EFFECTS OF CAPITAL FLIGHT ON AGRICULTURAL GROWTH IN NIGERIA (1970-2013)

EFFECTS OF CAPITAL FLIGHT ON AGRICULTURAL GROWTH IN NIGERIA (1970-2013)

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Abstract

Capital flight, a term used to refer to the leakages of financial resources from an economy pose a serious problem in Sub Saharan economies as it impacted negatively on capital scarce countries such as Nigeria. This study empirically examined the impact of capital fight on agricultural growth in Nigeria using ordinary least square technique for the period 1970 -2013. The data generated were analyzed using Unit root test, co integration test, regression analysis and F statistic. The study found negative and insignificant relationship(P>0.05) between total capital flight and agricultural growth; meaning that capital flight had no direct impact on agricultural growth or the impact on agricultural growth was shadowed by the other macroeconomic variables in the system. Also, the stock of gross external debt (EXD) variable showed positive and statistically significant relationship (P<0.05) with agricultural growth. The result showed that a unit change in EXD brought about 24% changes in the growth of agriculture provided other factors were kept constant. Political instability (POL) variable had negative and significant effect on agricultural growth in Nigeria. The result showed that a unit increase in political instability (as a measure of political freedom indicator) resulted to 60% decrease in agricultural growth, other factors kept constant. Other findings were that a unit increase in interest rate differential had 4% decline in agricultural growth in Nigeria, provided other factors were kept constant. Also variability in consumer price index had negative value (-0.372002), in-line with theoretical expectation, which stated that variability in inflationary variable had negative consequences on growth tendency mostly in developing nations such as Nigeria. The study recommended that Nigeria’s judicious use of the income accruing from loans and FDI was paramount if Agricultural growth was to be enhanced. There was also the need to address the decay in the critical infrastructures - power, transport, water in the country as this would help to enhance domestic investment as well as attract foreign direct investment. Furthermore, the overall peace, security of lives and property and guaranty of investment by the government was essential therefore; Government should take concerted step to improve security of life and property in the country.

CHAPTER ONE

INTRODUCTION

   1.1    Background of the Study

Capital flight from Africa has been recently put at the forefront of the development policy debate. The issue of capital flight from developing countries, including Nigeria has received appreciable attention from researchers. In recent years, considerable interest has arisen in the extent to which capital flight has a detrimental impact on economic development (United Nation Development programme UNDP, 2011). In addition to the recent work by Ndikumana and Boyce (2011), Global Financial Integrity (2010) and The World Bank (2011), the United Nations Economic Commission for Africa (UNECA) has just established a High-Level Panel on Illicit Financial Flows from Africa headed by Thabo Mbeki, former president of South Africa. The role of the Panel is to determine the nature, pattern, scope and channels of illicit financial outflows from the continent; sensitize African governments, citizens, policy makers, political leaders and development partners to the problem; mobilize support for putting in place rules, regulations    , and policies to curb illicit financial outflows; and influence national, regional and international policies and programmes on addressing the problem of illicit financial outflows from Africa.

The original definition of capital flight is rooted in political and economic uncertainty of the domestic economy (Kindleberger, 1937). The foundation of capital flight is in economic, political as well as social risks. Cuddington (1986) defined capital flight as short-term speculative outflows out of a country. This is taken to mean outflows that would involve the acquisitions of assets overseas plus net errors and omissions in the balance of payment of the country. The World Bank (1985) defines capital flight as the change in a nation’s foreign assets. It is premised on trying to identify both the sources and uses of international funds by a nation; source funds consist of the increase in recorded gross external debt and net foreign direct investment, which can in turn be used to finance the current account and/or to increase official reserves. In essence, it equates capital flight with all non-official capital outflows.

The sluggish economic growth and persistent balance of payment deficits in most developing countries have been attributed to capital flight (Ajayi, 1995). Indeed, the high levels of capital flight pose serious challenges for domestic resource mobilization in support of investment and growth in Africa (Fofack & Ndikumana, 2010). In addition, the UNDP (2011) argues that the magnitude of capital flight is a major hindrance to the mobilization of domestic resources for development, implying that capital flight aggravates resource constraints and contributes to undermining long-term economic growth (Beja, 2007).Therefore, the size of capital flight from developing countries is assuming a serious dimension that poses a huge threat to sustainable growth, especially in Africa. According to Boyce and Ndikumana (2001), many poor countries are losing more resources via capital flight than through debt servicing. Scholars have expressed concern over the magnitude, causes and consequences of these net flows. Investors from developed countries are seen as responding to investment opportunities while investors from developing countries are said to be escaping the high risks they perceive at home (Ajayi, 1997). Thus, according to Schneider (2003), Capital flight involves the outflows of resident capital which is motivated by economic and political uncertainties in the home country. Such lost of resources do not contribute to the expansion of domestic activities or to the improvement of social welfare of domestic resident. On the contrary, they imply forgone goods and services essential to sustaining economic growth ( Beja, 2006).

According to Ndiaye (2011), Theory of capital flight implies that this phenomenon is driven both by private actors and public authorities (Ndikumana & Boyce, 2003, 2008 & 2011; Ajayi, 2007; Ndiaye, 2009 & 2011). Firstly, according to these authors, capital flight is driven by private actors due to macroeconomic uncertainty, political and institutional instability, less developed financial system, and higher rate of return differentials abroad. In a context of portfolio choice (Collier, Hoeffler &  Pattillo, 2004), all these factors lead to increasing risks of losses in the real value of domestic assets of private agents, forcing them to shift their portfolio in favour of foreign assets. Therefore, private agents hold their savings abroad, which reduces private investment. Consequently, by decreasing the level of private investment, capital flight can reduce economic growth. Secondly, public authorities can also contribute to capital flight under conditions of poor governance and bad institutional quality (Ajayi, 1992; Awung, 1996; Loungani & Mauro, 2000; Ndikumana & Boyce, 2003; Le & Rishi, 2006; Cerra, Rishi &Saxena, 2008; Ndiaye, 2009 & 2011). In such a context, corrupt public authorities take advantage of their favourable position to amass a personal fortune abroad (Boyce & Ndikumana, 2001). As these resources held overseas are domestic public resources, capital flight operated by public authorities leads to a decline in public resources, thereby inducing a fall in public investment and, therefore, a decrease in growth.

Taiwo (2010) demonstrated that, trend of the data series clearly indicated Nigeria as a debt distressed economy, as the country recorded positive net increases in external indebtedness from a modest $61.25 million in 1970 to a staggering $2,676.80 million in 1980 and $3,316.90 in 1990. The 1990s witnessed slight reductions in the level of external indebtedness, with a peak of $4487.1 million increases in 2003.  The incidence of capital flight has been perceived as eroding the investment base of the country. The consequence of debt burden, which developing countries have to grapple with and the flight of capital from these countries constitute a drain on the available resources for investment activities to generate economic growth (Lawanson, 2010). In addition, capital flight can have other adverse consequences for developing countries. First, it reduces the ability of the banking system to create credit for business projects and other productive investment activities. Secondly, and probably most importantly, the loss of capital can affect income distribution by eroding the domestic tax base and by redistributing income from the poor to the rich (Pastor, 1990; Ajayi, 1997).

African Economic Outlook (2012) indicated that capital flight affects human development through several channels. First is the narrow association between capital flight and debt. For every dollar of Africa’s external debt, more than 50 cents leave the country the same year in the form of capital flight (Ndikumana & Boyce, 2011). The repayment of such public debt by African populations reduces their capacity to increase spending on agriculture, health, education, infrastructure, and other services to improve lives. Capital flight also deepens inequality. The people benefiting from capital flight are the elites who engage in trade mispricing of imports and exports or those who have the power to unlawfully appropriate and transfer resources abroad. Almost all the people engaging in capital flight in Africa are among the 10% richest segment of the population (Ngaruko, 2013). Even in countries where capital flight is mainly driven by portfolio considerations, it is the wealthy who benefit as they have access to foreign investment instruments that average citizens do not (Rodriguez, 2004; Vespignani, 2008). Capital flight in Africa is also associated with poor governance. Corruption increases capital flight by discouraging domestic investment by increasing risk and uncertainty in the domestic economy. As a result, domestic agents are better off investing abroad, increasing capital flight and depriving countries of jobs and other social benefits from domestic investment (Le & Rishi, 2006). Corruption helps the elite to unlawfully take public or private assets and transfer them abroad.

Investment is one of the most important conduits through which capital flight affects human development. If flight capital was saved and invested in the domestic economy of the country of origin it would increase income per capita and help to reduce poverty. In Nigeria and Angola, for example, this would imply additional investment of USD 10.7 billion and USD 3.6 billion per year, respectively in the period 2000 to 2008. If only a quarter of the stock of flight capital from Africa was repatriated to the continent for investment, Africa’s ratio of domestic investment to GDP would increase from 19% to 35%, giving the continent one of the highest investment rates (Fofack & Ndikumana, 2010). The missing capital could have a more direct impact on livelihoods by being invested in infrastructure which is high on Africa’s priority list: job creation, better access to schooling, health care, clean water; information and socio-political inclusion could all come out of the better use of the capital in infrastructure.

Agriculture constitutes one of the most important sectors of the economy. The significance of agriculture resource in bringing about economic growth and sustainable development of a nation cannot be underestimated. Abayomi (1997) stated that stagnation in agriculture is the principal explanation for poor economic performance, while rising agricultural productivity has been the most important concomitant of successful industrialization. The agricultural sector has a multiplier effect on any nation’s socio-economic and industrial fabric because of the multifunctional nature of agriculture (Ogen, 2007). Agriculture’s contribution to the Gross Domestic product (GDP) has remained stable at between 30 and 42 percent, and employs 65 per cent, of the labour force in Nigeria (Emeka 2007). In Nigeria, economic growth has largely been accounted for by resilient agricultural growth. According to the Nigeria Vision 2020 First Implementation Plan for the period 2010-2013, the agricultural sector contributed 73% of GDP growth over the period 1999-2009. With real growth averaging about 7% per annum from 2004-2008, and value added to the tune of 42% of the Gross Domestic Product (GDP) within the same period, the agricultural sector in Nigeria clearly stands out as the most dominant and leading component of economic growth. Generally, the agriculture sector contributes to the development of an economy in four major ways-product contribution, factor contribution, market contribution and foreign exchange contribution (Kuznetz, 1961; Abayomi, 1997;World Bank, 2007).

Theoretical postulations and country experiences in developing regions underscore the crucial role of agricultural growth for poverty reduction. Growth originating in agriculture could be up to four times as effective in reducing poverty as growth originating outside of the agricultural sector (World Bank, 2007). Agriculture and poverty are closely linked. Most of the poor live and work in the agricultural sector and low agricultural productivity and incomes prevent the movement out of poverty.  Over the past decades, higher incomes from agriculture and access to cheaper food have helped hundreds of millions of people to move beyond the US$1 per day poverty line. For example, China, Vietnam, Brazil and Thailand have experienced significant agricultural growth over the last three decades with corresponding decline in poverty. In particular, estimates indicate that Vietnam and China took 40% of their population out of poverty in 10 years, on the back of aggressive agricultural investment and growth. In China, poverty dropped from 33% to 17% between 1990 and 2001 and in India, from 42% to 35%. While the agricultural sector may have in recent years contributed significantly to improved growth performance in Nigeria, its actual contribution appears to be much short of overall potential (Oni, Nkonya,  Pender, Phillips & Kato, 2009; Nkonya et al, 2010; Eboh, 2011).

1.2   Statement of the problem                                                                                               

Capital flight is a serious problem in Sub Saharan economies as it impacts negatively on capital scarce economies such as Nigeria. When there is capital outflow, it is money that is “fleeing” from the country. In fact, increase capital outflow implies a potential lost for economic growth and development especially in a country that is heavily dependent on external financing and / or international aids or support. It is estimated that between 1970 and 2010, capital flight from African countries has amounted to over $1.3 trillion. The International Monetary Fund IMF (1996) reveals that Nigeria suffered a loss of $7,573million between 1972 and 1989 to capital flight. Out of this total, the sum of US$7,362 million was lost between 1972 and 1978 against a capital inflow of $270 million within the same period. Evidence suggests that capital flight has increased since 2000, a period that coincides with the commodity-driven growth resurgence in Africa (Boyce & Ndikumana, 2013) due to trade liberalisation. International Financial Corporation (1998) and Ndikumana (2000) observed that Nigeria is among many African economies that have achieved significant lower investment levels as a result of capital flight. Such low level investment brought about by high rate of capital flight in Nigeria also has multiplier consequences on other aspect of the economy including the alarming rate of unemployment as well as pronounced regressive effects on the distribution of wealth in Nigeria.  The 2007 United Nation Conference on Trade and Development (UNCTAD) report showed that around $13 billion per year have left the African continent between 1991 and 2004. This represents a huge 7.6% of annual GDP with Nigeria having external assets 6.7 times higher than her debt stocks. In addition, the total stock of illicit outflows from Nigeria between 2002 and 2011 was put at $142,274 million (Global Financial Integrity, 2013). According to Sanusi (2009), over $20 billion left Nigeria from 2008-2009 as a result of capital flight. Capital flight has been regarded as a major factor contributing to the mounting foreign debt and inhibiting development efforts in the third world countries (Cuddington, 1986). External debt in Nigeria for example, increased by 700 percent from $3.5 billion in 1980 to $28.0 billion in 2000 (Ajayi, 2000) while debt outstanding at year end 2012 stood at $6522 million. Similarly, the outflow of capital may augment foreign finance problems of heavily indebted poor countries if potential creditors like IMF and other donors are de-motivated to give further assistance as a result of capital outflow. That is to say, the damaging effects of capital flight have made rational foreign lenders hesitant to increase credits to the debtor’s countries. This, indeed, affects Nigeria.

Agricultural growth decline are among the economic problems in Africa especially Nigeria. The literature has reported that in spite of Nigeria’s rich agricultural resource endowment; there has been a gradual decline in agriculture's contributions to the nation's economy (Manyong et al., 2003). In the 1960s, agriculture accounted for 65-70% of total exports; it fell to about 40% in the 1970s, and crashed to less than 2% in the late 1990s. The value of agricultural exports decreased each year from US$654 million in 2005 to US$591 million in 2007, but increased close to 45 percent in 2008 to US$856 million. Meanwhile, the value of agricultural imports in 2008 was US$3400 million, an increase from the 2005 value of US$2619 million, but a decline from the previous year of US$6072 million. The average growth rate of imports from 2005 to 2008 was 27.2 percent. Low agricultural output has a negative effect on the Nigerian economy as a whole. Several factors have been identified to enhance or retard growth in the agricultural sector; these factors include infrastructure (Yee, Huffman & Newton, 2002) and inflation (Gokal & Hanif, 2002). Nigeria was heavily dependent on agriculture, which was the sector accounting for more than 40 percent of the Pre-1973 GDP. It was the major source of funds for implementing the first development plan, 1962-1968. Within a decade up to 1983 however, agricultural output in Nigeria declined to 1.9 percent and export fell to 7.9 percent. Nigeria is a net importer of food and agricultural products in general. Agriculture value added in 2007 was US$53.7 billion, an increase from the 2004 value of US$29.4 billion; it further shot up from US$61.6 billion in 2009 to an estimated US$1.01 trillion in 2013 (World Bank Nigeria database). The average agricultural growth rate for 2004–2007 was 7 percent but dropped to 5.2 percent from 2008-2013. Furthermore, the agricultural sector has been one of the least attractive sectors for FDI in Nigeria. Through 1970 to 2001 the sector comprised only 1.7 percent of the total FDI (FAO, 2012). 

Halting capital flight and repatriating the large stock of capital that is held abroad could become a new source of development finance to use on agriculture and other services. If the billions of dollars that leave Nigeria each year in the form of capital flight had been directed to infrastructural and human development, the country would be in a better position to meet its development objectives.

Studies on the determinants of capital flight and its impact on the Nigerian economy include those of Ajayi (1992: 1997), Lawanson (2007) and Onwiodwokit (2002). While many studies have been done on capital flight as it affects economic growth, little or nothing has been undertaken in relation to the assessment of the impact of capital flight on agricultural growth. It is against this backdrop that this study sets to find out the effects of capital flight and its macroeconomic determinants on agricultural growth in Nigerian and also proffering workable ways of curbing or reversing of capital flight as an opportunity not only to improve on the external liability situation of the country but also to promote Agricultural growth.

1.3   Objectives of the study                                                             

The broad objective of the study w




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