232 CHAPTER 5 STATES AND MARKETS CASE STUDY 1 Nigeria: A Weak State, Oil, and Corruption • Postcolonial, illegitimate state • State intervention: No local capitalists, state-sanctioned monopolies as part of lSI • Oil, a weak state, and neopatrimonial rule spur corruption • Debt crisis and slow and partial shift to SAPs • Democratic government's recent efforts to reduce debt and corruption Like almost all African countries, Nigeria was a poor, agricultural country with little industry of any kind when it gained independence in 1960. As much as 98 percent of the population worked in agriculture, producing 65 percent of the country's GOP and 70 percent of its exports. And like the governments of other African states, its new government initially attempted to industrialize via lSI. By the mid-1970s, however, oil production and revenue had overwhelmed all other aspects of the economy and made the government dangerously dependent on the global oil market for political and economic survival. The huge influx of oil revenue and the active involvement of the government in the economy helped create a situation ripe for corruption, and Nigeria ultimately became one of the most corrupt societies and governments Colonial and independent Nigerian states used marketing boards to reap profits from exports like cocoa, but they failed to reinvest these profits in productive development. Today oil has replaced cocoa as the country's primary revenue generator, but most Nigerians have benefited little from this wealth. Credit: AP Photo/George Osodi STATES AND MARKETS AROUND THE WORLD -, 19 r- ts nt ly ld ts nt )il 31. 'Ie np- of Its in the world. Corruption, oil dependence, and mismanagement combined to leave average Nigerians gaining virtually nothing from the country's massive oil wealth. Very little development has occurred under either democratic or military governments, and the country's elite have used oil wealth to enrich themselves and maintain their status among their political and economic clients. The origins of Nigeria's economic problems, and the troubled relationship between the state and the market, lay in colonial rule. As was true throughout sub-Saharan Africa, colonial rulers in Nigeria allowed only particular economic opportunities to Africans. In Nigeria, peasant farmers were encouraged to produce food and export crops, and these crops became the backbone of an export economy based on cocoa, cotton, peanuts, and palm oil. Nigerians were not allowed any significant opportunity in industry, and foreign businesses controlled what little industry there was. Africans' sole route to economic advancement under colonial rule was education and employment in the colonial government, and in contrast to the situation in most capitalist economies, government employment became a key source of wealth. At independence, the educated elite was primarily employed in government and had virtually no involvement or expertise in private industry. This elite thus saw an expansion of the government's role in the economy as central both to national development and to their own interests. As we noted earlier, development economists at the time agreed with this approach, arguing that in the absence of an indigenous capitalist class, the state could beneficially intervene to initiate the development process. The earliest manifestation of this model of state intervention in the interests of development came in the agricultural sector with the creation of marketing boards. These were government entities with monopoly control over the domestic and international marketing of key crops. Of particular importance were the marketing boards for export crops such as cocoa and cotton. These boards used their monopoly to buy export crops from Nigerian farmers at low prices and then sell them internationally at much higher prices. The difference between the money spent and the money earned became a key source of government revenue, as it was essentially an unoffiCial but quite substantial tax on farmers. British colonial rulers created this system, and the newly elected independent government continued it. When world prices for key crops were relatively high, the system worked well. When those prices dropped in the late 1960s, however, farmers faced even lower prices, and protests and riots broke out in key agricultural areas. Despite farmers" opposition to this unofficial tax, modernization theorists would argue that as long as the government used the revenue gained from agricultural exports to make productive investments in industry, its actions were justified. However, this money was not distributed or invested in the most effective or efficient way possible. Nigeria's federal system of government, which included four fairly autonomous regional governments in the 1960s, made effective and efficient distribution of revenues very difficult. The bulk of the revenue from the marketing boards went to the regional governments, and each government used the "revenue to build infrastructure and encourage industrialization. In the process, one regional government often duplicated the efforts of another. The marketing .board revenues also became an early source of corruption, further undermining efficient investment. Given the lack of private Nigerian involvement in industry, the government, supported by aid donors and advisors, saw joint government investment with foreign companies as crucial to industrialization. In 1963, private Nigerian investment constituted only 10 percent of large-scale manufacturing, foreign capital controlled 68 percent, and the various governments controlled the remaining 22 percent. By the 1970s, the government had passed laws on "Nigerianization" that required a certain percentage of the investments in key sectors of the economy to come from Nigerian sources, either the government or individual Nigerian investors. Using these 233 marketing boards: Government entities with monopoly control over the domestic and international marketing of key crops; usually found in Africa 234 CHAPTER 5 STATES AND MARKETS laws and revenue from oil reserves, the government rapidly expanded its investment in large-scale industry during the 1970s. Most of the private Nigerian investors were themselves government officials or political leaders, so participation in the government and politics remained the key source of wealth. Until the early 1970s, Nigeria's economic story of taxation of agricultural exports and state-led investment in industry was typical of Africa as a whole. Nigeria, however, possessed large oil reserves. In 1961, money from oil exports constituted less than 8 percent of government revenue; by 1974, that number hit 80 percent. Oil production increased steadily after independence, and in the early 1970s, it became subject to Nigerianization along with the rest of the economy. Since then, Nigerian governments have invested virtually nothing in agriculture, which has declined from being the most important sector of the economy to one that continues to employ many people but produces very little. The country depends almost totally on oil exports for its well-being, but both military and democratically elected leaders have frequently misused oil wealth, and huge variations in world oil prices mean the country is at the mercy of a fickle international market. The biggest economic change came with the quadrupling of world oil prices in 1973. Oil exports went from about 3 percent of the country's total exports at independence to 95 percent in the 1980s and 1990s. This gave the Nigerian government a windfall from which it has yet to recover. The military governments of the 1970s used the oil wealth to invest in large-scale infrastructure projects, borrowing money against future oil revenues to do so. The democratic government elected in 1979 did much the same thing, expanding infrastructure and government employment to purchase political support. When the oil market collapsed in the mid-1980s, the government was unable to pay back its loans and faced bankruptcy. Once again, it became a fairly typical African state, going to the IMF after 1983 to negotiate an SAP. The politically painful reductions in the government's size and activity that the IMF required were more than even the military governments could bear, and the process of instituting neoliberal pOlicies was long and remains incomplete. Certainly, the government has reduced its inVOlvement in industry (other than oil) and cut its size, but it has still only partially liberalized. The central role of the state in the economy prior to 1983 combined with huge oil revenues to create a situation ripe for corruption. Nigeria's worst ruler, Sani Abacha, is rumored to have stolen approximately $2 billion in government oil revenue in just five years while he was in power in the 1990s. By 2000, Transparency International ranked Nigeria as the world's most corrupt country. As in other parts of the postcolonial world, state intervention in the economy in the 1960s and 1970s gave government officials and politicians many opportunities to grease palms and stuff their own pockets. Every law that required government approval for some economic activity created a point at which an official could ask for a bribe. In Africa, the fact that government employment was the chief source of wealth contributed to this process. Ambitious young leaders went into government and politics not just to gain political power and to lead but also to make money. Some analysts argue that Nigerian and other African political cultures encourage corruption. Leaders were long expected to provide for their followers. The colonial government was seen as a source of wealth and resources; it had no other legitimacy in the eyes of the people. A cultural norm arose, then, in which people expected government officials and politiCians to provide something for them. Since democratic legitimacy was weak, and military governments had little legitimacy, patron-client links and the provision of resources became nearly the sole means of maintaining political support. Thus, neopatrimonial forms of rule became the norm. Nigerian leaders took bribes and stole from government coffers both to feather their own nests and to provide resources to their supporters, who would reciprocate by granting political support to the leaders. As we argued in chapter 2, weak state institutions al til rr in tu th pt to Tt st er re wi er ar cn ar gE At gc ou se m( th( er~ co in pa us' elit his re~ be, enl 1.2 17/ COt STATES AND MARKETS AROUND THE WORLD j ::l I) Y I- Ii/ r3., i2 s. !d y. d, 1e lis 3e lW 1e :In lCt ief is. -n~al nd .ge to )V- .nd the se, ent ing vas ttle wiiole IUS, the tole heir heir mtwe ons are both the cause and the effect of corruption. The illegitimacy of the colonial government and the newness of democracy after independence meant that governmental institutions were weak, so people did not value them and were not interested in fighting to preserve them. Corruption, then, was easy to engage in for those who were interested. The more corruption grew, the less legitimacy state institutions had, and a vicious cycle ensued. The democratic government 235 instructive to compare Nigeriawith zation of Petroleum Exporting that replaced military rule in 1999 came to power with promises to reduce corruption. To that end, the new president initiated a series of anticorruption measures, which included the creation of a special agency to investigate and prosecute corruption cases. An initial target was the return of the billions of dollars that Abacha had stolen, some of which the new government was able to get back from various European banks. In subsequent years, several major politicians in the new government also became targets of court cases. For the first time in Nigeria's history, political leaders faced criminal prosecution for stealing the country's wealth. In the run-up to the election in 2007, however, the anticorruption campaign became more politicized. The president used the anticorruption agency to target and eliminate potential opponents of his party and his hand-picked successor. Still, the overall results of the anticorruption campaign have reserves Sources: Organization of Petroleum Exporting Countries, Annual Statistical Bulletin 2009, http://www.opec.org/opec~web/static_files_ projectlmedialdownloads!publications!ASB2009.pdf; World Bank. been positive: Nigeria improved in Transparency International's rankings from a score of 1.2 (dead last) in 2000 to 2.4 (134th out of 178 countries) in 2010. Nigeria remains a very corrupt country, but strides have been made. The new democratic government used its international support to gain financial aid and debt relief from Western donors, but in turn it was required to make substantial progress in moving its economic policies in a neoliberal direction. By 2003, the government was able to convince Western creditors that the economy was moving in a positive direction. In 2004, half of Nigeria's $36 billion debt was forgiven; by 2006, its overall debt had dropped to only $3.5 billion, less than one-tenth of what it had been two years earlier (Gillies 2007,575). The government also brought inflation under control via tight monetary policy, stabilized government spending and the country's currency, and reduced various tariff barriers. Donors responded not only with debt relief but also with a massive increase in aid, from less than $200 million in 2000 to more than $6 billion in 2005. All this combined with rapidly increasing world oil prices to substantially improve Nigeria's global economic position. Given Nigeria's long history of development failure, a much longer period of success is needed to fundamentally change people's 236 CHAPTER 5 STATES AND MARKETS well-being. Economic growth has been relatively strong-around 5 percent in the new millennium -and non-oil sector growth was an impressive 9 percent from 2003 to 2009, indicating the first significant development outside of the oil sector in decades. The global financial crisis affected Nigeria mainly via the oil sector, which continues to dominate the economy. With oil prices holding up generally and increasing in 2010, however, Nigeria has weathered the crisis relatively well; its 2009 growth rate was 5.6 percent. More than 90 percent of Nigerians still live on less than $2 per day, and the level of corruption-though improved-remains a serious concern. Nonetheless, Nigeria's democratic government has started a process of reversing decades of corruption and ineffective development policy, thus at least slightly improving the country's position. I CASE SUMMARY I At least until the last few years, Nigeria has been a case study of development gone wrong. The largest country in Africa and blessed (or cursed) with abundant oil reserves, it remains one of the world's poorest countries. The development models pursuedboth lSI and SAPs-were justified in terms of reigning theories of economic development in their respective eras, but neither led to significant development. Dependence on vacillating oil markets left the government in crisis when oil prices dropped. Weak institutions, political demands, and massive oil wealth when prices were high produced monumental levels of corruption that undermined virtually all development efforts and expanded debt. Neoliberal policies are designed to encourage investment, but they have achieved little success in Nigeria outside the oil sector. In the absence of a strong and coherent set of state institutions and a favorable global economic context, economic blueprints do not produce the expected results, though they are frequently used to justify the politically motivated actions of various leaders. The new millennium has been slightly kinder to Nigeria, however. The new democratic government has somewhat reduced corruption, successfully convinced foreign creditors to forgive debt, and achieved the first real growth outside the oil sector in decades. The global recession has affected the country relatively little because its major connection to the global economy is via the price of oil. Whether this recent and modest success can be translated into lasting gains remains to be seen. cases and rn:o mini cases in this chapter demonstrate the great v around the . d in the relationship between the state and the mar economy. While virtually all c tries now have market economies, states in vene and guide them in different ways, WI different purposes, and to differ effects. And regardless of government polices, vas / different contexts me the market has vastly different effects in wealthy and poor co ries. / The United States has long been th ~el of a free-market economy with limited state intervention, though as we' seen, en here the state has intervened and expanded over the past cent to try to impr economic outcomes and limit negative market effects. ermany's social market nomy represents the common European alter lve. While there are variations fr country to country, most of the weal ler countries of Europe guide and limit t market much more than the lted States does, providing much more generous overnment support t ose not "making it" adequately in the market. Like most c untries that owed in the wake of the first wave of industrialization that took place in e Netherlands, the United Kingdom, and the United States, Germany and Japan also loni pos rea~ eve] sucJ diff wea mal co Wit vers The in tl if tr enc as 0 thei inte poli Wh Eco peo rati will Ger ket gre; free and Loc beli accc aba the the' and eco dist to F int
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