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Reforming the Unreformable

The MIT Press

Chapter One

How do people called upon to reform the economy of their country and manage a turn-around begin? Where should they turn for guidance? Although many economics textbooks devote pages to the theoretical aspects of reform, there are no guidebooks, manuals, or toolkits on the process of designing and implementing an economic reform program in a difficult low-income country, such as my home country of Nigeria. Even if there were manuals or toolkits, countries' economic and political circumstances and other "deep fundamentals" such as cultures and ethnic and religious makeups can differ greatly, so that guides that might apply in one country might not work in another. But, I thought, surely there must be lessons learned from efforts to reform individual countries that would be relevant to those starting out on the path to reform. All this led me to think deeply about the circumstances that had led to current efforts at economic reform in Nigeria.

Nigeria has had a checkered political and economic history. It is Africa's largest country by population, with about 160 million people, more than 350 ethnic groups, and as many languages. It was cobbled together and colonized by the British in the nineteenth century. Like many other African countries, it won independence in 1960. It went on to put in place a parliamentary democracy akin to Britain's, with a prime minister, a president who was a ceremonial head of state, and a bicameral legislature. This era, generally known in the country as the First Republic, lasted from 1960 to 1966 and was marked by ethnic tensions (fanned by many of the country's leading politicians), by poor governance, and by corruption.

In a way that outsiders often fail to understand or fully grasp, Nigeria has always been complex to govern in a way outsiders do not often understand or fully grasp. British colonialists and Nigerian politicians regularly exploited ethnic, religious (Christian, Muslim), and regional differences to divide the country rather than to build a nation. As a result, tensions abounded in the early days of the country. These tensions led to a series of military coups in 1966–67 and ultimately to a civil war—the Nigeria-Biafra war. The Ibos from the southeast of the country felt they had borne the brunt of ethnic tensions that exploded in the north of the country after the 1966 coup, in which northern leaders were killed in a military coup largely led by Ibo officers. Thousands of Ibos were killed in rioting in the north. Ibos fled to the eastern part of the country, where they seceded as Biafra. The war lasted from 1967 to 1970, when hostilities ceased and the focus turned to reintegration, reconciliation, and reconstruction.

The coups and the war paved the way for almost three decades of military rule, interrupted only briefly from 1979 to 1983 when General Olusegun Obasanjo returned the country to civilian rule in the so-called Second Republic under President Shehu Shagari. The 1983 coup of General Muhammadu Buhari ensured that the military stayed in control of political power until the return of democracy in 1999 under President Obasanjo. The years of military rule were politically and economically disastrous for Nigeria. Institutions of state were severely undermined as meritocracy gave way to mediocrity. Corruption, already burgeoning under the early politicians, became entrenched under military rule, and a kleptocratic elite with a very limited vision of the future of the country came into being. That elite remains largely intact today, even under democracy, and may constitute one of the biggest stumbling blocks in the way of Nigeria's progress.

On the economic side, Nigeria was and still is a well-endowed country. With the world's eighth-largest population, it has a big domestic market—in fact, the largest in Africa. Before the 1970s, its economy was based mainly on agriculture, and more than 80 percent of the population lived in rural areas. It exported a substantial share of the world's cocoa, palm oil, groundnuts, cotton, hides, skins, rubber, and coffee. Along with these agricultural products and commodities, it also exported tin, coal, and other minerals.

Exploration for hydrocarbons began as early as 1907. In 1956, crude oil was discovered in commercial quantities at Oloibiri in the Niger Delta. This discovery opened up the oil industry to investment from multinational oil companies such as Mobil, Tenneco, Amoseas (now Chevron Texaco), and Agip. Production of crude oil in commercial quantities began in 1958 at 5,000 barrels per day (bpd) and reached 17,000 bpd by 1960 (NNPC 2008). Both production and exports rose rapidly except during the Nigeria-Biafra war. By 1970, after the war, production had risen to 1 million bpd, and by 1974 (at the height of the first global oil shock) it had reached 2.26 million bpd. As of 2010, Nigeria was producing about 2.3 million bpd. Its reserves of oil amount to 37.2 billion barrels—the tenth-largest reserves in the world (OPEC 2011). Nigeria also has 5,110 billion cubic meters of natural gas reserves—the ninth-largest in the world (ibid.). In addition to the hydrocarbons, Nigeria has considerable undeveloped deposits of more than thirty solid minerals, including bitumen and tantalite.

The surge in oil production in the 1970s, in conjunction with the oil shock, had profound effects on the shape and structure of Nigeria's economy and also on its politics. A diversifying economy before 1970, Nigeria quickly turned into a monoculture economy based on oil. The surge in oil revenues was not managed properly, and the economy was awash with considerable liquidity (including in foreign currency) chasing too few goods. This quickly manifested in all the classic signs of Dutch Disease—a sudden influx of foreign-exchange income that causes inflation and results in neglect of investment in other parts of the economy. Nigeria's currency, the naira, became overvalued. The terms of trade turned against agriculture because the high value of the naira, made it easier and cheaper to import agricultural products than to produce them at home. With the adverse policy impact on agriculture and its neglect, there was tremendous out-migration of young people—labor—from rural to urban areas, further compounding the problems of the agriculture sector. Agriculture as a share of the value of exports declined from 75 percent in 1965 to 3 percent in 2010. Oil became the predominant export, going from 25 percent of exports by value in 1965 to about 96 percent by 2010. In four decades, oil became the primary source of revenue for the Nigerian government, averaging more than 75 percent of government revenues on an annual basis.

In 1985–1987, when oil prices plunged to US$8–10 per barrel and Nigeria could no longer pay its bills, there was a brief attempt to reform the economy and change its direction. Under General Ibrahim Babanginda, a structural adjustment program was implemented with the support of the International Monetary Fund (IMF) and the World Bank. While it recorded some successes in terms of fiscal tightening, reform of import licensing, and freeing up some sectors of the economy to the private sector, the fiscal stringency introduced cut into spending for the education and health sectors, affecting the well-being of many citizens, young and old. The devaluation of the naira cut into the purchasing power of ordinary Nigerians and further alienated them from the reforms. With public hostility increasing, the Babanginda administration abandoned the reforms half way, thus undercutting their impact. The episode left a bad taste in the mouth of many Nigerians and made them leery of reforms.

The economy never quite recovered from the distortions introduced by the almost exclusive reliance on income from oil and the inability to translate this oil wealth into better living standards for the majority of the population. Oil money virtually destroyed the social and moral fabric of society. Corruption became rampant during the four decades of mostly military dictatorships, reaching its height during the rule of General Sani Abacha (1993–1998). The brief periods of civilian rule were no better in terms of corrupt behavior of top officials and politicians.

From the mid 1970s to 2001, Nigeria earned more than US$300 billion from crude oil. Yet over the same period Nigeria borrowed abroad unwisely and unsustainably, accumulating up to US$30 billion in debt to the Paris Club of Creditors. This debt became difficult to service, especially during times of low oil prices, as in the mid 1980s. Though a great deal of oil revenue and borrowed money was invested in much-needed infrastructure, education, and health services, a lot was wasted on "white elephant" projects. A prime example is provided by the Ajaokuta Steel Mills, where an investment of more than US$5 billion yielded no returns to the economy.

A significant part of the resources disappeared into the hands of top-level and middle-level public officials and politicians, most of it ending up outside Nigeria, deposited in foreign bank accounts or used to buy or invest in foreign assets. By 2003, the dawn of the second Obasanjo administration, the economy was growing more slowly than the population: while the economy was increasing at an average 2.5 percent per year over the decade, the population was growing at 2.8 percent per year. Inflation soared into the double digits, foreign reserves fell, public institutions were very weak, and the manufacturing sector operated at low levels of capacity utilization. The structure of the economy remained skewed in the direction of hydrocarbons. Unemployment was high, even among recent university graduates, and Nigeria's human development indicators were among the worst of the low-income countries. It was clear that something had to be done to turn the economy around, and the newly democratically elected President Obasanjo saw an opportunity to make a difference.

My introduction to economic reform in my country really began in 2000 when, at the invitation of President Obasanjo, I took a leave of absence from my job at the World Bank to return to Nigeria for six months to serve as his Economic Adviser. My remit was very specific: advise the president on how to manage Nigeria's debt so that the country could begin the process of seeking and obtaining debt relief from its largely Western group of official creditors, all members of the Paris Club.

I first met President Obasanjo in 1999, shortly after he won the elections but before he was sworn in as president. He had decided to visit important Western capitals to engage in discussions about Nigeria's problems and to share his vision and his agenda for the country's economic and social recovery from the "dead" years of General Abacha's dictatorship. His public relations adviser, Onyema Ugochukwu, a relative and a close friend of my husband, thought that he needed additional briefing on topical international economic issues of the time, as well as specific advice on how to approach Western leaders on issues of concern to Nigeria, such as lifting the country's debt burden and improving its image.

Onyema Ugochukwu phoned me one Saturday morning in March 1999 and asked me to put together a brief that would help President Obasanjo prepare for his proposed world tour. The brief I put together focused on Nigeria's most pressing economic problems, especially its debt, and on how the international community could contribute to solutions. In particular, I suggested to the president that he might make the case to the international community that their support to solve pressing economic problems in Nigeria would yield the country a much needed "democracy dividend" after decades of military rule. The president liked the brief and the notion of a "democracy dividend." He used the expression extensively throughout his term in office.

I met President Obasanjo in person when he came to the United States a few weeks later. In January of 2000, he requested that I return to Nigeria as his Economic Adviser for six months. My work in those six months focused on sorting out the extent of the country's most important financial liabilities (including its US$30 billion in external debt), on getting the seven different offices managing different parts of the debt to cooperate with one another so we could begin to reconcile figures, and ultimately on creating a national Debt Management office (DMO) to bring some clarity and rationality to debt management. This work laid the foundation for my return as Minister of Finance three years later.

Building an Economic Team

In 2003, President Obasanjo won a second term in office and decided to focus much harder on reforming Nigeria's faltering economy. He needed a modern and technocratic finance minister who was familiar with the fierce politics of the time. My name was suggested to him by Lady Lynda Chalker, a former International Development Secretary of the United Kingdom based on recommendations from two other reformers—Nasir El Rufai and Oby Ezekwesili—with whom I had struck a friendship during my short stint at home. Since President Obasanjo was already familiar with my work, I seemed a logical choice, so he rang up my boss—James Wolfensohn, president of the World Bank—to ask him to persuade me to resign my job as vice president and corporate secretary of the World Bank to become Nigeria's Minister of Finance.

When Jim Wolfensohn approached me, I was torn and conflicted on both a personal and a professional level. On the personal level, my financial situation was different than it had been in 2000 during my advisory stint at home. Then, I had been able to forgo some of my earnings and benefits to serve because we had only one child attending a university. By 2003, we had two, and a third getting ready to go, and the main question that my husband and I had to confront was how to manage all the financial obligations without going into debt if I went home to serve President Obasanjo. On a professional level, setting up the Debt Management Office had been an eye-opening experience and at the same time a fulfilling one. I thought this would be an unprecedented opportunity to serve my country again, with a new democracy in place and a president who seemed open to change. But I had also experienced firsthand some of the complicated politics of implementing reform. Even with an issue as technical as debt management, there were people who were vested in the status quo and did not want change. It seemed to me that reforming the management of the country ' s debt would be a picnic in comparison with the challenges I would face as a Minister of Finance. This time, virtually every aspect of the economy would have to be reformed. A comprehensive strategy would be needed to stabilize Nigeria's volatile macroeconomic environment, tackle endemic corruption, and redress various structural features of the economy hindering private enterprise. The country's woeful social indicators and abysmal delivery of basic services such as power, water, and transportation would have to be addressed. The prospects were daunting.

Surely designing and implementing such wide-ranging reforms could not be done by one person alone. Were I to accept, I would need advice on how to approach that enormous task. And accept I did, after two weeks of reflection and consultation with family members and friends, many of whom were opposed to the idea because they felt it was too great a risk to my professional reputation. Many felt that somehow, to quote one of my friends, "my reputation would be rubbished"—either by those who would be against me in government or others outside.

Jim Wolfensohn proffered a great deal of wise advice that tended to confirm my own feelings that this could be a unique opportunity to give back to my country. Because the World Bank had a rule mandating resignation for those accepting policy-making positions, I resigned from my position there once I had decided to accept the offer from Nigeria. The financial problems were sorted out by President Obasanjo's approach to the United Nations Development Programme (UNDP) to open a Diaspora Fund similar to the arrangement they had worked out for Afghanistan and other countries. Returning members of the Nigerian diaspora would be paid their previous salaries for a year or two until they could make adequate financial arrangements to take care of their existing obligations abroad. Several of us returning to Nigeria benefited from this fund, and it made a clear difference in our ability to return at short notice. The arrangement later became controversial. Referred to in the news media as the "dollar salary" saga, it was seized on and played up over and over again by anti-reform elements to imply that I was somehow less than committed to Nigeria because I was being paid more than the other ministers, and in foreign currency. Neither the circumstances in which I took the job, nor the fact that I was not the only official being thus paid, nor even the fact that it was a transitional arrangement and that I gave it up during my last 15 months of work got much play in the media.

As I contemplated the tasks before me, there were no manuals to tell me what to do, so I turned to someone who had just had some success in managing economic reforms. Amaury Bier, Brazil's former deputy finance minister, had just joined the Board of the World Bank as Alternate Executive Director after four years of implementing successful economic reforms under the Cardoso administration. Jim Wolfensohn suggested I talk to him. How did they do it? What practical day to day steps did they take?

The first piece of advice Amaury Bier gave me was critical. "You will need to form an Economic Team of like-minded people who can stick together to fight the tough battles," he emphasized. In Brazil, he had learned the hard way, a team was essential to bring different perspectives and expertise to the design of the reform program, but, more important, to help push through the cabinet the approval of proposed reforms. Without team members supporting one another in cabinet, important reforms displacing vested interests could easily be blocked, he emphasized. He also counseled that building team spirit and keeping the team working together would be important as the reforms began to bite, since some people would be interested in dividing the team and fomenting dissension. To avoid this, Bier urged, the team should meet frequently—at least once a week—to discuss progress and problems.

A second piece of advice Bier gave was equally important: there was need for a comprehensive strategy that would set out major challenges and the reforms needed to turn these around. In particular, it would be important to build in the sustainability of such reforms right from the start to avoid later reversals. One good tool was the enactment of legislation to underpin reforms.

(Continues...)

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Excerpted from Reforming the Unreformable by Ngozi Okonjo-Iweala Copyright © 2012 by Ngozi Okonjo-Iweala. Excerpted by permission of The MIT Press. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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