990s, however, witnessed nearly complete stagnation, with average income, growing at a rate of less than half a percentage point per annum.[4]
***Figure 1. Real GDP Per Capita, 1960-2000.
***Table 2. Level and Growth Rate of Real Per Capita Income.
Aggregate investment
Figure 2 shows the ratio of investment to GDP in Nigeria, and in Table 2 we also provide a public sector/private sector breakdownfor available years. A comparison of Figures 1 and 2shows a distinct co-movementof real GDP per capita with the aggregate investment share. Both variables fall sharply during the civil war and again, after a protracted boom, during the economic crisis of the early 1980s.Consistent with the dominant share of the public sector in total investment (Table 3), revenues from oil exports serve as an extremely powerful driver of the overall investment rate. This is apparent in a comparison of Figure 2 with Figure 3, which shows the real world price of oil over time. Since investment has a domestically-produced component, changes in the investment share affect growth both from the demand side and from the supply side. Short-run aggregate demand effects of oil-financed investment are readily apparent in Figure 1. Sustained impacts on productive capacity, in contrast, are less evident, consistent with severe inefficiencies in the allocation of domestic investment, documented below.
***Figure 2. Investment as a Share of GDP.
***Table 2. Investment and its Components.
***Figure 3. Real World Price of Oil.
The performance of private investment since the initiation of structural adjustment has been particularly disappointing. Progress in macroeconomic adjustment was expected to trigger a significant resurgence of private investment,financed by increases in domestic savings and an acceleration of foreign capital inflows. Serven and Solimano (1992) document the failure of private investment to respond strongly to structural adjustment in a number of highly indebted poor countries (HIPCS) during the 1980s and make the following observations that we will argue below are relevant in Nigeria’s case:
First, the decline in the availability of foreign savings has not been matched by a corresponding increase in domestic savings. Second, the deterioration of fiscal conditions due to cuts in foreign lending, higher domestic interest rates, and the acceleration of inflation in several countries forced a fiscal adjustment that in many cases took the form of a contraction in public investment. Third, the macroeconomic instability associated with external shocks has hampered private investment. And fourth, the debt overhang has discouraged investors through its implied tax on future output and the ensuing credit constraints in international capital markets.
Structural transformation
The sectoral structure of output in Nigeria has changed substantially over time, reflecting the emergence of the oil sector starting in the early 1970s. Agriculture’s share in total output fell from approximately 64% in 1960 to 33% in the 1990s. By 1990 only 43% of the population remained in agriculture, by comparison with 73% in 1960. Meanwhile industry’s share rose from approximately 8% to 50%. While agriculture’s share was in line with the SSA average in the 1990s, the contribution of industry, at 50%, exceeded even the non-SSA developing-country average. The contribution of manufacturing, by contrast, was well below the SSA average, at merely 5 percent.[5]
The reallocation of labor out of agriculture has contributed to real GDP per capita, given the labor-productivity differential between industry and agriculture, which stood at nearly 3.5 to 1 in the early 1970s. Nonetheless, Nigeria does not display productivity-driven growth of the type emphasized in dynamic models of the dual economy (e.g., Jorgensen 1961, Fei and Ranis 1964, Matsuyama 1990). There is no evidence of ongoing labor productivity improvements in either industry or agriculture. Agricultural labor productivity fluctuated over time, reflecting the vagaries of a rain-fed agriculture, but advanced only marginally between 1973 and 1996 (from 2.49 to 2.54). Industrial labor productivity declined outright over the same period, with the result that the industry/agriculture ratio fell to 2.5 to 1. Labor productivity in services, the third-largest sector at nearly 30 percent of GDP in the 1990s, also fell. In agriculture, persistently low productivity growth reflects a host of factors, including inconsistent government policies towards the sector, inadequate use of modern inputs like fertilizer and modern machinery, and low level of education and skills of farmers. Industrial labour productivity growth has been held back by a hostile and uncertain policy environment for private investment, as well as by low capacity utilization, inadequate infrastructure (especially – and ironically –affecting domestic energy supplies), and the continued low skill level of workers.
Oil rents and regional distributional struggles
Figure 4 shows the ratio of natural resource rents to gross national income in Nigeria, by comparison with the same ratio among resource-rich countries in SSA and the rest of the developing world. Rents are calculated here as the difference between the world price of energy, mineral, or forest resources and their marginal cost of extraction, multiplied by the volume of the corresponding category of commodity exports.Gross national income is converted to dollars at official exchange rates. Two striking observations emerge. First, Nigeriabecame a resource-rich country during the 1970s, and a strikingly resource-rich one. Before the first OPEC oil shock in 1973, Nigeria’s resource rents were well below global norms for resource-rich countries; by the early 1980s, Nigeria’s rents exceeded average rents among other resource-rich countries globally, and by a considerable margin. Second, Nigeriaremained resource-rich to a striking degree: the ratio of rents to GNI shows no trend in Nigeriaafter the late 1970s, by comparison with the distinct downward trend among other resource-rich countries.
Fluctuations in the ratio of rents to GNI are driven primarily by (1) changes in world commodity prices, (2) changes in commodity export volumesas a share of GDP, and (3)changes in real official bilateral exchange rates against the U.S. dollar. In Nigeria, the remarkable explosion of oil rents during the 1970s reflects the first two of these influences, in the form of the OPEC oil price increases (Figure 3) and a sustained increase in the volume of Nigerian oil exports. The third influence, by contrast, operated in the other direction during the 1970s: a very sharp real appreciation of the naira meant that, the ratio of dollar oil rents to naira GDP rose less rapidly than it would have done had the real exchange rate been stable. The continued weight of commodity rents in Nigeria after the early 1980s reflects similar considerations, operating in reverse: a lack of diversification out of energy production, on the one hand, and a gradual unwinding, starting in the mid-1980s, of the real appreciation built up during the oil boom. Depreciations of the naira kept oil revenues from falling as rapidly, as a share of Nigeria’s naira economy, as they did relative to industrial-country prices (Figure 3 deflates by the U.S.A. consumer price index).
The continued importance of oil rents in Nigeria’s economy mirrors their importance as a flash point for political conflict. Nigeriais a striking example of what Sachs and Warner (2001) call the ‘natural resource curse’: the systematic tendency for narrowly-specialized primary commodity exporters to grow more slowly than countries with more diversified exports. Where did Nigeria’s natural resource rents end up, if not as productive domestic investments capable of supporting economic growth? One answer is in capital flight: virtually all the former military rulers amassed huge fortunes in foreign bank accounts. We argue below that the political environment of military rule rewarded rent seeking activities, bribery and corruption. Another answer is that domestic investment, particularly by the public sector, was often highly inefficient. Ethnic rivalries encouraged Northern political elites to ignore the Southern part of the country, where oil resources originate, in favour of developing the North. In pursuance of this goal, many costly mistakes were made regarding the siting of investment projects.