Introduction
In the 1960s/1970s, a low rate of domestic savings was argued to be one of the fundamental factors that was inhibiting real capital accumulation – along with economic development – in developing countries such as Nigeria (Lewis 1955; Rostow 1960). This idea that it was the ‘financing gap’ – presumed prevalent in most developing countries – that was mitigating economic development in the region significantly influenced the macroeconomic policies pursued by the governments of most of the Third World countries at that time: most placed heavy emphasis on capital mobilisation as a result of this consensus. This was also reflected in the aggressive foreign borrowings by many of these governments, and the massive use of subsidies, interest ceilings and credit rationing which were aimed at filling the ‘financing gap’.
However, despite these concerted efforts to develop the underdeveloped economies, many still lagged behind. So in the 1970s, given the failure of many economies in the Third world countries to catch up with the Western world, attention subsequently turned to economic liberalism. Government intervention in the economic process was subsequently blamed for the sluggish performance of many of the developing economies. Gurley and Shaw (1967) argued that subsidisation, which many governments in developing countries were adopting to boost capital accumulation, was the reason why most of them ran very low surpluses which caused there to be low government savings mobilised in the economy. McKinnon, on the other hand, argued that government intervention creates fragmentation in the economy, and causes the misallocation of resources (McKinnon 1973).
The alternative, widely advocated by many of these economists, and subsequently supported by a few international policy institutions (IMF and the World Bank), was the deregulation and liberalisation of the financial system. McKinnon and Shaw posited that deregulation of the rate of interest would allow it to effectively perform its equilibrating function of matching savings with borrowings. They argued that higher rates of interest stimulate more savings, which the financial institutions are then able to mobilise and subsequently allocate to real production processes (McKinnon 1973; Shaw 1973).
Also, it was asserted that higher rates of interest screen out unprofitable investments and thus encourage only viable investment prospects to be pursued. Many argued that if interest rates were intentionally capped at a low rate, excess demand for the scarce funds would have a crowding-out effect, which might actually cause the most efficient investment opportunities to be missed (McKinnon 1973; Shaw 1973; Fry 1997). Similarly, McKinnon and Shaw posited that the liberalisation of capital accounts will induce the inflow of capital from developed economies, which will help plug the ‘financing gap’ in developing countries.
It was based on these, and other numerous arguments1 put forward in favour of the free market, that most governments in developing countries, such as in Nigeria, subsequently embarked on the deregulation and liberalisation of their economies in the 1980s/1990s. In 1986, Nigeria implemented several of the recommended neoliberal reforms, which were embedded as policy prescriptions in the IMF/World Bank Structural Adjustment Programmes. The interest rate ceiling formerly subscribed to by the government was repealed and the tight control on the country's capital account was also deregulated. These two major policies precipitated huge increases in both the rate of interest charged by domestic financial institutions, and the amount of capital inflows into the economy.
The main purpose of this article is to ascertain whether these neoliberal policies – capital account and interest rate deregulation – have succeeded in inducing growth in real investment, for which they were originally intended.
The choice of Nigeria for this study is because of the country's strategic importance to the stability and development of sub-Saharan Africa. Nigeria is the source of stability in the region, having led a multilateral peacekeeping force to Liberia and Sierra Leone, and continuing its peacekeeping role in the sub-region. On the economic front, Nigeria accounts for over 50% of the region's national output (based on 2013 World Bank data). In essence, a vibrant and growing Nigerian economy will certainly act as a strong growth pole not only for the region but for Africa as whole.
To achieve the aim of this article, this study will be synthesising critical economic propositions with contemporary empirical data from Nigeria. The rest of the discussion is structured as follows. In the next section, this study will be delineating the emergence of neoliberalism in the Nigerian socio-economic and political conscience, and its contradictions. In the third section, an attempt will be made to explain the development and effects of financialisation on the Nigerian real economy. Conclusions will be provided in the final section.
Neoliberalism as the new orthodoxy
Since the late 1970s, several neoliberal reform policies have been aggressively implemented by many policymakers. Margaret Thatcher, during her reign as the UK prime minister in the 1980s, privatised several public institutions and deregulated the country's financial system. In the US, during the same period, Ronald Reagan pursued similar neoliberal reforms. He deregulated the financial sector, and extended the deregulation of the transport industry to the airline industry. In most developing countries, economic and financial deregulation and liberalisation were achieved via the Structural Adjustment Programmes (SAP) advocated by the IMF and the World Bank.
Two of the main neoliberal reforms adopted in Nigeria in the mid 1980s were the removal of interest rate ceilings and the deregulation of the country's capital account. Proponents of financial system deregulation and liberalisation, McKinnon (1973) and Shaw (1973) in particular, argued that government interventions in the financial system, through interest rate regulation and the administrative allocation of loanable funds, repress the financial system and cause there to be disequilibrium in its allocation of funds to potential investment opportunities. These scholars also posited that removing capital account controls will allow capital to flow from developed economies into the ‘capital-starved’ developing economies.
Prior to the implementation of the SAP in Nigeria in 1986, the monetary policy framework adopted by the Central Bank of Nigeria (CBN) placed emphasis on direct monetary controls (CBN 2011). The policies adopted under these frameworks relied heavily on sectoral credit allocation, credit ceilings, cash reserve requirements and administrative fixing of interest and exchange rates, as well as the imposition of special deposits (CBN 2011). This regulated approach to monetary policy lasted from 1959 to 1985, with some exceptions.
In line with the financial deregulation and liberalisation policies embodied in the SAP, there was a paradigm shift from the previously ‘repressive’ direct monetary policy control method to a ‘liberal’ indirect approach, anchored on the use of market instruments in monetary policies. The two main indirect approaches to monetary policy management adopted by the CBN were the exchange control liberalisation (including the deregulation of capital accounts), and the adoption of relevant pricing policies in all sectors of the economy (that is, the deregulation of interest ceilings).
The adoption of these neoliberal reforms in Nigeria arose mainly because of the growing deterioration of the country's macro-economy. In the wake of the declining petroleum prices in the early 1980s (following the global economic stagnation that emerged in the late 1970s in most Western economies), Nigeria's balance of payments deteriorated hugely, owing largely to its growing dependence on oil revenue (which plummeted owing to the decline in global demand that induced the oil price crash), and the relative decline of the agricultural sector, which had been the mainstay of the economy. During the periods from the collapse of the dollar-gold system in 1971 to the early 1980s, the exchange rate policy adopted by the policy makers was mainly geared towards the preservation of the value of the external reserves, the equilibration of the balance of payments and the maintenance of a stable, albeit high, exchange rate – with the latter objective based mainly on external and internal macroeconomic intents (Obadan 2006): for instance, during the 1970s, Nigerian policy makers placed emphasis on development projects, mainly through the encouragement of domestic industrialisation. They adopted the import substitution industrialisation growth strategy and this policy encouraged heavy reliance on the importation of industrial inputs and the discouragement of importation of finished industrial goods. Thus throughout the period of the 1970s, with a few exceptions, Nigeria's nominal exchange rate was stable or appreciated – owing first to the increasing oil revenue and, second, to the deliberate exchange rate policy which was aimed at helping domestic industrialists source inputs cheaply from abroad. The exchange rate policy of maintaining the appreciation of the naira, however, retarded growth of non-oil exports. This latter outcome was primarily due to the effect of an overvalued exchange rate, which invariably causes a country's outputs to be relatively expensive in the international market compared with the same products from other countries. As a result, there was an inevitable deterioration of the agricultural sector, which had been the mainstay of the economy: for instance, the annual production of the major cash crops such as cocoa, rubber, cotton and groundnut, which have been Nigeria's major export products, fell by 42, 29, 65 and 64% respectively between 1970 and 1985.
So, with the deterioration of the real economy (the agricultural and also the commercial sectors), Nigeria's income was thus exposed to the impulses of the oil price in the world market. With the oil price crash in the early 1980s, Nigeria's domestic economy unsurprisingly experienced severe setbacks. The country suffered huge balance of payments problems (Figure 1), a significant depletion of its external reserves (given that it now had to repay its debts by dipping into its reserves – Figure 2) and a burgeoning debt burden (Figures 3 and 4). This latter aspect – of burgeoning debt load – was largely due to the interest rate increases in the early 1980s, which occurred as a result of the aggressive monetary policy pursued by Paul Volcker, the then US Federal Reserve Chairman: in the wake of the rising inflation in the US in the 1970s, Volcker hiked the rate of interest. Given that Nigeria was borrowing heavily from abroad, the interest rate hike in the US inadvertently increased its debt load. From 1975 to 1980 for instance, Nigeria's external debt averaged just below 10% of its gross national income (GNI). However, after the unprecedented increase in the rate of interest in the US in the early 1980s, Nigeria's external debt stock spiralled to over 60% of its GNI by 1984.
Current account balance (US\(billions). http://www.imf.org/external/pubs/ft/weo/2014/01/weodata/index.aspx.
Source: author's elaboration based on data from the 2014 IMF World Economic Outlook Database (IMF 2014).
Total reserves minus gold (from 1980–1985, US\) billions). http://databank.worldbank.org/data/views/variableSelection/selectvariables.aspx?source=world-development-indicators#c_n.
Source: author's elaboration based on data from the World Bank's Development Indicators database (World Bank 2013).
External debt stocks (% of GNI). http://databank.worldbank.org/data/views/variableSelection/selectvariables.aspx?source=world-development-indicators#c_n.
Source: author's elaboration based on data from the World Bank's Development Indicators database (World Bank 2013).
Interest arrears (US\(millions).
Source: author's elaboration based on data from the World Bank's Development Indicators database, available at http://databank.worldbank.org/data/views/variableSelection/selectvariables.aspx?source=world-development-indicators#c_n. The interest arrears, private creditors for 1980 are in thousands, hence zero in the figure.
It was at the back of these deteriorating economic circumstances that the policy makers in the country heeded the World Bank's advice to deregulate and liberalise some of its sectors and also to devalue its currency.
The 1983 report by the World Bank on the plan of action for sub-Saharan Africa projected the neoliberal views of a minimalist state and the pre-eminent role of the private sector in Africa's development (World Bank 1983). The report identified domestic policy factors as the causes of the economic deterioration in sub-Saharan Africa. It blamed domestic policy factors, especially the policy of maintaining an overvalued exchange rate, as the main cause of the economic deterioration in sub-Saharan Africa. It singled out the conscious efforts by the government to maintain an overvalued exchange rate as triggering the decline in the agricultural sector in the region.
Also, heavily protected manufacturing industries and excessive state intervention were singled out as the ‘bad’ policies most responsible for the African crisis. Substantial currency devaluations, dismantling of industrial protection, price incentives for agricultural production and exports, and substitution of private for public enterprise – not just in industry but also in the provision of social services – were singled out as the contrasting ‘good’ policies that would rescue sub-Saharan Africa from its woes (Ibid.). The proposed Structural Adjustment reforms, the World Bank argued, would enhance efficiency, achieve equity and expand the stock of physical and human capital in the region.
In 1986, during the military regime of General Ibrahim Badamosi Babangida, the Nigerian government finally negotiated a standby agreement with IMF and subsequently implemented the Structural Adjustment Programme. The core sets of policy measures in the programme included:
The mobilisation of resources, which could be achieved through fiscal and financial reforms.
The improved performance of the public sector, which could be achieved through the privatisation of public sector companies, reform of the civil service and improvement in the institutions which support the public sector.
Trade liberalisations, such as removal and/or reductions of restrictions (quotas and tariffs) and the promotion of exports (through currency devaluation) and encouragement of foreign direct investment.
So in line with the deregulation and liberalisation policy prescriptions embodied in the SAP, there was thus a policy shift in Nigeria from the ‘interventionist’ direct monetary control methods to a ‘liberal’ indirect approach anchored on the use of market instruments in monetary policies. The interest rates for lending and deposits were deregulated and market-determined price-setting was permitted on inter-bank lending. Similarly, the foreign exchange control was deregulated. The free-market exchange rate strategy was adopted and the exchange rate policy objectives were pursued within the institutional framework of the tiered foreign exchange market system.
Contradictions of the neoliberal model
Despite all the neoliberal strategies adopted since the mid 1980s to attenuate the economic deterioration in Nigeria, the real sectors have shown little to no signs of growing, especially relative to their pre-neoliberal era levels. The results from the neoliberal regime have been mixed, with much of them being appalling, judging from the various current indicators of the country's economic performances since 1986. For instance, Nigeria's economy is still currently under-diversified – it is still heavily dependent on the oil sector, which presently contributes around 90% of the country's export revenues, 75% of the government's revenues and over 45% of its gross domestic product (GDP).
All major productive sectors have also shrunk considerably since the 1980s. From 1960 to 1984 for instance, the manufacturing2 output averaged around 7.3% of total GDP. The manufacturing outputs from 1985 onwards have not reached the average output witnessed in the pre-SAP epoch. In fact, the manufacturing output as a percentage of total GDP declined to an abysmal 1.6% in 2011. The agricultural sector, which provides employment to over half of the country's workforce, has also declined. Interestingly, the savings rate, which was argued would be increased if the financial system was deregulated, has stagnated over the years (see Figure 5). The various development indicators in the country have also recorded disappointing results. For example, the rate of unemployment, which was 11.9% in 2005, has since increased to over 23.9% (as of 2011) and the per capita income, which is currently about \)1071,3 is effectively below its level at the time of independence in real terms. Equally disturbing are the country's social indicators, which have slipped to well below the average for developing countries, with the worst being life expectancy at birth of only 52.3 years (compared with 59 for poor economies) and the under-five mortality rate as high as 143 per 1000 live births (compared with the average for poor economies, which is around 100 per 1000 live births).
Ratio of agricultural output, other manufacturing output and national savings to GDP.
Source: author's elaboration with data from the CBN's 2011 statistical bulletin.
The economic capacity is still highly under-utilised and uncompetitive. Nigeria is not only underdeveloped, it also experiences the worst forms of under-utilisation of both its human and industrial capacity: the manufacturing capacity utilisation has continually been low (fluctuating at around 30–55% of the potential capacity from the 1990s). Poverty is becoming deep, and pervasive, with about 68% of the population now living below the poverty line. Income distribution is skewed in the country: Nigeria is one of the most unequal societies in the world, with a Gini coefficient of 48.8% (the income share held by the highest 20% of the population is around 54% of the national income with the majority of the population [over 60%] holding a share of less than 20% of the national income).
In sum, it could be argued that the neoliberal strategies for growth have not been able to achieve, to a large extent, the desired impact for which they were intended, which was to induce economic development. In fact, one could argue, without fear of contradiction, that there have even been traces of further underdevelopment in the country's real economy since the implementation of the neoliberal Structural Adjustment policies in the mid 1980s.
Financialisation and subordinate financialisation in Nigeria
Critical economic theory posits that the capitalist, when faced with a shortage of investment opportunities, often channels his or her excess capital into financial speculations – i.e. that accumulation often proceeds from M-M1 (money capital begetting expanded money capital) instead of the usual M-C-M1 (money capital begetting commodities which begets expanded money capital) when there seems to be no profitable proposition in the real economy.
This natural oscillation, as Arrighi (1994) explained, reflects the alternation between periods of material expansion (M-C-M1) characterised by profit making by real production processes, and phases of financial expansion (M-M1) characterised by low profit making by real production processes. In phases of material expansion (i.e. industrial expansion), Arrighi remarked that money capital sets in motion an increasing mass of commodities (raw materials and labour [i.e. the ‘C’ in the accumulation cycle]) in production, whereas in phases of financial expansion an increasing mass of money capital sets itself free from its commodity form and accumulation proceeds mainly through financial deals (i.e. from M-M1).
In view of this, the explosion of financial activities and the rise to hegemony of the financial sector in the economy – what is termed financialisation – could be seen to be the result of the decline of profitable propositions in the real sectors. Furthermore, the sudden explosion in financial activities in the country could be argued to have been precipitated by the abolition of import licensing and the removal of subsidies, factors that contributed to the lowering of the possibility of capitalist enterprises in the country earning sufficient rates of profit from their productive processes (given that trade liberalisation inevitably exposed these nascent processes to the ‘perennial gale of creative destruction’4 inherent in the global capitalist system). The adoption of a floating exchange rate, on the other hand, opened a new opportunity for financial speculation. Overall, these neoliberal policies could be argued to have hastened the natural tendency of capitalism – i.e. the oscillation between M-C-M1 and M-M1 – in Nigeria.
To be sure, prior to these neoliberal reforms, the main sources of income in Nigeria were agriculture and commercial (wholesale and retail) trading. The outputs from these two sectors were averaging around 68% of total GDP from 1960 to 1970, while the outputs from the industry sector, which includes the oil and natural resources industries, and also the manufacturing industries, averaged 11% of total GDP in the same period. The outputs from the services sector, which includes the financial, communication and transport industries, averaged 15% of total GDP output in the same period. However during the periods of import substitution industrialisation, especially in the 1970s, the federal government actively intervened in the product market. It subsidised commodities for the domestic industries and regulated imports through the issue of licences, quotas and tariffs. As a consequence, there were declines in commercial activities and even in agricultural activities as resources were channelled to industrialisation. The oil windfall in the 1970s (with the oil embargo by OPEC in the early 1970s, the prices of oil doubled) further eroded the attractiveness of agricultural and commercial activities. The output from these sectors declined by 34% from 1971 to 1980 while the outputs from the industry sector increased from an average of 11% to over 30% of total GDP in the same period. From 1981 to 1985, the outputs from the industry sector were contributing almost an average of 42% to the total GDP. The eventual withdrawal of commodity subsidisation and import quotas and tariffs radically curtailed access to some of these5 sources of accumulation in the economy.
In contrast, while some of these leading sources of capital accumulation were in decline during the periods of neoliberal reforms, other sources for accumulation were emerging. The compensation for these declining fortunes in real economic activities emerged through opportunities for arbitraging, especially in the liberalised multi-tiered foreign exchange market. The prospective huge gains that could be garnered from currency trading and financing deepened the accelerated flight of capital (both human and physical) from the already weakened real sectors into financial activities. Most of the newly formed financial institutions, from the liberalisation exercise, were mainly focused on exchange rate trading and financing, speculation and fraud rather than conventional intermediation.6 The former governor of CBN, Professor Chukwuma Charles Soludo, once noted that some of the Nigerian banks were not even engaged in the strict banking business of intermediation but were rather engaged in the trading of foreign exchange, government treasury bills, and sometimes in direct importation of goods through private phoney companies (Soludo 2004). These financial institutions accumulated large gains by obtaining foreign exchange at auction prices and reselling it to end users or other market operators at higher prices (see Table 1).
| Year | WDAS/RDASa,b | BDCa,b | Premium (%)a,c |
|---|---|---|---|
| 1991–1994 | 17.87 | 32.81 | 73.75 |
| 1995–1998 | 22 | 85.58 | 289.00 |
| 1999–2002 | 106.93 | 120.6375 | 12.52 |
| 2003–2006 | 130.915 | 140.625 | 7.43 |
Note: Because the ‘black market’ rates are not recorded, these figures were not included in this calculation. However, the financial institutions and even the official BDC that buy at auction prices resell at higher rates in black markets. The premiums in the black market are often as high as 500%.
Source: figures are from the Central Bank of Nigeria statistical database and the calculations were made by the author.
aFigures are in averages.
bWDAS/RDAS = Weighted Dutch Auction System/Real Dutch Auction System.
cBDC = Bureaux de Change.
Similarly, most of these financial institutions were engaged in ‘round-tripping’ of funds. They took advantage of interest rate differentials and laundered money from low interest sources to the very lucrative money market. The conventional practice then was sourcing cheap capital from abroad and from government deposits, and using these funds for foreign exchange trading. During those periods as well, the public sector was also borrowing heavily from these banks (see Table 2). Overall, there was little to no significant allocation to the private sector.
| Year | Growth of credit to the economy | Growth of credit to the private sector | Growth of credit to the public sector |
|---|---|---|---|
| 1987 | 27.4 | 46.7 | 10.3 |
| 1988 | 22.2 | 16.9 | 28.4 |
| 1989a | −14.1 | 3.9 | −33.5 |
| 1990 | 17.1 | 18.4 | 14.9 |
| 1991 | 45.3 | 23.7 | 82.9 |
| 1992 | 65 | 4 | 136.7 |
| 1993 | 74.7 | 19.7 | 103.2 |
Source: author's elaboration based on CBN's Annual Reports, various issues.
aThe reversal in the credit allocated to the economy (both to the public and the private sectors) in 1989 was mainly caused by the withdrawal of public sector deposits from banks.
In general, the growth of financial activity in Nigeria after the neoliberal financial reforms of deregulation and liberalisation was, to a very large extent, propelled by foreign exchange speculation and interest rate arbitraging, and in some cases plain fraud. There existed weak linkages between the activities of these financial institutions and real production. By the mid 1990s, the gross domestic investment in Nigeria had declined to below its levels in the early 1980s: from the mid 1980s until 2012, the rate of gross investment in Nigeria had stagnated or risen at a sluggish proportion, while the rate of growth of financial assets had risen exponentially (Figure 6).
Investment and financial assets ratios (1981–2012).
Source: figures are from the CBN database and IMF World Economic Outlook Database (2014). Total financial assets include assets of commercial banks, finance houses, primary mortgage and microfinance institutions.
What is clear now is that deregulation of the financial sector and the liberalisation of international capital flows, instead of inducing real capital accumulation, precipitated increased financial speculation.
In turn, increased financialisation is seen to be at the root of the growing deterioration of economies. It is seen to be responsible for the widening of income inequality (Dumenil and Levy 2005) and the continual misallocation of resources in the economy (Tabb 2013).
Broadly defined, financialisation is a process whereby financial institutions and markets are given greater influence over economic policy both at national and international levels (Palley 2007). Krippner (2005) defined it as ‘a pattern of accumulation in which profits accrue primarily through financial channels rather than through trade and commodity production’ (173). According to Epstein (2005), financialisation means the increasing role of financial motives, financial markets, financial actors and financial institutions in the operation of domestic and international economies.
Evidently, the falling rate of profit accruable to real production processes in Nigeria, to a large extent, caused there to be a massive amount of capital sitting idle in the vaults of many financial institutions. The collapse of the Bretton Woods Treaty inadvertently opened a new channel of accumulation, the trading of foreign exchange. The subsequent liberalisation of the financial system in the late 1970s and early 1980s subsequently occasioned the emergence of shadow financial institutions and advanced financial instruments, which created further channels of fictitious profiteering that was separate from real production.
As Table 3 and Figure 7 clearly show, the capital inflows into Nigeria have been mainly into the financial sector and for portfolio investment. Recent data from the Nigerian Stock Exchange also show that the top traded equities (i.e. the most vibrant firms in the country) belong to the financial sector. Overall, it is clear that financial actors, institutions, markets and motives have gained an increasing role in the operation of Nigeria's domestic economy. That is, the Nigerian economy has been financialised.
Capital importation by type of investment in Nigeria (US\(millions). http://statistics.cbn.gov.ng/cbn-onlinestats/.
Source: author's elaboration based on data from CBN 2014 statistical database.
| Year | Agric. | % of total | Production/manuf. | % of total | Oil & gas | % of total | Finance | % of total | Totala |
|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2.50 | 0.31% | 46.87 | 5.86% | 12.62 | 1.58% | 590.07 | 73.80% | 799.60 |
| 2008 | 0.43 | 0.05% | 42.01 | 4.43% | 53.44 | 5.64% | 737.81 | 77.86% | 947.61 |
| 2009 | 0.30 | 0.05% | 29.98 | 5.37% | 11.44 | 2.05% | 418.58 | 74.95% | 558.50 |
| 2010 | 0.48 | 0.09% | 71.18 | 14.00% | 8.13 | 1.60% | 353.75 | 69.59% | 508.33 |
| 2011 | 1.78 | 0.27% | 46.80 | 7.10% | 1.91 | 0.29% | 550.69 | 83.61% | 658.65 |
| 2012 | 6.39 | 0.45% | 45.76 | 3.25% | 13.06 | 0.93% | 1212.4 | 86.21% | 1406.32 |
| 2013 | 9.15 | 0.48% | 32.61 | 1.70% | 11.78 | 0.61% | 1683.17 | 87.67% | 1919.92 |
Source: CBN statistical database.
aIncludes also the flows to other businesses (such as trading, hotels etc.).
On the contrary, however, the fortunes of most of the real capitalist enterprises, together with those of the large working class, have tended to decline. This is because of the increases in the rate of interest which massive inflows of liquid capital tend to induce. The monetary authority (the CBN) is often forced to hold the rate of interest at a relatively high level in order to curb the tendency of the rate of inflation to rise (following the massive inflow of liquid capital into the country). However, this tends to make the cost of capital relatively high for real investors. So the increased portfolio inflows induce an environment which is not conducive to the accumulation of real capital.
On the other hand, following the lucid exposition by Lapavitsas (2013), the deregulation of the capital account control is also inadvertently causing a massive outflow of potential capital from Nigeria. For instance, while the rate of investment in Nigeria has stagnated, capital has been channelled to accumulation of financial assets. Most capital inflows into the country have been into financial activities, with a stagnant or declining flow to the real sectors (Table 3). First, this trend is in huge contrast with the neoliberal assertion that contends that increased flows of capital from liberalised financial markets will actually lead to growth in real capital accumulation. The huge inflows into the financial sectors have had little to no effect on real investment in Nigeria (see Figure 6).
These increases in the accumulation of financial assets (particularly of portfolio assets, see Figure 7) merely occasion increases in stock market capitalisation: the ratio of market capitalisation to real GDP has been on the increase since the globalisation of Nigeria's stock market in the 1990s. From 1990 to 2000 the ratio fluctuated at around 59% of real GDP. From 2000 to 2011, the ratio had skyrocketed to over 790% of real GDP. The ratio peaked at a tremendous height of 2096% of GDP in the heat of the financial bubble in 2007. These increased activities in the financial markets and the increased inflows of liquid capital have certainly done little to influence relative increases in other sectors of the economy, given the decline and stagnation in these other sectors.
Second, and more crucially, what these massive liquid inflows are inadvertently causing is the outflow of potential capital from the economy. The huge capital inflows into Nigeria, as we have seen (Figure 7), have been mainly into financial activities and a large proportion of these inflows are borrowings by the domestic financial institutions.7 While these domestic institutions are borrowing from foreign investors, the Central Bank of Nigeria is holding a certain proportion of foreign reserve relative to these capital inflows. First, as a form of insurance against flow reversals which could undermine the country's currency, and second, because of IMF's requirement for countries to hold, in the form of foreign reserves, a certain proportion of the inflows into a country's economy. Owing to these reasons, the monetary authority goes on to accumulate foreign reserves. Most often, these foreign reserves (which are mostly in dollars) are not stored by the monetary authority, in a secured vault somewhere. Rather, a large proportion is often expended on securities issued by foreign governments (particularly the US).
As a consequence, while the domestic financial institutions borrow at market rates of interest in the international markets,8 the Nigerian monetary authority proceeds to ‘insure’ these private debts by advancing an official loan to the US (through the purchase of US Treasury securities) at a much lower official US interest rate.9 In Nigeria, an average of 17.21% of total GNI was held as foreign reserve from 2008 to 2012. Part of these funds was used subsequently to pay a form of informal ‘tribute’ to the US. In 2011 and 2012 alone, an average of 2.26% of the total foreign reserve of African oil exporters,10 amounting to over $7.6 billion per year, were held as US Treasury securities (see Table 4).
| Year | Value of short- and long-term Treasury securities held by African oil exporters (US\(millions) | Percentage changea |
|---|---|---|
| 2008 | 4308.00 | 170 |
| 2009 | 4396.00 | 175 |
| 2010 | 6032.00 | 277 |
| 2011 | 7642.00 | 378 |
| 2012 | 7758.00 | 385 |
| 2013 | 8222.00 | 415 |
aThe percentage change is based on the 2007 figure as 100. Source: US Department of the Treasury.
Overall, this circular flow between the core and the periphery embodies a significant social cost to the peripheries. This derives from the net interest accruals from these international transactions. While Nigerian firms borrow at the market rate of around 7%, the monetary authority ‘insures’ these borrowings by lending to the US at the abysmal rate of around 0.15%–2.5%. On average, potentially around 4.5%–6.85% of interest earnings are lost. The cost of the potential capital that is lost through this subordinate financialisation has been posited to be around 2% of the developing country's GNI (Lapavitsas 2013). This certainly represents a significant cost, and a drag on the development of most poor economies such as Nigeria.
Conclusion
The neoliberal protagonists, such as McKinnon and Shaw, asserted that the deregulation of interest rates and the liberalisation of the financial sectors will allow for efficient pricing of capital. They argued that higher rates of interest stimulate more savings, which can then be subsequently allocated to real productive processes. They also contended that higher rates of interest screen out unprofitable investments, thus allowing only viable prospects to be pursued.
However, it was shown in this study, with empirical evidence from Nigeria, that the neoliberal strategies have had relatively little to no significant impact on economic development in the country. Rather, since the mid 1980s, the contribution of the manufacturing sector to overall GDP has been declining and the rate of unemployment has been on the increase. Also, there has been a steady decline of the agricultural sector, and a stagnation in national savings levels.
It was contended that the falling rate of profit attributable to real production processes inherently causes capital to be channelled to the accumulation of financial assets that yield potentially higher profits, instead of being directed to real accumulation. This gravitational shift in accumulation, termed financialisation, was also noted to be contributing to further reductions in the rate of profit attributable to real capital accumulation via increases in the rate of interest that it often inadvertently precipitates.
Similarly, contrary to the neoliberal assertion that capital account liberalisation will induce capital flows from the core to peripheries, and as such induce real capital accumulation in peripheries with a shortage of capital, potential capital now flows from the peripheries to the core. Foreign reserve accumulation, conventionally held to mitigate the adverse effect of flow reversals, is now expended on US Treasury securities. While the private institutions in the periphery countries borrow at often high market rates of interest from the core, the reserve currencies accumulated by the recipient countries’ governments are advanced to the US (through the purchase of Treasury securities) at often very low official US rates of interest. Overall, the peripheries are inadvertently subsidising loans to the core, given the negative net return on interest earned, and are as a result worse off in the cycle of international flows.
In sum, for Nigeria to develop, it needs to address the negative influences of financialisation in the country. Second, and more crucially, it needs to contain the outflow of potential capital from the economy, which is currently constituting a drag on the real economy. The foreign reserves being accumulated by the government, and which are often subsequently expended on US Treasury securities, could instead be channelled to more productive activities in the economy. This potential capital, measured to be around 2% of GDP – possibly around \)10.2 billion per year (using the 2013 rebased value which was around $510 billion) – could be put to constructive use in Nigeria. It could be used to rebuild the country's dilapidated infrastructures, which are currently undermining the possibility of real capitalist enterprises in the country to compete favourably in the foreign market.