DEVELOPMENT IN NIGERIA: AN ANALYSIS OF

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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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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-

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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).

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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

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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

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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

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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.

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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

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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

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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

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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

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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

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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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