Forty years ago, in the 1970s, Nigeria was on the way to greatness. So, what policies did Nigeria implement back then and what happened to have set the country back to where it is today, where the economy has collapsed and the road to becoming a mid-level economic power is so daunting?
Many factors worked together to create a country that was more on the road to greatness in the 1970s but four are of particular importance. One was a much lower population; two, a dramatic increase in crude oil prices in the early 1970s as global economic and political risk factors worked in Nigeria’s favour as the price of a barrel of crude oil rose from $3.39 in 1970 to $12.21 in 1975 and $37.42 in 1980 after the Saudi orchestrated OPEC oil embargo of 1973; three, much better governance prior to the transition to civilian rule in 1979; and four, a much lower incidence of corruption.
Relatively low incidence of corruption, and good governance and the windfall of oil export revenues meant that in the 1970s, the Nigerian school system at all levels, were centres of excellence that graduated a competitive workforce of skilled artisans, erudite professors, practising engineers, highly competent doctors etc. The level of labour productivity was high and the economy grew at a fast clip year-on-year. The incidence of corruption was moderate relative to today and governance was much better. In the Murtala Mohammed regime for example, the official car for a minister was a Peugeot 504 car; compare that to today where government officials cruise around in convoys of bulletproof, black window-tinted SUVs bought for tens of millions of taxpayers’ money. And the country was nowhere as populous at it is today. In essence, there was less wastage and the return to every naira of oil revenue earned was much higher than it is today.
However, the seeds of today’s poor economic condition already were in place, though muted. The population rate was increasing rapidly as birth rates remained stable as the death rate fell significantly. The robustness of the labour market disguised the fact that the economy was not only dependent on earnings from selling crude oil, it was also centrally controlled by the Federal Governments. Initiatives like oil refineries, steel mill, paper mill, aluminum smelting and automobile assembly operations that are highly capital intensive were in the purview of the government. Telephone and electricity services were likewise provided by government. The danger with a government-led economy was soon revealed as investment into the real sector plunged as crude oil prices fell disastrously in the early 1980s. The country had lived high off the hog, in the Second Republic, with the National Party of Nigeria government at the centre, revelling in its ability to appoint board members and chief executives of government owned businesses, even as the United Kingdom (from where Nigeria copied its socialist, government-led business model) was implementing a massive privatisation effort. Consequently, Nigeria had very little buffer when crude oil prices crashed and the economy crawled along at growth rates that averaged one per cent throughout the decade and well into the 1990s.
Today, Nigeria is very much in the same place it was in the mid-1980s, billions of earnings from a spike in crude oil prices having been squandered. In fact, in many respects, the current situation is much more dire than back then because the quality of governance had not matched the significant rise in population and the economy’s competitiveness is nowhere close to that of countries like China, India, Indonesia, Malaysia and Brazil -whose business conditions were not significantly better than Nigeria’s in the 1970s- or even Vietnam, a country that was just emerging from a ruinous war on communism in the 1970s. In addition, relative to the 1970s, the quality of the educational system has deteriorated in very significant ways, investments into public infrastructure – as a percentage of the population – remains abysmally low, corruption has become a culture, and the political system has become very expensive and reliant on godfathers’ and slush money, accumulated from crony capitalism and corrupt practices.
At the macro level, several critical resources – related to the institutional changes required to counter the effects of the negative and powerful secular forces that have long buffeted the economy – are needed to improve business conditions and facilitate an effective diversification from an external crude oil dominated revenue and ramp up economic growth: effective governance at all levels of government, a crackdown on corruption, a significant increase in the number of skilled workers, an effective legal system, and campaign finance reform to reduce the cost of politicking and contesting for elections. The Muhammadu Buhari government seems intent on cracking down on corruption in a major way and should be able to provide better governance than the previous government led by President Goodluck Jonathan. However, it will be really stretched to deal with the massive financial challenges it inherited and that will have an impact (though not significant as the education system does not require significant dollar investments, but rather a restructuring of content and curriculum)on any well planned effort to revamp the educational system and by the same token also a limited impact on a legal system that needs to hire more lawyers, prosecutors etc. Its ability to implement campaign finance reforms will be handicapped by a National Assembly that has not articulated an understanding of the connection between financing expensive elections and public and private sector corruption and cronyism.
The major impact of the financial challenge will be felt in the ability to effectively fund the build-out of infrastructure and projects that are capital and skill intensive. It will also be felt by local businesses, as they will be forced to increasingly compete with the Federal Government for capital. Given the scarcity of dollars relative to demand, the governments will be forced to rely on cheaper loans from multilateral institutions like the Africa Development Bank and the World Bank to finance investments. The relatively shallow pool of capital available from these institutions and the global competition for them means that the rate at which Nigeria will improve its infrastructure and to make business investments, will be slow as long as the difficulty the country experiences in attracting foreign direct investment and entering in public-private partnership agreements is unmitigated. Another potential source of funding, the International Monetary Fund, is off the table for now, as the country does not yet have a balance of payments problem, the prerequisite for seeking a loan from the IMF. This is an unfortunate situation, at a time when the global financial system is awash with dollars sitting in bank vaults from the massive fiscal stimulus programs (Quantitative Easing) of the United States of America, the European Union, China and Japan since the end of the great financial recession of 2008. The fact is, poor governance and an unattractive business environment has resulted in Nigeria becoming an investment risk to global private sector financing and that has meant yields on five and 10 year bonds that are north of 13 per cent. Borrowing the huge amount of dollars Nigeria needs at such rates is ruinous!
PUNCH
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