GEG WP 115 The Successes And Failures Of Economic Reform .
The Global Economic Governance ProgrammeUniversity of OxfordThe Successes and Failures of EconomicReform in Nigeria’s Post-Military PoliticalSettlementZainab Usman1AbstractThis paper employs the political settlements framework to address a gap in ourunderstanding of variation in the growth of industries within resource-rich economies. It putsforward the proposition that the political settlement within which specific economic reformsare formulated and implemented accounts for the variation in the growth and decline ofeconomic sectors. As a framework for analysis, the political settlement enables us identify asociety’s sources of instability, which could be horizontal (elite competition), vertical (societalredistribution demands) or external (oil shocks and donor pressures), the pressures theyexert on a ruling elite, and the growth-enhancing or growth-retarding policy responses toaddress these pressures. Focusing on the telecommunications and oil sectors in Nigeria, thepaper finds that, the external pressure operating through oil shocks and fiscal constraints onthe ruling coalition at the end of military rule from 1999 generated growth-orientated policyresponses in non-oil sectors such as telecommunications. Concurrently, the oil sector wasinsulated by successive ruling coalitions from reform, leading to its stagnation and decline.Three causal mechanisms are identified:1. The nature of threats to the ruling elite explain the relative success oftelecommunications liberalisation while the oil sector, insulated from reform,remained an instrument for dispensing patronage.2. The capacity and resources of the ruling coalition in assembling a technocraticeconomic team and selectively empowering a domestic business class had adifferential impact on the telecommunications and oil sectors.3. The inequities in the distribution of benefits: of a growing telecommunications andbroader service economy which responded to reforms, horizontally to a few elitesand vertically to a small labour force heightened elite- and wider societaldistributional pressures on oil rents, which fostered inefficiencies in the oil sector,but also undermined the reforms’ legitimacy.It is hoped that this paper contributes to our understanding of the political underpinnings ofthe on-going economic transformation in sub-Saharan Africa and generally, the mechanismsof variation in the growth and decline of economic sectors in resource-rich countries.The Global Economic Governance Programme is directed by Ngaire Woods and has beenmade possible through the generous support of Old Members of University College. Itsresearch projects are principally funded by the Ford Foundation (New York), the InternationalDevelopment Research Centre (Ottawa), and the MacArthur Foundation (Chicago).1Zainab Usman is completing her DPhil in International Development at the University of Oxford. Thispaper draws extensively from Usman’s doctoral thesis entitled ‘The Political Economy of EconomicDiversification in Nigeria’. Email: Zainab.Usman@qeh.ox.ac.uk. With many thanks to Dr Nemat Bizhan(Oxford-Princeton Global Leaders Fellow) and Jonathan Phillips (Harvard University) for comments onearlier drafts of the paper.Page 1 of 54The Successes and Failures of Economic Reform in Nigeria’s Post-Military Political Settlement – Zainab Usman March 2016 / GEG WP 115
The Global Economic Governance ProgrammeUniversity of OxfordTable of ContentsIntroductionNigeria’s Recent Patterns of GrowthEconomic Policies Targeting GrowthGrowth Drivers: Commodity Boom and ServicesThe Extent of Structural Shifts in GDP, Exports and RevenuePolitical Settlement: A Framework for Analysing the Politics of Africa’sEconomic TransitionUnveiling Nigeria’s Post-Military Political SettlementConstraints for Economic Reform in Nigeria’s Post-Military PoliticalSettlementSuccessful Liberalisation of the Telecommunications SectorStagnation and Decline of the Oil SectorCentralisation of Oil Rents in the StateCompetition by Countervailing Interests for Access to CentralisedOil RentsLeakages, Reform Inertia and Stagnation of the Oil SectorConclusionReferencesPage 2 of 54The Successes and Failures of Economic Reform in Nigeria’s Post-Military Political Settlement – Zainab Usman March 2016 / GEG WP 11535671014172224293031354347
The Global Economic Governance ProgrammeUniversity of OxfordIntroductionLike other resource-rich emerging markets, Nigeria has witnessed rapid growth of a serviceeconomy including telecommunications, financial services and trade since the early 2000s.Like most African economies, this growth has not been accompanied by industrialisation. InNigeria’s case, while oil remains the central source of exports and government revenue, ithas not been the main driver of growth. ‘Resource-curse’ theories which have for longpredicted slow growth and the evisceration of non-oil sectors in oil-rich countries areinsufficient to explain this pattern of economic performance. Similarly, ‘Neopatrimonialism’which attributes the failure of Africa’s economic transformation to the prevalence of informaland clientelistic institutions is unable to explain variation in economic performance amongAfrican countries but also among sectors within a single economy. Large-N cross-casestudies on which ‘ethnic pluralism’ theories are built do not sufficiently explain the precisecausal mechanisms by which ethnic fragmentation affect economic performance.This paper employs the political settlements framework to address these theoretical gaps. Itputs forward the proposition that Nigeria’s political settlement, that is, the underlyinginstitutional framework, within which specific economic reforms were formulated andimplemented accounts for this pattern of economic performance. The political settlement isthe underlying distribution of power in a society negotiated among a society’s elite and othercontending societal groups, and the encapsulation of this power distribution in formalinstitutions. As a framework for analysis, the political settlement approach enables us identifya society’s sources of instability, which could be horizontal (elite competition), vertical(societal redistribution demands) or external (oil shocks and donor pressures), the pressuresthey exert on a ruling coalition at any point in time, and the growth-enhancing or growthretarding policy responses to address these pressures.Drawing on fieldwork in Nigeria, interviews with senior government officials, private sectorexecutives, civil society and western diplomats, economic data, speeches, governmentdocuments, memoirs, reports and secondary sources, I analyse the telecommunications andoil sectors in Nigeria. I find that the external pressure operating through oil shocks and fiscalconstraints on the ruling coalition generates policy responses to focus on non-oil growth. Inthe early 2000s, budgetary pressures during a period of low oil prices and heavy debtservicing were the impetus for growth-enhancing economic reforms in non-oil sectors suchas telecommunications. Concurrently, the oil sector was insulated from reform by successiveruling coalitions leading to its stagnation and decline.I conclude by highlighting the following causal mechanisms. First, the nature of threats to theruling coalition determines what economic sectors are targeted for reform. Since the impetusfor economic reform within the period were the fiscal constraints of dwindling governmentrevenue rather than political constraints of elite competition and threat of social unrest, the oilsector was insulated from reform as it remained an instrument for dispensing patronage bythe ruling elite. Second, the capacity and resources available to the ruling elite had adifferential impact on the telecommunications and oil sectors. The assembly of a technocraticeconomic team, and the selective empowerment of a largely domestic private sector, whichresponded to the stimulus of reform, contributed to successful telecoms liberalisation whilsttranslating into cronyism and predation in the oil sector. Third, the inequities in thedistribution of a benefits: of a growing service economy which responded to reformshorizontally to a few elites and vertically to a small labour force heightened elite- and widerPage 3 of 54The Successes and Failures of Economic Reform in Nigeria’s Post-Military Political Settlement – Zainab Usman March 2016 / GEG WP 115
The Global Economic Governance ProgrammeUniversity of Oxfordsocietal distributional pressures on oil rents, which fostered inefficiencies in the oil sector.Critically, distributional concerns undermined the reforms’ legitimacy among competing elitesand wider society and by implication the long-term effectiveness of new governance systemsand processes. It is hoped that this paper contributes to our understanding of the politicalunderpinnings of the on-going economic transformation in sub-Saharan Africa and generally,the mechanisms of variation in the growth and decline of economic sectors in resource-richcountries.Page 4 of 54The Successes and Failures of Economic Reform in Nigeria’s Post-Military Political Settlement – Zainab Usman March 2016 / GEG WP 115
The Global Economic Governance ProgrammeUniversity of OxfordNigeria’s Recent Patterns of GrowthNigeria’s sustained economic growth over the past decade has no doubt been one of thedrivers of the ‘Africa Rising’ narrative. Along with a number of other rapidly growing Africancountries, since the early 2000s, there was sustained annual economic growth averaging 7%until late 2014 (AfDB et al., 2012; IMF, 2012; Litwack et al., 2013) and 5% from 2010 to 2013(World Bank, 2014). As Figure 1 illustrates, this economic performance offset years ofeconomic stagnation averaging 1.5% from 1983 to 1999. As a confirmation of the upwardtrajectory of growth, in April 2014, Nigeria became Africa’s largest economy, and the 26thlargest economy in the world after a review of baseline GDP figures2.Figure 1: GDP Growth (%) .0198010.0- ‐10.0- ‐20.0Source: World Bank (2015) World Development IndicatorsThere are three features of this contemporary growth that are of interest to this study. Firstly,the performance of the oil and the emerging growth-drivers is linked to economic policies bysuccessive governments within this period. Secondly, growth was initially driven by acommodity boom3 (ECA and AUC, 2013) and increasingly by emerging services sectors(World Bank, 2013) such as information and telecommunications (ICT), trade, banking andfinancial services, entertainment and the informal economy. Thirdly, these specific growthdriving sectors have led to significant structural shifts in the composition of GDP, but not somuch in fiscal revenue and exports. These are analysed in greater detail below.2Rebasing is a statistical upgrade of the base year of national account series (GDP) with a morerecent base year or price structure (NBS 2014a). For the period, 1999 to 2010, data from the prerevision figures will be used, while the revised figures cover five years; 2010 to 2014, because eachseries measures data differently.3Other factors accounting for this growth include rising domestic demand associated with risingincomes and urbanization, increasing public spending, trade and investment ties with emergingeconomies (ECA and AUC, 2013).Page 5 of 54The Successes and Failures of Economic Reform in Nigeria’s Post-Military Political Settlement – Zainab Usman March 2016 / GEG WP 115
The Global Economic Governance ProgrammeUniversity of OxfordEconomic Policies Targeting GrowthSince independence in 1960, successive regimes have sought to ‘diversify’ the economy bycatalysing industrialisation, notably since the first oil boom and bust cycle from 1973 andespecially since the transition to democracy in 1999. Economic diversification has thus beenequated with economic development, evolving parallel to Nigeria’s revenue sources anddevelopment priorities. It means the transformation of the economy away from dependenceon all forms of primary production especially crude oil extraction, but also agriculture andmining, as key revenue and foreign exchange earners, to higher-value productive activitysuch as, manufacturing, resource-based industry and agro-industry.With the return to some form of development planning from 2004 after the StructuralAdjustment Programme (SAP) disruption of the 1980s and 1990s, there was a renewedemphasis on economic diversification as a pivotal policy priority. This is documented in theNigeria Vision 20:2020, the overarching framework 4 for successive governments’development priorities including Olusegun Obasanjo’s National Economic Empowerment andDevelopment Strategy (NEEDS) from 2003 to 2007, Umaru Yar’adua’s Seven-Point Agenda(2007-2010) and Goodluck Jonathan’s Transformation Agenda (2011-2015) (NPC, 2004;2013a; 2013b) 5 . The NV20:2020 outlines the promotion of “ private sector-led non-oilgrowth to build the foundation for economic diversification” as a critical policy priority (NPC,2009:10; 2010:7). The broad policy focus since 1999 are6:§ Macro-economic reform: debt reduction, budget, taxation and public financialmanagement reforms, and counter-cyclical policies such as the Excess CrudeAccount (ECA) and the Sovereign Wealth Fund (SWF).§ Economic Liberalisation and Private Sector Development: deregulation andliberalisation of the telecommunications sector, the downstream petroleum sector andthe power sector; privatisation of state-owned corporations; reforming the bankingsector and reform of trade, tariff and customs regimes.§ Economic Growth: focus on growth drivers such as crude oil, agriculture, naturalresources, industry (including Small and Medium-Scale Enterprises), trade andservices.§ Public-Sector Reform and Transparency: civil service reform, transparency in publicprocurement and anti-corruption, with the establishment of the Nigeria ExtractiveIndustries Transparency Initiative (NEITI), Economic and Financial CrimesCommission (EFCC) and other regulatory bodies.§ Social Development: health, education and the Niger-Delta.Since the early 2000s, the production structure has been increasingly diversifying towards aservice-oriented economy. However, exports and government finances remain dominated by4The Nigeria Vision 20:2020 articulates Nigeria’s economic growth and development strategies for theeleven-year period between 2009 and 2020, and is implemented using a series of medium termnational development plans. It incorporates the key principles and thrusts of the NEEDS (2003-2007),the Seven Point Agenda (2007 – 2011) and presently the Transformation Agenda (2011-2015), withina single, long term strategic planning perspective. See NPC (2009:7)5Unless necessary, this study does not cover the Muhammadu Buhari administration, which, less thana year old at the time of writing, provides insufficient material for comprehensive analysis.6Aggregated from NPC (2004; 2009; 2010; 2013a), Gboyega et al. (2011), and the memoirs of twoformer ministers, Okonjo-Iweala (2012) and El-Rufai (2013).Page 6 of 54The Successes and Failures of Economic Reform in Nigeria’s Post-Military Political Settlement – Zainab Usman March 2016 / GEG WP 115
The Global Economic Governance ProgrammeUniversity of Oxfordoil rents. An assessment of the economic data below provides a better picture of the growthof these sectors, which reforms have targeted, including trade, telecommunications, and thecentrality of the oil sector to the Nigerian economy.Growth Drivers: Commodity Boom and ServicesSince Nigeria’s transition to electoral rule, the main drivers of growth have shifted from oiland agriculture to a range of services. Available data suggests that between 1999 and 2009,the sectors with the fastest average growth rate of at least 10% were the non-oil sectors.These include services (12.2%) especially ICT whose average growth rate was 122%, trade(11.3 %) and agriculture (10.4 %) as Figure 2 below shows.Figure 2: Average Sectoral Growth Rate (%) .39.37.98.111.312.220.85.17.90.0Source: Nigerian National Bureau of Statistics DataWithin this period, the oil and gas sector’s average growth rate was only 1.3% although thismasks its extremely volatile performance. For instance, it grew by 11.1% in 2000, contractedby 5.7% in 2002, growing again by 23.9% in 2003 as global oil prices rose, but generallycontracted afterwards. However, in actual contribution to GDP growth, as Figure 3 shows,from 2000 to 2009, agriculture accounted for an average of 40.4% of GDP growth perannum, services was 22.5%, trade was 21.8% and the oil and gas sector was 8.5%.Page 7 of 54The Successes and Failures of Economic Reform in Nigeria’s Post-Military Political Settlement – Zainab Usman March 2016 / GEG WP 115
The Global Economic Governance ProgrammeUniversity of OxfordFigure 3: Average Sectoral Contribution to GDP Growth (%), 422.521.88.50.44.36.62.1Source: Nigerian National Bureau of Statistics Data (2015)Within this ten-year period, the non-oil sectors were the largest contributors to growth, whilethe oil sector was the fourth largest contributor to growth. These changes in the source andpattern of growth were more evident after the revision of GDP figures in 2014. As Figure 4shows, the fastest growing sectors with an average growth rate of at least 10% between2011 and 2014 are manufacturing (16.9%), solid minerals (16.4%) and building andconstruction (13.1%). Agriculture grew by 4.2%, trade by 5.4% and oil contracted by anaverage of 4.2%.Figure 4: Average Sectoral Growth Rate (%), 10.0- ‐5.0- ‐4.2- ‐10.0Source: Central Bank of Nigeria Statistics Database (2015)Page 8 of 54The Successes and Failures of Economic Reform in Nigeria’s Post-Military Political Settlement – Zainab Usman March 2016 / GEG WP 115
The Global Economic Governance ProgrammeUniversity of OxfordThe change in the sources of growth is even more evident when the sectoral contributions toGDP growth are assessed. As Figure 5 shows, the largest contributors to growth on averagebetween 2011 and 2014 are services (41.9%), manufacturing (24.7%), agriculture (19.8%)and trade (16.7%). Crude oil declined as a share of growth by an average of 11.4%.Figure 5: Average Sectoral Contribution to GDP Growth (%), 90.48.20.70.0- ‐10.0- ‐11.4- ‐20.0Source: CBN Annual Report and Statement of Account 2013 p.363; NBS (2014b) p.363There is an evident shift in the centres of growth, from agriculture and oil to a range ofservices. Although manufacturing is witnessing a recent surge, a further disaggregationshows the food and beverage sub-sector accounts for 50.4% of manufacturing output,especially Sugar at 27.6% (NBS, 2014b:9), and the sector constitutes less than 10% of GDP.The implication of services-driven growth without industrialisation as is evident in Nigeria ispart of an on-going debate7. The oil and agriculture sectors, which were growth drivers in theold series, are declining while trade and services are increasingly accounting for growth.Despite high global oil prices between 2003 and 2014, both the oil sector’s growth rate andshare of GDP have been declining. Consequently, the oil sector contracted between 2012and 2014 compared with growth of 6.8% for the non-oil economy. The emergence ofservices amidst the oil sector’s decline has implications for the broader processes ofstructural change as is discussed below.7Some scholars argue that sub-Saharan African countries would need to industrialise to attain sharedprosperity and broader social change. Others argue that like India, African countries can leap-frog theindustrialisation phase of development to focus on servic
emphasis on economic diversification as a pivotal policy priority. This is documented in the Nigeria Vision 20:2020, the overarching framework4 for successive governments’ development priorities including Olusegun Obasanjo’s National Economic Empowerment and : !!!!!
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