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ECONOMIC THEORY ASSIGNMENT

Nigerian Turkish Nile University Abuja

NAME: ANN-MARIE MARIAM MACHIMU


PROGRAM: MSC. IN MANAGEMENT
COURSE: ECONOMIC THEORY
COURSE CODE: BUS 806
ID NUMBER: 151343020
LECTURER: DR. T.A. ADEKUNTE
ASSIGNMENT QUESTION: DISCUSS THE CONCEPT OF ECONOMIC RENT AND
CARTEL AND RELATE IT TO THE NIGERIAN ECONOMY.

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ECONOMIC THEORY ASSIGNMENT

INTRODUCTION
Economic rent may be referred to as an excess payment made to or for a factor of production
over and above the amount expected by it owner. Nakhle (2008) defines economic rent as the
true value of a natural resource, which represents the surplus return above the value of capital,
labour and other factors of production used to exploit the natural resource. In my own
understanding, this could mean that economic rent is the extra money made over and above
expected pay. For example, the annual rent of a shop space located at Maitama Farmers Market
is at a market price of N800, 000. However, a Business Owner may be willing to pay the shop
owner N850, 000 due to the favorable location of the shop to his business in order to discourage
his competitors from getting the shop and accessing targeted customers in Maitama. The amount
of N50, 000 is therefore the economic rent.
ECONOMIC RENT AND THE NIGERIAN ECONOMY
Nakhles definition of economic rent shows how it relates to the Nigerian Economy. Nigeria is a
country blessed with the natural resource of Petroleum, natural gas, tin, iron ore, coal, limestone,
niobium, lead, zinc and arable land. Amongst its natural resources, petroleum and natural gas (oil
and gas sector) accounts for 35 per cent of gross domestic product, and petroleum exports
revenue represents over 90 per cent of total exports revenue. Given Nigerias dependence on
petroleum exports, it is the countrys aim to attract investment and capture maximum economic
rent on petroleum through its fiscal system. The main purpose of achieving economic rent
through tax is to finance the government expenditures and distribute the wealth generated to
other sectors of the economy. The two types of fiscal regimes are the tax royalty system and the
contractual system (Blake and Roberts, 2006). The contractual system consist of both production
sharing contract (which Nigeria practices) and Service agreement. The production sharing
contract entails the sharing of petroleum production called profit oil, between the host
government and the contracting company also known as consortium. In March 2016, it was
revealed by the Central Bank of Nigeria in its Economic Report for November 2015, stated that
besides PPT and royalties, Nigeria earned N822.2 billion from crude oil and gas exports, N1.24
trillion from domestic crude oil and gas sales and N91.7 billion from other sources in the
petroleum sector from January to November 2015.
CONCEPT OF CARTEL IN RELATION TO NIGERIA
The concept of cartel on the other hand is defined as a group of firms that gets together to make
output and price decisions or exclude entry of a new competitor in the market. It is a formal
organization of sellers or buyers that agree to fix selling prices, purchase prices, or reduce
production using a variety of tactics (Sullivan Arthur, 2003). Cartels usually arise in an
oligopolistic industry, where the number of sellers is small or sales are highly concentrated and
the products being traded are usually commodities. OPEC (Organization of the Petroleum
Exporting Countries) is perhaps the best-known example of an international cartel, as OPEC
members meet regularly to decide how much oil each member of the cartel will be allowed to
produce in order to alter prices to maximize profit. As of 2015, the 13 member countries

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accounted for 43 percent of global oil production and 73 percent of the world's "proven" oil
reserves, giving OPEC a major influence on global oil prices.
Nigeria is a founding member of OPEC since 1971 and though Saudi Arabia serves as its de
factor leader, Nigerias high population compared with other members places it at a strategic
position to influence the world oil industry. Nigerias membership with OPEC has benefited the
economy in the sense that it has provided access to funds like OFID (OPEC Fund for
International Development) in the form of loans for development project, grants for technical
assistance, research, food aid, humanitarian and emergency relief. According to OPEC bulletin,
Nigeria has benefited so far from its $18.7 billion OFID.
NEGATIVE CONSEQUENCE OF NIGERIA AS A RENT-SEEKING NATION
Nevertheless, the negative consequence of Nigerias membership to OPEC is that it eventually
made the nation a rent seeking state as oil became the major source of revenue for the country. In
economics and in public-choice theory, rent-seeking involves seeking to increase one's share of
existing wealth without creating new wealth. According to Dabla-Norris and Wade (2001), rent-
seeking results in reduced economic efficiency through poor allocation of resources, reduced
actual wealth creation, lost government revenue, increased income inequality, and potentially
national decline. Rent-seeking may grow at the cost of economic growth because rent-seeking by
the state can easily hurt innovation. Ultimately, public rent-seeking hurts the economy the most
because innovation drives economic growth.
With the oil sector accounting for 75% of the government revenue and 90 % of export earning, it
was no surprise that the economy was negatively affected as there was a 75% plunge in crude
prices to about $31-$33 per barrel. The value of naira plummeted with foreign exchange dealers
offering much higher rates and the government burnt through its foreign currency reserves which
fell to $28 billion at the end of January, 2016 from $43 billion dollars two years ago. The
government is now forced to seek its revenue from other sectors such as agriculture.
RENT-SEEKING BEHAVIOUR IN RELATION TO CORRUPTION
Chowdhury, Faizul Latif (2006) states that the concept of rent-seeking would also apply to
corruption of bureaucrats who solicit and extract bribe or rent for applying their legal but
discretionary authority for awarding legitimate or illegitimate benefits to clients. In Nigeria, top
public officials have been known to partake corruptly in the consumption of the national cake
and by this, they engage in activities for the benefit of their ethnic nationalities or
political/economic associates. The recent scandal of DasukiGate is an example of this behavior
as the Former National Security Adviser, Sambo Dasuki was arrested on the 1st December, 2015
for embezzling $2.1 billion and awarding phantom contracts to buy helicopters, fighter jets and
ammunition meant for the Nigerian military campaign against Boko Haram Islamist terrorist
militants.
Most public affairs analysts and international communities have strongly believed that corruption
and weak institutions are the twin reasons for Nigerias poor macro-economic performance. This
is because corruption diverts resources from the poor to the rich; increases the cost of running
businesses, distorts public expenditures and discourages foreign investment necessary for

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improved economic performance. It also cripples the countrys ability to deliver for its citizens
enjoyment of even the minimum social and economic rights including healthcare and education.
This generally has led to a retardation of economic development and to the deterioration of
whatever public infrastructures that has been put in place. Ribadu Nuhu (2004) pointed out that
corruption and institutional failures swallowed about 40 percent of Nigeria's $20 billion annual
oil income.

CONCLUSION
In conclusion, this paper shows how economic rent and cartel affect the Nigerian economy. It is
emphasized that there is need to find other alternatives to government revenue from the oil and
gas sector in Nigeria in order to curtail rent seeking behavior and the negative consequences that
come with it. In relation to cartel, Nigeria has not experienced any colossal negative impact of
cartel behavior to the economy as laws are put in place to discourage such from happening.

However there are some concerns raised by banking executives that the recent decision taken by
the Central Bank of Nigeria (CBN) to move official exchange rate to a market-determined
system and register only 10 banks as FX Primary Dealers (FXPD) will establish a cartel of the
favored banks and create avenues for price-fixing among them. In response, the CBN has
emphasized that the licensing of FXPD is meant to sanitize FX market and monitor close to
punish any anti-market behavior (Mayowa Tijani, 2016).

Nigerian competition law on cartels is not yet fully developed and has rarely been tested and the
possibilities for the future are huge.

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BIBLOGRAPHY

1) Blake and Roberts (2006). Fiscal Regimes: Components and the Economic Rent:
Available: http://www.themixoilandwater.com/2011/08/fiscal-regimes-components-and-
economic.html

2) Carole Nakhle (2008). Fiscal Regimes: Components and the Economic Rent: Available:
http://www.themixoilandwater.com/2011/08/fiscal-regimes-components-and-
economic.html

3) Chowdhury, Faizul Latif (2006). Corrupt Bureaucracy and Privatization of Tax


Enforcement. Pathak Shamabesh, Dhaka.

4) Dabla-Norris and Wade (2001) IMF. "Rent-seeking and Endogenous Income Inequality"

5) Mayowa Tijani (2016) The Cable CBNs choice of 10 banks will create an FX cartel
Available: https://www.thecable.ng/cbns-choice-10-banks-will-create-fx-cartel

6) Ribadu Nuhu (2004). Corruption costs Nigeria 40 percent of oil wealth; Available:
http://archive.boston.com/news/world/africa/articles/2011/07/17/corruptioncosts_nigeria_
40%20percent%20of%20oil%20wealth%20official%20says

7) Sullivan, Arthur; Sheffrin, Steven M. (2003). Economics: Principles in Action. Upper


Saddle River, New Jersey 07458: Pearson Prentice Hall. p. 171. ISBN 0-13-063085-3.

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