Business

Our Economy: Assuming We Didn’t Have Oil

The discovery of oil in the 1956 caused a dramatic shift in Nigeria’s economy. Agriculture fell from 60 percent of the Gross Domestic Product (GDP) to 31 percent by the early 1980s. Almost overnight, commodities like groundnuts, cocoa, palm oil, tin, hides and skins, once the mainstay of her economy and the major foreign exchange earner, were superseded by the country’s newfound black gold. With the oil boom of the 1970s the shift to an urban focus accelerated, luring investors to the easy money of oil contracts and supplies.

Most of Nigeria’s wealth and power comes from the control of physical assets – land, oil, iron and steel, coal. But in the 21st century, this cannot continue to happen. The main source of value and competitive advantage in the new economy is human and intellectual capital. With a population of 120 million people, Nigeria, in theory has the capacity to make a successful transition into a truly knowledge driven economy.

The shift took its toll on the agricultural sector. No longer a government priority, farm production dropped, infrastructure crumbled and the sector began its slow decline into neglect. More importantly, Nigeria moved from near food self-sufficiency to dependence on cheaper imports. A vicious circle formed as more and more people migrated to the towns, leaving fewer funds to be pumped into the sector while the import bill for food continued to rise. But Nigerians are a resilient people, as is their land. The country has continued to maintain one of the highest sustained rates of agricultural growth in Africa over the past decade.

Consistently ranked by international organizations, such as Berlin-based Transparency International, as one of the world’s most corrupt nations. In the last 47 years of the country’s independence, a succession of military and civilian governments have depleted the country’s resources, pocketing their gains in overseas bank accounts or spending zealously on lavish homes and gifts for cronies and family members. The situation reached a pinnacle in the last 17 years when some $150 billion earned from oil sales translated into crumbling infrastructure, a two-fold increase in external debt, a dwindling of per capita income all but depleted government coffers, yet, our economic and social context was characterized by slow growth, increasing salary and wage differentials and inequality, and the flight of capital. The collective damage it is doing to the average Nigerian is phenomenal to the extent that we think that the pendulum of redress should swing to the exact opposite because we are in a state of siege. All economic sectors other than the oil sector, particularly agriculture and agro-industries, were systematically neglected.

Following the restoration of democracy in 1999 the program for economic recovery that was put in place, and which sets the privatization or restructuring of major State owned companies, has been slowly applied, and slow to produce concrete results. Thus the achievement of the government in reducing budget deficits has not been accompanied by overall improvement in the economic situation, notably because of the following: Dependence on petroleum revenues is almost total, with exports of crude oil supplying 95% of State revenues, Savings rates remain very low at less than 10% of GDP, continuing threat of inflation taking off, with much, and increasing utilization of the US dollar within the economy.

In addition, it is noted that the role of the ‘informal’ or non cash economy in total national economic activity is estimated at 70% of this, making difficult the analysis and interpretation of Nigeria’s economic context only using official data. However and despite this, Nigeria has an estimated $ 115 Billion economy making it an African giant. Combined with its demographic power (over 126 Million) this country dominates the West African economy.

By any account, Nigeria’s market is a good investment. Average market price to earnings ratios hover around seven to eight times earnings on current figures. Looking forward slightly, they are even lower; around six to seven times earnings. The government’s strong promises on corruption and transparency have not been enough to convince outside investors that the market is over its former problems. Both government officials and the business community acknowledge combating corruption is no easy task, but most believe bringing the problem out into the open is half the battle won. If we do not tackle that problem, no matter how attractive the Nigerian economy is, a lot of people are going to be afraid to come here.

By the end of 1998 Nigeria’s fiscal health was poor. Federally collected revenue dropped by 20.5 percent to $5.15 billion while expenditure rose by 24.5 percent to $4.9 billion. Retained revenue was $3.4 billion. The ensuing deficit of $1.5 billion represented nearly 5 percent of Gross Domestic Product (GDP). By May, it had risen to $2.8 billion or 8 percent of the GDP. At the same time, foreign reserves, which started the year off at $7.1 billion had by May been cut by more than half to $3.1 billion. The severe economic retrenchment has been blamed on the former military government’s deficit spending. A flagging economy also took its toll on GDP, which grew by only 2.4 percent in 1998, down from 3.2 percent in 1997.

Hard hit by oil prices through most of 1998, the sector energy suffered severe constriction. Growth in the oil sector, which accounts for 95 percent of the nation’s foreign exchange, plummeted from 8.4 percent in 1997 to a modest 0.9 percent in 1998. Meanwhile oil prices, which averaged $19.4 per barrel in 1998, dropped to $12.9 per barrel. The combined effect was a deterioration of the country’s balance of payments position from a surplus of $15 million in 1997 to a deficit of $2,873 million by year-end 1998.

Then fact is that when the civilian government of ex-President Olusegun Obasanjo assumed power, it inherited an economy teetering on the brink of disaster. It had been pushed to the limit by oft-cited military mismanagement and corruption, plummeting world prices for petroleum and a crushing $29-billion debt to international institutions; the coffers were nearly empty, the budget had run over, infrastructure was crumbling and the private sector was reeling under burgeoning inflation and tight credit. At the presentation of his administration’s revised budget proposal to parliament, the president acknowledged the economy was “still very much in dire straits.

Nigeria on its part is looking to ensure that sufficient technology transfer occurs and that the country is not just turned into a dumping ground for finished goods. However before any company, in this age of technology, makes the required investment into any territory, the safety of its brand and intellectual property rights becomes crucial. Also of importance is its ability to properly measure and empower the market. This is the underlying reason why we are here today.

For decades Nigeria’s economy was characterized by the growing dominance of the public sector, over reliance on a single commodity (oil), and the pursuit of a highly import-dependent, import-substituting industrial strategy. While these policy thrusts were justified at their inception, experience has shown that growth based on expansionary public expenditure, import-substitution industrialization, and reliance on the export of a few primary commodities is neither efficient nor sustainable. That the strategy did not work in Nigeria is evident from several indices of sub optimal performance: low per capita GDP, a low growth rate, a weak industrial base with declining industrial output and capacity utilization, large budget deficits and deterioration in the social and infrastructure facilities, low productivity in the real sector, and a high level of unemployment. The private sector has been dogged by weaknesses inherent in its skewed structure. It is dominated by a few large multinationals that are heavily dependent on imports and operate largely as enclaves and a large segment of small and medium-size enterprises with very little, if any, linkage to the multinationals. A rent-seeking and unproductive culture of over dependence on government patronage and contracts, with very little value-added, governs the sector.

Recent empirical evidence from firm-level data across developing countries indicates that big bang import liberalization can hurt industrial development. Under a big bang liberalization, only a small proportion of firms operating at the frontier gain from competitive pressures; the vast majority of firms often risk being wiped out, with dire social and economic consequences. While the government is reducing the cost of doing business in Nigeria, it will use restrictions on imports as part of a strategy to ensure orderly restructuring of the industrial sector. The government will aggressively promote exports and general commercial policy to attract foreign direct investment, and it will pursue export orientation as a deliberate policy.

The service sector has witnessed a boom in recent years. Liberalization led to a substantial increase in the volume of activities in the banking and other financial services industries. The recent liberalization of the communications industry led to huge increases in telephone service per capita and created many new job opportunities. Improvements in the service sector are expected to strengthen performance of the real sector.

The private sector will be expected to become more proactive in creating productive jobs, enhancing productivity, and improving the quality of life. It is also expected to be socially responsible, by investing in the corporate and social development of Nigeria and by actively promoting the unity and cultural, educational, moral, and social development of the country.

However, there are some critical issues that we need to be mindful of. What if the protection is granted in the form of a local patent, but there are no research groups in the developing country that have the capacity, resources or equipment to do research in the discipline involved? And what if there are restrictions in the sale of certain dual use chemicals to that country? What if the negotiations of a free trade agreement to enhance technology transfer include anti-competitive extensions of the monopoly rights of patenting, secrecy or copyright? An example of this arose in the negotiations between the Southern African Customs Union (SACU) and the EFTA (Switzerland, Norway, Iceland and Liechtenstein) countries. These countries were pressuring SACU to enter into their legislation, five to ten years exclusivity on data for registration of brand name medicines, even those not protected by patents. This would give the brand name holder authorizing power even in emergency situations. Clearly in the context of developing countries’ health needs this is anti-competitive and protects branded medicines from legitimate competition with the producers of generics.

Post Comment