Impact of global economic crisis on Nigerian business environment

¶ … Global Economic Crisis on the Nigerian Business Environment

Nigeria is a land of stark contrasts, a country in which the extremely wealthy live together with the starving individuals. This is highly intriguing in a context in which the country's economy is one to reveal the highest growth rates. The aim of this paper is to assess the business environment in Nigeria and to answer several questions relative to the impact the contemporaneous economic crisis has had upon the Nigerian business environment.

General Description of the Nigerian Business Environment

In terms of measured gross domestic product for 2008, Nigeria is ranked as the 34th largest economy of the globe, with a GDP of $338.1 billion. Business operations in the African country are primarily focused on the usage of the land's natural resources, mainly natural gas and petroleum, tin, iron ore and arable land -- agriculture is a great part in economic development, accounting for 18% of the national income, together with services with 31% and industry with 51%. Despite this structure, the labor force by occupation reveals a reduced efficiency of the agricultural operations as the field only generates 18% of the GDP but employs 70% of the entire labor force; 10% are employed in industry and 20% in services (World factbook, 2009).

Oil operations are the main contributor to national income, with significant GDP increases being registered in 2007 and 2008 in a context of growing international oil prices. Businesses in Nigeria are currently registering increased operational costs due to the need to adequately respond to environmental challenges. The country's main difficulties include soil degradation, deforestation, water pollution, desertification or the growing loss of arable land. Additionally, the pressure to respecting environmental issues has increased in Nigeria and Shell for instance, the largest oil producer in the African country, has been subjected to fierce criticism (Manby, 1999).

Another challenge for the business environment belongs to the demographic category and refers to the reduced life expectancy of the population -- only 46 years. In the highly developed western economies, a 46 years old employee is a useful addition to an organization as he is highly trained and skilled and the investments in training him are minimal, while the benefits are highly increased. In Nigeria on the other hand, employees may well not even reach the age of 46. A second demographic challenge is posed by the very high risk of contracting an infectious disease. This is threatening for all employees, as well as potentially foreign manager / owner and increased absenteeism due to infectious disease generate increased financial loses.

In terms of a structure of the Nigerian business environment, it becomes obvious that the country is showing a deficit relative to small and medium size enterprises. The reasons why SMEs fail to succeed in this environment generally revolve around denaturized public perceptions over their activities, political instability, economic turmoil or the failure of the national authorities to support these types of organizations. Additionally, poor infrastructure, political corruption and an uneven distribution of natural and human made resources also constitute reasons why the SME community plays a reduced role within Nigerian business (Mumbula, 2002).

Historically speaking, the Nigerian business environment has been dominated by the intense presence of foreign business operators, with the actual presence and role of local entrepreneurs being limited. While the same is true for today, modifications have occurred in percentage, meaning that the presence and role of local entrepreneurs is gradually increasing. "Business in Nigeria has long been, and still is, in the hands of foreigners: British, Syrio-Lebanese, Greek, French, Indian and a few other nationalities including, in recent times, a handful of Americans. It is only recently that Nigerians have attempted to try their skills in the competitive world of business. […] Business comparable in size to those operated by foreign companies has been alien to the indigenous entrepreneur" (Smythe and Smythe, 1960).

1.2. Problem analysis

The past decades have been characterized by intensifying forces of globalization, meaning primarily a transcending of national values from one country to the other. These values include a multitude of fields, such as politics, culture and most importantly to this research, economics. The globalization of economic forces translated into increased abilities for territorial expansion and increased abilities to benefit from the comparative advantages of numerous global regions (such as cost effective labor force or an abundance of natural resources). However, the process has been forcefully disclaimed by parties pointing out the disadvantages of globalization, such as a loss of local cultural identify, the exploitation of natural resources, an uncontrollable expansion of corporations and multinational organizations or, the one most important to this paper, the globalization of business risks.

1.3. Purpose of Study

The most relevant example of how the forces of globalization materialize in a transcending of business risks from one country to the other has been offered by the contemporaneous economic crisis. Emerged from within the United States in a context of an unsustainable economic model based on consumerism and culminating with the real estate crisis, the crisis soon took over all fields of the American economy. And not only this, it also soon came to affect all of U.S.' economic partners and their partners in turn.

The effects of the economic crisis were multiple and often diverse based on each particular situation in the assessed countries. The strategies developed and implemented in resolving the financial difficulties were as such also diverse. While in the U.S., the new Obama administration implemented the TARP, or the Trouble Assets Relief Program, the U.K. officials discussed a reduction of the value added tax. These strategies were as such based on the particular consequences of the crisis within each country. Given a status quo in which an international analysis reveals varied impacts, it is necessary to conduct an individual examination of each country of interest. The purpose of this study is then to assess how the contemporaneous economic crisis has impacted the business environment within Nigeria.

1.4. Relevant Research Questions

a) What are some general impacts the internationalized financial crisis has manifested within the Nigerian business environment?

b) Oil is the main export commodity in Nigeria. What role has oil played in the crisis?

c) What other commodities does Nigeria export, aside from oil, and how has the economic crisis impacted the business sectors exporting the respective commodities?

d) How have the Nigerian authorities responded to the crisis and to what extent have they managed to achieve the desired goals?

1.5. Statement of Hypothesis

The statement at the basis of this paper revolves around the idea that despite its limited economic abilities and interactions with the outside world (in trade operations other than oil), the economic crisis has left its mark upon the Nigerian business environment in statistically identifiable ways.

1.6. Definition of Terms / Concepts

This section is focused on presenting not necessarily the unfamiliar terms and concepts, but rather those issues which are discussed in the analysis and which require a thorough understanding.

Business environment -- the totality of organizations, regulations and players that make up the environment in which business operations are being conducted. Major representative figures of any business environment include federal legislations, small and medium size entities, large or even multinational corporations, organizational employees and so on.

Hoarding goods -- a situation in which the population will store large amounts of goods for fear and insecurity of the future; the actions of hoarding are generally perceived as unnecessary and not based on real threats.

Commodity reliance -- the level to which a country relies on a single commodity or a set of commodities as the basis for its international trade operations and the main generator of income in the GDP.

Historical background -- a retrospective look at the past features of a business environment in order to better understand its current status.

International involvements -- the degree to which global organizations or other countries will become engaged in operations within a given country and the effects their involvement will have upon the respective state. The effects can be both positive, such as an alignment to international values, but also negative, such as an uncontrolled exploitation of the country's natural resources.

International trade? -- import and export of commodities to and from one country. The final results are organized into the balance sheet which is constructed on annual basis and reveals either a surplus, when exports exceed imports, either a deficit, when the country has bought more that it has sold.

1.7. Delimitation (Scope) of the Study

Given the information already presented, the scope of this study becomes a clear one -- that of assessing the Nigerian business environment in light of the contemporaneous economic crisis and answering the posed research questions.

1.8. Significance of the Research problem and the jurisdiction for investigating it

The relevance of the research problem is a concept that depends on the stand taken by each individual party. To an international investor that is looking to open a business within the African country, the relevance of the study is increased; so it is for an economist specializing in international affairs. To an average individual within the United States however, the relevance is reduced, with importance only for gathering general knowledge on the country. The jurisdiction of the analysis expands as far as the data is available and does not constitute intrusion on matters of national secrecy.

2. Review of Literature

2.1 Research Tools

The primary tool to be used in the answering of the posed questions is that of conducting research. This tool is based on the analysis of the available information in order to find answers to the posed questions. Based on the sources used in conducting the research, the methodology can be categorized into four main areas:

Primary research -- meaning the analysis of primary information, or that coming directly from the players in the Nigerian business environment.

Secondary research -- or the analysis of information generated by secondary parties, mostly organized in international players that do not directly conduct operations in Nigeria, but which assess the environment's features. Such sources could include economists specialized in international affairs or international organizations assessing global trends, such as the Word Trade Organization or the International Monetary Fund.

Books and peer reviewed research -- this category of research operations is based on the analysis of book and articles in specialized magazines. While the author of this paper will also focus on these sources of information, the current issue of the economic crisis in Nigeria is a relatively new issue and books on the topic have yet to be written. However, relevant information has been found in terms of historical events.

Finally, the last category of research is based on the analysis of articles on the internet. This type of analysis has numerous points of commonality with the previous three types of research in the meaning that peer-reviewed articles, book fragments, as well as primary and secondary information can often be found online. However, the internet provides the user with a multitude of amateurish articles. These can also be found of value, but one has to remember, with all types of research, to consult more resources in order to form an objective and unbiased opinion.

2.2. Historical Background

The Nigerian business environment has been greatly influenced by the British occupation to which the country had been subjected. Following political and armed conflicts, the country managed to gain its independence, but remained far from stability. The lack of an adequate legislation and a strong civilian government took their tool on the business environment, making it weaker than the international average. Rich in natural reserves of oil, the African country has always constituted an interesting destination for foreign entrepreneurs, but an actual business development was historically discouraged by high levels of corruption, poor infrastructure as well as a poor ability for micromanagement.

The first examples in this sense were obvious as early as five decades ago, when the Nigerian women, without jobs in companies, would occupy almost exclusively of the manufacture and trade of textiles. The large majority of these women were illiterate, but they were striving to offer their children better lives; would send them to schools in Europe and would build for them European-like houses (Little, 1973). These women were extremely competent at conducting the textile manufacturing and trade operations, but the scarcity of the resources, the bad roads and conditions of transporting the textiles, combined with barely existent political support, took a tool on the Nigerian textile operations, leading to their gradual demise.

During the 1980s, the government took action in order to restore political and economic stability. They aimed to do this through the implementation of the Structural Adjustment Plan (SAP). With its strategies to reduce the value of the national currency, the endeavor has however given birth to more limitations than advantages. To the business community, it meant that their financial resources were devalued, allowing them decreased abilities to conduct their operations, including the training of their staff members or the purchasing of the required commodities from outside the country. "Most small businesses could not afford to train their workers, and manufacturers found it difficult to obtain foreign exchange to order or purchase machinery and spare parts. There is also the problem of frequent harassment by government officials who extort money from the businesses. Poor infrastructure, including bad roads, inadequate water shortage, erratic electric supply and a poor telecommunications system are additional obstacles. Lack of these facilities cost most firms higher overheads because they have to be responsible for obtaining such facilities at their own expense" (Mambula, 2002).

But not only international businesses were interested in the local oil reserves, the Nigerian officials had also almost exclusively focused on exploitation and trade of oil and oil-based products. As this industry flourished then, others were barely existent. The situation was highly common during the reign of the military forces, which failed to diversify the operations handled by the business environment, leading to a situation in which 95 of the trade income was generated solely by oil based activities, which also accounted alone for 80 of the GDP. In the 1990s, major movements against oil exploitation became common, with the most representative one being the 1994 and 1995 MOSOP, or the Movement for the Survival of the Ogoni People. Despite the failure of the movement, oil related protests in Nigeria have since then gradually increased (Manby).

The international players took notice of the precarious situation in Nigeria as well as the country's business potential and the International Monetary Fund and the Paris Club offered the African country billion dollars in loans to be used on the development and implementation of economic reforms. In 2002 however, an analysis revealed that the Nigerian authorities had proven unable to reform the business environment and additional loan forgiveness from the Paris Club became impossible. A year later, the Nigerian government commenced operations to deregulate fuel prices. Additionally, they announced their intentions to privatize the four national refineries as well as developed and implemented their own version of the IMF's Poverty Reduction and Growth Facility program for fiscal and monetary management, in the form of the NEEDS, or the National Economic Empowerment Development Strategy. In 2005, the country convinced the Paris Club to accept a debt reduction in the amount of $18 billion in exchange for implementation of IMF regulations and subjection to thorough monitorization and control.

As a result, the government in Nigeria began to set the basis for a sustainable business environment which is based on the principles and orientation of a free market. "Since 2008 the government has begun showing the political will to implement the market-oriented reforms urged by the IMF, such as to modernize the banking system, to curb inflation by blocking excessive wage demands, and to resolve regional disputes over the distribution of earnings from the oil industry" (Central Intelligence Agency). Since the country's poor infrastructure is the main challenge in the path of a successful and competitive Nigerian business environment, current president Yar'Adua has committed to additional investments in infrastructure. Additionally, great emphasis is now being placed on developing more fruitful partnerships between the state's institutions and private players in order to improve electricity and roads (Central Intelligence Agency).

2.3. Model(s) and/or theories relevant to the research questions and hypothesis

The first theory at the basis of the analysis sees that the economic crisis has affected the entire globe and that it generated recurrent impacts from one country to the next. These general effects are succinctly summarized as follows:

lower rates of economic growth, reduced gross domestic product and even the threat of economic recession weaker financial systems and numerous situations of banking bankruptcies and takeovers, leading to a reduced trust in the financial sector and its intermediary role to support economic growth increasing unemployment rates crushes of stock markets; credit crunch and decreasing levels of liquidities (Soludo, 2009).

The second theory onto which the analysis of the Nigerian business environment will be based revolves around the main commodities a country exports -- in this case, the crude oil. The economic theory on the export commodities sees that as the price of the respective commodity will increase, the demand for it will decrease and the offer will increase. Vice versa, is the price decreases, the demand will most likely increase, whilts the offer will decrease. The price of exported oil is established within the international market based on demand and supply, with a major role being played by OPEC, or the Organization of Petroleum Exporting Countries. In terms of dependency upon a single export commodity, the theory argues that this is not advisable and that one country should diversify its production and trade in more goods from various industries in order to strengthen its competitive position within the international market but also to increase its levels of self-reliance and sufficiency.

Directly linked to the first model, the third theory sees that each country will strive to develop and implement strategies in order to most effectively address the challenges posed by the emerged economic crisis. The most common responses at a global level have materialized in the following:

central banks and governments have injected liquidities in the financial and private sectors and have reduced interest rates federal institutions would guarantee loans in order to strengthen financial and private organizations efforts to ensure market stability and the offering of financial stimulus to support certain sectors (Soludo).

2.4. Current Literature based on each of the relevant variables of the model or theory

As it has been mentioned in the previous sections, the specialized literature on the topic of the global economic crisis within Nigeria is relatively scarce as the issue is a new one and writings on it are relatively reduced. However, the internet provides the users with sufficient information that will assist in an assessment of the Nigerian business environment in these times of globalized financial difficulties.

General impact on the Nigerian business environment

The effects of the global economic crisis upon the Nigerian business environment are in many ways similar to the effects felt at a global level, as well as the individual impact felt by various countries. Differences however occur based on the diversities observed from one country to the next. More specifically, the following lines detail on the general impacts the internationalized financial crisis has had upon the Nigerian business environment:

the prices of the Nigerian commodities decreased -- this was mostly obvious in terms of crude oil, the country's main export commodity, but also other products, such as cocoa beans the abilities to generate revenues decreased and as a direct consequence, income within the Nigerian business community declined foreign investors also revealed reduced investment opportunities or implemented prudential strategies, all to culminate with reduced foreign investment in Nigeria

the accumulation of foreign reserves registered a negative trend and increased pressure has been put on exchange rates the low levels of foreign investment have also left a mark on the Nigerian banking sector, meaning that the financial institutions possessed lower levels of liquidities and were as such less able to offer funding opportunities; the problem is even more so critical as the Nigerian financial institutions are extremely robust and find it difficult to adapt to changes in the international context to the Nigerian business community, the shortages of the banking sector translate into a reduced access to financial resources (Soludo)

Nigerian oil in the global economic crisis

It is already a known fact that the large majority of the Nigerian business operations and income is derived from the extraction of crude oil. Throughout the past recent years, the price of the oil has been extremely volatile. It is even argued that the increasing international oil price has constituted a major cause in the occurrence of the contemporaneous financial crisis. The question which is being then posed refers to the role played by the Nigerian oil in these times of financial difficulties. In the most simplistic formulation, the growing oil prices in the international market meant that the Nigerian oil would be traded at higher prices and would register increased revenues, to the benefit of both business community, as well as government. In this light of events then, it can be argued that the extraction and export of crude oil has supported the African country in dealing with the crisis.

The crude oil has not however turned Nigeria into a recession proof state. More over, the increasing oil prices have benefited only those directly involved in the extraction and trade of oil. Basically, these individuals were already rich and are now getting even richer. The distribution of the oil-generated income is inefficient and the poor individuals remain poor, without any real ability to benefit from the oil gains. "The rich are getting richer. […] but the poor man in the street does not know the difference between now and when oil price was less than $20/barrel's (Stock Market Nigeria, 2009).

The situation may well be explained through a poor economic and political Nigerian structure, as well as governmental failures in addressing social equity issues. Moreover, to the overall Nigerian business environment, the increased reliance on oil has only managed to further deepen the already existent issues of lack of proper business diversification. This is important to mention as the country's ability to sustain itself as well as compete in the international background must be generated by multiple sectors, not just crude oil. In addition, the trend at a global level is that of creating alternative and renewable sources of energy in order to reduce dependency on foreign oil. However such a situation is not likely to materialize in the immediate future, major investments have already been made and it is possible that the situation will occur in the following decades. Additionally, the international financial crisis has translated into a reduced demand for oil in a context in which the western populations strive to reduce their expenditures. The most relevant example in this sense is given by the fall of the American automobile industry, represented at this stage by Ford Motors Company, which has lost its luxurious supremacy in the national market to Japanese manufacturer Toyota, which produced small size vehicles with fuel efficient engines. And this tendency has not only occurred due to the crisis, but also due to increased focus on environmental concerns.

Given then the international tendency towards reduced consumption of crude oil, Nigeria would lose not only its competitive edge, but also its sole source of national income. Overall, the role the Nigerian oil has played within the business environment in the context of the globalized economic crisis is a twofold one:

It managed to generate additional incomes for the players in the industry, generating more income for the state and the already rich, but no real benefits for the poor, leading as such to an even wider income gap

Secondly, it accentuated the already existent problems within the Nigerian business environment, namely the lack of adequate economic and political regulations and the subsequent the need for reforms

Trade of cocoa

Despite the fact that 90% of all national income is generated through the trade of oil and oil-based products, Nigeria is also an important exporter of cocoa; the African country is in fact the fourth largest exporter of the main ingredient in chocolate, after the Ivory Coast, Ghana and Indonesia. Recently, the Nigerian government has strived to offer local farmers incentives to grow cocoa beans and offered these individuals high quality and rapidly growing cocoa seeds at subsidized prices (Ghana Business News, 2009).

In these times of financial difficulties however, the operations and the players within this business sector have been affected. Statistical information reveals that, in the time period between December 2008 and April 2009, the export of cocoa beans from Nigeria decreased by 15% as compared to the same period of 2007-2008. In October 2008 for instance, cocoa beans exports had accounted for 123,651 metric tones, but had decreased to only 104,669 metric tones by February 2009. The statistics nonetheless only take into consideration the legal export operations. Since corruption remains increased within the African country, it is possible that the national statistics be changed due to the illicit trade. These numbers are however unavailable, but a possibility exists that illegal exports of cocoa had increased due to the desire to avoid legal fees. Nonetheless, the main argument at the basis of the export reduction is that of an insecurity on the part of the farmers and an intentional reduction in the amounts sold. "Exports dropped because many farmers hoarded cocoa between December and January to avoid low farm-gate prices, said Robo Adhuze, a market analyst for the Cocoa Association of Nigeria, which represents farmers, traders and processors, by phone from the southwestern cocoa-trading town of Akure" (Ghana Business News, 2009).

The insecurity and fear of the Nigerian farmers was in fact generated by the internationalized economic crisis, which reduced demand for virtually all commodities and which translated into a foreign ability to pay less for the cocoa beans. In this context then, the local farmers refused to sell their commodity at prices lower by 20% and preferred to keep the merchandize, generating as such a national decrease in exports. But this refusal to sell has had conversely a positive effect upon the players in the cocoa business -- the farmers have focused their efforts on improving the quality of their beans, which has in fact been achieved (Business News for the Food Industry, 2008). This means that when the operations are resumed to the normal amount, the Nigerian cocoa will reveal superior levels of quality, gaining as such an increased competitive position within the international market.