CHANGE IS HERE

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Wednesday, May 23, 2012

Nigeria and Brazil’s Divergent Development Paths---Alex Huelsemeyer


Introduction


In terms of development, the discrepancies between countries are undeniable. What
remains more mysterious however are the reasons behind an uneven pace of development
amongst post-colonial economies. Indeed, one may ask why some ex-colonies have
successfully industrialized and integrated in the world market, while others are struggling
in what seems to be a vicious circle of poverty and debt.  


This paper examines the cases
of Nigeria and Brazil in order to sketch which theories, policies and orientations might
influence the course of economic development. Also of critical importance is the
following question: how do we measure economic development, and is it desirable at any
price?


Nigeria and Brazil: Comparing Similar Context


Both large countries face the challenge of sustainably exploiting a rich pool of natural
resources. Their large population is strongly divided between rich and poor, and they
have to reconcile the specter of colonization with aspirations at being a regional major
influence. 


What’s more, they had similar development strategies: both applied ISI
(Import Substitution Industrialization) policies to protect both infant and mature
industries in the seventies, prior to liberalizing in the eighties and nineties.
Before looking at differing liberalizing paths, we first explore the dependency movement
as the theory initializing the development strategies of both countries.


The Dependency Movement


Dependency theorists propose that “The rise of international trade in goods and service as
well as foreign investment has come at the expense of southern states.” (Stoett &
Sens106) The exploitative nature of the colonization system, by which slave’s free forced
labor produced raw materials in the colonies to be transformed in the metropolis and resold in the colony at a higher price, has not changed. 


With 75 percent of exports being
raw material in 1992, Nigeria doesn’t benefit in international trade. (Anunobi 118).
Some political economists believe third world countries are maintained in a structurally
disadvantageous position with the collaboration of the local elites, the comprador class.
In 1990, Klein argues that in Nigeria “there appears to be a causal relation between
multinational activities and inequalities of development in the third world” (Klein 88).


If one believes foreign investment to be detrimental, the solution is to restrain
international economic movement. In order to do so, a commonly adopted solution by
dependency-influenced policy-makers was ISI. By transforming raw materials into
manufactured goods, the country solves the problem of declining terms of trade and
achieves autonomy from internationally set prices.
Because the government intervenes to protect infant industries and plans which sectors to
prioritize, this is a fertile situation for corruption and rent seeking 


Nigeria and Brazil’s divergent development paths | Poli 350 | page 3 οf 11


The net results of ISI seem to differ from one country to the other. While ISI created a
positive export ratio in Brazil, reaching a peak of 15% in 1974 (Baer 227), the 1972
Indigenization Act of Nigeria and the nationalization policies did not create a trade
surplus. This may be attributed to the need of raw material imports for intermediate
goods production (Kagami 78). Since ISI creates an import dependency in Nigeria, it
interferes with the goal of a trade surplus and autonomy,


Late-late Development


Nigeria and Brazil borrowed on international markets in order to finance large industrial
facilities. Certain countries are so far behind that is simply impossible for them to
develop, given the burden of debt repayment (Gilpin 308). Debt also leads to distorted
currency appreciation to keep up with debt repayment in foreign denomination.  


When faced with an acute crisis of payments, third world countries can choose to ask for a
bailout from the International Monetary Fund. Nigeria has done so from 1986 to 1990,
and Brazil also resorted to the IMF to defend the value its currency in 1999, the Real.


Nigeria’s Abrupt Policy Changes


Nigeria faces inflation, capital outflow, and most of all a fiscal policy solely based on oil
revenues. Alternations between protectionism and liberalization were numerous and
abrupt, reflecting internal instability. Protectionist ISI characterizes the seventies. A few
years of contracted fiscal and monetary policies lead to rapid liberalization in the eighties
and hastily implemented SAL (Structural Adjustment Lending) policies in the nineties.
The harsh impacts reversed the course to protectionism in 1992, but a second round of
SAL took place in 1996.


Fiscal and monetary policy


Nigeria experimented with tight inward-looking reforms under the Buhari regime (1983-
85), then liberalization with the IMF structural adjustment from 1986 to 1990 and a
second round in 1996. IMF agreements are still sporadically implemented, as in 2000 and
2005.


Neither fiscal, monetary nor foreign exchange policies managed to alleviate inflation.
“Oil wealth also largely explains why Nigeria has been able for so long to sustain
fundamentally unsustainable macro-economic policies, characterized most of the time by
excessively expansionary financial policies, a substantially overvalued currency, and a
lopsided structure of public finance, on both the revenue and the expenditure sides”
(Moser & al. 1) The latter is due to Nigeria’s heavy reliance on oil exports revenue to
finance its economy. 


Failure to diversify leaves Nigeria very sensitive to external shocks,
as was the case in the eighties. Moreover, as it lacks the internal absorption capacity to
transform sudden capital inflow into wealth, oil revenues are monetized and contribute to
inflation.Nigeria and Brazil’s divergent development paths | Poli 350 | page 4 οf 11


Theoretically speaking, fiscal and monetary policy should counter each other to prevent
inflation. For instance, if the government engages in heavy spending, the Central Bank
should issue bonds to commercial banks in order to reduce money supply in the
economy. It can also choose no to print more money, or increase the discount rate to
stimulate savings through high interest rates. Otherwise, producers will increase their
prices and not their production to profit from the extra money supply, therefore creating
inflation.


The IMF attempted to contain both the government and the central bank’s expansionary
policy. The Government-issued bonds to commercial banks as mandatory stabilization
securities, trying to reduce money supply to manage inflation. Overall, the monetary
policy was as expansionary as the fiscal policy. 


“The consequences of an expansionary fiscal policy could have been corrected by a
 countervailing monetary policy” (Moser & al. 45). 


But the fiscal policy by-passed the SAL checkpoints, as extra budgetary revenues
were directly invested in unplanned sectors. This lead to a black market of revenues
escaping IMF scrutiny.


The foreign exchange rate is also problematic. From 1970 to 1986, Nigeria maintained an
overvalued currency to counter inflation and create advantageous terms of trade for
imports. President Buhari expresses this view:


“The way the IMF sees it, if we devalue our exports would be cheap, imports would be dearer. If so, the
effect on Nigeria is irrelevant because we hardly export anything other than oil which is price[d] in dollars
and which is subject to currency fluctuations, so devaluation doesn’t make sense (…) we need cheap
imports, because our essential raw materials for our industry are mostly imported from the United States
and Europe so we don’t want to make it expensive our end product will be more expensive, and the
inflation will go up again, so the argument against devaluation in Nigeria is real, we hope the IMF will see
it that way” (Anunobi 221-222).


Currency policy


In order to maintain the artificially high value of the Naira, the Buhari regime (1983-
1985) adopted severe measures to reduce devaluation risks engendered by speculation
and capital mobility in the volatile post dollar-gold pegging era. The 1984 Foreign
exchange Control Regulations and Supplementary Regulations restricted the outflow of
Naira and its conversion in foreign currency. This action meant to keep foreign exchange
reserves in Nigeria to back up the Naira value. It also intended to curb corruption’s
money flowing to fiscal paradises


The scarcity of foreign exchange, matched with strict
import licenses issuing, lead to an import shortage. While inward-looking policy did
increase Nigeria’s autonomy from imports, on the short-term it created a production
dearth. Producers increased markup price and reduced personnel to make up for losses.
The drastic inward-looking measures to redress the economy and eradicate corruption
were abruptly halted, as growing resentment over the social consequences lead to the
overthrow of the regime.


Nigeria and Brazil’s divergent development paths | Poli 350 | page 5 οf 11


The growing gap between official and black market exchange rate forced the reevaluation of the Naira and its opening to the international market. The official value fell
by 44 percent from 1988 to 1990 (Moser &al. 15). This reality check on the Naira reflects
the vulnerability of soft currency in international markets. The Naira now has a dual
exchange rate: the internal one is sliding downwards, and efforts to keep the external one
high are motivated by the debt payment in foreign denomination and the necessity of
cheap imports, as articulated by General Buhari.


Trade


In order to rebalance oil-distorted exports, the IMF suggests investing in agriculture. This
solution seems counter-intuitive since agricultural products have inelastic prices which
tend to decline over time, exacerbating the unfavorable terms of trade and the trade
deficit in terms of revenues.


Additionally, implanted Multi National Corporations tend to favor capital- intensive
investment over labor-intensive investment (Anunobi 130, Arya 63). According to the
Hecksher-Ohlin theory, a country’s advantage resides in its abundant production factor.
Considering that Nigeria’s abundant production factor is labor, this is also counterintuitive.


The attractiveness of capital-intensive labor can be explained by the distortions created
by government incentives. The overvalued currency as well as subsidies on technology
imports contributed to make capital-intensive industries artificially profitable.


The curse of Oil


Not all oil-exporting countries are wealthy. When there is corruption, low absorption
capacity and a lack of sound policy-making, the black gold may even have detrimental
effects, as in the case in Nigeria.


Proven oil reserves in Nigeria are about 35 millions barrels, corresponding to 25 years at
current exploitation rate. The low-sulfur concentration makes it very valuable. Nigeria is
Opec’s fifth largest producer (www. eia.doe.gov).


The country is dependent on international oil prices. Even if it is part of Opec, a cartel
that has considerable weight in price setting, its vulnerability is high. It often had to ask
special favor to produce more than Opec quotas to meet both ends of its budget. Because


Nigeria heavily relies on oil exports revenues to finance itself, a price decrease directly
affects of the financial system. Oil also incurs environment costs and deteriorates the
living conditions of host communities. Ken Saro Wiwa denounced spillage risk, disease
and the social tissue disintegration (Klein 29). He was hanged. Economists yet have to
come up with a mathematical function mapping human rights and MNC’s interests.


Oil is also being hijacked, sabotaged and smuggled. The structurally uneven distribution
of oil revenues has kept the country poor, even relative to its oil-less African neighbors.
The wealth is concentrated in the hands of few individuals, there’s a rural-urban divide,
and oil richness does not reach the host communities. Although this is not a justification 
for violence, it is an undeniable cause.


 As recently as 2006, the Niger Delta remains an
agitated region where local revolutionary movements resist what they see as a
continuation of imperialism (BBC).


Political instability


Since independence in 1960, the country has seen more dictatorship than democracy.
Numerous coups have contributed to its vagarious economic policy. The lack of
coherence between regimes has made it hard to evaluate which policies were successful.


Surely, Nigerian economic development policies largely owe its failures to the absence of
long-term gradual strategies, which in turn bred unstable political regimes. Traditional
economist may regard this as bad policymaking, but the weakness of institutions may be
attributable to the colonial scar. 


Various ethnic groups inhabit this arbitrary country, and
the scarcity of resources exacerbates tensions, as the Biafran war (1967-1970) and recent
Christian-Muslim confrontations demonstrate Above all, the notion of nation-state is an
awkward western imposition.


However, Brazil and other countries have faced similar of post-colonial challenges with
much more success.


Brazil: successful embedded liberalism?


After decades of inward-looking development, Brazil also faced persistent inflation and
growing international debt. In order to pursue ISI policies, it contracted loans, which the
core easily gave at is experienced and oversupply of money. 


Growth at the expense of debt became symptomatic and much of the profits were exiled
 to external debt repayment, affecting the balance of payment. In the late eighties, both 
countries resorted to open their market. However, Brazil managed to entirely repay its 
debt in 2006, while Nigeria solicited a 60 percent debt cancellation. How is it that one 
country did so much better than the other?


Microcomputers and Embraer: ISI’s positive legacy


In the eighties, Brazil developed its own microcomputers and protected this infant
industry from international competition. National market share increased by more than
30percent and contributed to expand the national computer infrastructure, particularly in
the banking system (Kagami 92). 


Even if the venture eventually had to cease due to
United States pressure and uncompetitive prices, it greatly contributed to modernizing the
country. Another ISI offshoot is EMBRAER (Empresa Brasileira de Aeronáutica). This
airplane manufacturer is amongst the best in the world, and Brazil’s largest exporter in
1999-2001. The company was privatized in 1994, but the government still retains a
golden share to keep its veto.
                                                 
Although most SOE’s (State Owned Enterprises) were inefficient and crowded out small
private entrepreneurship, some paved the way for Brazil’s export diversification and
competitive advantage.


Brazil Liberalizing


In 1990, the Collor administration resolved to liberalize the country. Import tariffs
lowered to 7 percent for Mercosur (Mercado Comum do Sul, Southern common market)
countries and 15percent for the rest. SOE were privatized, and infant-industries subsidies
phased out. Instead of government planning, the market now determined its priorities and
prices. However, training in management and hi-tech sectors still reflected a dose of
interventionism on the part of the government. In the light of large SOE’s inefficiency,
anti-trust laws promoted small-scale enterprise. (Kagami 90)


Inflation


Inflation remained a major issue. The orthodox view holds that excess money supply and
expansionary fiscal policy defines inflation. What’s more, Brazil’s permissive stance on
inflation is to blame for its deep-seated recurrence. Main causes of inflation are oil
shocks, bad crops, and currency devaluation. One solution to curb inflation is to produce
more to diminish demand pressure and entice price decrease. However, overproduction
must find a surplus market.


On the other hand, structuralists believe that inflation is a symptom of Brazil’s oligarchic
enterprise structure promoted by the “large is beautiful” state incentives for SOE's. (Baer
119) Monopolies are able to pass price shocks to consumers. If their product is more
expensive to make, they maintain their profit by increasing the markup price.




As it breeds recession, increasing markup price can only be maintained for so long. Because
consumers are not able to afford inflated products, the demand diminishes and products
are even more expensive to make. Recession is then chronic and worsening over time.
Additionally, oligarchies adopt a defensive price setting attitude, that is they attempt to
achieve past levels of profit that may not be consistent with the current recession, or try
to prevent future losses.


Since the free floating of the currency in 1999, inflation control is a formal objective of
the Central Bank. The latter must reach a yearly nominal target for maximal inflation.
This mechanism has proven efficient, in that inflation is now under control.


Trade


While trade balance was positive in the 1980-1995 period, the effects of liberalization
reversed the trend. “In the second half of the 1990s, the trade balance became negative
again. By 1998 the trade deficit was almost US$ 6.5 billion. 


This was the result of a much greater expansion of imports than exports and reflected the impact of the liberalization policies followed by Brazil’s authorities under the Real stabilization plan and the
appreciation of the exchange rate (Baer 227). We can attribute/speculate that the positive
trade balance is due to persisting effects of ISI and SOE, and the lack of competivity of
these SOE in comparison with imports meant a loss of internal market share as well as a
small place in international markets. 


However, the neoliberal direction of Brazil’s
economy bared fruit in the new millennium. In 2005, the trade surplus reached a peak of
almost 30 billion. Production diversified in terms of internal geography: it spread away
from coastal lines and the south to the interior and, to a lesser extent, the northeast.


Finally, it diversified its client base, moving away from quasi-exclusive partnership with
the US and Western Europe to Mercosul, Japan and the Middle East (Baer 229). But
perhaps its currency devaluation was the determinant factor in the trade surplus, because
it made Brazilian exports prices much more attractive.


Fiscal and Monetary policy


From 1967 to 1999, Brazil’s currency was pegged to the US dollar. This pegging was
dynamic, in order to adjust to levels of inflation. In fact, manipulation of currency value
was instrumental to dealing with inflation. Anytime the inflation was too high due to
repetitive mini devaluations, the state would start over with a new currency.


 In this manner, the Cruzeiro Novo was replaced by the Cruzeiro (1970), then the Cruzado
(1986), Cruzado Novo (1989), Cruzeiro again (1990), Cruzado Real (1993) and since
1994 the Real. The artificially high value of each new currency was meant to offset
inflation. This was detrimental for exports, and it meant detrimental competition national
production. Another strategy to lower inflation was to index prices and wages.


In 1999, low official foreign reserves, the menace of Russian and Asian crisis spread in a newly
integrated -hence vulnerable- Brazil, forced the free floating of the Real. It fell by 40
percent relative to the US dollar. This also meant the abandoning of FX rate to control
inflation (Baer 216).


Brazil’s success


Brazil is currently one of the fastest developing economies of the world. Its boom can be
attributed to sound economic policies in the nineties, namely the Real Plan in 1993-1994.
In econometric terms, balance of trade is positive, and the economy is so flourishing as to
have paid its entire external debt to the IMF. 


Moreover, it has dealt with the Aids issue in
an exemplary manner, successfully containing the epidemic. However, a field trip to
Brazilian favelas imposes a reality check on praising a Brazilian miracle. On a day-to-day
basis, the social, racial, geographical and economic disparity is static. The income
redistribution is low, and the trickle-down effect is more of a theoretical claim than a fact.


Assessing Development


The analyzed data proves that Brazil’s liberalization helped trade growth while reducing
inflation. It is noteworthy to observe that in absolute terms even if ISI had a perverse
effect of increasing imports of raw materials, liberalization accentuated imports since
international competition crowded out local markets. But in relative terms, liberalization
increased the export to import ratio. 


Also, inflation cannot be overcome by distorting only one economic tool, 
be it exchange rate or price indexation. Factors must be analyzed
one in relation to each other; otherwise one remedy will cause other side effects.


Despite numerous denomination substitutions, the changes were gradual, especially in
comparison with Nigeria. The latter did not manage to overcome oil dependency and its
distorting effects. Moreover, the capital-intensive industrialisation and proposed favoring
of agriculture are paradoxal with the oversupply of labor and inelasticity of raw
agricultural products. 


In assessing the transferability of the Brazilian model to Nigeria,
one might object that Nigeria’s issue is first and foremost political instability. No
economic policy can take place without institutional stability. Nigeria’s political turmoil
allows tactics, not strategy. In this sense, any foreign model is not to be followed before
political stability is reached. 


However, minimal redistribution and economic planning are
also a prerequisite of political stability. The vicious circle of Africa can be resumed this
way. Perhaps stronger regional integration would strenghten institutions and help
coordinate efforts to deal with pandemics and common problems of black market,
corruption and economy.


If development can lead to well being, it most certainly is not a synonym. To begin with,
a more intuitive correlation must include environmental costs, education and women
situation, as well as the human rights issue. Only then can development be an objective
consistent with my normative goals.


Endnotes
1
 In 2005, Brazil ranks 62 and Nigeria 152 on the Corruption Perception Index. The most
corrupt country is Chad and Bangladesh, ranking at 152. (www.transparency.org)
2
 According to Arya, corruption is not detrimental per se since it creates a plus value on a
service or good. This benefit exceeds the discouraging effects on competitivity and
efficiency. The true problem of corruption is the capital outflow it creates. Because the
money is exiled and transformed in foreign currency, the substantial amounts of
corruption income are largely responsible for the devaluation of the Naira. (Arya 107)
3
 In 2006 more than 100 people died in Onitsha, a southern city of Nigeria animated by
religious tensions.
4
 This is consistent with Marx’s law of declining profit over time.

In 1986 only, the exchange rate was also indexed.


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