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8/8/2019 Trade Liberlisation 2009 Final 123 Ify

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distortion of some sector. It is assumed that trade

liberalization in the agricultural sector removes trade

distortion both in the international and domestic market and

removes efficient producer thereby making food cheaper and

simultaneously, increasing food security of people worldwide.

The studies reviewed and generally conclude that trade

liberalization has not necessarily benefited developing

countries like Nigeria in ways that it has promised. The WTOAgreement on Agricultural {AOA} was seen as disappointing,

since it further eroded the policy options of developing

countries to safeguard national food security and legitimized

protectionism and form port policies on the port of developed

countries.

Generally, encouraging the exploration of consumer goods

have really distorted the economy for example, the government

of china requires 3 million of tones of cassava from Nigerian

government and they have been able to export 2 million tones

which had affected our own cassava and this is due to the

increase in the price of cassava product as a result of not

having proper planning for exportation.

In the long run importation will outweigh exportation and it

will result into unfavorable balance of payment.


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Furthermore, it distorts our exchange rate, foreign reserves

and also leads to financial instability, foreign debt, build up

and recession.

Above all, government should make sure that there is limited

operation of trade liberalization so as not to bring the

economy back into monoculture. Therefore, before going to

liberalization government should take into account the timing

of such policies, the sequencing of the policy and also thequality of liberalization scope especially when it comes to

liberalization import to avoid dumping of goods and services

from developed countries.

For liberalization to be developed or adopted in the country,

the followings should be taken into consideration:

The strengthening of local industries

The development of human resources The development of technical reserves The development of infrastructures Increase in export capacity Building of infant industries Creation of an export market for product

Nigerian agriculture in recent years have not been able to meet

the food needs of the country. Rather, food production per

capital has been declining. To supplement the low


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domestically produced food supply; there has been a

substantial rise in food imports. The average food imports

have accounted for about 9.15% of total import over the period

between 1960 and 1993. Nigerias quick turn from a low food

importing to a high food bill country with food accounting for

(114.7%) of 1991s total import bill compared with 6.87 in

1970 was a sign of collapse of the agricultural sector. This

situation does not argue well for the Nigerian economy

especially when we realized that there are available resources

that can be exported to increase the local production of

foodstuffs.

2.8 AGRICULTURE AND EXPORT EARNING

The importance of agriculture can also be measured in

terms of its contribution to export earning. The contribution

of agriculture increased in absolute terms over the yearsfrom N282.4 million to 13.852 million in 1995.Its relative

share however, declined from 83.2% to only 1.8 in 1995.

The reason usually adduced from this features are its poor

performance in terms of productivity and the relative

importance of the petroleum sector, it can also be blamed


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on decline in world demand for primary product which

constitute the bulk of Nigeria agricultural export as well as

domestic industrial growth in Nigeria.

Due to the over reliance on foreign goods in Nigeria, the

extent of gaps between export and import is very great and

this has resulted into food insecurity in Nigeria which has

in turn affected our economic situation and also resulted

into balance of payment deficit in the country.

2.9 ISSUES IN TRADE LIBERALIZATION IN DEVELOPING

COUNTRIES

Some general points may be borne in mind when examining

the experience of any one country with respect to trade

liberalization and agriculture, as well as specific mechanismsthat generate links between trade policies and pattern of

incidence of poverty. Better trade performance is often viewed

as an end in itself, but of course, it is only desirable if it leads

to higher and sustained economic growth and poverty

reduction. It has been noted that trade strategies per se are

probably less significant in determining actual trade andgrowth performance, than an overall development strategy on

the part of the government. Of course, any trade strategy

implicitly or explicitly involves some industrial strategy as well

even a completely liberal trade policy which relies upon

unregulated markets to deliver outcomes essentially involves a


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particular approach towards industrial development. Trade

policies are also closely related to resource mobilization and

investment strategies. A systematic approach of the state

towards the economic growth process, that seeks to provide a

stable economic environment and encourage certain forms of

growth, necessarily means a certain attitude towards external

trade as well, which is critical in determining domestic

production structure. The second general point that has

emerged is that in most cases, increased global integration has

been the outcome of the growth and development process,

rather than a precondition for it, as Rodrik {2002} has noted.

As countries achieve higher levels of per capita income and

economic diversification, they are also able to engage the world

economy more, and typically tend to allow greater degrees of

international integration through trade and capital flows. Thismeans that cross-country regression exercises that attempt to

equate degrees of trade openness with rates of growth of

output and investment, are problematic not only because of

the criteria used to measure trade openness, but also because

the direction of causation is usually not established clearly.

Indeed, open trade policies do not necessarily imply fasterincome growth or poverty reduction; they can even be

associated with quite the opposite trends, depending upon

specific contexts. The point is not therefore necessarily to

move towards more liberal and less restrictive trade policies in

all contexts, but to consider the combination of controls,


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regulations and liberalization that may be appropriate in

particular circumstances and to meet particular goals.

For developing countries today, autarky is clearly not an

option, but more importantly, export growth remains an

important consideration. It is not just that exports can be an

important source of demand, which is often presented as the

route to growth suggested in the neo-liberal view, which

makes export growth significant. Even in growth patternsoriented more towards domestic market expansion, the crucial

need to generate foreign exchange to meet the needs for

imports of capital goods and equipment essential for growth

and diversification requires that measures to expand exports

remain on the agenda of developing country governments.

However, even in such a context, trying to increase exportgrowth does not necessarily require trade liberalization; in

some cases, it could even be thwarted by such liberalization.

The needs are for policies that provide sustained and

sustainable access to foreign exchange flows that can enable

more rapid domestic growth. Related to this, it is necessary to

critique the notion that export promotion and import

substitution are necessarily alternatives. This is not the case,

even though historically there may have been instances of

import substitution being associated with trade pessimism

and export stagnation. Indeed, most of the successful

developing country exporters are those countries which have

also (and simultaneously) gone in for systematic import


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substitution in particular sectors. This was typically done

through a combination of tariffs and subsidies, as well as

other fiscal and credit incentives, which ensured that certain

sectors were actively promoted for enhanced domestic

production and exports. Indeed, for sectors where (static and

dynamic) increasing returns to scale are substantial, such a

strategy is absolutely necessary if these sectors are to emerge

at all in developing countries.

Given these more general points, it is necessary to consider

the implications of trade liberalization in specific sectors.

Agricultural trade still accounts for a very significant

proportion of exports of developing countries, and has been

presented as an important avenue of development in recent

years. This is different from the post-war tendency, which wasfor developing countries to try and break out of primary

commodity export dependence and seek to diversify their

economies in various ways, in order to avoid the problems of

volatility, secular price declines and so on that were seen to be

typical of primary commodity markets in world trade. In sharp

contrast to this earlier widespread perception, the Uruguay

Round GATT agreement was negotiated with the dominating

perception of agricultural exports and textiles and garments

exports as the principal means to increase incomes and

employment in the developing world.


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The renewed focus on agricultural exports by developing

countries has also been linked to liberalization of trade in

agriculture, even though there is no clear economic

mechanism that could require such a link. The WTO rules

have imposed quite substantial agricultural trade

liberalization upon developing country members, both original

and new members. Almost all developing countries have made

major moves towards eliminating quantitative restrictions,

moving towards tariff-based protection with progressive

reduction of tariffs, reducing or removing export subsidies

directed towards crop exports. In addition, most developing

countries have also undertaken measures towards

deregulating imports and exports through decanalization of

external trade and reduction of the role of state trading and

marketing corporations. The relationships between tradeliberalization and agricultural growth and rural poverty are

complex, multi-directional and not always easy to predict.

They depend upon external factors emanating from

international markets as well as on domestic supply capacities

and the effects upon livelihood and income distribution within

the sector. These variables in turn are affected by landrelations and other government policies towards agriculture

and rural development, which determine the degree to which

cultivators can take advantage of international markets and

the extent to which they are threatened by them. The issues

that are directly relevant from the perspective of poverty


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reduction are those relating to the possibilities for agricultural

growth and the viability of cultivation; the effects on

employment and livelihood; and the effects on food security.

World crop markets are notoriously volatile and subject to

frequent and intense fluctuations in demand and price. Such

volatility is not new, but is probably more evident in recent

years because of the decline, since the late 1980s, of

international interventions such as those designed to stabilizecommodity prices through funds and price agreements. In

addition, the monopsonistic nature of world trade in many

commodities, with a few multinational companies emerging as

the major trading agencies, has implications for the prices

received by actual producers. The effect of continuing

subsidies in the developed industrial countries, upon worldtrade prices of many crops, has tended to dominate the policy

discussion in this area. But it is worth remembering that even

if such subsidies were to be substantially reduced; the basic

problems of volatility and long-term secular decline in output

prices would still be very much in evidence for most developing

countries. Historically, agricultural exports have served as a

route to enrichment only for a very select handful of countries,

and this route is likely to be even more limiting in the current

international context. Most countries that rely on this means

will remain relatively poor, and if they are unable to diversify

their economies, will also experience continuing lack of

development. In the 1990s, international price volatility was


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reflected in the initial rise and subsequent collapse of most

crop prices in world trade. Subsidies and protection in the

industrial countries were hardly brought down, as the fine

print in the Uruguay Round Agreement on Agriculture allowed

loopholes that effectively militated against the spirit of the

agreement. In addition, the fallacy of composition became

more acute, as more developing countries entered the market

as suppliers, especially for tropical crops. From the point of

view of crop exporters in developing countries, this is

obviously very adverse.

But the implications for food security are more complicated.

This tendency for falling international prices of basic food

crops can have very different implications even within

countries, for cultivators and those who are net purchasers of food, and the effect on poverty will also be correspondingly

mixed. It is argued that this has actually been good not only

for chronically food-deficit countries, but also for significant

sections of the poor in developing countries, who are net

purchasers of food. But this is not necessarily a valid

conclusion, given the obvious fact that food purchases require

money incomes, which may themselves be affected by trade

patterns that reduce rural employment.

Thus, even when falling food prices positively affect the poor in

particular years, the medium term implications of such

exposure to volatile international prices may be negative for


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the poor. Sustainable food security for the poor in developing

countries requires a certain relatively stable relationship

between purchasing power and food prices to be maintained,

which in turn means that even in rural areas, it is not the

absolute price of food which matters so much as the relation

between such prices and wages and available employment.

The basic fallacy made by most trade theories that assess

gains from trade in terms of the consumption benefits is that

this result is based in full employment. In the absence of full

employment, it is impossible to think of consumers as

independent entities with money incomes that arrive as

manna from heaven. Instead, consumers require purchasing

power, which means they require wage incomes and or access

to other livelihood which will allow them to make purchases in

the first place. This means that open trade that generateslower food prices is not always unambiguously beneficial for

the poor. If the same open trade which is providing access to

lower priced food is also generating unemployment and loss of

livelihood in the rural areas, and therefore reducing the

purchasing power of the poor, then obviously the effects of

such trade on the poor may be perverse.

It is often argued, most recently by the World Bank (2004) that

if only world trade in agriculture were actually to be made

more free, through reduced subsidies and more open

markets in the developed countries, then there would be

positive effects on employment generation and poverty


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reduction in developing countries. In other words, the

assumption implicit in the Uruguay Round negotiations, that

agricultural trade can be a route to increased prosperity and

development, is till valid. However, this assumption itself is

problematic, such that even more genuinely free trade in

terms of reduced government interventions in the North, need

not have positive implications in the predicted way. These

arguments are recognized in the Development Box proposals,

which have unfortunately not been implemented by the WTO.

Similar arguments may be made with respect to trade

liberalization in manufacturing and other sectors as well. The

mainstream argument (which is not supported by the current

research) concerning trade liberalization in manufacturing in

developing countries is centered on the belief that this willshift incentives within the economy towards more labour-

intensive activities and that therefore there will be a relative

rise in wages. Extensions of this argument also predict that

there will be a reduction in wage inequality, with the gap

between more and less skilled workers coming down because

patterns of trade will change patterns of domestic production

and therefore labour requirement. In terms of the focus of this

paper, poverty should decrease as a consequence of these

processes. This result emerges from the standard Heckscher-

Ohlin-Samuelson paradigm, which is well known to involve a

number of very restrictive assumptions such as perfect

competition in goods and factor markets, constant returns to


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scale, and crucially full employment. Once these assumptions

are relaxed, the outcomes are no longer predictable, nor are

the gains from trade unambiguous.

The crucial issues from the point of view of poverty reduction

then become: what happens to the aggregate level of

employment, and what happens to the wage rates and wage

dispersion, once trade is liberalized. It is possible that net

employment may come down, because domestic production forthe home market using labour-intensive methods may be

displaced by cheaper imports. In many developing countries,

the pattern has been that such imports are not produced by

more labour-intensive methods, so aggregate world

employment in such sectors may come down. Within the

developing country, trade liberalization can therefore lead to areduction in manufacturing employment, especially as small

scale producers (who are typically the most employment-

intensive) tend to be the most adversely affected by exposure

to international competition. This has very direct implications

for poverty, since loss of employment in manufacturing

usually leads to overcrowding of workers in refuge sectors

(increasingly urban services in most of the developing world)

which are characterized by low productivity, high

underemployment and expensive poverty.

In most developing countries, cultivation has been adversely

affected by the combination of trade liberalization, world trade


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patterns and changes in domestic policies towards the rural

sector. The basic process has been similar in most of the

countries: agriculturalists have placed greater reliance on

monetised inputs and faced rising prices of such inputs as

domestic explicit and implicit subsidies have been withdrawn;

around the same time, various import controls on agricultural

products have been withdrawn, so that the level of domestic

output prices is increasingly determined by the threat of

potential imports if not actual imports; export subsidies as

well as export taxes have been reduced or done away with, so

that local producers face international markets and volatile

world prices in a rather unprotected manner. The consequence

is that farmers in all of these countries have been caught in a

pincer movement of rising input prices and falling or volatile

output prices, which has rendered cultivation more risky andoften financially unviable. These difficulties have been

compounded by the reduction or withdrawal of various

government support systems, ranging from output price

support to input and credit provision.

It is evident that the most critical issues are those of the

viability of cultivation and the livelihoods of cultivators. In

these areas, the importance of supplementary and supportive

policies for agriculture cannot be underestimated. The real

problem for farmers in the North, but also that developing

country governments have reduced or withdrawn a range of

other policies and measures that are crucial for agricultural


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development. These include public investment in rural

infrastructure, ensuring adequate and timely institutional

credit for cultivators, and provision of agricultural extension

services that provide information about cropping practices and

techniques as well as material inputs, and so on. While small

and marginal farmers always received less of such assistance,

they have also been the worst facetted by the cutbacks in such

state support, and this has direct implications for poverty.

The second direct effect upon poverty comes from the effect on

employment in agriculture, for wage labourers. This has

definitely been hit by the combination of factors described

above, and even growing crop exports have not been enough to

ensure higher levels of wage employment in cultivation

because of the shift to more capital-intensive techniques for arange of crops. The attempts to diversify into other primary

exports (including horticulture and fishing which are seen as

the sunrise primary exports at the moment) have mixed

employment implications at best. The reduction of

employment in primary production is an important source of

greater poverty and directly impinges upon poverty reduction

efforts.

The third critical area is that of food security. As noted above,

this is a complex issue, because cheaper imports can certainly

have the immediate effect of immediately improving food

access for the poor who are net buyers of food, as long as they


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still have employment. However, even in the medium term,

high levels of trade dependence, the shift to cash crop

production and the exposure to international market volatility

all have severely negative implications for food security.

Finally, the issue of the sustainability of cultivation patterns

must be considered. Excessive dependence upon certain crops

or natural resources can lead to over-exploitation of these

resources or unsustainable cropping practices. These areexacerbated when trade liberalization erodes the ability of

governments to control such patterns. Unsustainable

extraction patterns affect the rural poor more adversely than

other groups over time, because they tend to rely more on

common property resources in their overall consumption

package.

CHAPTER THREE

THEORETICAL FRAMEWORK

3.1 INTRODUCTION

Trade liberalization has been identified in the previous chapteras a veritable source of providing major benefits to the

performance of developing countries through its competitive

effect by fostering domestic competition on domestic pricing

aside from its static and dynamic gains and as a result there

is need to theoretically investigate the effects of trade


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liberalization on agricultural development in Nigeria. To this

end, this chapter consists of the structural framework of the

study, going more in-depth on the subject matter and

reviewing the works done by other economists.

3.2 HISTORICAL BACKGROUND OF TRADE

LIBERALIZATION IN NIGERIA

During the period of colonial powers, there was a shift from

the production of food crops to cash crops. Non-cash crops

were produced largely in Nigeria, but due to the colonial

economy model, there was an increased production of cash

crops like cocoa beans, palm oil, groundnuts and so on to

meet the demand for raw materials for industrial production in

the modern countries. This trade in cash crops gave a boost to

the Nigerian economy at the expense of domestic agriculture

but after independence, particularly in the late 1970s and

early 1980s much of the cash crops were produced for home

consumption and as a result, exports decreased. In this time

the most important change was the emergence of crude

petroleum as a single dominant export commodity. Agriculture

during this period experienced a setback. Sequel to this,Nigeria had to import more goods and food import bills

therefore continued to rise.

Although there were official attempts to rejuvenate the

neglected agricultural sectors, the policies available were


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effects for the environment. For example, increased trade can

lead to the increased generation of financial resources to help

overcome poverty and pay for environmental protection

measures and resource depletion.

3.3 IMPACT OF TRADE POLIY REFORMS IN NIGERIA

A descriptive policy account may provide an indication that a

specific policy reform has taken place or has not. The primary

reason for implementing policy reform is, of course, to

influence the targeted economic variable; the corresponding

change in this target variable would then serve as an

indicator of policy impact. In principle, therefore, the impact of

African trade policy reform can be assessed by examining the

changes in appropriate target variables that can be ascribed

to trade policy reform.

There are several reasons why the impact evaluation

procedure described above is not as straight forward as it may,

at first, appear. First, as indicated earlier, it may be virtually

impossible to disentangle the effects of trade policy reform

from those emanating from more general macroeconomicpolicies or even exogenous developments that may impact on

the same set of variables. Second, trade reform episodes in

particular countries may be too short to permit an evaluation

based essentially on an analysis of time-series data. Third,

whether a discernible impact of a trade reform episode can be


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episodes appear to have generated sustainable balance-of-

payments deficit(i.e., they were payments incompatible) and

the government concerned were apparently unwilling to use

exchange rate policy aggressively enough as a means of

restoring payments compatibility, in the absence of adequate

and sustainable external financing. The typical target variables

in an evaluation of the impact of trade liberalization include

output change, change in various components of trade,

change in the performance of the manufacturing sector, and

change in employment.

The results of the trade liberalization experiences of Nigeria is

a dominant mineral sector which seems to have deflected the

impact of trade liberalization; although, the policy was

reversed before it could have any real impact. In any case,Musonda et al (1995) concludes that liberalization measures

probably had only a marginal effect on the performance of the

economy. During the decade from 1983, the import/GDP ratio

fell from 52% to 33%, while the export /GDP ratio declined

from 29% to 20%. In the case of Nigeria, Ajakaiye and Soyibo

(1995) concludes that trade liberalization had no significant

effect on output, employment and imports.

A few summarizing generalizations can be made on the basis

of the trade liberalization experiences. First, there has been a

shift of resources away from import-substituting and non-

tradable sectors to the tradables. As a result, exports have


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responded positively, although modestly, and trade shares

have generally decreased. Second, some amount of de-

industrialization has occurred in some countries. Trade

liberalization has unleashed competitive pressures that many

previously sheltered and inefficient industrial firms have been

unable to cope with; yet new export-oriented activities have

not bloomed sufficiently to take up the slack. Third and

finally, continued credibility of some of the trade liberalization

processes faces serious challenge as their heavy reliance on

external financing may not be sustainable.

3.4 TRADE POLICY REFORMS IN NIGERIA FROM THE

1980S SINCE THE INCEPTION OF SAP

Agriculture continues to play a significant role in the Nigerian

economy. It contributes about 40% of the GDP, plays key roe

in the supply of food, provision of employment, generation of

income, supply of raw materials to the agro-industrial

processing and manufacturing sector and foreign exchange

earnings through exports. In view of its large size and

economic importance, various policy reforms, which sought to

liberalize the economy and entrench competition over the lasttwo decades especially since the introduction of the structural

adjustment programme(SAP) in 1986, were quite visible in the

sector. Prior to the inception of SAP in 1986, several policies

aimed at providing support for the agricultural sector turned

out to be regarded as anti-competitive. The policies were


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introduced in the past due to market failures in the allocation

of resources and the need to achieve sustained growth and

equitable development in the country. They included: price

control(administered output prices for export commodities),

guaranteed minimum price for grains, input subsidy,

centralized marketing and export monopoly.

With the economic crisis witnessed in the country in the early

1980s, it was argued that both the market and thegovernment have failed in their basic responsibilities, and that

solution to the economic management problems would emerge

if there was greater reliance on market mechanisms in the

conduct of economic activities. Thus, when the SAP was

introduced in July 1986, the main policy elements were:

(i) Adoption of a realistic exchange rate.

(ii) Deregulation and greater reliance on market forces.

(iii) Trade liberalization.

(iii) Removal of subsidies on public sector goods and

services.

(iv) Privatization and rationalization of publicenterprises and a general reduction of the governmentsector and

Strong demand management policies(particularly tight

monetary and credit policies).


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In the agricultural sector, these translated into the following

policy measures such as product price decontrol since the

inception of SAP, desubsidization(withdrawal of subsidy on

agricultural inputs and services), abolition of commodity

boards, privatization and commercialization of agricultural

and agro-industrial enterprises.

3.5 THE EVOLUTION OF THE NIGERIAN ECONOMY

BEFORE SAP

Nigerias growth experience shows a gradual and steady

performance in the immediate post-independence period, with

a healthy balance of payments position through exports of

cash crops. Marketing boards were used to extract surpluses

from the agricultural sector, which were used to provide basic

infrastructure. The development of the economy since 1960

has witnessed a declining share of agriculture in the gross

domestic product(GDP). At constant factor cost, agriculture

which accounted for about 66% of GDP in 1958/59, was

estimated at 50% in 1970/71. Part of this decline is traceable

to the relatively higher growth rate of manufacturing and

mining, which is consistent with the development patterncharacteristics of developing countries. Agricultural export was

the engine of growth prior to 1973, providing much of the

revenue that the government used in developing a basic

infrastructural system. Agricultural export also financed the

import substitution industrialization programme. Increases in


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imports due to increasing income and the import requirements

of the emerging industrial sector induced balance of payments

problems in the late 1960s.

The oil boom of the early 1970s relaxed the financial

constraints to development. The GDP at 1977/78 factor cost

grew at an average rate of only 5.0% per annum between 1975

and 1980. One major characteristic of this growth was its very

unstable nature. The growth rates ranged from -1.3% in1975/76 to 9.5% in 1979/80. Generally, government services

recorded the highest growth of 17.7% in constant terms during

this period. Manufacturing grew at 13.3%, while agriculture

recorded a growth rate of -2.3%. The performance of the

economy suggests that there was more to underdevelopment

than financial constraints. The third national developmentplan acknowledged that the agricultural and manufacturing

sectors during the period 1970-1974 performed below

expectations. This informed the massive expenditure by

government in the following period in an attempt to remedy

these and other perceived constraints to growth.

The fourth national development plan observed a situation inwhich distribution accounts for as much as 21.6% of the GDP

while manufacturing accounts for only 4.8% portrays a

structural imbalance in the economy set-up. This imbalance

was also manifested in the external sector of the economy.

During this period imports were overshooting their anticipated


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levels- in fact, by about 46.5% more than the planned targets.

Food, capital equipment and raw materials were the fastest

growing categories of imports. Food importation increased by

almost 400%, indicating the magnitude of the food crisis

associated with the expansion of the economy during this

period. Exports, on the other hand, fell short of target by

about 20%. Crude oil was the dominant item on the export

list, targeted to contribute up to 96% of total exports during

this period. By the eve of the third plan in March 1975, the

countrys oil production was at a record level of 2.3million

barrel a day, while the price per barrel stood at $13.69, having

risen from $3.56 in 1973. Oil production was projected to grow

at a modest rate to reach 3.0million barrels a day by the end

of the plan period (Fourth National Development Plan). The

fourth plan observed that barely five months into the planperiod, Western nations demand for oil plummeted, with

adverse consequences for price. Nigerians production dropped

drastically, by 35%, to 1.5million barrels a day as prices also

dropped to as low as $12.00 per barrel. The situation

improved in 1976 and 1977 , but declined again in 1978.

These unexpected development greatly distorted the expectedflow of financial resources, making it necessary for the

government to engage in massive borrowing from the Euro-

dollar market and from multilateral institutions such as the

world bank (Fourth National Development Plan). Despite the

unexpected events in the export sector, imports continued to


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climb. Increased domestic spending sustained imports and put

serious pressure on the balance of payments.

One of the identified problems in Nigeria in the articulation of

SAP is that of policy-induced distortions. A key proposition is

that policy responses to the oil boom increased the level of

distortions within the economy. Some of the key propositions

on policy distortions in the economy are:

Pre-SAP policies encouraged the growth of domestic

demand far beyond the productive capacity of the

economy resulting in distortions in relative prices and

serious internal imbalance. Rapid expansion of public sector investment created

serious distortions in resource allocation. Investment was biased toward unproductive ventures

and investment projects were unviable and poorly

implemented, and the rate of their expansion easily

over tasked the capacity of the public sector, which

was dominant in this area. Rapid expansion of the public sector was also

characterized by increasing deficit spending by both

federal and state governments in very unproductive

sectors of the economy. Dependence on external financing generated

unsustainable financial needs.


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Trade policies during this period encouraged massive

importation of foreign inputs for industries with

unnecessary protection for very inefficient firms. Import licensing systems enhanced and encouraged

inefficiencies in the allocation of resources and an

over-valued domestic currency. The general level of subsidy, which was maintained

under a defective development strategy, undermined

competition within the economy and led to

inefficiencies, which in turn undermined growth.

The collapse of the international oil market was the

immediate cause of the economic crises of the 1980s.

Foreign exchange earnings dropped significantly, causing

adverse balance of payments. Despite events in 1981 andthe clear signs before then, the first

trade liberlisation 2009 final 123 ify

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