Nigera: Evaluation of growth and development strategies

IMF

The IMF is an organization that stabilizes the international finance system through short term lending to countries with balance of payments deficits and aims to promote the following:

1. international monetary cooperation
2. exchange rate stability
3. orderly exchange arrangements
4. economic growth
5. increase levels of employment
6. provide temporary financial assistance to countries to help ease balance of payment adjustments

World Bank

The World Bank, which is comprised of the international Bank for Reconstruction and Development and the International Development Association, is primarily concerned with the financing of reconstruction and development through the construction of national infrastructure to increase productivity, output, and incomes, and ultimately self-sustaining economic growth.

Other International Organizations

*The Food and Agriculture Organization of the United Nations raises levels of nutrition and standards of living, to ultimately improve the level of agricultural productivity and to better the living conditions of rural populations

*UNICEF, the United Nations Children’s fund aims to work with children and remove all obstacles like disease, poverty, discrimination that prevent their proper development

*WHO- World Health Organization is a specialized agency for health, with the objective of the attainment by all peoples of the highest possible level of health

Private Sector Banks

Private sector banks simply make loans to developing countries at commercial rates of interest

Non-Governmental Organizations

Non-governmental organizations support industries in developing economies—facilitating economic growth

Multinational corporations

Giant corporations control over 70% of the world’s trade, carry out the bulk of new R&D, shape international markets through advertising and exert a great deal of influence over price. While they may provide labor to people in develping countries—neither the labor conditions or wages are ideal.

Commodity agreement:

Commodity agreements are attempts to stabilize prices through buffer stock schemes, or attempts to raise prices through the use of quotes

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Nigerian economic policies shaped by World Bank and IMF recommendations, policy agreements and conditionality have so far lead to a dysfunctional electricity privatization process, a heavy and unfulfilled reliance on reform of the gas sector, and the failure to make any widespread practical progress on pro-poor people, decentralized renewable energy. (60% of people within Nigeria still lack access to electricity)

However, it would be simplistic to lay the disaster and inequity of Nigeria’s energy and power on the shoulders of the  IMF and World Bank . However, their influence cannot be disconnected from the corruption carried out by the country’s elites that have worsened the level of poverty and failed to provide adequate power to the nation; during President Obsanjo’s reign, 1999-2007, he claimed to have invested up to 16 billion doallrs made by the federal government—after 8 years of no significant results, his expenditures ended up being the subject of a corruption investigation.

Despite this ongoing corruption in Nigeria, the World Bank has made sincere efforts in developing Nigeria’s economy through various methods of support. Since Nigeria joined the World Bank in 1961, the World Bank has assisted it on 120 projects. Currently, the Bank’s International Development Agency, an interest-free lending group, currently supports 28 projects being carried out in Nigeria and Global Enviornment Facility grants. In fact, the bank is the largest development partner in Nigeria, committing roughly $4.5 billion.  Below is the graph which illustrates how the money is planned on being spent.



The Bank has also given approximately 300 million dollars to support the reforms and privatizations of Nigeria’s energy sector.

In October 2005, the International Monetary Fund approved a two-year “policy support instrument that focused on the rapid and sustainable non-oil economic growth and the reduction of poverty. By the end of the policy the IMF hoped that Nigeria would possess a well-articulated and sound policy framework, including sensible macroeconomic policies, a strengthening of institutions, and ensure a governance structure that was conducive to private sector activity.

The Food and Agriculture organization of the United Natinos (FAO)  has recently created a new strategy for Nigeria called the national special programme for food security (NSPFS). Under this program the government is depositing $43.5 million in a FAO unilateral trust fund that is being disbursed directly to the farming communities which should hold promise for food security in Nigeria. This program has introduced both economically attractive and environmentally friendly viable technologies to assist farmers’ nation-wide, intensify and diversify food production in order to achieve food security and poverty eradication. Because the money is allocated by the FAO, there is no need to worry about Nigeria’s corrupt government using the funds inappropriately.

UNICEF has also played a role in facilitating Nigeria’s development. Activities dealing with HIV-AIDS are included in most of UNICEF Nigeria programmes: education, protection, health and nutrition, communication. UNICEF interventions take place both at policy level, in health institutions and at community level. They focus on what have been called the four ‘Ps’ in the campaign strategy:

* Primary prevention among young people

* Prevention of Mother-to-child Transmission

* Paediatric AIDS

* Protection of orphans and vulnerable children

The WHO has made similar efforts to UNICEF.

Because of Nigeria’s massive debt, and the relatively low investor and creditor trust in Nigeria’s corrupt government, loans from private sector banks are not an ideal tool for Nigeria to achieve economic growth and are consequently not commonly implemented in Nigeria’ economic policies.

While a couple of NGO’s may contribute to the development of Nigeria—the contributions do not have significant effects in comparison to other strategies.

Similarly, MNC’s are mostly absent from Nigeria neither contribute to or hinder Nigeria’s economic growth.

Faced with rising prices of food in Nigeria, the government, in 2008 spent 350 million naira on a Buffer Stock scheme—in which 5,600 metric tones of corn, millet, beans, and rice were procured b the government and sold at a subsidized price. The grains were distributed to all the 25 local government areas while some government ministries, departments and agencies also benefited. In addition to stabilizing the price of food, these foods, the commissioner saw this as a way to encourage farmers to cultivate more land and provided some assurance with the ongoing food shortage in Nigeria.

Ultimately, in order for Nigeria to experience economic growth, it will need to fight and abolish the corruption in its government. Until it does so, significant portions of the aid it receives will be rendered useless, and her education sector, agricultural sector, and infrastructure for that matter will remain under funded. It is  therefore crucial that Nigeria uses the financial aid like it receives from the EU to combat corruption efficiently—and to continue programs that train government officials in a way that will ensure they act and work honorably. Once this is achieved, Nigeria should focus on improving its infrastructure—specifically its electricity supplies and agricultural tools needed to increase output to its full potential—while increasing its GDP and paying back its massive debt.

 

Nigeria’s Strategies to Achieve Growth

1. Harrod-Domar Growth Model : The Harrod–Domar Growth model suggests that the economy’s rate of growth is dependent on the level of savings and the productivity of investment (the capital output ratio)– suggesting that increased savings ratio and increase in capital-ratio will yield higher rates of growth.
2. Structural change/ dual sector model: Structural change/ dual sector model states that countries are assumed to pass through the primary production stage, then to the secondary stage, and finally the tertiary stage. In other words, theoretically, as an economy develops, its income will rise yielding an increased demand for agricultural goods. However, due to their low income elasticity of demand, at a proportionately lower rate than income. With that being said, the demand for manufactured goods will have a higher income elasticity of demand and thus as incomes grow further, the demand for these goods will grow at a proportionately higher rate– allowing the  secondary sector to grow. As incomes increase, people will increase their consumption of services as these have an even higher income elasticity of demand; causing/allowing the  tertiary sector of the economy to grow and develop.
3. Types of aid: Aid, or the assistance to developing countries can come in numerous forms, however is usually given in three main ways:

1. Humanitarian Aid: Can both be by individual country to country or via a major organisation such as one of the UN agencies. This is not a loan and is normally sent to help against a specific problem, e.g. drought.

2. Bilateral Aid: Aid given by one country to another in the form of a loan the loan

3. Multilateral Aid: Separate countries pay money into one central organization who then determines the recipient of the aid– as well as as its intended purpose.

Export-led growth/ outward- oriented strategies

• Involvement in the export sector of trade can promote the ending of protectionist policies.
• Exporting to more sophisticated markets may also force an economy to produce at higher standards in order to make their goods more competitive internationally and higher productivity.

• Other benefits of of an economy experiencing export-led demand include:

1. It conforms more closely to comparative advantage
2. Investments should increase.
3. Economies of Scale
4. Increased employment
5. Greater equality of income distribution

Import substitution/ inward-oriented strategies / Protectionism

Greater production of import substitutes can protect jobs and facilitate economic growth.
Commercial Loans

Commercial loans are loans from banks and other financial organizations– developing countries have borrowed these loans as a way to fund development

Fair Trade Organizations

Fairtrade organisations guarantee farmers and producers a ‘fair’ price for the goods they produce.This ensures that the price that farmers/producers end up with covers their production costs and provides them with enough surplus that they can reinvest in their business, as well as sustain a “reasonable” or adequate standard of living.

Micro-credit schemes

Microcredit schemes are schemes that loan small amounts of money to the poor ( usually in developing countries)

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Overall, Nigeria’s economy has been characterized by low savings-investment equilibrium, at less than 20%, and (perhaps consequently) low growth trap, as the economy remains at very low levels of industrialization, productivity, and exporting. With an average annual investment rate of barely 16% of GDP, Nigeria is too far behind the minimum investment rate of about 30% of GDP required to unleash a poverty-reducing growth rate of at least, 7-8% per year. As such, Nigeria’s economy does not meet the economic qualifications for the Harrod-Domar growth model—suggesting that Nigeria should employ strategies that will render increased savings, encourage investors to invest, and increase overall economic productivity if it wishes to grow as an economy. The low level of investments most likely correlates to the high level of corruption that is associated with Nigeria—making any investment in Nigeria a huge risk. The low level of productivity is often blamed on the Nigerian government—specifically how despite the fact it subsidizes fertilizer, it sells the fertilizer through “middle men” who increase the prices beyond what the poor and middle class farmers can afford. In a country where 70% of its 140 million inhabitants farm and 90% are considered “subsistence farmers” this can be extremely detrimental to agricultural output.

The structural change/ dual sector model:

Nigeria is extremely rich in natural resources and remains a huge exporter of oil and is extremely reliant on it as an export. Moreover, with 70% of Nigerian inhabitants being farmers, the low growth rate of agricultural goods, as this model demonstrates, could have detrimental effects on Nigeria, an economy that relies on natural resources for the production of its agricultural products and its main export, oil.  With that being said, if the corruption within the Nigerian government is resolved, which will most likely yield higher incomes and greater productivity, the people of Nigeria should see an increase in their level of incomes which, according to this model, should result in economic growth.  Based on this, Nigeria should once again focus on lowering the level of corruption within the government and begin to modernize its agricultural sector to gain efficiency, thereby increasing production.

Economic aid:

As of October 2005, World Bank assistance to Nigeria involved 19 active projects with a total commitment value of about $1.87 billion. Since Nigeria joined the World Bank in 1961, the World Bank has assisted it on 120 projects. In October 2005, the International Monetary Fund approved a two-year “policy support instrument” designed to promote the growth of the non-oil sector and to reduce poverty. Moreover, Nigeria has been a recipient of humanitarian aid from both the UK and the US for over the past six years.  Needless to say, Nigeria does lack financial aid— receiving a total of $6.437 billion in aid during the year of 2005. However, while the economic aid that Nigeria receives does have its benefits; the economic aid given by the UK gave millions of people in Nigeria free health care, provided them with the means to protect themselves form HIV, actions which medical experts say could save the lives of almost 700,000 children in a year ( a figure that is quite significant considering an estimated one million children in Nigeria die before the age of 5 due to a lack of health care) the issue of corruption is still a factor that inhibits Nigeria’s economic growth. And thus in addition to using the aid to improve Nigeria’s health care system, and basic infrastructure, the government should also use the aid to sustain its democracy and improve its governance by providing training on the roles and responsibilities of elected officials at the federal, state, and local levels prior to their installation. The European Union has just recently begun to support this idea by donating 1 billion US dollars to aid corruption in the government. Moreover the aid should also be used to strengthen Nigeria’s economic management—encouraging private sector development and economic reforms that will expose its agricultural sector to improved technology. In addition, the educational system should also be a priority when it comes to spending aid—so that the level, in terms of quality, of Nigeria’s labor force can increase.

Export-led growth:

Nigeria’s governments’ main focus, in terms of economic reforms seems to be increase the level of Nigerian exports, with good reason.  In a study conducted at the University of Ibadan, Nigeria, statistical data from 1970- 2006 revealed that with just a 10% increase in the growth of Nigeria’s export sector, the country would see a corresponding increase of about 35% in output growth.  As such, the government has begun to employ policies with the three main targets:

• Export promotion and diversification of exports away from oil
• Gradual liberalization of imports—common external tariffs and special leveies and import prohibitions to protect local industries in Nigeria
• Market-determined nominal exchange rate regime with the avoidance of overvaluation of the real exchange rate

The diversification foe port earnings are being pursued with specific reference to the exports of foods and other primary products in the short run, but with further value added to the domestic output for exports over time.

Import substitution:

Nigeria’s aggregate imports have grown substantially since the coutrny’s independence in  1960, from 2.5% to an average of 33% between the years of 1970-1989. As mentioned above, in the long run Nigeria is planning to apply protectionist policies in an effort to stimulate domestic consumption. Although currently, Nigeria has banned the imports of some products, the share of these products in total imports is not very significant. Furthermore, the lowering of tariffs (in tandem with the The West African Economic and Monetary Union) will most likely increase the import bill—potentially offsetting the effects of the import bans on the total import bill. Also, factor payments arising from industrialization programs and imports of industrial raw materials will continue, at least in the short run, to put pressure on the current account.—which will most likely yield slight current account deficits. The danger of imposing these tariffs on imported goods is the obvious increase in prices that the tariffs will bring.  Industrial growth can be constrained if imports are too expensive – hindering Nigeria’s economic growth. Moreover, the implementation of protecitonist policies could hurt Nigeria’s trade relations with other countries– relations that the economy is dependent on if it wishes to increase its level of exports.

Commercial Loans:

Years of government mismanagement, widespread corruption and dependence on an uncertain oil market has left Nigeria with a massive debt burden that has severely limited its ability to modernize. For more than 15 years, Nigeria is estimated to owe more than $25 billion to both international and commercial lenders. Just to pay the interest on the public debt took 7 percent of Nigeria’s economic output in 2002. Taken as a whole, the debt, $31 billion, represents more than 71 percent of the country’s entire gross domestic product.

Nigeria worked with the IMF to restructure its agreements with commercial and international creditors several times, the most sweeping in 1992. Even with these efforts, however, the country made little headway in reducing the overall financial burden: a decade later, the country’s debt is still estimated to be in $25 bilion range. In March 2002, Nigeria’s finance minister ended consultations with the IMF—arguing that continued collaboration with the agency would threaten Nigeria’s political stability, democratic consolidation, credibility, and accountability”

The move diminished investor and creditor trust in the Obasanjo  (the president of Nigeria) government to pay back current and future loans, thus limiting future access to loans

And so because of Nigeria’s large debt and investors/ creditors’ lack of trust in the government, commercial loans are not a viable strategy to achieve economic growth.

(Since 2002, the Obasanjo government has continued its relations with the IMF– yet the relationship is one that is unstable, as the two forces are often in opposition to each other’s ideas/priorities)

Fair Trade Organizations:

There is one primary fair trade organization that exists within Nigeria called “Alternative Trade Network of Nigera (ATNN). ATNN is a nonprofit and non governmental organization that works with approximately 82 artisans groups, involving roughly 2000 artisans, many of whom are rural farmers, widows, or educationally and physically challenged. These groups produce a wide variety of crafts, from wood and thorn products to batik, ceramics, calabash products, and musical instruments. Through their employment, these artisans are able to send their children to school, eat a satisfying diet and improve their housing.

In a country where 70% of the population is involved in farming, Nigeria’s economy would benefit greatly from an increase in fair trade organizations—especially since the ATNN only caters to 2000, out of 140 million Nigerians. By increasing the number of fair trade organizations, Nigerian farmers and producers should theoretically obtain enough surplus so that they can reinvest in their business, as well as a sustain an adequate standard of living.

Micro-credit schemes:

The Ekiti State government (within Nigeria) recently revealed in December that over 30,000 people. 3% of the population of Ekiti, and close to 10% of the elgible population, had benefited from its micro credit loan scheme since its establishment two years ago.

The Ekiti State government’s success reveals the potential benefits that Nigeria could see if it adopts a nation-wide micro-lending scheme. One of the issues with this idea is the fact that Nigeria is in extreme debt—meaning it does not have the funds necessary to loan out money to its people—especially when many Nigerians may not repay their loans in time.  With that being said, if Nigeria could fund the money to adopt a nation-wide micro credit scheme, it would provide communities who do not possess the amount of funds with the funds to start their own business. It will also provide start-up credit facilities for this category of people whose propensity to save is currently very low. This scheme would thus have the distinct advantage of creating jobs in the informal sector with possible multiplier effects.

In the just concluded first phase of the Micro Credit Scheme, over 110million Nigerian Naira was disbursed to 248 groups, out of which 67 million Nigerian naira representing 78% of due loans were repaid.

 

Nigeria: Barriers to Growth

Poverty cycle: Many poorer countries often find themselves in what is referred to as a ‘poverty cycle’ which is essentially a spiral ofevents that keeps an economy from developing. Instrumental factors that will allow development include investment.

However investment needs funding which requires savings. If an economy has low income levels, then this will mean that they subsequently have low saving levels as well. This translates into lower incomes; it is in essence a downward spiral of cumulative causation. (Low income = low investment levels = lower incomes )

Institutional and political factors:

•       Ineffective taxation structure: Many developing countries face difficulties when it comes to collecting taxes (actual access issues, data information, poor records of population). Low tax revenue makes it difficult to fund and develop required institutions.

•      Lack of property rights:  Developed countries often lack a well-developed system of property rights, such as landownership, preventing economic development which is based on ownership of FOPs so they can be traded.

•      Political instability: political instability creates an environment where it is difficult for economic activity to grow and develop. (In order for businesses to grow they need a sense of stability and consistency or at least a predictable political structure  to make them willing to engage in capital investment

•      Corruption: Corruption obviously makes development difficult and can negative influence oversea firms from investing in an economy

•            Unequal distribution of income: When economies grow, we tend to see an increasing gap in terms of income distribution which can consequently act as a barrier to growth.  (If growth means the rich get richer, it will constraint economic development)

•      Formal and informal market: Informal markets means unrecorded economic activity and no money exchanged.

•      Lack of infrastructure: high quality social infrastructure is vital for economic development– which is why in poorer countries very infrastructure is often poor, the infrastructure acts as a barrier to growth and development.

International Trade barriers:

•      Over dependence on primary products:  Because developing economies mainly trade in primary exports and the money raised from their sale pays for manufactured imports. Diversification has been such a slow process– a problem that has been noted to have a strong geographic bias. It is noted that in African countries, the reliance on low-valued primary exports has not fallen by a significant amount in the sources

Developing economies mainly trade in primary exports. The money raised from their sale pays for manufactured imports. Diversification has been a slow process and again it has a strong geographic bias. The Far Eastern economies have been able to move up through the categories of exports to command increased market shares of low and medium technology goods. However, for  many of the poorer African countries, the reliance on low-valued primary exports has not fallen by a significantamount in the sources of foreign exchange earnings.

In 1970 primary exports constituted 72% of total developing country exports. By 1999 this had fallen to 48% for low-income countries and 32% for middle-income countries. However, this contrasts with 18% for advanced economies and so is still very high. However, the ratio is still very high for many of the poorest African countries – over 90%.

International Financial Barriers:

-It is instrumental that developing countries have access to financial markets in order to increase the amount of investments within a country

-It is also important that developing countries have access to foreign capital—since often domestic savings are not great enough to provide adequate funds for government expenditures.

-Other financial barriers include indebtedness, non-convertible currencies, and capital flight

Social and cultural factors:

-Social and cultural factors have also been known to influence economic growth and development performance

-Religion, cultural traditions, societal gender expectations/roles can also influence economic growth

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Nigeria is a country of absurd economic realities. Despite the fact that it is the 12^th largest crude oil producer in the world, and has the second largest economy in Africa—earning an estimated $2.2 million a day in oil revenue, its GDP per capital, at just over $1,400, is amongst the lowest in the continent. In fact, 54% of its 151 million people live on less than $1 per day. The figures are shocking— especially because of its abundance in natural resources- primarily oil and natural gas, and massive agricultural potential based on its climate and significant rural population. More than 67 million Nigerians are docketed as poor according to standard definitions, while 35% of the total population live in extreme poverty.

Despite great natural wealth, Nigeria is poor and social development is limited

Three main problems hamper progress:

1. Not all our people enjoy the same chance of prosperity.
2. Past governments in Nigeria, instead of focusing on delivering essential public services, assumed control of major sources of national income. In the process, corruption thrived in public service and gained a strong foothold in society. Moreover, because money is not used to improve Nigeria’s educational system—their quality of the labor remains low, as workers often posess only the most basic skills and are restricted to jobs in the rural sector.
3. The environment in Nigeria is hostile to private enterprise; not one that helps businesses generate jobs and create wealth.

There are other institutional factors that hinder Nigeria’ economic growth and development as well.

For instance, in terms of social factors another serious factor effecting Nigeria’s economy is the prevalence of HIV/AIDS. Nigeria has the third largest infected population in the world behind only India and South Africa. 2,900,000 are already infected with HIV or AIDS and due to lack of education, the spread continues. The percentage of infected individuals is starting to drop but due to lack of education it is still a pressing situation. Limited education and poor health are only helping to perpetuate the poverty cycle.

Another social factors that hampers economic growth and development are the religious and ethnic tensions that continue to brew in different parts of Nigeria, erupting into outbreaks of violence and continually leading to a situation of escalating poverty and malnutrition. This environment of instability makes investment in Nigeria extremely unattractive. Moreover, the ethnic and religious tensions are what has led to the current fuel scarcity. The effects are widespread as the fuel scarcity is shutting down most of the textiles industry. When the shortages are added to the power outages in the private sector, it is killing the businesses that the administration was calling the engine of growth.

Another institutional factor is that affects Nigeria’s growth is corruption. An estimated $400 billion of the country’s oil revenue to be stolen by Nigeria’s leaders between 1960 and 1999. Lack of opportunities can further be caused by the failure of governments to provide essential infrastructure.

 

Nigeria: Sources of Economic Growth

Natural Factors: The quality and/or quantity of land or raw materials

In essence, natural factors include any naturally-existing resources in a country’s economy. Different countries are differently endowed with these natural factors and can often explain development: abundant resources can contribute to economic growth

Human Factors: The quantity and or/quality of human resources

Human factors include labor, and comprise of the skill, knowledge, experience, education and health of the population that creates the labor pool. Investment in any of these areas are called social investment and can increase human capital

Physical Capital

Physical capital include man-made factors of production—such as factories, machinery, and roads. The accumulation of capital increases a country’s capital stock.

Institutional factors that contribute to development

Institutions are not restricted to meaning a physical building or place. The concept is a broadly a set of rules which come together under organizations. Banking system, development banks, and group lending schemes, and educational systems are often considered theresut of a developed and well-functioning economy, but increasing the flip side of the correlation coin is pointed out: these instutions play an instrumental role in the process of development

Population

The quantity of labor is affected by the labor supply and this will depend on changes in the country’s population and thus can be a central part of development

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Nigeria’s economy is struggling to leverage the country’s vast wealth in fossil fuels in order to displace the crushing poverty that affects about 57 percent of its population. Nigeria is commonly referred to as suffering from the “resource curse”, a term used to coin developing countries that have vast wealth in resources yet suffer from extreme poverty.

Poverty is widespread and Nigeria’s basic social indicators place it among the 20 poorest countries in the world. According to the World Bank, about 66% of the population now falls below the poverty line of about a dollar a day, compared to 43% in 1985. Life expectancy in Nigeria ia also extremely low, at 46.8 years in 2007. According to Director-General of the Nigerian Institute of Medical Research (NIMR), Dr Oni Idigbe, Major causes of deaths within the various Nigerian communities were communicable diseases—especially HIV/AIDS, “Due to relatively low socio-economic development in most communities, the degree of risk or probability of contracting these infections diseases are rated as high in the country. Without the epidemic, life expectancy would have risen from 53 years in 1991 to 57 years in 2003 and 62 years in 2013 at the pace reported in 1991”.

In terms of education, the literacy rate of Nigerians from ages of 17 and above is only 74% meaning 26% of the population can neither read nor write perhaps because the education in Nigeria is free, but not compulsory. Moreover, a politically instable and corrupt government most likely accounted for the  poor funding towards Nigeria’s education sector—consequently decreasing the quality of the labor force in Nigeria.  (A long-term solution to increasing Nigeria’s output maybe by employing supply side policies by improving the quality of education).

Nigeria’s exports of oil and natural gas have enabled the country to post merchandise trade and current account surpluses in recent years. 80 percent of Nigeria’s energy revenues flow to the government, 16 percent cover operational costs, and the remaining 4 percent go to investors. However, the World Bank has estimated that as a result of corruption 80 percent of energy revenues benefit only 1 percent of the population. In 2000 oil and gas exports accounted for more than 98% of export earnings and about 83% of federal government revenue. In fact, it is arguable that Nigeria’s economy even revolves around oil

In terms of agriculture, Nigeria ranks twenty fifth world-wide—and first in Africa in terms of farm output. Nigeria is reliant on the agriculture sector of its economy—as it accounts for over 26.8% of Nigeria’s GDP. In 1990, estimates indicated that 82 million hectares out of Nigeria’s total land area of about 91 million hectares were arable. However, only about 34 million hectares (42 percent of the cultivable area) were being cultivated at the time—suggesting that Nigeria is not using its natural resources to its full potential, which could be hindering its level of output. Similarly, although Nigeria’s soil is rated from low to medium in productivity, the Food and Agriculture Organization of the United Nations concluded that most of the country’s soil would have medium to good productivity if this resource were managed properly—further demonstrating how resources are being used in an inefficient manner.

Outside of the energy sector, Nigeria’s economy is also highly inefficient. Moreover, human capital is underdeveloped—Nigeria ranked 151 out of 177 countries in the United Nations Development Index in 2004—and non-energy-related infrastructure is inadequate

 

Background Information regarding Nigeria’s Economic development (1990’s and onward)

During the 1990’s, the agriculture sector was the focus of intense development with food-self sufficiency being the ultimate goal.  As such, in 1990 agriculture was the subject of a separate three-year development plan involving public and private spending targets primarily concentrating on the “family farmer”. The program included price stabilization plans in addition to schemes to revitalize the palm oils, cocoa, and rubber sub sectors. These Agricultural Development Projects continued through the decade but Nigeria found that the implementation of the goals was quite difficult. Nigeria still continues to import of its wheat from the United States.

An integrated petrochemical industry was also a priority. Using the output of the nation’s refineries, Nigeria produced benzene, carbon black, and polypropylene. The development of liquid natural gas facilities was expected to lead to the production of methanol, fertilizer, and domestic gas. Nigeria’s refineries operated at less than optimal rates throughout the 1990s.

In the manufacturing sector, the government was backing a policy of local sourcing whereby locally produced raw materials were converted into finished products. By 1999, manufacturing accounted for less than 1% of Nigeria’s GDP.

By the beginning of the 2000s, the government was more concerned about halting corruption and reigning in the state budget than economic development. Nevertheless, the Niger Delta Development Commission (NDDC) was created to coordinate economic and social development in the oil-producing region.

Nigeria’s foreign debt stood at around $28.5 billion in 2001, a large portion of which was interest and payment arrears. The Obasanjo administration in the early 2000s was supporting private-sector-led, market-oriented economic growth, and had begun economic reform programs. Privatization of state-owned enterprises continued. A Stand-By Arrangement with the International Monetary Fund (IMF), approved in 2000, lapsed in 2001 as the government’s economic reform program went off track. There were indications a new IMF program for the country would be negotiated in 2003–04.

 

3 Big Ideas About Exchange Rates

1. Higher interest rates within a country, for the purpose of this explanation, country “A”,  compared to its competitor country “B”, will make Country B’s exports less competitive in the market. This may consequently lead to less off Country’s A exports being sold, as essentially the opportunity cost of purchasing Country’s A’s exports has risen. With that being said, the extent to which the sales of exports will decline is depending on the price elasticity of demand for the exports.  If this caused a worsening of the current account, the exchange rate would consequently depreciate. With a decreased demand for exports and imports becoming more attractive in terms of its seemingly cheaper prices, the demand for Country A’s $ will fall, while supply will increase.
2. All exchange rates, fixed and floating, tend to be influenced by the actions of governments. In other words, if Country A’s government wanted to exert upwards pressure on Country’s A $ (maybe as a part of a monetary policy to lower inflation rates), they could purchase Country A’s dollars on the foreign exchange market using their own reserves of foreign currency. This will result in increased demand for Country A’s currency, which will result in appreciation, while increasing the supply of other economies’ currencies, which would exert a downward pressure on them.
3. Trade flows can also affect exchange rates. A surplus of exports over iports for Country A, will result in increased demand for Country A’s currency and will thus exert upward pressure on the exchange rate.  Conversely, a deficit situation in which Country A’s imports exceed exports will cause an increase in supply of Country A’s currency. (Country A importers will need to supply country A $’s to obtain the foreign currency required to pay for the imports)  This will create downward pressure on the exchange rate.

 

E Pluribus Tunum

The article entitled “E pluribus tunum” from the Economists, essentially suggests that iTunes’ decision to implement uniform prices for online music is ineffective in maximizing their profits.  The article backs this assertion up primarily through the use of fundamental supply and demand theory. In other words, the article states that iTunes has wrongfully established a uniform price that is well below what consumers are both willing, and able to pay per song.  This means that consumers who would have been willing to pay more for a song receive a “big chunk of the surplus”, leaving less for the seller, which could potentially mean less profit. And so it would seem that this uniform benefits the consumers much more than the iTunes firm.

This claim that individuals are wiling to pay more than 99cents per song is supported by the research of Ben Shiller, and Joel Waldfogel, two economists at UPenn’s Wharton business school.  The two economists presented 500 undergraduates at Upenn with clips of the 50 most popular songs on iTunes earlier that month. They then had each undergraduate listen to the clip and then asked the students to write down the most they would be willing to pay to download the song in question. The findings were surprising, in that the data on more than 23,000 songs allowed researchers to construct a demand curve for each popular song.  Ultimately, the exercise showed that “a uniform price per song that maximized revenue among the students was quite high—$2.30 in 2008 and $1.46 in 2009.”

Although these findings are only representative of Upenn undergraduates, they do show that in certain demographics, consumers are willing to pay more than 99 cents per song—illustrating a loss of producer surplus on be half of iTunes. Moreover, the study only created demand curves for songs that were “popular” and thus the findings for less popular songs may vary, as students may not be as wiling to spend as much money on such songs. And so the study seems to suggest that one alternative to uniform pricing would be song-specific pricing based on the predicted popularity of the song. However, the article has shown that this would only increase profits by 3%.

Ultimately, the article seems to suggest that charging an “entry freee” for use of the service and then a small, fixed, per-song cost for downloads would benefit both sellers and buyers. “The most revenue, according to the 2009 survey data, would be generated by charging the students $21.19 for entry and 37 cents a song.” And so with this data in mind, we can possibly expect some kind of entry free from iTunes and perhaps lower fixed prices of songs— despite people’s willingness to purchase songs above their price of 99 cents.

Article Retrieved from: http://www.economist.com/businessfinance/economicsfocus/displaystory.cfm?story_id=14699573

 

Readers go electronic as machine prices drop

The article entitled “Readers go electronic as machine prices drop” examines the increasing popularity of electronic books. The article states that the driving shift towards e-books is primarily because electronic editions are in demand because “they are more convenient, take up less space and can be made available to more people”.

In economic terms, the E-book is a substitution good for traditional paperback books. Thus theoretically, we can assume that as the demand for E-book increases, we will consequently see a decrease in the demand for traditional books. As demand for traditional books decreases, so will the price of these books, which will ultimately result in less production of books—meaning increasing unemployment for those individuals who hold jobs in the production of paper-back books. With that being said, increasing production of E-books/devices will require more workers to supply sufficient output, and thus the unemployment in the traditional book market may be made up for in the Ebook market.

Moreover, as firms begin to recognize the increasing popularity of electronic books, and as there is no clear monopolistic power, we can expect to see more firms enter the electronic book market as market entry barriers are relatively low. This will essentially result in a greater supply of electronic books/devices, suggesting that we may see decreasing prices of electronic books in the future.

 

Article retrieved from:

http://www.sun-sentinel.com/business/sfl-ebook readers101809,0,5171677.story

 

A reflection of myself as a learner of IB Economics

It has been several months since I have begun my second year of IB HL Economics. Due to the new reliance on technology, specifically being forced to use the online textbook, I have found that the class as changed significantly from what I was accustomed to previously. While the powerpoint lectures provide students with downloadable notes, I find that the content of the powerpoints tend to be almost identical to the online book, and for that reason not as useful for studying or review. Furthermore, while introducing a graph on a powerpoint may be effective as a way of introducing a new graph, I think it is instrumental to actually draw these graphs by hand numerous times, using hypothetical examples in order to fully understand the meaning and implications of the graphs. This was something that was done in last year’s class, and I believe it is one of the main reasons why I have been able to develop a complete understanding of the graphs I have learned last year.

Moreover, the online text-book lacks the level of analysis present in McGee’s Economics textbook. In other words, the online text-book is, for the most part, purely definitional. As economics is essentially about applying econmic terminology to real-world sittuations and not about memorizing definitions, I have personally found that McGee’s textbook is much more effective in developing the economic analytical stills necessary to employ the terminology being learnt, allowing me to score highly on IB questions. I believe this is clearly reflected through my results on past assessments within the class and for this reason I do not think that students should be forced to use the online textbook, especially since both textbooks cover the same material.  Moreover, I have found that the lack of discussion that takes place in class, compared to last year, due to the reliance on powerpoints, the online textbooks, and the class blogs, that I have a harder time digesting the new economics knowledge being taught since in classes, we tend to go over the definition of a concept once, and then simply move one, rather than spending time on each concept respectively.

With all this being said, I am satisified withthe results I have obtained so far in the course (aside from my Blog grades). IN order to improve this aspect, I will try to take greater initiative with my posts.

 

US imposes duties and tariffs on Chinese Tires

The article entitled “US and China”, of BizEd discusses the US’ accusation of China deliberately selling tires in the US to capture market share, or in economic terms, “dump”.  Thus in protest, Obama went again his public statements about refraining from increasing tariffs above current levels, and decided to implement duties and tariffs on Chinese-made tires. According to the article, “Duties of 35% will be levied for the next year with a 30% tariff in year two and a 25% one for the subsequent two years.”.  In response, China has retaliated by suggesting that the US may in fact be dumping chicken meat and carts into China.

This current event is clearly an example of retaliation, a negative consequence of protectionist policies.   In this circumstance, in can be assumed that the US was acting to preserve the competitiveness of its domestic goods by essentially increasing the price of imported goods via tariffs. Although theoretically this should increase aggregate demand, seeing as tariffs increase a country’s net exports, and decrease unemployment levels, this protectionist policy can have adverse effects as well. One of these effects, is retaliation, as China has clearly demonstrated in this article. Thus it can be argued that the effects of tariffs may in fact be negated, as retaliation from other countries can result in a decrease in the tariff-imposing country.