Download Udeogu_Rate-of-profi..

The Rate of profit, Financialization and Economic Growth: Evidences from
Nigeria.
Ejike Udeogu1
Abstract
In this paper, attention is drawn to a significant growth determinant that has often been
overlooked by mainstream economics when discussing factors that determine growth of real
capital accumulation. It is argued here that the rate of profit, defined as the percentage return
on an invested capital, is the principal determinant of how much capital is committed to real
production. The rate of profit constitutes also a good first approximation of the health of an
economy and thus expresses the potential of an economy to accumulate capital and
simultaneously increase productivity and grow.
The thesis of this study therefore is that it is the inability of real capital assets in Nigeria to
earn sufficient rate of profit that underpins the falling rate of real investment, employment,
income and growth in the country. Additionally, the neoliberal market-led strategies instead
of enhancing real capital accumulation have, in fact, occasioned financialization which has
mitigated growth of profitability of real capital accumulation in Nigeria and thus contributed
to the overall stagnation of capital accumulation, productivity, employment, and growth.
1
University of East London. Email: [email protected]
Page | 1
1. Introduction
Low rate of domestic savings, persistent fiscal deficits, and misaligned policies; such as the
overvaluation of foreign exchange, rationing of credit and the setting of interest rate ceilings
– have all been noted in mainstream economic theories as the factors that inhibited real
capital accumulation and economic growth in developing countries. As a result, since mid1980s emphasis have been on the adoption of market-led strategies; deemed by many
orthodox economists, as prerequisite stratagems that will revive the stagnant economies and
also ensure the effective mobilization of savings and its allocation to real capital
accumulation.
The purpose of this paper is to articulate the significant growth factor that determines the rate
of capital accumulation, which has often been overlooked by mainstream theories. The
weakening of this underlying factor is advanced as a more plausible reason for the perennial
deterioration of Nigeria’s real economy. Additionally, it is argued in this paper that the
neoliberal policies, especially that of financial system deregulation and liberalization
precipitated financialization, which has further quickened the flight of both industrial and
human capital from the already sclerotic real sector and into the financial sector. In similar
fashion, the liberalization of trade occasioned unequal competition with advanced foreign
capitals, which also impedes the valorisation of high-cost domestic capital-assets in periphery
economies such as Nigeria.
In the next section, this study will be examining the emergence of neoliberalism, the
mainstream theory which shaped the economic policies adopted in several countries in recent
years. The impact of these resultant economic policies on Nigeria’s real economy will be
particularly examined in order to provide a background to this paper. In the third section, the
neoliberal postulate underpinning deregulation and liberalization of the financial system will
be critically reviewed.
The occurrence of low rate of profit, which this study advances as the fundamental reason for
the continual decline of the Nigerian real sector will be discussed in the fourth section
together with the factors which contributes to the declining of the rate of profit. The
phenomenon of financialization, with empirical evidences from Nigeria will be examined in
the fifth section while the conclusions and some recommendations will be contained in the
last section.
Page | 2
2. Neoliberalism as the new orthodoxy
Since the late 1970s, several neoliberal reform policies have been aggressively implemented
by many policymakers. Margaret Thatcher during her reign as the UK Prime Minister in the
1980s privatized public entities and subsequently deregulated the financial institutions.
Similarly in the US during the same period, Ronald Reagan deregulated the financial sector
and further deepened the deregulation of the airline industry. In most developing countries,
deregulation and liberalization of their economies were achieved via the Structural
Adjustment Programmes.
Strategically at the heart of all these various neoliberal reforms adopted in the developed and
developing economies in the late 1970s and early 1980s is the deregulation and liberalization
of the financial systems. Proponents of financial system deregulation and liberalization,
McKinnon (1973) and Shaw (1973) in particular, argued that government interventions in the
financial system, through interest rate regulation and the administrative allocation of loanable
funds, represses the financial system and causes there to be disequilibrium in its allocation of
funds to potential investment opportunities. The paradigm shift from state-led strategies to
market-led strategies was, in fact, based on the perception of the inability of the state-led
strategies, which had regulated the financial system, to reverse the continuing deterioration of
the real economies.
One of the core consequences of these market-led strategies is the repealing of previous
regulatory policies that had ‘restrained’ finance. For instance earlier regulatory policies in the
US such as the Glass Steagall Act of 1933, the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, formerly installed in order to lower the risk of another
financial crisis after the 1929 financial crisis and to simultaneously direct savings toward
productive investment and away from speculative activities were respectively repealed. The
Garn-St. Germain Depository Institutions Deregulation and Monetary Control Act of 1982
got rid of the interest rate ceilings and other regulations that were originally imposed in the
1930s. Similarly in the UK, the ‘Big Bang’ of October 1986 (Financial Services Act of 1986)
eliminated the existing barriers between banks and securities houses and also allowed the
entry of foreign firms into the UK Stock Exchange.
In Nigeria, prior to the implementation of the Structural Adjustment Programme (SAP) in
1986, the monetary policy framework adopted by the Central Bank of Nigeria (CBN) placed
emphasis on direct monetary controls (CBN, 2011). The policies adopted under these
Page | 3
frameworks relied heavily on sectoral credit allocation, credit ceilings, cash reserve
requirements, and administrative fixing of interest and exchange rates as well as the
imposition of special deposits (ibid). This regulated approach to monetary policy lasted from
1959 to 19852.
In line with the financial deregulation and liberalisation policies embodied in the Structural
Adjustment Programme adopted in 1986, there was a paradigm shift from the previously
“repressive” direct monetary policy control method to a “liberal” indirect approach, anchored
on the use of market instruments in monetary policies. The three main indirect approaches to
monetary policy management adopted by the CBN were - the exchange control liberalisation,
adoption of relevant pricing policies in all sectors of the economy and a further rationalisation
and restructuring of public expenditures and customs tariffs (CBN, 2011).
The adoption of these neoliberal reforms in Nigeria arose mainly due to the growing
deterioration of its macro-economy, which many argued was due to excessive government
intervention in the real economy. In the wake of the declining petroleum prices in the early
1980s, Nigeria’s balance of payment deteriorated hugely, owing largely to its growing
dependence on oil revenue and the relative decline of the agricultural sector which had been
the mainstay of the economy.
Prior to 1973, Nigeria’s exchange rate policy was in consonance with the IMF’s fixed
exchange system. As such, the exchange rate was subject to administrative management
according to IMF’s regulations. Following the breakdown of the Bretton Woods agreement in
1971, the Nigerian currency was adjusted in relation to the US dollars. However in 1978, the
Nigerian naira was pegged to a basket of twelve currencies that comprised Nigeria’s major
trading partners (Obadan, 2006). During the periods from the collapse of the dollar-gold
system in 1971 to early 1980s, the exchange rate policy adopted by the policy makers was
mainly geared towards the preservation of the value of the external reserves, the equilibration
of the balance of payment and the maintenance of a stable, albeit high exchange rate
(Obadan, 2006). As Obadan observed, the latter objective was based on external and internal
macroeconomic objectives.
During the 1970s, the Nigerian policy makers placed emphasis on development projects,
mainly through the encouragement of domestic industrialization. It adopted the import-
2
The only exception being in 1966 when credit restriction was lifted temporarily in order to enable banks finance the
government to prosecute the civil war (CBN, 2011).
Page | 4
substitution industrialization (ISI) growth strategy and this policy encouraged heavy reliance
on the importation of industrial inputs and the discouragement of importation of finished
industrial goods. Thus throughout the periods of 1970s, with some few exceptions, Nigeria’s
nominal exchange rate was stable or appreciated, owing firstly to the increasing oil revenue
and also to the deliberate exchange rate policy which was aimed at helping domestic
industrialists source inputs cheaply from abroad.
The exchange rate policy of maintaining the appreciation of the naira however retarded
growth of non-oil exports. This latter outcome was primarily due to the effect of over-valued
exchange rate which invariably causes a country’s outputs to be relatively expensive in the
international market compared to the same produce from other countries. As a result, there
was an inevitable deterioration of the agricultural sector which had previously been the main
stay of the economy in the past. For instance, the annual production of the major cash crops
such as cocoa, rubber, cotton and groundnut, which have been Nigeria’s major export, fell by
42, 29, 65 and 64 percent respectively between 1970 and 19853.
So with the deterioration of the real economy (the agricultural and also the commercial
sectors4), Nigeria’s income was exposed to the vagaries of the oil price in the world market.
With the oil price crashes of the 1980s, Nigeria’s domestic economy unsurprisingly
experienced severe setbacks. The country suffered huge balance of payment problems (see
figure 2.1), a significant depletion of its external reserves (see figure 2.2) and a burgeoning
debt burden (figure 2.3); this latter aspect was largely due to the interest rate increases in the
early 1980s occasioned by the ‘Volcker shock’5.
3
Data sourced from the CBN statistical bulletins, various issues.
Deteriorated largely due to the import quotas and tariffs restrictions on finished industrial imports
5
The US Federal Treasury Chairman, Paul Volcker, adopted a drastic neoliberal monetary policy in the early 1980s which
occasioned unprecedented hike in the rate of interest. This hike has often been termed the Volcker shock.
4
Page | 5
Figure 2.1 – Current account balance (in billions of US$)
Data source: 2014 IMF world Economic Outlook Database
Figure 2.2 – Total reserves minus gold (from 1980-85 in billions of US$)
Data source: World Bank Development Indicators
Page | 6
Figure 2.3
Source: Data are from the World Bank’s world development indicators database
From 1975 to 1980 for instance, Nigeria’s external debt averaged just below 10% of its GNI.
However after the unprecedented spike in the rate of interest instituted by the US Fed
chairman, Paul Volcker in early 1980, Nigeria’s external debt spiralled to over 60% of its
GNI by 1984. In sum, it was at the back of these deteriorating economic circumstances that
the policy makers in the country heeded to the World Bank’s advice to deregulate and
liberalize some of its sectors and also to devalue the naira.
The 1983 report by the World Bank on the plan of action for Sub-Saharan Africa projected
the neoliberal views of a minimalist state and the pre-eminent role of the private sector in
Africa’s development (World-Bank, 1983). The report identified domestic policy factors as
the main cause of the economic deterioration in Sub-Saharan Africa, especially the policy of
maintaining over-valued exchange rate, which it singled out as the main culprit for the
decline in the agricultural sector.
In 1986, during the military regime of General Ibrahim Badamosi Babangida, the Nigerian
government finally negotiated a standby agreement6 with IMF and subsequently implemented
the Structural Adjustment Programme. The core sets of policy measures in the programme
include –
6
The agreement was undertaken without direct IMF financing. However, it embodied the standard donor prescriptions for
reforms such as currency devaluation, privatization of state enterprises, deregulation and liberalization of the financial
sector, general fiscal and monetary restraints and a reduction of public sector subsidies (see FRN, 1986).
Page | 7
i. The mobilization of resources, which it sets out, could be achieved through fiscal and
financial reforms.
ii. The improved performance of the public sector which it sets out could be achieved
through the privatization of the public sector companies, reform of the civil service
and improvement in the institutions which support the public sector.
iii. Trade liberalizations such as removal and/or reductions of restrictions such as quotas
and tariffs and the promotion of exports (through currency devaluation) and
encouragement of foreign direct investment
In line with the financial deregulation and liberalisation policies embodied in the Structural
Adjustment Programme adopted in 1986, there was a policy shift from the ‘interventionist’
direct monetary control methods to a ‘liberal’ indirect approach anchored on the use of
market instruments in monetary policies.
By the end of 1986, the CBN also eased restrictions on bank licensing. The easing of
restrictions on bank licensing promoted an increased profusion of new banks. For instance by
1989, the total number of commercial banks operational in Nigeria had grown from just 29
banks with a total of 1,360 branches nationwide in 1986 to about 47 banks with an additional
489 local branches. By 2002, the number had almost doubled to 90 banks7. Also in 1987, the
interest rate for lending and deposits were deregulated. A market determined price-setting
was permitted on inter-bank lending. Similarly, the foreign exchange market was liberalised.
The free-market exchange rate strategy was adopted and the exchange rate policy objectives
were pursued within the institutional framework of the tiered foreign exchange market
system.
However, despite all the neoliberal strategies adopted since the mid-1980s to remediate the
real economic deterioration in Nigeria, the real sectors have shown little sign of growing,
especially relative to its pre-neoliberal epoch levels. The results from the neoliberal regime
have been mixed, with much of them being appalling; judging from the various current
indicators of the country’s economic performances since 1986. Nigeria’s economy is still
currently under-diversified and has tended to heavily depend on the oil sector, which
7
These huge increases were in some part due to the adoption of Universal banking in 2001. This saw the conversion of
Merchant banks to Deposit Money Banks (DMB).
Page | 8
presently contributes around 90% of its export revenues8, 75% of the government’s
revenues9, and over 45% of its Gross Domestic Product (GDP)10.
Furthermore, the increasingly poor investment climate has caused private agents to keep the
bulk of their assets abroad11 (with independent estimates of the stock of capital flight abroad
at over $50 billion), and have also instigated the mass exodus of high skilled workers from
the country. Over one million Nigerians (mostly highly educated) have emigrated to Europe
and the U.S (the brain drain conundrum). Also, most of the Foreign Direct Investment (FDI)
into the country is mainly into the financial sector, further reflecting the unattractiveness of
real capital accumulation in the country.
All major productive sectors have considerably shrunk in size since the 1980s. From 1960 to
1984 for instance, the manufacturing12 output averaged around 7.3% of the total GDP. The
manufacturing outputs from 1985 onwards have not reached the average output witnessed in
the pre-SAP epoch. In fact, the manufacturing output as a percentage of the total GDP
declined to an abysmal 1.6% in 2011. This decline in real capital accumulation is also
reflected in the rate of unemployment which has been on the increase since 2005. From
11.9% in 2005, the rate of unemployment has increased to 23.9% in 201113.
The economic capacity remains highly underutilized and uncompetitive. Nigeria is not only
underdeveloped; it also experiences the worst forms of underutilization of both its human and
industrial capital. The manufacturing capacity utilization has continually been on the
decline14 and poverty is becoming deep, severe and pervasive, with about 68% of the
population now living below poverty line15. Income distribution is so skewed that the country
8
This figure is for 2011. This represents a percentage of merchandise export income that is from fuel export alone. Figures
are from the World Bank Development Indicators database:
http://databank.worldbank.org/data/views/variableselection/selectvariables.aspx?source=world-development-indicators
9
This figure is from the 2012 federal account. Total revenue (gross) was N 11,116.90billion and oil revenue (gross) alone
stood at N 8,025.95billion. sourced from the CBN statistics database: http://statistics.cbn.gov.ng/cbnonlinestats/DataBrowser.aspx
10
2011 GDP at current basic prices and the 45% represent contributions from crude petroleum & Natural gas, Solid
Minerals, Quarrying & other mining and oil refining. Data sourced from the CBN 2012 statistical bulletin.
11
Goldin and Reinert (2012) noted that the residents of low- and middle-income countries hold a great deal of their wealth in
form of flight capital mainly due to poor domestic investment opportunities.
12
This excludes oil refining, mining and extraction outputs.
13 Data sourced from the IMF world Economic Outlook Database for 2012. The figures represent the percentage of the total
labour force that is unemployed.
14
Manufacturing capacity utilization in Nigeria, on average, is between 40-60% since the mid-1980s compared to 80-95%
capacity utilization in Malaysia and other semi-periphery countries.
15
This is the percentage of the population living below $1.25 PPP per day. 84.5% of the population are living below the $2
PPP a day. Figures are for 2010 alone. Figures were sourced from the UNDP human development indicator and the World
Bank world development indicator databases.
Page | 9
is one of the most unequal societies in the world, with a Gini coefficient of 48.8% 16. The
income share held by the highest 20% of the population is around 54% of the national
income. The majority of the population (over 60%) hold a share of less than 20% of the
national income17.
The country’s economic and social development remains far below the minimum
expectations of the population, with per capita income just about $107118, which is
substantially below its level at the time of independence in real terms. Equally disturbing are
the country's social indicators which have slipped to well below the average for developing
countries with top on the ladder being life expectancy at birth of only 52.319 years and the
under-five mortality rate as high as 143 per 1,000 live births20.
In summary, it could be argued that the neoliberal strategies for growth have not been able, to
a large extent, achieve the desired impact for which it was intended for, which is to induce
economic growth. In fact, one could argue, without fear of contradiction, that there have even
been traces of further underdevelopment in the country’s real economy since the
implementation of the neoliberal Structural Adjustment policies from the mid-1980s21.
16
The Gini coefficient measures the deviation of the distribution of income (or consumption) among individuals or
households within a country from a perfectly equal distribution. A value of 0 represents absolute equality and a value of 100
represents absolute inequality. Data is sourced from the World Development Indicator database for 2010.
17
Figures are for 2010 alone. Sourced from the World Development Indicator database
18
2012 figure from the World Bank Development Indicator database. Discounting this figure to 1960’s using a moderate
inflation rate of 5% = 1071/ (1+0.05)53 = $80.68. 1960’s GDP per capita was higher at $93.
19
The figure is for 2012 life expectancy at birth index from the UNDP human development indicators database. Life
expectancy at birth for countries with very high human development index is 80.1 years and 73.4 years for high, 69.9 years
for medium income and 59.1 for low income countries. Nigeria’s 52.3 years is still below the average for low income
countries.
20
This figure is for 2010. Nigeria’s figure is still higher than the average (110 per 1000 births) for low income countries.
21
A fact many authors such as Wapenhans (1994), Ajayi (1994) and Stiglitz (1993, 2000, 2002) have respectively remarked
in their works.
Page | 10
3. Neoliberalism and its inherent contradictions
The works of Goldsmith (1954), Gurley and Shaw (1955) and more recently McKinnon
(1973), Shaw (1973) and Fry (1978), have inspired scholarly discourse on how factors that
affect financial intermediaries might simultaneously impact the rate of real capital
accumulation, which drives economic growth. McKinnon and Shaw in particular posited that
deregulation of the rate of interest will allow it to effectively perform its equilibrating
function of matching savings with borrowings. They argued that higher rates of interest
stimulates more savings, which the financial institutions are then able to mobilize and
subsequently allocate to real production processes (McKinnon, 1973, Shaw, 1973).
Also, these neoliberals asserted that higher rates of interest screens out unprofitable
investments and thus encourages only viable investment prospects to be pursued. They
argued that if interest rates were intentionally capped to a low rate, that excess demand of the
scarce funds will have a crowding-out effect, which might actually cause the most efficient
investments opportunities to be missed (Fry, 1997). Goldsmith (1954) advanced that
deepening (expansion) in the financial sector reflects a growing base of finance capital that
financial intermediaries have mobilized and which they would subsequently allocate to the
productive processes. It was later posited by McKinnon and Shaw that it is only by
liberalizing the financial sector will “deepening” occur in the sector.
Recent empirical studies have subsequently tried to corroborate these neoliberal theses. For
instance, Roubini and Sala-i-Martin (1991) asserted that there is a negative relation between
trade distortions (import restrictions, quotas and tariffs) and growth. They posited also that
financial repression has negative consequences for growth. They noted that due to the inward
oriented policies adopted by these Latin American countries, they appear to be growing
slower than the rest of the world. They also contended that countries that are financially
repressed will have higher inflation rates, lower real interest rates, higher base money per
capita and lower per capita growth than countries that are financially developed.
The widely adopted financial proxy variables in most of the mainstream finance-growth
empirical studies include, among many others, the ratio of market capitalization to GDP, the
ratio of bank assets to GDP, the ratio of development bank assets to GDP, financial
repression index (the difference between the rates of interest and inflation), financial
efficiency index (the spread between the deposit and lending rate) and the ratio of bank
liabilities to GDP (some used the ratio of private savings to GDP). These financial proxies
Page | 11
were mostly regressed against some macro-economic variables such as GDP per capita
growth, investment efficiency, and the rate of capital formation.
Many of these mainstream studies observed that high ratio of market capitalization reflects
growth in the economy (Levine, 1991, Beck and Levine, 2004). King and Levine (1993)
concluded that higher levels of the ratio of liquid liabilities to GDP (M3/GDP) and the ratio of
deposit-money-bank (DMB) domestic assets to deposit-money-bank domestic assets plus
central bank domestic assets are strongly associated with higher future rates of capital
accumulation and improvements in the efficiency with which economies employ capital.
Nonetheless, these neoliberal postulates have been contradicted by the declining rate of real
capital accumulation in the economies of the many countries that implemented these
neoliberal reforms22. In most developing countries, such as Nigeria, the rate of real capital
accumulation have stagnated and even declined in some sectors, since the adoption of these
neoliberal reforms while the ratio of some of the financial proxies have been on the increase.
The level of income inequality has been increasing, the rate of income compensation to
labour has declined significantly and capital has tended to flow ‘out’ instead of ‘in’ to the
economy.
The inherent flaws of these neoliberal studies unarguably stems from the contradictions
innate in the classical theory of interest and investment, which underpins neoliberalism. John
Maynard Keynes in his book, ‘The general theory of Employment, Interest and Money’,
lucidly articulated these flaws. Keynes (1936) remarked that the classical economists
assumed that any individual act of abstaining from consumption (i.e. savings) necessarily
leads to and amounts to the same thing as causing the labour and commodities thus released
from providing for present consumption to be invested in the production of capital wealth.
For Keynes, those who think along these “supply-side economics” are fallaciously supposing
that there is a nexus which unites decisions to abstain from present consumption with
decisions to provide for future consumption. Keynes remarked that the act of individual
savings actually depresses the business of producing for today’s consumption without
necessarily stimulating automatically the business of making ready for some future act of
consumption.
22
Stiglitz (2000) for instance remarked that a liberalized financial and capital market actually induces increased frequency of
financial and economic crises. This increased frequency of financial and economic crises brings about instability, which has
the tendency of causing persistent negative effects on economic growth.
Page | 12
Keynes contended that the ‘real savings’, which actually stimulates investment, is principally
determined by the ‘scale’ of investment. That is, the capitalist agent must normally save from
his existing investment (real savings) before investing in the future. On aggregate therefore,
real savings are primarily created out of real investment. Hence, the implication is that real
savings are rather dependent on the collective behaviours of individual consumers,
particularly their propensity to consume, which influences the scale of investment. Therefore,
if on aggregate the individuals refrain from present consumption (i.e. collectively save), it
will depress present investment and will subsequently reduce the rate of real savings and
invariably reduce the scale of future investments.
The insufficiency of effective demand, culminating from excessive individual savings, will
thus inhibit rather than promote the process of production. In sum, the act of individual
savings depresses the business of producing for today’s consumption without necessarily
stimulating automatically the business of making ready for some future act of consumption.
As a result of this contradiction, Keynes remarked that the classical assertion that assumes
that there is a nexus that automatically connects individual savings with future investments is
fundamentally flawed.
This flaw is what is contended in this study that essentially undermines the many neoliberal
postulates that assume that increased individual savings reflect increased economic growth.
These studies are fundamentally assuming that there is a nexus that connects individual
savings with real investment. They clearly did not consider the relative proportion of real
savings created by the capitalist agents, which is to a large extent determined by the rate of
profit. For, as Keynes have shown, it is the savings by the capitalist agents, influenced by
increased demand for their products, that actually determines, to a very large extent, the
amount of capital that is invested into the productive process.
Similarly, Keynes explained that a rise in the rate of interest intended to induce higher
savings which could be channelled to real production will rather have the effect of reducing
the amount of the ‘real savings’ mobilized. This is because the inducement to invest
fundamentally depends on the relation between the schedule of marginal efficiency of capital
(rate of return) and the complex of rates of interest on loans of various maturities and risks.
As a consequence, the stimulus to accumulate capital essentially depends on the marginal
efficiency of a given stock of capital rising relatively above the rate of interest. Therefore if
Page | 13
the rate of interest rises above the rate of return, the entrepreneur, Keynes argued, will not be
induced to accumulate capital wealth.
In sum, Keynes opined that it is the rate of profit that induces investors to accumulate capital
wealth23 and also to even demand loanable funds at any given rate of interest. He concluded
that the scale of investment depends therefore on the relation between the rate of interest and
the rate of profit and the rate of profit, on the other hand, depends on the relation between the
cost of production and the prospective yield of the production outputs, with the latter
dependent on the entrepreneur’s expectation of individuals’ propensity to consume his output
(which is the inverse of individual savings).
The significant role the rate of profit plays in determining the level of capital accumulation
was also recently discussed by Robert Brenner in his book, ‘The Economics of Global
Turbulence’. Brenner (2006) asserted that the realized rate of profit is the fundamental
determinant of the rate at which the economy’s constituent firms will accumulate capital and
expand employment and subsequently its output, productivity and wage growth. Brenner
posited that the rate of profit determines the relative attractiveness of productive commitment
and that it was the decline in the profit rate throughout the advanced capitalist world that
caused the parallel major declines in the rate of growth of investment, and with it the growth
of output in the real sectors.
Furthermore, Brenner remarked that the average rate of profit expresses the degree to which
the system is vulnerable to economic shocks. He noted that the average rate of profit will
determine the proportion of firms on the edge of survival and thereby the potential for serious
recession or depression. He concluded that measures undertaken to boost capital
accumulation over the years, such as neoliberal globalization, have failed to prevent the
performance of most capitalist economies from worsening as time went because these
measures failed to address the falling rate of profit attributable to real capital accumulation in
the global system.
In conclusion, it is advanced in this paper that the fundamental reason for the deterioration in
Nigeria’s real economy stems from the declining rate of profit accruable to real production
processes in the real sector. Since the mid-1980s, the rate of profit accruing to real production
23
Marx (1867) had explained that the objective basis of the circulation of capital (M-C-M1) in the modern capitalist system
is the expansion of value. A point Arrighi (1994) summed as the raison d’être why capitalist agents invest money in a given
input-output combination.
Page | 14
processes in Nigeria have been on the decline and this, it is argued, precipitated the fall in the
rate of real capital accumulation in the country and with it the increasing rate of
unemployment and the dwindling wages and spiralling poverty rate. The rate of profit
expresses the economy’s capacity to generate a surplus from its capital stock and therefore
constitutes a good first approximation of the economy’s potential to accumulate capital and
thereby increase productivity and grow.
This paper asserts that the rate of profit should be seen as the fundamental determinant of the
rate of real capital accumulation. When calculating the determinants of growth, the rate of
profit should be highly considered as a significant determinant because, as Armstrong et al.
(1991) remarked, “capitalism is not a system geared to production of goods simply because
they are needed; it is geared to production for profit”. This means the chase of profit is what
essentially drives the capitalist to invest. Arrighi (1994) noted also that the capitalist is not
interested in committing capital to an input-output process just for its sake but rather to
accumulate more capital. Thus, the rate of profit should be seen as a key determinant of how
much capital is committed to real production in the economy and should therefore take centre
stage when issues that affect economic growth are being discussed.
Similarly, if there is a low rate of profit accruing to a particular production process, any
increase in the rate of interest will stifle rather than boost new investment in that production
process. With the falling rate of profitability in the global system since the 1970s, the
neoliberal deregulation that has succeeded in increasing the rate of interest has not only
thrived in further impeding the growth of profitability but has also induced with it falling rate
of real capital accumulation, reduced productivity, rising unemployment and dwindling
wages.
Therefore, not only is the rate of profit a key indicator of growth, it is also a benchmark for
stipulating the rate of interest. The neoliberal strategies of growth (market-led strategies such
as deregulation and liberalization) could be argued to have failed to stimulate growth in most
countries principally because they did not consider the significance of the rate of profit to
capital accumulation. For if it was observed initially that the rate of profit in the capitalist
system have been on the decline, the argument in favour of raising the rate of interest should
have been carefully thought through in the first instance.
Page | 15
4. More discussions on the rate of profit and factors affecting it in Nigeria
The systemic cycle of accumulation in the capitalist production process depicted by Marx’s
general formula, M-C-M1, involves a transaction that commences with money and ends with
expanded money, with the transformation of commodities24 in-between. According to Marx,
in the M-C-M1 circuit, the C (commodity capital) contains the constant capital “c” (the
objective factor), which is the part of capital represented by the means of production, such as
the raw materials and other technological equipment, and the variable capital “v” (the
subjective factor), represents the labour-power which transforms the other inputs to reproduce
use and exchange values (Mandel, 1968). Overall, C equals c + v and when transformed, C1
equals (c + v) + s, where “s” is the surplus value which includes the profit.
Keynes (1936) defined profit rate as equal to the rate of discount which would make the
present value of the “series of returns” on the capital assets during its life just equal to its
supply price (the replacement costs). According to Armstrong et al. (1991), the share of profit
is the amount of the net income (that is, income after setting aside a sum to cover
depreciation costs) that goes to employers after discounting the share to the working class.
The rate of profit is thus the percentage return of the share of profit on invested capital.
In sum, profit could be said to represent the excess value that the capitalist receives after
discounting the original capital he previously advanced for the purchase of the production
process (both labour and material inputs) and the depreciation cost of the production tools.
Both Marx and Keynes noted that it is this excess value that actually induces the capitalist to
continually invest in a given production process. As Marx put it, the objective basis of the
circulation of M-C-M1 is only the expansion of value. Keynes (1936) concluded that the
volume of employment (of both labour, raw materials and other means of production in a
given production process) is fixed by the capitalist agent under the motive of seeking to
maximise his present and prospective profits.
Therefore, a well-functioning capitalist economy could be said to be one where some parts of
the excess values generated by the capitalists are continually re-invested in new productive
capacities25. However, if there are any doubt by the capitalist agents of future profits, often
24
The commodities include labour-power, means of production and other inputs. It is during the production process that the
labour-power transforms the inputs, with the use of labour tools, to reproduce first its own values (c + v) and also produce an
excess, the surplus value (s).
25
Wallerstein (2004) remarked that a system is a capitalist one only when the system gives priority to endless accumulation
of capital.
Page | 16
due to shortfalls on realized profits, the capitalist agents may be hesitant of re-investing all of
their already accumulated expanded money capital in that uncertain production process.
The shortfall in expanded production that ensues because of the pessimism of the capitalist
agents often produces a vicious circle of declining employment, income and increasing
poverty levels. Keynes remarked that the resultant high levels of income inequality, caused
by the shortfall in expanded production tends to hold down the relative purchasing power of
the working class, which inherently weakens consumption and again leads to falls in the
expected profits of new investment (Keynes, 1936). Overall, it is the rate of profit that plays a
crucial role in the whole cycle of accumulation.
In delineating the trajectory of the falling rate of profit, several explanations have been
offered. Wallerstein (2004) for instance attributed the declining rate of profit to the high
external cost that firms are now forced to internalize. Some of these internalized external
costs include the costs of toxicity, exhaustion of raw materials and transportation. He argued
that the increases in these costs have had a detrimental impact on the rate of profit of many
firms. Crotty (2005) on the other hand, argued that it is the increases in the real rate of
interest and also the increasing share of cash flow of firms now paid out as a dividend that
reduces the profit rate of many firms.
Brenner (2006) remarked that the starting point for the rate of profit to fall stems from the
anarchy and the competitiveness of capitalist production in the world-system. He explained
that the need for capitalists to acquire competitive advantage requires them to cut costs,
which they often pursue by introducing ever more efficient technology (i.e. constant
innovation). However by pursuing this strategy, Brenner argued that the outcome embodies
two separate effects on the wider economy. On the one hand, these constant innovations bring
about unprecedented development of the productive forces but at the same time prevent firms
with higher-cost methods of production, frozen in their already-existing plant, equipment, and
software, from realizing their fixed capital investments. Overall, the effects from the
unprecedented development of the productive forces which prevents the valorisation of
capitals with higher-costs manifests in both over-capacity and reductions of profitability
respectively.
For the case of Nigeria, this study advances four main factors, which it maintains that their
constellation are fundamental to explaining the persistent low rate of profitability and the
subsequent falling rate of real investment in the country. These factors include – the uneven
Page | 17
competition between Nigerian capitals and those from the core and semi-peripheries; the high
internalized external costs, particularly for electricity generation; ineffective demand for
domestic products, exacerbated by the increasing cost of medical care; and finally the
increasing cost of capital, mainly due to the exorbitant rate of interest charged by the
financial institutions.
These factors are briefly discussed below: i. Uneven competition – the neoliberal policy of trade liberalization involved the
removal of the various barriers to international trade which many developing
countries, such as Nigeria, had previously erected to protect their nascent
industries. In Nigeria for instance, import tariffs and quotas and subsidies to
local firms were respectively abolished during the implementation of the
Structural Adjustment Programme in the late 1980s. A consequence of these
liberalizations is the opening up of Nigerian economy to intense competition
from advanced economies.
The developing bloc of capital in Nigeria had, for an extended period of time
during the regulation epoch, tended to dominate its own markets thus
discouraging challengers. However, the advanced capitals of the core and the
semi-periphery blocs allowed by virtue of trade liberalization to compete with
those of the peripheries tend to rise and challenge those of the developing bloc
by offering lower-priced substitutes, which it can afford to make through the
combination of its lower-cost inputs (especially achieved through access to
cheaper labour and more advanced lower-cost technologies) thus making for
an intensification of inter-capitalist competition. The resultant intensification
of competition between these two blocs undermines the ability of large masses
of fixed capital investments (especially those of the developing blocs) to
realize themselves, thereby leading to the onset of declining rates of profit and
subsequently to falling rate of real capital accumulation.
This fact was recently echoed by Kate Meagher in her book, Identity
Economics. She noted that liberalization and state neglect had condemned
Aba’s26 informal producers to a future of disconnection and economic failure
26
Aba is one of the industrial cities in Nigeria. Located in the eastern part of the country, the annual turnover of the city’s
shoes and garments industry was estimated to be around $174.9m in 1999/2000 period and the sector was estimated to be
providing employment to over 20% of the total population in that area (Meagher, 2010).
Page | 18
(Meagher, 2010). She described how liberalization of imports in Nigeria had
undermined the competitive capacity of Nigerian producers. The cheap
imports (mostly made in China and imported via the Freeport of Dubai)
flooded the Nigerian market and subsequently caused the collapse in demand
for locally manufactured goods. She noted that these crippling foreign
competitions were causing the haemorrhaging out of business of local
producers. From her estimate, by 2005 alone, nearly half of the businesses she
had interviewed earlier in the 1990s had moved into other activities or
completely shut down.
The effect of the intensive global competition on Nigeria’s real economic
prospect is also reflected in the rate of business closures in the country. A look
at the number of large non-financial corporations listed on the Nigerian stock
exchange reveals that the number of large NFCs has been on the decline since
the turn of the millennium. From the over 250 firms listed on the Nigerian
Stock Exchange’s (NSE) main board in 2002, only 187 were still currently
listed in 2013. 63 firms, representing 25.2% of the total, have been de-listed as
of June 2013. Only 7 of these delisted firms are financial institutions which
have either merged with another financial institution or been nationalized by
the Central Bank of Nigeria. The 56 remaining de-listed firms belong to the
manufacturing industry (with only 2 out of these 56 being absorbed through
merger with another industry)27.
ii. High internalized external costs – In a study carried out in Nigeria in 2001,
over 90% of the firms surveyed, that are engaged in real production,
complained that the dilapidated infrastructural facilities hampered their ability
to remain profitable and productive (Tyler, 2002).
97% of the 232 firms surveyed owned private generators which generated
their electricity and the study showed that on average, the cost of acquiring
these private generators and its components and the subsequent annual cost of
maintenance amounts to a combined total of around 25% of the total value of
machinery and equipment needed for a full production. Even though the diesel
fuel mainly used for powering these generators were subsidised by the
27
Figures are from the Nigerian Stock Exchange website.
Page | 19
government, the real pump prices are highly volatile and most often are
constantly increasing year-in year-out, thus constituting also to further
uncertainties in the production costs of domestic firms in Nigeria. Overall, the
huge costs incurred in generating private steady electricity alone bears heavily
on the overall cost of production in Nigeria.
Some of the firms surveyed in the study posited that these costs double and in
some, it treble their costs of production. For instance one of the firms
surveyed, which produces pharmaceutical goods, noted that it had to stop local
production of one of its drugs when it observed that it costs higher to produce
in Nigeria than to import from India. This high cost of production that is still
prevalent in Nigeria clearly highlights why there are dwindling outputs in real
production even up to date.
The high cost of production was actually worsened as soon as commodity
subsidization (especially for industrial inputs), import tariffs and quota (on
cheap foreign substitutes) were withdrawn. This meant the domestic producers
bore the total cost of production including that of generating steady electricity.
Intuitively therefore, if foreign firms are faced with X cost of production,
Nigeria firms on the other hand are faced with extra (1+25%)X cost of
production. As a result, Nigerian firms are at a cost disadvantage and often are
not able to compete equally in a competitive global market, where intense
competition often produces a down-ward pressure on prices thus making high
cost production processes unable to earn sufficient returns.
The social cost of this inadequate electricity power was recently measured to
be costing Nigeria around 3.7% of its GDP (Foster and Pushak, 2011). The
authors also noted that Nigeria’s epileptic power sector has held the per capita
growth rate back by about 0.13% point from 2003 to 2007. They noted that
developing Nigeria’s power sector to the level of the African leader; Mauritius
for instance, would effectively boost annual per capita growth rates by an
average of 2% points. Their study also confirmed that infrastructure
constraints are responsible for about 40% of the productivity handicap faced
by Nigerian firms. The table below further illustrates how serious poor
electricity provision in Nigeria erodes the competitiveness of the real sector.
Page | 20
Table 4.1
Nigeria
Malaysia Mauritius
If there were outages, average duration of
a typical electrical outage (hours)
8.2
2.4
3.2
8.5
..
0.5
25.2
..
1.2
75.9
15.5
42.9
85.7
16.1
24.5
60.9
1.4
3.4
Losses due to electrical outages (% of
annual sales)
Number of electrical outages in a typical
month
Percent of firms identifying electricity as
a major constraint
Percent of firms owning or sharing a
generator
If a generator is used, average proportion
of electricity from a generator (%)
Source: The figures are from the World Bank’s Enterprise Surveys database. The figures for
Nigeria and Malaysia are for 2007 and that for Mauritius are for 2009.
From the table above, the level of epileptic supply of electricity in Nigeria is
quite glaring. With the cost of privately providing electricity amounting to a
further 25% to the total cost of production of a typical firm and the power
outages further costing an average loss of 8.5% of a firm’s annual sales
(mostly due to the amount of time wasted rebooting machines, or the materials
spoilt in the midst of the power outage), a typical Nigerian firm is essentially
therefore incurring on average a combined loss of 33.5%. With over 85% of
firms in Nigeria generating their own power most often (in a 12 hour work
period, a typical power outage in Nigeria is over 8 hours long) it is clear most
firms in Nigeria are not spared of these extra costs and hardships. With static
and often declining prices in the global market due to intensive competitive
pressures, real capital-assets in Nigeria faced with these increasing costs,
plainly find it very difficult to realize adequate profits.
iii. Ineffective demand – Keynes (1936) remarked that the mere existence of an
insufficiency of effective demand may, and often will halt increases in
investment. In fact, he concluded that the insufficiency of effective demand
will inhibit the process of production.
Page | 21
The consequence of declining investment is often the stagnation and reduction
in the rate of employment and income. Due to competitive pressures and rising
cost of production, the entrepreneur is often inclined to stagnate or reduce the
wages of his workers. The stagnation and/or reduction in the wages of the
labourers further squeeze aggregate demand which in turn impedes subsequent
investment growth. The one factor advanced in this paper that exacerbates the
weakening demand in Nigeria is the increasing cost of medical care which the
poor masses in the country are forced to off-set from their pockets.
According to WHO (2011), 60% of the total spending on health in Nigeria are
funded by households and the share of government spending allocated to
health is only about 37%. In contrast, in the UK for instance, only 8% of the
total spending on health is funded by the households. The government funds
over 83% of the total spending on health. Thus, with the low wages which are
not helped with the meagre interests on savings deposit28, the wage labourer’s
disposable income is further depleted through high cost of living occasioned
most often by high level of inflation and exorbitant healthcare expenditures.
The end effect is an overall decline in the domestic aggregate demand,
especially for domestic products.
Figure 4.1
Source: data from WHO 2013 statistical database
In sum, it is these pressures on disposable incomes of the working class
masses that causes the decline in demand, especially for locally made goods
28
See table 5.2.2. The rate of interest is often as low as 1.5% on savings accounts.
Page | 22
which often command a slightly higher price relative to Chinese imports (due
to high cost of production). The excessive pressures on the low wages of the
large populace emanating from high out-of-pocket medical expenses explains
to some extent the high preference by many Nigerians for cheap and often
second-hand goods from abroad.
iv. High cost of capital – Since the deregulation of interest rates in the mid-1980s,
the rate has skyrocketed. The prime lending rate which averaged 7% from the
1960s to mid-1980s skyrocketed to over 19% from the mid-1980s to 2011.
Similarly, while the maximum chargeable rates in the pre-reforms era were
around 11-13%, the equivalent in the post-reform era fluctuated around 2736%, representing an increase of over 100%.
Overall, with the intensifying decline in the rate of profit, due to increasing
cost of means of production in the face of the unequal competition in the
global market and with dwindling demand for locally made products, these
local NFCs are further burdened with increasing interest rate charges which
further depletes their cash-flow and causes them to adopt short-term strategies
such as constant laying-off of workers and in most cases shutting down.
The Nigerian minister of finance, Dr Ngozi Okonjo-Iweala, recently remarked
that the current interest rates charged by financial institutions (often as high as
25%) was too high for the productive sector to survive (Anon, 2013).
However, the issue of high interest rate been charged by the financial
institutions is not a new thing. Since the late 1980s, the rate of interest on
loans has rarely dropped to a single digit.
Most of the NFCs, faced with these high cost of capital, are now even
diverting to investing in financial assets that yield potentially higher returns
instead of stocking up on productive inventories. These trends, including also
the erosion of the cash-flows of NFCs through the payment of dividends, are
what Crotty (2005) opined that were responsible for the gradual decline in real
productions (dearth of NFCs) in the United States and which, this study also
posit explains the continual dearth of real capital accumulation in Nigeria.
In sum, it is the constellation of these four factors that inherently impedes the ability of real
capital-assets in Nigeria to reproduce surplus value and which then causes the decline in the
Page | 23
rate of real investment in the country. The resultant falling rate of real capital accumulation
induces increasing unemployment, falling income and overall underdevelopment of the real
economy. Thus, if these impeding factors to profitability are resolved, then there is a huge
possibility of addressing the problem of persistent decline of real capital accumulation pari
passu with problems of economic growth in Nigeria.
Page | 24
5. Financialization and economic growth: A theoretical and empirical review
5.1.
Theoretical review
The precipitate cause of the economic crisis in the late 1960s and early 1970s have been
attributed to the falling rate of profitability (Brenner, 2006). In response to the 1970s crisis,
the institutional form of capitalism along with its dominant economic ideology underwent
restructuring. By late 1970s, a new form of economic structure, now widely referred to as
neoliberalism, replaced the Keynesian regulated economic orthodoxy. The new orthodoxy
rejected the previous regulated frameworks and advocated free market-led strategies.
What most scholars now argue is that deregulation of the financial sector and the
liberalisation of international capital flows precipitated, what is now termed, financialization
(Epstein and Jayadev, 2005, Silvers, 2013). It is widely argued that financialization was at the
root of the deterioration of the real non-financial sectors (Crotty, 2005), responsible for
widening of income inequality (Dumenil and Levy, 2005) and the continual misallocation of
resources in the economy (Tabb, 2013).
Broadly defined, financialization is a process whereby financial institutions and markets are
given greater influence over economic policy both at the national and international levels
(Palley, 2007). Krippner (2005) defined it as ‘a pattern of accumulation in which profits
accrue primarily through financial channels rather than through trade and commodity
production’. According to Epstein (2005), financialization means ‘the increasing role of
financial motives, financial markets, financial actors and financial institutions in the
operation of the domestic and international economies.
Overall, many studies have shown that the underlying factor that is responsible for the
gravitational shift from real accumulation to financial accumulation stems from the falling
rate of profit attributable to real production (Keynes, 1936, Sweezy and Magdoff, 2009b).
The rate of return to real production has been declining relatively faster compared to the rate
of returns to financial accumulation. As a result, investors have tended to accumulate
financial assets rather than real productive assets
The recent study by Crotty (2005) elucidated how financialization stifles real capital
accumulation. Crotty asserted that the Non-Financial Corporations’ (NFCs’) performances
are adversely affected by the ‘impatient’ financial markets that raised real interest rates and
also coerced NFCs to pay an increasing share of their cash flow (as dividends) to financial
agents. The profit rates of NFCs he argued were thus lowered (due to the increasing interest
Page | 25
rates and the increasing dividend pay-outs), and as such their indebtedness increased
culminating in a slower rate of accumulation which forced most NFCs to switch from the
long-term strategies that had labour relations at its core to short-term strategies that involved
attack on labour relations. The end result, Crotty argued, is the rise of rentier capitalists. The
income of the finance capitalist increases while those of productive agents diminishes.
On the other hand, Lapavitsas (2013) noted that due to the liberalization of capital accounts
that capital has flown, instead, from poor to rich countries. Lapavitsas argued that the
accumulation of reserves is the main reason why the net global flow of capital has been
reversed leading to capital flowing from poor to rich countries. He remarked that this policy
of reserve accumulation has amounted to developing countries storing dollars (the world
reserve currency) in order to be able to participate in international trade and to confront
financial flows in the world market.
Therefore, in view of this world money being nothing more than a state-backed central
money resting on US government securities that doesn’t yield additional value, Lapavitsas
argued that most developing countries that accumulated dollar as a reserve currency tend to
purchase US treasury bills with their reserves. It is this process that he pointed out that
embodies the flow of finance from poor to rich countries. He remarked that the developing
countries have been implicitly subsidizing the hegemonic power in the world market, through
this subordinate financialization, purely to gain access to the dominant form of valueless
world money.
The costs of this subsidy, Lapavitsas narrated, can be seen from focusing on countries that
have received significant inflows of private short-term capital and are thus obliged to keep
sizeable reserves in order to offset the risk of sudden reversal of flows. This group of
countries he explained has received significant borrowing from abroad; mostly incurred by
private enterprises that have borrowed from the international market at the going market rate.
However since the private borrowing occurred at the prevailing, often high, market rate of
interest while the “insurance” (accumulated treasury bills) earns a much lower official US
rate of interest, Lapavitsas argued that such capital flows entails a significant cost for
developing countries, because they are mostly worse off in the whole international capital
flow cycle.
In general, the increasing phenomenon of financialization over the years could be seen to
have left a disastrous imprint on real economies of many developed and developing
Page | 26
economies. The emergence of increased financialization has been traced to the wave of
financial deregulation and liberalization in the 1970s (Crotty, 2005, Lapavitsas, 2013). The
collapse of the Bretton Woods Treaty in 1971 is often seen as setting in motion the wheels of
financialization that kicked off in frenzy on the wake of liberalization (Fouskas and Gokay,
2012).
Overall, the deregulation and liberalization of the financial system paved the way for the
emergence of new financial instruments and institutions that provided new means for
expanded financial assets accumulation. It is the speculative frenzy, created by the new
financial structures that contributed to undermining growth and stability in the real
economies. As Keynes famously once noted, “speculators may do no harm as bubbles on a
steady stream of enterprise but the position is serious, when enterprise becomes the bubble on
the whirlpool of speculation (Keynes, 1936 pg. 159).
Put simply, what Keynes meant was that when the capital development of a country becomes
a by-product of the activities of a casino (speculators/gamblers), that the job is likely to be illdone. Without much doubt, since financialization took the centre-stage on the socioeconomic fabric of the capitalist system from the 1980s, the job of inducing economic
growth, reducing income inequality and poverty could be said to have been badly done given
the rises in global inequality and poverty in developing countries such as Nigeria over these
years.
Page | 27
5.2 Empirical evidences from Nigeria.
The sudden explosion in financial activities in Nigeria were essentially given impetus by the
abolition of import licensing, removal of subsidies and the adoption of a floating exchange
rate. Prior to these neoliberal reforms, the main sources of income in Nigeria were from
agriculture and commercial (wholesale and retail) trading. The outputs from these two sectors
were averaging around 68% of the total GDP from 1960 to 1970 while the outputs from the
industry sector, which comprises the oil and natural resources industries and also the
manufacturing industries, averaged 11% of the total GDP in the same period. The outputs
from the services sector, which comprises the financial, communication and transport
industries, averaged 15% of the total GDP output in the same epoch.
However during the periods of import-substitution industrialization from the 1970s29, the
Federal government actively intervened in the product market. It subsidized commodities for
the domestic industries and regulated imports through the issue of licenses, quotas and tariffs.
As a consequence, there were declines in commercial activities and even in agricultural
activities as resources were channelled to industrialization. The oil windfall in the 1970s
(after OPEC doubled the prices of oil) further eroded the attractiveness of agricultural and
commercial activities. The output from these sectors declined by 34% from 1971 to 1980
while the outputs from the industry sector30, increased from an average of 11% to over 30%
of total GDP in the same period. From 1981 to 1985, the outputs from the industry sector
were contributing almost an average of 42% to the total GDP. The eventual withdrawal of
commodity subsidization and import quotas and tariffs radically curtailed access to some of
these31 sources of accumulation in the economy.
In contrast, while some of these leading sources of capital accumulation were in decline
during the periods of neoliberal reforms, other sources for accumulation were emerging. The
compensation for these declining fortunes in the core economic activities emerged through
opportunities for arbitraging, especially in the liberalized multi-tiered foreign exchange
29
After the civil war in 1970, the government embarked on rebuilding the economy through adopting the import-substitution
industrialization strategy. The objective of the Enterprise Promotion Decree of 1972 partly was to pave the way for the
participation of the indigenous citizens in promoting industrial development.
30
The industry sector had an average output ratio of 1:3 between manufacturing and crude petroleum & natural gas from
1971 to 1980. That is for every one unit contribution from real manufacturing to the industry sector, the crude petroleum and
natural gas industry was contributing thrice. This figure changed immensely from 1986 after the implementation of some
SAP policies. From 1986 to 1995, average ratio of output between these two industries has increased to 1:6. For every unit
of output from manufacturing to the industry sector, the crude petroleum & natural gas contributed 6 units. Since then, the
output from the manufacturing industry has been on the decline coupled also with the declines in agriculture and commercial
trading, thus, causing over-dependence on oil since the mid-1980s.
31
More especially to real manufacturing which was beginning to boom based on the subsidies and the relatively strong
exchange rate that afforded the industrialist cheap foreign inputs.
Page | 28
market. The prospective huge gains that could be garnered from currency trading and
financing deepened the accelerated flight of capital (both human and physical) from the
already weakening real sectors into financial activities.
Most of the newly formed financial institutions were mainly focused on exchange rate trading
and financing, speculation and fraud rather than conventional intermediation32. The former
Governor of CBN, Professor Chukwuma Charles Soludo, once noted that some of the
Nigerian banks were not even engaged in strict banking businesses of intermediation but
were rather engaged in trading of foreign exchange, government treasury bills, and
sometimes in direct importation of goods through private phony companies33. These financial
institutions accumulated large gains by obtaining foreign exchange at auction prices and reselling them to end users or other market operators at higher prices.
Similarly, most of these financial institutions were engaged in ‘round-tripping’ of funds.
They took advantage of interest rate differentials and laundered money from low interest
sources to the very lucrative money market to garner large premiums. Most of these
institutions in some extent had no need to resort to deposits from customers at all.
Table 5.2.1 – Average exchange rate indicators (1991-2006)
Year
WDAS/RDAS*+
BDC**+
Premium***+
1991-1994
17.87
32.81
73.75%
1995-1998
22
85.58
289.00%
1999-2002
106.93
120.6375
12.52%
2003-2006
130.915
140.625
7.43%
Source: Figures are from the Central Bank of Nigeria statistical database and the calculations were done by the author
+
Figures are in averages. *WDAS/RDAS = Weighted Dutch Auction System/Real Dutch Auction System. **BDC =
Bureaux De Change.
***
Premium = did not consider the ‘black market’ rates. Because the ‘black market’ rates are not
recorded, these figures were not included in this calculation. However, the financial institutions and even the official BDC
that buy at auction prices re-sell at higher rates in black markets. The premiums in the black market are often as high as
500%.
32
Lewis and Stein (1997) noted that the rate of malfeasance in the Nigerian financial sector in that period was high.
In a speech delivered to the special meeting of the Banker’s Committee, held on July 6, 2004 at the CBN Headquarters,
Abuja.
33
Page | 29
Table 5.2.2 - Interest rates (1986-2013)
Year
Savings rate*
Maximum lending rate*
Spread*
1986-1989
11.67
16.35
38.80%
1990-1993
16.305
27.15
65.83%
1994-1997
10.45
20.7775
128.24%
1998-2001
5.3025
25.475
384.67%
2002-2005
3.8325
23.345
514.32%
2006-2009
3.05
19.5225
551.96%
1.8725
23.3075
1184.38%
2010-2013
*
Source: CBN, statistical database ( figures are in averages)
In general, the growth of financial activity in Nigeria after the neoliberal financial reforms of
deregulation and liberalization was to a very large extent propelled by foreign exchange
speculation and interest rate arbitraging and in some cases plain simple fraud. There existed
weak linkages between the activities of these financial institutions and real production. By
mid-1990, the gross domestic investment in Nigeria declined to almost half its levels in early
1980s. Since the mid-1980s, the rate of gross investment in Nigeria had stagnated or risen at a
sluggish rate while the rate of growth of financial assets has risen exponentially (fig. 5.2.1).
Figure 5.2.1 – Investment and financial assets ratios (1981-2012)
Source: figures are from the CBN database and IMF World Economic Outlook Database. Total financial assets include
assets of commercial banks, finance house, primary mortgage, and microfinance institutions.
Page | 30
The manufacturing output34 in Nigeria has been on the decline especially after the mid-1980s
(fig. 5.2.2). A recent data obtained from the World Trade Organization showed that the
percentage of Nigeria’s export made up of manufactured goods declined to a measly 2.5% in
2012. The continual decline in the rate of real production undoubtedly has wider implications
on the general rate of employment, level of household incomes, aggregate demand,
prospective investments and the overall growth of the macro-economy. From 1982, the
household income (measured as the ratio of employee compensation to real GDP income) has
been on a steady decline (fig. 5.2.3). The figure which stood at 25% of real GDP income in
1982 declined to an abysmal rate below 5% of real GDP by 2003.
Figure 5.2.2 – Manufacturing output (% of GDP)
Source: Figures are from the CBN statistical database
34
This figure represents revenues from the industry sector excluding those from the crude petroleum & gas, solid minerals,
and the extraction industry
Page | 31
Figure 5.2.3 – Ratio of employee compensation (% of GDP)
Source: figures are from the CBN annual statistical bulletins (various issues)
While the rate of investment in Nigeria has stagnated, capital has been channelled to
accumulation of financial assets. Most capital inflows into the country have been into the
financial sector, with a stagnant or declining flow to the real sectors (Table 5.2.3). This trend
is in huge contrast with the neoliberal assertion that contends that increased flows of capital
from liberalized financial markets will actually lead to growth in real capital accumulation.
The huge inflows into the financial sectors have had little to no effect on real investment in
Nigeria.
Table 5.2.3 - Capital importation by nature of business (US$ - Millions)
Year
Agriculture
Agriculture
%of total
Production/man
ufacturing
%of
total
Oil & gas
% of total
Financial
activities
% of
total
Total*
2007
2.50
0.31%
46.87
5.86%
12.62
1.58%
590.07
73.80%
799.60
2008
0.43
0.05%
42.01
4.43%
53.44
5.64%
737.81
77.86%
947.61
2009
0.30
0.05%
29.98
5.37%
11.44
2.05%
418.58
74.95%
558.50
2010
0.48
0.09%
71.18
14.00%
8.13
1.60%
353.75
69.59%
508.33
2011
1.78
0.27%
46.80
7.10%
1.91
0.29%
550.69
83.61%
658.65
2012
6.39
0.45%
45.76
3.25%
13.06
0.93%
1,212.36
86.21%
1,406.32
9.15
0.48%
32.61
1.70%
11.78
0.61%
1,683.17
87.67%
Source: CBN Statistical database. *includes also the flows to other businesses (such as trading, hoteling etc.)
1,919.92
2013
Page | 32
Figure 5.2.4 – Capital importation by type of investment (US$ - Millions)
Source: CBN statistical bulletin (The total of these inflows include also the inflows into other investments)
These increases in the accumulation of financial assets reflect the huge increases in stock
market capitalization in Nigeria’s domestic stock market. The ratio of market capitalization to
real GDP has been on the increase since the globalization of Nigeria’s stock market in the
1990s. From 1990 to 2000 the ratio rose to 59% of the real GDP. From 2000 to 2011, the
ratio had skyrocketed to over 790% of the real GDP. The ratio peaked at a tremendous height
of 2096% of GDP in the heat of the financial bubble in 2007. These increased activities in the
financial markets and the increased inflows of capital to finance have done little to influence
relative increases in other sectors of the economy.
What we have witnessed rather is a reversal in accumulation pattern. From 1980-1990,
finance, as a percentage of manufacturing output, averaged 6.64% while the contribution
from manufacturing to GDP averaged around 32%. However from 2004-2013, finance has
averaged around 67.52% of manufacturing output (a growth rate of 917.71% from the
previous period) whereas the contribution from manufacturing to GDP has declined to an
average of 2.34%. Overall, while finance was growing in the economy, manufacturing was to
a large extent declining.
Page | 33
Figure 5.2.5 – Manufacturing and finance income (as % of current GDP)
Source: CBN statistical database
Clearly, these changes in the social relation between finance and real production, which
neoliberalism occasioned, have had little impact on the real economy. There have been
persistent fall in the rate of real capital accumulation and this had subsequently led to an
increasing rise in the rate of unemployment and huge declines of wage incomes while the size
of financial assets and activities have been on the increase. Similarly, these neoliberal
market-led strategies have led to the reversal of flow of capital – instead of capital flowing
from the core to Nigeria; it now flows from Nigeria to the core.
The huge capital inflows into Nigeria, as we have seen (fig. 5.2.4), have been mainly into the
financial sector and a large proportion of these inflows are borrowings by the domestic
financial institutions35. At the same time, the central bank of Nigeria is required to hold a
certain proportion of reserve relative to these capital inflows. As such, the monetary authority
accumulates the international reserve currency. Most often, this fiat currency is not stored by
the monetary authority; rather, a large proportion is expended in purchasing treasury bills
issued by foreign governments (particularly the US).
As a consequence, while the domestic financial institutions borrow at market rates of interest
in the international markets, the Nigerian monetary authority proceeds to ‘insure’ these
private debts by advancing official loan to the US (through the purchase of US treasury bills)
at a much lower official US interest rate. In Nigeria, an average of 17.21% of the total GNI
35
The average proportion of the total portfolio investment inflow that is attributed to loans to domestic financial institutions
from 2007-2013 is around 26%.
Page | 34
was held as foreign reserve from 2008 to 2012. These monies unarguably could have been
potentially invested domestically to support development. Instead, part of these funds is been
used to pay a form of informal tribute to the US. In 2011 and 2012 alone, an average of
2.26% of the total foreign reserve of African oil exporters36, amounting to over $7.6 billion
per year, were held as US treasury securities.
The proportion of the foreign reserves of these countries expended on US treasury securities
have been on the increase since after the financial crisis in 2007 (Table 5.2.4). The more
inflows into these countries, the more they accumulate reserves and the more these reserves
are used to accumulate US treasury securities37 (see figure 5.2.6).
Table 5.2.4 – The US treasury securities holdings (2008 – 2013)
Year
2008
2009
2010
2011
2012
2013
Value of short and long term treasury
securities held by African oil exporters (in
million $)
4,308.00
4,396.00
6,032.00
7,642.00
7,758.00
8,222.00
Percentage changea
170
175
277
378
385
415
a
The percentage change based on 2007 figures as 100. Source: Figures are from the US department of Treasury.
Figure 5.2.6 – Changes in value of purchased US treasury billsa and portfolio investmentb
a
Percentage change in the value of US treasury securities purchased by African oil exporters (2008 values as 100).
b
Percentage of portfolio investment inflows into Nigeria (2008 values as 100). Source: CBN statistical database and the US
department of treasury.
36
These countries include Algeria, Gabon, Libya and Nigeria
The correlation between portfolio inflows into Nigeria and the value of US treasury held by African oil exporters is around
0.79% with a significance level of 0.001%. This means an increase in the inflows reflects in increases in reserve
accumulation which also reflects increases in treasury securities purchased.
37
Page | 35
In 2012 for instance, $7.76billion were expended by the African oil exporting countries on
US treasury securities. Assuming these four countries spent equal amount amongst
themselves to purchase these securities, this will amount to approximately $1.94billion for
each country. In Nigeria in 2012, approximately $1.4billion capital was received from foreign
investors. Assuming these were lent to Nigerian investors at a conservative rate of 7%38, it
meant foreign investors earned approximately $98million that year for their investment in
Nigeria. On the other hand, the monetary authority in Nigeria that ‘insured’ these inflows by
accumulating reserves and expending a proportion on treasury securities earns a paltry
average rate of 0.15%39 ($2.9million) interest on its $1.94billion treasury purchase. Overall,
this capital flow embodies a significant social cost (from this example, it is around
$95million loss every year) to Nigeria.
38
This is the average rate of interest on new external debt commitments by private institutions. Sourced from the World
Bank development indicator database
39
Based on a 1year (2012 only) average Treasury yield curve rates (i.e. the Constant Maturity Treasury rates). Sourced from
the US department of Treasury.
Page | 36
6. Conclusion
The neoliberal protagonists, such as McKinnon and Shaw, asserted that the deregulation of
interest rate and the liberalization of the financial sectors will allow for efficient pricing of
capital. They argued that higher rates of interest stimulate more savings, which can then be
subsequently allocated to real production processes. They also contended that higher rates of
interest screen out unprofitable investments, thus allowing only viable prospects to be
pursued.
However, according to Keynes, these neoliberal postulates are inherently flawed. This is
because the underlying neoliberal assumption that posits that increases in savings will
automatically lead to increased capital accumulation is inconsistent. As Keynes remarked, it
is fallacious to assume that there is a nexus that automatically links individual savings with
capital accumulation. Furthermore, increasing the rate of interest will actually inhibit the
“real savings” that determines the scale of investment.
It was shown in this study, with some empirical evidences from Nigeria, that the neoliberal
strategies have had relatively minute to no significant impact on economic growth in the
country. Rather, since the mid-1980s, the contribution of the manufacturing sector to the
overall GDP has been declining and the rate of unemployment has been on the increase. Also,
there has been a steady decline in wage levels and income inequality has been on the rise in
the country. The underlying factor that was noted as a more plausible cause of the
deterioration of these macroeconomic variables is the declining rate of profit accruable to real
production processes in the country.
It was noted that the uneven competition occasioned by the liberalization of trade, the
increasing internalized ‘external’ costs of production, declining domestic demand and
increasing cost of capital have all contributed to the declining rate of profit in Nigeria. The
resultant consequence of the declining rate of profit we have seen is the declining rate of real
capital accumulation, which precipitates declining productivity, employment and overall
growth in the real economy. For, as theories have shown, it is the rate of profit that
determines how much capital is committed to real production in an economy.
It was contended also that the falling rate of profit attributable to real production processes
inherently causes capital to be channelled to the accumulation of financial assets that yield
potentially higher profits. This gravitational shift in accumulation, termed financialization,
was noted to also contribute to further reductions in the rate of profit attributable to real
Page | 37
capital accumulation via increases in the rate of interest and dividend pay-outs that it induces.
These increases, altogether, reduces the cash flow of NFCs while still contributing to rises in
incomes of the rentier class. We also discussed how capital account liberalization now
constitutes subordinate financialization.
Contrary to neoliberal assertion that capital account liberalization will induce capital flows
from core to peripheries and as such induce real capital accumulation in peripheries with
shortage of capital, capital now often flows from the peripheries to the core. It was shown
how reserve accumulations, traditionally held to mitigate adverse effect of flow reversals, are
now expended on US treasury bills. While the private institutions in the periphery countries
borrow at often high market rate of interest from the core, the reserve currencies accumulated
by the recipient countries’ governments are advanced to the US (through the purchase of
Treasury securities) at often very low official US rate of interest. Overall, the peripheries are
worse off in the cycle of international flows.
In sum, this paper advances that policies aimed at boosting capital accumulation in periphery
countries should also focus on ameliorating the factors that have been pointed out as
inhibitors to growth of the rate of profit accruable to real capital assets. Emphasis should be
placed at enhancing the rate of profit in the real sector for, as have been discussed earlier, the
capitalist agent fixes the amount of employment of both human labour and other physical
capital at a point where he will be able to maximize the rate of present and future profit
accruable to him. If therefore the Nigerian government genuinely intends to increase
employment and with it the aggregate income and also reduce poverty in the society, it
should assist in creating a conducive environment that ensures the rate of profit accruable to
the capitalist is increased to an adequate level where the capitalist deems it satisfactory to
accumulate real capital.
Page | 38
References
Ajayi, I. S. (1994). The State of Research on the Macroeconomic Effectiveness of Structural
Adjustment Programmes in Sub-Saharan Africa. In: Hoeven, R. v. d. & Kraaij, F. v. d. (eds.) Structural
Adjustment and Beyond in Sub-Saharan Africa: Research and Policy Issues. London: James Currey.
Anon. (2013). Is Interest Rate Another Ghost Hunting Nigeria? Vanguard, 03/09/13.
Armstrong, P., Glyn, A. & Harrison, J. (1991). Capitalism since 1945, Oxford: Basil Blackwell,
Inc.
Arrighi, G. (1994). The Long Twentieth Century, London: New Left Books.
Baran, P., A. (1957). The Political Economy of Growth, New York: Monthly Review Press.
Baran, P., A. & Sweezy, P. M. (1966). Monopoly Capital: An Essay on the American Economic
and Social Order, New York: Monthly Review Press.
Beck, T. & Levine, R. (2004). Stock Markets, Banks, and Growth: Panel Evidence. Journal of
Banking & Finance, 28, 423-442.
Brenner, R. (2006). The Economics of Global Turbulence: The Advanced Capitalist Economies
from Long Boom to Long Downturn, 1945-2005, London: Verso Books.
CBN (2011). What Is Monetary Policy? Understanding Monetary Policy Series No. 1. Nigeria:
Central Bank of Nigeria.
Collier, P. (2008). The Bottom Billion: Why the Poorest Countries Are Failing and What Can Be
Done About It, New York: Oxford University Press.
Crotty, J. (2005). The Neoliberal Paradox: The Impact of Destructive Product Market
Competition and 'Modern' Financial Markets on Nonfinancial Corporation Performance in the
Neoliberal Era. In: Epstein, A. G. (ed.) Financialization and the World Economy. Cheltenham, UK:
Edward Elgar Publishing Limited.
Dumenil, G. & Levy, D. (2005). Costs and Benefits of Neoliberalism: A Class Analysis. In:
Epstein, A. G. (ed.) Financialization and the World Economy. Cheltenham, UK: Edward Elgar
Publishing Limited.
Epstein, A. G. (ed.) (2005). Financialization and the World Economy, Cheltenham, UK:
Edward Elgar.
Page | 39
Epstein, A. G. & Jayadev, A. (2005). The Rise of Rentier Incomes in Oecd Countries:
Financialization, Central Bank Policy and Labor Solidarty. In: Epstein, A. G. (ed.) Financialization and
the World Economy. Cheltenham, UK: Edward Elgar Publishing Limited.
Foster, V. & Pushak, N. (2011). Nigeria's Infrastructure: A Continental Perspective. In: Bank,
T. W. (ed.) Policy Research Working Paper. Washington, DC.
Fouskas, K. V. & Gokay, B. (2012). The Fall of the Us Empire: Global Fault-Lines and the
Shifting Imperial Order, London: Pluto Books.
Fry, M. J. (1978). Money and Capital or Financial Deepening in Economic Development?
Journal of Money, Credit & Banking (Ohio State University Press), 10, 464-475.
--- (1997). In Favour of Financial Liberalisation. The Economic Journal, 107, 754-770.
Goldsmith, W. R. (1954). The Share of Financial Intermediaries in National Wealth & National
Assets, 1990 - 1949. In: Goldsmith, W. R. (ed.). NBER.
Gurley, J. G. & Shaw, E. S. (1955). Financial Aspects of Economic Development. American
Economic Review, 45, 515.
Keynes, J. M. (1936). The General Theory of Employment, Interest and Money, London:
Macmillan & Co Ltd.
King, R. G. & Levine, R. (1993). Finance and Growth - Schumpeter Might Be Right. Quarterly
Journal of Economics, 108, 717-737.
Krippner, R. G. (2005). The Financialization of the American Economy. Socio-Economic
Review, 2, 173.
Lapavitsas, C. (2013). Profiting without Producing: How Finance Exploits Us All, London:
Verso.
Levine, R. (1991). Stock Markets, Growth, and Tax Policy. The Journal of Finance, 46, 14451465.
Lewis, P. & Stein, H. (1997). Shifting Fortunes: The Political Economy of Financial
Liberalization in Nigeria. World Development, 25, 5-22.
Mandel, E. (1968). Marxist Economic Theory: Volume One, London: Merlin Press.
McKinnon, I. R. (1973). Money and Capital in Economic Development, Washington DC:
Brookings Institution.
Page | 40
Meagher, K. (2010). Identity Economics: Social Networks & the Informal Economy in Nigeria
(African Issues), Suffolk, UK: James Currey.
Obadan, M. (2006). Overview of Exchange Rate Management in Nigeria from 1986 to Date.
In: Okogbue, S. A. (ed.) Bullion. Nigeria: Central Bank of Nigeria.
Palley, I. T. (2007). Financialization: What It Is and Why It Matters. The Levy Economics
Institute Working Paper. New York: The Levy Economics Institute of Bard College.
Roubini, N. & Sala-i-Martin, X. (1991). Financial Development, the Trade Regime and
Economic Growth. NBER Working Papers. Cambridge, MA: National Bureau of Economic Research.
Shaw, E. S. (1973). Financial Deepening in Economic Growth, London: Oxford University
Press.
Silvers, D. (2013). Deregulation and the New Financial Architecture In: Wolfson, H. M. &
Epstein, A. G. (eds.) The Handbook of the Political Economy of Financial Crises. New York: Oxford
University Press.
Soludo, C. C. (2004). Consolidating the Nigerian Banking Industry to Meet the Development
Challenges of the 21st Century. Banker's Committee. Abuja, Nigeria: Central Bank of Nigeria.
Stiglitz, J. E. (Year) Published. The Role of the State in Financial Markets. The World Bank
Annual Conference on Development Economics, 1993 1993 Washington, DC. The International Bank
for Reconstruction and Development/ The World Bank.
--- (2000). Capital Market Liberalization, Economic Growth, and Instability. World
Development, 28, 1075-1086.
--- (2002). Globalization and Its Discontents, London: Penguin Group.
Sweezy, P. M. & Magdoff, H. (2009a). The Deepening Crisis of U.S. Capitalism, New York and
London: Monthly Review Press.
--- (2009b). Stagnation and the Financial Explosion, New York: Monthly Review Press.
Tabb, K. W. (2013). The International Spread of Financialization. In: Wolfson, H. M. &
Epstein, A. G. (eds.) The Handbook of the Political Economy of Financial Crises. New York: Oxford
University Press.
Tyler, G. (2002). Public and Private Electricity Provision as a Barrier to Manufacturing
Competitiveness. In: Bank, T. W. (ed.) Private Sector and Infrastructure. Washington, DC.
Page | 41
US-Treasury. (2014). Interest Rate Statistics [Online]. Washington, DC: US department of the
Treasury. Available: http://www.treasury.gov/Pages/default.aspx [Accessed 20/04/14.
Wallerstein, I. (2004). World-Systems Analysis: An Introduction, United States: Duke
University Press.
Wapenhans, W. (1994). The Political Economy of Structural Adjustment: An External
Perspective. In: Hoeven, R. v. d. & Kraaij, F. v. d. (eds.) Structural Adjustment and Beyond in SubSaharan Africa: Research and Policy Issues. London: James Currey.
WHO.
(2013).
Global
Health
Expenditure
Database
[Online].
Available:
http://apps.who.int/nha/database/StandardReport.aspx?ID=REPORT_COUNTRY_PROFILE [Accessed
10/12/ 2013].
World-Bank (1983). Financial Intermediation in Nigeria. Washington, DC: World Bank.
---. (2013). World Development Indicators [Online]. World Bank. Available:
http://data.worldbank.org/data-catalog/world-development-indicators [Accessed 10/12/ 2013].
WTO.
(2013).
Statistics
Database
[Online].
Available:
http://stat.wto.org/CountryProfile/WSDBCountryPFView.aspx?Language=E&Country=NG%2cZA%2c
GB%2cUS [Accessed 10/12/ 2013].
Page | 42