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Capital formation and investment decision in Nigeria: An analysis

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Capital formation and investment decision in Nigeria: An analysis

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Content CAPITAL FORMATION AND INVESTMENT DECISION IN NIGERIA
AN ANALYSIS
by
Aminu Dan Ibrahim
A Thesis Presented to the
FACULTY OF THE GRADUATE SCHOOL
UNIVERSITY OF SOUTHERN CALIFORNIA
In Partial Fulfillment of the
Requirements for the Degree
MASTER OF ARTS
(Economics)
August 1982
UMI Number: EP44892
Ail rights reserved
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Di sser t at i on Pu bl i shi ng
UMI EP44892
Published by ProQuest LLC (2014). Copyright in the Dissertation held by the Author.
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UNIVERSITY OF SOUTHERN CALIFORNIA
THE GRADUATE SCHOOL
UNIVERSITY PARK
LOS ANGELES. CALIFORNIA 90007
This thesis, w ritten by
under the direction of h.h?....Thesis Com m ittee,
and approved by a ll its members, has been pre
sented to and accepted by the D ean of The
G raduate School, in p a rtia l fu lfillm e n t of the
requirements fo r the degree of
AMINU DAN IBRAHIM
MASTER OF ARTS
Dean
D a te AUGUST..1JU..1282
THESIS COMMITTEE
Chairman
ACKNOWLEDGMENTS
The author wishes to express his appreciation to Dr. Nake M.
Kamrany, thesis supervisor, for generating his interest in the thesis
and for his counsel, guidance, and encouragement through the study |
and development of the thesis; and to Drs. John H. Niedercorn and !
I
Robert C. Kalaba for their inspiration as teachers. I
i
The author extends his gratitude to Maxine Pennington for j
editing and typing the manuscript. ;
I
Finally, he appreciates the strain that this study has placed !
on his wife, Dorcas, daughter, Hannatu, and the rest of his family.
To all of them, he expresses his gratitude for their understanding.
1
TABLE OF CONTENTS
Page
ACKNOWLEDGMENTS................................................. ii
i
LIST OF TABLES.................................... iv
Chapter
1. INTRODUCTION .................................. I
2. GENERAL CHARACTERISTICS OF THE NIGERIAN ECONOMY .... 8
i
Economic Activities and Resource
Distribution in Nigeria ............................ 10
Nigeria after O i l .................................... 12
Development Problems .................................. 16
3. CAPITAL FORMATION FROM 1950-70 ......................... 21
Classification of Capital by Sectors ................. 25
Sources of Capital Formation .......................... 33
4. INVESTMENT DECISIONS.................................... 44
Households/Peasant Farmers ............................ 45
Industrial Sector............ 46
Public Corporations .................................. 48
5. INVESTMENT IN AGRICULTURE............................. 51
T r a d e ................................................. 5 7
Efficiency............................................. 61
6. SUMMARY AND CONCLUSIONS............................... 69
BIBLIOGRAPHY ................................................... 73
iii
LIST OF TABLES
Table Page
1. Public Investment Programs by Sector:
Nigeria, 1955-80 . . . .................................. 17
2. Composition of Gross Capital Formation by Assets,
1951-58 at 1966 Prices (in M m ) .......................... 21
3. Composition of Gross Fixed Capital Formation by
Assets (195 9-70) in Purchase Value (in Mm) ............. 22
4. Output and Investment: 1962-68 (at current
factor prices) ........................................... 23
5. Growth Rates of Output, Investment Ratio, and
Increment Capital Output Ratios
for 1960-70 24
6. Gross Fixed Capital Formation by Assets Percentage
Distribution (1959-70) at Current Prices ............... 26
7. Percentage Distribution of Gross Fixed Capital
Formation by Organization Sectors (1951-58)
at 1966 Prices........................................... 27
8. Gross Capital Formation in Organization Sector
(1962-68) (in Mm) ...................................... 31
9. Institutionalized Savings Cumulative in M Thousands,
1962-70 34
10. Development Stocks: Central Bank's Initial Holdings
as Percentages of T o t a l ................................ 37
11. Nigeria: Flow of Foreign Capital (1964-68) 37
12. Tax Revenue as a Percentage of the Gross Domestic
Product (GDP) and Gross Capital Formation (GCF),
1962-68 . . 42
13. Structural Changes in GDP by Origin in Percentages .... 53
14. Sectoral Composition of Investment in Percentages .... 54
15. Production of Major Export Crops in Thousands
of T o n s ..................... 55
16. Distribution of Nigerian Imports by SITC Sections,
1946-74 58
17. Distribution of Nigerian Exports by Major Commodities,
1946-74 64
Chapter 1
INTRODUCTION
Over the last two decades or so there has been an increasing
flood of literature on the economic problems of the underdeveloped
countries. Most of the case studies have been written on Asia and
Latin America. However, Africa has also become of great intellectual
interest to social scientists. Little apology is therefore needed for
offering this thesis as a small contribution to a much-needed discus-
I
sion in depth on African economic development with particular reference
to Nigeria. To those who know the continent well and are familiar withj
the aspirations of its peoples, little apology is necessary for examin
ing the Nigerian scene as a case study. This thesis is written as a
contribution for extensive and articulated economic inquiry into the
prerequisites for a rapid social transformation of the Nigerian
economy.
Our thesis is thus stated: "The Nigerian policy planners have
diverted their attention from agricultural investment to investments
in other sectors of the economy with the resultant negative effect on
agriculture to the extent that the country has to embark on importation
of some food items to feed the population!"
The main objective of this study is to try and digest the
available information as is relevant to agricultural policy in Nigeria
1
with a particular focus on investments. It is the contention of this
study that our policy makers in Nigeria with the discovery of oil/
petroleum have neglected agriculture to the extent that food to feed
the population has to be imported from abroad, thereby decreasing the
country's foreign exchange reserves. This we rightly call "uneconomic
development
Quite apart from the impact of the civil war, the second half
of the 1960s was a turning point in Nigeria's economic development.
Until then international trade of Nigeria's agricultural produce had
largely determined the pattern of income, investment, and the balance
of payments . Agricultural exports were primarily responsible for an
average Growth Domestic Product (GDP) rate of about 5% per annum during
the 1950s and the early 1960s. Growth was provided mainly by the em
ployment of surplus land and labor, and by the substitution of higher
value export crops for subsistence crops, without significant reorgani
zation of the society or the introduction of new production techniques.
This economic growth took place within a fairly static framework with
little or no intervention from the government.
We then began to see a new development pattern emerge in the
mid-1960s, as agricultural exports stagnated from 1962 onward. Rapidly
growing industries, until then too small to be significant, began to
exert considerable influence on the economy; even more dramatic was
the shift to petroleum extraction as the leading growth sector. It is
this petroleum industry that has overshadowed the agricultural sector,
probably due to its significance in the world market and its revenue
generating potential for the economy. Thus oil became the single-most
2
important resource for generating revenue for the federal government.
And, the irony of it is that agriculture is not getting its fair share
of capital investment relative to other sectors such as manufacturing,
construction, and the like from this revenue. Therefore, our main task
is to analyze the position of agriculture as it now stands relative to
the other sectors of the economy, and suggest ways and means that will
stop the abuse or neglect of this industry--given the available data
from the early 1960s to the 1970s. We attempted some projections of
figures where available data permitted.
Our analysis first begins by giving the background or general
characteristics of the Nigerian economy; i.e., its land surface, popu-
i
lation, geographic location, temperature, climate, types of agricultural
crops, employment, industries and trade, and type of government. Under
this section we proceeded to examine some economic activities and re
source distribution in Nigeria where we saw that agriculture has been
the age-old industry in the country and the single-largest employer of
labor.
From here, we went on to examine Nigeria after the discovery of
oil; more specifically her economic, political, and social life. We
learned that oil has had a great impact on the economy in general;
that is to say, it has served as the single-most important source of
revenue for the country; and with this revenue very ambitious develop
ment plans have been implemented. It is from this section that our
thesis begins to take shape, because oil has now replaced agriculture
as the state's chief revenue earner. Also, in this section, some de
velopment problems begin to emerge which we examined with some
3
supportive data and tables relating to our proposition. One of the
main problems was that of resource allocation in the Third National
Development Plan, 1975-80.
We then proceeded to examine capital formation from 1950 to
1970, i.e., structural patterns only of our statistical series for
policy inferences by our policy makers. Here we found out that al
though gross fixed capital formation was increasing, growth in output
was actually declining. The purpose of this research is to help
explain output and investment within the economy from 1962 to 1968.
Furthermore, a classification of capital formation by sector was under
taken in order to gain a greater insight of its structure and to under
stand its historical perspective from 1959 to 1970— whether or not I
there has been a significant improvement in these assets over the
years. We found that agricultural assets compared to machinery and
plant equipment actually saw a decline from 12.0% in 1966-67 to 7.8%
in 1969-70, while the latter experienced an increase during the same
period from 20.0% in 1968 to 22.2% in 1970. This phenomenon helps
explain the demise of agriculture at least during this period. We
then went on to analyze these classifications of assets by sectors
and their significance to the Nigerian economy in world trade; i.e.,
whether or not we benefited from the importation of some of these
assets such as plant and equipment, but found that we really did not,
instead our construction activities were weakened by this action.
The section on sources of capital formation examined in part the
various sources available to the government for generation of revenue
in order to finance most of her development plan projects; e.g., sav
4
ings, taxation and foreign investment, marketing boards, corporations,
and deficit financing. The purpose of this study is to attempt to
prove to our policy makers, despite all these options for revenue,
that agricultural exports is the only viable one, if only proper man
agement and equipment are accorded it. We saw this trend under the
subtitle "Marketing Boards and Corporations," which was solely estab
lished to stabilize export prices of agricultural commodities in the
country. From here we proceeded to examine investment decisions in
the next section. The purpose of this is to enable us to deduce the
economy of the various levels or forms of investment decisions. This
deduction would give us a clue as to how our peasant farmers go about
cultivating their pieces of land with little or no assistance from the
i
government.
In our analysis, we noted that the assistance available to the
farmers in the form of financial aid or agricultural credit most often
does not reach the farmers--a kind of "blessing in disguise" from the
government. This attitude of our policy makers most often discourages
the poor peasant farmer. Consequently, the rural areas are deserted
for the urban sectors, in search of a more meaningful life. The ulti
mate effect of this action by the farmer is to lower agricultural out
put for the market place; however, the private enterprise or corpora
tions are not left out of the picture. Their contribution in terms
of economic development was also looked into, and we found that their
demands on the farmers were much more than the peasant farmer can cope
with in terms of agricultural credit in order to improve his investment.
5
Investment in agriculture follows investment decisions; the
logical connection between the two sections is that while the latter
focused on who makes the decision to invest and in what areas of the
economy, the former concentrated on the actual investment made in agri
culture by our policy makers and found out that it is not adequate for
the needs and aspirations of the nation. This conclusion was reached
after a critical analysis of this sector of the economy, and a careful
comparison made with investment in the other sectors of the economy--
chiefly manufacturing and construction, etc. A further analysis also
revealed some shocking statistics in our import and export tables;
i.e., the country imports food stuff from abroad to feed the nation
instead of exporting such items to other needy African nations. For
example, as at the last census count, the population of the country
stood at about 70 million people, which is an unofficial figure, with
A
an estimated 2% to 3% annual growth rate. This is a staggering statis
tic for the economy to bear, particularly with a dwindling supply of
food stuff'. Our import statistics showed a steady increase of im
ported goods from H57.8m in 1970 to S154.6m in 1974, while our export
figures for cocoa during the same period showed only a modest increase
of only M133.0m in 1970 to M15 9.0m in 1974. The figures for machinery,
transport, and equipment during the same period jumped from M282.6m in
1970 to M611.8m in 1974. These phenomena at least help shade some
|
light into the priority of investments in the country by our economic
planners (see Table 16 on imports).
Under this section we have also examined the efficiency of the
agricultural industry (sector) relative to the manufacturing and
6
construction industry, and argued from five basic viewpoints that we
are better off as a nation investing in agriculture than in manufactur
ing and construction, at least for now.
Finally we summarized and offered our suggestions to our policy
makers based on our findings in the conclusions. The lengthy discus
sion was necessary in order to show the significance of our proposition
and to further prove that with such policies our planners are doomed to
failure unless they correct their attitude toward agricultural develop
ment with the revenue we are now enjoying from petroleum export.
7
Chapter 2
GENERAL CHARACTERISTICS OF THE NIGERIAN ECONOMY
By any agreeable standard of measurement, Nigeria with a total
land surface of almost 357,000 square miles is one of the larger coun
tries of Africa. It lies entirely in the tropics, between longitude
3° East and 14° East and latitude 4° North and 14° North. The longest
distance from East to West is over 700 miles, and from North to South
I
is over 1,000 miles. The country has the characteristic West African (
I
vegetation that moves rapidly northward from the swampy southern coast,!
through the rainforest, derived savannah open grassland, and the south
ern fringes of the Sahara Desert. The mean annual temperature is about
80°F, and, except in the far north, the mean annual rainfall is about
30 inches.
Nigeria is divided into three regions by two large river basins,
the Niger and Benue. These rivers and other smaller ones provide ade
quate drainage for agriculture, fishing, and water transportation. The
combination of these river basins, the expansive land surface, deep
soil, and good climate provides an excellent basis for tropical agri
culture. Furthermore, the varying degrees in which these factors are
combined in different parts of the country provide for great diversity
in the concentration of primary activities.
8
Ia the mangrove and rainforest, fishing and hunting are the
main occupations, while nature provides valuable hardwoods, e.g.,
mahogany, cedar, and walnut. In the derived savannah, cash crops--
cocoa, rubber, palm produce, and arable crops such as yam, cassava,
and maize--are grown. The open grassland is noted for raising cattle
and other livestock and the cultivation of grains. Fishing, the grow
ing of sugar cane, and various kinds of vegetables are the most impor
tant occupations in the river basins.
An important gift of nature is the great amount of mineral
deposits in Nigeria. These range from the alluvial gold deposits in
I
the West, through the tin mines of the northern states to the coal,
lead-zinc, and petroleum deposits in the midwestern and eastern states.
In addition, there are iron deposits, radioactive minerals, and useful 1
I
deposits of limestone and clay for industrial and building activities.
Although the country's population estimate is subject to doubt,
nonetheless the controversial 1963 census puts it at 56 million as of
that year. If we assume the population grows at an annual rate of 2.7%.
this assumption is not unrealistic if we compare it with the population
growth rates of neighboring African countries. This growth would put
the country's population at 79 million in 1981. The population dis
plays a young age composition (with attendant implications for economic
development and employment) and a comparatively small proportion of
non-African races .
The lack of adequate figures on employment and earnings does not
permit a detailed study to be made of the extent of unemployment and
underemployment in Nigeria. However, from the available information
9
on this subject a meaningful study can be attempted for the purpose of
knowledge. Unemployment in Nigeria is one of the most pressing social
problems, with political as well as economic consequences. It can be
attributed to the excessive drift away from agricultural employment,
mainly by school dropouts, into the urban areas.
The country has been under military administration for over 10
years. The pledge on the part of the military authorities to return
the country to civilian rule before the 1975 coup was not honored.
Another pledge was made in October 1979, which was finally honored
and the army handed over the government in October 1980, but not until
after a draft constitution for the new civilian government had been
written and debated for adoption by the constituent assembly. Local
government reforms were also undertaken to prepare the local communi
ties for the new civilian government when elected. The new president
elect is Alhaji Shehu Shagari who was elected to office in October of
1980.
Economic Activities and Resource Distribution
in Nigeria
Until fairly recently, the Nigerian economy was essentially
agriculture-based, but with the discovery of petroleum, drilling and
pumping have become a very important sector of the economy. This sec
tor has been the main source of the rapid growth of the country’s econ
omy over the last 20 years or so. But, this development notwithstand
ing, agriculture still continues to be the broad base of the economy
as well as the most dominant sector; at least in terms of the volume
of employment which it generates for the greater proportion of the
10
country's labor force. These two sectors between them provide the
resource base of the country's wealth and the greater part of its eco
nomic activity accounting for well over four-fifths of the GDP. More
specifically, the agricultural sector provides employment for some 70%
to 807» of the country's labor force.^ Production in this sector is
organized in two types: (a) the large-scale capitalist plantation
form of production employing modern technology and (b) peasant produc
tion consisting of subsistence output of millions of individual small
holdings, relying on traditional methods with the use of simple imple
ments such as the hoe and the cutlass. The larger proportion of the
country's agricultural production is in this latter category, where
virtually all the food crops and almost all the export crops are pro-
I
duced, with a relatively small proportion of total output coming from I
the large-scale plantations.
The pattern of agricultural production and specialization is
highly dictated by the variations in the country's climatic conditions,
soils, and natural vegetation. For example, in food production, the
rainier southern parts of the country specialize in production of
staple tree and root crops such as plantains, bananas, cassava, and
yams, while the production of grains--sorghum, locally known as guinea
corn, maize, and millet, and livestock, all of which require little
rain--are produced in the North. This regional specialization of food
production has provided the basis of the growth of the country's inter
regional trade over the decades and also is the production of export
crops.
Although mineral explorations have been under way in the coun
try for about a century now, the present great impact of mining on the
11.
economy is a thing of the recent past, resulting mainly from the exten-
2
sive exploration of crude petroleum in the last 10 to 15 years.
Mining activity in the country is concentrated in particular
areas. Thus, most of the metallic minerals--tin, columbite, lead, and
zinc, the mining of which represents a sizeable proportion of world
output--is concentrated on the Jos Plateu state in the northern part
of the country. On the other hand, coal mining is centered around
Enugu in the southeastern part of the country. Close to this area
also, around Abakaliki and Owerri, the mining of lead and zinc is
carried on. Considerable deposits of iron ore exist in the country,
although they are still largely unexplored. The major deposits are
i
I
centered in the Lokoja area of Kwara state in the Middle Belt as well
as around Enugu in the southeast. Oil wells, the major source of the
country's recent wealth, are located in the extreme southern part of
the country, particularly in the delta region of Bendel, Rivers,
Anambra, Imo, and Cross Rivers states.
Nigeria after Oil
Oil is rapidly changing the economic, political, and social
life of Nigeria. Perhaps for another 30 years--a short time in his
torical terms but long enough politically--it will provide the means
of turning the potential of the Nigerian economy into actuality of
power and influence. In the mid-1970s oil was the basis of almost
all political and economic calculations. They provided the total re
sources and revenue. The role Nigeria should adopt in OPEC, and, more
generally, towards the rest of Africa and above all, is how this wealth
12
is to be used at home. In the period of 1967 to 1971, covering the
Civil War, the growth rate for oil ran at 9% per annum, and oil replacec
agriculture as the state's chief revenue earner.
The history of Nigerian oil can be categorized into three
stages. The first phase was short: the period of 1958-1961 (covering
independence) when the still small industry, then completely controlled
by BP-Shell, exported entirely to Britain and Holland. The second
stage--1962-1969--was characterized by a substantial diversification
and Nigerian oil was also sold increasingly to West Germany, France,
Canada, the United States, Argentina, and Ghana, and the Japanese
market was being explored. The third phase which was from 1970 and
beyond saw both a rapid expansion of sales to Japan and the emergence
of the United States as the largest single market of Nigeria's crude I
4 !
oil. By 1973 Western Europe, including Britain, was Nigeria's largestj
j
customer, buying 51% of Nigeria's crude oil. Twenty-seven percent \
went to the United States, 13% to the West Indies, and 5%, to Japan.
The following year the American figure had risen to 30%, and this
figure is continually fluctuating.
Oil has transformed the Nigerian economy. Oil revenue ac
counted for 3% of the, government revenue in 1963, 17% in 1967, and
7570 in 1972. In 1970-71 savings exceeded estimates by about W118m
(which is about $240 million dollars); in 1971-72 the figure had
risen to M233.9m,^ but as the then Federal Commissioner for Economic
Development and Reconstruction, Professor Adebayo Adedeji, said:
"This increase in savings is not due to the abstinence of individual
Nigerians. It is primarily due to the larger current revenue of the
13
public sector, which is a reflection of increased receipts from the oil
industry" (Daily Times. August 1977). Oil is reflected in every aspect
of the economy; for example, there was a 12% growth rate in 1971-72,
5.7% was due to oil, while manufacturing accounted for only 1.2%, and
agriculture only By 1974 oil was contributing 50% of government
revenue and 80% of foreign exchange.
Nigeria's oil policy has constantly to be related to its cus
tomers. The higher cost of Nigerian oil should in normal times (when
there is no recession) be offset by two advantages: the shorter and
therefore cheaper haul to its main markets of the European Economic
Community (EEC) countries and North America, and the low sulphur con
tent of its oil, which, for example, makes it especially attractive to
Japan because of that country's stringent anti-pollution laws. During
1975, however, these advantages were eroded because of the slump in
the tanker business and the fact that when prices are high, pollution
policies tend to go by the board. But this picture is now changing
due to its membership in OPEC and the most recent OPEC meeting to
standardize oil prices among member nations. Apart from Nigeria's
main customers of EEC, the United States, Japan, and Nigeria, is
g
increasing its sales in West Africa too.
Oil made possible the vast developments envisaged in the Third
9
Development Plan for 1975-80. The main features of the plan can be
summarized briefly as follows:
1. On the average, the economy is expected to grow by about
9% per annum. This growth rate will be achieved by a
combination of more intensive capacity utilization and
14
an increasing rate of capital formation.
2. Gross domestic capital formation will average about 40%
of GDP. Two-thirds of capital formation is scheduled to
come from a greater domestic saving effort, derived from
a combination of government fiscal and household saving-
investment response in a setting of rising income oppor
tunities .
3. At the terminal period (1980) per capita income should be
growing by at least 6.5% so as to achieve a target of N700
in 20 years, thus doubling the standard of living within
12 years.
4. High employment potential.
5. The approach to investment analysis is the social cost-
social benefit ratio.
6. To indigenize economic activity.
The fundamental objectives of the plan are economic growth,
price stability, and social equity. It was the largest and most
ambitious plan ever launched in Nigeria. Its capital program of over
N32 billion is roughly 10 times that of the second plan, while its
planned growth rate of over 9% far exceeds the First and Second Plans'
target growth rates of 47> and 6.6%, respectively. In the allocation
of this capital expenditure, the economic sector is accorded a high
order of priority, with 62.3% of the total resources'tear marked" for
the sector. In terms of capital expenditure allocation, the three most
*M1 = $3.2.
15
important areas are transport, trade and industry, and primary produc
tion with shares of 22.2%, 17.9%, and 14.9%., respectively. This leaves
the social and administrative sectors with only 24.1% and 13.6% of the
allocation. Both of these sectors suffered a decline in the relative
share of planned capital expenditure in the Third Plan. (See Table 1.)
Development Problems
By far the most potent impediment to effective plan implemen
tation in Nigeria has been the inadequacy of executive capacity with
the increase in the scope and the capital expenditures of successive
plans. The executive capacity constraint on plan implementation has
become most serious. As noted on the first progress report on the
second development plan, "all the governments (of the Federation)
suffer from the same implementation constraint of the shortage of
staff and lack of feasibility studies.Manpower remains the main
bottleneck to the development of the nation.^
Resource constraint is another factor which to some extent
has hindered effective plan implementation in Nigeria. The restrictive
effect of this factor was particuarly noticed during the 1962-68 plan
period, when several projects had to be abandoned for lack of funds.
Much of the problem arose from the failure of external sources of
finance to meet their expected contributions. Although it had been
assumed that 50% of planned capital expenditure would be financed from
foreign sources, at the end of the plan period, foreign funds in fact
12
amounted to only 25%. of the realized capital investment. As a
result of this experience, Nigeria has decided for greater self-
reliance in development financing. In spite of this change in policy
16
Table 1
Public Investment Programs by Sector: Nigeria, 1955-80
Source
1955
Mm
-62
%
1962
Mm
-68 1970
Mm
-74
7o
1975
Mm
■
00
o
S ' S
Economic 378.4 57.3 915.2 67.8 1,779.0 53.1 20,474.1 62.3
Primary production 37.8 5.7 183.5 13.6 368.3 11.0 4,881.7 14.9
Trade and industry 20.8 3.2 180.6 13.4 237.7 7.1 5,875.2 17.9
Transport 255.4 38.7 287.6 21.3 901.8 26.9 7,303.1 22.2
Communication 29.2 4.4 40.0 4.4 129.2 3.9 1,338.9 4.1
Others 35.2 5.3 203.5 15 .1 142.0 4.2 1,075.2 3.2
Social 158.2 24.0 330.3 24.4 889.5 26.6 7,930.9 24.1
Education 47.8 7.2 139.5 10.3 400.0 11.9 2,463.8 7.5
Health 27.8 4.2 34.2 2.5 152.6 4.6 759.9 2.3
Information
a a
7.3 0.5 86.8 2.6 380.2 1.2
Town and country planning 5.2 0.8 83.5 6.2 64.0 1.9 754 .9 2.3
Water 37.0 5.6 48.5 3.6 144.8 4.3 930.0 2.8
Others 40.4 6.2 17.3 1.3 41.3 1.2 2,642.1 8.0
Administration 93.4
14 - h
98.1 7.2 607.8 18.2 4,449.6 13.6
Financial obligations 30.2° 4.6 7.8 0.6 73.6 2.2
~ - - - - —
Note. From the National Economic Council, Economic Survey of Nigeria, 1959, p. 128; Federal Ministry
of Economic Development, National Development Plan, 1962-68, p. 41; Third National Develop
ment Plan, 1975-80, pp. 27, 348-349.
cl
Included in Communications.
Unclassified loans.
and vastly improved internal resources made possible by the oil boom,
inadequate financial resources remain an important constraint on plan
implementation in Nigeria.
The Nigerian political system and its occasional upheavals have
sometimes constituted an impediment to effective plan implementation.
For example, the implementation of the iron and steel complex, which
is crucial to the country's development, had to be delayed for a long
time due to inter-regional rivalry over its location. Also the
'Nigerian political structure of federalism is largely to blame for
progress in this direction. Furthermore, the lack of adequate communi
cation facilities, and their quality, account to a greater extent on
plan implementation in Nigeria. The lack of adequate and relevant data !
i
also contributes to delays in this area of planning and implementation. I
i
| i
This inadequacy of the relevant information coupled with that of inade
quate executive capacity have made it difficult to work out feasible
and viable projects that could fully absorb sectoral fund allocation.
The results of the oil boom have been felt in various degrees
in all parts of the country. The greatest political problem arising
from it remains that of fair distribution of wealth, while the greatest
political gain for the Federal Government is an effective economic
weapon of control over the states. Meanwhile oil wealth is creating a
national bourgeoisie--the wealthy businessmen (general contractors,
importers, exporters, etc.) are making money and beating the legal
system— ensuring that inflation remains high and bringing a new set of
problems and social upheavals to the oil-producing areas of the coun
try. Oil may have brought wealth to Nigeria as a whole, but it is
18
'ironic that the inshore areas where it has been discovered are poor,
as most of the oil is offshore. Their villages have been deprived of
their old occupations without the majority of the peasants finding
something new to do, and as yet few benefits from the oil boom have
filtered through to them.
Oil wealth has brought to Nigeria vast possibilities of break
ing out of an old attitude of dependence on foreign investors and bring
ing development to all its people, but it has also brought with it
many problems: maldistribution of incomes and rewards with their
'accompanying political and social complications, rising living costs,
t
widespread corruption, violent crime, and a near total neglect of the
agricultural sector and other age-old industries such as mining, fish-
i
ing, and quarrying. Even with the present problems, opportunities that
lave come with oil wealth are infinitely greater than the problems.
19
NOTES
^J. Duesenberry, Income, saving and the theory of consumer be
havior (Cambridge, Mass.: Harvard University Press, 1949).
p. 93
2
E. E. Denison, Measuring the contribution of education (and the
residual) to economic growth in The residual factor and economic growth
(Paris: OECD, 1964), pp. 13, 55.
3
Denison, pp. 13, 55.
/ [
Guy Arnold, Modern Nigeria (London: Longman Group, 1977),
^Arnold, p. 95.
^Arnold, p. 98.
^Arnold, p. 101.
g
Arnold, p. 94.
9
0. Aboyade, Foundations of an African economy: A study of in
vestment and growth in Nigeria (New York: Frederick A. Praeger, 1966).
Third National Development Plan. The actual plan is not made available
to us for review. The review of the plan contained here is based on the
postplanning writings of the authors of the plan (pp. 18, 63) and that j
of the best known critic of the plan, Aboyade. I
^L. M. Hansen, Comprehensive economic planning in Nigeria. In
C. K. Eicher & C. Liedholm (Eds.), Growth and development of the Ni
gerian economy (London: Longman Group, 1977) .
^ Second National Development Plan, 1st progress report (Lagos;
Federal Government, 1970-74), p. 71.
12
Third National Development Plan (Lagos: Federal Government,
1975-80), p. 71.
20
Chapter 3
CAPITAL FORMATION FROM 1950-70
In this section, we shall investigate the structural pattern
and trends in capital formation in Nigeria both seetorally and inter-
temporally. Our statistical series depict only broad trends as space is
rather limited for a detailed breakdown. Hopefully, as such trends
are uncovered they will provide sufficient bases for appropriate policy
inferences. j
Table 2
Composition of Gross Capital Formation by Assets,
1951-58 at 1966 Prices
(in Mm)
Jcategory 1951 1952 1953 1954 195® 1956 1957 1958
l
Buildings 32.8 47.0 51.0 66.4 74.0 90.6 109.0 135 .0
Civil engineering
works
8.6 11.0 11.8 19.6 23.4 29.6 22.0 28.0
Plant, machinery,
and equipment
13.4 23.8 23.8 22.6 27.2 35 .6 38.6 40.8
Vehicles (road,
rail, water,
and air)
10.4 14.4 15.2 16.0 23.4 26.6 26.6 35.8
Land and mineral
resources and
peasant agri
culture
18.4 16.4 25.4 46.4 69.6 74.2 36.6 53.2
Total 83.6 112.6 127.2 171.0 217.6 256.6 233.0 292.81
Note. From 0. Aboyade , Foundations of an African Economy (New York:
Praeger, 1966), p. 109
21
Table 3
Composition of Gross Fixed Capital Formation by Assets (1959-70) in Purchase Value
(in Mm)
Category 1959-60 60-61 61-62 62-63 63-64 64 65 65-66 66-67 67-68 68-69 69-70
Residential and
non residential
buildings
. 135.2 142.0 135 .0 141.6 144.0 164.2 212.8 205.2 151.8 142.0 158.6
Other constructions,
except land
improvement
56.0 56.0 59.4 68.6 75.6 90.4 116.6 128.0 135.6 101.6 139.8
Land improvement
and plantation
and orchard
23.2 22.0 60.4 51.2 66.8 66.0 73.4 71.6 52.2 46.2 41.0
development
Transport equipment 37.2 42.6 36.2 24.0 35.4 61.4 54.6 52.4 43.2 46.2 71.6
Plant, machinery,
and equipment
57.2 56.0 65.6 66.6 70.2 121.0 157.8 144.4 100.8 98.0 116.6
Total GFCF 308.8 318.6 356.6 352.0 392.0 503.0 615 .2 601.6 483.6 434.0 527.6
Note. From Federal Office of Statistics, Economic Indicators. Lagos, March 1970. Tables 2 and
3 exhibit the main trends of capital formation for the two decades under review. Start
ing from M83.6 million in 1951, capital stock had grown to M308.8 million in 1960. This
represents a three-fold increase from M318.6 million in 1961. It had grown to M527.6 in
1970--an almost two-fold increase in about a decade. Thus, in the period under review,
capital formation has grown at an average rate of about M319.5 million annually.
N S
N>
The pre-independence (before 1960) average growth rate was
M200.34 million annually and in the post-independence decade, it jumped
to about M458.70 million annually. The rate of growth started acceler
ating from 1963-64, reached a peak of M615 in 1955-66 before it started
declining in 1967. It started picking up an increasing trend again in
1970. The phase of accelerated growth was probably due to impact of
capital investments implemented from the first National Development
'Plan, 1962-68.
Table 4
Output and Investment: 1962-68
(at current factor prices)
Gross Domestic Product Investment
------------------------ Investment
Amount Percentage Amount Percentage as Percent-
Year (Mm) Change (Mm) Change age of GDP
1962 2,597.6 -- 319.8 -- 12 .3
1963 2,825 .6 8.7 354.0 10.6 12.5
1964 2,948.0 4.3 390.0 10.2 13.2
1965 3,146.8 6.7 468.2 20.0 14.8
1966 3,044.8 -3.3 484.8 3.7 15 .9
1967 2,572.2 -15.5 444.8 -8.2 - -
Note. From Federal Republic of Nigeria, Second National Development
Plan, 1970-74 (Lagos: Federal Ministry of Information, 1970),
p. 12; Table 1. ■
Although gross fixed capital formation was increasing, growth
in output was actually declining. This fact is clearly seen in Table 5.
In this table it is clear that while the investment ratio increased
from a little over 12% in 1962 to almost 16% in 1966, the GDP growth
rate dipped to 4.3% in 1964, from 8.7% in 1963. The growth rates of
23
6.7% and 8.37, recorded in 1965 and 1966, respectively, were not all
impressive when compared with the investment ratios of about 15% and
16% during the two years, respectively. We see a clear case of invest
ment without growth.
Investment without growth is clearly seen when one examines
the quinquennial breakdown of investment ratio, the Incremental Capital
Output Ratios (ICOR), and the compound growth rate of the GDP in the
past decade.'*' Table 5 depicts this situation.
Table 5
Growth Rates of Output, Investment Ratio, and Increment Capital
Output Ratios for 1960-70
Years
Compound Annual
Percentage Rate
of Growth of GDP
Gross Investment
Ratio Percentage
(at constant prices)
ICOP Percentage
at Constant
Prices
1960-65 4.78 11.4 2.4
1965-70 2.69 12.9 4.8
1960-70 3.73 12.2 3.3
Note. From United Nations, Statistical and Economic Information
Bulletin for Africa (No. 4) (New York: Author, 1973), p. 58.
It will be observed that ICOR grew from 2.4% in the first quin
quennium to 4.8% in the second, but averaged 3.3% for the whole decade.
When this average is compared with the GDP growth rate of 3.737., it
becomes apparent that increased investment in the decade was not
matched with corresponding increased output as might have been expected
on theoretical grounds. If we refer to ICOR as a rough indicator of
capital efficiency, it could be inferred that such efficiency actually
declined markedly in the quinquennium of the last decade. Why was this
24
case? Some of the reasons include: under-utilization of capital, the
long gestation period associated with most capital projects, and man
power bottlenecks, especially at managerial and technical intermediate
levels as noted elsewhere in this study. The manpower constraint would
therefore underscore the validity of our earlier theoretical reasoning
that looks at growth as a generalized process of capital accumulation
with human capital formation as a strategic complement to the physical
capital components.
Classification of Capital by Sectors
Greater insight into the structure of capital formation might
be gained if we undertake a sectoral desegregation and highlight trends
in some of the major components.
buildings
Construction stands out as the most conspicuous contributor
in capital formation during the period under review. In the pre
independence decade, it accounted for about 40% of the total capital
formation and in the post-independence decade, its contribution was a
little over 507a (see Tables 6 and 7) . Thus construction activity has
{
been accounting for about one-half of the country's gross capital for
mation for 20 years. This heavy concentration has a far reaching im
plication for the growth prospects of the Nigerian economy. Theoret
ically, the multiplier effects of the growth of the construction
industry are expected to be substantial because of the forward and
backward linkages they characterize. Why was this theoretical expec
tation not fulfilled in Nigeria's case? The answer to this question
25
Table 6
Gross Fixed Capital Formation by Assets Percentage Distribution
(1959-70) at Current Prices
Assets 1959-60 60-61 61-62 62-63 63-64 64-65 65-66 66-67 67-68 68-69 69-70
Residential and non-
residential
buildings
43.7 44.6 37.9 40.4 36.7 32.6 34.7 34.1 31.4 32.8 30.2
Other construction,
except land
improvement
18.2 17.6 16.6 19.6 19.4 17.9 19.1 21.3 28.1 23.5 26.6
Land improvement,
plantation, and
orchard develop
ment
7.5 6.9 16.8 14.5 17.1 13.2 11.9 12.0 10.8 10.6 7.8
Transport equipment 12.0 13.5 10.1 6.9 9.2 12.2 9.0 8.7 8.9 10.6 13.7
Machinery, plant, and
equipment
18.6 17.6 18.5 19.1 17.9 24.1 25.7 24.0 20.9 22.6 22.2
Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
N>
< y >
Table 7
Percentage Distribution of Gross Fixed Capital Formation by Organization Sectors (1951-58)
at 1966 Prices
Fixed Assets by Sectors 1951 1952 1953 1954 1955 1956 1957 1958
Buildings
Public sector
Private sector
Personal (household)
19.5
9.8
70.7
21.7
9.4
68.9
27.8
10.6
61.6
25.1
10.5
64.4
20.0
10.8
69.2
19.9
9.9
70.2
23.5
10.5
66.0
17.3
10.1
72.6
Civil engineering works
Public sector
Private sector
95 .3
4.7
94.5
5.5
94.9
5 .1
95 .6
4.1
97.3
3.4
95.5
2.7
95.7
4.5
95 .7
4.2
Vehicles
Public sector
Private sector
28.8
71.2
36.1
63.9
25 .0
75.0
36.3
63.7
39.3
60.7
24.8
75.2
37.1
62.9
33.5
66.5
Plant, machinery, and
equipment
Public sector
Private sector
29.9
70.1
43.9
65.1
34.5
65 .5
39.8
60.2
28.7
71.3
37.1
62.9
34.7
65.3
28.4
71.6
Land and mineral resources
Private sector
Public sector
Peasant farmers
5.4
10.9
83.7
6.1
17.1
76.8
3.9
15.8
80.3
3.0
12.5
84.5
3.7
8.9
87.4
1.9
7.5
90.6
6.0
23.4
70.6
3.8
18.8
77.4
Note. From Aboyade, p. 42.
Ni
cannot be far fetched. First, from the standpoint of the development
history of most advanced nations, Aboyade has correctly observed that
Nigeria happens to be the only country that exhibited such a high ratio
of residential building to total construction at a comparable stage in
its development. Thus, instead of having an engineering bias in her
construction activities as do the United States, West Germany, and
Japan, Nigeria showed a definite residential (construction) bias. This
bias seems, however, to be peculiar to most developing countries. For
instance, a recent estimate by the ECA shows that in the second quin
quennium of the decade, 1960-70, the proportions were quite substantial
for most African nations: e.g., Egypt (527°), Ghana (61%), Tanzania
(62%), and Lesotho (90%). The average compound annual rate of growth j
t
in construction is 8.9% for North Africa and 5% for East Africa. j
i
Second, the construction bias so exhibited did not succeed in
generating output and employment in the economy as one would have ex
pected. The fact that most of the construction equipment and components
were imported, necessarily weakens the multiplier effect of construc
tion activities in Nigeria.
Third, it is paradoxical that, even though residential con
struction took such a big chunk of capital stock, the country was still
faced with housing problems, especially in urban areas. The problem
became critical and was more dramatized after the war as prices of
houses and rents rose by over 200% in Lagos and other urban centers
that had received a huge influx of immigrants from rural areas. The
investment that was made, apparently catered mainly to middle-class
housing needs and demand.
28
Another aspect of distortion in housing investment noted is the
boom in rural housing. This represents a misallocation in investment
when it is considered that such houses do not earn rents for their
owners, who, presumably, are paying high rents in the urban areas.
Another aspect of rural housing is the obvious waste involved in those
buildings which were not completed and will probably never be completed.
Such assets are frozen, and, hence, cost the economy's stock of produc
tive capital. Government policy should be directed to correcting such
misallocations through appropriate tax measures in the case of un
rented buildings in rural areas, based on evidence of availability of
i
resources (to reduce incidents of uncompleted buildings). Encourage- J
ment to the development of building material industries in the domestic|
i
economy seems long overdue. This is particularly necessary if the
economy is to capture all the potential multiplier effects of the con
struction industry.
Manufacturing
Here again, construction dominates manufacturing. The contri
butions of plant, equipment, and machinery to capital formation ranged
between 12% to 18% in the pre-independence decade and about 20% in the
post-independence decade. What is worth noting here is the slow growth
of capital formation in this sector over the period under review. Ob
viously, this indicates that the industrial base of the Nigerian econ
omy is relatively weak. This is particularly disturbing since the
manufacturing sector is expected to create a development momentum for
the economy via the generation of increased output and employment. Its
performance in this respect has not been impressive as can be seen from
29
the chronic picture of unemployment problems that characterizes most
urban areas of the country.
Mining
The average contribution of the mining sector was about 22%
in the 1950s and about 307. in the 1960s . Towards the close of the
last decade, oil drilling has emerged as a leading sector in terms of
2
its contribution to the GNP. One-half of the 12%> growth rate recorded
in 1971 was accounted for by the petroleum industry. It is expected
that the oil industry will accelerate the rate of capital formation
in the whole economy, thereby speeding up its take-off and structural
transformation.
Public vs. Private Sectors
Dividing the analysis into organizational sectors, viz., public
and private, the overall contribution of each presents an interesting
contrast (see Table 7). In the 1950s, almost half the total of capital
formation was accounted for by the household and the peasant sectors.
The contributions of the public and private sectors were about the
same, except for the conspicuous contribution of the private sector
in vehicles (about 65% throughout the 1950s) and that of the public
sector in civil engineering (about 95% throughout the 1950s). One can
rightly attribute the latter to the character of a colonial economic
investment in which emphasis is often placed on improving transporta
tion and other infrastructural facilities relevant to the exploitation
of the existing natural resources. In the Nigerian case, this era saw
the expansion of railways, bridges, and roads to facilitate the trans
30
port of export products such as cotton, groundnuts, cocoa, and oil palm
produce.
This relative stagnation of manufacturing during the era comes
as no surprise, because the colonial economic arrangement invariably
dictated that the country be dependent on the metropolitan sources of
supply for its manufactured commodities. Import substitution as an
industrial strategy was given little or no attention.
The decade of the 1960s, shows a lopsided picture of the con
tribution of the,private sector vis-a-vis the public sector. This is
shown in Table 8.
Table 8
Gross Capital Formation in Organization Sector (1962-68)
(in Nm)
Public Sector Private Sector
Year GCF (share) (share)
1962 319.6 129.2 190.4
1963 354.0 126.8 227.2
1964 390.0 136.0 254.0
1965 468.2 . 167.6 300.6
1966 485.2 181.8 303.4
1967 444.8 7.9 7.9
1968 7.9 7.9 7.9
Note. From Federal Republic of Nigeria, Second National Development
Plan. 1st progress report (Lagos: Federal Government, 1970-
74), p. 11.
31
This table indicates the private sector gathering momentum in
capital formation from 1962 and the public sector weakening. The con
tribution of the private sector was about twice that of the public
sector in the decade of the 1960s. Although this private sector
strength reflects the post-independence enthusiasm in private business
enterprises, it should not lead one to overlook the apparent ineffi
ciencies and waste that occurred in capacity utilization.
It is significant that capital formation in the public sector
failed to reflect the growing role of government participation in the
economy in the post-independence era. The reasons for this cannot be
far fetched. J
First, there was the apparent lack of well-articulated projects J
with clearly defined policies oriented towards their achievement.
Second, there was inadequate pre-investment analysis of projects
and there were delays in taking strategic decisions on their implemen-
i
tation. A case in point is the iron and steel complex, which never
passed an investigative stage because of political bickerings over the
choice of an appropriate location. Yet, this industry was supposed to
3
be the cornerstone of Nigerian industrialization.
Third, the import substitution policy, although paying a
healthy dividend by boosting the manufacturing sector, brought in its
wake a rise in cost and volume of imported raw materials, intermediate,
and capital goods, which contributed about 45% of added industrial
costs. The effects of all the above factors and others not mentioned
due to lack of adequate information, contributed to the lack of growth
of the public sector capital formation.
32
Sources of Capital Formation
This section cannot be completed without examining the sources
of capital formation in Nigeria. We shall in this section examine the
roles of savings, marketing boards and corporations, deficit financing,
taxation, and foreign investment in capital formation in Nigeria,in
short, both the public and private sources of capital finance in
Nigeria.
Private Savings
The close association between savings and investment had been
noted by both the neo-classicists and Keynesians. For the former,
saving is a determinant of investment while in the latter's theoretical
scheme it is an increasing function of income which is generated by
investment. Modern growth-oriented theories have broken the apparent
circularity in the neo-classical Keynesian synthesis by posing savings
as an independent constraint on investment. Following this formulation
which is very much in the spirit of the vicious circle, "caricature"
of the developing countries, capital formation crucially depends on
the availability of savings for its funding. Under-developed nations
are generally known to be low savers; the Nigerian situation is not
different.
Although a vigorous empirical study of the savings income rela
tionship on an aggregative scale is yet to be carried out in Nigeria,
it is not difficult to see that Nigeria's saving-income ratio is as
low as could be expected (see Table 9). Among the outstanding features
of the table are the following observations: (a) The savings ratio was
33
Table 9
Institutionalized Savings Cumulative in N Thousands, 1962-70
Year
Savings and
the Deposits
at Commercial
Banks
National
Provident
Fund
Post
Office
Savings
Savings
with
NBSa
Premium Board's
Savings
Certificate
Total
Savings
Gross Domes
tic Product
(Mm)
Savings
GDP
Ratio
(%)
1962 83,288 2,184 5,956
b
n .a. 16 91,444 2,597.6 3.5
1963 94,270 8,906 5,928 484 112 109,700 2,825.6 3.9
1964 108,428 17,786 5,898 774 176 133,062 2,948.0 4.5
1965 141,018 27,328 5,490 962 268 175,066 3,146.8 5.5
1966 162,516 39,112 5,314 1,174 366 206,482 3,044.8 6.8
1967 131,242 43,578 4,848 1,378 422 181,428 2,572.2 7.0
1968 183,558 50,884 4,930 1,766 188 241,320 2,543.8 9.4
1969 215,406 58,596 5,068 2,014 180 281,264 3,234.5 8.7
1970 279,190 63,082 5,026 2,530 150 349,980 4,242.0 8.2
Note. From Central Bank of Nigeria, Annual Report and Statements of Accounts for the year ended
31st December 1971 (Lagos: Central Bank of Nigeria, 1972), p. 59; Federal Republic of Nigeria,
Second National Development Plan, 1970-74, p. 52; Table 1.1.
8l
NBS = Nigerian Building Society.
^n.a.= not available.
very low. It increased from 3.5% in the early part of the decade to
about 8% at the end of the decade, (b) Its annual percentage increase
was equally low (betwee 1% and 2%, and (c) There was relative stagnation
of the post office savings bank as a savings mobilization mechanism
(its volume of savings had always stayed at an annual figure of about
45 million, while commercial banks and National Provident funds were
recording substantial progress).
From M91 million in 1962, institutional savings had grown by
about three times at the end of the decade. It should be noted that
this figure is likely to understate the actual volume of savings in the j
economy since the savings from family unions, and local thrift associa
tions, as, for example, the "ESUSU" which is prevalent in the southern 1
i
I
part of the country, were not recorded. This, therefore, suggests the j
need to adopt a more effective mechanism of savings mobilization in the
rural areas of the country. Cooperatives could be organized to under
take this type of job more efficiently. Furthermore, the need to
spread commercial banking facilities and services to remote areas of
the country is pressing if savings are to be effectively mobilized for
productive capital formation in Nigeria.
Marketing Boards
The purpose of these boards in Nigeria is to help stabilize
export prices of agricultural commodities by setting up a buffer be-
4
tween sellers and the fluctuating world commodity prices. A reserve
which was to be built up in years of high prices was to be used in
years of low prices for paying the producers so as to guarantee them
a stable earning. But this board was fraught with all kinds of prob
35
lems ranging from domestic to international; consequently, its contri
bution to capital finance in Nigeria was only brief--to finance the
first national development plan of 1962-68. Hence it proves to be
unreliable as a source of capital formation in Nigeria. With improve
ments in production, marketing organizations and in-world market prices
of the Nigerian primary export commodities, there seems to be no reason
why the marketing boards should not make a positive contribution to
capital formation in the future as they did in the 1950s .
Public Corporations
These are semi-governmental bodies which were set up to under
take the production and marketing of some basic utilities, and develop-,
j
ment of some export produce. They include, for example, the Nigerian ,
Ports Authority, National Electric Power Authority, Nigerian Airports !
Authority, the railway corporation, etc. These corporations were
expected to invest M349 million during the First National Development
Plan, 1962-68, N160m of which was to come from their internal resources,
the balance being made up through loans from the federal and state
governments. Their performance in the first two years was disappoint
ing, for only M28 million was contributed.^
This low performance could be alluded to the glaring mismanage
ment which bedevilled most of these corporations. They are havens for
political failures and sycophants rather than positions for experts.
Up to the present some of the corporations are a financial liability
to the economy and hence cannot be relied upon to contribute to capital
formation in Nigeria, as one would have hoped for (see Tables 10 and
11) .
36
Table 10
Development Stocks: Central Bank's Initial Holdings
as Percentage of Total
Year Issue
Value
(Mm)
Central Bank's
Holding
(%)
1959 1st Nigerian Development £oan 4 0
1961 2nd Nigerian Development Loan 20 37.0
1962 3rd Nigerian Development Loan 14 34.8
1963 4th Nigerian Development Loan 30 61.7
1968 5th Nigerian Development Loan 40
a
n.a.
1969 6th Nigerian Development Loan 30 95 .8
1970 7th Nigerian Development Loan 40 68.8
Note. From the Central Bank of Nigeria, Annual’Report and Statement
of Accounts, 1969-70 (Lagos: Author, 1970).
aNot available.
Table 11
Nigeria: Flow of Foreign Capital (1964-68)
Year
Net Flow
(Mm)
1964 126.0
1965 110.0
1966 98.8
1967 95 .2
1968 73.4
Note. From the Central Bank of Nigeria, Economic and Financing
Review (June 1971), 9.(1), Table 1, p. 6.
37
It seems the major problem of public corporations in Nigeria is
that of lack of competent management and executive leadership. If
modern management techniques are carefully applied and positions are
not filled by corrupt and incompetent officials, there is no reason why
the public corporations may not have an important role on capital for
mation in Nigeria. Further, it is the recommendation of this study
that an overhaul of the system is long overdue. Drastic steps should
be taken to "clean up" these corporations for a better financial base.
Foreign Investment and Aid
The growing limitations of foreign private investment as a
catalyst in development, especially within the last two decades, have |
been widely documented. This growing concern has to do with the
i
t
dwindling quantity of flow of private capital funds and/or aid to the
developing nations rather than the intrinsic worth of the flow per se.
In the traditional "gap" analysis, the role of private investment and
foreign aid in capital formation in particular, and economic develop
ment in general, can be quite substantial. They can for instance (a)
trigger off indigenous capital formation by accelerating domestic
demands, and this could be accomplished through the traditional multi
plier acceleration process following any investment project, (b) con
tribute technical and managerial expertise, thereby relieving bottle
necks in these areas, and (c) make free foreign exchange available for
consumer goods imports, thereby removing the balance of payments con
straint in mobilization of existing local resources.
This source of finance is not that reliable because the rich
nations of the world are not particularly keen to transfer resources
38
to most developing countries at a quantum that could expidite rapid
economic transformation in the latter. Their investment is usually
for exploitative purposes and not for economic development of a third
world. Also the rich nations seem too preoccupied with their internal
and external economic problems--heacach.es of advanced capitalism or
socialism--so that they consider the price of developing the poor
countries too high to pay.
The above reasons are advanced to underscore why not much reli-J
ance can be placed on "salvation from abroad" when it comes to the cru
cial issues such as resources for capital formation. It does not,
however, suggest that efforts should be relaxed in getting private
J
foreign investment and aide to supplement the domestic resources. I
)
Taxation
Taxation or forced savings could be a very useful instrument of
capital formation both in terms of the sectoral distribution of the
formation and in terms of offering incentives to other agents of
g
capital formation. Tax-financed capital formation is particularly
justified on the grounds that most investments are undertaken by public
agencies, e.g., railways, roads, bridges, and public utilities. Be
sides, many private investors look up to publicly-sponsored financial
agencies such as the Industrial Development Bank and Agricultural
Development banks for credit. Thus, even when all other avenues of
capital formation dry up, taxation remains the last single source for
any economy.
39
Deficit Financing
This can be defined as net increase in the amount of money in
circulation where such an increase results from a conscious governmen
tal policy designed to encourage economic activities, which would
otherwise not have taken place, as defined by Gardner Patterson.^
Prudently used, deficit financing could be a very powerful tool of
capital formation. If the proceeds are used to finance consumption,
then its very rationale will have been defeated. The traditional
methods of deficit financing include net borrowing from the Central
Bank, the commercial banking system, non-banking financial intermedi
aries , and depletion of cash balances.
Although deficit financing is a powerful instrument of mobiliz
ing savings if well organized, it carries with it some inflationary j
g
dangers. These two aspects of its role have been empirically investi-
9
gated between 1957-70 for Nigeria by Oyejide. His findings show that |
(a) the high proportion of gross capital formation in the first decade
of independence in Nigeria could be explained in terms of the deficit
financing policy and (b) that a statistically significant positive
correlation exists between price level and deficit financing in Nigeria
for this period. Such conclusions seem plausible when one considers
the declining role that the marketing boards and other corporations
have played in the Nigerian economy. A prudent application of this
policy could continue to enhance its contribution to capital formation.
The danger to watch is its inflationary aspect that can easily be
handled if the output effect of financing outweighs the cost-price
40
leffects. There is also the need to encourage public participation in
the money market so that the Central Bank may be relieved of the burden
of carrying too many credit instruments.
41
Table 12
Tax Revenue as a Percentage of the Gross Domestic Product (GDP)
and Gross Capital Formation (GCF), 1962-68
Year
Tax Revenue
(Mm)
GDP
(Mm)
Tax Revenue
as Percentage
of GDP
GCF
(Mm)
Tax as
Percentage
of GCF
1962 211.7 2,597.6 8.O., 356.6 59.3
1963 225 .3 2,825.6 8.0 352.0 64.0
1964 258.7 2,947.6 8.8 393.0 65 .8
1965 287.2 3,146.8 9.0 503.0 57.1
1966 277.3 3,044.8 9.1 615.2 45 .1
1967 250.2 2,572.2 9.7 601.6 41.5
1968 350.2 2,543.8 13.8 483.6 72.4
Note. From Central Bank of Nigeria, Economic and Financial Review
(June 1971), 9(1), p. 127; Table 1; Table 2.
42
NOTES
N. A. A. Okuboyejo, Economic development and planning in
Nigeria 1945-68 in T. M. Yesufu (Ed.), Manpower problems and economic
development in Nigeria (Ibadan: Oxford University Press, 1969), p. 3.
2
Simon Kuznet, Commodity flow and capital formation (New York:
National Bureau of Economic Research, 1938), p. 3.
3
United Nations, Statistical and economic information bulletin
for Africa (No. 4) (New York: Author, 1973), p. 46.
4
P. N. C. Okigbo, Nigerian national accounts (Lagos: Federal
Government, 1957) .
^R. W. Hooley, The measurement of capital formation in under
developed countries, Review of Economics and Statistics (August 1967), j
75 , p . 105 . |
!
f \ I
Aboyade, p. 223. I
^Aboyade, p. 223.
8
Hooley, p. 208. The appropriate deflator to use for the for
eign trade statistics is the foreign price index, not the domestic
index. Therefore, with the use of the latter, there will be over
evaluation of capital goods when the official exchange rate is used
to measure the volume of addition to capital stock.
9
ICOR should be interpreted with caution as its computation im-
plicity assumes a direct casual link between investment and output,
which is not necessarily true. Besides, the estimate of capital stock
is necessarily incomplete. ICOR is the ratio of the increase in a
country's capital stock to the increase in its productive capacity
and is measured as:
LJLlkA .
K / Q
Where K and Q stand for capital stock and output, respectively.
"^Central Bank of Nigeria, Annual report and statement of ac
counts. December 1976 (Lagos: Author, 1978).
43
Chapter 4
INVESTMENT DECISIONS
Structurally, the Nigerian economy exhibits features that are
jantipathetic to the achievement of effective planning. It still has a
large subsistence output from small widely-scattered peasant producers.
'It has a capitalistic sector, subdivided between small-scale indigenous
producers and large-scale monopolistic foreign enterprises. It has a
^decentralized public sector that has little confidence in itself and
the prominent leaders of which are in league with the business enter
prise sector. It is, however, this alliance of bourgeois interests
which poses a serious problem for the planning task of increasing the
rate of domestic savings and investments. However, these economic
structural defects can be overcome by a coherent development planning
(directed at the federal level and embracing all production units in the
country. To achieve this, other than by a political revolution, insti
tutional arrangements conducive to serious and massive economic devel
opment must be devised. The socio-political climate itself must change
by closing the gap between the government and the governed, the increas
ing class differentiation being fostered by the undemocratic manipula
tion of the state machinery must be arrested, and promote a national
consensus behind a well-defined philosophy of economic development to
which all leaders will be committed. A plan that is divorced from the
grass-root of the peoples' problems and aspirations will lead to disas-
44
trous social consequences; not have a neutral effect.^
It is difficult to discuss changes in the structure without
first considering the process of decision making in the households with
respect to housing expenditure. It would be useful, therefore, to
identify the principal decision agents and to analyze the factors that
may likely influence their decisions.
In this section we intend to look briefly at the principal fac
tors of investment decision in Nigeria. This group is comprised of the
households, the peasant farmers, the small business units, incorporated
private enterprise/industrial, and the public corporations.
Households/Peasant Farmers
In the traditional sectors, decisions about investments by
peasant farmers in building or stocks are made by the heads of indi
vidual households. He or she decides on what amount shall be invested
in buildings, bonds, stocks, or the family's farm land. Since most of
the family's income is mainly derived from agricultural proceeds, not
much is expected to be spent in buying bonds, stocks, and the like;
instead, most of the expenditures are made on equipment for land cul
tivation and dwellings for an extended family. The dwellings use tra
ditional materials and substantial family labor input. However, with
increasing income from agricultural yields, it is expected that the
task of managing the family's business becomes much more demanding,
thus decisions of what to be done calls for an additional hand from
the family, usually that of the senior wife of the household. Deci
sions for the acquisition of stocks and bonds or other government
4
securities are a rarity in the rural areas of Nigeria. The reason
45
being that banks are scarce in the rural areas and peasant farmers
know little to nothing regarding the value of a commercial paper. How
ever, this trend is now rapidly changing, with the government's recent
policy of providing banks in some rural areas of Nigeria. The case for
organizational reform in traditional agriculture is, however, a problem
with many dimensions. But of immediate relevance to our analysis in
this section is how to improve the decision-making process in order to
minimize the cost of new land clearance for production expansion ac
companied by increased productivity. The capital formation in farming
was provided substantially by households in the 1950s and official
emphasis has been a modernizing agricultural practice through farm
settlements. But the way these settlements are so far executed has the!
effect of raising both the money and opportunity costs substantially. !
It is also very doubtful if these schemes constitute an optimal invest
ment choice, considering available organizational alternatives in the
agricultural sector opened to the policy makers.
Industrial Sector
The industrial sector in Nigeria can be divided into three sub
sectors: rural cottage industry, small-scale urban industry, and firms
employing 10 or more persons. Little is known about the cottage indus
try, but the little information that exists points to the fact that in
1965 over 900,000 households were engaged in manufacturing activities
and that the major areas of production were goods processing, textiles,
2
palm oil extraction, clothing, mats, and metal products.
Our knowledge of the nature and extent of urban small-scale
industries is better than the cottage industries. We know, for example,
__________________________________________________________________________46
that there is a high degree of uniformity between geographical areas,
that over a third of the concerns are one-man operations, and that in
the larger firms more than half of the labor force consists of appren-
3
tices. The urban small-scale industry exhibits some features that
should be noted. First, this industry is not evenly spread geographi
cally, but tends to be highly concentrated in the new commercial and
4
administrative cities where there exists considerable wage employment.
This feature attributes to the fact that the products of small-scale
industry are consumer goods, and, therefore, these industries tend to
concentrate in areas where there is a concentration of purchasing power
that could support them. Second, we can identify at least three types
of producers in the small industry sector: unskilled producers of
crude consumer goods whose number is closely related to the volume of
urban immigration, the skilled artisan producers of simple but better
quality products (e.g., cabinet-making), and relatively complex modern-
scale industry (e.g., baking, bottling). Finally total employment in
small-scale industry would seem to be in the neighborhood of 100,000,
which is less than in rural cottage industry but greater than the num
ber employed in establishments of 10 or more
Therefore, given the above picture of small-scale businesses in
Nigeria, the investment decision factor can be easily visualized. The
small-scale business man decides solely what amount of resources to
invest depending upon his trade and volume of business. Further, we
should add that his sources of finance are principally from personal
savings and/or friends, since his capital requirement is not that heavy.
Our knowledge of establishments employing 10 or more persons is
__________________________________________________________ 47
based on the industrial survey of 1963.^ Of the 649 establishments
returning information in that year, 59% employed 10 to 49 workers,
33% employed 50 to 299, and 8% employed 300 or more. The survey re
vealed information concerning ownership. Of the paid-up share capital
of 321 limited companies ,<§68% was of foreign origin. Of the remainder,
22% was Nigerian public, and 10% Nigerian private. These figures con
firm the fact that foreign enterprise plays a leading role in Nigeria's
industrial development. It is therefore not difficult to see where the
sources of investment decision in these enterprises emanate. The per
centage breakdown reveals at least, in part, the decision of what to
invest in, and in most cases comes from abroad. This gives a grim
picture of the economy and that of the policy planners since they are
at the mercy of the multi-national corporations. It is our well-
thought opinion that our policy makers reverse this picture for the
benefit of industrial and economic development of the country.
Public Corporations
The public corporations are midway houses between the commer
cial firms and government departments. Their role is of the non
economic or cultural variety (e.g., broadcasting, electricity, etc.);
hence, their aim is non-profit making. Public corporation employees
are not civil servants; hence, cannot be controlled by government de
partments. For an elaboration of their role see the previous section
on capital formation. Investment decisions are made by board members
drawn from the various political parties of the country. These members
decide on what policies to undertake and generate their own funds from
48
their respective organizations. But often, they rely on the government
for funds due to mismanagement and abuses of power and self-interests.
49
NOTES
T. A. Oyejide, Deficit financing, inflation and capital forma
tion: An analysis of the Nigerian experience 1957-1970, Nigerian Jour
nal of Economics and Social Studies (March 1972), 14.(1), pp. 27, 42.
2
P. Kilby, Industrialization in an open economy: Nigeria 1945-66
(Cambridge, England: Cambridge University Press, 1969), p. 17.
3Kilby, p. 18.
4Kilby, p. 19.
5Kilby, p. 19.
g
Federal Office of Statistics, Industrial survey of Nigeria,
1963 (Lagos: Author, 1966) .
50
Chapter 5
INVESTMENT IN AGRICULTURE
In this section we shall focus our analysis on the theme of
our thesis, namely that our policy planners have neglected agricultural
investment to the detriment of economic development. As a result of
this we have resorted to the importation of some food items, which
were previously produced in the economy to feed the population, which,
in turn, has grossly affected foreign exchange earnings.
The share of agriculture in gross domestic product (GDP) has
been declining constantly since 1958-59. At constant factor cost, the
share of agriculture, forestry, and fishing stood at 66% in 1958-59;
by 1966-67 it was down to 55%, and is estimated to be about 50% in
1
1970-71. Part of this decline in the share of GDP can be attributed
to the high growth rates of manufacturing and petroleum. Statistics on
agriculture during the war years 1967-68 to 1969-70 show some fluctua
tions because of the varying geographical coverage and the disruptions
in productive activity caused by the civil wars.
The agricultural sector accounted for almost all of Nigeria's
export until the early sixties. With the growth of oil or petroleum,
the share of agricultural commodities in total value of exports dropped
to 61% in 1966 and 38% in 1970. This trend will probably continue, with
agricultural products providing less than 12% of gross export proceeds
2
by 1975, and probably less in 1980.
51
It is our submission that agriculture must continue to be a
major focus of development activity in Nigeria, as about 72% or so of
the labor force derives its income from the agricultural sector. This
sector also has a considerable untapped development potential. A
review of a survey undertaken by the International Bank for Reconstruc
tion and Development (IBRD) in 1971 of the agricultural sector in
Nigeria reveals that
if immediate steps are taken to improve price incentives, and
investment, the supply of farm inputs and transportation in the
East, agricultural production could achieve an average growth
rate of about 3 per cent through 1975, provided the weather is
favourable and food output responds to the pressures of demand.
This is still less than the average annual increase of 3.3 per
cent achieved from 1958-59 to 1966-67. It is our belief that
in the longer run, provided appropriate steps are taken to over
come the development constraints discussed here, the annual rate
of growth could reach 5 per cent by the 1980s.3
As shown in Table 13, the transformation of the economy which
can reasonably be expected is demonstrated by the projected sector
shares in the national product. The years chosen are those at the end
of the Second Development Plan and the last years of the Third Five-
year plans. By the end of the "Fourth" plan in 1983-84, if there is
any at all, the agricultural sector may not account for more than just
one-quarter of the domestic product, half its relative importance in
the base year 1970-71.
52
Table 13
Structural Changes in GDP by Origin in Percentages
1970-71
(actual) 1973-74 1978-79 1983-84
Total GDP at factor costs 100 100 100 100
Agriculture 50 42 33 27
Petroleum 11 15 15 12
Manufacturing and
construction
13 16 20 24
Transport, public utilities 4 5 7 10
Others 22 22 25 27
Note. From Federal Office of Statistics, Nigeria (Lagos: Author,
1971). j
i
1
It is of some interest to note that the share of the oil produc
ing sector reaches a peak soon after the end of the second development
plan period (1973-74) and falls thereafter. This is based on the as
sumption that the present fields will remain in full production with
some modest increase of output over the years, but no major new dis
coveries nor any investments in the utilization of vast natural gas
resources of the nation will be made. Although plans and proposals
to begin gas liquefaction on a large scale are presently being dis
cussed, the time-phasing, costs, and outputs are too uncertain at
this time to take these into account. The projections therefore pre
suppose a declining trend in investment in the oil producing sector
by 10% to 12% per year after 1973-74, which, in fact, may not be real
istic if a liquefied natural gas complex is to be established.
53
Table 14
Sectoral Composition of Investment in Percentages
1970-71 19 m -74 l'978-79 1981-84
Total fixed investment 100 100 100 100
Agriculture 8 7 10 8
Petroleum sector 21 16 6 2
Manufacturing and
construction
29 27 30 39
Transport, public utilities 21 24 27 27
Other services 21 25 27 24
Note. From Federal Office of Statistics, Federal Ministry of Economic
Development, Nigeria (Lagos: Author, 1969-71).
Investment in agriculture remains low throughout the projection
period, largely reflecting the lack of capacity to implement projects
at the level of the states which carry the major responsibility in
this sector. The heavy investments in the construction sector in the
base year 1971-72, inflate the share of manufacturing and construction.
The increasing share of other services reflects substantial invest
ments in public administration in the new states and in education and
health facilities all preying at the expense of agriculture!
54
Table 15
Production of Major Export Crops in Thousands of Tons
Average Average Projections
1959-60/64-65 1965-66/70-71 1974-75 1979-80 1984-85
Groundnut 625 728 1,100 1,100 1,000
Cocoa 203 226 245 222 210
Palm oil3 504 406 390 356 349
3.
Palm kernel 404 285 425 425 410
Rubber 65 60 79 72 72
Seed cotton 126 154 240 220 210
Note. From World Bank Report, 1978, Statistical Annex Table 36 (pro
jections are mine).
aCalendar years.
An analysis for individual agricultural product shows that the
constraint on expansion has almost always been supply rather than
demand, even for the export crops. The rate at which domestic demand
may grow in the years ahead makes it likely that this will continue to
be true for a number of important crops. The shortage of supply is
due largely to the few hands left on the land to farm, as the younger
farmers have fled the land to the modern sector in search of more
lucrative jobs--a situation which is largely the fault of our policy
planners. The few involved in production and distribution are not
able to respond promptly and effectively to changes in the market
situation, and, more specifically, to increase in demand.
55
Although investment programs alone cannot create conditions in
which an adequate supply response is assured, there is no doubt that
improved roads, and specifically access and feeder roads which would
end the isolation of traditional agriculture from the modern sector,
must play an important role. Further, the attitude of the land desert
ers should be discouraged by providing them with the necessary infra
structure in the rural areas. The promotion and use of modern inputs
and the provision of improved plant material through the revamping of
an entirely inadequate extension service is equally important, as are
|
the provision of marketing channels and storage facilities. All this,t
i
and more, can become a wasted effort if it is not made a part of a j
coherent and consistent strategy of the government for rural and agri- |
t
cultural development, embracing not only direct investment and the (
i
i
input of more and better trained manpower, but also including proper
pricing policies and realistic recognition of the role of the private
sector in agricultural marketing and distribution.
Such a strategy, adequately geared to a realistic domestic
demand forecasts that the need to maintain reasonable price stability
should be devised. The lack of or weakness of existing institutions,
the uncertainty of the role of the Federal Government in agricultural
development, the peculiar relation between prices paid to agricultural
procedures and the revenues of the states, and the uncertainty regard
ing future federal/state financial relations, all tend to go together
in hampering the effective implementation or even the formulation of a
sound strategy. The main emphasis here is on the description and
56
analysis of present patterns of production, marketing, and input use--
the market prospects for major export crops and the identifiable con
straints to development.
Trade
The ratio of imports and exports to the GDP is a crude but
widely used index of the size of a country's foreign trade department.
Judged by this index, the Nigerian economy appears to be characterized
by a large foreign sector. In 1970, for example, approximately 17% of
the couhtry's GDP was exported, while imports amounted to 15% of the
GDP. Thus, in that year, the composite ratio--the measure of the size
of the foreign sector--was 32%
Nigeria's imports have grown considerably since the Second
World War. From about M41 million in 1946, they had risen to Ml,737
million by 1974! (See Table 16.) An interesting question worth exam
ining is whether this rapid growth of imports has been accompanied by
any fundamental change in the structure of the country's imports.
Table 16 shows the distribution of imports by Standard International
Trade Classification (SITG), which we think provides an answer to this
question.
Table 16 also shows that there were some significant changes
in the structure of Nigeria's imports during 1946-74--the period under
review. To some extent, the changes are a measure of the degree to
which the agricultural sector of the economy is unable to meet the in
creasing domestic demand for food. The share of food in total imports
which amounted to 5.8% in 1946 had risen to 11.1% by 1960. Between the
___________________________________________________ 57
Table 16
Distribution of Nigerian Imports by SITC Sections, 1946-74
1946 1950 1960 1965 1970 1974
Vf.v,
mXl % Mm 70 Mm % Mm % Mm % Mm %
Food 2.4 5.8 8.2 6.7 47.8 11.1 46.1 8.4 57.8 7.6 154.6 8.9
Beverages &
tobacco
2.7 6.5 6.1 4.9 12.3 2.8 4.0 0.7 4.0 0.5 9.0 0.5
Crude materials 0.2 0.4 0.4 0.3 4.3 1.0 13.2 2.4 16.6 2.2 63.7 3.7
Mineral fuels 4.6 11.4 7.8 6.3 22.7 5.2 34.7 6.3 22.0 2.9 55.4 3.2
Animal & vegetable
oils & fats
__
— — — 0.1 0.0 0.3 0.0 0.8 0.1 3.6 0.2
Chemicals 2.0 4.8 5.1 4.1 24.5 5.7 40.4 7.3 88.4 11.7 191.0 11.0
Manufactured goods 15.1 37.0 49.7 40.2 162.3 37.6 180.0 32.7 226.0 29.9 523.4 30.1
Machinery & trans
port equipment
4.4 10.8 23.5 19.0 103.3 23.9 184.8 33.6 282.6 37.4 611.8 35.2
Misc. manufactured
goods
8.8 21.6 21.1 17.0 47.8 11.1 41.1 7.5 39.6 5.2 114.0 6.6
Misc. transactions 0.7 1.7 1.8 1.5 6.7 1.6 6.2 1.1 18.6 2.5 10.6 0.6
All 40.9 100.0 123.7 100.0 431.8 100.0 550.8 100.0 756.4 100.0 1,737.3 100.0
Note. Federal Office of Statistics, Trade Report, Annual Abstract of Statistics and Review of External
Trade, Central Bank of Nigeria, Annual Reports.
latter year and 1965 there was a reduction in both the absolute value
and relative share of this category of imports. However, since 1965
the rising trend of the early years appears to have been resumed; the
food import bill of 1974 being more than twice that of 1965. At 8.9%
the share of food in total imports in 1974 was much higher than the
5.8% recorded for 1946. Thus, there is a tendency for the share of
food to grow in the long run, probably well into the 1980s . The prin
cipal items of food imports are fish, sugar, milk, and flour which
jointly accounted for 74% and 50% of the.imported food bill in 1965
and 1971, respectively. These items are consumed mainly by the rela
tively well-to-do citizens and with the growth of income over the years
the demand for them will increase.
Another significant factor contributing to the growth of the
import food bill and consequently to the demise of agriculture is the
liberal government trade policy on the importation of food stuffs.
With the rapid increase in Nigeria's population and the relatively
slow growth of the country's agricultural sector, such a policy has
become one of the "necessary" instruments for curtailing the rise in
the cost of living.
It is our contention that Nigeria,which is basically an agri
cultural economy, should never have embarked upon such a drastic and
ill-advised policy at the expense of her populace and economic growth.
To arrest this trend, we recommend a vigorous policy of modernization
of the agricultural sector by the introduction of the most modern
scientific equipment and fertilizers; this is now the main laggard
59
sector of the economy. The growth of the sector should be the prime
objective of development planning.
In conclusion, therefore, despite the growing importance of
other sectors, agriculture, including forestry and fishing, which
accounted for about 50% of GDP at factor cost in 1970-71, will remain
a key factor in Nigeria's economic development as the largest employer
of labor (about 72% of the labor force in 1970-71)--the principal
source of food and raw material for the increasing population and a j
I
significant, although relatively declining earner of foreign exchange.
The acceleration of agricultural growth and the provision of additional
employment opportunities in the sector is, therefore, crucial to our
country's future progress. I
There are comparable opportunities for growth in this sector, j
which is primarily based on the existence of expanding foreign, and,
particularly, domestic markets for Nigeria's agricultural output; the
abundance of fertile land and human resources whose diverse productive
capacities are presently under-utilized, and the availability of im
proved technology, which, if exploited, could increase productivity
substantially. The constraints on the other hand are numerous as we
mentioned earlier. They range from low producer incentives, transport
and distribution bottlenecks, inadequate machinery for planning, coor
dinating, and implementing a national policy for rural and agricultural
development to insufficient qualified manpower and shortages of improves,
seeds, fertilizers, chemicals, credit and other farm inputs. All these
are but a few of the problems which with proper policy and careful co
ordination can be overcome and with the passage of time Nigeria will
60
become self-reliant in agriculture once more.
Efficiency
In this section we shall attempt to explore agricultural effi
ciency from five basic areas: population needs of the people, export
potential, employment, linkages between agriculture and industry, and
time and entrepreneurial ability of the farmer. A brief statement
about efficiency is worth mentioning before we embark upon our analysis.1
Efficiency is an elusive concept, which to all appearances is rather
simple. An intuitive notion of efficiency refers to the achievement j
i
of maximum output from a given set of resources--the greater the output |
relative to the inputs, the higher the level of efficiency. This be- j
guilingly simple notion suffices to establish the importance of the
concept in the economist's quest to identify and explain the components
of economic growth; therefore, our analysis is limited in scope to
agriculture as mentioned above. In short we are not interested in the
theoretical analysis of the word efficiency as stated in the literature,
but in the specifics of it--how it relates to our main thesis in Ni
gerian agriculture.
Agriculture and minerals are the primary sources of the coun
try's wealth. Production of export crops by peasant farmers was the
mainspring of economic growth from 1900 to 1965 . The spectacular
growth of petroleum production has since reduced the proportionate
contribution of agriculture to the national product and to export
earnings, but agriculture is expected to remain for several decades
as the mainstay of the export structure and the money economy as well
as of employment and subsistence production.
61
The country has an exceptionally broad agricultural base.
Because of the varied climates, almost every product of tropical agri
culture can be grown successfully on the land. With the exception of
animal proteins, the country provides an adequate and varied basic food
supply for the largest population in Africa and is one of the world's
two leading exporters of cocoa, groundnuts (peanuts), and palm kernels.
It also produces other products that are in active demand in world
markets. These include rubber, cotton, palm oil, palm kernel oil,
sesame, and tropical hardwoods
Furthermore, Nigeria provides a model of export development in
I
I
which individual small-scale tradition-bound producers respond spon- |
i
taneously and rapidly to the stimulus of external demand to produce a '
large variety of crops for exports if given the proper incentives
(money--prices and land).
Given the above brief picture, it will not be wrong to conclude
that investment in agriculture, which we have been arguing for will
result in an outflow of food within the shortest possible time limit I
than in the other sectors of the economy, all things being equal.
Hence its efficiency can be seen in one direction. The greater the
output, the more foreign exchange it will generate for the economy,
consequently there will be less dependency on foreign importation of
food. Agriculture must continue to meet the most of the country's raw
material requirements for local industry and export, observed one critic
of the Third Development Plan (1975-80).
62
Population Needs
One of the means by which agriculture can contribute to the
development effort is, as we stated earlier, through the provision of
an adequate and well-balanced food supply for the ever-increasing Ni
gerian population. The availability of an adequate food supply is vi
tal because food shortages will lead to higher prices, which, in turn,
will lead to importation of food stuffs from abroad, as we have asserted
in our thesis. This phenomenon could have some adverse effects on the
level of investment and therefore on the rate of economic growth.
Furthermore, this could also impinge upon our foreign exchange reserve.
Export Potential of Agriculture j
Another significant area where the importance of the agricul
tural sector may be stressed is its export-earnings potential. Its
role in the period of 1946-47 is seen in Table 17. Just immediately
after the Second World War, virtually all the nation's foreign exchange
was obtained from the exportation of primary commodities. This con
tinued until 1960 when petroleum emerged as an important export item.
Even by this time, petroleum's share of 2.6% appears negligible. All
these seem to indicate the efficiency of agriculture--given the proper
1
attention that is to say in terms of investment and manpower--, agri
culture still has the potential to turn the economy around even when
the earnings from oil are decreasing.
Employment
The Nigerian economy is currently plagued with a unique combi
nation of rural to urban migration, stagnating agricultural produc-
63
Table 17
Distribution of Nigerian Exports by Major Commodities, 1946-74
1946 1950 1960 1965 1970 1974
Mm 7o Mm % Mm % Mm % Mm % Mm %
Cocoa 7.6 15.4 38.0 21.1 73.5 21.7 85.4 15.9 133.0 15.0 159.0 2.7
Groundnuts 11.3 22.9 30.4 16.9 45.8 13.5 75.6 14.1 43.6 4.9 6.8 0.1
Groundnut oil — -- 0.5 0.3 10.6 3.1 20.0 3.7 23.2 2.6 11.4 0.2
Palm kernels 8.3 ' 11-6.9 33.4 18.5 52.1 15.4 53.1 9.9 21.8 2.5 43.7 0.8
Palm oil 4.1 8.3 24.1 13.4 28.0 8.2 27.2 5.1 1.2 0.2
a
Hides and skins
2.7 5 .5 12.8 7.1 8.6 2.5 9.1 1.7 5.6 0.6 10.6 0.2
Rubber (natural) 2.8 5.7 5.7 3.1 28.5 8.4 22.0 4.1 17.4 2.0 33.2 0.6
Timber (logs
and sawn)
0.7 1.4 4.9 2.7 14.1 4.1 12.5 2.3 6.2 0.7 11.2 0.2
Raw cotton 1.1 2.2 6.0 3.3 12.4 3.7 6.6 1.2 13.2 1.5 — O-'
Bananas 0.1 0.2 3.5 1.9 5.2 1.5 —
_ _
-- -- o - '
Petroleum (crude)
—
-- - - -- 8.8 2.6 136.2 25.4 5KK0 57.6 5,365.7 92.6
Columbite 0.3 0.6 0.6 0.3 4.2 1.3 2.3 0.4 2.0 0.2 1.4
Tin ore 5.7 11.6 12.0 6.7 12.1 3.6
a a
— -- — -■
Tin metal 29.8 5.6 33.8 3.8 26.4 0.4
Other exports 4.6 9.3 8.5 4.7 35.5 10.4 56.7 10.6 74.4 8.4 125.4 2.2
Totals 49.3 100.0 180.4 100.0 339.4 100.0 536.5 100.0 885.4 100.0 5,794.8 100.0
Note. Taken from Federal Office of Statistics, Annual Abstract of Statistics and Review of External
Trade, Central Bank of Nigeria, Annual Reports.
^ __________N e gligible. _________ ___________________________ _______________________________________________
tivity, and growing unemployment and underemployment. This incidence
of unemployment and underemployment is particularly severe among the
younger element of the population. These people do not have the skills,
opportunities, or other resources for participating actively in the
economy. Obviously, the industrial sector of the economy can provide
employment for only a small percentage of the population. Therefore,
the agricultural sector will have to play an important role in provid
ing gainful employment for the majority of the working population.
This will, in turn, ensure the massive population drift to the cities
in search of employment to cease, with the proper combination of incen-,
i
trves. i
Linkages between Agriculture/Industry j
Apart from the creation of expanding markets for the products
of the other sectors of the economy, agriculture could also have im
portant linkage effects with domestic manufacturing activities through
the provision of raw materials for industrial use. For example, do
mestically produced rubber could be used for making footwear, foam
rubber, and tire retreading. The textile industries could make use
of local cotton, while soap and margarine could be made from palm
produce. In this way, agriculture could assist in the development
of the other sectors of the economy.
However, we must be careful not to stress the linkage effect
between agriculture and the other sectors of the economy too far.
This is because agriculture does not require many intermediate inputs.
Helleiner, quoting Hirschman, has shown that only a small part of the
total agricultural output of developing countries receives elaborate
65
local processing, since the bulk is usually sent abroad. He also
pointed out that agriculture normally performs better in the supply of
intermediate inputs to other sectors than in the use of others’ inter
mediate inputs.
Entrepreneurial Ability
As earlier discussed in this research, most of Nigerian agricul
ture is cultivated on a family land-holding basis only. Therefore, if
the farmers were given the proper incentives, we think more efforts
would be put into the cultivation of land, and, consequently, the land
would yield more per acre. This is as opposed to other forms of land j
I
tenure systems such as share cropping system, absentee land ownership, j
etc., which are not within the realms of this discussion. We therefore
i
feel that this system of agriculture if properly handled will enable a '
better and more efficient agricultural output.
Time
The time consideration of cultivating and planting seeds is
relatively less when compared with acquiring and installing an indus
trial equipment from overseas. This is an added advantage to agricul
ture, since seeds sowed in one season are usually harvested in another
and with the proper climate and good weather a bumper harvest could be
realized. On the other hand, before an industry is ready to produce
efficiently, it often takes twice as much time as agriculture would
need. Time factor is an essential element in the production of agri
cultural output. With our modern day scientific gadgets we can culti
vate and produce a better crop within a limited time that will feed
66
the ever-rising population in the country. The research in this direc
tion is continuing, given this platform, therefore, we can rightly
argue that the time consideration of producing a bumper harvest is
considerably less than that required in assembling a production plant
and preparing it for an efficient production. Hence, the call for more
and better investment in agriculture is needed than in other industries.
In summary, what emerges from the above discussion of efficiency
is that agriculture is still the backbone of the Nigerian economy. In
spite of its decline over the years, the share of agriculture in our
GDP was about double the share of the mining sector in 1973-74. |
Helleiner had asserted in a book published in 1966 that !
no matter how much development and structural transformation is ^
achieved it [agriculture] will retain its relative dominance in I
the economy for many decades to come. More important, it is
from agriculture, and in particular agricultural exports, that
the economy has received its principal stimulus to economic
growth. (p. 83)
If we may add one or two comments to the above statement, giving
the fact that petroleum is a volatile resource and the fact that with
the current economic trend of this resource in the world market, it
will seem pertinent to reiterate to our policy makers that our only
hope now lies in the immediate revitalization of the Nigerian agricul
tural industry with some of the profits earned from the diminishing
petroleum industry.
67
NOTES
■'"World Bank Report, 1971, Options for long-term development
(Lagos: Author), p. 33.
^World Bank, p. 33.
^World Bank, p. 33.
4
Charles Wolf & Sidney C. Sufrin, Capital formation and
foreign investment in underdeveloped areas (New York: Syracuse Uni
versity Press, 1966), p. 22.
^Federal Office of Statistics, Review of external trade.
Nigeria (Lagos: Author, 1972), p. 13.
^Fiscal incentives, for instance, could be used to induce
business to undertake investment at certain places.
68
Chapter 6
SUMMARY AND CONCLUSIONS
In conclusion, it seems pertinent to reiterate a few observa
tions with their implied policy inferences. Kuznet's warning that what
matters is not so much capital formation as its utilization has some
relevance for Nigeria where under-utilization of existing capital stock
is an obvious problem.'*'
Given the slow rate of capital growth in Nigeria, it is sub- !
mitted that the rate of capital formation matters equally. Since both ^
seem important in their own context, Nigeria should aim at maximizing
both capital growth and capital utilization.
It must also be noted that non-economic factors can and do have
negative or positive effects on capital formation and utilization. One
of such factors in underdeveloped countries discussed by Wolf and
2
Sufrin is the scarcity of entrepreneurship, to which Nigeria is not
an exception. The need to study these non-economic factors and to
assess their impacts on capital formation and investment seem to be
indicated. Such studies should throw light on measures to be taken
to alleviate the negative impacts of non-economic factors.
Further, the distorted picture of capital formation in Nigeria
calls attention to the need to aim for a balanced structure and/or
investment in areas with high productivity potential, e.g., agriculture
and manufacturing. The trend towards unproductive residential con-
_____________________________________________________ 69
struction should be stopped. Efforts at a decentralized pattern of
industrialization would ensure the mobilization of rural savings for
rural capital formation, which in turn would be invested in agricul-
3
ture to improve farm yields. Most of these savings have no mobility
prospects, and so they are either activated locally for productive use
(family) or left to waste.
Finally, all the domestic sources of financing capital forma
tion mentioned earlier in this report should be strengthened because of
the ultimate task of accelerating our pace of capital formation, and,
hence, growth and development of the economy (with particular reference
to agriculture) must be accomplished by our domestic resources. The
discovery of oil should provide a good base for this much needed action.!
The era of externally generated growth seems outdated. At this stage J
(
of our development, there is of course no reason to be pessimistic of
the future, because we are endowed with both the human and natural
resources, but what we should be most concerned with (i.e., those who
are responsible for the country's future) is the "recognition by
everyone that the good fortune from oil which is a vanishing resource,
is an opportunity to improve the well being of the entire population
on a more permanent basis, and not a surplus to be squandered by the
4
few who are in a position to do so." We see this to be found in agri
cultural development and investment. A contented population is one
that is well fed and cared for by the government. Nigeria is basically
an agricultural country and the discovery of oil should not deceive
our policy makers. This resource may not last forever, instead the
revenue generated from it should be used to develop the agricultural
70
industry, which we think serves as the backbone of the nation. Current
observations reveal a glut of oil in the world market. What effect
this has on the producing nations is that it drives prices down, hence
less revenue for the producers. Furthermore, with science developing
at an alarming rate, a substitute to oil is not far in the future.
All these should shed some signal to our policy makers that the only
solution available lies in a modernized agricultural development; excess
yield could be sold to other African countries who are in need.
However, we may want to add that this problem of agricultural
neglect is not unique to Nigerian economy alone, it is a common phe
nomenon among most if not all developing countries. As new sources of
revenue are discovered, agriculture is neglected and attention is given |
to the new products at the expense of agriculture--an age-old industry.
71
NOTES
^Aboyade, p. 112.
2
This strategy has been elaborated on elsewhere. See Joe U.
Umo, Some aspects of urbanization and implications for development in
Nigeria: African urban notes (East Lansing: Michigan State'University,
fall 1975), pp. 71-73.
72
BIBLIOGRAPHY
Aboyade, 0. Foundations of an African economy: A study of investment
and growth in Nigeria. New York: Frederick A. Praeger, 1966.
Arnold, Guy. Modern Nigeria. London: Longman Group, 1977.
Denison, E. E. Measuring the contribution of education (and the resi
dual) to economic growth. In The residual factor and economic
growth. Paris: OECD, 1964.
Duesenberry, J. Income, saving and the theory of consumer behavior.
C mbridge, Mass.: Harvard University Press, 1949.
Hansen, L. M. Comprehensive economic planning in Nigeria. In C. K. I
Eicher & C. Liedholm (Eds.), Growth and development of the Nigerian,
economy. London: Longman Group, 1977. j
Hooley, R. W. The measurement of capital formation in underdeveloped
countries. Review of Economics and Statistics. August 1967,
75, 105.
Kilby, P. Industrialization in an open economy: Nigeria 1945-66.
Cambridge, England: Cambridge University Press, 1969.
Kuznet, Simon. Commodity flow and capital formation. New York:
National Bureau of Economic Research, 1938.
Okigbo, P. N. C. Nigerian national accounts. Lagos: Federal Govwrn-
ment, 195 7.
Okuboyejo, N. A. A. Economic development and planning in Nigeria
1945-48. In T. M. Yesufu (Ed.), Manpower problems and economic
development in Nigeria. Ibadan: Oxford University Press, 1969.
Oyejide, T. A. Deficit financing, inflation and capital formation:
An analysis of the Nigerian experience 1957-1970. Nigerian Journal
of Economics and Social Studies, March 1972, 14(1), 27, 42.
Umo, Joe U. Some aspects of urbanization and implications for develop
ment in Nigeria: African urban notes. East Lansing: Michigan
State University, fall 1975.
United Nations. Statistical and economic information bulletin for
Africa (No. 4). Washington, D.C.: U.S. Government Printing
Office, 1973.
73
Wolf, Charles & Sufrin, Sidney C. Capital formation and foreign
investment in underdeveloped areas. New York: Syracuse University
Press, 1966.

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Creator Ibrahim, Aminu Dan (author)

Core Title Capital formation and investment decision in Nigeria: An analysis

Degree Master of Arts

Degree Program Economics

Publisher University of Southern California (original), University of Southern California. Libraries (digital)

Tag economics, general,OAI-PMH Harvest

Language English

Contributor Digitized by ProQuest (provenance)

Advisor Kamrany, Nake M. (committee chair), Kalaba, Robert E. (committee member), Niedercorn, John H. (committee member)

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