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ECONOMIC MELTDOWN AND THE CHALLENGES IN BUSINESS ENTERPRISES: THE NIGERIAN EXPERIENCE. R.A. AKINSEYE (MRS.) This paper addressed the global economic meltdown as it affects Nigeria enterprises. It further examined the circumstances that brought about economic predicament. The study adopted empirical approach which involved eliciting information from two enterprises, one public and one private. The primary and secondary sources of information were sources from the staff of Oyo State Water Corporation and Airtel hitherto called Zain, all are cited in Ibadan, the largest city in West Africa. The piece of information were obtained from the managements of the two enterprises. This was beefed up with secondary data within the same enterprises. It also sourced information purposively from the users of the product of the organizations, this was necessary as the users are very likely to feel the impact of the economic meltdown. To this end, few randomly selected managers and directors of the two organization were interviewed. The findings of the empirical study revealed that business enterprises in Nigeria including public parastatals inclusive cannot cope with the global economic condition and many of these shrink to unexpected level (74.5%). Furthermore, the global economic crisis affects the private sector and the public sector (60.5%). Also, both Airtel and Oyo state Water Corporation were of the belief that the global recession has resulted in sharp drop in international trade, rising unemployment and slumbing commodity prices (55%). The study concluded that global economic meltdown has a far reaching negative effect on public as well as on private enterprises in Nigeria going by the statistical evidences in the findings of this study. INTRODUCTION Economic meltdown which is a situation in which economic activities and its associated parameters shrink to unexpected level, has Department of Public Administration and Local Government Studies, The Polytechnic, Ibadan Oyo State, Nigeria. [email protected] +2348032202036, +2348076611665 Being a Paper Presented at the 14th International Business Research Conference, Held Between 28-30 April, 2011. At the Crowne Plaza Hotel, Sheikh Zayed Road, Dubai, UAE. 1 recently become the most widely studied theme. Different approaches have been adopted by various experts and researchers in proferring solutions to the challenges of economic meltdown. During recessions, many macroeconomic indicators vary in a similar way. Production as measured by Gross Domestic Product (GDP), employment, investment spending, capacity, utilization, household, incomes, business profit and inflation, all fall during recessions, bankruptcies and unemployment rate rise. The global recession has resulted in sharp drop in international trade, rising unemployment and slumping commodity prices. Several economists have predicted that recovery may not appear until 2011 and that the recession will be worst since the depression in the 1930s. The conditions leading up to the crisis, characterized by an exorbitant rise in asset prices and associated boom in economic demand are considered as a result of the extended period of easily available credit, inadequate regulation and oversight or increasing inequality. The present economic crisis is a reflection of general failure of business in different regions of the world, poor economic calculation; non-performing loans and other factors have been identified to fuel the situation. Catherine (2010) reports that economic meltdown occur due to multiple factors all coming to a head at the same time. These factors include high unemployment, no liquidity or difficulty obtaining credit, lack of consumer confidence and a plunge in the stock markets. Each of these factors is intertwined with the other, which is precisely what makes this economic meltdowns so severe. An overly-simplistic explanation illustrates this point: a lack of lending during the bank liquidity crisis beginning operations, in November and 2008 consumers meant couldn’t 2 companies receive couldn’t loans. finance Consequently, companies began laying people off. In turn, these people couldn’t pay their mortgages, which exacerbated the bank lending crisis. All of these factors created a giant snowball effect of economic catastrophe. She stressed further that economic meltdowns are not new. The most significant of these meltdowns was Great Depression beginning in 1929. This meltdown was caused by a collapse in the stock market once too many shares were “called in” by creditors who demanded payments for their shares from people who had marginal investments in them. This led to a “run” on the banks by depositors to collect their funds. Because banks only hold a fraction of the money they lend, the banks then collapse as they were unable to give people the full amount in their accounts. Though the rampant inflation of the 1970s and the, then bubble of the early 2000s caused some severe economic recessions, no economic meltdown of equal comparison to the Great Depression occurred until the mortgage crisis and bank collapses in 2008. Andrew (2009) argued that an economic meltdown is no longer restricted to just one country. As evident by the economic collapse of 2008, the ramifications are felt world-wide. This is, in part, due to the linking of the financial systems abroad. For instance, nations like China and Japan buy U.S bonds and own large portions of U.S experiences an economic meltdown and the value of those shares is reduced, the Chinese and Japanese economies are affected. Allen (2009) asserts that businesses around the globe were hit so hard by the economic crisis that several businesses had to seek monetary assistance from the government in order to survive. The trends in the market place began to fluctuate along with the demand of various products. Almost every business was affected by this global economic 3 crisis but the companies that were hard hit were the companies having large scale operation along with those who provide their services at high prices. The consumers are now turning to the businesses which render similar services at comparatively cheap prices. Businesses that can survive this economic recession in a better way are basically small as well as medium scales industries. Nonetheless, it does not suggest that they are not hit by economic crisis. The difference primarily lies in the fact that small medium scale enterprises have comparatively undersized operations and have the ability to maintain the operation with fewer revenues. Such business usually has streamline way of operation which minimizes the total effect of the global crisis for survival. Akinsanmi (2011) comments that the global meltdown crept in gradually and went like wildlife to virtually all the developed and developing countries in which Nigeria is a victim. The financial sector have been greatly affected and other economic sectors such as the real sector have also been affected by this recession which is indeed imposing one of the greatest threat to our human survival. Animashaun (2010) further claims that the global financial meltdown is a topical issue because it seems to have affected many countries all over the world. It has various implications for both the developed and developing economies. United state of America and other developed countries are experiencing severe closure of companies, loss of jobs, crash prices, squeeze in consumer credit facilities, crumbling mortgage facilities among others. In the case of the developing countries of which Nigeria is one, the implication are noticeable in the areas of crash in prices, dwindling revenue, few direct investments from developed countries. 4 In view of this paper therefore has identified several measures to be adopted to solve the problem of genuine economic damage, threatening stagflation and a reversal of globalization. LITERATURE REVIEW WHAT GLOBAL FINANCIAL MELTDOWN IS The term “global financial meltdown” is a recognition of the globalize economy as we have today. Gladson et al, 2009 “We are not sure that we have read the actual definition of this global financial meltdown in any paper so far. In a common man’s is description, global financial meltdown refers to a financial distortion that started at one point (Wall Street, USA) which has gradually but steadily affected all financial institutions and economies in the world negatively” (N. Gladson Nworah et al, 2009). They further illustrated this concept by making reference to the human body. “If an individual has a malaria parasite, the first symptoms might be headache and fever. If he does nothing to treat the malaria, it might get to a point where his entire body system would demobilized”. According to Aham et al. (2009) “Financial meltdown has much to do with the crash of stock/share prices in the various stock exchange markets of countries. There is a linkage between the collapse of both the mortgage investments and auto industry in the US and the wall street crisis. These companies and their positive performance till the crunch came down on them was due to investor’s confidence in the ability to manager their activities and return dividends to their investment”. Since the emergence of this global financial crisis most nations have continued to propose and announce financial bailouts for various 5 companies. These emergency and financial bailouts are suggesting that government should not leave their economies without continuous progressive regulations and capital inputs. HISTORICAL DEVELOPMENT OF THE FINANCIAL CRISIS Opinions vary on how the present global financial crisis started. One frequently canvassed origin was the financial instability in the U.S.A caused in part by the failure and/or sub-prime mortgage lending difficulties of the investment banking industry in the US. Specific mention had been made of Lehman Brothers, Merill Lynch, Morgan Stanley and PJ Morgan chase as well as government-backed mortgage giants Fannie Mae and Freddie Mack (Aluko, 2008:48). In trying to answer to the question of how this financial crises began? Donal (http Us. Mz. Yahoo.com) observed that banks and mortgage brokers and borrower all are responsible for making loans and borrowing money on terms that were not fully, understood by buyers, or ignored by them, and offered by unscrupulous lenders who violated that basic law of economies: NEVER LEND MONEY TO PEOPLE WHO CANNOT PAY IT BACK: a good home loan will have 20% down payment from borrower’s earned saving and a fixed interest rate for 30 years with total monthly payment that includes principal, interest. Homeowner’s insurance having a total that the borrower can pay for easily out of current income which has been verified by the loan committee that approves the loan. Violation of these simple basic laws in common sense, results in inability to make the payment which precipitates foreclosure which puts the borrower on the street and the house sits empty-bringing in an income for anyone. The failure to regulate the activities of lenders 6 and the borrowers with hard laws, encourages poor business practices which usually results in financial failure. A further support to the historical origin of this crisis was noted in daily champion (2008:29) where it was reported that critics have blamed an oversight and failures by US and other regulators to detect the problems as prime reasons for the financial crisis. Continuing, the paper noted that the crisis broke out in the United States around August 2007. Mortgage Investments sourced with the housing market’s collapse and the fallout quickly spread and foreclosure skyrocketed. The troubles crimped auto and student loans and locked up lending for many consumers and business worldwide. WORLD SITUATION This section reviews statements credited to informed sources on the financial meltdown. 1. The US government has bailed out citigroup Inc. agreeing to shoulder most of the potential losses on $306 billion of high risk assets and inject $20billion of new capital in its biggest rescuer of a bank yet. Citi group’s rescuer marks the latest’s government effort to contain a widening financial meltdown that has caused the disappearance of bankruptcies of companies including Bear Stearns Cues, Lehman Brother Holding Inc. and Washington Mutual Inc. (Reuters, 2001). 2. As noted by Ayankola (2008:18) unfortunately for OPEC, the world economic crisis is showing no sign of easing off. The United state, the biggest economy in the world and the biggest consumers of oil, is witnessing a huge drop in demand because of financial meltdown and president elect, Barrack Obama, is already talking about 7 seeking for alternative energy. In Europe, the situation is also not any better. Many of the European economies are also on the brink of recession with demand for crude oil dropping sharply. China and India which are the two economic power blocks among the Asia tigers are not left out as crude oil demand had also dropped. 3. In the property and environment section of daily Champion (2008:32), it was noted that the financial crunch had eventually hit Dubai. Quoting the “Architects” Journal, the report noted that “architects and developers in Dubai are freezing recruitment and making redundancies as the emirate’s real estate market begins to crumble. “Similarly, in the Dubai financial market, the general stock index had fallen from a high of 6,315 earlier this year to just 2, 1012 yesterday (November 26, 2008). 4. Gordon Brown (prime minister of Britain) had warn that the world is facing “the first truly global financial crisis (Msthaba, July 4, 2008). Gordon further positioned that both the World Bank and UN were out of date and should be formed to tackle the emerging problems. 5. Gordon further stress that the Economic problems afflicting many countries suffering recession have been blamed on the subprime mortgage crisis in the US that has led to plunging property prices and billions in losses by banks. 6. Khan (2008:25) blamed the current global meltdown on the exuberance of the developed economies which was largely credit based without the requisite regulation to control the current spinoff. 8 The world situation as far as this global financial crisis is concerned is very fluid, change take place at enormous speed thus making definite statements and projections very difficult. The instances cited above points to the fact that most developed countries have been affected and are still being affected by the crisis. NIGERIA SITUATION AND CHALLENGES The Nigerian economy is not an isolated one and this is why it could be freed when the world economy is in distress. Expectedly, Nigeria has experienced and is experiencing this situations as can be seen from the evidence below. 1. According to Salako (2008), an average investor in Nigeria stock market has lost 43 percent return on his investments in the past 11 months according to the closing position of the stock market at the week-end. Key value-based overall market indicators at the Nigerian Stock Exchange (NSE) closed November deeper in red with market capitalization of quoted companies indicating that not less than N3trillion has been lost to the sustained recession in the past nine months. 2. The Nigerian capital market has experienced a downward trend in the share prices. As noted by Iwuala (2008) the capital market during this period (March 5 to November 28) has shed some 33 percent of its value when it attained a peak of N12.9 trillion in market capitalization. Much of the downturn was attributed to the mass flight by international hedge funds which most of the last year played a role influencing sentiments in the market. Foreign investors had fled the market over concern of irrationality of the 9 NSE introduction of circuit breakers, which was a deliberate policy to stop price from sliding. 3. Prof. Charles Soludo, former Governor of CBN was quoted as reassuring Nigerians that Nigerian banks will not be affected by the global financial meltdown. This assurance was based on the volume of Nigeria’s external reserves estimated at over $60billion which according to him is safe despite the crumbling financial institutions abroad (2008:46). 4. Fiaka (2008) reported that operators in the nation’s industrial sector are beginning to nurse the fear of possible credit squeeze as the global financial meltdown remains unabated even as they face fresh difficulties over non-oil exports to the United State of America. The fear is that a troubled USA economy will surely affect Nigerian manufacturers as they trade in dollars and export most of their good to the country. In addition, obtaining credit facilities will become more difficult. 5. Nwachukwu (2008) quoting Remi Babalola (Minister of state for finance and supervising minister of FCT) noted that as a result of dwindling revenue from the joint venture contracts occasioned by this drastic drop in oil production levels, actual production is down to two million barrels per day against actual projection of 3m bpd and a quota of 2.25 bpd. He further noted that there is compelling need for Nigeria to focus on economic growth but homogenous private investment will. GLOBAL FINANCIAL CRISIS AND IMPLICATIONS FOR NIGERIA The global financial crisis has continued to have impact on the Nigerian economy. Some of the implications are as follows. 10 1. The Nigerian economy is depended on oil revenue and the fall in oil prices has affected the revenue from oil since the recent fall in the international market creating worries for the government coupled with decline in oil production from 2.25 million bpd to 2.0 million bpd. The decline in both price and volume reflected in the federation account allocation committee’s (FAAC) October report which shows mineral revenue at N46.22billion as against N495.56 billion generated in September 2008 (Nwachukwu, 2008). 2. The implications of the global financial meltdown in Nigeria have been adequately captured in the communiqué issued by the ASUU National president Prof. Ukachukwu Awuzie (2008). The implications includes. a. The economic effects of global capitalist crisis may eventually lead to a social crisis in Nigeria. b. The remittance by Nigerians who work and stay abroad will be reduced as they are affected by the crisis. This led to a reduction of welfare of their dependents in Nigeria. c. Loss of huge sums of money by Nigerian investors (marginal borrowers) who borrowed from banks for investment in the stock exchange market. This may as w ell be the Nigeria’s “supreme” problem. 3. The safety of Nigeria’s foreign reserve as noted by Aluko (2008:49), out of the Nigeria’s foreign reserve (October 1,2008), 87.3% ($42.30) of the naira of N5.617 trillion (442 billion) shares was denominated in US 8.7% dollar and in Euro currency 1.78%. 11 CAUSES OF ECONOMIC MELTDOWN Financial meltdowns are situations in which the normal economic activity of a country--such as the lending and borrowing of money and the buying and selling of stocks and bonds--slow tremendously in a very short time or even stops completely. Financial meltdowns can be triggered by a number of factors, both economic and political. Wolf (2010) identified the followings as the major causes of economic meltdown. SPECULATION One of the foremost causes of a financial meltdown is speculation, in which a particular type of asset is exceedingly overvalued. When investors discover that the asset is overvalued, the bubble of inflated value pops, spurring off a wave of selling. Because of the interconnectedness of modern financial systems, the decline in value is not simply contained to the overpriced asset, but affects many other items as well. Unsure of a fair price for loans and investments, trading often freezes up, as happened during the Asian market crisis of the late 1990s. CURRENCY DEVALUATION Financial meltdowns can also be triggered by a government’s decision to devalue its currency. Occasionally, in a effort to curb inflation, a government changes the rate at which its currency can be exchanged for foreign currency. For example, in Zimbabwe in 2008 and North Korea in 2010, the value of the currency was moved much lower virtually overnight, with a single unit worth several hundred times less than it had been the day before the decree. This rapid change in the value of assets can create chaos for investors, leading to a financial meltdown. 12 DISASTER Some disasters, both natural and man-made, can lead to financial meltdowns, as investors fear that a country’s assets may be damaged or rendered worthless. Many countries have suffered financial meltdowns in the wake of massive natural disasters, such as earthquakes or hurricanes. Wars can also precipitate financial meltdown, as the normal economic activity of the nation ceases. Investors may flee the country, in the fear that investments will be damaged or taken over, either by the current government in support of the war effort or by an invading force. CHANGES IN LEADERSHIP Changes in political leadership, particularly the movement from a capitalist, free-market economy to a socialist government can impact financial markets. Investors may fear that they will no longer be able to trade freely under a new, government-controlled economy and choose to disinvest assets before they are prohibited from doing so. This results in the suspension of normal economic movement. For example, in 1917, in the wake of its revolution, Russia suffered a temporary financial meltdown as many assets were seized by the country’s new, communist leaders. 13 DISCUSSION AND FINDINGS ANALYSIS OF QUESTIONNAIRES DISTRIBUTED One hundred questionnaires were distributed to members of staff of Oyo State Water Corporation, Airtel, and some selected members of the company. Eighty percent of these distributed questionnaires were retrieved. The questionnaires distributed were analyzed using inferential statistics and beefed up with descriptive analysis. See the below tables. Table 1: Analysis of Questionnaires Distributed Variable Frequency Percentage Retrieved 80 80 Unretrieved 20 20 Total 100 100 Source: fieldwork, 2011 Table 1: The above table shows that hundred questionnaires were distributed but eighty representing 80% were retrieved while 20% were unretrieved. Table 2: Economic meltdown is an added burden on poor nations as their economies are affected directly or indirectly. Variable Frequency Percentage Great Burden 51 63.75 Partial Burden 24 30.00 Never a Burden 5 6.25 Total 80 100 Source: fieldwork, 2011 Table 2: 14 The study discovered that economic meltdown is an added burden on poor nations as their economies are affected directly or indirectly. 51 respondents equivalent of 63.75% admitted this assertion while (24) (30%) agreed partially and 6.25% of the respondent disagreed. Table 3: Businesses around the globe were hit so hard by the economic crisis and that several businesses had to seek monetary assistance from the government in order to survive. Variable Frequency Percentage Yes 68 85 No 12 15 Total 80 100 Source: fieldwork, 2011 Table 1: Table 3: established that businesses around the globe were hit so hard by the economic crisis and that several businesses had to seek monetary assistance from the government in order to survive. 68 respondents equating 85% admitted this assertion while 12 respondents comprising 15% disagreed. Table 4: The current global economic meltdown has negatively affects the private sector than the public sectors. Variable Frequency Percentage Agreed 54 67.5 Disagreed 16 20.0 Undecided 10 12.5 Total 80 100 Source: fieldwork, 2011 Table 1: 15 The study has confirmed that the current global economic meltdown has negatively affected the private sector than the public sector. 54 respondents equivalent of 67.5% strongly agreed 16 respondents (20%) disagreed while 12.5% failed to decide. Table 5: The global economic meltdown is indeed imposing one of the greatest threat to human survival. Variable Frequency Percentage Agreed 64 80 Disagreed 16 20 Total 80 100 Source: Fieldwork, 2011 The study also found out that the global economic meltdown is indeed imposing one of the greatest threat to human survival. 64 respondents i.e 80% strongly agreed with this statement while 16 respondents (20%) disagreed. Table 6: Level of inflation during economic recession. Variable Frequency Percentage Very high 56 70.0 Very low 10 12.5 Partially high 14 17.5 Total 80 100.0 Source: Fieldwork, 2011. 16 Majority of the respondents (87.5%) commented that during recessions, many macroeconomic indicators vary in a similar way. Production as measured by Gross Domestic Product (GDP), employment, investment spending, capacity utilization, household income, and business profit were all fell during recession. Not only these, inflation and the unemployment rate rises. This implies that the global recession has resulted in a sharp drop in international trade, rising unemployment and slumbing commodity prices. Table 7: The Nigeria governments need to reduce waste and improve in social environment with rapid industry and service sector job creation to underemployment in the society. Variable Frequency Percentage YES 60 75 NO 20 25 Total 80 100 Source: Fieldwork, 2011. Some of the respondents whose there opinions were the sampled in Oyo state water corporation agreed that to prevent the global economic meltdown, there is the dire need for government at all levels to reduce waste and improve social environment with rapid industry and service sector job creation to reduce the rising youth unemployment and underemployment in the society. 75% of the respondents agreed and 25% only disagreed. 17 Table 8: Level of public Discontent Variable Frequency Percentages Very high 67 83.75 Very low 13 16.25 Total 80 100.00 Source: fieldwork, 2011. 67 respondents (83.70%) claimed that the global economic meltdown tends to increase the level of public discontent while 16.25% disagreed. CONCLUSION Arising from the analysis and discussion of data gathered from the field, the followings are therefore the major findings of this study. i. Economics meltdown is an added burden on poor nations as their economies are affected directly or indirectly. This claim is justified by 93.75%. ii. That the role of the government in managing the crisis can not be undermined as several businesses in the country had to seek monetary assistance from the government in order to survive.(85% ) iii. The current global economic crisis has negatively affected the private sectors than the public sectors. This is due to the fact that, there are closures of private companies, loss of jobs in most private establishments, crash prices, squeeze in consumers credit facilities, crumbling mortgage facilities, among others. (67.5%) iv. Government at various levels need to reduce waste and improve social environment with rapid industry and service sector job creation to reduce the rising youth unemployment and under unemployment in the society. 18 REFERENCES Andrew Caleb (2009). The Nigerian Economy. An overview. Abuja, Macmillan Press. Animashaun Tairu (2010). History of Nigerian Economy Lagos, University Press. Aluko Adeboye (2008). 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