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DEVELOPMENT IN NIGERIA: AN ANALYSIS OF
Digitally Signed by: Content manager’s
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ORJI ANN N.
Faculty of Social Sciences
Department of Political Science
ECONOMIC DIPLOMACY AND ECONOMIC DEVELOPMENT IN NIGERIA: AN ANALYSIS OF
OBASANJO’S ADMINISTRATION, 1999
UGWU, OLIVER UCHE PG/M.Sc./12/61362
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: Content manager’s Name
Weabmaster’s name
a, Nsukka
ECONOMIC DIPLOMACY AND ECONOMIC DEVELOPMENT IN NIGERIA: AN ANALYSIS OF
OBASANJO’S ADMINISTRATION, 1999-2007
2
ECONOMIC DIPLOMACY AND ECONOMIC DEVELOPMENT IN
NIGERIA: AN ANALYSIS OF OBASANJO’S ADMINISTRATION, 1999-2007
BY
UGWU, OLIVER UCHE PG/M.Sc./12/61362
A PROJECT REPORT
SUBMITTED TO THE DEPARTMENT, POLITICAL SCIENCE UNIVERSITY OF NIGERIA, NSUKKA IN PARTIAL FULFILLMENT OF THE
REQUIREMENTS FOR THE AWARD OF MASTERS DEGREE IN POLITICAL SCIENCE (INTERNATIONAL RELATIONS)
SUPERVISOR Dr. PETER MBAH
NOVEMBER, 2013
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TITLE PAGE
ECONOMIC DIPLOMACY AND ECONOMIC DEVELOPMENT IN NIGERIA: AN ANALYSIS OF OBASANJO’S ADMINISTRATION, 1999-
2007
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APPROVAL PAGE
This project report has been approved on behalf of the Department of Political Science
University of Nigeria, Nsukka.
By
____________________ _________________
Dr. Peter Mbah Prof. Jonah Onuoha (Project Supervisor) (Head of Department)
___________________ ____________________ Prof C.O.T Ugwu External Examiner
Dean of Faculty
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DEDICATION
I dedicate this work to God Almighty through whom all things are possible.
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ACKNOWLEDGEMENTS
As always the case, many people contributed to the success of my dream; they hated to
see my dreams being stillborn. The first among these is my amiable project supervisor Dr Peter
Mbah whose fatherly approach sharpened my focus in the course of this work.
I can never forget the input of many distinguished academics in the Department of
Political Science, University of Nigeria whose tutelage greatly broadened my horizon. They
include my humble HOD Prof. Jonah Onuoha, the Coordinator of Postgraduate programme Prof.
AMN Okolie, Professors Obasi Igwe, Okechukwu Ibeanu, Emmanuel Ezeani and Ken Ifesinachi.
Others are Dr Herbert Edeh; Dr Ukwuaba, Dr. Ifeanyi Abada, Dr.G. Ezirim, Dr. Jombo
Nwagwa, Dr. Nwachukwu, Dr. Christian Ezeibe and Dr. Agbo . My appreciation also goes to Mr
P.C. Chukwu, S.N. Asogwa , and Elias Ngwu (Facilitator) for nurturing me in the academic
world.
Also in appreciation is my wife Mrs Joy Ugwu, my children Uchenna Junior,
Onyedikachi, Mmesoma, and Chikamso all of whom always prayed for me. Others include my
siblings – Gloria, Louisa, Stella, Martina and Melford. I also appreciate my in-laws Livinus,
Ifeanyi and others. And of course my colleagues in the department like, Ugwueze Michael,
Ogenyi Millicent, Christopher and the many others who cannot be acknowledged by name for
obvious reasons.
I love you all.
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ABSTRACT
As a foreign policy tool, economic diplomacy is a vital instrument for the promotion and the protection of a nation’s economic and national interest objectives. This informed the decision of the Obasanjo administration that came into power in 1999 after prolonged military dictatorships to adopt economic diplomacy as its major foreign policy thrust. The major planks of Nigeria’s economic diplomacy as pursued under that administration were identified as improving the standard of living of the Nigerian people through the securing of the cancellation of the nation’s huge external debts, and the boosting of the nation’s economy through the attraction of foreign direct investment (FDI). After over a decade of democratic experiment though, the living standard of Nigerians remains in a parlous state, and the country’s industrial output has remained meager thereby casting doubt on the achievements of the twin policy foundation laid by the Obasanjo administration in relation to the country’s economic development. Extant analyses of the foreign policy of the Obasanjo administration have not clearly articulated the impact of the economic diplomacy of that administration on the standard of living of Nigerians and the nation’s industrial capacity development. This study is therefore intended to fill this gap in existing knowledge on the subject. To do this, the study examines whether the economic diplomacy undermined the standard of living of Nigerians, and also whether the drive for foreign direct investment by the Obasanjo administration resulted in improved domestic industrial capacity in Nigeria. The study made use of qualitative descriptive method of collecting secondary data, which we used in interrogating our hypothesis and the data was analyzed using content analysis. The power theory variant of the Realist paradigm of international relations was adopted as its theoretical framework of analysis. The study found that the economic diplomacy of the Obasanjo administration actually undermined living standards of Nigerians, and that the inflow of foreign direct investment under the Obasanjo administration failed to boost the development of Nigeria’s industrial productive capacity. The study therefore recommends among other things that the federal government of Nigeria should work assiduously to invest Nigeria’s oil wealth into productive ventures that would stimulate economic development rather than continue to depend on illusive foreign inputs for her development needs.
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LIST OF ACRONYMS
ADB African Development Bank
ADF African Development Fund
AFRODAD African Forum and Network on Debt and Development
AIDS Acquired Immune Deficiency Syndrome
AU African Union
C BN Central Bank of Nigeria
DFI Development Financial inflow
DMO Debt Management Office
DR Direct Reduction
ECOMOG ECOWAS Monitoring Group
ECOWAS Economic Community of West African States
EDF European Development Fund
NEEDS National Economic Empowerment and Development Strategy
EFA Education for All
EFCC Economic and Financial Crime Commission
EPZ Export Promotion Zone
FDI Foreign Direct Investment
FGN Federal Government of Nigeria
FHEA Fitzgerald Health Education Associates
FIWON Federation of Informal worker’s Organization of Nigeria
G8 Group of Eight Industrialized Countries
G 77 Group of Seventy Seven
GDP Gross Domestic Product
GE General Electric
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HDI Human Development Index
HDR Human Development Report
HIPC Heavily Indebted Poor Countries
HIV Human Immune Virus
IBRD International Bank for Reconstruction and Development
ICJ International Court of Justice
ICPC Independent Corrupt Practice Commission
ICT Information and Communication Technology
IDA International Development Association
IDCC Industrial Development Coordinating Committee
IFAD International Fund for Agriculture Development
IMF International Monetary Fund
IPA International Peace Academy
MNC Multinational Corporations
MW Mega watts
NAM Non- Aligned Movement
NBS National Bureau of Statistics
NEPAD New Partnership for Africa’s Development
NEPD Nigeria Enterprise Promotion Decree
NGO Non Governmental Organization
NIIA Nigeria Institute of International of Affairs
NIPC Nigerian Investment Promotion Commission
NIPSS Nigerian Institute for Policy and Strategies Studies
NSDA Nigerian Steel Development Agency
OAU Organization of African Unity
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ODA Overseas Development Assistance
OPEC Organization of Petroleum Exporting Countries
PRGF Poverty Reduction and Growth Facility
PRSP Poverty Reduction Strategy Paper
R and D Research and Development
SAP Structural Adjustment Programme
UN United Nations
UNCTAD United Nation’s Conference on Trade and Development
UNDP United Nation Development Programme
UNESCO United Nations Educational, Scientific and Cultural Organization
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TABLE OF CONTENTS
Page
Chapter One: Introduction
1.1 Background to the Study 1
1.2 Statement of the Problem 5
1.3 Objectives of the Study 8
1.4 Significance of the Study 9
Chapter Two: Literature Review and theoretical framework 10
2.1 Literature review 10
2.2 Theoretical framework 39
Chapter Three: Method of Data Collection and Analysis
3.1 Method of Data Collection 44
3.2 Research Design 46
3.3 Method of Data Analysis 48
3.4 Hypotheses 49
3.5 Logical Data Framework 50
Chapter Four: Economic Diplomacy and the Living Standard of Nigerians
4.1 The Paris Club Deal and the Reduction in Nigeria’s External Debt Obligations 52
4.2 Economic Diplomacy of Debt Cancellation and the Standard of Living of Nigerians 71
Chapter Five: Inflow of Foreign Direct Investment (FDI) and Domestic Industrial Capacity
Development in Nigeria
5.1 Structure of FDI Inflow into Nigeria since 1999 83
5.2 FDI and Industrial Capacity Development in Nigeria 96
Chapter Six: Summary and Conclusion
6.1 Summary and Conclusion 61
Bibliography 113
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CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
Diplomacy refers to the peaceful process and skillful method of negotiation by which the
government of nations manage their external relations with other actors in international politics
(Ifesinachi, 2001: 1). It refers to the process of bargaining among states in order to narrow areas
of disagreement, resolve conflicts or reach accommodation on issues over which agreement
cannot otherwise be reached (Asobie, 1999: 35).
Economic diplomacy is therefore, defined as:
The process through which countries tackle the outside world, to maximize their national gain in all the fields of activity including trade, investment and other forms of economically beneficial exchanges, where they enjoy comparative advantage; it has bilateral, regional and multilateral dimensions, each of which is important.
Thus, economic diplomacy encourages and promotes investment, protects deals from inception
to signing of contracts and in fact markets an entire nation as if it is a business outfit itself. The
diplomats would conduct trade events and seminars, attend trade shows, visit potential investors
and be proactive in marketing the attributes of their country. Success in this endeavour requires
knowledge of the business process, of the home country’s economy, and of salesmanship. In this
wise, and with proper training, diplomats become essential link in the strengthening of their
economies by private investors, with governments facilitating the process.
Asobie (1991) further explained that economic diplomacy may be understood as the
management of international relations in such a manner as to place accent on economic
dimension of a country’s external relations. It is the conduct of foreign policy in such a manner
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as to give topmost primacy to economic objectives of a nation. It has to do with the various
diplomatic strategies which a country employs in its bid to maximize the mobilization of external
material and financial resources for economic development. According to Asobie, this is
obviously a limited view of the notion of economic diplomacy but it is the sense in which the
term is used in Nigeria by Nigerian political leaders.
He further observed that successive Nigerian governments have demonstrated an
appreciation of the linkage between the country’s foreign policy and her economic circumstances
but that the way in which this linkage was conceived and the policies deriving there from
however differed, though not necessarily from regime to regime. Overall, from 1960 to 1965,
three overlapping trends of strategies emerged in the history of Nigeria’s economic diplomacy.
These are: the diplomacy of dependent Import substitution industrialization (DISI), 1960 – 1974;
the diplomacy of Regional Economic Integration (REI), 1970 – 1985; and the diplomacy of the
establishment of the New International Economic Order (NIEO), 1973 – 1985. It was however
the diplomacy of Structural Adjustment Programme (SAP) introduced by the Ibrahim Babangida
administration in 1986 that marked the watershed in Nigeria’s economic diplomacy.
As pursued in Nigeria, the diplomacy of Structural Adjustment Programme was
christened the “new” economic diplomacy in the sense that it represented an attempt for the first
time in Nigeria’s diplomatic history to consciously and deliberately shift the emphasis in
Nigeria’s foreign policy from political considerations to economic motives. Before 1986, it was
an important tradition of Nigeria’s foreign policy to try to balance what Nigerian policy makers
generally regarded as the two imperatives in Nigeria’s external relations. These were a leading
political role for Nigeria in the international system, especially in the African sub-system and the
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promotion of Nigeria’s economic development objectives. In the third quarter of 1986 however,
there emerged signs of a rethinking of that policy (Asobie, 1991: 57).
Ibeanu similarly observed that Nigeria’s economic woes of the 1980s brought about a
rethink in her foreign policy pursuit, as a result of which Nigeria neglected a number of its
traditional concerns in Africa and increasingly sought to accommodate some of the erstwhile
adversaries of Nigeria’s global citizenship – all justified in populist, pragmatist, and realist terms
(Ibeanu, 2010). Guided by this paradigm shift in Nigeria’s external relations, the Obasanjo
administration that came into power in 1999 after long years of military rule gave great accent to
Nigeria’s economic considerations.
Meanwhile, at the time of assumption of office by the Obasanjo civilian administration,
Nigeria had arguably her worst international image ever. Nigeria was suspended from the
Commonwealth, the European Union (EU), Canada, and the United States imposed travel and
economic sanctions on Nigeria for the incredible human rights violations and the denial of
fundamental freedom under the General Sanni Abacha junta. The EU countries as a bloc had
withdrawn their envoys from Nigeria while Nigerian envoys in EU countries had been recalled
by the Nigerian government in retaliation, an act which had further compounded Nigeria’s
foreign policy regime and external relations (Adeniran, 2008: 354). On assumption of office
therefore, Obasanjo’s immediate concern was to improve Nigeria’s image as a prelude to the
pursuit of his foreign policy objectives. His foreign policy focus, according to Adeniran, were
better image for the Nigerian nation and Nigerians, recovery of looted Nigerian monies kept in
foreign banks, external debt relief, and the inflow of Foreign Direct Investment (FDI), peace and
security in Africa – especially in the West African sub-region, international cooperation and
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partnership, and due recognition for the worth of Nigeria and Africa at the international level
(Adeniran, 2008: 356).
Consequently, in his maiden address to the United Nations General Assembly (UNGA) in
1999, Obasanjo had summed the foregoing thus:
…Nigeria and indeed the entire West African sub-region have devoted considerable human, material, political and diplomatic resources to the resolution of the crisis in the sub-region, starting with Liberia and subsequently Sierra Leone and Guinea Bissau. Similarly, efforts are being made in the democratic Republic of Congo and in Angola towards peaceful resolution of their conflicts
Without doubt, Nigeria’s external image improved significantly after a few years of
OBJ’s administration. The EU lifted all sanctions imposed on Nigeria, and the country resumed
her rightful active roles in ECOWAS and in the African Union (AU) whose transition from the
Organisation of African Unity (OAU) was championed by Nigeria. She also became a lively
member of the Commonwealth and that of the United Nations. Nigeria was also a prominent
voice in the conceptualization of the New Partnership for African Development (NEPAD) to
reposition the African Union and shift its focus from conflicts to economic development
(Adeniran, 2008: 357). Under the Obasanjo administration, therefore, the major plank of
Nigerian foreign policy was the wooing of Foreign Direct Investment (FDI) with the federal
government’s establishment of a one-stop-investment agency (Nigerian Investment Promotion
Commission, NIPC) and the quest to secure debt relief for poor African countries, including
Nigeria. Adeniran explained that in pursuant of these, even before he was actually sworn in,
Obasanjo had embarked on foreign trips which marked the start of what was to be eight years of
peripatetic diplomacy such that by the time he left office, he had travelled more than four times
the total number of foreign trips undertaken by Nigeria’s former Presidents and Heads of States
combined.
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It is against this back drop that this study critically examines impact of Nigeria’s
economic diplomacy on the country’s economic development during the Obasanjo
administration, 1999 – 2007.
1.2 Statement of the Problem
Nigeria’s foreign policy objectives and principles at independence consisted of the
following: The protection of the sovereign and territorial integrity of the Nigerian state; The
promotion of economic and social well being of Nigerians; The enhancement of Nigeria’s image
and status in the World at large; The promotion of unity as well as the total political, economic,
social and cultural liberation of our country and Africa; The promotion of the rights of the black
people and others under colonial domination; The promotion of international cooperation,
conducive to the consolidation of world peace and security; mutual respect and friendship among
all peoples among the state; Redressing the imbalance in the international power structures that
has tended to frustrate the legitimate aspirations of developing countries; The promotion of
world peace based on the principles of freedom, mutual respect and equality of all persons of the
world (Ade-Ibijola, 2013: 566).
Beginning from 1985 however, the focus of Nigeria’s foreign policy shifted to economic
diplomacy, specifically the diplomacy of Structural Adjustment Programme (SAP). The SAP as
articulated under the Ibrahim Babangida administration was hinged on the theoretical assumption
that ‘no amount of ideological posturing’ will produce an effective foreign policy; that, on the
contrary, only a strong national economy is the best guarantee of an effective foreign policy and
of power within the international political system. As General Ike Nwachukwu, Nigeria’s
External Affairs Minister under the Babangida administration put it, ‘it is the responsibility of
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our foreign policy apparatus to advance the course of national economic recovery’. Asobie
(Asobie, 1991: 57) stated that:
its two central elements are the rejection of conceptual grand design as the basis of diplomacy, and crude economic determinism, involving an artificial separation of the economic from the political and, paradoxically, an insistence, also, that the former determines the latter.
Before 1986, it was an important tradition of Nigeria’s diplomacy to try to balance what
Nigerian policy makers generally regarded as the two imperatives in Nigeria’s external relations.
These were: a leading political role for Nigeria in the international system, especially in the
African sub-system; and the promotion of Nigeria’s economic development objectives. In the
third quarter of 1986 however, with the adoption of the economic diplomacy of SAP, there
emerged signs of a rethinking of this policy (Asobie, 1991: 57). Nigeria’s, national interest
objectives as identified under the new economic diplomacy were: the promotion of export trade;
inflow of foreign direct investment; and inflow of external public loans and grants as well as debt
rescheduling.
These national interest objectives continued to chart Nigeria’s foreign policy trajectories
to varying degrees all through the protracted military rule in Nigeria, and the drafters of the 1999
constitution did little to elucidate Nigeria’s national interest beyond providing in Section 19(a)
that Nigeria’s foreign policy objectives shall be “promotion and protection of the national
interest’. It was therefore left to the civilian administration of President Olusegun Obasanjo,
which assumed the reins of leadership in 1999 to articulate Nigeria’s national interest and the
appropriate policy tools for the realization of such interests. In his inaugural speech on 29 May,
1999, he clearly identified one of the priority issues, which his administration must deal with as
the debt question. Accordingly, he called ‘on the world, particularly the Western World to help
us sustain democracy by sharing with us the burden of debt, which may be crushing and
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destructive to democracy in our land’ (Obasanjo, 1999). President Olusegun Obasanjo began a
new brand of diplomacy that was aimed at achieving debt relief for Nigeria. This diplomatic
campaign was significant because it marked a departure from the approach by successive
governments who had resorted to rescheduling as the only way to manage the huge debt. More
so, the new diplomatic initiative entailed the personal involvement of the President who had to
travel to several Western countries to mobilise the support of influential world leaders and also
to present Nigeria’s case to relevant international bodies, including the Group of Eight (G8), the
United Nations (UN), the Commonwealth of Nations and the African Union (AU).
A twin national interest objective of the administration as identified by Sule Lamido,
Nigeria’s Foreign Affairs Minister between 1999 and 2003 was to attract foreign investment as a
vehicle for economic development. This, he said, is simultaneously a foreign and national policy
objective. He pointed out that various reforms have been and are still being implemented as part
of the process of creating the conducive environment for the inflow of foreign investments, and
that while in themselves these reform initiatives appear useful and necessary, often their
immediate effects on ordinary citizens have not been directly positive (Lamido, 2012: 8).
Meanwhile, President Obasanjo’s economic diplomatic foreign policy approach, which
took him to about 113 countries of the globe, according to the Daily Trust report, has since raised
serious debate over its sensitivity to Nigeria’s economic development. It is, for instance,
contended that though the shuttle diplomacy of the administration had brought some
psychological relief in the country following its re-integration and accommodations into the
world affairs, cancellation of about $18 billion (60%) of the nation’s over $30 billion debt by the
Paris Club and reassertion of the Nigeria’s leadership role in the West African sub-region, the
increased cases of collapsed infrastructures and social services, mass poverty with a significant
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percentage of population living below the poverty line, rampant corruption and insecurity of life
and property have since called into question the propriety of the Obasanjo administration’s
economic diplomacy vis-à-vis Nigeria’s national interest. Scholars like Alsop and Rogger
(2008:14), AFRODAD (2007:31), among others have even questioned the wisdom in the debt
cancellation deal secured with Nigeria’s creditors given the odious nature of the debts in the first
instance. It is further contended that even though the drive by the Obasanjo administration may
have improved foreign direct investment inflow into Nigeria, it does not appear to have impacted
substantially on the productive sector of the Nigerian economy.
It is in the light of the skepticisms expressed in extant literature that this study critically
examines the extent to which the economic diplomacy of the Obasanjo administration enhanced
Nigeria’s economic development between 1999 and 2007. To do so, the study poses the
following research questions:
1. Did Obasanjo’s economic diplomacy undermine the standard of living of Nigerians?
2. Did the inflow of Foreign Direct Investment (FDI) under the Obasanjo administration
impede domestic industrial capacity development in Nigeria?
1.3 Objectives of the Study
The study has both broad and specific objectives. The broad objective of this study is
to critically examine whether Nigeria’s economic development was served by the policy of
economic diplomacy pursued by Obasanjo administration between 1999 and 2007. Its
specific objectives are:
1. To explain how Obasanjo’s economic diplomacy undermined the standard of living of
Nigerians; and
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2. To analyze how the inflow of Foreign Direct Investment (FDI) under the Obasanjo
administration impeded domestic industrial capacity development in Nigeria.
1.4 Significance of the Study
This study has both theoretical and practical significance. At the theoretical level, the
study shall contribute to the existing stock of literature on the subject of matter of foreign
policy and Nigeria’s national interest. By focusing on the outcome of the economic
diplomacy of the Obasanjo administration, the study will no doubt add to the accumulated
knowledge built up from similar studies of the economic diplomacy of earlier regimes
notably that of Ibrahim Babangida. In this way, it could form the building block for a
diachronic study of Nigeria’s economic diplomacy during the two periods. It is therefore
expected to be of immense intellectual value to students and scholars alike.
At the practical level, it is hoped that the findings of the research would feed into the
policy process and serve as a compass for a more meaningful navigation of Nigeria’s
economic diplomacy in the turbulent waters of global political economy. In this sense
therefore, it would be of modest tool in the hands of Nigeria’s diplomats, technocrats and
policy makers at various policy circles.
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CHAPTER TWO
LITERATURE REVIEW AND THEORETICAL FRAMEWORK
2.1 Literature Review
The review of existing literature is divided into two themes:
1. Obasanjo’s Economic Diplomacy and Living Standard of Nigerians
2. Foreign Direct Investment and Industrial Development in Nigeria
Obasanjo’s Economic Diplomacy and Living Standard of Nigerians
One of the most important objectives of economic diplomacy as a state policy was the
development of an enduring economy for the Nigerian people, especially through the attraction
of foreign investment. This necessitated the reorganization of the Ministry of External Affairs
(MEA) and this was complemented at the domestic level by a host of reforms aimed at achieving
positive results. These included the adoption of a new investment code whose objective was to
make the process of company incorporation easier; the amendment of the indigenization decree
of the 1970s to increase the number of foreign investors in the economy; the elimination of
bureaucratic `procedures associated with profit repatriation and dividend remittance, and the
introduction of new tax relief measures (Olukoshi and Idris, 1991).
It has also been noted that the inherent linkage with the West made it impossible for the
Nigerian government to pursue the country’s true national interests and its declared policy of
non-alignment (Ate, 1986). Similarly, Shaw and Fasehun (1986) were of the view that the oil
wealth of the seventies has merely extended Nigeria’s role as a peripheral capitalist state (i.e. its
dependency) in the international economy, with inhibitive effects on its real influence in Africa
and foreign policy generally. Similarly, the relationship between the Nigerian economy and the
world economy had been the subject of the 12th Annual Conference of the Nigerian society of
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International Affairs, held in the university of Ilorin between the 5th and 8th of November, 1984.
The conference noted that colonialism, dependency, backwardness and inequality determine the
place of Nigeria in the global political economy. The impact of crisis on economic relations in a
capitalist economy like Nigeria also came under focus.
In the same vein, Olusanya, et al (1988), observe that following the Nigerian economic
crisis of the 1980s the preoccupation of government policy had been on engendering national
economic revival and sustained growth in order to arrest the trend, overhaul the economy and
generally lay a solid foundation for future economic development of the country. Accordingly,
they not that the nation’s foreign policy should seek positive alignments with the precariously
vital external inputs, such as the World Bank’s structural adjustment loans and the willingness of
the major Western banks and other creditor agencies to reschedule Nigeria’s loan obligations.
Olusanya, et al, nevertheless argue that the dependence of the country on the same international
finance capital that also dominates and controls Nigerian economy effectively constrains her
economic development and defines the framework for the administration of its foreign policy.
In the same way, Bangura (1989) examined the effects of the economic crisis of the
1980s and the stabilization programmes on the conduct of Nigeria’s foreign policy. Situating
analysis on dialectical materialism, he sees the stabilization and adjustment programmes of the
Shagari, Buhari and Babangida administrations as interrelated parts of a continuum. He notes
that the regimes relied primarily on foreign finance, trade liberalization, domestic demand
management measures and the allocation of resources through the market mechanism to resolve
Nigeria’s economic crisis.
Bangura also sees Nigeria’s lopsided and dependent incorporation into the world
capitalist economy to condition the level of the disarticulation of its national economy and
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foreign policy. However, he maintains that though the pattern of accumulation ensures a foreign
policy of collaboration with foreign capital in periods of economic crisis, yet anti-imperialistic
forces within the ruling class and society unleash social forces that are opposed to the structure
of dependence. He however, stresses that the pattern of collaboration and conflict that
characterize the relationship between developing countries and the west is one that does not
challenge the roots of incorporation of the local economy into the Western financial system.
There is an implicit assumption that only a radical break with the west can challenge the roots of
incorporation. This view, although unrealistic, is popularly held by most underdevelopment
theorists.
Although Bangura tried to bring out in bold relief the social and political forces that
influence the operation of the economy and orientation of foreign policy, he failed to see the link
between, the nature of the conflict and collaboration that characterize Nigeria’s foreign policy,
and the general crisis of development in Nigeria.
Olukoshi (1991), while acknowledging that the Structural Adjustment Programme (SAP)
was a product of pressure from foreign quarters, examines its implications for Nigeria’s foreign
policy orientation. While agreeing with Bangura, he argues that anchoring the study of foreign
policy on the economy, affords the analyst the opportunity of understanding the social and
political forces connected with the economy as well as the way in which they define the
orientation and parameters of foreign policy.
In this connection, Olukoshi argues that the state is a product of society firmly implanted
in the economy, mirroring and articulating the complex contradictions in the social system, and
is the chief apparatus, through with foreign policy is conducted, and as such the content and
direction of foreign policy becomes concretely influenced by the class struggle in the society. He
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also maintains that the conduct of foreign policy allows the state to call on foreign resources to
support the domestic system of accumulation economically, politically and culturally.
Olukoshi therefore, sees Nigeria’s foreign policy as having a dual character, in that pro-
imperialist positions are blended with a nationalist outlook. This situation, he sees to arise from
the contradictions of the forces of Western imperialism and the reproduction of the Nigerian
economy through the mediation of the world market. Global market forces and nationalistic
hatred for imperialism become contradictions that are reproduced in the conduct of foreign
policy in Nigeria. He also showed how conflict and collaboration was played out in the rejection
of the IMF loan by the Bangangida administration, while accepting the conditionality as the
strategy of Nigeria’s diplomacy of economic crisis management.
Olukoshi further noted that the introduction of SAP by the Babangida administration
enabled the regime to successfully negotiate a series of debt rescheduling agreements with
Western creditors, which attracted further Western financial confidence on the Nigerian
economy. Finally, he argues that by leaning more closer to the Western nations at a time of
serious economic crisis implied that Nigeria’s succumbed further to the imperatives of
imperialism.
According to Ifesinachi, Olukoshi brilliantly essays the organic interconnections between
the contemporary international order, the politics of economic revival and Nigeria’s foreign
policy, however, he failed to situate the strategy of Nigeria’s diplomacy of economic
management within the wider contest of Nigeria’s development crisis nor did he factor in his
analysis the economic diplomacy as perceived and practiced by the Obasajno administration
between 1999 and 2007.
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A number of other writers have also tried to examine the linkage between the politics of
economic revival and the foreign policy of nations. In this light, Agbaje construes the current
prominence of economic diplomacy in the lexicology of the weak in the emerging terrain of the
global economic system as a phenomenon that requires conceptual rethinking. He sees economic
diplomacy as an endorsement of the IMF/World Bank hegemonic regime which informs the
pursuit of the economic regime of structural adjustment at home. In this light, he argues that this
economic regime is intended to consolidate the gains of economic reform, even as it constrains
and restrains, subordinating as it does most other considerations, local and foreign, to the
economic imperative. Accordingly, Agbaje (1991) sees economic diplomacy as a filibustering
approach, doctrine and instrument hoisted on developing countries by the same vested interests
that dominate the structure and process of global economic relations. Consequently, he sees
developing countries as suffering from the confusion and poverty of received theories, ideas and
policies. Quoting Callaghy, Agbaje sees Africa as having lost its way between state and the
market.
Agbaje also noted that developing countries should be cautious adopting doctrines
hoisted on them for solving socio-economic problems. He argues that the incongruence between
the theory of trade liberalization and the practice of its vendors has not had the required impact at
the conceptual and policy levels. He therefore, stresses the need for a critical examination of the
role of multilateral institutions that serve as theatres for economic diplomacy such as GATT
(now WTO) and UNCTAD, in order to halt the trend toward the marginalization of developing
countries in world trade. While advocating for a more vigorous regional co-operation among
developing countries, he urges developing nations to transcend the conceptual underpinning of
SAP and strive for internally generated ideas of economic recovery.
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Ifesinachi noted that Agbaje’s analysis captures the link between the politics of economic
revival and the external relations of developing nations. Although he sees the acceptance of
received formulas as contributing negatively to the recovery prospects of the developing nation,
his peripheral notation of the historical social forces which reproduce the contradictions implicit
in his analysis led him to prescriptions in line with the same conceptual confusion he set out to
clarify. Thus, the logical interconnections between the general crisis of development and the
conceptual orientation of the policy process in developing nations are not adequately addressed.
Similarly, Ogwu and Olukoshi (1991) see economic diplomacy as nothing new in
Nigeria’s pro-Western foreign policy slant. They see the policy as the abandonment by the state
of any political or economic activism that might be construed by the leading western nations as
obstructive to their goals. In this connection, they argue that having accepted the global agenda
of the leading states and the agencies, which they dominate such as the IMF and World Bank, the
prospects of promoting domestic economic and social justice will be quite slim. In assessing the
operational efficiency of economic diplomacy in Nigeria, Ogwu and Olukoshi argued that the
complex internal dynamics of the Nigerian state, economy and society are not likely to promote
an undiluted conformism to the imperatives of imperialism.
Ogwu and Olukoshi’9 perception of the link between the politics of economic revival and
foreign policy is quite lucid and pungent, however, their analysis of economic diplomacy was not
situated in the context of the general crisis of development in Nigeria.
In another vein, Asobie (1991) perceives Nigeria’s economic diplomacy in terms of the
foreign policy demands of economic development as well as a set of strategies and tactics
formulated and applied for achieving a fundamental restructuring of the existing international
economic order, termed the diplomacy of economic liberation82. While demonstrating and
27
appreciating the linkage between Nigerian foreign policy and Nigeria’s domestic economy and
national interest, Asobie83 identifies four overlapping patterns of Nigeria’s economic diplomacy,
which includes:
1. The Diplomacy of Dependent Import-Substitution Industrialization (D. I. S. I.) 1966-
1974
2. The Diplomacy of Regional Economic Integration (R.E.I.) 1970-1985;
3. The Diplomacy of the establishment of a New International Economic Order (NIEO)
1973-1985; and
4. The Diplomacy of Structural Adjustment Programme (SAP) since 1988.
Asobie’s84 analysis essentially concerned with using the national interest conceived as the
class interest of the state, to evaluate these different patterns of Nigeria’s economic diplomacy.
Accordingly, he argues that economic diplomacy conceived under the Babangida administration,
as the attraction of foreign capital, cost-consciousness, and a realistic foreign aid policy, certainly
deviated and negated the requirements of Nigeria’s foreign policy devoted to African
emancipation from domination and exploitation. He also argues that economic diplomacy has not
accelerated the rate of net capital inflow to Nigeria, and at any rate actually undermines the
fundamental basis of Nigeria’s national security.
Asobie, therefore, advances the diplomacy of economic liberation which involves
regional integration, a radical restructuring of the existing international order and the
mobilization of the human and material resources of the nation for self-reliant development
through a strategy of horizontal multilateralism. By and large, Asoibe’s86 analysis is a very vivid,
stimulating and illuminating demonstration of the interconnection between Nigeria’s national
interest, the economic crisis and her diplomacy of economic revival. However, the dialectical
28
underpinning of his mode of analysis, based on the Marxist political economy, tends to vitiate
the prospects of his postulations on horizontal multilateralism as a strategy of self-reliant
development.
In conclusion, what seems to emerge from the literature on the interconnection between national
development and foreign policy is that greater attention is paid to the relationship between the economic
aspects of development and foreign policy in Nigeria. Even the impressive and effortful analyses of the
dependency and underdevelopment approach have not adequately addressed the correlation between the
economic diplomacy of structural adjustment and Nigeria’s development crisis. More importantly, there
has not been an adequate systematic treatment of the economic diplomacy of the Obasanjo administration
either as a logical corollary of the general crisis of development or, its potentials for addressing the
problems of social and economic decay in Nigeria. The present study is an attempt to fill this gap in the
literature.
Foreign Direct Investment and the Development of Domestic Industrial Capacity
Economic theories and empirical studies support the notion that foreign direct investment
is conducted in anticipation of future profit. It is generally assumed that investment flows from
regions of low anticipated profit to those of high anticipated ones, after allowing for risk.
Although, expected profits may ultimately explain the process of foreign direct investment,
corporate management may emphasize a variety of other factors when considering investment
motive. These factors include market-demand conditions, trade restriction, investment
regulations, labour cost and transportation cost (Kim and Seo, 2003).
The neoclassical economists argue that FDI influences economic growth by increasing
the amount of capital per persons. Bengos and Sanchez-Robles (2003) assert that even though
FDI is positively correlated with economic growth, host countries require minimum human
capital, economic stability and liberalized markets in order to benefit from long-term FDI
29
inflows. Capital from external country can be very helpful in speeding up the rate of economic
growth and can act as a catalytic agent in making it possible to exploit natural resources
predominantly in a developing country. Foreign investment inflow can, at best be
complementary to domestic savings. In developing economies, literatures have shown that
foreign investment unaccompanied by domestic investment cannot create any stable basis for
higher standard of living in the future.
Alfaro (2003) noted that FDI impacts on growth differ across sectors. The benefit
depends on the spread out potential of the industry. Further studies also draw consideration to the
fact that the benefits of FDI on growth cannot be generalized across different countries or
sectors. Each has certain specific conditions that characterized market which could improve or
hamper these benefits on the host country’s economic growth. However, despite these conflicting
views on the relationship between FDI and growth, it is still highly recommended that emerging
markets should actively pursue FDI (Nwankwo, 2006).
The central point on FDI and economic growth can be generally classified into two. First,
FDI is well thought-out to have direct impact on trade through which the growth progression is
assured (Markussen and Vernables, 1998). Second, FDI supplements domestic capital thereby
stimulating the productivity of domestic investments (Borensztein et al., 1998; Driffield, 2001).
These two arguments are in conformity with endogenous growth theories (Romer, 1990) and
cross country models on industrialization (Chenery et al., 1986) in which both the quantity and
quality of factors of production as well as the alteration of the production progression are
components in developing a competitive advantage. FDI has empirically been found to stimulate
economic growth by an integer of researchers (Borensztein et al., 1998; Glass and Saggi, 1998;
Vu, 2008).
30
De Mello (1997) identified two channels through which FDI may be growth attractive:
FDI might promote knowledge transfers; both in terms of labor training and skill attainment and
better management. FDI can also promote the implementation of new technology in the
production process through capital spillovers.
Greenaway et al. (2007) noted that developing countries with progressively more liberal
trade policies are the ones with upward ratios of trade and inward investment to national income
and with advanced growth rates. Fosu and Magnus (2006) examine the long-run impact of
foreign direct investment and trade on economic growth in Ghana between 1970 and 2002.
Using an augmented aggregate production function growth model and by applying the bounds
testing approach to co-integration, they found long-run relationship between growth and its
determinants in the aggregate production function model. The consequences of their work
pointed toward negative impact of FDI on growth which is a divergence from most past studies.
Trade however, was found to have considerable positive impact on growth.
An agreed framework of foreign direct investment exists in the literature that is foreign
direct investment (FDI) is an investment made to acquire a lasting management interest
(normally 10% of voting stock) in a business enterprise operating in a country other than that of
the investor defined according to residency (World Bank, 1996). Such investment may take the
form of either “Greenfield” investment) or merger and acquisition (M&A), which entails the
acquisition of existing interest rather than new investment.
In corporate governance, ownership of at least 10% of the ordinary shares of voting stock
is the criterion for the existence of a direct investment relationship. Ownership of less than 10%
is recorded as portfolio investment. Foreign direct investment comprises not only merger and
acquisition and new investments, but also reinvested earnings and loans and similar capital
31
transfer between parent companies and their affiliates. Countries could be host to foreign direct
investment projects in their own countries and a participant in investment projects in other
countries. A country’s inward foreign direct investment position is made up of the hosted foreign
direct investment projects, while outward foreign direct investment comprises those investment
projects owned abroad.
One of the most salient features of today’s globalisation drive is conscious
encouragement of cross-border investments, especially by transactional corporations and firms
(TNC’s). Countries and continents (especially developing) now see attracting foreign direct
investment as an important element in their strategy for economic development. This is most
probably because foreign direct investment is seen as an amalgamation of capital, technology,
marketing and management. However, sub-saharan Africa as a region now has to depend very
much on foreign direct investment for so many reasons some of which are amplified by Asiedu
(2001). The preference for foreign direct investment stems from its acknowledged advantages
(Sjoholm, 1999; Obwona, 2001, 2004). The effort by several African countries to improve their
business climate stems from the desire to attract foreign direct investment. In fact, one of the
pillars on which the new partnership for Africa’s development (NEPAD) was launched was to
increase available capital to $64billion US dollars through a combination of reforms, resource
mobilisation and a conducive environment for foreign direct investment (Funke & Nsouli, 2003)
Unfortunately, the efforts of most countries in Africa to attract foreign direct investment
have been futile. This is in spite of the perceived and obvious need for foreign direct investment
in the continent. The development is disturbing, sending very little hope of economic
development and growth for these countries. Further, the pattern of the foreign direct investment
that does exist is skewed towards the extractive industry, meaning that the differential rate of
32
foreign direct investment inflow into sub-Saharan African countries have been adduced to
natural resources although the size of the local market may also be a consideration.
However, Nigeria as a country, given her natural resource base and large market size
qualifies to be a major recipient of foreign direct investment in Africa and indeed is one of the
top leading African countries that have consistently attracted foreign direct investment in the last
decade. However, the level of foreign direct investment attracted by Nigeria is mediocre (Asiedu,
2003) compared with the resource base and potential need. Further, the empirical linkage
between foreign direct investment and economic growth in Nigeria is yet unclear; despite
numerous studies that have examined the influence of foreign direct investment on Nigeria’s
economic growth with varying outcomes (Oseghale & Amonkhienam; 1987; Odozi, 1995;
Adelegan, 2000; Akinlo, 2004; Ayanwale, 2007). Most of the previous influential studies on
foreign direct investment and growth in sub-Saharan African countries are multi country studies.
However, recent evidence affirms that the relationship between foreign direct investment
and growth may be country and period specific (Asiedu, 2001) submits that the relationship
between foreign direct investment in one region may not be the same for other regions. In the
same vein, the determinants of foreign direct investment in countries within a region may be
different from one another and from one period to another.
The results of studies carried out on the linkage between foreign direct investment and
economic growth are not unanimous in their submissions. A closer examination of these previous
studies reveals that conscious effort was not made to take care of the fact more than 60% of the
foreign direct investment inflows into Nigeria is made into the extractive (oil) industry. Hence,
these studies actually modelled the influence of natural resources on Nigeria’s economic growth.
33
In addition, the impact of foreign direct investment on economic growth is more
contentious in empirical than theoretical studies, hence the need to examine the relationship
between foreign direct investment and economic growth in different economic dispensations.
There is the further problem of endogeneity, which has not been consciously tackled in previous
studies in Nigeria. Foreign direct investment may have a positive impact on economic growth
leading to an enlarged market size, which in turn attracts further foreign direct investment. Also,
there is an increasing resistance to further liberalization within the economy. This limits the
options available to the government to source funds for development purposes and makes the
option of seeking foreign direct investment more critical.
Renewed research interest in foreign direct investment stems from the change of
perspective among policy makers from “hostility” to “conscious encouragement”, especially
among developing countries. Foreign direct investment had been seen as “parasitic” and
retarding the development of domestic industries for export promotion until recently. However,
Bende-Nabende and Ford (1998) submit that the wide externalities in respect of technology
transfer, the development of human capital and the opening up of the economy to international
forces, among other factors, have served to change the former image.
Caves (1996) observes that the rationale for increased efforts to attract more foreign
direct investment stems from the belief that foreign direct investment has several positive effects.
Among these are productivity gains, technology transfers, the introduction of new processes,
managerial skills and know how in the domestic market, employee training, international
production networks, and access to markets.
Borenstein et al (1998) sees foreign direct investment as an important vehicle for the
transfer of technology, contributing to growth in larger measure than domestic investment.
34
Findlay (1978) postulates that foreign direct investment increases the rate of technical progress
in the host country through a “contagion” effect from the more advanced technology ,
management practices and so on, used by foreign firms.
On the basis of these assertions, governments have often provided special incentives to
foreign firms to set up companies in their countries. Carkovic and Levine (2002) note that the
economic rationale for offering special incentives to attract foreign direct investment frequently
derives from the belief that foreign investments produces externalities in the form of technology
transfers and spillover.
Curiously, the empirical evidence of these benefits both at the firm level and at the
national level remains ambiguous. De Gregorio (2003), while contributing to the debate on the
importance of foreign direct investment, notes that foreign direct investment may allow a country
to bring technologies and knowledge that are not readily available to domestic investors, and in
this way increases productivity growth throughout the economy. Foreign direct investment may
also bring in expertise that the country does not possess, and foreign investors may have access
to global markets. In fact, he found that increasing aggregate investment by one percentage point
of gross domestic product (GDP) increased economic growth of Latin American countries by
0.1% to 0.2% a year, but increasing foreign direct investment by the same amount increased
growth by approximately 0.6% a year during the period 1950-1985, thus indicating that foreign
direct investment is three times more efficient than domestic investment.
A lot of research interest has been shown on the relationship between foreign direct
investment and economic growth, although most of such work is not situated in Africa. The
focus of the research work on foreign direct investment and economic growth can be broadly
classified into two. First, foreign direct investment is considered to have direct impact on trade
35
through which the growth process is assured (Markussen and Vernables, 1998). Secondly,
foreign direct investment is assumed to augment domestic capital thereby stimulating the
productivity of domestic investments (Borensztein et al., 1998; Driffield, 2001). These two
arguments are in conformity with endogenous growth theories (Romer, 1990) and cross country
models on industrialization (Chenery et al., 1986) in which both the quantity and quality of
factors of production as well as the transformation of the production processes are ingredients in
developing a competitive advantage. Foreign direct investment has empirically been found to
stimulate economic growth by a number of researchers (Borensztein et al., 1998; Glass and
Saggi, 1998). Dees (1998) submits that foreign direct investment has been important in
explaining China’s economic growth, while De Mello (1997) presents a positive correlation for
selected Latin American countries. Inflows of foreign capital are assumed to boost investment
levels.
Blomstrom et al. (1994) reports that foreign direct investment exerts a positive effect on
economic growth, but that there seems to be a threshold level of income above which foreign
direct investment has positive effect on economic growth and below which it does not. The
explanation was that only those countries that have reached a certain income level can absorb
new technologies and benefit from technology diffusion, and thus reap the extra advantages that
foreign direct investment can offer. Previous works suggest human capital as one of the reasons
for the differential response to foreign direct investment at different levels of income. This is
because it takes a well educated population to understand and spread the benefits of new
innovations to the whole economy. Borensztein et al. (1998) also found that the interaction of
foreign direct investment and human capital had important effect on economic growth, and
suggests that the differences in the technological absorptive ability may explain the variation in
36
growth effects of foreign direct investment across countries. They suggest further that countries
may need a minimum threshold stock of human capital in order to experience positive effects of
foreign direct investments.
Balasubramanyan et al. (1996) report positive interaction between human capital and
foreign direct investment. They had earlier found significant results supporting the assumption
that foreign direct investment is more important for economic growth in export-promoting than
import-substituting countries. This implies that the impact of foreign direct investment varies
across countries and that trade policy can affect the role of foreign direct investment in economic
growth. In summary, UNCTAD (1999) submits that foreign direct investment has either a
positive or negative impact on output depending on the variables that are entered alongside it in
the test equation. These variables include the initial per capita gross domestic product, education
attainment, domestic investment ratio, political instability, terms of trade, black market,
exchange rate premiums, and the state of financial development. Examining other variables that
could explain the interaction between foreign direct investment and growth, Olfsdotter (1998)
submits that the beneficiary effects of foreign direct investments are stronger in those countries
with a higher level of institutional capability. He therefore emphasized the importance of
bureaucratic ideas in enabling foreign direct investment effects.
The neoclassical economists argue that foreign direct investment influences the amount
of capital per person. However, because of diminishing returns to capital, it does not influence
long run economic growth. Bengos and Sanchez-Robles (2003) assert that even though foreign
direct investment is positively correlated with economic growth, host countries require minimum
human capital, economic stability and liberalized markets in order to benefit from long term
foreign direct investment inflows. Interestingly, Bende-Nabende et al. (2002) found that direct
37
long term impact of foreign direct investment on output is significant and positive for
comparatively economically less advanced Phillipines and Thailand but negative in the more
economically advanced Japan and Taiwan. Hence, the level of economic development may not
be the enabling factor in the foreign direct investment growth nexus. On the one hand, the
endogenous school of thought opines that foreign direct investment also influences long run
variables such as research and development (R&D) and human capital (Romer, 1986; Lucas,
1988).
Foreign direct investment could be beneficial in the short term but not in the long term.
Durham (2004), for example, failed to establish a positive relationship between foreign direct
investment and growth, but instead suggests that the effects of foreign direct investment are
contingent on the “absorptive capability” of host countries. Obwona (2001) notes in his study of
the determinants of foreign direct investment and their impact on growth in Uganda that macro
economic and political stability and policy consistency are important parameters determining the
flow of foreign direct investment into Uganda and that foreign direct investment affects growth
positively but insignificantly. Ekpo (1995) reports that the political regime, real income per
capita, rate of inflation, world interest rate, credit rating and debt service explain the variance of
foreign direct investment in Nigeria. For non oil foreign direct investment, however, Nigeria’s
credit rating is very important in drawing the needed foreign direct investment into the country.
Further more, spill over effects could be observed in the labor markets through learning
and its impact on the productivity of domestic investments (Sjoholm, 1999). Sjoholm suggests
that through technology transfer to their affiliates and technological spill over to unaffiliated
firms in host economy, transnational corporations (TNCs) can speed up development of new
38
intermediate products varieties, raise the quality of the product, facilitate international
collaboration on research and development (R&D), and introduce new forms of human capital.
Foreign direct investment also contributes to economic growth via technology transfer.
Transnational companies can transfer technology either directly (internally) to their foreign
owned enterprises (FOE) or indirectly (externally) to domestically owned and controlled firms in
the host country (Blomstron et al., 2000; UNCTAD, 2000). Spillovers of advanced technology
from foreign owned enterprises can take any of four ways: vertical linkages between affiliates
and domestic suppliers and consumers; horizontal linkages between the affiliates and firms in the
same industry in the host country (Lim, 2001; Smarzynska, 2002); labor turnover from affiliates
to domestic firms; and internationalization of research and development (Hanson, 2001;
Blomstrom and Kokko, 1998). The pace of technological change in the economy as a whole will
depend on the innovative and social capabilities of the host country, together with the absorptive
capacity of other enterprises in the country (Carkovic and Levine, 2002).
Other than the capital augmenting element, some economists see foreign direct
investment as having a direct impact on trade in goods and services (Markussen and Vernables,
1998). Trade theory expects foreign direct investment inflows to result in improved
competitiveness of host countries’ exports (Blomstrom and Kokko, 1998).
Transnational companies can have a negative impact on the direct transfer of technology
to the foreign owned enterprises, however, and thereby reduce the spillover from foreign direct
investment in the host country in several ways. They can provide their affiliate with too few or
the wrong kind of technological capabilities, or even limit access to the technology of the parent
company. The transfer of technology can be prevented if it is not consistent with the
transnational company’s profit maximizing objective and if the cost of preventing the transfer is
39
low. Consequently, the production of its affiliates could be resistant to low-level activities and
the scope for technical change and technological learning within the affiliate reduced. This
would be by limiting downstream producers to low value intermediate products, and in some
cases “crowding out” local producers to eliminate competition. They may also limit exports to
competitors and confine production to the needs of the transnational companies. These may also
ultimately result in a decline in the overall growth rate of the “host country and worsened
balance of payment situation” (Blomstron and Kokko, 1998).
Moreover, the classical theory claims that foreign direct investment and multinational
corporations are very vital and contribute to the development of host countries through several
channels. These channels include; the transfer of capital, advanced technological equipment and
skills, improvement in the balance of payments, the expansion of the tax base and foreign
exchange earnings, creation of employment, infrastructural development and the integration of
the host economy into international markets (Zein, 2006).
The product life cycle theory posits that foreign direct investment exist because of the
search for cheaper cost of production. It states that many manufactured products will be
produced first in the countries in which they were researched and developed, these countries are
typically industrialized and overtime the production will tend to become capital intensive and
production will shift to foreign locations. So over time, a product initially introduced in a country
and exported from that country may end up becoming a product produced elsewhere and then
imported back into that country.
The product life cycle theory assumes the following dimensions: The introduction stage
which has to do with innovation, production and sales in the original country. The second stage
is referred to as the growth stage which is characterized by increase in export by the innovating
40
country, more competition, and increase in capital intensity and some foreign production. The
maturity stage is the third stage which has to do with decline in exports from the innovating
country, more product standardization, more capital intensity and increased competitiveness of
price. This stage is the decline stage which is characterized by concentration of production in less
developed countries (LDC’s) and innovating country becoming net importer. The limiting
criterion of the product life cycle theory is that the growing process of globalization and
integration of the world economy however invalidates this theory. This is because since
globalization is aimed at breaking trade barriers the innovating country can easily employ cheap
factors of production from the less developed countries. However, this theory is also in line with
the classical theory. The shift of production from one country to another leads to the transfer of
capital, advanced technological equipments and skills, improvement in the balance of payments,
the expansion of the tax base and foreign exchange earnings, creation of employment,
infrastructural development and the integration of the host economy into international markets.
Foreign direct investment consists of external resources, including technology,
managerial and marketing expertise and capital. All these generate a considerable impact on host
nation’s productive capabilities. At the current level of gross domestic product, the success of
government’s policies of stimulating the productive base of the economy depends largely on her
ability to control adequate amount of foreign direct investments comprising of managerial,
capital and technological resources to boost the existing production capabilities. Foreign direct
investment is therefore supposed to serve as a means of augmenting Nigeria’s domestic
resources in order to carry out effectively her development programmes and raise the standard of
living of her people (Shiro, 2005).
41
According to Nwankwo (1998), factors responsible for the increased need for foreign
direct investment by developing countries are: The world recession of the late 1970s and early
1980s and the resultant fall in the terms of trade of developing countries; this averaged about
11% between 1980 and 1982, high real interest rate in the international capital market, which
adversely affected external indebtedness of these developing countries, bad macro economic
management, fall in capita per income and fall in domestic savings.
Foreign direct investment is now becoming a source of capital for many developing
countries. This is becoming a crucial issue particularly in the case of Africa with a very small
share of foreign direct investment inflow compared to other developing regions (Asiedu, 2003).
Foreign direct investment, according to Abdur and George (2003), has potentially desirable
features that affect the quality of growth with significant implications for poverty reduction.
Klein et al, (2001) posits that foreign direct investment generates revenue and support the
development of a safety net for the poor. Adison and Heshmati (2003) also support the view that
the determinants of foreign direct investment in developing countries clearly suggests the
centrality of infrastructure, skills, macroeconomic stability and sound institutions for attracting
foreign direct investment. The importance of information and communication technology (ICT)
has also been documented in recent empirical works.
The consensus in the literature seems to be that foreign direct investment increases
growth through productivity and efficiency gains. The empirical evidence is not unanimous.
However, available evidence for developed countries seems to support the idea that the
productivity of domestic firms is positively related to the presence of foreign firms (Globeram,
1979; Imbriani and Reganeti, 1997). The results for developing countries are, not so clear, with
some finding positive spillovers (Blomstrom, 1986; Kokko, 1994) and others such as (Atiken et
42
al.; 1997) reporting limited evidence. Still others find no evidence of positive short run spillover
from foreign firms. Some of the reasons adduced for these mixed results are that the envisaged
forward and backward linkages may not necessarily be there (Atiken et al.; 1997) and that
arguments of transnational companies encouraging increased productivity due to competition
may not be true in practice (Atiken et al.; 1999). Other reasons include the fact that transnational
companies tend to locate in high productivity industries and, therefore, could force less
productive firms to exit (Smarzynska, 2002). Cobham (2001) also postulates the crowding out of
domestic firms and possible contraction in the total industry and or employment. However,
crowding out is a more rare event and the benefit of foreign direct investment in export
promotion remains controversial and depends crucially on the motive for such investment
(World Bank, 1998). The consensus in the literature appears to be that foreign direct investment
spillovers depend on the host country’s capacity to absorb the foreign technology and the type of
investment climate.
The review shows that the debate on the impact of foreign direct investment on economic
growth is far from being conclusive. The role of foreign direct investment seems to be country
specific, and can be positive, negative or insignificant, depending on the economic, institutional
and technological conditions in the recipient countries.
Most studies on foreign direct investment and growth are cross country evidences, while
the role of foreign direct investment in economic growth can be country specific. Further, only a
few of the country specific studies actually took conscious note of the endogenous nature of the
relationship between foreign direct investment and growth in their analysis, thereby raising some
questions on the robustness of their findings. Finally, the relationship between foreign direct
investment and growth is conditional on the macro economic dispensation the country in
43
question is passing through. In fact, Zhang (2001) asserts that “the extent to which foreign direct
investment contributes to growth depends on the economic and social condition or in short, the
quality of the new environment of the recipient country”. In essence, the impact foreign direct
investment has on the growth of any economy may be country and period specific. And as such
there is the need for country specific studies.
Contributing to the debate, Fasanya (2012) noted that the relationship between the inflow
of foreign direct investment (FDI thereafter) and economic growth in the host country has
become one of the most debated issues in the empirical literature. According to hum, the
question bears upon whether FDI promotes economic growth or it is only being attracted by
favourable economic conditions in the host country and by profits. He noted that the empirical
evidence obtained from these extensive studies has been mixed. On one side of these empirical
studies are those who suggest that the relation is positive. At the other extreme are those who
conclude that the association between FDI and growth is negative (Easterly et.al. 1997).
FDI, he said, is thought to be promoting growth through the capital, technological know-
how that it brings into the recipient country. By transferring knowledge, FDI will increase the
existing stock of knowledge in the host country through labour training, transfer of skills, and the
transfer of new managerial and organisational practice. FDI will also promote the use of more
advance technologies by domestic firms through capital accumulation in the domestic country
(De Mello, 1997, 1999). Finally, FDI is thought to open up export markets and to promote
domestic investments through the technological spillovers and the resulting productivity
increase. Overall FDI is thought to be more productive than domestic investments. Indeed, as
Graham and Krugman (1991) argue, domestic firms have better knowledge and access to
markets.
44
Many empirical works are available in the economic literature showing the causal
relationship between FDI and growth. A number of early studies have generally reported an
insignificant effect of FDI on growth in developing host countries. FDI may have negative effect
on the growth prospect of the recipient economy if they give rise to a substantial reverse flows in
the form of remittances of profits, particularly if resources are remitted through transfer pricing
and dividends and/or if the transnational corporations (TNCs) obtain substantial or other
concessions from the host country. For instance, Singh, (1988) found FDI penetration variable to
have a little or no consequences for economic or industrial growth in a sample of 73 developing
countries. In the same way (Hien, 1992) reported an insignificant effect of FDI inflows on
medium term economic growth of per capita income for a sample of 41developing countries.
At the firm level, several studies provided evidence of technological spillover and
improved plant productivity. At the macro level, FDI inflows in developing countries tend to
“crowd in” other investment and are associated with an overall increase in total investment. Most
studies found that FDI inflows led to higher per capita GDP, increase economic growth rate and
higher productivity growth (see De Mello 1997, Kumar and Siddharthan 1997, & Saggi 2000)
FDI increases technical progress in the host country by means of a contagion effect, (Findlay,
1978) which eases the adoption of advanced managerial procedures by the local firms. Similarly
(De Gregorio, 1992) analyzed a panel of 12 Latin American countries in the period 1950-1985.
His results suggest a positive and significant impact of FDI on economic growth. In addition the
study shows that the productivity of FDI is higher than the productivity of domestic investment.
While, (Fry, 1992) examined the role of FDI in promoting growth by using the framework of a
macro-model for a pooled time series cross section data of 16 developing countries for 1966-88
period. For his sample as a whole he did not find FDI to exert a significantly different effect
45
from domestically financed investment on the rate of economic growth, as the coefficient of FDI
after controlling for gross investment rate was not significantly different from zero in statistical
terms.
FDI inflows had a significant positive effect on the average growth rate of per capita
income for a sample of 78 developing and 23 developed countries as found by (Blomström et.al,
1994). However, when the sample of developing countries was split between two groups based
on level of per capita income, the effect of FDI on growth of lower income developing countries
was not statistically significant although still with a positive sign. They argue that the least
developed countries learn very little from MNEs because domestic enterprises are too far behind
in their technological levels to be either imitators or suppliers to MNEs. In this regard, another
study was conducted by (Borensztein, et.al, 1995) he included 69 developing countries in his
sample. The study found that the effect of FDI on host country growth is dependent on stock of
human capital. They infer from it that flow of advanced technology brought along by FDI can
increase the growth rate only by interacting with country’s absorptive capability. They also find
FDI to be stimulating total fixed investment more than proportionately. In other words, FDI
crowds-in domestic investment. However, the results are not robust across specifications.
Export-oriented strategy and the effect of FDI on average growth rate for the period 1970-85 for
the cross-section of 46 countries as well as the sub-sample of countries that are deemed to pursue
export-oriented strategy was found to be positive (Balasubarmanyam, et.al, 1996) and significant
but not significant and sometimes negative for the sub-set of countries pursuing inward-oriented
strategy. Accordingly (Sanchez-Robles, 1998) explored empirically the correlation among public
infrastructure and economic growth in Latin America in the period 1970-1985. She also found a
positive and significant impact of FDI on the economic growth of the countries of this area.
46
Another economist (De Mello 1999) also conducted time series as well as panel data
estimation. He included a sample of 15 developed and 17 developing countries for the period
1970-90. The study found strong relationship between FDI, capital accumulation, output and
productivity growth. The time series estimations suggest that effect of FDI on growth or on
capital accumulation and total factor productivity (TFP) varies greatly across the countries. The
panel data estimation indicates a positive impact of FDI on output growth for developed and
developing country sub-samples.
However, the effect of FDI on capital accumulation and TFP growth varies across
developed (technological leaders) and developing countries (technological followers). FDI has a
positive effect on TFP growth in developed countries but a negative effect in developing
countries but the pattern is reversed in case of effect on capital accumulation. De Mello infers
from these findings that the extent to which FDI is growth-enhancing depends on the degree of
complementarity between FDI and domestic investment, in line with the eclectic approach given
by (Dunning, 1981). The degree of substitutability between foreign and domestic capital stocks
appears to be greater in technologically advanced countries than in developing countries.
Agosin and Mayer, (2000) analyzed the effect of lagged values of FDI inflows on
investment rates in host countries to examine whether FDI crowds-in or crowds-out domestic
investment over the 1970-95 period. They conclude that FDI crowds-in domestic investment in
Asian countries crowds-out in Latin American countries while in Africa their relationship is
neutral (or one-to-one between FDI and total investment). Therefore, they conclude that effects
of FDI have by no means always favourable and simplistic policies are unlikely to be optimal.
These regional patterns tend to corroborate the findings of (Fry, 1992) who also reported East
Asian countries to have a complementarity between FDI and total investment. In another study
47
by (Pradhan, 2001) found a significant positive effect of lagged FDI inflows on growth rates only
for Latin American countries. He used a panel data estimation covering 1975-95 period for 71
developing countries. The study sheds light that the effect of FDI was not significantly different
from zero for the overall sample and for other regions. Tang et al. (2008) examined the causal
link between foreign direct investment, domestic investment and economic growth in China over
the period 1988-2003. The authors confirmed a unidirectional causality that runs from foreign
direct investment to domestic investment and to economic growth. Abdus (2009) analyzed the
relationship between foreign direct investment and economic growth for 19 developing countries
of South-East Asia and Latin America. The author employed the co-integration technique,
Granger causality test and Error Correction Model (ECM) to analyze the variables. The author
discovered a unidirectional causality that runs from economic growth to foreign direct
investment for five countries in Latin America and one country in East and South East Asia.
For studies conducted in Nigeria, Oyaide (1977) study the role of direct foreign private
investment in the economic development of Nigeria. Using indexes of dependence and
development as parameters of Nigeria’s economic dependence and development, he suggested
that studies on the role of foreign investment in host countries should entail time series analysis
of specific features of the host countries and of technology by which reveals it’s most important
effects as a means of delineating the need and proper use of foreign investment in economic
growth. He concluded that foreign private investment caused both economic dependence and
development. Eke (2003) in their study used causality test to analyze the impact of FDI on
economic growth in Nigeria. They investigated the causal test from foreign private investment to
GDP and causality test from GDP to foreign private investment. The results indicate that
causality runs in both directions. They concluded that foreign direct investment is relevant and
48
also a significant determinant of real development in Nigeria, however, foreign capital inflow is
growth – path dependent.
Using least squares technique on annual data for 1962 – 1974, Obadan (1982) supports
the market size hypothesis confirming the role of protectionist policies (tariff barriers). The study
suggests taking the cognizance factors such as market size, growth and tariff policy when dealing
with policy issues relating to foreign investment to the country. A study conducted by Anyanwu
(1998) on the economic determinants of FDI in Nigeria also confirmed the positive role of
domestic market size in determining FDI inflow into the country. This study noted that the
abrogation of the indigenization policy in 1995 significantly encouraged the flow of FDI into the
country and that more effort is required in raising the nation’s economic growth so as to attract
more FDI. Iyoha (2001) examined the effects of macroeconomic instability and uncertainty,
economic size and external debt on foreign private investment inflows. He shows that market
size attracts FDI to Nigeria whereas inflation discourages it. The study confirms that unsuitable
macroeconomic policy acts to discourage foreign investment inflows into the country. Anyanwu
(1998) and Iyoha (2001) have studied on the determinants of FDI in Nigeria. Major limitations of
these studies are the traditional econometric technique and non-consideration of natural resource
in determination of FDI inflow. Using time series econometric technique on annual data of
Nigeria, this study examines the effect of the country’s natural resource export, along with
openness, market size and macroeconomic risk variables like inflation and foreign exchange rate
on FDI inflow during 1970-2006. Omisakin et al. (2009) investigated causal and long-run
interrelationships among foreign direct investment, trade openness and growth between 1970 and
2006 through the Toda-Yamamoto non-causality test and auto regressive distributed lag
techniques to analyze the relationships among the variables. The results indicated that a
49
unidirectional causality runs from foreign direct investment to output growth. Oyejide (2005)
provided conceptual framework for the analysis of the macroeconomic effects of volatile capital
flows and concluded that capital flows have their pros and cons. This however depends on the
initial conditions of the developing economy concerned. It can stimulate growth of the real
sectors when the initial conditions are right. It could retard growth however, due to
macroeconomic shocks that could undermine the stability of real sector and impose higher
adjustment cost on the economy. The paper therefore recommends capacity building as a way of
maximizing benefits and minimizing risks from capital flows. Otepola (2002) examines the
importance of foreign direct investment in Nigeria. The study empirically examined the impact
of FDI on growth. He concluded that FDI contributes significantly to growth especially through
exports. This study recommends a mixture of practical government policies to attract FDI to the
priority sectors of the economy.
Akinlo (2004) investigates the impact of FDI on economic growth in Nigeria using data
for the period 1970 to 2001. His error correction model (ECM) results show that both private
capital and lagged foreign capital have small and insignificant impact on economic growth. This
study however established the positive and significant impact of export on growth. Financial
development which he measured as M2/GDP has significant negative impact on growth. This he
attributed to capital flight. In another manner, labour force and human capital were found to have
significant positive effect on growth. In short, the results of research on the relation between FDI
and growth vary depending upon the models, data and countries of analysis. Therefore, the
debate over the impact of FDI on growth is on-going and left open to further study.
50
Gap in Literature
The reviewed literature did not explain how Obasanjo’s economic diplomacy undermined
the living standard of Nigerians. Again, it failed to explain how Foreign Direct Investment
inflow under Obasanjo administration impeded domestic industrial capacity development in
Nigeria. These and other issues form point of our departure.
2.2 Theoretical Framework
A theory is a set of interrelated constructs (concepts), and propositions that present
systematic view of phenomena by specifying relations among variables, with the purpose of
explaining, and predicting the phenomena (Kerlinger, 1977). In a nutshell therefore, a theory first
sets out the interrelations among a group of variables; secondly, it presents a systematic view of
the phenomena described by the variables and then finally explains and predicts the phenomena
(Obasi, 1999:38).
This study is anchored on the power theory of the realist paradigm in international
relations as propounded by Hans J. Morgenthau (1978). According to Donnelly (), although
definitions of realism differ in detail, they share a clear family resemblance, ‘a quite distinctive
and recognizable flavour’. Realists emphasize the constraints on politics imposed by human
selfishness (‘egoism’) and the absence of international government (‘anarchy’), which require
‘the primacy in all political life of power and security’ (Gilpin 1986: 305). The conjunction of
anarchy and egoism and the resulting imperatives of power politics provide the core of realism.
Emblematic twentieth-century figures associated with realism include George Kennan, Hans
Morgenthau, Reinhold Niebuhr and Kenneth Waltz in the United States and E. H. Carr in
Britain. In the history of Western political thought, Niccolo Machiavelli and Thomas Hobbes are
usually considered realists while Thucydides is sometimes seen as a realist, but that is a minority
51
reading today according to Donnelly. Realists, although recognizing that human desires range
widely and are remarkably variable, emphasize ‘the limitations which the sordid and selfish
aspects of human nature place on the conduct of diplomacy’ (Thompson 1985: 20).
Meanwhile, Asobie (nd) delineated two traditions within the realist school namely; the
power theory tradition of Hans Morgenthau and the eclectic tradition of George Kennan, to use
two well-known American writers on the subject. According to Morgenthau, the objectives of
foreign policy must be defined in terms of national interest and must be supported with adequate
power. Further, the national interest of a state ‘can only be defined in terms national security and
national security must be defined as integrity of the national territory and of its institutions”. He
concedes that what constitutes the national interest of a state at any time may vary, depending on
the cultural and political context of in which the state exists and acts, but then, this contextual
variable can be objectified and operationalized as by defining national interest in terms power.
Thus, the variations in the content and methods of pursuing the national interest would occur
within the context of the power available to the state at the material time. Faced with a concrete
situation, then, the question that a realist statesman or policy maker would ask is: what are the
national interests involved and the power available on either side of the conflict. A statesman
would be acting against the national interest, in other words, he would be acting irrationally if he
failed to pursue these concrete (and selfish) objectives which national power dictates and instead
pursued desirable goals dictated by either ethical or ideological considerations, a sense of legal
obligations, sensitivity to public opinion, or worse, sentimental attachment to, or sympathy for,
certain persons or group of persons. This conception of national interest is based on the realist or
power theorist notion of international politics as the struggle for power. In the words of Hans J.
Morgenthau:
52
International politics, like all politics, is a struggle for power. Whatever the ultimate aim of international politics, power is always the immediate aim. Whenever statesmen and peoples strive to realize their ultimate goals b means of international politics, they do so by striving for power (Morgenthau, 1978: 553).
Clearly, the Morgenthau tradition of the realist school rejects a moralistic approach to
international politics. Furthermore, it considers the core interest of the nation as relatively
permanent: it has to do with the protection of the physical, political and cultural identity of the
nation against encroachment by other nations; all other interests are peripheral, their pursuit
depends upon the power of the nation.
In sum, Morgenthau identified six principles of the power tradition of realism to include:
the first is that state behavior is guided by objective laws which have their root in human nature.
These laws are not subject to human preferences and human manipulations, they are generally
constant. The second principle of Realism, according to Morgenthau, is that the key to
understanding international politics or the behavior of states is the concept of interest defined in
terms of power. According to him, it is this concept that gives meaning to the balance of states
and provides a rational basis for explaining that behavior. The pursuit of strategic and economic
interests is therefore central to the objectives of all states in the international system.
The third principle of Realism as conceived by Morgenthau is that state behavior cannot
be explained in terms of morality, ideology or the motives of statesmen. Even when a statesman
makes a preference to some ideology, for example advocacy of human rights or carrying the
burden of civilization, this is done only to gain acceptance of the legitimacy of the foreign policy
objectives of that country and therefore to more effectively protect and promote the national
interest. The national interest defined in terms of power is always the underlying essence of state
behavior. The fourth principle of Realism is that there is no generally agreed set of universal
53
moral principles. What states do is try to impose the principle inherent in their own domestic
culture on other states or to universalize those domestic principles of morality and transform
them into universal moral principles.
The 5th principle is that state power will vary in time, place and context but the concept of
interest remains consistent. This means that the forms of power available to states may change
depending upon social, cultural or economic circumstance and the type of power chosen by any
state will depend upon the circumstances of that state and the historical period.
The fifth principle is that intellectually, the sphere of international politics is autonomous
and differs from every other sphere of human concern, be it legal, moral or economic. What
gives international politics its distinctiveness therefore is the concept of interest defined in terms
of power.
Application of the Theory
In applying the power theory of Hans Morgenthau to the explanation of Nigeria’s
economic diplomacy under the Obasanjo administration, it is to be noted that in charting the
course of Nigeria’s foreign policy the administration was acting within the constraints imposed
on it by Nigeria’s circumstances and the limitations of her national power, particularly national
economic power. As has been pointed out, when the administration came into office, Nigeria was
heavily indebted so much so that her foreign debt management had assumed a crisis proportion
as Nigeria’s credit rating had flattened out. Also, FDI inflow into Nigeria had virtually dried up
as Nigeria had become a pariah in the comity of nations with the country under various economic
and military sanctions imposed as a reaction to the draconian rule of late General Sanni Abacha,
particularly the execution of the globally acclaimed environmental rights activist, ken Saro
Wiwa. Given these severe constraints on Nigeria’s national power, it was impossible for the new
54
administration to pursue an independent foreign policy aimed at the protection of the nation’s
core values and the promotion of the well being of the nation’s citizens. This being the case, the
administration was at the mercy of the Paris club of creditors, the multilateral financial
institutions, and other major players in the global capitalist system who seized the moment to
extract from the hapless nation millions of dollars in debt cancellation deals, only to plough back
the money in the form of FDI into the commanding heights of the Nigerian economy,
particularly oil and gas, communications, banking and power sectors after having persuaded the
Nigerian government to remove all forms of control from those sectors.
55
CHAPTER THREE
METHOD OF DATA COLLECTION AND ANALYSIS
3.1 Method of Data Collection
Methods are techniques and approaches employed to gather data which are used as
criteria for inference, interpretation, explanation and prediction (Cohen & Manion, 1980:26). On
the other hand, data are the information, evidence or facts from which conclusion can be drawn.
The method of data collection for this study is the qualitative method. According to McNabb
(2005:341), the qualitative research method is a set of non-statistical inquiry techniques and
processes used to gather data about social phenomena. Thus, qualitative data refers to some
collection of words, symbols, pictures, or other non-numerical records, materials or artifacts that
are collected by a researcher and is data that has relevance to the social group under study. The
uses for these data go beyond simple description of events and phenomena; rather, they are used
for creating understanding, for subjective interpretation, and for critical analysis as well.
According to Wikipedia (2010), qualitative research is a method of inquiry employed in
many different academic disciplines, traditionally in the social sciences. Qualitative method is a
non-numerical data collection. The method aims to gather an in-depth understanding of human
behaviour and the reasons that govern such behavior. The qualitative method investigates the
why and how of decision making, not just what, where, when. Hence, smaller but focused
samples are more often needed, rather than large samples. The qualitative method produces
information only on the particular cases studied, and any more general conclusions are only
hypotheses. There are certain attributes to it this method:
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First, in qualitative research, cases can be selected purposefully, according to whether or
not they typify certain characteristics or contextual locations. Second, the researcher's role
receives greater critical attention. This is because in qualitative research the possibility of the
researcher taking a 'neutral' or transcendental position is seen as more problematic in practical
and/or philosophical terms. Hence, qualitative research reflects on the role of the researcher in
the research process and makes this clear in the analysis. Third, qualitative data analysis can take
a wide variety of forms, and approaches analysis holistically and contextually, rather than being
reductionistic and isolationist. Nevertheless, systematic and transparent approaches to analysis
are almost always regarded as essential for rigour.
Burnham et al (2005:31) sees the qualitative method as “very attractive in that it involves
collecting information in depth but form a relatively small number of cases”. He goes on to state
that “analytic induction is often used by qualitative researchers in their efforts to generalize about
social behaviour. Concepts are developed intuitively from the data, and are then defined, refined
and their implications deduced from the data” (Burnham et al, 2004:41).
As noted by Nachmais & Nachmias (1981:153), all social research begins and ends with
observation. Observation, according to Kaplan (1963:126), is purposive perception abstraction of
facts from their more colligated phenomenal world to provide data for scientific investigation.
Observation is controlled investigation; a deliberate search carried out with care which is
informed by theory guided systematic organization. Observation is therefore purposefully
planned and systematically executed act of watching the occurrence of events, activities and
behaviours which constitute the focus of study (Obasi, 1999:169).
57
Through observation of speeches and interviews made by officials of the Obasnjo
administration, we were able to identify the foreign policy trust of that administrations and are
better able to evaluate its harmony, or lack of it, with Nigeria’s core national interest objctives.
Therefore, the relevance of the observation method to social inquiry, including in our
study, is further highlighted by the argument of Babbie (1983:178) that deliberate and sustained
personal observation is an indispensable part of the study of any social institution from which the
investigator classifies his ideas, revises his personal classifications and tests his tentative
hypotheses. Matilda Riley (1963) holds that even though disposition to act politically and
socially may be best accessed by questionnaire, observational methods are required to assess the
“acting out” of these dispositions. More so, the relationship between a person and his or her
environment is often best maintained in observational studies.
Obasi (1999) identified two forms of observation methods – the participant and the
spectator – which aid a variety or research purposes. In this research, we are restricted to the
spectator type. This form of observation is relevant here because it helps the researcher to
evaluate verbal, non-verbal, extra-linguistic and linguistic phenomena in order to compare them
with actual behaviours. It is for these preceding reasons that we adopt the qualitative method as
our method of choice for gathering the needed data for our interpretation of the place of national
interest in the economic diplomacy of the Obasanjo administration in Nigeria.
3.2 Research Design
A research design is a plan that guides the investigator in the process of collecting,
analyzing and interpreting observations. It is a logical model of proof that allows the researcher
to draw inferences concerning causal relations among the variables under investigation. It also
defines the domain of generalizability, that is, whether the obtained interpretations can be
58
generalized to a larger population or to different situations (Leege & Francis, 1974; Bailey,
1978:191; Nnabugwu, 2006:100).
This research is basically qualitative and non-experimental, therefore it is based on the
single case ex post facto design. An ex post facto design is used when experimental research is
not possible, such as when people have self-selected levels of an independent variable or when a
treatment is naturally occurring and the researcher could not "control" the degree of its use. The
researcher starts by specifying a dependent variable and then tries to identify possible reasons for
its occurrence. This type of study is very useful when using human subjects in real-world
situations and the investigator comes in "after the fact." That is why the researcher needs to
establish a plausible reason (research hypothesis) for why there might be a relationship between
two variables before conducting a study (Diem, 2002).
Cohen and Manion (1980) define the ex post facto design as those studies which
investigate possible cause-and-effect relationships by observing an existing condition and
searching back in time for plausible causal factors. According to Kerlinger (1977), the ex post
facto design is a form of descriptive research in which an independent variable has already
occurred and in which an investigator starts with the observation of a dependent variable; he then
studies the independent variable in retrospect for its possible relationship to and effects on the
dependent variable.
This research design is very relevant to our study given the nature of the phenomenon
under investigation. As noted above, this design is useful when using human subjects in real-
world situations and when a treatment is naturally occurring and the researcher could not
“control” the degree of its use. In applying the single case ex post facto design to our study, the
test of the hypothesis involves observing the independent variable (Obasanjo’s economic
59
diplomacy) and dependent variable (inflow of Foreign Direct Investment into Nigeria between
1999 and 2007) at the same time because the effects of the former on the latter have already
taken place before this investigation. It also involves observing the standard of living of Nigerian
citizens prior to the attraction of FDI through Obasanjo’s economic diplomacy and what it was
after the attraction of the FDI to see how the former impacted on the latter.
3.3 Method of Data Analysis
The data for this study shall be analyzed using qualitative, descriptive analysis.
According to Burnham et al (2004:41-42) and McNabb (2005:366-367), data analysis refers to
the use of relevant techniques, tools, strategies and procedures for exploiting relationships among
key variables gathered in the course of research. This involves logically breaking down the data
collected to draw inferences about the relationship between the variables that are of interest to
the researcher on the particular occasion. It also implies that data collection naturally leads up to
data analysis such that in the course of the analysis the collected data is broken and given
appropriate treatment so as to read meaning out of the data that has been generated, presented,
tested and interpreted. Obasi (1999:178), for instance, had emphasized that “the need for clarity
in the presentation of data can only be fully appreciated when one recognizes that a properly
generated data which is free from the common problems of unreliability and inaccuracy, can still
not serve a useful purpose if not properly analyzed and presented. In other words, analysis “is the
breaking down and ordering of the quantitative information gathered through research” (Asika,
1991:11).
The purpose of analysis therefore is to understand and explain how the constitutive
elements of a complex whole are related in order to gain a better knowledge of the unit or subject
being studied. In this wise, the data used in this study were analyzed qualitatively and critically,
60
in order to arrive at a valid argument and make valuable deductions. This in turn led to
conclusions that informed recommendations advanced to prevent Nigeria’s further descent into
religious extremism or fundamentalism. Also, tables and map would be used when and where
necessary to enhance clarity of thought and presentation.
3.4 Hypotheses
1. Obasanjo’s economic diplomacy undermined the standard of living of Nigerians; and
2. The inflow of Foreign Direct Investment (FDI) under the Obasanjo administration
impeded domestic industrial capacity development in Nigeria.
61
3.6 Logical Data Framework
Hypotheses Variables Main Indicators Method of Data Collection
Method of Data Analysis
1. Obasanjo’s economic diplomacy undermined the standard of living
(X)
Obasanjo’s economic diplomacy
o Debt cancellation ; o Capital flight.
• Books
• Journal articles
Content analysis
62
of Nigerians
(Y) Undermined standard of living of Nigerians
• High poverty level • High rate of unemployment • Rising inequality • Low Literacy level • Lack of access to primary
healthcare. • Low level of life expectancy • High level or corruption
• Official documents
• Internet sources.
1. The inflow of Foreign Direct Investment (FDI) under the Obasanjo administration impeded domestic industrial capacity development in Nigeria.
(X) Inflow of Foreign Direct Investment (FDI)
• Increase in volume of Greenfield investment in Nigeria;
• Increase in profit reinvestment in Nigeria
(Y) Domestic industrial capacity development in Nigeria.
• Lack of domestic industrial growth;
• Low volume of export of manufactured goods
63
CHAPTER FOUR
ECONOMIC DIPLOMACY AND THE LIVING STANDARD OF NIGERIANS
Introduction
As a foreign policy tool, the economic diplomacy of the Obasanjo administration
between 1999 and 2007 was ostensibly targeted at a key national interest objective of Nigeria as
identified in Section 19 of the 1999 constitution which is the improvement in the standard of
living of the citizens. A major plank of the economic diplomacy of the Obasanjo administration
was the securing of the cancellation of Nigeria’s huge external debt majority of which was owed
to the Paris Club of creditors. On face value, Nigeria's 2005 agreement with the Paris Club over
the much-talked about debt relief program for the West African country may seem like a cause
for celebration. But a close look at this dubious gift gives one a real cause for concern and
skepticism. A critical analysis of the "debt relief" shows that, on balance, Nigeria comes out as
the big looser of a lop-sided game in which the odds were against Nigeria from the onset. The
deal confirms what the literature of the international economic order has long argued:
colonialism grafted Africa into an inclement international financial system, which is designed to
benefit the haves of the wealthy Northern hemisphere at the expense of the Southern hemisphere.
It vindicates dependency theorists' contention that this inclement international economic order
inevitably produces dependent development and creates structures of poverty in the post-colonial
societies.
In sum, the Nigeria-Paris Club agreement provides that the club will "write off" 60% of
the debt that Nigeria owes members of the club. Nigeria, on its part, will pay back the remaining
40% in two phases. As a news report puts it, "in real terms, the Paris Club will cancel $18 billion
64
of Nigeria's debt, or about 60% per cent of the about $30 billion owed to the Club. But the Club
will be paid `an amount of $12.4 billion.'"
It's also reported that the Paris Club members "endorsed Nigeria's economic reform
programme," which, sometimes, is characterized as Nigeria's poverty-reduction program-- a
euphemism for IMF's structural adjustment program that historically leaves a "reformed" country
worse off economically than it was at the onset. It has therefore been reckoned that despite the
debt cancellation to the tune of $18 billion received by Nigeria from the Paris club, including the
subsequent payment of $12 billion to offset the remaining debt, there is no evidence of
accelerating pace of growth and development of the country and therefore no improvement in the
living standard of living of Nigerians. In this chapter, therefore, we examine the evidence in
order to test our hypotheses which states that the economic diplomacy of the Obasanjo
administration failed to improve the living standard of Nigerians.
4.1 The Paris Club Deal and the Reduction in Nigeria’s External Debt Obligations
According to Ezeabasli (2011), Nigeria began to experience external debt problems from the
early 1980’s when foreign exchange earnings plummeted as a result of the collapse of prices in
the international oil market, and external loans began to be acquired indiscriminately (Obadan
2003). Like every developing country, Nigeria has had cause to borrow to finance investments in
order to stimulate growth and development. Ordinarily such investments should be financed
from national savings but this is hardly the case in developing countries like Nigeria. This is due
to the large gap between national savings and investment requirements (Obadan 2003).
Consequently, the country had to resort to external sources to finance the savings-
investment gap. However, the seeds of external debt problem were actually sowed in 1978.
Before then, the debts incurred were mainly long-term loans from multilateral and bilateral
65
sources such as the World Bank and the country’s major trading partners. The debts did not exert
much burden on the economy because the loans were obtained on soft terms. Moreover, the
country had abundant revenue receipts mainly from oil, especially during the oil boom of 1973
— 1976. The dwindling oil prices in 1977/1978 forced the country to raise the first jumbo loan
of about USD1.O billion from the Eurodollar international capital market on commercial terms.
The loan which had a grace period of three years was used to finance various medium and long
term infrastructural projects which did not directly yield returns (Arikawe, 2005; Obadan, 2004).
Since then the stock of debt has grown in leaps and bounds, and from the mid 1 980s, in
particular, the rapid growth of debt and debt service payment became a wedge on national
development (Obadan, 2003).
Table 1, Column 2, shows that Nigeria’s external indebtedness rose from US$8.93 billion in
1980 to US$35.94 billion on December 31, 2004. Between 1980 and 31st December 2004,
Nigeria’s outstanding debt stood at US$35.94 billion in spite of the fact that Nigeria had paid
about US$48.43 billion to its creditors between 1980 and 2004. This means that Nigeria was
obliged to repay about (US$35.94 + US$48.43) US$84.37billion by the end of 2004.
66
Table 1: External Debt Position of Nigeria: 1980—2004
Year Nigeria’s Ext. Public Debt outstanding (US$ billion)
1980-2004
Total Ext. Debt Service Payment (US$
billion)1980—2004
1980 8.93 1.52
1981 11.55 2.36
1982 15.3 2.65
1983 17.7 2.36
1984 17.3 2.65
1985 18. 90 1.50
1986 25.57 1.28
1987 28.32 0.74
1988 30.69 1.58
1989 31.59 2.17
1990 33.10 3.57
1991 33.74 3.44
1992 27.54 2.39
1993 28.72 1.77
1994 29.43 1.84
1995 32.59 1.62
1996 28.06 1.88
1997 27.09 1.50
1998 28.77 1.27
1999 28.24 1.73
2000 28.50 1.71
2001 28.35 2.13
2002 30.99 1.67
2003 32.92 1.81
2004 35.94
TOTAL 48.43
Source: Debt Management Office (2004) Annual Report and Statements of Accounts p.26 and Aluko S.A(2003).
From the table above, it can be seen that between 1980 and 2004 external debt grew by
about 402.3 per cent. This was about 396.1% of total Federal revenue in 2004 as against 14.4 per
cent in year 1980. The increase in the debt stock was largely as a result of the interest component
67
of additional payment arrears that accumulated, and continued depreciation of the US dollar
against other currencies in which the debts were denominated.
Meanwhile, the origin of Nigeria’s external debt dates back 1958, when the sum of
US$28million was contracted for railway construction. However, in 1978, owing to the oil glut,
which exerted considerable pressure on government it became expedient to borrow for balance
of payment support and project financing (Gana, 2002). The initial debt was to support the
persistent fiscal and current accounts deficits and income decline caused by the depression in oil
market recession. The depression equally encouraged policy makers to adopt a business-as-usual
approach the erstwhile trend in expansionary fiscal policy (NCEMA, 2002).
The debt problem emerged in 1978 as the country borrowed from the Euro-dollar
international capital market on commercial terms. Thus, the debt structure showed a significant
shift from the traditional concessional bilateral and multilateral sources to market sources
characterized by high and variable interest rate, shorter repayment and grace periods. And since
the early eighties, the rapid growth of debt stock and debt service payments have become clogs
on the national economic growth (Todaro and Smith, 2004; Obadan, 2003; Arikawe, 2005).
Thus, the debt structure showed a significant shift from the traditional concessional bilateral and
multi-lateral sources to market sources characterized by high and variable interest rates. This
further led to the inability of the nation to increase its domestic investment, and the collapse of
oil prices and other agricultural products in World market and thus contributing to decline in
foreign exchange earnings and thereby making it difficult to service debts due. Sharp increase in
interest rates in the - financial markets, while increasing the cost of borrowed funds, r n in the
grace and repayment periods Activities of the multinational corporation through export over-
invoicing and import under-invoicing deprives them of the much needed foreign exchange
68
resources for growth and debt Exchange rate volatility, particularly, the 1 .ions of the US dollars
against the other transaction currencies resulting in sharp increases in dollar denominated debt
(NCEMA, 2002).
External Debt Outstanding by Creditor Category as At December 31, 2004
Source: Debt Management Office, Abuja
From the figure above, the largest proportion of Nigeria’s debt was owed to the Paris
Club. It is also to be noted that the preceding submissions that Nigeria has two major categories
of external creditors namely: official creditors and Private creditors. Her official creditors are:
International Fund for Agricultural Development (IFAD), African Development Fund (ADF),
European Development Fund (EDF), International Bank for Reconstruction and Development
(IBRD), African Development Bank (ADB), Economic Community of West African States
(ECOWAS) Fund, and European Investment Bank. These official lists of international funders
are Nigeria's multilateral creditors. In the bilateral league are the Paris Club Creditors and Non-
69
Paris Club Creditors. Also, Nigeria is indebted to Private Creditors which consist of Promissory
Note Holders and The London Club Group. Initially, Nigeria borrowed concessionally only from
the World Bank, a multilateral institution. This explains why in 1960 when Britain - Nigeria's
colonial masters handed over power to Nigeria, she had only incurred external debts of N82.4m
(Okonjo-Iweala, 2003).
Nigeria external debt can be grouped in two main categories: official and private debts. a.
Official debts components are Paris Club debts, multilateral debts and Non-Paris Club Bilateral
debts b. The private debt components on the other hand, are made up of uninsured short-term
arrears contracted through the medium of bills for collection, open account etc Commercial bank
debts o through loans/letters of credit are referred to as London Club debts (DMO, 2001).
The Paris Club is an informal group of official money lenders formed in 1956 with its
Secretariat in Paris. The Club has no legal basis or status. Its role is to find coordinated and
sustainable solutions to the payment difficulties experienced by countries indebted to it. It is a
voluntary gathering of creditor countries willing to treat in a coordinated way, the debt due to
them by the developing countries. The Paris Club debts are government to government credit
guaranteed by various export credit agencies of creditor countries (DMO, 2001;
www.dmo.gov.ng).
The following 19 countries are permanent Paris Club members: Australia, Austria, Belgium,
Canada, Denmark, Finland, France, Germany, Ireland, Italy, Japan, Netherlands, Norway, Russia
Federation, Spain, Sweden, Switzerland, United Kingdom and United States of America. The
following countries sit in Paris Club meetings on an as needed basis: Abu Dhabi, South Africa,
Argentina, Brazil, Korea, Israel, Kuwait, Mexico, Morocco, New Zealand, Portugal, Trinidad
and Tobago, and Turkey (www.dmo.gov.ng).
70
For clearer understanding, these are loans insured through Export Credit Agencies of
creditor governments or their appropriate institutions, extended to the Federal Government of
Nigeria (FGN), the States and other public entities and which are covered by the guarantee of the
Federal Government of Nigeria. · The Paris Club debts also include commercial credits or trade
arrears incurred by private entities which have been verified by the Federal Government of
Nigeria.
The drastic reduction in foreign exchange earnings in the 1980s made it extremely
difficult for Nigeria to meet its external payment obligations, resulting in massive build up of
arrears. · The foreign creditors reacted by suspending new lines of credit, thus compounding the
economic problems facing the country. Nigeria then decided to approach the Paris Club for an
agreement on paying at a later date.
Nigeria has rescheduled its debts on four different occasions: 1986, 1989, 1991 and 2000.
The intended effects of rescheduling include extending the period of repayment, and improving
the means with which payments are made. In effect it means postponing the evil day. However,
despite these rescheduling agreements, Nigeria’s Paris Club debt still continued to increase
because of the country’s inability to fully pay what was due each year.
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Nigeria’s debt outstanding to each of the Paris Club creditor countries as at December 31,
2004 is displayed in the picture below.
Paris Club Debt Stock by Creditor as at December 31, 2004 in US$ (Millions)
Source: Debt Management Office, Abuja
As can be seen, Nigeria owes the highest amounts to the United Kingdom, France, Germany
and Japan. But Nigeria needs the consent of even the smallest creditors like Spain and Finland to
be able to secure debt relief. Meanwhile, failure for Nigeria to honour its payment obligations to
the Paris Club undermined the country’s efforts to obtain substantial debt relief over the medium
term. Another consequence of defaulting on the Paris Club Agreement, particularly with respect
to the payment of agreed debt service payments, was the confirmed inability of Nigeria to benefit
from credit facilities, which lower the cost of doing business. Export credit agencies in Paris
Club creditor agencies do not provide cover and risk guarantees to countries in default of debt
service payment. Business and government agencies from such countries such as Nigeria seeking
72
to import goods and services will be required to pay the full 100 per cent cost upfront, even
against deliveries that will take several years (DMO, 2001).
At one extreme, debt relief can mean palliative measures by the creditors to ameliorate a
debtor country’s debt repayment problems through re-scheduling (changing the terms, like
interest rate and maturity) of existing debt. At the other extreme, it can refer to a complete write-
off by the creditor of the debts. In between these two extremes, there are various degrees of debt
relief that involve a combination of stock relief (like partial write-off of the debt stock) and flow
relief (like partial write-off of debt service payments). In all cases, debt relief is creditor-driven,
at the discretion of the creditors (DMO, 2004). The DMO identified three measures that have
been applied to developing countries by creditors thus:
- “Traditional” Approaches;
- HIPC (Heavily Indebted Poor Countries) initiatives; and
- Evian Approach.
The HIPC (Heavily Indebted Poor Countries) initiatives
The objective of this Initiative is to reduce the debt burden of those poor countries adjudged
to be heavily indebted to a level they would have capacity to repay. That is, to “sustainable
levels” It was f in 1996 before the “Enhanced” version replaced it in 1999 before the “enhanced”
is designed to provide according to the Bretton Woods Institutions “faster deeper and broader
debt relief and strengthen the links between debt relief, poverty reduction and social policies”.
In order to reach the Decision Point, all eligible countries requesting HIPC initiative
assistance must have prepared a Poverty Reduction Strategy Paper (PRSP). They are also
required to adopt adjustment and reform programs supported by the IMF (in ff form of Poverty
Reduction and Growth Facility, PRGF) and the World Bank, with a satisfactory record of
73
compliance. Also the Debt Sustainability Analysis would have to show that the country’s debt
capacity indicators meet the above criteria. Upon attainment of the Decision Point, the country
would get the debt stock relief. During the period between the Decision and Completion Points,
which is “floating” or not time bound, the country would have to establish a further track record
of good policy performance under the IMF/World Bank-supported programs including
satisfactory implementation of key structural and macroeconomic policies and poverty-reduction
strategy. Both official and commercial creditors are supposed to participate in the enhanced
Initiative.
The eligibility for HIPC debt relief is based solely on low per capita income level, high debt
sustainability indicators (mainly, high external debt/export ratio), and having the status of being
an “IDA-only” country. While many countries with similar debt sustainability indicators and per
capita income level as Nigeria have either benefited or are deemed to be potentially eligible to
benefit under the Initiative, Nigeria was denied eligibility technically, because Nigeria does not
have the “IDA-only” status. A country is accorded by the World Bank an “IDA-only” status if it
has a low per capita income (not more than US$885) and a lack of creditworthiness for
international market-based borrowing. With a per capita income of below US$300 and lack of
access to foreign credit markets, Nigeria should have been accorded the “IDA-only” status and,
hence, should have been eligible to seek HIPC debt relief. But, surprisingly, Nigeria has been
denied eligibility However n moderately indebted low-income countries and even some middle-
income countries are eligible HIPCs (and hence accorded “IDA-only” status) while Nigeria,
severely indebted low-income country was not. A probable reason for being d status that the
Bretton Woods Institutions would adduce as an excuse was Nigeria’s policy reform stance But
this stance has since improved dramatically recently and the status of Nigeria still was not
74
reviewed This gave rise to a speculation that Nigeria, Pakistan and Indonesia were denied “IDA-
only” status and hence HIPC eligibility; that Nigeria is an “oil-rich” country seems to provide an
inadequate excuse for its exclusion (as some are prone to speculate) since Cameroon, a country
with greater oil contribution relative to the size of its economy, is an eligible HIPC (DMO,
2004).
The 2003 G8 Summit in Evian reached an agreement on debt relief and this is what has
since been referred to as the Evian Approach. The approach sets out changes to the way in which
the Paris Club will treat all non-HIPCs - low — and middle-income countries.
Traditionally, the Paris Club has offered debtor countries a menu of options, depending
on their level of indebtedness, but also on their income grouping. The poorest (IDA-only)
countries could receive relief on Naples Terms, a two-third (2/3) reduction in their stock of debt,
or for countries involved in the Enhanced HIPC Initiative, which (though only in principle) is
around 90% debt reduction. For other countries, the most generous deal available was Houston
Terms, under which debts are rescheduled over 20 years, but with no debt write-off. But under
the Evian Approach, there is a more flexible approach adopted by the Paris Club, according to
which deals would not be based on pre-defined terms, but would instead be adapted to meet a
country’s individual circumstances. So, it is designed to be a tailor-made approach and it is
linked to a debt sustainability analysis prepared by the IMF. The Paris Club would now look at
the sustainability of a debtor country’s long term debt position, as opposed to short-term cash
needs. If the debt position is clearly seen to be unsustainable, creditors will adopts a more active
approach, including debt reduction if necessary, with the aim of offering a long-term solution.
75
However, this Approach, unlike the HIPC, ignores both multilateral and commercial debts,
which constitute about 20 percent of Nigerian debt stock; it only affects official bilateral debts
(DMO, 2004).
In accordance with Paris Club Agreed Minute IV, the Debt Management office of Nigeria
had been negotiating on a bilateral basis with the fifteen creditor countries on the specific details
of each agreement. The negotiations focused on the final reconciliation of eligible debt, as well
as bilateral negotiations on the specific terms of rescheduling the eligible debts, including the
applicable interest rates. The last of such negotiations was concluded with Italy in October 2004,
and the details of all the bilateral agreements reached between Nigeria and its Paris Club
creditors are provided in Table 3 below
Table 3: Status of Paris Club Bilateral Negotiations/Agreements as at 31st December 2004
S/No COUNTRIES STATUS
1 Austria Fourth Bilateral Debt Rescheduling Agreement signed December 2002.
2 Denmark Fourth Bilateral Debt Rescheduling Agreement signed August 2003
3 Belgium Fourth Bilateral Debt Rescheduling Agreement signed September 2003.
4 Finland Fourth Bilateral Debt Rescheduling Agreement signed January 2003.
5 France
Fourth Bilateral Debt Rescheduling Agreement signed January 2003.
6 Germany Fourth Bilateral Debt Rescheduling Agreement signed September 2002.
7 Italy Fourth Bilateral Debt Rescheduling Agreement and Debt Swap Agreement signed October 29, 2004.
8 Israel Fourth Bilateral Debt Rescheduling Agreement signed January 13, 2002
9. Japan Fourth Bilateral Debt Rescheduling Agreement signed September 19, 2003.
10 Netherlands There are two Bilateral Debt Rescheduled agreement for the commercial loans, signed October 17, 2003; and the agreement for ODA signed September 23, 2004
11 Russia Fourth Bilateral Debt Rescheduling agreement with Russia was signed October 22, 2003
12 Spain Fourth Bilateral Debt Rescheduling Agreement Signed April 2003
13 Switzerland Fourth Bilateral Debt Rescheduling Agreement signed January 24, 2002.
14 UK Fourth Bilateral Debt Rescheduling Agreement signed March 27, 2003
15 U.S.A. Fourth Bilateral Debt Rescheduling Agreement signed September 11, 2003.
Source: Debt Management Office (2004) Annual Report and Statements of Accounts. P.26
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Nigeria’s total external debt outstanding as at December 31 2004 was US$35.94 billion
made up as follows:
• US$30.85biIIion or 85.82% was owed to the Paris Club
• US$2.82billion or 7.86% was owned to Multilateral Institutions
• US$1 .44billion or 4.01% was owed to the London Club
• US$0.78billion or 2.18% was owed to the Promissory Note holders
• US$0.O48billion or 0.13% was owed to non-Paris Club creditors.
Clearly, the largest proportion of Nigeria’s debt was owed to the Paris Club which was
about 85.82 per cent of total external debt. This also means that success in securing substantial
reduction on this category of debts was critical to Nigeria exiting the debt trap
(www.DMO.gov.ng).
Meanwhile, Nigeria’s Paris club debts are loans insured through Export Credit Agencies
of creditor governments or their appropriate institutions, extended to the Federal Government of
Nigeria (FGN), the States and other public entities and which are covered by the guarantee of
Federal Government of Nigeria. The Paris Club debts also include commercial credits or trade
arrears incurred by private entities which have been verified by the Federal Government of
Nigeria. Nigeria had rescheduled its debts on four different occasions: 1986, 1989, 1991 and
2000. The effects of rescheduling include:
- extending the period of repayment, and
- improving the means with which payments are made.
However, despite these rescheduling agreements, Nigeria’s Paris Club debt still continued to
increase because of the country’s inability to fully pay what was due each year (DMO 2004
www DMO gov.ng). This, according to Ezeabasili, is because the creditor had outrageously
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blown the debt burden through long-term rescheduling made repayment very difficult. In the
years past Nigeria has spent nothing less 4 US$2 billion annually on debt servicing Between the
late 1980s and mid 1990s Nigeria was believed to have obtained external loan of less than
US$15 billion; since then it has paid a total of about US$48 billion and owes over US$34 billion
apparently due to capitalization of interest and punitive charges, exchange rate depreciation
(Business Times, 2004; Ezeabasili, 2006).
The furore over Nigeria’s eligibility status for debt relief dates back to 1998 when it was
mysteriously dropped from the group of Heavily Indebted Poor Countries (HIPC), which were
then entitled and qualified to receive a minimum of 67% reduction in their debt stocks. Nigeria’s
disqualification was, ostensibly on the grounds that it was a blend country. That is, Nigeria was
deemed to belong to a group of countries, which were eligible for both non-concessionary
(commercial-rate) loans from the International Bank for Reconstruction and Development
(IBRD) as well as concessionary loans from the soft lending arm of the World Bank, the
International Development Association (IDA), although Nigeria had not borrowed from the
IBRD since 1993. However, Nigeria at present did not re-seek HIPC status for debt relief, but
would prefer to pursue the “Evian approach” which works on a case by case basis (DMO, 2004).
From most accounts, Nigeria’s debt was unsustainable. All available poverty and debt
indicators point to the fact that Nigeria deserved substantial debt relief. Nigeria has a very high
incidence of poverty with close to 57% of the population living in abject poverty, defined by the
world community as living on less than US$1 per day. Nigeria has been ranked 151st out of 177
countries in the 2004 United Nations Human Development Indicator ranking. While the major
indicators have improved considerably over the last three decades, life expectancy of 51 years
and adult literacy of 65% are still among the lowest in the world, even when compared with
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other developing countries. Infant mortality at 110 per 1,000 and maternal mortality at 1 000 per
100 000 live births are among the ht in the world Nigeria may be perceived as a rich country but
with a population of over 132 million in per capita terms Nigeria does not match up with other
able oil exporting Sub-Saharan African countries like Gabon and Angola and is more aligned to
other HIPC countries like Cameroon (DMO 2004)
Indeed there is the strong perception that Nigeria may have been accorded unequal treatment
with clear instances of double standards on the issue of the application of debt relief of deserving
countries. The World Bank has continued to call Nigeria a ‘blend’ country although it has the
char of an ‘IDA-only’ country. This double standard continued to limit Nigeria’s access to
concessional credit and substantial debt relief (Moss, Stanley and Birdsall, 2004). Furthermore,
Nigeria is poorer than Iraq and its oil wealth per capita falls far below that of Iraq, the latter has
benefited from substantial debt cancellation, obviously for political and strategic reasons. These,
if analyzed carefully, may well apply to Nigeria. Additionally, aid to Nigeria of less than US$2
per capita was amongst the lowest in the world.
Despite this aid, after debt service payments, a net transfer was made from Nigeria to rich
governments of over US$12 for every Nigerian annually. Therefore, given its high debt level and
debt servicing obligations, it is doubtful that Nigeria will meet the millennium development
goals (MDGs) targeted date of 2015. Indeed, of the US$3.2billion debt service due in 2005, (of
which US$2.5billion was owed to the Paris Club), and an additional US$4.3billion in arrears,
only US$1 .7billion was allocated in the budget for the year (DMO, 2004).
Nigeria has obtained debt relief through a series of debt rescheduling agreements, mainly
with the Paris Club, and opportunistic buy-backs. However, the general belief was that these
measures were not adequate to address the high debt burden of the country. There was therefore
79
the need to complement the above “conventional” approaches with deeper debt relief in the form
of substantial debt cancellation. Nigeria had embarked on a major programme of reform to
increase the efficiency of public service delivery and expenditure management, cut corruption
and promote the rule of law (DMO, 2004).
This is important because Nigeria needed to address head-on the concerns of creditors that
savings from debt relief would be mismanaged, or that it would simply open another avenue for
corruption. Creditors need to be assured that savings would go to the neediest of areas in
education 4 and other critical sectors that impact directly on poverty alleviation and that a
transparent and effective system for the allocation of the resources would be put u (DMO 2004)
Specific actions that the Federal Government d on towards this end are a) A public
expenditure management pF4 and the establishment of a Virtual Poverty Fund (VPF) to provide
a framework for a transparent and effective system of resource allocation b) The formulation of a
Fiscal Responsibility Bill, the aim of which is to ensure transparency and accountability in public
governance and the setting up of government agencies, like the Economic and Financial Crime
Commission (EFCC) and Independent Corrupt Practice Commission (ICPC), to deal with corrupt
practices (DMO, 2004).
With the return to civilian rule in 1999, Nigeria embarked on a relentless campaign for debt
relief. Nigeria’s debt, which stood at US$35.94billion in December 2004 was unsustainable,
President Obasanjo campaigned. “Nigeria pays more on interest payments than it does on health
care. Given this debt level, Nigeria cannot achieve the Millennium Development Goals”
(www.Dmo.gov.ng).
Accordingly, the quest for debt relief was declared a priority of the Obasanjo administration
upon his assumption of office in May 1999. To achieve this objective, a Debt Management
80
Office (DMO) was established in October 2000 as the sole agency responsible for the
management of the country’s debt. With the concerted efforts of President Obasanjo, the
Ministry of Finance, National Assembly, DMO, the Economic Management Team, NGOs and
other stakeholders, the credible implementation of the country’s National Economic
Empowerment and Development Strategy (NEEDS), as well as the securing of an IDA only
status for Nigeria (a factor very supportive for debt relief), the creditors and multilateral financial
institutions began to positively consider Nigeria for debt relief.
In 2005 the campaign for debt relief reached a climax when Great Britain, acting as
chairman of the G8, brought to the fore Third World, and particularly, African debt issues. At
their meeting on Wednesday, June 20, 2005 the Paris Club announced its decision to grant debt
relief to Nigeria (www.dmo.gov.ng)
The agreement consists of three parts The Paris Club agreed to give Nigeria “Naples terms”
debt relief. This simply meant that the club will write off a minimum of the total debt stock. The
name “Naples Terms” comes from the first time used in Naples Italy in 1994 that a reduction of
up to 67% could be applied to a debtor country. Nigeria was required to settle arrears owed to the
Paris Club. Arrears are amounts of principal, interest and late interest that have been due, but
have not been paid. These payments are known as “arrears”. It is a standard requirement of the
Paris Club for a debtor to clear its arrears prior to commencement of any debt relief negotiation.
It should be noted that Nigeria’s case is exceptional in the sense that the debt agreement was
made even before the settlement of the arrears. Once the arrears have been paid, there would be a
reduction of the debt stock in favour of Nigeria, followed by a “buy back” of the remaining stock
as appropriate (www.DMO.gov.ng).
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What this meant for Nigeria in practice are the following:
1) About US$6billion, which was in arrears, would be paid up front.
2) Nigeria’s total indebtedness to the Paris Club amounting to $31 billion would be reduced
by 60% or US$18billion.
3) The remaining amount of about US$7billion would be bought back at a discount.
Through this process Nigeria would have cleared the entire US$31 billion owed to the Paris
Club. Usually, to reach a deal with the Paris Club, a country is required to have a formal
agreement with the IMF. Nigeria does not have an IMF program, but had to sign up to a new
framework with the IMF known as a Policy Support Instrument (PSI). This is essentially an
arrangement for IMF officials to endorse NEEDS, Nigeria’s locally driven economic reform
program. The IMF already endorses NEEDS on a quarterly basis. The PSI only formalized this
endorsement arrangement. After arrears have been paid and the PSI signed, Nigeria had another
meeting with the Paris Club in September 2005 to conclude details of the agreement. Between
September 2005 and March 2006 the debt write off occurred and the buy back processed thereby
ensuring that Nigeria no longer owes the Paris Club any money. However Nigeria still had
external debt outstanding of about US$5billion owed to Multilateral Financial Institutions,
Promissory Notes Holders, London Club Creditors and Non-Paris Club Bilateral Creditors. Over
the years Nigeria has continued to meet its obligations to these group of creditors as and when
due. (www.DMO.gov.ng)
According to the DMO, President Obasanjo’s debt diplomacy finally paid off when in 2005
Great Britain, acting as chair of the G8 (the eight most developed countries of the world),
brought to the fore Third World, and particularly, African debt issues. The G-8 communiqué, in
recognition of the progress made by Nigeria in the implementation of economic and governance
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reforms, agreed to support a sustainable debt treatment for the country within the framework of
the Paris Club. At their meeting on Wednesday June 29, the Paris Club creditors announced the
decision in principle, to grant a debt relief package amounting to about US$18 billion out of the
US$30.84 billion outstanding as at December 31, 2004. Consequently, by 4th of April 2007,
Nigeria had also virtually exited the debt owed the London Club of Creditors after it paid $82m
oil warrant. The Nigeria’s remaining external debt then stood at about $3.035bn made up of
$2.65bn multilateral, $326m bilateral debt, and $101m commercial debt (Faloseyi, 2007).
The debt management office identified the expected gains of the debt relief as follows:
• The debt write off of US$1 8billion is a direct savings on debt service payments of which
the country would have had to make over the next 20-22 years.
• Henceforth, the Government will be able to spend an additional US$1 billion, which could
have been used for debt service payments annually to fund education, health and other
socio-economic services and infrastructure. This applies to both the Federal and State
Governments and will assist Nigeria to meet the Millennium Development Goals.
• The debt deal will de-classify Nigeria as a “bad and doubtful debt” country. This will
encourage the inflow of investment.
• Export Credit Guarantee Agencies will be confident to restore insurance cover for exports
of goods and services, as well as investment capital to the Nigerian private sector. This
will improve the competitiveness of private enterprises.
• Nigeria’s early and permanent exit from the Paris Club debt overhang will bring a
psychological and emotional relief to all Nigerians (www.DMO.gov.ng).
In a nutshell, it is obvious that in negotiating the debt cancellation deal with the Paris Club
of creditors, the Obasanjo administration believed quite strongly that the deal would result in a
83
marked improvement in the standard of living of Nigerians. In the rest of this section, we access
the validity of such claim against the background of available empirical evidence.
4.2 Economic Diplomacy of Debt Cancellation and the Standard of Living of
Nigerians
Empirically, in spite of the debt relief granted to Nigeria by the Paris Club, progress
towards the eradication of poverty and hunger in Nigeria has been slow. According to Ezeani
(2012: 37), although the Gross Domestic Product (GDP) and the rate of economic growth have
improved over the last decade, this has not led to more jobs or less poverty. For example, the
GDP at 1990 constant prices increased from 6.03% in 2006 to 6.60% in 2007 and fell slightly
to 5.98% in 2008. The GDP grew by 6.96% and 7.87% in 2009 and 2010 according to NBS
(2010b: 8), the percentage of the population living below the poverty line however increased
significantly from 27.2% in 1980 to 68% in 2010 (see Table 1 below).
Table 4: Relative Poverty Headcount, 1980-2010
Year Poverty incidence (%)
Estimated population (Millions)
Population in poverty (millions)
1980 27.2 65 17.1 1985 46.3 75 34.7 1992 42.7 91.5 39.2 1996 65.6 102.3 67.1 2004 54.4 126.3 68.7 2010 69 163 112.47
Source: NBS 2010
Distributing the population into non-poor, moderately poor and extremely poor, table 2
below shows a downward trend in percentage of the non-poor reduced fro 72.8% in 1980 to
57.3% in 1992 and further to 34.4%, 43.3% and 31% in 1996, 2004, and 2010, respectively.
The moderately poor recorded a percentage increase from 21% in 1980 to 34.2% in 1985. It
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went down from 36.3%, 32.4% to 39.3% in 1996, 2004 and 2010respectively. The percentage
of the extremely poor increased from 6.2% in 1980 to 29.3% and 38.7% in 1996 and 2010
respectively.
Table 5: Relative Poverty: Non-poor, Moderate poor and the Extremely poor, 1980 -2010
Year Non-Poor Moderately Poor Extremely Poor
1980 72.8 21.0 6.2
1985 53.7 34.2 12.1
1992 57.3 28.9 13.1
1996 34.4 36.3 29.3
2004 43.3 32.4 22.0
2010 31.0 30.3 38.2
Source: NBS, 2010
Table 6 below measures poverty in Nigeria using four measures namely: relative
measure; absolute measure; dollar per day; and food measure. The table shows that food poor
increased from 33.6% in 2004 to 41% in 2010, absolute poverty increased from 54.7% in 2004 to
60.9% in 2010, relative poverty increased from 54.4% in 2004 to 69% in 2010 while the number
of people living on less than one dollar per day increased from 51.6% in 2004 to 61% IN 2010.
Table 6: National Poverty Incidence 2003/2004 and 2009/2010
Year Food poor Absolute poor Relative poor Dollar poor
2004 33.6 54.t 54.4 51.6
2010 41.0 60.9 69.0 61.2
Source: NBS 2010c cited in Ezeani (2012:40)
With respect to the education sector, Table 7 below shows that the net enrolment ratio in
primary education was 68 in 1990, increasing to 95 in 2000, before reducing to 88.8% in 2008.
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The proportion of pupils starting primary one who reached primary 5 was 67 percent in1990,
increasing to 97 percent in 2000 and 2001 and subsequently reducing to 72.3 percent in 2008.
The primary 6 completion rate was 58% in 1990, increasing to 76.7 percent in 2000 and 2001
and to 82% percent in 2003 and 2004, reducing to 67.5% percent in 2008. The literacy rate of
15-24 years old women was 80% in 2008.
Table 7: Showing the Net Enrolment in Primary Schools, 1990 – 2009
Indicator 1990 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2015 Target
Net Enrolment Ratio in Public Primary Schools
68 95 95 NA NA 81.1 84.6 87.9 89.6 88.8 NA 100
Proportion of Pupils starting primary 1 who reach primary 5 (%)
67 67 97 96 84 74 74 74 74 72.3 NA 100
Primary 6 completion rate
58 76.7 76.7 NA 82 82 69.2 67.5 67.5 NA NA 100
Literacy rate of 18-24 year old women and men (%)
NA 64.1 NA NA 60.4 60.4 76.2 80.2 81.4 80.0 Na 100
Source: Federal Republic of Nigeria (2010b: 17), cited in Ezeani, 2012: 46
While the sector would appear to have recorded some progress, a disaggregation of the data
shows that Nigeria still has more than seven million children out of primary school, of which girls
constitute about 62 percent. Furthermore, the education system largely excludes disadvantaged groups
and the quality of education is poor. A lot still needs to be done in teacher education and the development
of infrastructure. In 2006, only 58% of primary school teachers in Nigeria were qualified. The situation
was even worse in the northern states of the country. For example, in Sokoto and Zamfara states, only 22
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percent of the teachers were qualified, in Bauchi state 21 percent and in Taraba 33 percent (NBS, 2009
cited in Ezeani, 2012: 46).
In the same vein, the Education for All (EFA) Regional overview report that highlights
the situation in sub-Saharan countries named Nigeria as one of the countries at serious risk of not
achieving the universal primary education goal. The report defines serious risk as ‘furtherest to
go and moving away from goal or progress too slow’. The same goes for the adult literacy and
gender parity goals. With an Education for all Development Index (EDI) of less than 0.8, Nigeria
is among 16 countries in sub-Saharan Africa very far from achieving EFA goals (The Nation
Thursday, October 16, 2008).
Despite the reported growth in the Nigerian economy, the country did not make the list of
11 countries in sub-Saharan Africa that recorded more than two per cent annual human
development index, HDI, gains since 2000, the 2013 Human Development Report, HDR, has
revealed. The improvements in the economy have been stated by senior government officials
including the Finance Minister and the Governor of the Central Bank. The Minister of Finance
and Coordinating Minister for the Economy, Ngozi Okonjo-Iweala, said at the briefing on the
2013 Budget in Abuja last week that “in spite of the turbulent global economic environment and
changing global oil map, the Nigerian economy has been resilient, experiencing a robust growth
in 2012 of 6.5 per cent compared with global growth of 3.2 per cent, with inflation down to
single-digits at 9 per cent in January 2013 compared with 12.6 per cent in January 2012.”
The Central Bank of Nigeria, CBN governor, Lamido Sansui during the last Monetary
Policy Committee, MPC, meeting gave estimated real Gross Domestic Product, GDP, growth
rate at 6.61 per cent for 2012, saying it is lower than the level recorded in 2011 by 0.84 per cent.
He said the GDP growth rate of about 7.09 per cent in the fourth quarter of 2012 was higher than
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the 6.48 per cent in the third quarter, though lower than the 7.68 per cent recorded in the
corresponding period of 2011.
However, the report which was launched by the United Nations Development
Programme, UNDP, Administrator, Helen Clark and President of Mexico, Enrique Pena Nieto in
Mexico City, listed lesser endowed African countries among those that made the greatest strides
in HDI improvement since 2000. The countries include Angola, Burundi, the Democratic
Republic of the Congo, Ethiopia, Liberia, Mali, Mozambique, Niger, Rwanda, Sierra Leone and
Tanzania. Sierra Leone showed the second-highest HDI improvement in the world since 2000.
The Report, titled “The Rise of the South: Human Progress in a Diverse World,” shows that
Africa has the second highest growth in its accompanying HDI after South Asia over the past ten
years. The term “the South” refers to developing countries and “the North” developed ones.
“Africa has achieved sustained rates of economic growth at a time of great involvement with
emerging economies,” says Regional Director of UNDP Africa, Tegegnework Gettu, who also
noted that “the progress has been broad-based, with strong improvements in other dimensions of
human development such as health and education.”
Table 8: Ranking of African Countries by their HDI Performance
Very High Human DevelopmentRank 1 Seychelles
Rank 2 Libya
3 Mauritius
4 Tunisia
5 Algeria
Medium Human Development
Rank 6 Gabon
7 Botswana
8 Egypt
9 Namibia
10 South Africa
11 Morocco
12 Equatorial Guinea
13 Cape Verde
14 Swaziland
15 Republic of the Congo
16 São Tomé and Príncipe
17 Kenya
18 Ghana
Rank 19 Cameroon
20 Benin
21 Madagascar
22 Mauritania
23 Togo
24 Comoros
25 Lesotho
26 Nigeria
27 Uganda
28 Senegal
29 Angola
30 Djibouti
31 Tanzania
32 Côte d'Ivoire
33 Zambia
34 Gambia
35 Rwanda
Table 8: Ranking of African Countries by their HDI Performance
Very High Human Development Country HDI World rank
Seychelles 0.806 46
High Human Development Country HDI World rank
0.755 53
Mauritius 0.701 72
Tunisia 0.683 81
Algeria 0.677 84
Medium Human Development
Country HDI World rank 0.648 93
Botswana 0.633 98
0.620 101
Namibia 0.606 105
South Africa 0.597 110
Morocco 0.567 114
Equatorial Guinea 0.538 117
Cape Verde 0.534 118
Swaziland 0.498 121
Republic of the Congo 0.489 126
São Tomé and Príncipe 0.488 127
Kenya 0.470 128
Ghana 0.467 130
Low Human Development Country HDI World rank
Cameroon 0.460 131
0.435 134
Madagascar 0.435 135
Mauritania 0.433 136
0.428 139
Comoros 0.428 140
Lesotho 0.427 141
Nigeria 0.423 142
Uganda 0.422 143
Senegal 0.411 144
Angola 0.403 146
Djibouti 0.402 147
Tanzania 0.398 148
Côte d'Ivoire 0.397 149
Zambia 0.395 150
Gambia 0.390 151
Rwanda 0.385 152
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World rank
World rank
World rank
World rank
36 Malawi
37 Sudan
38 Guinea
39 Ethiopia
40 Sierra Leone
41 Central African Republic
42 Mali
43 Burkina Faso
44 Liberia
45 Chad
46 Guinea
47 Mozambique
48 Burundi
49 Niger
50 Democratic Republic of the Congo
Rank Somalia
Eritrea
South Sudan
Western Sahara
Zimbabwe
Compared to other regions, the report said, sub
average national HDI, with the 11 top performers a mix of countries with or without resources as
well as diversified and high-performing agriculture
Mauritius, Rwanda and Uganda. “That progress has happened amid
investment and development cooperation with emerging economies like Brazil, China and India
that have succeeded in pulling millions out of poverty,” the report said. Citing China’s trade with
sub-Saharan Africa as an example, the repor
about $1billion to more than $140 billion between 1992 and 2011, adding that countries in Africa
have continued to increase their partnership with a diverse set of regions, such as funds based in
the Arab region and Latin American firms. It said existing relationships with bilateral partners
have helped boost exports, create jobs and finance needed for infrastructure on the continent
Malawi 0.385 153
0.379 154
Guinea 0.340 156
Ethiopia 0.328 157
Sierra Leone 0.317 158
Central African Republic 0.315 159
0.309 160
Burkina Faso 0.305 161
Liberia 0.300 162
0.295 163
Guinea-Bissau 0.289 164
Mozambique 0.284 165
Burundi 0.282 166
0.261 167
Democratic Republic of the Congo 0.239 168
Unavailable Data Country HDI World rank
Somalia
Eritrea
South Sudan
Western Sahara
Zimbabwe
Source: Wikipedia, 2013
Compared to other regions, the report said, sub-Saharan Africa still has the lowest
average national HDI, with the 11 top performers a mix of countries with or without resources as
performing agriculture-based economies including Angola, Ethiopia,
Mauritius, Rwanda and Uganda. “That progress has happened amid an upsurge in trade,
investment and development cooperation with emerging economies like Brazil, China and India
that have succeeded in pulling millions out of poverty,” the report said. Citing China’s trade with
Saharan Africa as an example, the report said the trade relations yielded an increase from
about $1billion to more than $140 billion between 1992 and 2011, adding that countries in Africa
have continued to increase their partnership with a diverse set of regions, such as funds based in
region and Latin American firms. It said existing relationships with bilateral partners
have helped boost exports, create jobs and finance needed for infrastructure on the continent
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World rank
Saharan Africa still has the lowest
average national HDI, with the 11 top performers a mix of countries with or without resources as
based economies including Angola, Ethiopia,
an upsurge in trade,
investment and development cooperation with emerging economies like Brazil, China and India
that have succeeded in pulling millions out of poverty,” the report said. Citing China’s trade with
t said the trade relations yielded an increase from
about $1billion to more than $140 billion between 1992 and 2011, adding that countries in Africa
have continued to increase their partnership with a diverse set of regions, such as funds based in
region and Latin American firms. It said existing relationships with bilateral partners
have helped boost exports, create jobs and finance needed for infrastructure on the continent
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while many African nations have tapped into new funding, technology, markets and know-how
to invigorate their economies.
The report noted that advances are best achieved in countries with strong political
leadership, openness and transparency to trade and a firm focus on innovative social policies,
pointing out that investments targeted at the health sector has resulted in a surge in life
expectancy in sub-Saharan Africa by 5.5 years between 2000 and 2012 to 55 after stagnating
between 1990 and 2000 as a result of the HIV and AIDS pandemic. It identified education as
another area where remarkable improvement is recorded, with significant improvements in
access to health services in Rwanda through community-based health insurance and successive
waves of education reform in Ghana and Uganda. “By combining regional integration and
partnerships with developed and emerging economies, sub-Saharan Africa will be in a position to
continue to grow and improve the lives of millions,” the Report noted, adding that aggregate
HDI in sub-Saharan Africa could rise by 52 per cent by 2050.
Human Development Index is a comparative measure of life expectancy, literacy,
education, and standards of living for countries worldwide. It is a standard means of measuring
well-being. It is used to distinguish whether the country is a developed, developing, or
underdeveloped country, and also to measure the impact of economic policies on quality of life.
Countries (almost all UN member states and a couple of special territories) fall into three broad
categories based on their HDI: high, medium, and low human development.
From the preceding presentation of data, it can be deduced that Nigeria’s debt deal with
the Paris Club earned for the country a reduction of her debt overhang. For instance, it is
recorded that after the deal in 2005, Nigeria’s debt profile dropped from 35.94 dollars to about
$3.035bn made up of $2.65bn multilateral, $326m bilateral debt, and $101m commercial debt
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with a corresponding drastic reduction in Nigeria’s debt servicing obligations. It would have
been thought that with this reduction in Nigeria’s external debt stock and the country’s debt
service obligations, more money would now be freed to devote to the provision of basic
infrastructure, social services, stimulate economic growth, provide social safety nets and create
more jobs all of which would have led to a reduction in the incidence of poverty, creation of
more jobs for the teaming unemployed Nigerians, greater access to education, high level of life
expectancy, and in a word, improvement on the living standard of Nigerians.
As the evidence presented above has however shown, by all available indicators the
standard of living of Nigerian has actually deteriorated making it among the lowest in the world
even among sub-Saharan African countries with much fewer resources than Nigeria. Equally
worrisome is the fact that Nigeria’s external debt has begun to accumulate once again raising
fears that the country may soon be drawn into yet another round of debt trap.
On the basis of these overwhelming evidence therefore, we uphold our first hypothesis
which states that the Paris Club debt cancellation under Obasanjo’s administration failed to
improve the standard of living of Nigerian citizens.
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CHAPTER FIVE
INFLOW OF FOREIGN DIRECT INVESTMENT (FDI) AND DOMESTIC
INDUSTRIAL CAPACITY DEVELOPMENT IN NIGERIA
Introduction
The evidence and extent of FDI-related technology spillovers in the host economies of
developing countries has since emerged as an important area of research in the international
economics and management literature. The general belief (Ikiara, 2003; Marin, 2006; Dutse,
2008 and UNCTAD 2009) is that MNC subsidiaries bring in new technologies, skills, marketing
expertise and novel management techniques from their parents into host countries, these
knowledge resources may ‘leak’ to indigenous companies through various channels. This could
be through the integration of the local market with the international operators, labour mobility
between subsidiaries and indigenous firms resulting in knowledge spillover, learning from the
demonstration of new technologies represented in foreign subsidiaries and when indigenous
firms receive technical assistance. UNCTAD (2005) emphasize that FDI-led Technology
spillovers can play a significant role in the productivity growth of indigenous enterprises in a
host economy. Lichtenberg & De la Potterie (1996), Xu (2000), Pradhan (2006), Sun (2010)
agree.
Recently, however, a growing number of empirical studies have emerged in literature
discuss with somewhat contradictory conclusions. For instance as (Ghali and Rezgui 2008)
explain, that the outcome of the studies are significant in some cases and insignificant in some
for instance, the earlier studies of (Blomström & Persson, 1983) and (Blomström 1986) covering
developing and low income economies, have confirmed the presence of positive spillover using
cross sectional data. However, as can be seen in the summaries of (Görg and Greenaway, 2001)
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and (Ozturk,2007), the work of (Haddad & Harrison, 1993) on Morocco using panel datasets,
shows weak and insignificant slipover effects while (Saltz, 1992; Kokko, Tansini and Zejan,
1996; Aitken & Harrison, 1999; and Kathuria, 2000 on India) found significantly negative
effects Recently the works of (Marin and Bell, 2006; Pradhan, 2006; Sasidharan, 2006; Marin
and Giuliani, 2008), have presented conclusions of several in-depth studies that attempt to
provide some level of explanations for the contradictory findings on spillover effects. To provide
logic to the debate Marin (2008) in one of her prolific writings on FDI-related spillover, offers a
novel pattern of opinion suggesting that experts should be questioning the main assumptions
underlying the models used by the researchers. She explains that “what matters much more is
what subsidiaries actually do once they have been established or acquired – namely whether
they are entrepreneurial and innovative enough to contribute to the host economy in a
constructive way. P: 25”. Accordingly this should be the key issue in research and policy priority
decisions on how government of Nigeria can promote the accumulation of technological assets
and capacities by MNC’ subsidiaries in the host economy and also strengthen the absorptive
capabilities of indigenous manufacturing sector of the economy P91
In this chapter therefore, we test the second hypothesis of this study which states that the
inflow of Foreign Direct Investment (FDI) under the Obasanjo administration impeded domestic
industrial capacity development in Nigeria. To do this, we shall examine the volume of FDI
inflow into Nigeria during the period under study, the percentage of the FDI inflow into the
industrial sector and the impact of the inflow in industrial production measured in terms of
industrial production exports as well as import of manufactured goods.
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5.1 Structure of FDI Inflow into Nigeria since 1999
UNCTAD’s World Investment Report 2004 reported that Africa’s outlook for FDI is
promising but that the expected surge was yet to manifest. FDI is still concentrated in only a few
countries for many reasons, ranging from negative image of the region, to poor infrastructure,
corruption and foreign exchange shortages, an unfriendly macroeconomic policy environment,
among others. Nigeria’s share of FDI inflow to Africa averaged around 10%, from 24.19% in
1990 to a low level of 5.88% in 2001 up to 11.65% in 2002. UNCTAD (2003) showed Nigeria as
the continent’s second top FDI recipient after Angola in 2001 and 2002. Nigeria has since
overtaken Angola as the continent’s investment destination of choice. For instance, UNCTAD
recorded in its World Investment Report 2013, titled: “Global Value Chains: Investment and
Trade for Development,” that FDI inflows to Nigeria stood at $7.03billion. South Africa
recorded $4.572 billion, Ghana ($3.295 billion), Egypt ($2.798 billion), and Angola (-6.898
billion), among others.
A breakdown of the Global FDI report showed that Foreign Direct Investment flows to
African countries increased by five per cent to $50billion in 2012, even as global FDI fell by 18
per cent. According to the report, global FDI fell by 18 per cent to $1.35 trillion, while FDI is
expected to increase to $1.45 trillion in 2013, $1.6 trillion in 2014 and $1.8 trillion in 2015.
UNCTAD said: “The road to FDI recovery is thus proving bumpy and may take longer than
expected. UNCTAD forecasts FDI in 2013 to remain close to the 2012 level, with an upper range
of $1.45 trillion – a level comparable to the pre-crisis average of 2005 to 2007.
“Developing countries take the lead in 2012 – for the first time ever – developing
economies absorbed more FDI than developed countries, accounting for 52 per cent of global
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FDI flows. This is partly because the biggest fall in FDI inflows occurred in developed countries,
which now account for only 42 per cent of global flows.”
In 2011, Nigeria was ranked Africa’s biggest destination FDI, with total FDI inflows of
$8.92 billion. South Africa was ranked next with total FDI inflows of $5.81 billion, while other
African countries such as Ghana received $3.22 billion; Congo, $2.93 billion; and Algeria, $2.57
billion worth of FDIs respectively. Experts argued that the FDI trend had been encouraging,
though Nigeria needed to continue to address its security and political challenges to improve on
the trend. Only last Tuesday, President Goodluck Jonathan inaugurated the General Electric’s
$1billion service and manufacturing facility in Calabar.
The ground breaking ceremony followed the Memorandum of Understanding signed by
the Minister of Industry, Trade and Investment, Mr. Olusegun Aganga; and the Global
Chairman/Chief Executive Officer of GE, Mr. Jeff Emmelt, in January.
Procter & Gamble has also commenced a $250million investment in Nigeria. The ground
breaking for investment in Agbara Ogun state was held in July 2012.
Table 1: Nigeria’s Net foreign direct investment inflow (US$ million)
Source: UNCTAD Foreign Direct Investment Database online
The details of FDI inflow into Nigeria for the period 1970 to 2002 are shown in Table 2.
The nominal FDI inflow ranged from N128.6 million in 1970 to N434.1 million in 1985 and
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N115.952 billion in 2000. This was an increase in real terms from the decline of the 1980s. FDI
forms a small percentage of the nation’s gross domestic product (GDP), however, making up
2.47% in 1970, -0.81% in 1980, 6.24% in 1989 (the highest) and 3.93% in 2002. On the whole, it
formed about 2.1% of the GDP over the whole period of analysis. Prior to the early 1970s,
foreign investment played a major role in the Nigerian economy. Until 1972, for example, much
of the non-agricultural sector was controlled by large foreign owned trading companies that had
a monopoly on the distribution of imported goods. Between 1963 and 1972 an average of 65% of
total capital was in foreign hands (Jerome and Ogunkola, 2004).
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Table 2: Nigeria: Foreign direct investment, 1970–2002
Source: CBN Statistical Bulletin (various issues)
Because successive Nigerian governments have viewed FDI as a vehicle for political and
economic domination, the thrust of government’s policy through the Nigeria Enterprise
Promotion Decree (NEPD) (indigenization policy) was to regulate rather than promote FDI. The
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NEPD was promulgated in 1972 to limit foreign equity participation in manufacturing and
commercial sectors to a maximum of 60%. In 1977 a second indigenization decree was
promulgated to further limit foreign equity participation in Nigeria business to 40%. Hence,
between 1972 and 1995 official policy toward FDI was restrictive. The regulatory environment
discouraged foreign participation resulting in an average flow of only 0.79% of GDP from 1973
to 1988.
The adoption of the structural adjustment programme in 1986 initiated the process of
termination of the hostile policies towards FDI. A new industrial policy was introduced in 1989
with the debt to equity conversion scheme as a component of portfolio investment. The Industrial
Development Coordinating Committee (IDCC) was established in 1988 as a one-step agency for
facilitating and attracting foreign investment flow. This was followed in 1995 by the repeal of
the Nigeria Enterprises Promotion Decree and its replacement with the Nigerian Investment
Promotion Commission Decree 16 of 1995. The NIPC absorbed and replaced the IDCC and
provided for a foreign investor to set up a business in Nigerian with 100% ownership. Upon
provision of relevant documents, NIPC will approve the application within 14 days (as opposed
to four weeks under IDCC) or advise the applicant otherwise. Furthermore, in consonance with
the NIPC decree, the Foreign Exchange (Monitoring and Miscellaneous Provision) Decree 17 of
1995 was promulgated to enable foreigners to invest in enterprise in Nigeria or in money market
instruments with foreign capital that is legally brought into the country. The decree permits free
regulation of dividends accruing from such investment or of capital in event of sale or
liquidation. An export processing zone (EPZ) scheme adopted in 1999 allows interested persons
to set up industries and businesses within demarcated zones, particularly with the objective of
exporting the goods and services manufactured or produced within the zone.
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In summary, the polices embarked on by the Nigerian government to attract foreign
investors as a result of the introduction of the SAP could be categorized into five: the
establishment of the Industrial Development Coordinating Committee (IDCC), investment
incentive strategy, non-oil export stimulation and expansion, the privatization and
commercialization programme, and the shift in macroeconomic management in favour of
industrialization, deregulation and market-based arrangements.
Following the vigorous drive for the attraction of FDI by the Obasanjo administration, it
has been reported that the administration attracted a modest inflow of FDI while it lasted. It has
however been suggested that most FDI inflows into Nigeria are reinvested earnings from the oil
multinationals (Kolawole and Henry, 2009). According to him, reinvested earnings have
averaged two-thirds of overall FDI inflows in recent years, with the bulk directed towards the
energy sector. There has been a modest surge in non-oil sector foreign investment in Nigeria in
recent years, after it became clear that the previous regime, of Olusegun Obasanjo, was firmly
established and that economic growth was picking up. Although much of the investment was by
large multinational companies that were already operating in the country, there have been some
new European entrants since the beginning of this decade, and South African companies have
also strongly increased their presence in recent years, particularly in the mobile phone sector.
Nigeria the second largest FDI recipient has more of it concentrated in the extractive industry but
a veritable non-oil sector, manufacturing sector that recorded 47% of FDI stock in 1992 has been
a great source of FDI to the country. The recent banking consolidation exercise also boosted FDI
(and portfolio inflows) into Nigeria as existing foreign banks increased the capitalization of their
subsidiaries to meet the new minimum capital requirements.
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Steinbock (2013) further noted that with its natural resources, size and growth, Nigeria is
Africa’s largest recipient of foreign investment. He however queried whether the huge FDI flows
benefiting ordinary Nigerians? According to him, Global FDI is no longer immune to the post-
global recession challenges. Last year, it plunged by a whopping 18 percent. Nonetheless, FDI
inflows to African countries actually rose by five percent, to $50 billion, while Nigeria receives
the largest amount of FDI in Africa – almost 15 percent of the total. What about the Nigerians?
FDI success: Last June, Nigeria was ranked Africa’s number one destination for foreign direct
investment (FDI), for the second time in two years. The country’s FDI inflows exceeded $7
billion. In the post-global crisis years, FDI stock in Nigeria as a percentage of GDP has increased
to 27.6 percent. In 2012, FDI flows in Nigeria as a percentage of gross fixed capital formation
(GFCF) were almost 24 percent.
Under the 1995 Nigerian Investment Promotion Commission Act, 100 percent foreign
ownership is allowed in all industries except for oil and gas. Typically, Nigeria’s most important
sources of FDI have been the home countries of the oil majors: the United States (Chevron
Texaco, Exxon Mobil), the UK (Shell), China, and South Africa. Understandably, the
government would like to bring in even more investment to meet its target of becoming one of
the world’s top-20 economies by 2020. The objective, however, is predicated on a sophisticated
business environment, lower corruption and rising competitiveness.
Competitive challenges: Usually, investors rely on global indicators to review FDI
opportunities, focusing on business environment, corruption, and competitiveness. After some
deterioration in the rankings over recent years, Nigeria moved up to 115th last year, thanks to
improved macroeconomic conditions and a financial sector that is recovering from its 2009
crisis. The negatives include the institutional environment, e.g., concerns about the protection of
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property rights, ethics and corruption, undue influence, and government inefficiencies, as well as
security. The country also receives poor assessments for infrastructure, health and primary
education levels, and the low rates of ICT penetration.
In the Doing Business Indicators (World Bank), Nigeria is ranked 131st. This
performance is relatively weakest in such areas as starting a business, getting electricity,
registering property, paying taxes, trading across borders, or resolving insolvency. Finally,
Nigeria ranks 139th in the Corruption Perceptions, (Transparency International), far behind
South Africa, Tanzania, Ethiopia and Sierra Leone. In this regard, perceived corruption is similar
to that in Pakistan (139) and Bangladesh (144). According to him, in order to move higher in the
value-added chain, Nigeria must improve its performance in these rankings. The country needs
urgently to develop medium-term public-private partnerships to upgrade its business
environment, fight corruption, and foster competitiveness.
Spreading prosperity: This is the paradox: unlike those nations that attract FDI because of their
relatively strong performance in competitiveness, their business environment, or their minimal
corruption, Nigeria garners FDI despite its vulnerabilities. The bad news is that, in such a
situation, the gains of natural resources are unlikely to benefit the nation as a whole. Rather, the
status quo virtually ensures that small enclaves in the economy will grow richer, even as the real
per capita income of the majority remains relatively low. That’s a risky recipe to economic
polarization and social division. What Nigeria needs is to attract investors primarily with higher
productivity. The goal should be to improve the quality of the location in ways that benefit many
companies and industries, not just one or two companies. Third, the point should be to develop
‘sticky’ incentives that are tied to the location rather than the investor. Moreover, the focus
should be on sustained investment rather than transient one-time deals. From the standpoint of
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competitiveness, oil-driven FDI is a distraction because it steers attention away from the
fundamentals of competitiveness.
FDI that benefits the nation: Recently, President Goodluck Jonathan said the economy could
achieve a 7.2% growth rate before the year-end. In a grim international environment, such
growth will attract investor interest worldwide. However, broader industrialization could achieve
greater spread effects across the economy.
Global FDI is no longer unaffected by the gloomy and uncertain environment, including
the potentially longer growth slowdown in several emerging economies – especially if the
anticipated unwinding of monetary policy stimulus in the U.S. leads to sustained capital flow
reversals. Since, however, Nigeria’s FDI relies on its natural resources, it is likely to remain
relatively immune from the decline of overall global FDI. Nigeria’s challenge is to translate a
lucrative enclave of the economy into national gains, through increased competitiveness,
enhanced business environment and lower corruption. That’s a tall order. However, it is vital to
avoid deepening economic polarization and rising social pressures over time.
Figure 1 illustrates the trend of FDI inflows into Nigeria from 1969 to 2009. The figure
clearly shows the upward spiral of the FDI inflow in the country. This showed that the country
FDI is bias toward oil FDI than non-oil FDI. The crash of world oil prices in 1980 caused a
massive divestment from the nation and the low level of inflow obtained until 1986. Other
government legislation such as the Companies Tax Act 1961, Exchange Control Act 1962 and
Immigration Act 1963 had also served to discourage FDI during the early period. But it is
evident that the 1990s witness a huge FDI into the country.
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Figure 1: Trend of Nigeria FDI (1969-2009)
Source: CBN Annual Report of various years
With respect to the inflow of FDI into the export sector of Nigeria’s economy, a study by
Oyatoye et al, 2011noted that empirical work on the linkages between Direct Foreign Investment
and Export has not tried to establish causation, that is, to determine for example, whether inflows
of Direct Foreign Investment cause export to be greater than what should be expected or whether
expanding exports attract increased Direct Foreign Investment. The focus rather has been on the
more modest goal of seeking to determine whether increase in Direct Foreign Investment (DFI)
will increase export or vice versa. Table 3 below shows Nigeria’s Export, GDP and FDI inflow
between 1987 and 2006.
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Table 9: Export, GDP and FDI inflow between 1987 and 2006
Source: CBN Statistical Bulletin (Various Years)
Trends in FDI income
a. General trends
Global FDI income increased sharply in 2011 for the second consecutive year, after
declining in both 2008 and 2009 during the depths of the global financial crisis. FDI income rose
to $1.5 trillion in 2011 from $1.4 trillion in 2010, an increase of 9 per cent (figure I.31). FDI
income, a component of the balance of payments, accounted for 6.4 per cent of the global current
account. The fall in FDI income in 2008 and 2009 suggests that foreign affiliate operations were
severely affected at the outset of the global downturn. This is consistent with sharp declines in
the corporate profits in many economies. By 2010, however, global FDI income had surpassed
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the previous peak reached in 2007. For developed economies, FDI income generated by
investing TNCs has not completely recovered to its pre-crisis 2007 level, primarily because of
slow growth in the EU that reflects the region’s continuing sovereign debt crisis. For developing
economies, FDI income declined modestly in 2009 before growing strongly in 2010, especially
in East and South-East Asia. For transition economies, FDI income declined sharply in 2009 but
rebounded strongly in 2010 and 2011.
b. Rates of return
Rates of return on FDI or FDI profitability can be compared across regions, by direction
of investment, and with other types of cross-border investment. For instance, for the United
States, the cross-border portfolio rate of return was 2.7 per cent, while the FDI rate of return was
4.8 per cent in 2011 – the latest year for which data are almost complete. FDI rates of return can
also be compared with rates of return for investment conducted by locally owned corporations in
host economies (on a country-by-country basis). In the United States, the rate of return on inward
FDI is lower than that of locally owned entities (for 2011, 4.8 per cent as against 7.5 per cent10),
but this varies from country to country. There are a number of reasons why rates of return may
be different between FDI and locally owned firms in a host economy. They may include firms’
characteristics (such as length of operations), possession of intangible assets, transfer pricing and
other tax minimization strategies, and relative risk.
In 2011, the global rate of return on FDI was 7.2 per cent, up slightly from 6.8 per cent in
2010 (table I.6). Rates of return have decreased since 2008 in developed economies. In
developing and transition economies, FDI rates of return are higher than those in developed
economies, and vary over time and by region. For example, while the global average rate of
return on FDI for 2006–2011 was 7.0 per cent, the average inward rate for developed economies
106
was 5.1 per cent. In contrast, the average rates for developing and transition economies were 9.2
per cent and 12.9 per cent, respectively. For instance, in Africa and transition economies, natural
resources, extractive and processing industries consistently contribute to higher rates of return.
At the individual country level, therefore, many such economies rank high in the list of the top
economies with the highest rates of return, and all but one of the 20 economies are developing or
transition economies.
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Table 10: Inward FDI rates of return, 2006–2011(Per cent)
Source: UNCTAD, based on data from the IMF Balance of Payments database.
Figure I.32. Top 20 economies with highest inward FDI rates of return, 2011(Per cent)
Source: UNCTAD, based on data from the IMF Balance of Payments database
108
From table 11 above, it can be seen that in addition to the high return rate on FDI
recorded in developing and some transition economies, Nigeria actually ranks as the fourth
country with the highest return rate on foreign direct investment in the world.
5.2 FDI and Industrial capacity Development in Nigeria
In a communiqué issued after the Roundtable Organized to Mark the Africa
Industrialization Day 2012 by key industrial unions in Nigeria; the Textile, Garments and
Tailoring Workers’ Union of Nigeria, the Construction, Woodwork and Civil Engineering
Workers Union, the Food, Beverage and Tobacco Senior Staff Association, the Agriculture and
Allied Workers Union, Steel and Engineering Workers as well as the Federation of Informal
Workers’ Organizations of Nigeria, FIWON with the Theme: Accelerating Industrialization for
Boosting Intra-African Trade, in November 2012, it was noted that despite recent improved
growth performance of the Nigerian economy, key economic indicators revealed that industrial
development in Nigeria is on the decline rather than improving. It noted that crude oil export
with little local value addition followed by agriculture and services have been the main drivers of
growth with the result that economic growth in Nigeria has not promoted desired structural
changes that would make manufacturing the engine of growth, thereby create employment, and
promote technological innovations and development. It was further observed that as a
consequence composite employment data showed that the rate of unemployment surged to
19.7% at end-December 2009 from 14.6% in 2007 and by January 2010, the unemployment rate
was 21.1%. Indeed, Nigeria’s Ministry of Youth Development puts the estimates of unemployed
youths at an alarming 68 million. It is also noted that for those in employment, the overwhelming
majority operate in the informal sectors of the economy. Nigeria’s spiralling youth
unemployment and the dramatic rise in social unrest and crime including Niger Delta militancy,
109
Boko Haram, and Jos Crisis among others signpost the urgent need to provide employment
opportunities.
Worried, that notwithstanding an annual GDP average of 7.4 per cent in the last decade,
growth has not been inclusive, broad-based and transformational. Stressed, that the paradox of
economic growth without development is best illustrated by the performance of key sectors of
the economy especially the agricultural, oil and gas, textile, food and beverages, and the
construction sectors. These key sectors have been adjudged to perform below their potentials.
Worried by, the declining performance of the manufacturing sector over the last decade, on the
average, manufacturing contribution was a paltry 7% in the 1960s and 1970s before growing to
its peak of 10.5% in 1985. Since then, total contribution of manufacturing has been on a steady
decline. The lowest in the history of the country is in 2010 where the total contribution was as
low as 2.2%. Between 2000 and 2010, more than 850 manufacturing companies either shut down
or temporarily halted production. Capacity utilization in manufacturing was around 53% on
average. Imports of manufactured goods dwarf sales of homegrown products – manufactured
goods have constituted the biggest category of imports since the 1980s. Nigeria spends about $8
million dollars per day importing food.
It noted further that the biggest problem facing rapid industrialization in the country over
the past decade has been inadequate infrastructure in general and lack of power supply in
particular. The country sets a target of generating 6,000 MW of electricity by the end of 2009,
but estimated national demand is 25,000 MW. Manufacturers have mainly installed their own
generators to compensate for spotty supply from the state - the manufacturing industry as a
whole generates around 72% of its own energy needs. But operating these generators greatly
increases the cost of manufacturing goods, and the increase in cost is passed on to the consumer,
110
making it difficult for Nigerian goods to compete with cheaper imports. Other challenges include
ineffective backward integration policies, lack of adequate and appropriate technology, trade
barriers and massive smuggling, ineffective and inefficient privatizations, poor linkage between
wage increases and productivity resulting in wage increase related job losses, lack of government
patronage of locally manufactured goods and services especially personnel of the armed forces
and related institutions, dumping of substandard goods, government waivers on restricted
imported goods, counterfeiting, bootlegging and piracy, lack of access to long-term capital, lack
of appropriate skilled manpower as well as incoherent and inconsistent policy frameworks.
Concerns were also expressed about growing insecurity as a result of upsurge in terror
campaigns by extremist religious and criminal gangs, jeopardizing needed peaceful environment
for industrial growth and development. Further noted that the problems dovetail into the informal
economy with its peculiar need for participatory policy frameworks in the areas of access to
decent workplaces, trainings in new technologies, affordable credits and inclusive city and
municipal service provisioning especially in the areas of paved roads, water and sanitation
facilities.
According to Kornecki (2008), FDI inflow measures the amount of FDI entering a
country during a one year period. The foreign direct investment stock represents the total amount
of productive capacity owned by foreigners in the host country. It grows over time and includes
all retained earnings of foreign-owned firms held in cash and investments. This investment stock
has the potential of utilizing the national resources optimally for productive use and
consequently, it is expected to influence the growth of the economy.
111
The foreign direct investment has increased in the past twenty years to become the most
common type of capital flow. The most important economic reason for attracting FDI at the
beginning of the transformation process of an economy was to facilitate the privatization and
restructuring of the economy key sectors (Heimann, 2003). At present, as the privatization and
reconstruction process nearly comes to an end, the main reason to pursue foreign direct
investment in major sectors of the economy is to enhance productivity or output, encourage
employment, stimulate innovation and technology transfer as well as enhance sustained
manufacturing output growth as witnessed in most developing nations of the world like Nigeria.
The pattern of the FDI that does exist is often skewed towards extractive industries, meaning that
the differential rate of FDI inflow into Sub-Saharan African countries like Nigeria has been
adduced to be due to natural resources, although the size of the local market may also be a
consideration (Morriset 2000; Asiedu, 2002). Nigeria as a country, given her natural resource
base and large market size, qualifies to be a major recipient of FDI in Africa and indeed is one of
the top three leading African countries that consistently received FDI in the past decade.
However, the level of FDI attracted by Nigeria is mediocre compared with the resource base and
potential need (Asiedu, 2003).
In Nigeria, net FDI increased from N38 million in 1960 to N184.3million in 1979
representing 385% increase within two decades and during this period industrial and agricultural
outputs in 1960 stood respectively at N134 million and N1.4 billion, and this further increased to
N15.4 billion and N9.2billion in 1979 (CBN, 2011). These represent 11,392.5% and 557.1%
increases in real sector output between 1960 and 1979. The real sector growth during the periods
that marks the first, second and third national development plans era can be attributed in the
growth in foreign capital inflow in the country. However, the emergence of oil boom resulted in
112
the neglect of the real sectors of the economy as foreign direct investment grew annually by
51.3% and 129.9% in 1980-1989 and 1990-2010 respectively. This significant upward growth in
foreign capital was not reflected in the growth of the real sectors as the industrial sector output
grew at a marginal annual rate of 23.2% and 29.1% in 1980-1989 and 1990-2010 respectively.
Also, real sector output growth stood at 16.4% and 33% during the same periods. These
indicate that influx of foreign capital is beneficial to industrial and agricultural outputs growth in
Nigeria as evidenced in the 1960s and 1970s. Unfortunately, the efforts of most countries in
Africa including Nigeria to attract FDI to the real sectors of the economy such as industrial and
agricultural sector have been futile. This is in spite of the perceived and obvious need for FDI in
the continent. The development is disturbing, sending very little hope of economic growth and
development for these countries. Also, the empirical linkage between FDI and manufacturing
output growth in Nigeria is yet unclear, despite numerous studies that have examined the
influence of FDI on Nigeria’s manufacturing output growth with varying outcomes (Oseghale
and Amonkhienan, 1987; Odozi, 1995; Oyinlola, 1995; Adelegan, 2000; Akinlo, 2004;
Ayanwale, 2007).
Ingwe (2012) observed that to explicate the performance of Nigeria’s industrial sector,
we need draw a few points from explanations by Central Bank of Nigeria (CBN)’s Governor –
appointed to a five-year term since 2007, Sanusi L. Sanusi, who recently elucidated on Nigeria’s
economy generally and the manufacturing sector in particular concerning connotations of
manufacturing in Nigeria’s official statistical system. He defines sub-divisions within Nigeria’s
industrial sector as comprising manufacturing, mining (including crude petroleum and gas) and
electricity generation. In terms of structure and organization, the Nigerian manufacturing sub-
sector comprises establishments (enterprises) of three main categories: large, medium and small,
113
while the headings (categories) that existing cottage industries and hand-craft units remains
unspecified. Nigeria’s mining sub sector is composed of crude petroleum, gas and solid minerals.
Prior to the advent of fossil fuels (including petroleum and hydro-carbon-based minerals such as
coal, tin was the major mineral exported in Nigeria’s era of colonial rule by Britain. After the
advent (or discovery of commercially viable deposits of petroleum and natural gas in 1956/7 in
the South-South geo-political zone or geographical south-east of Nigeria; crude oil export
assumed relative importance compared to solid minerals, which faded into insignificance in the
reckoning of policy-makers. For the avoidance of doubt, the largest mining activity in Nigeria
has been crude oil production, (the latter’s sudden dominant position -in terms of government
revenue and export earnings- since the 1970s), is indubitably the result of ineptitude of Nigeria’s
thieving parasitic elite. More recently, natural gas production has increasingly attracted attention,
as another alternative export commodity/product whose huge potential, in terms of its vast
deposit is tending to reduce the pathological dominance of crude oil in Nigeria’s economy
(Sanusi, 2011).
While Nigeria’s ruling class on attainment of independence on 1st April, 1960 claimed
that a programme of transforming the country’s agrarian economy of that time into an industrial
one was a top priority of the government, the outcome –as revealed by statistics- has been
disappointing (see table 1). This poor outcome has happened in spite of spirited efforts made by
successive post-independent administrations/governments to boost manufacturing output by
enunciating various policy regimes. One main indicator of this assertion that the performance of
manufacturing has been poor is the sector’s failure to make significant contribution to the growth
of the economy compared to other sectors as well as compared to the performance of
manufacturing in other developing countries/economies in Asia and Latin America.
114
According to him, data analysis informs that manufacturing, -as a whole- contributed
only 11.3 per cent of the GDP in 1960-70, afterwards grew significantly in the next two decades:
from 29.1 per cent between 1971-1980, to a high of 41.0 per cent between 1981-1990. The latter
growth is attributable largely to the crude petroleum and gas production during those decades.
Manufacturing’s contribution declined to 38.6 per cent in the 1990s and further to 29.4 per cent
during the first decade of the 21st Century: 2001-2009. The contribution of Nigeria’s
manufacturing sector was on average below 5.0 per cent in the last two decades. It is important
to enhance understanding of this title by clarifying that the relatively high contribution of oil
sector to the industrial sector contribution has resulted largely from crude production contrasted
to the associated ‘core industrial’ components of that sub-sector such as refining and
petrochemicals. While the contribution of wholesale and retail trade and services has more or
less remained stable during the study period the contribution of building increased steadily: from
5.3 per cent in the 1960s to 8.3 per cent in the 1970s, but declined consistently, afterwards, to 1.8
per cent during 2001-2009. The country’s manufacturing sector performance improved slightly
during and a few years after Nigeria’s era of violent enforcement of the structural adjustment
programme (SAP), a policy imposed by the Washington Consensus (WC) and adopted by IB
Babangida’s dictatorship from 1985-1993 (see, Ingwe, Ikeji & Ojong, 2010; Ekpo & Umoh, no
year). This was indicated by increases in manufactured exports (textiles, beer and stout, cocoa
butter, plastic products, processed timber, tyres, bottled water, soap and detergents as well as
iron rods) during the period mentioned. Ruefully, some of these products disappeared from the
export list afterwards due to deterioration of the manufacturing environment such as sharp
decline in public electricity supply.
115
Table 11: Contributions by various Sectors to GDP
Source: Sanusi, 2011 citing National Bureau of Statistics
From the table above, it is to be noted that the industrial sector contributed 11.3 percent
to Nigeria’s GDP in the decade 1960-1970. It then increased to 29.1 percent in the decade 1971-
1980, a further increase to 41 percent in the decade 1982-1990 before dropping to 38.6 percent in
the decade 1991-2000 and then slumped to 28.9 percent in the decade 1991-2000 which is our
unit of observation. it could therefore be inferred from this presentation that in spite of the
appreciable increase in FDI inflow into Nigeria under the economic diplomacy of the Obasanjo
administration, Nigeria’s industrial growth actually recorded a decline in the period under study.
Ingwe observed in respect of the table above that change in FDI inflow consisted of
increase by 727.31 per cent during the decade coinciding with the administration of the industrial
development income tax relief (i.e. 1971-1980) and also by 52.20 per cent during the following
decade 1981-1990. He noted that by virtue of the FDI inflow’s stagnation during the subsequent
decade, it was unchanged between 1991 and 2000 before rising by 28.64 percent between 2001
and 2006. According to him, this suggests that the industrial development income tax legislation
largely accounted for the sharp increase in FDI inflow into Nigeria in the 1970s. He nonetheless
116
acknowledged the contributions of other factors like the historical fact that the 1970s (1971-
1980) coincides with the immediate post-Nigeria’s civil war era.
The foreign direct investment has increased in the past twenty years to become the most
common type of capital flow. The most important economic reason for attracting FDI at the
beginning of the transformation process of an economy was to facilitate the privatization and
restructuring of the economy key sectors (Heimann, 2003). At present, as the privatization and
reconstruction process nearly comes to an end, the main reason to pursue foreign direct
investment in major sectors of the economy is to enhance productivity or output, encourage
employment, stimulate innovation and technology transfer as well as enhance sustained
manufacturing output growth as witnessed in most developing nations of the world like Nigeria.
The pattern of the FDI that does exist is often skewed towards extractive industries, meaning that
the differential rate of FDI inflow into Sub-Saharan African countries like Nigeria has been
adduced to be due to natural resources, although the size of the local market may also be a
consideration (Morriset 2000; Asiedu, 2002). Nigeria as a country, given her natural resource
base and large market size, qualifies to be a major recipient of FDI in Africa and indeed is one of
the top three leading African countries that consistently received FDI in the past decade.
However, the level of FDI attracted by Nigeria is mediocre compared with the resource base and
potential need (Asiedu, 2003).
In Nigeria, net FDI increased from N38 million in 1960 to N184.3million in 1979
representing 385% increase within two decades and during this period industrial and agricultural
outputs in 1960 stood respectively at N134 million and N1.4 billion, and this further increased to
N15.4 billion and N9.2billion in 1979 (CBN, 2011). These represent 11,392.5% and 557.1%
increases in real sector output between 1960 and 1979. The real sector growth during the periods
117
that marks the first, second and third national development plans era can be attributed in the
growth in foreign capital inflow in the country. However, the emergence of oil boom resulted in
the neglect of the real sectors of the economy as foreign direct investment grew annually by
51.3% and 129.9% in 1980-1989 and 1990-2010 respectively. This significant upward growth in
foreign capital was not reflected in the growth of the real sectors as the industrial sector output
grew at a marginal annual rate of 23.2% and 29.1% in 1980-1989 and 1990-2010 respectively.
Also, real sector output growth stood at 16.4% and 33% during the same periods. These
indicate that influx of foreign capital was beneficial to industrial and agricultural outputs growth
in Nigeria as evidenced in the 1960s and 1970s. Unfortunately, the efforts of most countries in
Africa including Nigeria to attract FDI to the real sectors of the economy such as industrial and
agricultural sector in recent times have been futile. This is in spite of the perceived and obvious
need for FDI in the continent. The development is disturbing, sending very little hope of
economic growth and development for these countries. The consequence is that most of the FDI
inflow into Nigeria has been concentrated in the extractive and service sectors which do not have
direct impact on the nation’s industrialization needs but instead has continued to engender
massive capital flight from Nigeria. A clear illustration of this is the very high return rate of FDI
in Nigeria as shown table 11 above.
Ironically, Nigeria’s president, Dr Goodluck Jonathan had in his response to the famous
letter written to him by former president Olusegun Obasanjo pointed to the high return rate on
FDI as evidence of the sound economic policies of his administration. Ironically, high return rate
on FDI is hardly a measure of a country’s astute economic management. On the country, it
suggests a lax regulation of foreign investment in underdeveloped countries in their quest to
attract foreign capital which they have been persuaded is the only route to their economic
118
development. To elaborate, if high return rate on FDI were a measure of economic management
skills, it is obvious that the more industrialized countries of the world would have done much
better than the developing countries on this count as they have done in other performance
indicators. In point of fact, high return on FDI is actually indicative of global capital plundering
the extractive sectors of these countries where the bulk of such investments are usually
concentrated. High rate of return on FDI is therefore actually an indication of huge capital flight
from the economies of underdeveloped nations.
In this regard, study by Boyce and Ndikumana noted that even though a key constraint to
Sun Saharan Africa’s growth and development is the shortage of financing, at the same time, the
sub-region is a source of large-scale capital flight, with the group of 33 SSA countries covered
by the report losing a total of $814 billion dollars (constant 2010 US$) from 1970 to 2010 which
exceeded the amount of official development aid ($659 billion) and foreign direct investment
($306 billion) received by these countries. Oil-rich countries account for 72 percent of the total
capital flight from the sub-region ($591 billion). The escalation of capital flight over the last
decade coincided with the steady increase in oil prices prior to the global economic crisis. It
further noted that assuming that flight capital has earned (or could have earned) the modest
interest rate measured by the short-term United States Treasury Bill rate, the corresponding
accumulated stock of capital flight from the 33 countries stands at $1.06 trillion in 2010. This far
exceeds the external liabilities of this group of countries of $189 billion (in 2010), making the
region a “net creditor” to the rest of the world which makes the stereotypical view that SSA is
severely indebted and heavily aid-dependent is not fully consistent with the facts.
The report further noted that Capital outflows rose particularly rapidly among major oil-
exporting countries, jumping to a 10-year total of $325 in 2000-10 (43 percent of the total), up
119
from $64 billion in the 1990s and $133 billion in the 1980s (Figure 2). The group of major oil-
exporting countries consists of nine large oil exporters: Angola, Chad, Cameroon, Republic of
Congo, Democratic Republic of Congo, Côte d’Ivoire, Gabon, Nigeria and Sudan. Oil exporters
are predominantly at the top of the list in terms of volume capital flight, led by Nigeria with total
capital flight of $311 billion, Angola with $84 billion, and Côte d’Ivoire with $56 billion.
120
Table 12: Capital Flight by Country, 1970-2010 (countries are ranked by amount of total capital flight)
Source: Boyce and Ndikumana (2012: 9)
121
From the foregoing presentation of data, it can be seen that there was an appreciable
increase in Foreign Direct Inflow into Nigeria in the decade 2001 to 2010 which may be
attributed to the drive for FDI embarked upon by the Obasanjo administration between 1999 and
2007 as a component of the administration’s economic diplomacy. It is however equally of note
that Nigeria’s industrial performance as measured in terms of sectoral contribution to GDP and
manufactured goods as a share of exports declined within the same period. This shows that rather
than act as a catalyst to industrial development, FDI inflow into Nigeria during the period
impeded industrial growth owing to the concentration of FDI in the extractive and service
sectors, the concomitant diversion of domestic capital to those sectors s well as the capital flight
it engendered. On the basis of the preceding presentation of data therefore, we validate the
second hypothesis of this study which states that the inflow of Foreign Direct Investment (FDI)
under the Obasanjo administration impeded domestic industrial capacity development in Nigeria.
122
CHAPTER SIX
SUMMARY, CONCLUSION AND RECOMMENDATIONS
6.1 Summary and Conclusion
This study examined the extent to which the economic diplomacy thrust of the foreign
policy of the Obasanjo administration accorded with Nigeria’s economic development goals
between 1999 and 2007. The study identified two foreign policy goals which formed the major
plank of the economic diplomacy of Obasanjo administration as its unit of analysis. These are the
quest for external debt cancellation and the drive to attract foreign direct investment (FDI).
Concomitantly, it identified two national interest objectives, ostensibly targeted by those foreign
policy goals. These are: the standard of living of Nigerian citizens, and the development of
Nigeria’s industrial/manufacturing sector. Specifically, the study was guided by the following
research questions:
• Did economic diplomacy of the Obasanjo’s administration undermine the living standard
of Nigerians?
• Did the inflow of Foreign Direct Investment (FDI) under the Obasanjo administration
impede domestic industrial capacity development in Nigeria?
Following from these research questions, the study proposed the following hypotheses
which provide tentative answers to the research questions:
• The economic diplomacy of the Obasanjo’s administration undermined the living
standard of Nigerians; and that
• The inflow of Foreign Direct Investment (FDI) under the Obasanjo administration
impeded domestic industrial capacity development in Nigeria.
123
The study was anchored on the power theory of the realist paradigm in international
relations as propounded by Hans J. Morgenthau (1978). Data for the study was collected from
books, journal articles, official documents, and internet sources and were analyzed using content
analysis.
Drawing from data from such sources as the United Nation’s Conference on Trade and
Development (UNCTAD), the National Bureau of Statistics (NBS), the Central bank of Nigeria
(CBN), etc, the study found as follows:
• That the economic diplomacy of the Obasanjo’s administration undermined the
living standard of Nigerians; and
• That the inflow of Foreign Direct Investment (FDI) under the Obasanjo
administration did not enhance domestic industrial capacity development in
Nigeria.
On the strength of these findings therefore, the study concludes that the economic
diplomacy of the Obasanjo administration did not enhance Nigeria’s economic development as
was envisaged by the administration. While the debt cancellation deal relieved Nigeria of heavy
strangulating debt service obligations, it has been rightly argued that it came at great cost
considering the odious nature of those debts. And with respect to the drive for FDI, it has rightly
been noted that though the administration recorded appreciable inflow of FDI, such inflows were
rarely targeted at the industrial productive sector, which constitutes the driving force of modern
economies and as a result, failed to aid the development of the domestic industrial capacity.
124
6.2 Recommendations
Following from the findings, the study recommends that:
• The federal government of Nigeria should work assiduously to invest Nigeria’s oil wealth
into productive ventures that would stimulate economic development rather than continue
to depend on illusive foreign inputs for her development needs;
• Rather than the current practice of sharing of the nation’s oil wealth among the three tiers
of government who generally misappropriate such monies, proceeds from the nation’s
natural resources should be geared towards the development of the nation’s technological
and industrial capacity through appropriate educational and research and development (R
and D) programming;
• Rather than canvass for foreign investment which is usually attracted at concessionary
terms, the government should invest more in the provision of infrastructural facilities as
this would create the right kind of environment which would attract foreign capital
investment without having to make too many concessions while at the same time
stimulating domestic productive forces.
125
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