JOURNAL OF SOCIAL SCIENCES (JSS) Vol. 2 No. 2. December, 2018
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JOURNAL OF SOCIAL SCIENCES (JSS) – Vol. 2. No.2 December, 2018
EDITORIAL COMMITTEE
EDITOR-IN-CHIEF
Assoc. Prof. Dr. Ganiyat A. Adesina Uthman ,acma,mnes,fce, fifp Department of Economics, National Open University of Nigeria
ASSOCIATE EDITORS
Prof. Dimis I. Mai-Laifia Department of Economics, University of Jos
Prof. Mercy Ada Anyiwe Department of Economics, University of Benin
Assoc. Prof. Dr. Ibrahim Bakare Department of Economics, Lagos State University
Dr. Oyebode Oyebamiji Department of Political Science, National Open University of Nigeria
Dr. Ojo Mathew Department of Political Science, National Open University of Nigeria
Dr. Abdul-Lateef Adelakun Department of Mass Communication, National Open University of Nigeria
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ASSISTANT EDITOR Dr. Ebele Udeoji Department of Political Science, National Open University of Nigeria
JOURNAL SECRETARY
Dr. Emmanuel I. Ajudua Department of Economics, National Open University of Nigeria
Mrs. Antonia Hafunjoh Okonye Department of Political Science, National Open University of Nigeria
JOURNAL BUSINESS MANAGER
Mr. Samuel Olusanya Department of Political Science, National Open University of Nigeria
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EDITORIAL ADVISORY BOARD
Prof. Kabir Hassan New Orleans University, U.S.A
Prof. Sheriffdeen A. Tella Olabisi Onabanjo University, Nigeria
Prof. Anthony A. Akinola Oxford University, United Kingdom
Prof. Abdallah Uba Adamu National Open University of Nigeria
Prof. Risikat Dauda University of Lagos
Prof. Abiodun S. Bankole University of Ibadan
Prof. Shehu Abdallah Federal Capital Territory
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THE EDITORIAL
The Journal of Faculty of Social Sciences, National Open University of Nigeria (NOUN) is a bi-annual peer reviewed journal published by Faculty of Social Sciences, NOUN. The objectives of the journal is to establish a symbiosis among scholars, state and society by providing purpose-driven research as a template for the formulation of problem-solving policies in response to the myriad national and international integration and development challenges. JSS-NOUN is an offshore peer review journal published two times in a year by the Faculty of Social Sciences-NOUN.
Notes to Contributors
The journal operates a double blind reviewing process; it accepts original articles from fields of Social Sciences and other related fields that have not been submitted anywhere else for publication.
Manuscript Submission Guides
The language of the journal is English Font size is 12-point type in Time New Romans with double line space Manuscript SHOULD NOT be more than 5000 words.
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Tables and Figures must be numbered serially, titled and must be inserted under the text explaining them Topic should not be more than 20 words, written in 14 point font, at the Centre of A4 paper. Author(s)’ name(s) should be written in same font as topic; should be in the centre with email and phone number of the Author. In case of 2 or more Authors, the Corresponding Author should be identified. The journal style of referencing is APA, 6th Edition Authors should submit softcopy of articles as MS-Word document electronically to [email protected]. Final paper after review process should be submitted to [email protected]
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TABLE OF CONTENT
Effect of Financial Liberalisation on Macroeconomic Convergence Variables in the West Africa Monetary Zone- Page 2 Tunde Abubakar BAKARE-AREMU, PhD
Conflict Transformation and Peace Building in Divided Homogeneous Communities: A Case Study of Ife and Modakeke- Page 57 Basil IBEBUNJO, PhD and Samuel Opeyemi IROYE, PhD
Tax Incentives and Industrial Development in Nigeria- Page 89 Emmanuel Ifeanyi AJUDUA, PhD and Davis OJIMA, PhD Poverty and Inequalities Nexus: A Comparative Study of Nigeria and Ghana- Page 117 Samuel Olumuyiwa OLUSANYA
Usage of Electronic Banking Services and Customer Satisfaction in Lagos State, Nigeria- Page 157
Jameelah O. YAQUB, PhD and Anthonia T. ODELEYE, PhD
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Nollywood to Onlinewood: Issues on Film Censorship and National Security in Nigeria- Page 193
Lateef Adekunle ADELAKUN, PhD
Islamic Leadership Model and the Burden of Terrorism and Leadership in Nigeria: Issues, Myths and Realities-Page 231
Ibrahim Olatunde UTHMAN, PhD, FIPMD
Positive or Negative Reinforcement of Staffs’ Behaviour towards Achievement of University Vision, Mission and Objectives: Which Works Better?-Page 269 Aminu Kazeem IBRAHIM, PhD
Yoruba Muslim Youths and the Problems of Identity in the Midst of Diversity-Page 296
Mikail Kolawole ABDULSALAM and Jamilah Adenike ADEOGUN
Role of the Mass Media in Community Development in Nigeria:A Study of Ushafa and Amaigbo Communities-Page 328 Josephine OBIAJULU and Daniel Ewomazino AKPO Employability of Journalism Graduates of Open and Distance Learning (ODL) Institutions: A Tracer Study of National Open University of Nigeria Graduates (2009-2014)-Page 370
Chidinma Henrietta ONWUBERE, Ph.D, LL.B
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Effect of Financial Liberalisation on Macroeconomic Convergence Variables in the West Africa Monetary Zone
Tunde Abubakar BAKARE-AREMU, PhD
Department of Economics Faculty of Social Sciences National Open University, Jabi, Abuja. Email: [email protected]
Abstract
his research study examines the effect of financial liberalization policy on the prospect of attainment of key Tmacroeconomic convergence criteria required for the commencement of West Africa Monetary zone (WAMZ). Achieving these WAMZ's global convergence criteria ex-ante policy coordination by member states have however proved difficult. This study examines the influence of financial liberalisation policy on the likelihood of achieving these criteria without prior policy coordination within the zone using descriptive and panel data techniques on data which spanned the period 2001 to 2015.The study revealed that lack of policy coordination within the zone had an adverse effect on financial liberalisation policy as regards its effects
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on the WAMZ area macroeconomic convergence variables possibly due to the asymmetrical policy thrust. The study concludes that there might not be any reasonable macroeconomic convergence without policy coordination and that financial liberalisation policy is a key factor to reckon with for a successful WAMZ.
JEL Classification: C13; C33; F33; G14
Keywords: Financial Liberalisation, Macroeconomic Convergence Variables, Panel Data Analysis, West Africa Monetary Zone
1 INTRODUCTION
Developing nations have lately witnessed an increase in international capital and investment flows occasioned by the implementation of financial liberalisation policies. Major drivers of these flows are globalisation and financial market liberalisation which allow investors to seek higher rate of returns and have the opportunity to diversify risk globally (Nwaogwugwu, 2012). Nations that adopted financial liberalisation policies encourage inflows of capital through dismantling of restrictions and controls (regulations) on foreign capital flows. It also entails domestic financial markets deregulation in order to improve their economic prospects through the adoption of market-driven economic systems. According to Diamond (1984); and
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Obstfield (1994); financial liberalisation promotes access to international capital inflows which allows recipient economies to smooth both investment and consumption, especially in a situation of adverse shocks. Ram (2009) identified the key elements of financial liberalisation to be: deregulation of interest rate; removal of credit control; privatisation of government banks and financial institutions; removal of restrictions on entry of private sector and/or foreign banks and financial institutions into domestic financial markets; introduction of market based instruments of monetary control; and capital account liberalisation
In West Africa, almost all the countries embarked on financial liberalization with the adoption of Structural Adjustment Programmes (SAPs) in the mid 1980s. In particular, all West Africa Monetary Zone (WAMZ) countries adopted financial liberalisation policy, and thus implemented market reforms and liberalisation as part of SAPs. Five of the six countries in WAMZ adopted and commenced the Structural Adjustment Programme in 1986, while Liberia had begun two years earlier. The Gambia and Guinea adopted the programmes in bits. In the Gambia, it was known as Structural Adjustment Loan One and Two (SAL I & SAL II), which took place in 1986 and 1992 respectively. But, Guinea referred to it as Structural Adjustment
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Programme One and Two (SAP I & SAP II) in 1986 and 1997 respectively.
There is a consensus in the literature that macroeconomic policy outcomes and performance reflects the relative degree of financial liberalisation policy (Abdullahi and Suardi (2009); Romain et.al. (2011); Bekeart, et. al.(2006)). In addition, Balogun, (2014) reiterates that liberalisation policy regime soften influenced a number of macroeconomic variables indicators such as economic growth, trade openness, deficit financing, capital and current account balances and financial prices (i.e. inflation rate, exchange rate, interest rates and external reserves, etc.). Summarily, this study links financial liberalization policy to macroeconomic performance and national capacity to meet ex-ante macroeconomic convergence criteria in WAMZ area.
- The proposed WAMZ consists of six West African countries, namely: the Gambia, Ghana, Guinea, Liberia, Nigeria and Sierra Leone. These countries wish to have a common currency through monetary union. However, for this to happen, nine macroeconomic variables preconditions must be met ex-ante macroeconomic policy coordination simultaneously. That is, these nine macroeconomic convergence criteria must be met ex-ante before the monetary union
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could commence. The two sets of criteria to be met are: the primary and the secondary criteria. The primary consists of the following macroeconomic stance which each intending member of WAMZ must attain with the targets in parenthesis: They include the following: Inflation rate (single digit); fiscal deficit/GDP excluding grants (≤ 4%); Central bank financing of fiscal deficit as percentage of previous year tax revenue (< 10%): gross external reserves–month of imports (≥ 3). The secondary criteria are tax revenue as a GDP ratio (> 20%); salary mass/total tax revenue ( 35%); Public investment financed from domestic receipts as percentage of total tax revenue (≤ 20%); real interest rate (>0) and exchange rate against WAMZ ERM (± 15%). Table 1 show the score card of the participating countries with respect to the number of criteria met annually from 2001 to 2013.
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Table 1: Summary of Convergence Criteria Score Card of WAMZ Member Countries Country 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Mean Expected
Gambia 4 2 2 6 6 7 6 6 6 4 5 5 5 4.9 9
Ghana 2 1 4 4 4 5 5 2 3 2 6 5 5 3.6 9
Guinea 4 4 1 1 3 2 4 3 3 1 5 5 4 3.0 9
Liberia 3 3 3 4 4 3 4 6 6 5 5 5 5 4.2 9
Nigeria 6 5 5 6 7 8 8 6 7 5 6 6 6 6.3 9
S/Leone 3 3 1 3 5 3 3 2 1 2 3 4 5 3.4 9
Source: derive from WAMZ convergence reports (2015); www.wami.org
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The Table 1.1 shows evaluation of individual country’s criteria performance in term of its expectation to satisfy the proposed nine convergence criteria. The best performance ever witnessed within the zone was by Nigeria in 2006 and 2007 followed by the Gambia in 2006, while the highest score (in term of satisfying the nine convergence criteria) ever attained by other countries, include the following; Ghana, five (5) in 2006 and 2007; Guinea, four (4) in 2001 and 2002; Liberia, six (6) in the year 2008 and 2009; and Sierra Leone, five (5) in 2005. The highlighted figures represent the best each country has attained in term of satisfying the criteria. In spite of subscribing to the membership of WAMZ, individual macroeconomic policy pursuits did not foster macroeconomic convergence as desired.
2.0 LITERATUREREVIEW
2.1 Financial Liberalisation and Macroeconomic Outcomes
Stiglitz (1994) posited that while government intervention (beyond financial sector regulation) could not guarantee a more productive and efficient financial sector, a partially repressed financial sector clearly had the capacity to outperform more liberalised finance. It should, therefore, not be assumed a priori, that liberalisation will bring a net improvement in the financial sector or in the real sector performance.
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In a related study by Willi and Brigitte (2010), the major issues involved in financial market liberalisation were examined. These included policy proposals put forth as a correcting mechanism for the last financial meltdown by the G20 group, the US, the UK, and the EU and it was found that liberalisation thrived in a well developed financial sector. In addition, the role of capital flows volatility threat on economic growth stability was examined in selected developing economies, using the empirical model of panel logit estimation, and it was shown that foreign debt liabilities to total liabilities and foreign direct investment liabilities to total liabilities increase the likelihood of banking crisis (Helmi & Nabila, 2014). Misati and Nyamongo (2012) investigated the dual role of financial liberalization on growth in 34 Sub-Sahara African countries, using a bank crisis model and a growth model. The outcome of their study indicates that institutional variables are the key factors that determine economic growth while they recommend the adoption of the financial liberalisation policy and institutional reform measures.
McKinnon (1973) argued that the limited capital market development of developing countries meant that firms were largely confined to self-finance at the same time that indivisibilities in physical capital required the accumulation of savings prior to physical capital
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accumulation. Bekaert, Harvey and Lundblad (2005) looked at growth volatility and financial liberalisation in 40 developed and 95 developing countries and concluded that financial liberalisation was associated with decline in the ratio of consumption growth volatility to GDP growth volatility. This means there is a nexus of financial liberalisation and consumption volatility; the result, however, holds for both total and idiosyncratic consumption growth. A similar study carried out by Abdullahi and Suardi (2009), found that trade liberalization was observed to increase the efficacy of consumption growth smoothing and income stability. In the same study, it was demonstrated that volatility in output and consumption growth caused by trade liberalisation was negatively associated with the depth of the financial market.
Romain et al (2011) examined the costs and benefits of financial liberalisation and concluded that a number of problems are associated with financial liberalisation. Ameliorating contract enforceability problems, through a better legal system and other institutional reforms are seen as fundamental sources of higher growth and lower volatility in the long-run. They noted, however, that it often takes time for these reforms to be achieved. They further noted that countries with a functioning financial sector can be made better-off
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by liberalising and experiencing a rapid but fairly risky growth path, rather than by remaining closed and trapped in a safe ‘haven’ but slow growth path. In a similar work by Fowewe (2006), who examined the effect of financial liberalization on savings in 16 Sub- Saharan African countries, found that financial liberalisation had dual and conflicting effects on savings. These conflicting effects were as a result of the usage of two mutually exclusive variables to proxy financial liberalisation namely, FINDEX1 and FINDEX2, the former being derived from method of principal component which put into consideration various phases of financial liberalisation process while the latter (FINDEX 2) used period in which the countries under study adopted financial liberalization policy which took dummy ‘0’ before liberalisation and ‘1’ after liberalisation. The conflicting resultant effects indicate that financial liberalisation (FINDEX 1) positively and significantly spurs savings while financial liberalisation (FINDEX 2) has a negative effect on savings. This was as a result of the credit constraint in the economy which the financial liberalisation removed and thereby increased consumption. This findings supported the studies by Giovannini (1983): and Bandiera et al.(2000).
Gries et al (2009) examined linkages between financial deepening, trade openness and economic development for 16 Sub-Sahara Africa
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countries and concluded that there was a limit to which the financial sector could promote regional development and thereby refuted the popular finance-led hypothesis. In general, they found that financial deepening and trade openness had swayed regional development only marginally. Therefore, rather than support any development strategies prioritising financial sector liberalisation or trade liberalisation, they advocated a holistic approach that would take into account other fundamental development factors. Their study, however, did not look at the country specific-effect on these Sub-Sahara Africa countries, they only considered the joint effects. In a related study, carried out by Bekeart, Harvey and Lundblad (2006) which examined the possibility of financial liberalisation in supporting economic growth (i.e. financial liberalisation–growth nexus), they found that equity market liberalisation on average led to 1% increase in real economic growth over a five-year period. Also, they gathered that financial liberalisation furthered financial deepening but that the measure of financial development failed to fully neutralise the liberalization effect. In the same vein, investment/GDP ratio increases post liberalisation, meaning that financial liberalisation spurs investment. However, differentiating across liberalising countries, they found that secondary school enrolment, a small government and an Anglo-Saxon legal system tended to enhance the liberalisation effect.
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Niels and Robert (2005) examined the influence of financial liberalisation on savings, investment and economic growth in twenty- five (25) emerging market economies during the 1973-1996period. The investigation of the relationship between financial liberalisation, on the one hand, and savings, investment and economic growth, on the other hand, reveals that there is no evidence that financial liberalisation affects domestic savings and total investment although there are some signs that financial liberalisation may actually reduce rather than increase domestic savings, whereas it is positively associated with private investment as well as per capita GDP growth. They further provided evidence of an adverse relationship between financial liberalisation and public investment, and suggest a substitution of public investment for private investment which, they noted, may contribute to higher economic growth. Menzie and Hiro (2007) presented a new measure of financial openness or liberalization which seeks to address the shortcomings in earlier literature on the extent of openness in cross-border financial transactions. In creating this index (i.e. index which aimed at measuring the extent of capital controls), they make use of the information from the International Monetary Fund (IMF), Annual Report on Exchange Arrangement’s and Exchange Restriction (AREAER).
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Also, John (2009) examined the impact of financial liberalisation on domestic resources mobilization in nineteen (19) African countries. He noted that the available domestic savings were insufficient to meet the already low investment requirement, and that to achieve the Millennium Development Goals, some substantial external resources inflows was required, with a view to relieving the savings and foreign exchange constraint faced by most of these countries. He further noted that most resources inflows for the preceding three decades were largely Official Development Assistance (ODA), that is, they were aid rather than capital investment inflows. This is, however, dangerous because it could lead a country into aid dependency and incapable of mobilising financial resources, domestically. Specifically, during the period stated earlier, foreign savings had been necessary for funding more than 35 percent of the region’s already low investment level and they are largely ODA.
2.2 Financial Liberalisation and Macroeconomic Outcomes in the West African Monetary Zone (WAMZ)
Essays (2013) analysed the relationship between capital account liberalisation and economic growth in the West African Monetary Zone (WAMZ) for the 1980-2012 period. The result revealed that in Ghana and Sierra Leone there was a significant positive relationship
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between capital account openness and economic growth, both in the short and the long-run. But, there was no significant long-run relationship between capital account liberalization and economic growth in the Gambia, Guinea, Liberia and Nigeria, and thus concludes that opening of capital accounts should be gradual and be complemented with sound macroeconomic and financial policies. In a related study by Akingunola, Adekunle, Badejo and Salami (2013), in which vector error correction model was used to establish a positive relationship between financial liberalisation and economic growth in Nigeria. In line with this, Sulaimon, Oke and Azeez (2012), empirically investigated the effect of financial liberalisation on economic growth in developing countries using the Johansen co- integration test and the Error Correction Mechanism (ECM) and found that financial liberalisation had growth stimulating effects.
A study by Essay (2015) noted that the failure of Keynesian theories of government intervention had reinforced the invisible hand of allocative power of the market of the classical thought with the adoption of financial liberalisation through structural adjustment programmes in Ghana and Nigeria. The study further examined whether these two countries had benefited from the policy, noting the imperfection of their financial markets and concluded that the duo
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have benefited but that more could be achieved, if the market is well developed. In a similar study, Owusu (2009), investigated the financial sector reforms programme in Ghana taking into consideration, the pre and post-reforms policies to determine whether those policies had helped to eradicate associated problems in the financial system and noted that the performance had been substantial and healthy since the adoption of financial liberalisation (financial reforms).Also, Orji, Eigbiremolern and Ogbuabor (2013) examined the nexus between financial liberalisation and private investment in Nigeria and found that financial liberalisation had a significant impact on private investment flows. The study noted the existence of a structural break within its scope.
Agbaeze and Nwaka (2014) examined the sequencing of financial liberalisation process within the hostile macroeconomic environment and concluded that the hostile macroeconomic environment minimised the expected benefit of financial liberalisation. They then however, recommended policies that could ensure promotion of monetary stability, stabilise macroeconomic environment and provide infrastructures to enable private investments to thrive in Nigeria. Also, Santigie (2010) examined the complementarity between the accumulation of money balances (financial assets) and physical
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capital accumulation in Sierra Leone within the context of a theoretical underpinning of the McKinnon-hypothesis and suggested the need for achieving positive real interest rate to support capital formation. Quartey, Aidam and Obeng (2008) also investigated the effect of trade liberalisation on economic growth of Ghana and, by implication, on poverty reduction level. The study shows that trade is better than no trade and that trade liberalisation will significantly improve exports earnings and enhance economic growth in Ghana.
Mansaray and Swaray (2013) examined how changes in the financial market in Sierra Leone affect real money balance behaviours. The result suggested stable demand for real money balance and recommended that monetary authorities should continue to pursue real money balance as an intermediate target in setting the country's monetary policy framework. Nwadubu and Onwuika(2014) observed the impact of financial liberalisation in Nigeria on saving-investment relationship and, by implication, on economic growth using error correction mechanism (ECM). They concluded that financial liberalisation impacted minimally on economic growth. In contrast to this, the study by Sulaimon et al (2012) examined the presence of the McKinnon-Shaw hypothesis in Nigeria, that is, that financial liberalisation has a positive impact on economic growth. The study
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concluded that financial liberalisation has a growth-stimulating effect in Nigeria and, thus, recommends that economic stability should either be maintained or pursued before implementing financial liberalisation measures, and that, the regulatory and supervisory framework for the financial sector should be strengthened. Antwi, Mills and Zhao (2013) examined the major macroeconomic factors (variables) that drive the Ghana economy proxied by Ghana's real per capita GDP growth, and found a long-run relationship among those macroeconomic factors and economic growth and recommended that the government should look inward in revenue generation rather than relying on foreign aid. Dapaah, Brar, Cole, Olowo-Okere and Seligmann (2013) scrutinised Liberia's financial management capacity building initiatives from the immediate aftermath of the 14 years civil war, looking at challenges, support opportunities and threats, and concluded that financial management capacity building in Liberia followed an incremental open and collaborative approach. In summary, most studies in the West African monetary zones favour financial liberalisation policy measures on both country-specific and zone-wide basis, but it was observed that macroeconomic stability is key to a successful financial liberalisation adoption.
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2.3 Analysis of Macroeconomic Convergence in Africa and Beyond
Calvin and Olumide (2014) examined the challenges of financial integration and monetary coordination in the West African Monetary Zone (WAMZ) and the East African Community (EAC).The challenges noted include lack of minimum prerequisite condition such as an adequate degree of trade and economic integration. The authors' observed that synchronisation of key convergence criteria between the two regions will help, and that different degrees of financial sector development may equally hinder the process of financial integration in the two regions. In a similar study, Kumo (2011) examined convergence in real per capita GDP and macroeconomic policy and stability indicators within the Southern African Development Community (SADC).
The outcomes of his tests indicate that, there is no evidence of absolute beta and sigma convergence in real per capital GDP among the SADC economies. In addition, according to him, further assessment of possible conditional beta convergence to own steady state showed no evidence of convergence either. A related study by Babones (2014) looked at the macro trends of global convergence with particular attention to the "BRIC” countries (i.e., Brazil, Russia,
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India and China) and the "four tigers''' economies of East Asia ( Hong Kong, Korea, Singapore, and Taiwan). He observed that the macroeconomic trajectories of the BRICs since 1980 could be seen as disparate cases of evolution towards equilibrium: stagnation for Brazil, convergence down for Russia, and convergence up for India and China. He further noted that all the four countries would soon have near identical macroeconomic characteristics (except for India which was at a much earlier point on the curve than the others). A review of development in the world economy and its implication for Southern African was carried out by Goeiemann (2007), with primary focus on the progress towards the achievement of macroeconomic convergence (MEC) targets in SADC member states. The study compared the actual performance against agreed macroeconomic indicators and targets in the SADC's macroeconomic convergence programme, and then presented prospects for the 2007 and beyond. The study by Maleke (2005) investigated the evidence for convergence in macroeconomic variables of Southern African Custom Union (SACU), using panel data unit root tests. The results showed significant evidence that the SACU countries had reached a reasonable threshold of convergence on some specific macroeconomic convergence variables which he attributed to common economic policies and institutional characterisations.
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Most other studies on macroeconomic convergence are based on selected convergence variables, mainly inflation rate which was analysed using inflation differentials to validate ex post the doctrine of the “law of one price” which had been analysed with several models especially in the Euro area {Hofmann & Remsperger, 2005; Angeloni & Ehrmann, 2007; Horvath & Koprnicka, 2008 and Mara & André, 2011}. The empirical approach of these studies was econometric differing only in terms of model specification, scope and span of data. While Hofmann & Remsperger (2005) analysed inflation differentials by panel-generalized method of moments over 1999Q1-2004Q2. Angeloni and Ehrmann (2007) analyzed both output and inflation differentials observed across the Euro area over 1998Q1-2003Q2, from aggregate demand and supply equations. The findings of these authors suggest that the observed inflation differentials are mainly influenced by differences in cyclical positions and fluctuations of the effective exchange rate, combined with a rather high level of inflation persistence, while the proxies of price level convergence do not show significantly.
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3.0 THEORETICAL AND CONCEPTUAL FRAMEWORK
3.1 Conceptual Framework of Financial Liberalisation and Macroeconomic Convergence
3.1.1 The Concept of Financial Liberalization
Prior to financial liberalisation, the government of developing countries practiced financial repression thereby limiting the administrative framework of the financial system to its whims, such that financial policies formulated and implemented go well with its desires, (Sulaiman et al, 2012). However, financial liberalisation (FL) refers to the deregulation of domestic financial markets and the liberalisation of the capital account. The effects of FL have been a matter of some debate. In one view, it strengthens financial development and contributes to higher long-run growth. In another view, it induces excessive risk-taking, increases macroeconomic volatility and leads to more frequent crises. (Romain, 2007).
According to Khan and Hassan (1998), the main financial liberalisation policies were aimed at liberalising interest rates, reducing controls on credit, enhancing competition and efficiency in the financial system, strengthening the supervisory framework, and promoting the growth and deepening of financial markets.
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FINANCIAL L1BERALISATION
Interest Rate Exchange Rates Privatizatio Removal of Foreign Ownership Capital Stock Market Deregulation Deregulation n of Banks. Credit Control and Participation in Account Liberalization Banking Sector Liberalizati
Banking Sub Sector Reform and Development Foreign Capital
Financial System (Sector) Development
Enhanced Macroeconomic Indicators
Economic Growth and Development
Figure 1: Conceptual Framework of Framework of Financial liberalisation
Source: Bakare-Aremu (201 Bakare-Aremu (2018)
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The conceptual framework of financial liberalisation shows several linkages among financial liberalisation policies and financial sector development on the one hand and economic growth and development on the other hand (Finance-led Growth Thesis). This begins with financial liberalisation policies (such as interest rates deregulation, exchange rate deregulation, removal of credit control, private and foreign ownership and control of banks, capital market and capital account liberalisations) which lead to domestic financial sector development and positive net foreign capital inflows. Both foreign capital inflows and domestic financial sector development (financial deepening) have dual effects on economic activities. Firstly, they smoothen hitherto deficit domestic financial resources through improved savings mobilization and also increase investible funds in the capital market; secondly it encourages foreign direct investment flows. These dual effects will result in the enhancement of some macroeconomic indicators, such as reduction in inflation rates and improved investment (productive base), increased GDP growth rate, increased tax base and tax revenue, (and thus reduced public debt and debt servicing), increase in foreign reserves, appreciate and conserve foreign exchange earnings, improve balance of payments and trade, and increase real interest rates. These improvements on the macroeconomic indicators will then have direct and indirect
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enhancement effects on the economic growth and development. Direct effect is evidence from increased productivity through enhanced funds mobilisation and its optimal disbursement for productive purposes. On the other hand, the indirect effect is premised on the fact that financial liberalisation can enhance revenue generation and reduce debt financing and servicing, and thus in a way increase the productive base of the nation through provision of improved infrastructures and facilitation of social health insurance that will consequently increase the average wellbeing of the people and their performance in the work place.
3.1.2 The Concept of Macroeconomic Convergence The convergence theory is based on the neoclassical growth model (Solow, 1956; Swan, 1956) and implies a tendency, over the long- term, to level the rate of income growth or that of per capita production in different geographical zones. In other words, there is convergence when a “poor” economy tends to increase more rapidly than a “rich” economy, in a way that the “poor” country will, in the long-term, catch up with the level of income or per capita production of the “rich” country.
The idea of convergence in economics is also sometimes known as the catch-up effect. It is the hypothesis that poorer economies' per
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capita incomes will tend to grow at faster rates than richer economies. As a result, all economies would eventually level up in terms of per capita income. It was noted that developing countries have the potential to grow at a faster rate than developed countries because of diminishing returns (in particular, to capital) are not as strong as in capital-rich countries. Furthermore, poorer countries can replicate the production methods, technologies, and institutions of developed countries, shortening the period needed to reach the production level of the more developed economies.
3.2 THEORETICAL BACKGROUND
3.2.1 Financial Liberalization Theory
The justifications for policies of financial liberalisation find their initial expression in the propositions contained in the independent (and nearly simultaneous) publications of McKinnon (1973) and Shaw (1973). These propositions, taken together, have since become known as the McKinnon-Shaw hypothesis or the financial liberalisation thesis. In sum, these authors argued that the financial sectors of most developing economics were repressed by misguided financial and monetary policies, overregulation of the financial sector and other forms of public sector intervention and excessive public
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borrowing from the financial system. The consequences of this repression could be seen in: Administering low nominal interest rates, often resulting in negative real rates (nominal interest rate less inflation rate). Low ratio of real money to national income. Small and oligopolistic financial sectors (relative to the size of the economy) dominated by intermediation in short-term financial assets. Dual economies with capital-intensive modern sectors served by cheap foreign exchange and low-interest finance and labour-intensive traditional sectors, left to be served by informal finance. Large government deficits that pre-empted the resources of the formal financial sector and generated inflation (by inducing excess money creation).
The outcome of that repression was low savings and investment rates and retarded growth. Shaw (1973) argued that increased financial intermediation provided the impetus for growth more directly. Liberalisation would result in an expanded, improved and integrated financial sector that would lead to:
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an Increase in the savings rate from the diversion of potential savings from inflation hedges, capital flight and the like; an Increase in the rate of investment by facilitating more lumpy investment; and a direct enhancement to growth via improved financial technologies
These growth-inducing consequences of increased monetisation and financial sector intermediation are referred to as Shaw’s ‘intermediation’ effect. Financial liberalisation, in the view of both authors, meant: a) Market-determined interest rates b) Greater ease of entry into the banking sector to encourage competition c) The elimination of directed credit programmes d) Reduced fiscal dependence of the state on credit from the banking system (to allow for greater expansion of credit to the private sector) e) The integration of formal and informal markets f) A movement towards equilibrium exchange rates and, eventually, flexible exchange rate regimes with open capital accounts
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Initiatives (a)-(e) are, effectively, domestic financial liberalisation, while (f) extends liberalisation to external finance. Though the causal links between liberalised finance and growth suggested by McKinnon (1973) and Shaw (1973) were different, they were not mutually exclusive.
However, McKinnon (1973) and Shaw (1973) identified savings as one of the transmission mechanisms through which financial liberalisation is expected to affect economic growth. The Fig. 3.2 shows that, the artificially low interest rates, resulting from financial repression, keeps savings low. Low savings lead to a higher degree of competition between different investment projects than would otherwise be the case, resulting in a situation where high-yielding investments are rationed out. The financial liberalisation hypothesis states that removing repression should increase interest rates and so attract deposits which will improve savings and, thereby, increase saving from point X on the SS curve to point E, the equilibrium point.
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Real
Interest I Z S Rate
r2
r* E
C r1 X Y I
0 Savings, 1 2 Investment I I8 I Figure 2: Financial Repression
Source: Romain et al (2011)
In Figure 2, the real rate of interest is measured on the vertical axis, while the level of investment and savings are measured on the horizontal axis. The SS curve represents the savings function, while the II curve represents the investment function. If the market is allowed to operate freely, equilibrium in the market for loanable funds would be attained at point E, where amount saved (S) is equal to amount invested (I*), and the market-determined rate of interest will be r*. However, if an interest rate ceiling (C) is imposed on 1 deposit interest rates at r1, savings will be I , banks can charge a 1 lending rate at r2, which corresponds to investment at I . However,
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interest rate ceilings will more likely apply to both deposit and lending interest rates. In this case, both savings and investment will be restricted to II; XY amount of investment opportunities is not met, and the investment undertaken will be inefficient (dotted area).
Liberalisation of the financial sector through interest rate decontrols, denationalization of banks, strengthening of prudential regulations, and the granting of more bank licenses (including foreign participation), is expected to raise interest rates, thereby increasing savings and also investments. This process will continue until the real interest rate is at r*, where saving is enough to satisfy investment. McKinnon and Shaw, therefore, advocated the liberalisation of such repressed financial systems so as to increase savings and investment, and consequently promote economic growth.
4.0 RESEARCH METHODOLOGY
4.1 Research Design
The static panel data estimation techniques were used for this study. The study estimated the three methods: the Pooled OLS, the Fixed Effect Model (FEM), and the Random Effect Model (REM) where necessary for each model, and the optimal results were presented after diagnostic tests. In the empirical analysis, this study used data from
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six (6) member countries of WAMZ spanning 2001 to 2015. This technique (panel data technique) was used to estimate and test for this study objective as indicated in equation (6). The static model is implied because this study wish to estimate long run relationship as against the dynamic model (GMM) wish is meant for short run analysis.
4.2 Model Specification
To test for this study objective, which is on the effect of financial liberalisation on the macroeconomic convergence variables in WAMZ, the study adopts the openness and financial liberalisation model, which is in consonance with the model estimated by Niels and Robert (2005) and Abdullahi and Suardi (2009). The former estimates a set of equation to investigate the relationship between financial liberalisation on savings, investment and growth. The econometric specification used in the study, (which is in line with the theoretical formulation of financial liberalisation thesis with some modifications) can be generally described as follows:
yit j j FINLIB jt X jt t (1) s FINLIB X y j j jt jt t (2) i FINLIB X y j j jt jt t (3)
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ipr FINLIB X y j j jt jt t (4) ipb FINLIB X y j j jt jt t (5) where is the per capita growth rate; is the domestic saving to yg s y
GDP ratio; is the total investment to GDP ratio; is the private i y ipr y investment to GDP ratio; is the public investment to GDP ratio; ipby
is the country specific constant; FINLIB is the measure of j financial liberalisation, and is a vector of country variables X jt which are normally used in cross-country analysis. The subscripts j and t refer to a specific country and time period, respectively and t is the error term. The reasons for the adoption of the above model in estimating the effect of financial liberalisation (proxy FLPIND) on macroeconomic convergence variables are; (a) cross – country (i.e., WAMZ); (b) multiple regression technique; and (c) multi-dependent variables (6)
Similarly, for the purpose of this study, equation (6) is estimated to elucidate the impact of financial liberalisation on the nine macroeconomic convergence variables. Therefore, Yi represents the
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dependent variables, that is, all macroeconomic convergence variables while financial liberalisation indicator (FLPIND) is the main explanatory variable and financial sector development (FDN), that is, financial deepening and net capital flow (NCF) are represented in the earlier equations as Xij, which are the control variables that are assumed to have influence on the dependent variables because of their relationship with common policy programmes (Structural Adjusted Programme) adopted by all member states. All variables are annual time series data, and various tests were carried out on these variables for reliability and appropriatability of the model. Such tests include the Haussmann tests which were conducted to examine whether the model estimation should be Fixed Effect (FE) or Random Effect (RE).
4.3 The Techniques of Analysis
The panel data method of analysis was employed in this study because of the nature of data involved. It was used to achieve the objective because the data's nature is both cross sectional and time series. These techniques allow for correction of those problems that are associated with pure time series analysis, such as problem of autocorrelation and heteroskedacity.
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4.4 Data Sources
The data used in this study were obtained from two separate sources, namely: (a) Internal sources (b) External sources (a) The Internal Sources
These are annual data publications of individual member country’s Central Bank Statistical Bulletin, the Stock Exchange Markets, and Bureaux of Statistics. (b) The external sources
These include, largely, West Africa Monetary Institute (WAMI) publications, the World Bank, and International Financial Statistics (IFS) of IMF.
4.5 Description of Major Variables
The implementation process of financial liberalisation involves a number of policies. Most of the studies that involve financial liberalisation implementation policies use individual financial liberalisation policies, or a dummy variable, to represent the effect of the policy. However, such studies either treated partial financial
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liberalisation as the full liberalisation policy or excluded it by taking only the date of the full liberalisation. To avoid the problem of losing information on the full liberalisation and allowing possible reversal of the policy, this study follows Shrestha and Chowdhury (2006), Caprio et al (2000), Laeven (2003), Owusu (2012), and Fowowe (2007) and construct a financial liberalisation index, using principal components analysis (PCA) for the selected ECOWAS countries (WAMZ), unlike Owusu (2012) and Fowowe (2007) who used multiple indices to capture FLP. The former used three financial liberalisation indices (FLIR, FLCA and FLBL) which were captured through the same process (i.e. PCA) but different policy thrust. The latter combined two methods of generating financial liberalisation indices: the dummy variable of 0s and 1s, and the PCA. Others, such as Caprio et al. (2000) construct a financial liberalisation index for eight developing countries by including eight main components of financial liberalisation in their index, which are: (i) interest rates, (ii) pro- competition measures, (iii) reserve requirements, (iv) credit controls, (v) banks’ ownership, (vi) prudential regulation, (vii) stock markets, and (viii) international financial liberalisation. Laeven (2003) also constructs a similar index for 13 developing countries. He included six measures of financial liberalisation but excluded the measures related to stock markets and external sector in his index, whilst
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Shrestha and Chowdhury (2006) construct a similar index for Nepal which included both internal and external liberalisation. However, according to Shrestha and Chowdhury (2006), in order to derive the financial liberalisation indices, some arbitrary value is assigned to each of the financial liberalisation policy variables. Each policy variable can take a value between 0 and 1, depending on the implementation status. When a particular sector is fully liberalised, that policy variable takes a value of 1, and when that sector remains regulated, it takes a value of 0. To capture the scenario of part, step- wise or gradual liberalisation process in a particular sector, partial values, like 0.33, 0.50, and 0.66, would be assigned. A value of 0.50 (or less, depending on the number of policy thrust to achieve full liberalisation) would indicate the first phase of partial deregulation in a two-step deregulation process, whereas a value 0.33 and 0.66 would indicate the first and second steps, respectively, in a three-phased deregulation process. The two-phased process takes a value of 1 in the second phase and the three-phased case takes a value of 1 in the third phase. In other words, if a country is fully liberalised in a single phase, the value assigned in this case is 1, but if the liberalisation is completed in two phases, then 0.5 is assigned for the first phase and 1 for the second. Similarly, if the liberalisation takes place in three
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phases, then the number assigned is 0.33 for the first phase, 0.66 for the second phase and 1 for the last phase (Shrestha and Chowdhury, 2006). This study joins other authors, in particular, Fowowe (2006) and Owusu (2012), to derive financial liberalisation policy index for WAMZ, using five compressed policy thrusts to represent both domestic and foreign or international dimension of financial liberalisation policy (FLP), which includes, capital account liberalisation (including stock market liberalisation), removal of credit control, interest rate deregulation, ownership structure of banks (indigenes, foreigner participation, and privatisation of government banks) and, lastly, foreign exchange liberalisation. Each of these is assigned the value of 0.2 and any country that has achieved the five is assigned 1 and that indicates full liberalisation. This is in line with Owusu (2012), and Shrestha and Chowdhury (2006).
Financial sector development (FDN) is in line with the Central Bank of Nigeria's definition, that is, ratio of credit to private sector, as a percentage of GDP. The value of net capital flows is derived from the difference between total capital inflows and capital outflows. Missing values are approximated with the aid of the linear interpolation technique, and in a bid to render all the coefficients as elasticity (where applicable), the log transformation of the time series data
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involved in this study is based on the advice of Carlos Barrera-
log( x) if x 0 Chaupis, that is, to adopt the rule: log (x) = where ''x'' is log( x) if x 0 the time series variable. The macroeconomic convergence variables are a creation of WAMI and are taken from the source.
5.0 RESULTS AND DISCUSSION
5.1 Financial Liberalisation and Macroeconomic Variables in WAMZ
The main objective of this study is to assess the effect of financial liberalisation policy on the macroeconomic convergence variables in WAMZ. This was achieved through panel data estimation for the entire zone. However, the method reported in Table 5 (primary convergence variables) and Table 6 (secondary convergence variables) are the optimal model among the variants of panel data analysis method
Table 2: Panel Results on Effect of Financial Liberalisation Policy on Primary Macroeconomic Convergence Variables in WAMZ Variables INFR FDY CBFD GER C -0.7585 2.9624 -0.48169 6.60701 (0.8916) (0.3909) (0.9622) (0.0092)* FDN -1.5641 -1.81479 -4.282128 -0.018156 (0.0275)** (0.0001)* (0.0147)* (0.9442) NCF -0.00002 -0.00028 -0.000153 0.000498 (0..5863) (0.2698) (0.9048) (0.7539) FLPIND 27.5616 2.71858 42.79557 4.5261 (0.0079)* (0.6643) (0.0202)** (0.1793)
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R-Squared 0.308393 0.79325 0.087358 0.684067 Adjusted R- 0.228209 0.76929 0.050359 0.646899 Squared F- Statistics 3.843991 33.6918 2.361088 18.40445 (0.0006)* (0.0000)* (0.07822) (0.0000)* Wald Joint 7.72025 34.6639 7.117501 1.05795 Infl. Test (0.0522) (0.0000)* (0.0482)** (0.7887)
*Source: Author’s Computation, (2016)
**The values in parentheses are the probability of the coefficient and represent the level of significance. Where * and ** depict one and five per cent respectively The results in parentheses are the probability values of individual coefficients while asterisk (*) shows level of statistical i significance, i.e., 1% (*) and 5% (**). However, the result shows that financial liberalisation policy (FLPIND) has a significant positive impact on INFR, as indicated from the coefficient of FLPIND against INFR, (which means that the policy of financial liberalisation could engender inflationary pressure in WAMZ) and CBFD, which is against the theoretical expectation. Theoretically, inflation rate is expected to reduce as financial liberalisation progresses, only if the financial inflows are used for investment smoothening, rather than for consumption smoothening, all things being equal. Also, fiscal deficit financing through central banks should also reduce because FLP is
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expected to boost investment and increase revenue base of the government, thereby reducing fiscal deficit financing through the central bank. The of volatility and external shocks (Baerkert, 2004; Diamond, 1984; Obstfield, 1994 and Aghion et al, 2004). It is worth noting that the R-squared that measured the goodness of fit is 30% for INFR and 9 per cent for CBFD, but F-statistic and Wald test show robustness of the INFR model. The net capital flows (NCF) show inverse relationship, as expected on inflation rate (INFR), while financial sector development (FDN) equally indicates expected inverse relationship on inflation rate, meaning that financial sectors in the zone are well developed, such that, they mobilised and channelled funds to their most profitable uses, and as a result cushion inflation pressures. NCF increases the gross external reserves through conservation of foreign exchange from improved investments.
The finding that domestic financial sector development, as indicated by FDN, could reduce inflation through improved investment that is made possible through availability of investible funds, is in consonance with the study by Owusu (2012), while the result that linked financial liberalisation policies to high inflationary pressure, is also in line with the submission of Kamirsky (2009) who reiterated that financial liberalisation could be a source of shocks. It is useful to
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note that financial liberalisation policy (FLPIND) has expected sign on GER, but the effect is statistically insignificant. The reverse is the case for FDY, but it still statistically insignificant. However, the fact that the R-square in these two models is high (68% and 78%, respectively) and that the post estimation diagnostic test shows the robustness of the models at one per cent level of significance, further indicates that variables other than FLPIND has more influence on FDY and GER. Therefore, net capital inflows, proxied by NCF, and financial sector development indicators (FDN), are very crucial variables that explain variation in FDY and GER. Along with financial liberalisation policy indicator, financial deepening and capital flows should be taken note of, if primary convergence is to be achieved. The inverse relationship between FDN and FDY implies that financial sector development could lead to reduction in fiscal deficit, as expected. Since FDN's aim is to make funds available to its most potent or optimal user, this, in turn, will stimulate investment and productivity and, thereby, generate a new source of revenue to the government. The result further shows that for any one per cent reduction in FDY, FDN contributes a 1.8% of the estimated reduction.
Also, NCF measures the degree of financial openness of WAMZ and constitutes the activities in the capital accounts of WAMZ nations.
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This also indicates an inverse relationship as FDN. However, FLPIND indicates a positive relationship with FDY, which shows that FLP could be a source of fiscal indiscipline or recklessness in such manner that financial intermediation could be skewed towards raising of funds for public authorities. It could be summarised from these results that financial liberalisation has a positive effect on all primary macroeconomic convergence variables, whereas the theoretical expectation is that the relationship should be inverse to three of these four variables, namely INFR, FDY, CBFD. This implies that financial liberalisation is a source of volatility on these variables and could be a factor hindering the actualisation of convergence; but zonal gross external reserves is spurred by FLPIND, as expected.
The results that show the effect of financial liberalisation policy on secondary macroeconomic convergence variables in WAMZ countries using panel data analysis, are displayed in Table 3.
Table 3: Panel Results on Effect of Financial Liberalisation Policy on Secondary Macroeconomic Convergence Variables in WAMZ Variables TRY SMRTR PIFDR EXR RIR C 7.1592 34.1061 -4.08634 45.7063 2.148 (0.0029)* (0.0002)* (0.6957) (0.0019)* (0.6659) FDN 0.1055 2.1968 -6.00412 -0.8830 0.1457 (0.7175) (0.0094)* (0.6346) (0.6202) (0.8156) NCF -0.00002 -0.00042 -0.00003 -0.0001 -0.00003 (0.0911) (0.3877) (0.9963) (0.3811) (0.9238) FLPIND 11.13161 -7.70843 38.686 86.4195 -12.5697 (0.0102)** (0.5057) (0.0448)** (0.0013)* (0.1674) *Source: Author’s Computation (2016) Bakare-Aremu (2018)
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R-Squared 0.81534 0.13715 0.077869 0.69073 0.32709
Adjusted 0.79393 0.10217 0.041335 0.6585 0.24907 R-Squared F- Statistics 38.08254 3.9207 2.10678 19.2635 4.19255 (0.0007)* (0.0118)** (0.1066) (0.0000)* (0.0000)* Wald Joint 17.76629 17.7663 4.50575 18.3817 3.30652 Infl. Test (0.0005)* (0.0005)* (0.2118) (0.0023)* (0.3454)
**The values in parentheses are the probability of the coefficient and represent the level of significance Where * and ** depict one and five per cent respectively.
The results in parentheses are the probability values of individual coefficients while asterisk (*) shows the level of statistical i significance, i.e., 1% (*) and 5% (**). Therefore, the results of the first model (TRY dependent variable) show that FLPIND has a significant positive impact on TRY, as theoretically expected. This means that the policy of financial liberalisation should stimulate tax revenue and increase the tax base through investment and productivity, such that for a one per cent increase in TRY in WAMZ, 11% of this is explained by the financial liberalisation policy. Also, it can be deduced that FDN has a positive effect on TRY, as expected, because financial sector development should spur investment and increase tax revenue base, however, not statistically significantly. But NCF has an inverse and
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significant effect on TRY, the economic meaning of this is that there is existence of repatriation of profits and evasion of taxes by expatriates within the zone. The F-statistic value however, suggests the robustness of the model at one per cent level of significance and the goodness of fit measured by R-squared and adjusted R-squared at 82% and 79% respectively suggests reliability of the model and also allied with the Wald test for joint influence of explanatory variables which is significant at one per cent level.
The second dependent variable is the SMRTR, which is estimated in the same line with the first, over the same set of explanatory variables or regressors and indicates that FDN, which is proxied by the domestic financial sector development, has direct relationship with the dependent variables. This implies that financial sector development of WAMZ area could lead to increase in salary mass in relation to tax revenue. The expected relationship should be inverse, that is, FDN should spur the growth of private investment and productivity and reduce reliance on authority to create jobs, since FDN's aim is to make funds available to its most potent or optimal user. Also, net capital flows (NCF) measure the degree of financial openness of WAMZ and constitute the activities in the capital accounts of the WAMZ nations. This indicates an inverse relationship as FLPIND, as expected, but it is
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not statistically significant. This implies that financial liberalisation policy has expected theoretical relationship with SMRTR but not it is significant. The R-squared and the adjusted R-squared are at 14% and 10%, respectively, and are in disagreement with other statistical measures, such as F-statistic and Wald test for joint influence of explanatory variables that both indicate a one per cent level of significance. The Wald test for joint influence of countries dummy variable is, however, at one per cent significant which means that the individual countries that make up WAMZ differ in intercepts. The third is the PIFDR, and the indicator of financial liberalisation, which is the key explanatory variable (i.e., FLPIND) that indicates a positive relationship at 5% level of significance. This implies that policies of financial liberalisation spur public investments, financed domestically, as expected, while FDN, that is, financial deepening, shows an inverse relationship with PIFDR, meaning that private sector financing is paramount and more profitable and could reduce the amount available for public investment financing. However, the joint influence of financial indicators shows an acceptance of the null hypothesis that all the indicators, pooled together, do not have much significant influence on PIFDR. Similarly, the R squared and adjusted R- squared are 8% and 4%, respectively, which shows a very weak goodness of fit. In the same vein, the F statistic also indicates a non-significant relationship,
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but the Wald dummy variable test depicts a strong effect of dummy variables at one per cent.
The next dependent variable is the WAMZ exchange rate (EXR), which is regressed on the set of financial sector indicators; the domestic financial sector development (FDN), financial liberalisation policy indicator and net capital flows. The last two of these explanatory variables have an inverse relationship but it is not statistically significant, while the FLPIND, which is the measure of financial liberalisation policy, is positively related to the WAMZ exchange rate, which is at variance with the theoretical postulation. This shows that FLP could be a source of exchange rate volatility and depreciation. This is in consonance with the study of Kamirsky (2009), Roman (2011) and Owusu (2012). The adjusted R-squared which measures goodness of fit indicates a 66% goodness of fit. The F-statistic is at one per cent level of significance and the Wald test for joint influence indicates significant at one per cent.
The last dependent variable is the RIR, this is also set against the set of financial indicators. The domestic financial development of WAMZ (FDN) shows a direct relationship with WAMZ (RIR) which implies that a well developed domestic financial sector will promote return on investment, and reduce the spread of rate of interest (LR - DR) and
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increase real interest rate. In contrast, NCF and FLPIND both have inverse but insignificant relationship with RIR. The adjusted R-squared is 25% which is considerable low, but the F-statistic indicate robustness of the model. In contrast, the Wald joint influence of explanatory variables shows acceptance of null hypothesis that there is no joint influence of financial sector indicators on WAMZ real interest rate. It should be noted that the relationship between financial liberalization policy index and real interest rate in WAMZ is in contrast with McKinnon and Shaw financial liberalisation hypothesis.
In conclusion, financial liberalisation policy on average, has adverse effect on EXR and RIR but spur PIFDR, SMRTR (though not statistically significant), and TRY. These imply that if financial liberalisation policy is well tailored, it will result in maximum gains, and it could help in achieving macroeconomic convergence in WAMZ. In other words, WAMZ economies should liberalise their financial sector with caution to derive benefit from global financial resources.
6.0 CONCLUSION AND RECOMMENDATION
This study could be summarised as an enquiry into the possible effect of financial liberalisation policy on these macroeconomic convergence variables in the region (WAMZ area). It confirmed the divergent (mostly adverse) effect of FLP on the macroeconomic convergence
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variables, with both theoretical and empirical support. That is, FLP adversely affects most of the nine convergence criteria (both primary and secondary convergence variables) and, as such, could impair the chance of achieving convergence, which the authorities need to manage and control.
In conclusion, from the study's discussion, it is clear that financial liberalisation policy among other things, has had a major role to play in the realisation of the WAMZ macroeconomic convergence. Therefore, in the light of this conclusion, the following recommendations are made:
Policies should be jointly developed against the evil effect of financial liberalisation that would serve as antidote for zone- wide adverse effect of the policy. In addition, those countries that have overcome these adverse effects should serve as guides to others. Financial liberalisation policy should be adopted with caution and macroeconomic policy framework should be strengthened
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Conflict Transformation and Peace Building in Divided Homogeneous Communities: A Case Study of Ife and Modakeke
Basil IBEBUNJO, PhD Centre for Strategic and Development Studies Ambrose Alli University, Ekpoma, Edo State.
and Samuel Opeyemi IROYE, PhD
Peace Studies and Conflict Resolution Unit Faculty of Social Sciences National Open University of Nigeria, Jabi, Abuja.
Abstract raditional conceptions and approaches to conflict resolution typify conflict along lines of heterogeneity. Consequently, Tcentury old intra-ethnic conflicts such as the Ife-Modakeke crises tend to defy regular approaches to conflict resolution techniques. Rebuilding divided intra-ethnic societies presents more daunting challenges. Their resolution and transformation are equally cogent because interactions at this level are more frequent than inter- ethnic or larger divisions such as inter-State or regional conflicts. Indeed, Ife and Modakeke are homogenous in that they share common ancestry and are both located in Osun State. The Modakekes settled in Ife during the period of the collapse of Old Oyo Empire in the 19th Century. Various studies have examined the history, causes and consequences of Ife-Modakeke crisis and found that they became
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divided by conflicts ranging from economic, political and identity crisis revolving around the indigenes and settlers question. Attempts made to resolve the conflicts have been mostly political, administrative and judicial in nature. Consequently, these efforts have failed and armed hostilities have been recurrent in the locality. This study used conflict transformation theory as a framework, placing emphases on John Paul Lederach and Thomas Imobighe’s approaches. It was guided by justice, reconciliation and full participation, which enhance peace building in divided societies. It also highlighted informal grassroots peace building initiatives, projecting it along Burton‘s thesis which operates on the premise of meeting human needs. The study posited that justice and reconciliation is key to securing a peaceful future for Ife and Modakeke, rather than political, economic and judicial solutions that the political bigwigs from either intra-ethnic extraction continue to project. In addition to justice and full grassroots reconciliation, the study recommends full implementation of key findings of the reconciliation committees. Finally this study advocates the involvement of civil society in the peace building process.
Keywords: Conflict Resolution, Homogeneous Communities, Conflict transformation, Reconciliation, Peace building
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1.0 INTRODUCTION
Conflict is a naturally occurring phenomenon that is inevitable in any interaction between humans. The resultant positive or negative manifestation of conflict is the sum of all the different divergent or opposing emotions, desires, ideologies, and goals. Conflict has rightly been used interchangeably with friction. Without friction there can be no purposeful movement in the forward or backward direction. Without motion, there can be no progress.In the same manner, conflict is a necessary constant for progress or retrogression. Conflict can therefore be good or bad depending on how it is managed.
Nigeria is a multi-ethnic society with high propensity for intra and inter-ethnic rivalry that often become violent. Examples of such hostilities include: Yoruba-Hausa community in Shagamu, Ogun State; Ibo-Hausa community in Kano; Eleme-Okrika in Rivers State; Itsekiri-Ijaw/Urhobo in Delta State; Ijaw-Ilaje conflict inOndo State; Tiv-Jukun in Wukari, Taraba State; Ogoni-Adoni in Rivers State; Ife- Modakeke in Osun State Zango-Katafanin Kaduna State; Chamba- Kuteb in Taraba State; Aguleri-Umuleri in Anambra State; Basa- Egbura in Nassarawa State; Hausa/Fulani-Sawaya in Bauchi State; Fulani-Irigwe and Yelwa-Shendam, both in Plateau State; Hausa-
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Yoruba clashes in Idi-Araba in Lagos State (Imobighe,2003; and Omotayo, 2005).
According to Yoruba history, the Ifes and Modakekes are sons and daughters of the same parents since their ancestry is traceable to Oduduwa, the progenitor of the Yoruba race. This makes them homogeneous communities. With the frequency and magnitude of destruction from such conflicts, it is a wonder that solutions are yet to be found for the resolution of internal conflicts in Nigeria. More worrisome are homogenous conflicts such as the Ife-Modakeke conflicts. This is because Ife and Modakeke are both located in the same state.
1.1 Statement of the Problem
The collapse of the Old Oyo Empire in the 19th century caused a flood of refugees down south towards Ile-Ife. Albert (1999: 143) noted that visitors from Oyo must have been attracted to Ile-Ife by the historic image of the city as the aboriginal home of the Yoruba people [Orisun Yoruba]. According to Ade-Ajayi (1986),
The Ife welcomed Oyo migrants as a source of cheap labour; but soon Ibadan began to use the Oyo settlers to intervene in Ife Politics. In 1851, the Ooni, in
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trouble with his Chiefs, and relying on the Oyo settlers for support, granted their request for a township of their own outside Ife. The new settlement, named Modakeke, was later used by the Ibadan twice to sack Ife. The second time was in 1882 when the Alerin, the Ooni-elect, had to take refuge in Oke-Igbo.
This conflict, which is regarded as the oldest conflict in the history of Nigeria, started in 1835 and is still ongoing. Various scholars have examined the Ife-Modakeke crisis. Such studies include Albert (1999), Aguda, (2001); Oladoyin (2001), Agbe (2001), Toriola (2001), and Babajimi (2003). The focus has been on the history, causes and consequences of Ife-Modakeke crises. The causes of the conflicts are varied ranging from socio-economic, political and identity issues revolving around land ownership issues, payment of land rent (Isakole), and the status of Modakeke community.
With the post-1997-2000 conflict that is constantly brewing within the locality of Ife and Modakeke, there is no doubt that conflict resolution techniques used in the resolution of Nigeria’s oldest conflict need to be revisited. This is because Ife and Modakekeare still divided and struggling to maintain the fragile peace so far achieved. Indeed, homogenous conflicts are the most difficult to
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resolve because they are not temporal in nature. In our case study, it is historical, generational, traditional, political, socio-economic and even cultural. There is therefore the need to examine and proffer better peace building instruments and techniques for the divided homogeneous communities of Ife and Modakeke.
2.0 CONCEPTUAL CLARIFICATIONS Conflict Conflict has been defined in various ways by different scholars. Zartman (1991:370) stated that conflict is “an unavoidable concomitant of choices and decisions and an expression of the basic fact of human interdependence”. Chaplin (1979:109) defined conflict as “the simultaneous occurrence of two or more mutually antagonistic impulses or motives.” To Francis (2005:6), conflict is the “pursuit of incompatible interest or goals by different groups.”While all the above and many other definitions of conflict are correct in that they present the basic element of conflict, which is antagonism, they however omitted the essential elements of hostility (which may be non-violent and violent), that can result when antagonism crosses a certain threshold on the conflict/war index. According to Ibebunjo (2012: 35), the definitions of conflict by Thomas Imobighe and that of Bartos and Wehr addressed this deficiency.
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Bartos and Wehr (2002:22) define conflict “as a situation in which actors use conflict behaviour against each other to attain incompatible goals and/or to express their hostility.” For Imobighe (1997: 272) “the term conflict represents a disharmony, antagonism or hostility in a relationship, which could arise due to incompatibility of the goal being pursued or incompatibility of the means used in pursuing such goals.” The fault-line in Bartos and Wehr’s definition arises from the fact that it is possible for incompatible goals to be pursued using compatible means, and at the same time keep conflict within a manageable rate. Also, compatible goals could be pursued by two or more persons (or group of persons) through incompatible means, with the end result being antagonism and violence (Ibebunjo, 2012: 35).
Peace Building The term peace building is usuallyattributed to Johan Galtung, who first used it in 1975. Galtung (1996) defined peace building as strategies designed to promote a secure and stable lasting peace in which the basic human needs of the population are met and violent conflicts do not recur. He also incorporates the goals of both negative peace (absence of physical violence) and positive peace (absence of structural violence) into the conception of peace building.
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More contemporary definitions of peace building are drawn from Galtung’s exposé. Lederach (1997) introduced a notion of peace building which he linked to sustainable reconciliation in divided societies. He argued for a shift in focus on social relations and reconciliation as tools to the attainment of sustainable peace in war- torn societies. Essentially, he advocated for a long-term and holistic perspective, and called for a change from the focus on the use of external to internal actors in the peace building process. This became the foundation for a broader, better and more inclusive understanding of peace building.
Spence (2001) noted that peace building includes those activities and processes that focus on the root causes of the conflict, rather than on just the effects. She also emphasised that such activities must i) support the rebuilding and rehabilitation of all sectors of the conflict ravaged society; ii) encourage and support interaction between all sectors of society in order to repair damaged relations and start the process of restoring dignity and trust; iii) recognize the specifics of each post conflict situation; iv) encourage and support the participation of indigenous resources in the design, implementation and sustainment of activities and processes; v) and promote processes
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that will endure after the initial emergency recovery phase has passed. This is the sum of an adequate peace building process. It is obvious that some of these processes are lacking in the post-conflict settlements of Ife-Modakeke crises.
Divided Homogeneous Communities Oberschall (2007) defined divided society as one in which the relationships of the dominant group to ethnic minorities are hostile rather than cooperative. Lederach (1995) supports this assertion when he argued that ethnically inclined nature of many states serves to create and exacerbate social cleavages in already divided societies where armed conflicts are rampant.
According to Horowitz (1985)a divided society can be characterised as a society that has a segmented organizational structure that applies to the structure of economic organizations, as it does to political organizations. In other words, in divided societies, identities and divisions are structurally flawed and reinforced through imbalances of socio-economic power along with political differentiation.
2.1 Theoretical Framework
A number of conflict theories have been put forward to explain how conflicts are generated, maintained and terminated in human society.
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They are generally referred to as “conflict theory”, a term, which according to Sanderson (2007, 662), came into wide use in sociology during the 1960s, when it was seen as an alternative and rival of functionalism”. Sanderson explained that the term initially “seemed merely to identify a more neutral Marxian perspective, but for some it meant something broader” (Sanderson: 2007, 662).
Conflict transformation theory Miall (2015) and a number of other scholars had theorised that a distinctive theory of conflict transformation is indeed emerging. Good examples include Lederach(1995) and Imobighe (1995: 2003). Indeed, this theory draws from many of the familiar concepts of conflict management and conflict resolution, and it also rests on the same tradition of theorising about conflict. It is best viewed not as a wholly new approach, but rather as a reconceptualization of the field in order to make it more relevant to contemporary conflicts (Miall, 2015).However, conflict transformation is not entirely a new conception. It draws its conceptual building blocks from a number of other theories and also borrowed from other schools of thought. Conflict formation as a thought was already present in the work of the European structural theorists who analysed it (See Krippendorf, 1973 and Senghaas, 1973). The most influential work on the subject is however reputed to be that of Galtung (1996, 70-126).
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Essentially, conflict transformation theorists argue that modern conflicts require more than the framing of positions and the identification of win-win outcomes. They opine that the very structure of conflicting parties and their relationships may be embedded in a pattern of conflictual relationships. This may extend beyond the conflict if not properly managed, leading to the recurrence of the conflict. Conflict transformation can therefore be said to be a “process of engaging with and transforming the relationships, interests, discourses and, if necessary, the very constitution of society that supports the continuation of violent conflict” (Miall, 2015). In constructive conflict, which is seen as a vital agent or catalyst for change, all conflict parties within the society or region affected have complementary roles to play in the long-term process of peace building.
Drawing from his experience as both a mediator and a non-violent activist, Lederach (1995) explained the differences between social justice activists and conflict resolution practitioners. He suggested that for effective conflict resolution, both approaches are necessary. As Lederach noted:
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Conflict transformation must actively envision, include, respect, and promote the human and cultural resources from within a given setting. This involves a new set of lenses through which we do not primarily see ‘the setting and the people in it as the problem ‘and the outsider as the answer‘. Rather, we understand the long- term goal of transformation as validating and building on people and resources within the setting (Lederach, 1995).
Similarly, Imobighe explained that:
Since conflict is an inevitable part of human relations, it is important that when conflict occurs, it should be managed productively to avoid its destructive effects. While we cannot eliminate conflict completely, we can, at least prevent it from escalating into violence and transform it into a creative element (Imobighe, 2008:1).
Imobighe (2003:2) provides the framework for an adequate conflict transformation with his Integrated Conflict Management Circle (ICMC). He explains that conflicts are best managed by tackling the
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conflictual issues at their roots. This is by eliminating early such enabling conditions that cause conflict to fester. Conflict management processes must therefore be proactive rather than reactive. ICMC comprises three types of activities: conflict prevention and/or peace promotion and consolidation; conflict control/abatement; and conflict resolution. This is represented in the figure 1 below.
Conflict Prevention/Peace Promotion Possible Responses: • Democratic Conflict Control & practice Abatement • Behavioral code Possible Responses: • Confidence • Passing resolutions building • Making appeals measures & • Using neutral • Integrative forces to activities keephostile parties apart
Conflict Resolution Possible Responses:
Use of mediatory organs Conciliatory activities Intensive negotiations
Figure 1. Integrated Conflict Management Circle (ICMC) Source: Imobighe (2003:2). Ibebunjo & Iroye (2018)
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As Ibebunjo (2012) explained, the hallmark of Imobighe Conflict model (ICM), is the ICMC. This adequately captures and explains an essential but often omitted aspect of conflict, which is the fact that the conflict process is a cycle that must be adequately managed to avoid a recourse to armed hostilities. This is the case for Ife-Modakeke and other conflicts in Nigeria, Africa and to a large extent, the world.
3.0 HISTORY OF IFE-MODAKEKE CONFLICT
The relationship between the Ifes and Modakeke was cordial and mutually beneficial from the start. Both visitor (Modakeke) and host (Ifes) farmed, traded together and also jointly defended their cities. From the successes of this, the same warm welcome was extended to the Oyos, who provided military assistance to the Ifes during the Owu War of 1825 and other Ijesha invasions (Albert, 1999:144). Ife Chiefs were so encouraged by this that they threw their doors open to more of Oyo refugees.
The first of many of these crises occurred between 1835 and 1849 (Oladoyin, 2001), making the Ife-Modakeke Conflict the oldest intra- ethnic conflict in Nigeria. It has been on-going for more than a century (Albert, 1999 and Toriola, 2001). Albert, (1999: 144-145) tells us that the origin of Ife-Modakeke crises started with the Ife
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Chief, Okunade (the Maye), the autocratic and brave leader of the Yoruba warriors who had settled in Ibadan in the early nineteenth century. His power and influence in Ibadan politics was so great that the Ifes started to see Ibadan as an extension of their town. Okunade’s autocracy was however challenged in 1835, by some Oyo citizens in Ibadan. Consequently, he was expelled from the town. He was so bitter that he attempted to recapture the city during the Gbanamu battle. He was however killed in the battle and the Oyos thus took over the political leadership of Ibadan and totally excluded their Ife allies. The response of Ifes was the maltreatment of Oyo refugees in their town. They were even sold into slavery (Ajayi and Akintoye 1980).
With rumours of impending invasion of parts of Yorubaland by Fulani jihadists who were based in Ilorin, Ife surroundings such as Ikire, Iwata, Gbongan, Ipetumodu and Origbo were abandoned and the refugees ran to settle in Ile-Ife. Unfortunately, there was already conflict between Ife and the settlers, so after the defeat of the Fulani invaders at Osogbo in 1840, the Ooni Abeweila (who ascended the throne in 1839), sent some of the refugees back to Ipetumodu, Gbongan and Ikire in 1847. The Ooni also created a separate settlement for those Oyo refugees who had no home to return to. This
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was named Modakeke, mimicry of the cry of a nest of storks on a large tree near the settlement site.
There have been about seven major violent conflicts between Ife (who is regarded as the landlords), and Modakeke (the “strangers/tenants”). These wars were fought in the following years: 1835-1849, 1882-1909, 1946-1949, 1981, 1983, 1997-1998 and 2000. These crises have caused unquantifiable death and loss of properties.
3.1 Various Approaches in Resolving the Conflicts I. Institutional Approaches to Resolving Ife-Modakeke Conflicts Most conflicts in Nigeria and indeed Africa, are not taken serious and resolved until they become violent and spiral out of control. Like many other communal (homogeneous and heterogeneous) conflicts in Nigeria, attempts to resolve Ife-Modakeke conflict served mostly to complicate it using political solutions. This was carried out by successive governments and politicians. As an example, in 1981, the defunct House of Assembly of the then Oyo State (now Osun State), created 54 additional local government areas (LGAs). It was said that the powers that be, in Ife community prevented the creation of a separate Modakeke LGA. Subsequently, the Modakekes decamped en
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mass from the Unity Party of Nigeria (UPN), the dominant party in Oyo State, for the National Party of Nigeria (NPN). NPN was the opposition party in Oyo State but was the ruling party at the federal level.
The Ooni was so enraged by this development, that he renamed streets in Modakeke and downgraded the title and status of the Ogunsua. This sparked off another series of violent conflicts between the two communities. In attempt to resolve this new violence, a Judicial Commission of inquiry headed by Kayode Ibidapo-Obe (a judge of the High Court of Oyo State), was constituted by the federal government. The commission recommended the creation of a separate Modakeke LGA but the governor of the then Oyo State, late Chief Bola Ige refused to carry out this directive. Consequently, in the general elections of August/September 1983, Modakeke voted massively for Chief Victor Omololu Olunloyo of the NPN. The result was that Chief Ige lost the governorship election of the old Oyo state. This resulted in another violent conflict.
Again in 1996, the Arthur Mbanefo Panel constituted by the then Federal Military Government recommended the creation of additional units of administration at the state and LGA levels and on boundary adjustments. The panel also recommended the creation of an L.G.A.
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for the Modakekes. This was not realised as it was alleged that the Ife elite impeded this recommendation. The result was the placement of the headquarters of the new local government area for the Modakekes in Enuowa, a locality where the palace of the Ooni is situated. This was protested by the Modakekes, thereby compelling the federal government to return the headquarters to Modakeke. The Ifes saw this as an assault on their revered traditional stool. The state radio, the Osun State Broadcasting Corporation (OSBC) on August 14, 1997, announced to the public that the site of the headquarters of the new LGA is no longer Modakeke but Oke-Igbo in Ife.
The Military Administrator claimed that Oke-Igbo was a neutral ground belonging to neither the Ile-Ife nor the Modakeke, but the Modakekes, however, claimed that Oke-Igbo was part of Ile-Ife and that the announcement by the Military Administrator was a disguise to maintain the status-quo ante. They subsequently accused the Ooni of using his enormous wealth and influence with the then ruling military regime to perpetuate his “oppression” of their community.
The Modakeke youths quickly organised a protest march that was dispersed with tear gas. This was effectively the beginning of what was known as the “Ife-Modakeke War” of August 1997. By August 18 1997, a full-scale armed hostility erupted between the Ifes and the
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Modakekes, with significant loss of lives. Also, property worth hundreds of millions of Naira were burnt, looted and vandalised. It was reported that military grade ammunitions and other sophisticated/traditional tools of violence (such as machetes, cutlasses, axes, clubs etc.), were freely used. Police and military personnel were deployed from the state Police Command and later from other states as well. The violence was eventually halted by the government, using federal peacekeeping instruments. As it is traditional with conflict resolution practice in Nigeria, once the warring parties have been separated and the peace enforced, the conflict resolution process is halted. As Imobighe’s conflict model explained, when the issues of conflict are not adequately addressed, there will likely be a return to other aspects in the conflict cycle. There was therefore another violent clash between Ife and Modakeke in February 2000. Again, the contention was centred on the same issues of citizenship rights and struggles over land ownership between the Ife “landlords” and the Modakeke “strangers/tenants”.
II. Judicial Approach to the Ife-Modakeke Crisis The continuing conflict between Ife and Modakeke communities is in spite of all the judicial approaches and efforts made to solving the conflict. The earliest resort to the judiciary was the 1946 Ife-
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Modakeke crisis. This resulted from the commercialization of cocoa and the huge revenues accruable to Modakeke farmers. This made Ife land owners demand 10% of the harvest. Modakeke lost all cases relating to the demands made by Ife, even at the Appeal Court. This obviously did not solve the problem but rather, complicated and exacerbated it.
Other attempts were made by successive governments (at both state and federal levels), to institute different investigative commissions to look into various aspects of the Ife/Modakeke crisis. The most recent of such commissions include:
• The Justice KayodeIbidapo-Obe Judicial Commission of Enquiry, of 1981 (Oyo State government);
• The Arthur Mbanefo Panel for the Creation of Additional States, Local Governments and Boundary Adjustments of 1996, (Federal Military Government of General Sani Abacha);
• The Olabode George Presidential Conflict Reconciliation Committee of June 2000, on Ife/Modakeke, Ife North Local Government communities, (Federal Government); and
• The Human Rights Violations Investigation Commission
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(HRVIC), popularly known as the Oputa Panel, which sat between 1999 and 2002.
The various commissions submitted reports and recommendations. Till date, no one has been brought to books as it was mostly a peace committee. The Oputa Commission itself only submitted its report and recommendations to the Federal Government in May 2002. The other three Commissions never submitted their reports to the various governments that constituted them. Iroye (2017) thus concluded that judicial approaches to conflict resolution are inadequate to tackle such conflicts. An indication of the failures of past approaches to resolving the homogeneous conflict is the return to the conflict path as Imobighe (2003), has shown in the ICMC.
Recent Ife-Modakeke Conflict In October, 2017, there was another conflict between Ife and Modakeke communities, leading to fears that the two homogenous communities may again take the war path. Ife youths accused Modakeke community of flouting the peace agreement reached by the two communities in 1999 after the clash that claimed several lives and properties worth billions of naira. Consequently, they (Ife youths), wrote a letter to Governor Rauf Aregbesola and copied all the security agencies in Osun State. The letter read in part:
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“On behalf of the generality of youths in Ile-Ife, these pressure groups known as Great Ife Movement, GIM and Ife Youth Vanguard, IYV, wish to intimate your excellency of imminent incursion on Ife-land and for your Excellency to use your good offices as the Chief Security Officer of this state, to urgently do the right thing at the right time to impending trouble. Otherwise the 1997-2000 Modakeke/Ife imbroglio may be a child’s play… (Osogbo, 2017).
The youths of Ife thus accused the traditional head of Modakeke, the Ogunsua of Modakeke-Ife, of leading his people to trespass on Ife’s belongings by “cunningly and forcefully depriving our Obas, Baales, chiefs and Ife people of their inheritance with impunity”. Another reason for this outcry is the claim that the Ogunsua is tactically replacing
The Ooni appointed Obas and Baales with his own favourites in Ife North Local Government Area. This is usurping the authority of the Ooni of Ife and it is in contrast with the Ife Native Law and Custom. “This is our bitter experience now at Toro, Famia, Oyere , Opoye, Ejesi, Alapata, Jabata, Igbofon-Salami, Kilibi,
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Rogborogbo, Idi-iroko, Kinkinyinun/Onibambu, Oyoo-lowa, Oyo-onikeke, etc where the Ogusua is appointing his own Obas and Baales to replace those earlier appointed by the late Ooni Sijuade, Olubuse. The lives of Ooni-appointed Obas and Baales are also often being threatened (Osogbo, 2017).
Two things can be deduced from the above:
1. Issues of the age-old conflict are still unresolved; and 2. The Ife-Modakeke Conflict of 1997-2000, which claimed many lives and saw to the wanton destruction of properties is still glorified and romanticised.
Another indication of ineffective conflict resolution and peace building initiatives is the outbreak of conflict in the locality by either of the former warring parties with new group(s). A good example was the outbreak of violent conflict between the Hausa community and Ife people in the ancient city of Ile Ife on Wednesday, March 8, 2017. This led to the wanton destruction of lives and property. The bloody clashes were later contained by the Osun State security operatives, but tension and acrimony that had been built up by the incident will continue to undermine the peace process in the troubled town.
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Violent conflicts in such localities often follow the established trend of conflicts. This can be readily seen from the pattern and weaponry used. Combinations of daggers, guns, clubs, arrows, cutlasses and swords dane guns, cutlasses and traditional magical power were used by the parties. True to type, the clash between the Hausa and Ife community was described as “a replica of Ife-Modakeke conflict” (Kolawole, 2017).As usual, besides the usual rhetoric, little or nothing was done to resolve and transform the conflict. The Ooni of Ife, Oba Adeyeye Ogunwusi, cautioned the warring factions to give peace a chance as there are no gains in crisis. Speaking through his media aide, Comrade Moses Olafare, the monarch stated that
peace would soon be normalised between the two warring factions in the town and assured that, every one of them would tolerate one another and live as one without segregation, sectionalism, de-tribalism and nepotism saying all tribes are one in the country (Kolawole, 2017).
This was accompanied with the usual threat and /or use of force to quell any disturbances to the peace. The governor of the state, Rauf Aregbesola, while speaking on the issue noted that “…Osun is the land of peace and love, we have not experienced this in the last six
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years, and I believe such thing would never happen again (Kolawole, 2017)”.
Burton’s human needs theory of conflict resolution posits that a pre- condition for the successful resolution of conflict is that fundamental human needs be met (Burton and Sandole, 1986). Burton adopted eight fundamental needs from the basis of the work by the American sociologist Paul Sites and introduced one further need of his own (Scimecca, 1990: 206). Those adopted needs included control, security, justice, stimulation, response, meaning, rationality and esteem/recognition in essence; the Track 1 diplomatic techniques used to solve Ife-Modakeke and other conflicts in Nigeria will continue to fail. In this method, only the leaders of the conflict parties are invited to the table to negotiate with actors such as government agents and external forces such as the United Nations (UN), African Union (AU), etc. It is often assumed that the negotiated ‘peace’ will trickle-down to the rest of the population. There is however a growing acknowledgement that Track I diplomatic efforts is not enough to end the world‘s violent conflicts and wars and create peace. In Nigeria, the rest of the population include the restive youths, and this does not usually happen because the elders have lost the respect and authority they held over the youth. As Lederach emphasised in his conflict
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transformation thesis, “anyone who has lived in settings of protracted conflict or engaged in peacemaking activities in divided societies knows that standardized formulas do not work” (Lederach, 1997:23).He also noted that conflicts such as Ife-Modakeke are difficult to resolve because of the
“close proximity of conflicting groups, the shared common histories of the conflictants, and the dynamic of severe stereotyping coupled with radically differing perceptions of each other. The geographic setting of these conflicts is often the immediate community, neighbouring villages, or the domains of close sub- clans... (Lederach, 1997: 13).
Again, Lederach noted that community leadership who are key in the conflict resolution negotiations often “act as underlying forces in the dynamics of control and domination-forces” and manipulate the process to further their gain and positions.(Lederach, 1997: 13).This has been the case in the unending Ife-Modakeke conflict. This means that continuous informal grass root peace building initiative must be encouraged and practised. This must involve youth from both sides of the divide and civil society. Government and other agents the peace
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process must ensure that community leaders and politicians do not hijack the process. Only then can stable peace be achieved and the conflict transformed fully, putting the conflict cycle to a manageable non-hostile peaceful phase.
4.0 CONCLUSION In addition to threat and/or use of force to separate the warring parties, political and judicial solutions have been traditionally used to resolve Ife-Modakeke and other conflicts in Nigeria. From the foregoing, it becomes clear that the traditional conflict resolution technique employed by the government and its agents have failed to secure stable peace in Nigeria. This is evident from the recurring cases of Ife-Modakeke conflicts and the devastation that accompany them. For intra and inter-ethnic conflicts to be fully resolved, the peace building process must move away from the traditional Track I diplomatic efforts, where only key and political stakeholders are factored into the peace accord. Conflict transformation that focuses on the youth and all other stakeholders in the restive communities must be engaged. There is therefore no need to outline lengthy recommendations in this study. Recommendations of various commissions of enquiry, if implemented will be instrumental in the
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peace process. Additionally, civil society must be encouraged to join in the efforts to build a more peaceful society by contributing to reduce violence and end armed hostilities. They must constantly engage the conflicting parties by being unbiased umpires who are flexible, available and collaborative.
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REFERENCES
Albert, I. 1999. Ife – Modakeke crisis. In Otite, O. and Albert, I. S; Community conflict in Nigeria: Management, Resolution and Transformation (Ibadan: Spectrum Books.
Bartos, O. J. and Wehr, P. E. (2002). Using Conflict Theory (Cambridge: Cambridge University Press, Cambridge).
Burton, J. W. and Dennis J. D. Sandole, D. J. (198) ―Generic Theory: The Basis of Conflict Resolution‖, Negotiation Journal, 2(4), October.
Burton, J. W. (1990). Human Needs Theory (New York: St. Martin's Press).
Chaplin, J. P., (1979). Dictionary of Psychology (New York: Dell Publishing).
Francis, D. J. A., (2005). Peace and Conflict Studies: An African Overview of Basic Concepts” in Introduction to Peace and Conflict Studies, S. G. Best (ed.) (Ibadan: Spectrum Books).
Galtung.J. (1969).Violence, Peace and Peace Research, Journal of Peace Research: 167-191.
Horowitz, Donald H. 1985. Ethnic Groups in Conflict. Berkeley: University of California Press.
Ibebunjo, B. O. (2012), Imobighe Conflict Model In: Theoretical Perspectives in Strategic Studies, Agara, T. (Ed.) (Epkoma: Ambrose Alli University Press).
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Imobighe, Thomas A. (1997). “Conflict Management in Nigeria” in I. B. Bello-Iman (ed.) Governance in Nigeria: Economy, Politics and Society in the Adjustment Years 1985-1995 (Ibadan: Stirling-Horden Publishers).
Imobighe, T. A. (2003). “Ethnicity and ethnic conflicts in Nigeria: an Overview” in Thomas A. Imobighe (ed.) Civil society and ethnic conflict management in (Nigeria Ibadan: Spectrum).
Imobighe, T. A., (2003). The OAU (AU) and OAS in Regional Conflict Management: A Comparative Assessment, (Ibadan: Spectrum Books Ltd.).
Imobighe, Thomas A., (2008). Conflict /Crisis Management Training Manual for “Conflict/Crisis Management Exercise” held at the Centre for Strategic and Development Studies (CSDS), Ambrose Alli University, Ekpoma,
Iroye S.O. (2017). An Evaluation of the Nigerian Legal System in The Resolution of Conflicts in Nigeria, PhD thesis, Ambrose Alli University, Ekpoma, Edo State.Kolawole, Y. (2017). A Bloody Clash in Ile-Ife, ThisDay, March 13.
Krippendorf, E. (1973). Peace Research and the Industrial Revolution“, Journal of Peace Research, Vol 10, 185-201.
Lederach, John Paul. 1995. Preparing for Peace: Conflict Transformation Across Cultures. Syracuse, Syracuse University Press
Lederach, J. P. (1997). Building Peace – Sustainable Reconciliation in Divided Societies (Washington: United States Institute of Peace Press)
Oberschall, Anthony. 2007. Conflict and Peace Building in Divided Societies: Responses to ethnic violence. New York: Routledge. {86}
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Omotayo, B. 2005. “Women and conflict in the new information age: Virtual Librariestothe rescue” A paper presented at the World Library and Information Congress: 71th IFLA General Conference and Council “Library - a voyage of discovery” August15th – 18th 2005, Oslo, Norway.
Osogbo, G. O. (2017). Tension as Ile-Ife youths accuseModakeke of encroachment, Vanguard, October 16.
Sanderson, Stephen K., (2007). “Conflict Theory” in Encyclopedia of Sociology. Available online at: https://onlinelibrary.wiley.com/doi/10.1002/9781405165518. wbeosc089. Accessed on June 13, 2018.
Senghaas, D. 1973.,Conflict Formations in Contemporary International Society,“ Journal of Peace Research, Vol.10, 163-184.
Miall, H. (2015). “Conflict Transformation: A Multi-Dimensional Task”, Bergh of Research Center for Constructive Conflict Management: Available online at: http://www.berghof- handbook.net. Accessed on April 23, 2015. Scimecca, J. A. (1990) Self-reflexivity and Freedom: Towards a Prescriptive Theory of Conflict Resolutiin, In J.Burton (ed.) Conflict: Human Needs Theory. Human Needs Theory (New York: St. Martin's Press). Spence, R. (2001) Post-Conflict Peacebuilding: Who Determines the Peace? In Bronwyn Evans-Kent & Roland Bleiker (eds) Rethinking Humanitarianism Conference Proceedings, 24-26 September 2001. (St Lucia: University of Queensland)(2001): 137-8. Zartman, W. I. (1991). Conflict Resolution in Africa, (Washington DC: The Brookings Institute).
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Tax Incentives and Industrial Development in Nigeria
Emmanuel Ifeanyi AJUDUA, PhD
Department of Economics Faculty of Social Sciences National Open University, Jabi, Abuja Email: [email protected] and Davis OJIMA, PhD
Ignatius Ajuru University of Education Port Harcourt, Rivers State Abstract he paper investigated tax incentives and industrial development in Nigeria. Using a well structured questionnaire, the paper assessed the relationship that exists between tax incentives and industrial development in Nigeria. One hundred and seventy one questionnaires were administered to top and middle management staff of four selected companies in Rivers state which had a combined population of about three hundred staff. Data obtained were analysed using the Chi- Square Test (X2). From our findings, it was seen that tax incentives has a positive relationship on industrial development in Nigeria as it boost industrial output, promote investment, and bring about development of the industrial sector. It was thus recommended that tax incentives should be {89}
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pursued and granted to industries and firms for an all round development of the industrial sector. There should be strategies to ensure that incentives granted to local industries are properly utilized. There is also a need for industries benefitting from incentives to send periodic progress report to authorities in charge of such incentives. Keywords: Tax incentives, Industrialization, Development, Chi Square JEL Classification: H25, O14
1.0 INTRODUCTION Policies centred on industrialization have become a key focus of most underdeveloped and developing economies due to the vital role it plays in economic growth and development. Industrialisation involves the transformation of an economy from a crude agrarian society to a manufacturing based economy. The processes of achieving industrialization has remained a key component in the developmental objectives of successive governments in all economies as it aims at improving quality of human life through extensive re-organisation of the economy for the provision of goods and services at various scales of production.
In Nigeria, several measures and policies have evolved which are geared towards promoting industrialization and the development of the industrial sector. This study looks at the tax incentives as a policy essential for industrial development. Ajudua &Ojima (2018)
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Tax incentives are direct government policy which involves the manipulation of the tax system to the advantage of a potential tax payer aimed at reducing the incidence of taxation on some sectors of the economy (Dotun, 1996). It is a fiscal provisions designed by core industry-driven governmental authorities to attract and empower investors in strategic sectors of the economy (Ohaka & Agundu, 2012).
Tax incentive is a strong fiscal measure targeted at stimulating and encouraging investment for higher capital formation in certain preferred sectors of the economy, reallocate and attract domestic and foreign investment, reduce industries liability, provide working capital to encourage production, influence production level and curb unemployment. It thus improves productivity of industries and enhances industrial growth and development which ultimately promote the standard of living of the people.
Government pursuit of tax incentives is a means to an end. It involves funds mobilization channelled towards achieving higher output without necessarily making the benefiting industries to borrow and pay interests even if the causal links between each of these stages is far from proven. In determining the tax incentives to adopt in an economy, the circumstances surrounding the economy, the
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competence of the tax administration, the type of investment being courted and the budgetary constraints of the government are put into consideration (Barbour, 2005). These tax incentives include tax holiday, capital allowance, investment allowance, investment tax credit, accelerated depreciation, rural investment allowance, interest subsidy, and export processing zone (EPZ) incentives, tax exemption, reduction of tax rate, reduction of import duty on imported raw materials, among others.
Some researchers have posited that tax incentive encourages economic growth and industrial development through less charges and taxes on manufacturing companies. According to Amadiegwu (2008), tax incentives expand investment spending which is essential for enhancing production possibilities thereby sustaining improvement in the standard of living of the people. Beyond this, tax incentives ought to fight and stem the existing depression in the economy, counter inflation thus increasing the equitable distribution of income. However, it is believed by some that the incentives reduce revenue accruable to the government and therefore do not stimulate the economy.
Despite the numerous tax incentives available to investors and entrepreneurs in Nigeria, there appears to be no appreciable growth in
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the industrial sector while the poverty level and unemployment rate among others have remained high. This begs the questions; to what extent do tax incentives determine the output of manufacturing companies in Nigeria? Are the existing tax incentives adequate for industrial development and economic growth? Do these incentives stimulate individuals to establish new enterprises which will boost industrial development and economic growth? Do these tax incentives induce the existing industries to pursue vigorous expansionary policies?
It is against this backdrop one is tempted to access the impact of these tax incentives on the industrial sector. The study thus investigates the linkage between the utilization of the numerous tax incentives on the industrial sector development in Nigeria and would be guided by the research hypotheses
Hypothesis I
H0: Tax incentives have no significant impact on industrialization in Nigeria.
Hypothesis II
H0: Tax incentives have no significant impact in stimulating the establishment of more enterprises essential for industrial development.
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2.0 REVIEW OF LITERATURE
2.1 Industrialisation in Nigeria
Industrialisation is one of the crucial problems facing Nigeria. It could be regarded in a sense as a sine qua non to modern prosperity and as such the key to the development process. Thus, every country exploits available options so as to achieve industrialisation. The need for industrialisation cannot be farfetched. Industrialization is an essential aspect of long-run development and a hallmark of modernization and national economic power (Brundtland, 2007). It aids in diversification of the economy, increase economic flexibility, creates employment; boost exports etc.
An overview of Nigeria industrialisation shows that prior to independence in 1960, the predominant economic activity was agricultural production and marketing of imported goods, exporting raw material and importing from it finished goods. Industrialization was hardly a policy objective as Nigeria predominantly produced primary raw material for foreign industries (Iwuagwu, 2009). With independence, came industrialisation policy, this led to the first National Development plans (1962 – 1968) which was prepared and executed with the aid of foreign investment and focused mainly on
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import substitution as a means of strengthening the Nigerian manufacturing sector. Other focuses of the policy were; increased participation of Nigerians in control of the economy, expanding the technological base of the country to support industrialization etc. Subsequently, the Nigerian government has embarked on numerous economic and industrialization policies (Iheanacho, 2014). With the most recent being the Vision 20:2020. Nigeria attempted to leap directly into a modern industrial structure through public investment in large scale industries. The state assumed the dominant position for lack of a strong indigenous entrepreneurial class and the major aim was to avoid the foreign control of industrial activities (Akinlo, 1996). The nation thus adopted the policy of import substitution industrialization strategy and established industrial development centres. Industrialization witnessed an upward surge in output, also helped by the oil boom of that period which made foreign exchange available for importation of the needed industrial inputs.
However, the oil glut of the late 1970s and early 1980s affected the industrial sector as stringent economic policies were put in place and many industrial businesses were closed down. The government embarked on deregulation, privatization and commercialization of public enterprises to reduce the financial burden on her. Till today the
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industrial sector has been witnessing series of policy change to adjust the sector and direct it to the part of growth. The components of industrial sector are manufacturing, mining, electricity, construction, water and gas (Kirkpatrick, Lee and Nixson, 1984). In this work, we concentrate on manufacturing, mining and electricity. However, more attention is accorded manufacturing since the degree of manufacturing in the country measures the extent to which other components have been effectively utilized (Ndebbio, 1994). With the decline in oil price in the early 1980s, the manufacturing sector suffered as capacity utilization of the sector which was impressive and stood at 76.6% in 1975 and 70.1% in 1980 due to increased foreign exchange earnings during this period dropped to 38.8 in 1986, 46.2% in 2005 and has not climbed above 50% since then (CBN, 2016). The manufacturing sector performance began to decline. Its contribution to GDP fell from 11.2% in 1982 to 7.98% in 1986 to 8.65% in 1988 and stood at 4.16% in 2012 (CBN, 2013), in the fourth quarter of 2016, growth of the Manufacturing sector stood at 3.56% as against 6.93% recorded in 2015 while its contribution to GDP was 8.34% in the fourth quarter of 2016 as against 9.09% recorded in 2015, and 8.59% in the third quarter of 2016 (NBS, 2017).
Manufacturers Association of Nigeria (MAN) in 2005 in a forum on
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reviving Nigerian industries, classified Nigerian manufacturing industries as follows; 30% closed down 60% ailing, 10% operating at sustaining level. In 2009, it was reported that about 820 industries closed down or temporarily suspended production nationwide while in 2016, about 272 shut down, (MAN, 2016). This was blamed on several factors among which include multiple taxation and levies slammed on manufacturers by tiers of government.
2.2 Tax Incentives: An Overview Tax incentive is a prominent feature of developing countries. It is basically designed to attract new investment into the entry and to expand existing ones in priority industries which is based on the country development plan capable of stimulating economic growth. Tax incentives are granted on sector basic to key sectors such as agriculture, manufacturing, mining, oil and gas, etc. and are reviewed regularly (Somorin, 2015).
Nigeria’s experience in the granting of tax incentives is traceable to the inception of British Administration in the territory, when all sorts of reliefs, allowances, and tax holidays were granted to British Companies and individuals as an attraction to establish trade links with the country. Tax incentives for industrial development came to national scene in 1958 (Oriakhi and Osemwengie, 2013). The benefit
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of the incentive development income tax relief Act of 1971 as amended to date, granted a period of up to five years relief period concession which is to attract and support the establishment of big industries. Again, import duties concession typically have a significant effect in their mission of duties, construction materials, machinery and equipment, and also to reduce the fixed cost of a new business and then place the enterprise on a more competitive advantage. To consider the chances of the scheme, there is usually an assessment of the adequacy of legislation and also a suitability of the administration. The costs of these incentives are determined by analyzing the opportunity cost of the foregone alternative.
Based on Barbour (2005), an effective and efficient tax incentive should be able to
1. Stimulate investment in the desired sector or location, with minimal revenue leakage, and provide minimal opportunities for tax planning. 2. Show transparency and be easy to understand, and have specific policy goals expressed precisely in legislation. 3. Resist frequent changes, and should provide investors with certainty over its application and longevity.
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4. Avoid trying to target cyclical depressions due to the lag effects of intervention. 5. Should be developed, implemented, administered and monitored by a single agency. 6. Should have low administrative costs for both governments and firms. 7. Should co-ordinates national, regional and local governments effectively and should include follow-up and monitoring, so as to ensure that the incentive criteria are being met while providing monitoring and evaluation feedback loop. 8. Should be non-discretionary and applied consistently against an open set of transparent criteria.
The use of tax incentives in developing countries to encourage investment so as to boost industrial development and economic growth has brought contrasting ideas among scholars and experts. This is so because while it is clear that incentives are used to attract investors, there is the inability to collect tax effectively given the high evasion rate thereby depleting government purse (Dotun and Sanni, 2009). Also irrespective of the incentive given or offered to businessmen, the business environment and the atmosphere associated with incentives in many developing countries are great
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factor of consideration. They compete among themselves to attract foreign investors in their countries. The more incentive a country is able to offer the more potential investors it is able to attract. Some scholars hold that tax incentives have impacted the economy in the following ways.
1. It directs investment and developmental activities which improves the standard of living of the populace.
2. Tax incentives lead to diversification, increases urban and rural development.
3. Tax incentives stimulate and motivate companies, individuals and business firms to establish industries leading to industrial development.
4. It is a strong fiscal measure/policy which raises investment funds and can in turn bring about industrial growth and economic development.
5. Tax incentives attract investors to a given environment and with the presence of these potential investors, investments are made into the economy of the given environment thereby causing developmental changes leading to industrial and economic growth.
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6. Compensating for other deficiencies in investment climate.
7. Measures that reduce the tax imposed on income from capital leave investors with a higher net rate of return. This leads to greater incentives for investment, and (hopefully) more investment.
8. Revenue Gains.
However, problems associated with tax incentives, particularly selective incentives are seen as
1. Revenue Loss for the government
2. Tax incentives often create opportunities for businesses and individuals to engage in aggressive tax planning -a polite term for tax avoidance. It is instructive to cite a few examples of how tax planning can convert well-intended incentives into a revenue drain.
3. Company Churning. A term used to describe an existing company closing down all or part of its operations and establish a new company so as to qualify for a full tax holiday.
4. False export declarations. In many parts of the world, tax incentives or subsidy schemes that target export performance have triggered false declarations that can be extremely costly.
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2.3 Empirical Review
Regan (2008) surveyed fifty-five Jamaican firms and concluded that there is no economic justification for having granted tax concession to most of the firms under the pioneer industrial law in Jamaica. Only two of the fifty-five industries interviewed mentioned tax incentives as an important factor of influencing investment in Jamaica.
Regan (2008) further posited that the state government generates less revenue through incentives as exemption of low income earners from tax payment depletes the government purse.
Chukwu (2012) in a study on tax incentive; a catalyst for industrial development and economic growth opined that tax incentives has positive impact on the investment decision of an organization.
Okafor (2009) in his contribution on the effect of tax incentive contends that the policy creates a healthy economy and assists the tax paper to invest scarce resources into valuable prospects. He further opined that apart from employment generation, tax incentives will motivate entrepreneurs into incorporating limited liability companies. The effect of which is to stimulate the economy and ultimately engender growth.
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Olabiri (2009) revealed in his study that tax incentives as a catalyst for economic development summarizes that tax incentives has positive impact on the investment decision and greatly stimulate the stability of economic growth in Nigeria, he further averted that tax incentives should be considered along with tax infrastructure.
3.0 METHODOLOGY
The study adopted the random sampling technique, while the population of the study was drawn from respondents of four selected companies in Rivers state which have a combined population of about 300 top and middle management staff made up of Chief Executive Officers, auditors, managers and accountants. The sources of data in this study are the primary sources which involved the use of questionnaire. The questionnaire was structured to carry a 5-point likert scale; respondents were allowed to indicate their opinion as strongly agreed (SA), agreed (A), undecided (U), disagreed (D) and strongly disagreed (SD). Using the Taro Yamane method, the sample size for the study was gotten. The formula is given as; n =