Monday, December 12, 2011

Deregulation of The Downstream Sector of the Nigerian Oil Industry (Part 3)

Feasibility | Contestability | Sustainability

Revenues from Nigeria's Oil resources has not
translated into substantial economic gains
Although the recent Occupy WallStreet is a major advocacy against corporate greed, the free market upon which this corporate organizations are built hold key values underpinning the modern economy. But we also need the government to play its own role in strengthening the operating environment thereby allowing a level playing ground for businesses. When some foreign firms make supernormal profits at the detriment of the common man, the common man is bound to revolt. Obviously, perfect market scenario create the efficient and welfare maximizing structure and behaviour for the common man particularly because allocative and technical cost considerations as well as pricing mechanisms are always favourable. Monopolists are not necessarily inefficient but our major concern is in terms of their pricing mechanism, their absolute freedom to set prices and the resultant supernormal profit is what raises concern. What we need to think about then is how do we ‘contest’ the monopoly powers in the downstream oil sector in Nigeria?

Contestability will ultimately result to Sustainability
A market is feasible (a usual condition for markets) when it clears (i.e. Total output=Total demand at price P) and firms that operate within the industry are not making negative profit.  More importantly a market is sustainable if above all it is feasible, no new entrant into the market can make profit (given incumbent price). If this is the case, it implies that marketers must set prices sufficiently low so much so that any further price reduction will lead to negative profit. But monopolist (especially the ones that operate in Nigerian oil market) will hardly ever bring their price that low. We can only attain an economically sustainable point in premium motor spirit (PMS/Petrol) and related product pricing when government encourages contestability rather than regulate (control-which brings about more corruption as will be discussed later) or renationalise (total government ownership- which is characterized by greater inefficiency, waste more corruption) is introduced. So let me stop making the term “contestability” a cliché, this is what it means in principle:
“A con-testable market is one into which entry is absolutely free, and exit is absolutely costless” Baumol (1982) [1] “The market price is independent of the number of firms currently serving a market because the mere possibility of entry suffices to discipline the actions of the supplier” (Browing and Zupan, 2009)
“The threat of entry is enough to cause the incumbent monopolist to price at the competitive level”
Let me demonstrate the idea with this diagram:
Click to enlarge
While the idea of contestability is very rare in real market scenario, it is a broader ideal which has a wider applicability based on the perfect market model and it is obviously an extension of Adam’s smith theory of the invisible hand.
This is what we advocate for in summary that government can promote sustainably low prices by encouraging contestability. As much as possible, government must ensure that barriers to new entrant into the oil market be removed. When the monopolist is contested, we can witness powerful optimal results: Prices will fall from Pm to Pc (see Diagram A), firms operate in a unique environment where zero profit is made; prices are equivalent to the average costs of the firm and best (second-best) pricing can be achieved. We also don’t need to regulate the industry as there will be a level playing ground for firms. No need for government to be involved. But we need to keep an eye on the fact that incumbent monopolists still have their way of erecting entry barrier upon which they still make their supernormal profit.

The Downside: Corruption
Just as I have always anticipated in previous posts that most of the figures available to us may be subject to inaccuracies, I am not at all surprised as a recent Sahara Report of the Ministry-of-Finance-aidedKPMG forensic report of the NNPC shows various levels of anomaly. We know that if government has truly been subsidizing as it claims our people should be better off; the hardship would not be this pronounced. it seem clear now that both the recent importers/marketers have questions to answer and the NNPC responsible for of paying the huge billions of subsidy money as well as handle all Nigeria’s oil transaction have develop mastery in diverting a portion of these money for personal benefit, leaving the masses struggling to meet their daily need. It’s a low blow for someone like me who claim Nigerian in overseas country when faced with such report of corruption.

The upside: Corruption will be dealt with
But we will not give up. As the global disparity become more pronounced - emerging economies becoming brighter (especially those in Africa) while the western world witness shortfalls (climaxed in the EU crisis and poverty spikes in the US) - we will continue to advocate for efficient optimal solutions for our dear country. We are optimistic that our nation is at a cross-road, where God fearing people have to take their stand in corporate and governmental arena. Not just Christians (many have failed us), we need sons and daughters of God who will not compromise God’s standard in their daily dealing. I believe you and I can bring that so much desired, long awaited change. But first, we must change ourselves. Now is the time for change.

Seun Oyeniran

[1] [‘freedom of entry’ is used carefully here. It does not mean that it is costless or easy, but that a new entrant suffers no disadvantage in terms of production technique or perceived product quality relative to the incumbent monopolist, and that potential entrants find it appropriate to evaluate the profitability of en-try in terms of the incumbent firms' pre-entry prices]
Smith, Adam (1977) [1776]. An Inquiry into the Nature and Causes of the Wealth of Nations. University Of Chicago Press
Baumol, W. J., (1982), Contestable Markets: An Uprising in the Theory of Industry Structure, American Economic Review, Vol. 72 No. 1, pp. 1-15
Baumol, W. J., Bailey, E. E., and Wil-lig, R. D., (1977), ‘Weak Invisible Hand Theorems on the Sustainability of Multiproduct Natural Monopoly’, American Economic Review, 67, 350-65.
Browning, E. K.,  and  M. A. Zupan, (2009), Microeconomics: Theory and Applications, John Wiley & Sons Inc.

Saturday, November 19, 2011

Part 2: Deregulation of The Downstream Sector of the Nigerian Oil Industry

Inefficiency and Welfare loss
Nigeria: The welfare of the people needs attention
Building on the first post, it cannot be overemphasized that the demand for PMS and other related product (kerosene, diesel, etc) is very high (inelastic) and the supply of these relatively scarce commodities are low. So we are right to call these few (but foreign based) suppliers monopolists since we assume them to be collectively categorized under the same industry. The monopolist import fuel into Nigeria and sells at the price it fixes by itself. If we look at Diagram A, it becomes clear that the monopolist charging prices at Po results in allocative inefficiency since consumer welfare is loss of the range QoQ1. Another issue is that these foreign based producers will not ensure lowest cost in their production (i.e. it will not produce at its lowest average cost. See Diagram A). It is therefore productively (or technically) inefficient. A monopolistic market mechanism is an imperfect one especially in the Nigerian situation. The affordability range of the common man is improved when prices of petrol come down. And this is where government needs to come in, but should it be through subsidy?
If the data available at PPPRA is correct (sincerely), then there is truly regulation and government involvement; the Diagram B shows the obvious disparity in what is supposed to be the price of petrol to what is obtainable at retail or filling station. What we are supposed to pay is N139.69 but we are currently paying N65 because government has subsidized the actual cost. If the billions of naira subsidy is truly paid as we are being told, the masses are being helped and removal (diversion as some stakeholders claim) of these subsidy will lead to unprecedented hardship for the masses. But applying subsidy itself is not an efficient solution, it comes with problems.
Governmentization Problems
while it is still very difficult for us to verify data,  if governmentization (a word I coined for government + subsidization) is actually applied as we have in other parts of the world (in order to regulate the industry), then it will surely come with certain problems. The first problem is that government lack enough information about the industry and particularly about the production outlay of foreign firms. Paying for subsidy on very poor information of the industry is tantamount to waste of resources and money. Additionally, it may be difficult for government to also quantify these products since they government may not be directly involved in quantity estimation. It may be useful to note also that the time to apply subsidy may have been wrong from the beginning. Subsidy implementation administrative cost may result in overall higher cost. The final and most important problem with subsidy is that most of government involvement in issues like these is politically motivated and the economic rationality may not be fully considered. Although it may look like it benefits the people, maybe an arrangement is been made between the government and a particular foreign oil firm (?)

More Key Issues
If we must always use petrol and related product, we need to demand for lower prices. There must be a way for us to get these products at a cheaper price. If prices must then fall from what we have now, we need to look more into the supply side economics. Governmentization may be a feasible option but it does not look like a sustainable one. Subsidy comes with its own problems as explained above and so may not result in a pareto optimal solution. Since what will result in a continuous price reduction will emanate from reducing production cost and increasing efficiency (allocative and technical), it will be logical for us to think first of revamping Nigeria’s refineries. We can then ensure that those firms that import or sell to Nigeria from abroad establish local refinery in Nigeria. This will not only reduce their overhead costs, it will lead to increasing FDI flows into Nigeria. I have mentioned earlier on this blog that, although it may come with risks, companies that invest in new, unfamiliar or difficult terrain like Nigeria will be quick to reap the revenue because they will build economies of scale, increase in their experience curve and enjoy the ever buoyant domestic demand potentials that Nigeria possess. The result of this is increased infrastructure and competition. We will tie everything together in the economic theory of contestability which I will discuss briefly later.

Seun Oyeniran

Beesley, M. E., and Littlechild, S. C., (1989), ‘The regulation of privatised monopolies in the United Kingdom’, Rand Journal of Economics, Vol. 20 No. 3, pp. 454-72.
Borcherding, T. E., Pommerehne, W. W., and Schneider, F., (1982),‘Comparing the Efficiency of Private and Public Production: A Survey of the Evidence from Five Federal States.’, Journal of Economic Theory, Public Production, Suppl. 2 pp. 127-56.
Ehrlich, I., Gallais-Hamonno, G., Liu, Z., and LutterSource, R., (1994), ‘Productivity Growth and Firm Ownership: An Analytical and Empirical Investigation’, The Journal of Political Economy, Vol. 102, No. 5, pp. 1006-1038.
Quiggin, J., (2002), ‘Privatisation and nationalisation in the 21st century’, Growth 50, 66–73.
Grossman, G.M., and Helpman, E. (1994), Endogenous Innovation in the Theory of Growth, Journal of Economic Perspectives 8, No. 1, pp. 23-24.
Ehrlich, I., Gallais-Hamonno, G., Liu, Z., and LutterSource, R., (1994), ‘Productivity Growth and Firm Ownership: An Analytical and Empirical Investigation’, The Journal of Political Economy, Vol. 102, No. 5, pp. 1006-1038.
Lewis, W.W., (2004), The Power of Productivity, Chicago: University of Chicago Press
Porter M.E., (1990), “The Competitive Advantage of Nations”, Harvard Business Review
The Economist (2010), Businesses will learn to look beyond the BRICs, Nov 22nd 2010 | from The World In 2011 print edition (
Hill, C.W.L., (2011), International Business: Competing in the Global Market Place, New York: Mc Graw-Hill
CORRUPTION PERCEPTIONS INDEX 2010 , accessed 3/3/2011
Human Development Report 2010, The Real Wealth of Nations:Pathways to Human Development, UNDP 2010, accessed 3/3/2011
Saugato Datta, (2011) (Eds), Economics: Making Sense of the Modern Economy, London: Profile Books

Monday, November 07, 2011

Deregulation of The Downstream Sector of the Nigerian Oil Industry

The Struggle for Optimality
Petrol is an essential commodity. As one of my friends always asserts, after water, another product the common man cannot do without is petrol. It is therefore not a surprise that any policy adjustments that concerns this essential commodity raises the attention of not only the masses, but also key stakeholders like the Nigerian Labour Congress (NLC). While the issue of deregulation is an extensively broad one (I must confess), we will better understand the concept when we furnish ourselves with some level of information. The first idea we need to carry on is the fundamental idea of Optimality (Pareto Optimality) put forward by Vilfredo Pareto. Pareto Optimality is a situation where social efficiency is attained. And social efficiency is only attained when changes in production or consumption can make at least one person better off without making anyone else worse off. We are all rational in our economic behaviour, we tend to maximise our tendencies towards increasing activities that produces higher marginal benefit than marginal cost and do less of activities whose marginal cost exceeds marginal benefit. Inevitably our businesses (including those in the downstream oil sector) are handled in this economically rational way. We will apply this basic understanding of optimality vis-a-vis price theory and simple demand and supply analysis, to explain the struggle towards deregulation of the oil industry in Nigeria.  

Petrol Demand, Regulatory Framework and Black Market
Markets (firms, businesses) are always aiming for private (business) efficiency so their model is predominantly tilted towards profit maximization. It is always the role of government (and other regulatory machineries such as the PPPRA) to bring the private sector to social efficiency where their operating cost covers also for the externality they produce.  It is the involvement of government, this struggle to attain Pareto Optimality or Social Efficiency, that brings about price controls which comes in form of taxes or subsidy. But because petrol is an essential commodity (where demand-price ratio is inelastic), many firms operating within the downstream oil sector are natural monopolists that set prices by themselves. The pump price that gets to the consumer is usually a function of the landing cost of imported refined crude oil. While the four refinaries in Nigeria (two in Port-Harcout, one in Warri and one Kaduna) remain at non-functional state, many regulatory attempts to change the pump price has led to sudden shortage in supply due to excess demand as shown in the diagram above. Since demand remains very high, many of the traders will sell at the ‘Market Price’ Pe, rather than the 'Official Price' P1.  Even so, many of the masses are still willing to pay for the high price at Pe. Keeping the prices mandatorily at P1 leads to persistent product supply shortages (Q2) while demand remains high at Q1. The fact that people want to still buy at Pe, despite regulatory frameworks, is actually cause of ‘Black Market’. Until there is a way that the ‘Official Prices’ Balances with the ‘Market Prices’, Nigeria will continue to have shortages which are in reality ‘disguised shortages’(since the traders are monopolists). To ensure that shortages are not witnessed nationwide and to support the masses, government apply subsidy so as to 'disguisedly' maintain the prices at less than Pe or probably at P1. BusinessDay newspaper recorded the amount of this subsidy to averages N400 billion per year between 2006 and 2008 increasing to about N600 billion in 2009.

Critical Questions
Moving forward, the first question to ask is that are we really not buying Premium Motor Spirit popularly called petrol or gasoline and other related products at the market importation landing cost even though we say there is subsidy? With our level of corruption, have we really witnessed subsidy in the first case?  The second issue is that if truly subsidies need to be provided, how can these prices balance? Will government continue to pay subsidies as other regulatory machineries struggle for consistent fall in prices of petrol? Or do we leave the market forces of demand and supply to control the price of petrol by itself by introducing contestability? We may want to ask finally that how do we really achieve Pareto Optimality or Social Efficiency that will lead to higher welfare gains for the common people? 

As I look through the lines again, preparing for the next post on this blog which will be a sequel to this very post (where I explore the implication of the removal of subsidy and the advent of privatization in the downstream), it is imperative we call ourselves to earnest prayers for the country. This blog remains firm on a positive note that Nigeria will be great, albeit only through divine visitation. What seemed like 'resource curse' in the time of Elisha was reversed by divine intervention (2Kings 2: 19-22), it can happen in Nigeria. We need God's instrumentality.  

Seun Oyeniran

title. (n.d.). Vilfredo Pareto: The Concise Encyclopedia of Economics | Library of Economics and Liberty.Library of Economics and Liberty. Retrieved November 6, 2011, from
Beesley, M. E., and Littlechild, S. C., (1989), ‘The regulation of privatised monopolies in the United Kingdom’, Rand Journal of Economics, Vol. 20 No. 3, pp. 454-72.
Borcherding, T. E., Pommerehne, W. W., and Schneider, F., (1982),‘Comparing the Efficiency of Private and Public Production: A Survey of the Evidence from Five Federal States.’, Journal of Economic Theory, Public Production, Suppl. 2 pp. 127-56.
Ehrlich, I., Gallais-Hamonno, G., Liu, Z., and LutterSource, R., (1994), ‘Productivity Growth and Firm Ownership: An Analytical and Empirical Investigation’, The Journal of Political Economy, Vol. 102, No. 5, pp. 1006-1038.
Quiggin, J., (2002), ‘Privatisation and nationalisation in the 21st century’, Growth 50, 66–73.
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Seidmann, D., (1991), Bundling as a facilitator Device: A reinterpretation of leverage theory, Econometrica, 58:491-499
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Sloman, J. , and Wright, A., (2009), Economics, England: Pearson

Thursday, October 27, 2011

RE: Can Nigeria Outstrip Italy and Canada?

Global Disparity and the Convergence Theory

As my last post "Can Nigeria Outstrip Italy and Canada?" (2/7/2011) raise discussions and debate across boards, I try in this post to put forward responses to the many ongoing but underground discussions that the article generated. While most of the reaction (especially by Nigerians) to the question under discussion tilted towards the negative gradient (meaning that Nigeria outstripping Italy and Canada in economic term is not possible), many others hold the resolve that it can happen, Nigeria can outstrip Italy and Canada. The pessimist have valid points to justify their stand based on the obvious economic doldrums that Nigeria is at the moment - climaxed on the Boko Haram issues, the optimist have their justifications too albeit divided into two categories. Some Nigerians are "religiously" optimistic for a better tomorrow while others take a more tacit approach to their resolve that Nigeria will be better. I belong to the positive religious tacit optimist of Nigerians who seem to apply strong spiritual and academic understandings without necessarily doing that in a show-off manner. Not that the obvious is not imminent: that Nigeria is a country stacked between abundance and poverty, its just that I and many other optimistic Africans believe that once we get the leadership crisis resolved (i.e. the right mix), we can make radical progress. We can not, however, isolate the overarching power of a divine God in achieving the progress that we so dream of (see my previous posts here)
Yes, if we Nigerians do away with CORUPTION! It's in habit of all. We need God's divine visitation. God bless Nigeria with listening and God fearing leaders and follower. (Oyeniyi Ayodeji Oyedotun)
Global Disparity| Looking beyond Africa (Nigeria), we see a global disparity that has taken shape in the last three decades. Many countries that were thought to be economically advanced and "stable" have witnessed huge economic crisis that has shake their policies to the roots. Its interesting what is happening globally today. Although coming at the cost of war and conflicts, many African countries (and other developing and emerging economies) are consolidating their democracies and putting in place many policies and reforms that will entrench sustainable growth and development. Contrary to what is happening in Africa, the recent downgrading of America's Investment Rating from AAA to AA+ for the first time since 1941 by the Standards & Poor's should paint a better picture of the direction in which growth in take in the global space in subsequent decades to come. It is important to also mention that the recent upheaval against Wall Street (Occupy Wall Street) shows that times are truly changing a phenomenon some call response to "Corporate Greed". These developments fits neatly with the struggle to recover from deficits in many European countries leading to many European government budget cuts and resulting in the worst ever protest and street rioting all of which should make us understand that there is tendency for multinationals to begin to look into Africa for business purposes. In fact countries like UK and USA that have delayed their moves to spread their businesses to Africa are already beginning to reap the brunt of their inactions. Lets take a vivid look at the disparity in a chat I present below.

In 2007, real GDP growth rates for emerging/developing economy was 8.7% when compared with 2.6% for advanced economies. Despite the fact that both regions’ growth rate declined, it remained at 6.5% and 2.3% for emerging and developing economies and advanced countries respectively in 2011. The disparity lingers on to the present since it started from the year 2000.

Another way the global disparity is seen is the case where certain countries such as Nigeria which are endowed with high population are coming higher up the matrix when interpolated nominal GDP. This is illustrated below.
The Convergence Theory | We can use the convergence theory to partly justify the stand that Nigeria can outstrip Canada and Italy. Its a simple economic theory that combines some aspects of endogenous and exogenous growth theories. The idea of convergence in economics (also sometimes known as the catch-up effect) is the hypothesis that poorer economies' per capita incomes will tend to grow at faster rates than richer economies which will be witnessing what Robert Solow called "steady state". Consequently, what we now see will be a resultant: both emerging/developing economies (BRICS+N-11 Nigeria inlcusive)  and the advanced economies should eventually converge in terms of per capita income. Developing countries have the potential to grow at a faster rate than developed countries because diminishing returns (in particular, to reproducible capital) are not as strong as in capital rich countries. Furthermore, poorer countries can replicate production methodologies, technologies and institutions currently used in developed countries making them achieve quicker growth rate within a short time.
The essentially of good operational environment is inevitable as we call for peace across the African continent. A social externality cost is incurred and recipe for disaster guaranteed when young people lack skills that can lead to gainful employment due to poor education funding especially in highly populated countries. Hence we call for more funding for education. Needless to say that funding education will lead to production of entrepreneurs who will ultimately stimulate wealth and income creation and a further growth in agricultural and service sector will ensue due to persistent technical progress. 

My answer to the question remains a yes, Nigeria can!

Seun Oyeniran.

Saturday, July 02, 2011

Can Nigeria Outstrip Italy and Canada?

As I start my MSc dissertation this week, I keep jumping into several details that excites and fascinates me. I know the caption above may sound very controversial, but that's just how journalists are beginning to ask the Goldman Sachs team. Its not just the question in itself that seem interesting, the mere fact that  these questions can be asked is a testament to the shift in the global economy and it makes me sit down and press forward to focus my [re]search light on this area. And I think I will be talking about this a bit more for weeks to come. 

Whether or not the Nigeria's vision 20/2020 dream is built on this postulation is not so clear but materials available at the National Planning Commission office show some elements of Goldman Sachs Report on N-11 which I have discussed briefly on my previous post on this blog. The N-11 term is more than an acronym, it is a distinct group of countries in itself, albeit one defined by population. Following the BRICs (Brazil, Russia, India, China) are the N-11 which includes: Bangladesh, Egypt, Indonesia, Iran, Korea, Mexico, Nigeria, Pakistan, Philippines, Turkey and Vietnam. Mainstream economic growth theories put forward by Adam Smith and Alfred Marshal have pointed out that labour and capital are two fundamental variables that can propel a country's productivity. Other neoclasical economists have extended this aspect of labour to include particularly human capital. It is thus expected that a country with high population will have a high growth potential (i.e. GDP). Inadvertently, if we agree with both classical, neoclassical and modern theorist, Nigeria as a country can leverage it vast human capital resources and youthful population to foster economic growth and development (remember 'demographic dividends' and youth 'bulginess' from previous posts?). Building up on stories of gloom for Nigeria being as a failed state (as put in some recent publication with questionable sources), we are once again faced with reports of hope. Whether they are forecasts targets or estimates, the Nigerian government is seen to align in this positive direction of making the future brighter than the past.
 "One of the most remarkable phenomena of the past couple of years is just how enthusiastic the leaders of some of the N-11 countries seem to be about changing policies and wanting to engage in globalization. Nigeria is one country that deserves special mention, and is certainly a country that has captured my attention. With a population close to three times that of South Africa, Nigeria's ability to deliver on our 'dream' could be vital for the whole African continent" Jim O'Neill (November 23, 2007)
Nigeria has the scale to be important in global economies if it can deliver sustained growth. Although not very popular like other N-11 countries e.g. Korea and Mexico, but it is precisely this uncertainty and the fact that Nigeria lie well off the radar screens that makes it so intriguing. If Nigeria defy skeptics and take concrete steps towards addressing areas of weakness, her growth could be much higher. Certainly, improving global conditions while the global backdrop is benign is likely to offer the best chance of weathering the next storm.

So the question of whether Nigeria can outstrip Italy and Canada has already be shown to be possible in the  figures above showing GDP estimates in 2050.These forecasts are subject to inaccuracies caused largely by variable that were not considered prime of which is the climate change. While that is a global perspective, How we handle our systemic issues (i.e. violence, crime, corruption, political stability, etc) as a nation will determine to a large extent where we will be in the nearest future. I will be dedicating the next few weeks to considering factors that may or may not make us achieve first the vision 2020 targets as well as the N-11 vision 2025 and then 2050.

However, just as someone was asking me after my presentation on Nollywood in Lancaster, UK whether it was a 'Good People, Great Nation' propaganda I was doing know ([laughs]), I want to answer a similar question headlong: these blog posts are not for propaganda or to put a government in a good light or otherwise. Although they carry element of good will to both the people and the government of Nigeria, they are purely academic and aimed at stirring further research and discussion. 

Seun Oyeniran.

Downloads . (n.d.). NIGERIA NPC - National Planning Commission | National Planning Commission Offices . Retrieved July 1, 2011, from

Goldman Sachs | BRICs. (n.d.). Goldman Sachs. Retrieved July 1, 2011, from

Monday, June 20, 2011

Wrong Family Up-Bringing in Nigeria - Its Long-Run "Negative Y-Index Cost" and Externality

Young Nigerians in the UK
I don’t know if you have received one of those highly forwarded messages with strings of e-mail addresses attached to it? I actually received one of such e-mails recently from an elderly friend titled: “Letter to Nigerian Parents”. Quiet unusual of me, I made effort to read through the entire message whose author remains anonymous; it became the main idea behind this particular writing.
This work starts by lamenting on the idea of not allowing children to have work experience in Nigeria. While many of UK-born, white, English undergraduate go on holiday especially during the summer, they all get jobs to keep themselves running. In fact many of them as early as 18 have become so self-sustaining and ready to leave their parents to begin their own life. These are issues I have experienced through my stay in the UK. The case is otherwise for the Nigerian child who absolutely dependence on parents for food, clothing, housing and shelter. The anonymous writer criticizes this and I share a similar view too.
“I also watched Richard Branson (owner of Virgin Airline) speaking on the Biography Channel and, to my amazement, he said that his young children travel in the economy class -even when the parents (he and his wife) are in upper class. Richard Branson is a billionaire in Pound Sterling. A quick survey would show you that only children from Nigeria fly business or upper class to commence their studies in the UK. No other foreign students do this. There is no aircraft attached to the office of the prime minister in the UK – he travels on BA. And the same goes for the Royals. The Queen does not have an aircraft for her exclusive use…Kate Middleton (lady who married Prince William) drives a VW Golf or something close to it. But there's one core difference [between] them and us (generally speaking). They (even the billionaires among them) work for their money, we steal ours!”
 The anonymous author may sound rather ‘hard’ on his choice of words but he makes absolute sense.
It’s not that parents should hands-off their children affairs but rather, they should tailor it towards them attaining independent economic sustainability in life. Parents in Nigeria, especially the wealthy ones are used to giving their children pocket money that sometimes beat top executive’s salary. Many young people from Nigeria that I have personally met in the UK are living the Jenniffer Lopez, Victoria Beckham, or Parris Hilton kind of lifestyle.
“we have Nigerian children who have never worked for 5 minutes in their lives insisting on flying "only" first or business class, carrying the latest Louis Vuitton ensemble, Victoria 's Secret underwear and wearing Jimmy Choo's, fully paid for by their "loving" parents”
Even the average and middle-class parents are following this trend. You now see many Nigeria campuses flooded with expensive cars driven by young boys and girls who have not worked for five minutes in their lives (the yahoo + syndrome is another issue on its own). Many of them go out with security escorts not because they need them for protection but for someone to be able to carry them into the car when they are overdrunk from parties. What kind of a life is that? And what is the implication of this for our country Nigeria?
First is that it piles up cost for the future. I’ll just call it “negative y-index cost” [i.e. cost to society created by young people which is similar to marginal social cost created by marginal private benefit] emanating from wrong family up-bringing. It leads to a generation, as we are now seeing in our society, that is half-baked academically, physically and mentally. With absolute dependence on parent for livelihood, young adults are liable to become a minus rather than a plus to the nation. While this is the first problem that will emanate from this trend, a second issue is a systemic one that leads to poor productivity in the Nigerian state. So, what happens within the family creates an external, lon-run cost that will be very difficult for us as a nation to recover from if something urgent is not done about this current trend. Space cannot allow me to talk about the poverty we will be carrying on into the future since our competitive value as a nation will drop drastically. This goes first to parents. Spiritual leaders: Pastors and church leaders also have a lot to take home from this. 

Seun Oyeniran.

A copy of the anonymous e-mail "Letter to Nigerian Parents" can be found here

Saturday, May 14, 2011

Repositioning Nigeria's Position

As I look through the media recently I pick a wave of interesting facts. What actually stirred my quest was the outcry against the war in Iraq shown in an IVAR video on facebook. As I dig deeper I realized that most war have direct or indirect economic implications and quite interestingly Nigeria is at the core of all the issues raised. Why I eventually decided to write this piece is to throw more light on the critical need for us to move our attention off crude oil and reposition ourselves as a country, to what our fore fathers handed down to us during our independence, a culture of hard work and creativity.

‘Depression 2.0’: March towards 2050, The Period of abundant oil opportunity or Misery
More than ever before the myth that crude oil production is increasingly diminishing is now hitting the world like never before. The industrial doomsday scenario put forward by peak oil theorists isn't just for far flung voices on the Internet anymore. A term shell itself (the second largest company in the world) call ‘Depression 2.0’. Not that crude oil reserves all over the world is running out, in fact the world has enough to sustain energy, productivity and growth globally, the critical issue lies fundamentally in the fact that it is becoming very expensive for firms to afford its mining and processing which on their own attract tremendous oil usage. Apart from the critical link oil has with many of the recent war that truncated global peace, the adverse effect of oil to the economy and society is obvious. The growing volatility of oil prices together with the externality it creates such as global warming, human right violation, pollution, blocking of alternative energy sources and in our own Nigeria context, corruption should make us think of alternative economic engines that crude oil. As the demand for oil buts up against actual production and remaining reserves, the climbing price of oil will cause the gross domestic product of all nations to decline.

Crude oil or Palm oil: A dire need to diversify our economy

The figure above is from one of my recent presentation on Nigeria’s Creative Economy. It’s obvious that while crude oil production fell between 2006-2008, the value and share of creative goods exported (and produced) by Nigeria increased. It was interesting to note that income per capita also increased as returns from oil dwindled. This is a practical exhibit to prove that earnings from our local production capacities has the ability to propel growth that envisaged in previous years. Yes, we have crude oil, God blessed us with it. But going by the recent trends, it is becoming increasingly obvious that an economy that solely depends on crude oil production is as volatile as the prices of the crude oil itself. While Libya’s issue has caused Nigeria, UAE and Kuwait to jack up our daily production quota, we may benefit from the oil boom. However, this may prove contrary to the countercyclical domestic demand policy that proved useful for Nigeria during the time of depression in 2008/2009. What helped us then, when prices of oil fell was the fact that our agricultural sector and other domestic creative capacities especially within the West-African sub-region helped cushion the effect. We should not lose focus of these benefits in the face of the recent sudden rise sudden hike in OPEC crude oil prices to distract us from the need to pay attention on diversifying the economy. From my research on agriculture, palm oil, one of our main produce in the 60s and 70s has the capacity to produce jobs quite dynamically to eradicate poverty than crude oil would do. The non-oil Sector is the way forward after the elections. Most developed countries are willing to seek cheaper source of raw material input for their industries, the more reason why China is becoming very popular.

Let me try to keep this short from here as I conclude. Nigeria’s GDP was remarkable in 2010 at $207 billion or $2,400 per capita on a purchasing power parity basis, with real growth of 6.8 percent. The International Monetary Fund's World Economic Outlook predicts GDP will increase 7 percent in 2011. What this means to a lay man is that the total value of goods and services produced in Nigeria in 2010 was higher than that of 2009 and this trend is projected to increase in 2011. In fact by 2012, it is expected that Nigeria’s GDP would exceed South Africa (which is currently Africa’s leeding economy). Achieving vision 20/2020 seem sceptical and more pessimistic is to assume that we can’t achieve it, but it’s clear that the economic records of 2010 hinges upon internal domestic activities and policies that strengthened local production capacity. Many of the foreign reserves (down by 23% from 2009) are been depleted to fund infrastructural projects, which is reasonable in my personal opinion as long as those infrastructural project will continue to yield increasing domestic factor productivity and attract FDI into Nigeria. Consolidating democracy as seen in the recent April election, building on the banking and financial sector reform so as to make credit available for local entrepreneral engagements as seen in the ‘AMCON to NPL buy-offs’, building on gains from telecommunication and linking them directly with the financial systems and implementing plans for the energy reform will go a long way in 2011 and vision 20/2020 in general. In fact, the Nigerian Stock Exchange All Share index closed on April 18 at 25,429, up 1.6 percent. It is up 2.7 percent since the end of 2010.

As I go on to carry out further research on Nigerian non-oil sector and its implication for sustainable economic growth and development, some other seemingly important issue is burning in my mind. We needs to address this urgently and it has to do directly with how the Nigerian parents are bringing up their young ones. We need to consider if the idea that ‘my children must not suffer what I suffered’ is actually a good idea for our society. Maybe it’s a slogan that has allowed corruption to thrive and the resultant drop in quality and work ethics in Nigeria, especially among the youths.

Seun Oyeniran


Tuesday, March 22, 2011

What the Elections Hold For Nigeria: Gloom or Glory (An Economist View)

From the greatest of economic optimism to the highest forecast of gloom, Nigeria is always tossed in between when looked through the knowledge prism of intellectuals around the globe. Global Trend 2025 Report forecast Nigeria to be part of the ‘arc of instability’ due to its youthful age structure and rapidly growing population. This ‘youth bulge’ is expected to remain on rapid growth trajectories and according to this report, unemployment conditions must change ‘dramatically’ to avert instability and state failure. This report holds element of truth, but there is greater optimism. My personal findings working with young people in Nigeria and been a youth myself in my mid-twenties, I have come to understand more fundamentally that the youth, as much as they hold the ability to ruin the nation as seen in the case of Niger Delta militias, they also have the capacity to transform the Nigerian economy. A phenomenon I call the ‘Y-index’ (i.e. youth index). Another intellectual, Okonjo Iweala calls it ‘demographic dividends’. Together with growing technology in the area of telecommunication and the Nigerian Banking reforms (see figure below), the impact the telecoms industry is playing in the banking sector is now so obvious. This provides a bouyant financial sector for core economic activity. Nigeria is on its pathway to growth and that is more so now than ever before. Approaching elections, due in April 2011 (couple of weeks time), is likely to usher in a period of political instability that will probably see a significant increase in political tension. This is the opinion of a school of thought,but on the other hand, we as a nation have become wiser, thus this political tension can be averted or at least minimized in order for Nigeria to attain the required economic growth as a nation. Again, the youth has arole to play in achieving this. Economic expansion will be buoyed by robust performance in the non-oil sector. Real GDP growth is expected to average over 6.5% in 2011-15, provided political tension do not alter these forecasts, Nigeria can be seen to be on its path to economic glory.

Looking Beyond the BRICS: Nigeria, Among the Emerging Emerging Markets 'Frontiers'
Key Data: GDP growth: 5.8%, GDP: $248bn (PPP: $397bn), Inflation: 11.2%, Population: 155.2m, GDP per head: $1,600 (PPP: $2,560).

The biggest concentration of overlooked markets is in Africa (which is in many ways an overlooked continent). In 2011, according to The Economist (2010), there will be a great deal about the unexpected merits of ‘frontier’ economies such as Nigeria who are poorer and riskier than the emerging BRICS (Brazil, Russia, India and China). Multinationals intending to invest in foreign countries will be wise to do so now in order to enjoy location economies while leveraging the valuable skills in Nigeria to increase profitability and profit growth. Based on my recent work, I'll recommend two major non-oil sectors for profitable investment: Agricultural sector and the film industry (Nollywood).
Although with very high volatility, moving into Nigeria can provide a foreign company the needed vitality. Companies that move first will enjoy lots of advantages. They will be able to forge deals with aggressive young companies, strike infrastructure deals with local governments. And they can shape the tastes of future consumers. Companies that succeed in these neglected emerging markets are not only putting down roots in the world’s most fertile soil. They are giving themselves a chance to establish business habits (learning experiences/curves) for years to come. Many reforms are on-going in Nigeria and many is still to come. After all, there are hardly easy markets.

Seun Oyeniran

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