$Unique_ID{COW02631} $Pretitle{357} $Title{Nigeria Chapter 3A. The Economy} $Subtitle{} $Author{Robert Rinehart} $Affiliation{HQ, Department of the Army} $Subject{land government percent foreign plan agricultural development oil nigerian sector} $Date{1981} $Log{Bronze Head of Olokun*0263101.scf } Country: Nigeria Book: Nigeria, A Country Study Author: Robert Rinehart Affiliation: HQ, Department of the Army Date: 1981 Chapter 3A. The Economy [See Bronze Head of Olokun: Ife bronze head said to represent Olokun, god of sea and wealth] Oil revenues and the dominant role of the government in economic development were the most immediately outstanding features of the Nigerian economy in the early 1980s. Toward the mid-1970s the growth of oil revenues to massive proportions transformed Nigeria from a developing country whose economy was constantly in deficit to one having a large or potentially large surplus. Large-scale use of this surplus to acquire majority or major equity holdings in the productive sectors (except for agriculture), to implement public sector productive projects, and to expand the country's infrastructure had quickly propelled the government into preeminence in the economic arena. Strikingly, by 1981 the government's broad participation had not materially changed the free enterprise character of the economy that marked it at independence. Private enterprise flourished and was encouraged, and socialization was not a proclaimed government goal. But transfer of control and ownership of resources and productive facilities from foreign to Nigerian hands was such a goal. Nevertheless limited foreign ownership was still welcome, and for the medium-term-while Nigerians prepared themselves to take over-foreign management was acceptable. Nigeria's oil wealth directly affects only a very few people. Employment in the highly capital-intensive oil sector is limited, and only through the development made possible by oil revenues has the benefit from this natural resource provided any broad improvements in standards of living. Oil, however, is a nonrenewable resource; thus the principal reason given for the government's large-scale acquisition of equity in productive enterprises and its capital investment in fully state-owned facilities has been to provide future sources of earnings for continued economic expansion. The high level of economic activity generated by oil revenues has not concealed significant weaknesses in the economy. In 1981 Nigeria had essentially a monoeconomy and was dependent on the vagaries of world oil production and prices for achieving economic viability in other sectors. The government understood this well, and its plans for the rest of the decade envisioned a conscious effort to widen the base of public revenues and export earnings through diversification away from the oil sector. Manufacturing and agriculture were the principal target areas. Agriculture, the mainstay of a large majority of the population, had declined in the 1970s to the point that it did not meet overall domestic food needs, and Nigeria had become a major net food importer. In the case of manufacturing, marked expansion had taken place since independence. But growth had been from a narrow base, and the sector still remained a comparatively small contributor to the economy. An overriding problem was the shortage of skilled and professional manpower, which perhaps constituted the most crucial restraint on economic development. Shortages in practically all occupations and sectors had reduced effective management of the government's investment programs throughout the 1970s. Despite stepped-up efforts to increase the supply, the greatly enlarged development activities projected for the 1980s created even heavier demand for manpower, and the government anticipated the practical need to facilitate the free inflow of qualified foreign personnel, particularly in scientific and technical occupations. Economic Development and Income Distribution When Nigeria became independent in 1960, its economy was engaged almost exclusively in the production of food for the population and commodities for export. Minerals were of only moderate significance-the petroleum industry was just starting-and manufacturing consisted largely of traditional crafts and some modern enterprises, most of which were engaged in the assembly of imported materials rather than true manufacturing. The colonial government had initiated a five-year economic development plan in 1955 that was later extended to 1962. This plan, however, consisted of three separate programs-one for each region-having differing goals. In 1962 the new government introduced the First National Development Plan (1962-68). The private sector was expected to provide about one-third of the total planned capital investment, and encouragement was offered to the sector in the form of various tax, profit repatriation, and other incentives. The economic climate at the time was also very attractive, and private investment, of which a substantial amount came from abroad, greatly exceeded expectations. In contrast actual governmental investment was far below plan, and although major government projects were completed (among them the country's first oil refinery, paper and sugar mills, and the Kainji Dam and hydroelectric station), the significant progress achieved toward industrialization and overall plan goals was attributable largely to the private sector's performance. The civil war played some part in the failure of the public sector to attain its aims, but important deficiencies in planning, shortages of qualified management staff, and major shortfalls in the induction of foreign capital also contributed. The government's relatively limited effort to improve agriculture during the First Plan period has been considered a factor in the failure of agricultural production to keep pace with population growth from the early 1970s. The Second National Development Plan (1970-74), which did not get under way until October 1970, was aimed primarily at the reconstruction of facilities damaged by the war. General economic rehabilitation and recovery had already started and continued at a high rate through 1971, stimulated mainly by widespread demands that had built up during the war. Although by 1972 government investment under the plan had grown, the economy was set back from 1972 to early 1974 by major drops in agricultural production caused by a serious drought in the northern part of the country and by significant damage to crops in the south resulting from an overly long dry season. Public capital expenditure continued to grow through the remainder of the period but at a rate below that planned. In part to permit completion of ongoing projects and in part to allow time for better preparation of the next plan, the Second Plan was extended to the end of fiscal year (FY-see Glossary) 1974-75. Government investment during the period was concentrated largely in the areas of infrastructure and administration. As in the First Plan expenditure on agriculture was seriously inadequate and was a major cause of stagnation in output and growing food deficits. Before the end of the Second Plan the dramatic rise in world oil prices presented Nigeria with sudden wealth. This was reflected in a highly optimistic Third National Development Plan (1975-80) containing a massive public investment program that was eventually set at 26.5 billion naira (for value of the naira-N-see Glossary). This was eleven time greater than the government's actual capital expenditures on the Second Plan. Planners programmed a greatly increased role for the public sector-from approximately equal public and private sector expenditures in the Second Plan to two-thirds by the public sector during the Third Plan. Ambitious goals were established for transportation, heavy industry, and education. Although greater funding was provided for agricultural development, the emphasis, in the view of foreign economists, still remained far short of requirements to revitalize the sector. In view of the short time before the Third Plan was to end-in March 1980-and a decision to change the country's fiscal year to coincide with the calendar year, the civilian administration that assumed power in October 1979 extended that plan to the end of 1980 to allow more time for preparation of the Fourth National Development Plan (1981-85). A detailed summation of the Third Plan's achievements was not yet available in mid-1981. But much had been accomplished-a list of completed government projects included additional cement plants, two new oil refineries, port construction and expansion, new and improved airports, additional electric power generating facilities, and others. Projects financed entirely by indigenous private capital and those undertaken jointly with foreign entrepreneurs, as well as government projects in association with foreign entrepreneurs had resulted in new manufacturing facilities such as breweries, automobile and truck assembly plants, a sugar mill, and a roofing nail plant. In the preparation of the Third Plan the large oil revenues then being received apparently were expected to continue at the same high, or even higher, level. This did not occur, and expenditures had to be cut back as the result of the resources restraint (see Foreign Trade and Balance of Payments, this ch.). Implementation of the plan was also adversely affected by domestic political and economic factors, such as the July 1975 coup, the attempted coup of 1976, and rising inflation. Many government projects, notably in the manufacturing sector, were delayed, but most were expected to be commissioned during the Fourth Plan period. With regard to the Fourth Plan, it could only be noted in mid-1981 that total expenditures were programmed at 82 billion naira, of which 70.5 billion naira (86 percent) constituted the public sector share. The private sector contribution was projected at 11.5 billion naira (14 percent). It was estimated that over four-fifths of total expenditures would come from local resources, chiefly oil revenues. The government stated that the highest priority would be given to increasing agricultural production and processing facilities to develop the means to feed the country's population adequately. Also given priority status were housing, education, and manpower development-factors considered crucial to the attainment of the goal of substantial improvement in the standard of living of every Nigerian. Development of the other sectors was to be in accordance with the aim of all-around development of the economy. Two of the principal objectives of the various plans have been a more even distribution of income among individuals and socioeconomic groups and increasing participation by Nigerians in the ownership and management of productive enterprises. Information on income distribution was extremely meager in mid-1981. Foreign economists believed that the country's economic expansion had primarily benefited urban dwellers. Income improvements in urban areas, however, were very unequally distributed. Groups in commerce, trade, and government services apparently had made the most significant gains. Because of government freezes on wages, urban workers had suffered a decline in real income from inflation. In rural areas the relative stagnation in agricultural output and the adverse effect of inflation on the terms of rural-urban trade had caused a relative decline in rural incomes; an absolute decline may have been limited by remittances from the numerous migrants working in cities and towns. Greater Nigerian participation in modern economic activities had been a long-standing concern of the colonial government. Among various actions taken was the creation in 1956 of a national committee on Nigerianization of business enterprises, which recommended that aliens be barred from the distributive trades. The recommendation was adopted after independence, but only indifferent efforts were made to enforce it. In 1968 the military government established an expatriate quota board as a step toward speeding up the Nigerianization of top management staff. Two years later the Second Plan noted that many foreign firms had appointed Nigerians to management positions, but that in numerous cases the responsibilities of the appointees were far from commensurate with the position. The appointments were in fact intended chiefly for the sake of appearances. The problem was compounded by the lack of an enforcement agency, which meant that the individual foreign firms decided the pace and degree of Nigerianization. The plan stated that positive action would be taken to correct the situation. But, more importantly, it declared that indigenization would be expanded to encompass eventual government ownership and control of the greater portion of the country's productive assets to ensure that Nigeria's economic destiny would be determined by Nigerians. Indiscriminate nationalization was in no way envisioned. The government would seek complete control and full public ownership of highly strategic industries, but in other cases joint participation with private business-either foreign or indigenous-was expected. In the exploitation of strategic natural resources, however, the government would in all cases be the dominant partner. The first major step toward acquiring government holdings in foreign enterprises was taken in 1971 when the Nigerian National Oil Corporation (NNOC-later the Nigerian National Petroleum Corporation [NNPC])-was established; by 1975 the NNOC had secured a 60 percent equity in all foreign oil companies in Nigeria. In the private sector two significant measures were enacted during the 1970s; their purpose was to increase private Nigerian ownership, control, and management and ultimately to reduce foreign participation to a complementary role. The first law, the Nigerian Enterprises Promotion Decree of 1972, listed twenty-eight kinds of businesses reserved for Nigerians, consisting primarily of activities in the commercial and service sectors and some simple food processing. A second group of twenty-five comprised mainly light and primary processing industries in which a minimum of 40 percent Nigerian equity was required. Other businesses then under foreign control were not affected. The provisions of the decree were to have been implemented by the end of 1974, but only about a third of the foreign businesses encompassed had completed the process by mid-1975. The operation failed to expand greatly Nigerian participation because of the relatively small number of individuals able to furnish the needed capital; the unwanted result was a concentration of ownership. A provision of the decree permitted naturalized citizens to own 100 percent of assets, and a large but unknown number of foreign owners proceeded to obtain citizenship. Other ways were also found to circumvent the law, and a government panel was appointed in 1975 to investigate the decree's overall implementation. The findings resulted in the Nigerian Enterprises Promotion Decree of 1977, which was to be effective as of December 1978. The decree contained a list of service activities and simple manufacturing endeavors that were exclusively reserved for Nigerians. A second list, mainly light industries, required 60 percent Nigerian ownership, and all remaining businesses had to have a minimum of 40 percent Nigerian equity. The last group included such basic industries as transport equipment and chemicals. One result of the decree was that henceforth all new foreign ventures had to have at least 40 percent Nigerian participation. From the standpoint of ownership participation, indigenization policies have achieved considerable success. In 1966 foreign ownership of enterprises amounted to 92.9 percent of the total. British private investment in fixed assets then constituted 52.3 percent of the total; United States interests, 17.3 percent; West European investments, 22.7 percent; and others, 7.7 percent. In 1977 foreign ownership had declined to 58.5 percent, although meanwhile total foreign fixed assets had risen threefold (from 651 million naira in 1966 to 1,990 million naira in 1977). The British share remained about the same at 50.1 percent. A substantial increase in United States holdings had occurred (to 29.5 percent), while West European investment had declined to 9.3 percent. Other foreign investment accounted for 11.1 percent. Foreign equity in oil dropped from 100 percent in 1966 to 39.2 percent in 1976, the result of acquisitions by the NNOC. Important changes also occurred in manufacturing during the same decade; Nigerian interests rose from 18.5 percent to 43.3 percent. In trade the Nigerian-owned share increased from 1.1 percent to 28.3 percent. Greater Nigerian equity in agriculture was of less significance; foreign private assets in the sector constituted no more than 1 percent of total foreign investment. In 1980 disagreement existed among both Nigerian and foreign observers as to whether indigenization had retarded direct investment. Some disinvestment occurred after each decree was announced, and foreign businessmen contended that much of the increase in foreign investment after 1972 represented reinvestment of profits rather than new capital entering the country. Some shifts were made between lists to allow greater foreign participation in certain economic activities, but in mid-1981 any major reversal of indigenization policies did not appear politically feasible. Introduction of new foreign capital remained important for Nigeria and was actively sought, not so much from the standpoint of funds (oil surpluses provided much of the required investment capital) but rather because of the much needed technology and managerial skills that accompanied such funds. Agriculture, Forestry, and Fisheries At independence about 70 percent of Nigeria's gross domestic product (GDP-see Glossary) was attributable to agriculture, and the vast majority of the population was engaged in agricultural pursuits. Agricultural commodities accounted for close to 90 percent of export values. But by 1980 these proportions had been altered by the increasing contributions of manufacturing, the oil industry, and other economic sectors. The estimated GDP share of agriculture in 1980 was less than 20 percent, and agricultural exports accounted for only about 5 percent of total exports. Agriculture, however, retained its basic importance as the supplier of most of the country's food, and 70 to 75 percent of the Nigerian people continued to depend on it for their livelihood. The agricultural sector consists predominantly of smallholder farm families, estimated to number between 5 and 6 million, who in the late 1970s produced 90 percent or more of the country's agricultural output. Farming methods followed traditional practices, and productivity was low, given the country's potential. In some areas that had agricultural extension services, the use of fertilizers and pesticides had been introduced. But in 1981 the total number of farmers who used them remained small. The development of plantations had been discouraged in colonial times by British policies, but after the start of self-government in 1951 the number of plantations increased. In mid-1981, however, the total plantation area constituted only a very minor proportion of agricultural land. During the 1970s the government had moved to establish large, 4,000-hectare, mechanized farms in each of the states as a way to increase productivity, but those that were actually operating had enjoyed little success. The average area cultivated by a smallholder ranged from less than half a hectare to over two hectares. The size depended largely on the amount of land that could be cleared and farmed by a family and the crop grown. Population pressures played some part, tending to restrict available land. Agricultural production was believed to have stagnated during the 1970s, when according to estimates output grew at an average annual rate of no more than 1 percent. An aging farm population (many young persons migrated to urban centers where life was more attractive), low producer prices, and inadequate credit appear to have been largely responsible. Exports of certain agricultural commodities suffered major declines during the decade, giving rise to the belief that production had fallen. It appears that in important instances production declines did occur, but increased domestic consumption was also responsible for much of the drop in exports, as in the case of cotton where almost the entire crop was procured in the late 1970s for use by local textile mills. Growing local demand for groundnuts (peanuts), groundnut oil, and palm oil also greatly reduced the quantities of those products available for export. In the late 1970s producer prices for groundnuts paid by the government's pertinent commodity promotion and buying board were increased. There was little farmer response through sales to the board, but observers believed that production was probably maintained or possibly increased because of a ready-and higher price-local market for groundnut products. Government concern over the failure of agricultural production to expand and over the need to import increasing quantities of foodstuffs to meet primarily urban demands was reflected in Operation Feed the Nation (OFN), which was launched by the military government in 1976. OFN was intended to impress upon the people the necessity for becoming self-sufficient in food production. Seeds, fertilizers, pesticides, and other inputs were made available-but frequently in the wrong quantities at the wrong time. Promised credit did not materialize for the small farmer, and the existing extension services proved inadequate for the size of the task. In early 1980 the civilian government of President Alhaji Shehu Shagari announced a new agricultural plan. Drawn up by Nigerian and International Bank for Reconstruction and Development (World Bank-see Glossary) experts and labeled the Green Revolution, the effort was designed to make Nigeria self-sufficient in food crops in five years and in industrial crops in seven years. Vastly increased expenditures on agriculture were projected in the national development plan announced in early 1981. Emphasis was on the smallholder, and the private sector was expected to play a larger role in the important procurement and distribution of agricultural inputs. Successful efforts initiated by the government in the mid-1970s in conjunction with the World Bank had established small-scale agricultural development projects in several parts of the country. These projects, which furnished a package of inputs, extension services, and feeder roads, were to be extended through the Accelerated Development Area Program (also in conjunction with the World Bank). The new program would eventually provide similar (although somewhat simplified) help to other rural districts throughout the country. Since 1979 foreign investors have been able to participate with the government in agricultural projects in which foreign equity can constitute 60 percent. This opportunity was created through a modification of the Nigerian Enterprises Promotion Decree of 1977. Land Use, Soils, and Land Tenure In mid-1981 estimates of land potential generally agreed that a large part of the approximately 91.1 million hectares comprising the country's total land area could eventually be used for cultivation. In the late 1970s, however, land actually devoted to crops totaled about 23.8 million hectares (26.2 percent of the cultivable area), according to the Food and Agriculture Organization (FAO) of the United Nations (UN). Much of this land was farmed under bush fallow systems whereby an amount substantially larger than the cultivated area was left uncropped for varying periods to allow natural regeneration of soil fertility. Another 20.8 million hectares (22.8 percent) were classified as permanent pasture, but a considerable part of this land had the potential for crop use. About 31.1 million hectares (34.1 percent) were occupied by forests and various kinds of woodland. In mid-1981, except for about 9 million hectares included in permanently reserved state forests, this land was also potentially usable for crops. The country's remaining 15.4 million hectares consisted of built-on land, streets, highways, wasteland, and apparently some unclassified potentially productive land. From the standpoint of natural fertility and the common use of traditional agricultural methods, Nigeria's soils fall within a low-to-medium productivity range. However, in a major study of agricultural development potential carried out in the mid-1960s, the FAO concluded that the vast majority of the country's soils actually would be in a medium-to-good productivity range if adequate soil management practices were employed. Some government efforts were made during the 1970s to improve farm practices; but in mid-1981, except for limited areas, soil productivity remained unchanged or had declined because of excessive use and resultant loss of fertility. Soils particularly suitable for the cultivation of specific crops are found in different parts of the country. Most notable are the clayey, moisture-retaining soils on hilltops and upper slopes in a large area of the southwest in which cocoa flourishes. Others include two large areas of soils in the north that developed on wind-blown sands deposited during an earlier geologic period. In one case the soil is highly suitable for cotton and in the other for groundnuts. Traditional land tenure concepts and practices throughout Nigeria were based on essentially similar customary laws under which land was considered the property of the community. An individual had usufructuary rights to the land he farmed in his lineage or community area. Possession was in perpetuity as long as he used the land to the benefit of his family and society. He could pass it on to heirs and even pledge its use to satisfy a debt but could not sell or mortgage it. The right of disposal belonged only to the community acting through traditional authorities, who exercised the right in accordance with the unwritten customary law. The Fulani conquest of much of northern Nigeria in the early 1800s brought a change in land tenure in areas under their control through the bestowal of land on certain individuals in the form of fiefs. In many cases the new landlords appointed overseers who had the power to allocate unused or unoccupied land as they wished without regard for local community interests. One result was a growing number of grants during the nineteenth century to strangers-a practice relatively rare under customary land tenure laws-as overseers sought to increase the revenue from the landlord's holding. This led gradually to significant reductions in bush land, which seriously affected the expanding populations of the indigenous communities and was instrumental in the increasing migration of farmers to urban areas that began toward the end of the century. In the early 1900s the British defeated the Fulani and declared all land in the former Fulani fiefs public property. Subsequently, in contrast to southern Nigeria where land was privately owned by the community, occupancy permits were required from the government. At the same time, however, the northern authorities were charged with supervision and protection of the indigenous population's traditional rights, and a general reversion to customary land tenure practices occurred. In predominantly Muslim areas traditional land inheritance laws were allowed to continue. As a result of the government's upholding of local customary laws, the encroachment of strangers appears largely to have been halted. In 1962 the government of the Northern Region placed formal restrictions on landholdings by individuals who were not members of a northern community. During colonial rule the English concept of individual ownership of property was introduced, and a form of legal conveyance of land that could be registered with the government was authorized. Various laws and ordinances gave the government the power to acquire statutory landholdings by the payment of compensation. Expansion of the money economy and cultivation of commercial crops encouraged farmers to seek absolute ownership. Nonetheless, although data were relatively imprecise at the beginning of the 1970s, customary tenure remained the principal form of land tenure throughout Nigeria. During the decade acquisition of land by individuals and business enterprises, especially in the expanding urban areas, became a major problem as land prices rose sharply. In the south customary private owners and speculators turned from land sales to more profitable high-rent leasing arrangements. In northern Nigeria, where land was held only by permit, farmers and farming communities on the outskirts of cities became victims of developmental rezoning. Their permits were revoked, and they were paid a minimal compensation for the land and moved to other areas. The land was then subdivided and sold for high prices. A potentially serious problem was the developing change in the long-standing generally equal holdings of land in rural areas as more affluent families and individuals acquired large tracts that were then farmed by tenants. In April 1977 the Federal Military Government (FMG) appointed a Land Use Panel to carry out a study of land tenure, use, and conservation practices. This was followed by the Land Use Decree of March 1978, which was designed to establish a uniform land tenure system for the entire country. The decree, subsequently incorporated as a provision of the Constitution of 1979, in effect nationalized all land by requiring certificates of occupancy from the government for land held under customary and statutory rights and the payment of rent to the government. However, the decree declared that anyone who normally occupied a piece of land and carried on its development would continue to enjoy the right and benefit of occupancy and could sell, transfer, or otherwise assign his interest in the development of the land. This applied to farmers and rural residents as well as to individuals and organizations in urban areas, who would retain absolute rights to all developed land legitimately theirs. The main purpose of the decree, according to then head of state Lieutenant General Olusegun Obasanjo, was to make land for development available to all individuals, corporate bodies, institutions, and governments. Provisions for this were contained in the restriction on occupancy or possession of undeveloped urban land to a half hectare in any one state, 500 hectares of land for agricultural purposes, and 5,000 hectares usable for grazing. The decree gave state and local governments paramount authority to take over any undeveloped land and to assign and lease it as required. An important proviso, intended in part to prevent fragmentation, was that statutory rights of occupancy could be passed on only to one person or heir. Strong opposition to the decree came from the traditional rulers in the south, where outright land ownership was the rule. In late 1980 it was reported that implementation had been difficult and that the new civilian government was attempting to develop a revised law that would be easier to carry out.