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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. 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