Economic Reform Programs

Back to: ECONOMICS SS3

 

Welcome to class! 

In today’s class, we will be talking about economic reform programs. Enjoy the class!

Economic Reform Programs

Before June 2004, there were 89 banks in Nigeria with 3,382 branches network.  The banking sector was characterized by structural and operational weaknesses such as:

1. Low capital base: Dominance of a few banks.
2. Insolvency and illiquidity
3. Over-dependence on public sector deposit and foreign exchange trading.
4. Poor asset quality.
5. Weak corporate governance: A system with low depositor confidence
6. Banks that could not effectively support the real sector of the economy at 24% of GDP, compared to Africa average of 78% and 272% for developed countries.

The professor Charles Soludo led Central Bank, reduce the banks to 25 with a capital base of N25 billion this led to merger and acquisition in the banking industries.

The aim of re-capitalization of banks

1. To ensure a strong financial base.
2. To increase deposits’ confidence in banks.
3. To enhance the liquidity and solvency of the banks.
4. To increase loan to real sectors.
5. To encourage banks to practice real retail banking instead of depending on public sectors fund.

INDIGENIZATION; NATIONALIZATION; COMMERCIALIZATION and PRIVATIZATION POLICY

INDIGENIZATION

Indigenization may be defined as a process through which the government through the use of law increase the level of participation of citizens (indigenes) of a country in the ownership and management of business enterprises and the industrial sectors of the country’s economy.

The objective of the indigenization policy is to give Nigerians increased involvement in her ownership, control and management of a business enterprise that was formerly dominated by foreigners in the country. The fulcrum of the policy was the Nigerian. Enterprises Promotion Decree (1972)

The NEPD (1977) grouped businesses under three categories

1. The first group consists of businesses reserved exclusively for Nigerians (i.e. 100% reserved for Nigerians) e.g. manufacturing of blocks, candles etc.
2. The second group consist of businesses which can be undertaken by foreigners so long as Nigerians hold or have not less than 60 per cent participating shares e.g. banking, insurance, construction, mining, beer brewing
3. The third group consist of businesses which are open to foreign investments provided Nigerians hold not less than 40 per cent participating shares e.g. textile, tobacco and drug manufacturing hotels, synthetic resins, distilling etc. The NEPD (1992) was revised in 1977

Objectives of Indigenisation Policy

1. To promote and encourage the participation of indigenes of the country actively and effectively in the industrial sector of their economy
2. To reduce foreign control of the country’s economy
3. To promote industrialization through the use of indigenous technology
4. To reduce the country dependency on foreigners
5. Creation of employment opportunities for indigenes
6. To encourage local retention of profits made
7. To avoid neo-colonialism and imperialism
8. To improve the income and standard of living of the people
9. To ensure economic stability in the country

Advantage/Importance of Indigenization

1. Increase in participation of indigenes in the economy
2. Reduction of foreign control of an economy
3. Encouragement of local retention of profits
4. Promotion of Industrialization
5. Creation of employment opportunities
6. Enhancement of self-reliance i.e. reduction in dependency
7. Improvement in standard of living
8. Economic stability is enhanced

Disadvantages of Indigenization Policy

1. Discouragement of Foreign investors
2. The concentration of wealth in the hands of few indigenes
3. It widens the gap between the rich and the poor
4. It may lead to economic instability
5. It may result in retaliation by the foreign countries involved
6. It may lead to political instability

Problems of Indigenization in Nigeria

1. Shortage of Capital: The indigenes do not have enough capital to take over the business
2. Lack of technical and managerial skills
3. Reduction of Foreign investments
4. The widespread incidence of fronting i.e. collusion between indigenes and foreigners who uses the indigenes as cover to perpetuate their continuing ownership of the businesses
5. Mismanagement of the business taken over by indigenes

NATIONALIZATION

This may be defined as the taking over by the government of privately owned businesses.

It involves the transfer of ownership of privately owned business enterprises to the government for economic, social and political reasons.

Such industries taken over by the government are known as nationalized industries and the individual owners of the affected businesses are paid compensation by the government.

Reasons why government nationalize industries

1. To prevent the exploitation of the consumer
2. To ensure state security and for political considerations.
3. To provide employment for the citizens
4. To generate revenue that will be used for development
5. To ensure fair and equitable distribution of social and economic amenities
6. To break the private monopoly power
7. To provide the large capital required to establish or run some business especially where private interests cannot raise such capital.

Advantages of nationalization

1. It eliminates wasteful competition
2. It enables the government to provide essential goods and services to consumers at affordable prices
3. It is used by the government to protect the consumer i.e. to prevent the exploitation of consumers
4. It promotes a steady supply of goods and services
5. It leads to the elimination of monopoly by private businessmen
6. It [provides employment opportunities
7. It enhances government control of the economy

Disadvantages of nationalization

1. It destroys private initiatives
2. It promotes state monopoly
3. Nationalized businesses become inefficient
4. Corruption and embezzlement of funds is rampant among nationalized industries
5. Bureaucracy and political interference in the nationalized businesses

COMMERCIALIZATION AND PRIVATIZATION

Commercialization is a process whereby state-owned enterprises are restructured (re-organized) and run with the primary aim of turning them into profit-making entities. The policy makes it possible for state-owned enterprises to explore all avenue of making a profit.

Privatization is the process whereby ownership and control of businesses, companies, industries or corporations are transferred from the government (public sector) to private individuals i.e. private sector.

Advantages of commercialization and privatization or the objectives of the government’s privatization policy

1. It promotes efficiency in the business that are commercialized or privatized
2. Government generates a lot of revenue during the implementation of the policies
3. It leads to competition and innovation as well as improvement in the quality of goods and services
4. There is a great reduction in the level of public expenditure one enterprises that are not viable
5. It deepens or widens the capital market
6. It gives consumers an increased range of choice

Disadvantages of commercialization and privatization

1. It leads to uneven distribution of income
2. It leads to increases in prices
3. It leads to mass retrenchment of workers
4. Both commercialization and privatization fuel inflation
5. It leads to reduction or lowering of the standard of living of the citizen
6. It may result in strikes, protests and public unrest
7. The privatization process may not be transparent – allowing a few rich people to take over choice government businesses

 

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