Q1: How was the wedding? What kind of Wedding was it?

The wedding was amazing. As many of you know I’m Ghanaian (Akan ethnicity, under the Ashanti tribe), while my wife is Haitian. We both wanted our heritages in the room, so we took a Western-style wedding and infused it with Ashanti & Haitian cultural elements.

Q2: What Ghanaian Cultural Elements did you include in your Wedding?

I did kete dancing.

Historically, Kete was a royal-religious Ashanti ritual used to communicate with chiefs, spirits, and ancestors. But its modern, widespread popularity in Ghana traces back to Ghana’s 1st Prime Minister & President, Kwame Nkrumah (1957-1966).

Kwame Nkrumah made many mistakes, in fact, many Ghanaians do not tolerate any criticism of him at all. He is called “Osagyefo” or “Redeemer” in Twi (A dialect of the Akan language). But, I’ll discuss more in deep detail when my Substack roadmap finally hits Ghana. (Programming note: I plan to finish Nigeria this year, then Kenya. Then I’ll make you guys vote next).

But one thing Nkrumah got absolutely right was forging a strong sense of Ghanaian Nationalism.

I don’t want to overstate this. Ghanaians will still identify with their ethnicity and have voting patterns based on ethnicity (for example: many Akan-speaking groups like Ashanti, Akyem, Kwahu, Akuapem will vote NPP while Ewe, Guan, and many Northerners vote NDC) but compared to other African countries, there’s never been a sense that people cannot live together. Unlike Sudan, Nigeria, Uganda or other African countries where ethnicity was historically a backdrop to war or mass violence, Ghana hasn’t had anything on that scale despite being a mix of ethnicities.

To bridge the diverse tribes (Ewe, Akuapem, Ashanti, Fante, Gonja, Ga, etc.), Nkrumah did many programs to downplay tribalism. This was difficult since some ethnic groups have historical animus against each other, especially against the Ashanti which was the historical “regional imperialist”. In fact, the Fante, who basically speak the same language as the Ashanti, but with a different dialect, teamed up with the British against the Ashanti.

His government established the Ghana National Dance Ensemble and the Arts Council of Ghana. These institutions collected, staged, and popularized regional royal dances for national audiences. Kete was integrated into university curriculums and school competitions, which removed the traditional hereditary requirements to learn it.

By the 1980s & 1990s, the diaspora and upper middle class had adopted Kete for weddings and celebrations.

The point is, I give Nkrumah’s government credit of repurposing an ancient royal-religious ritual, associated with one tribe, into a celebration of national unity.

Q3: Does your wife read your substack? What languages does she speak?

She is incredibly supportive of my Substack, but she doesn’t actually read my articles. She doesn’t feel the need to since she hears me narrate them aloud while I’m drafting. She speaks English, Haitian Creole, French and Spanish.

Q4: Where did you go on your honeymoon?

We went to France, which has always been her dream destination to go for a honeymoon.

We went to Paris, Versailles, Nice, and a couple other places. Now, on to more traditional Yaw substack programming.

Q5: Why does a country borrow in dollars if it can create its own currency?

At first glance, this seems really weird. If you are in a 1st world country, your country generally borrows in its currency. America borrows in dollars, UK borrows in pound sterling, and most countries in the European Union borrow in euros.

So if Pakistan has Pakistani rupees, Zambia has kwacha, and Sri Lanka has Sri Lankan rupees, why would government voluntarily borrow in dollars, yen, or euros? Especially when borrowing in a foreign currency can be dangerous.

Pakistan gives us a perfect example. In 2021, the Pakistani government went to international investors and basically said: “Give me $1B today by buying my $1B eurobond (which is dollar denominated), and I promise to pay you 7.4% interest per year, and I’ll give you your $1B back in 10 years.”

When Pakistan issued that eurobond, Pakistan received $1B (~160B rupees at that exchange rate). Right now in August 2026, the Pakistani rupee has depreciated sharply, now that same $1B principal represents 280B rupees.

If you borrow 160B rupees, pay interest, and then have to pay back 280B rupees, your principal is nearly up 75% in rupee terms. On top of that, the interest itself is getting more expensive in rupees every year its paid.

Pakistan collects revenues in rupees but has to pay debts in dollars. If the rupee depreciates to the dollar, the domestic currency cost of Pakistan’s foreign debt rises with it.

So why would Pakistan willingly take that risk?

There are several reasons, but I’ll just discuss two today:

1. Sometimes the country actually needs foreign currency

2. Sometimes borrowing in dollars can be much cheaper than borrowing in local currency

Even then, dollar loans are not a magic potion. But to understand those constraints, we first need to understand what actually happens when a government borrows in its own currency.

5.1 How does a government borrow in its own currency?

Let’s look at Pakistan. (And by the way, everything that I am saying about Pakistan right now is also true about the United States or Switzerland. The differences will come later).

Pakistan’s currency is the Pakistani rupee. If the government needs money, it issues rupee bonds, and then a commercial bank in Pakistan, like Habib Bank Limited (HBL), buys the bond with its settlement reserves.

HBL’s settlement reserves are transferred from HBL to the Pakistani government’s account at the Central Bank.

Where do HBL’s settlement reserves come from? From Pakistan’s Central Bank, the State Bank of Pakistan (SBP), which provides settlement reserves using two different tools.

1. Outright Purchases: The Central Bank buys commercial banks’ rupee bonds with settlement reserves, basically swapping a bank’s bonds for cash.

2. Repurchase (Repo) Market Operations: HBL hands over rupee bonds to the Central Bank as collateral and borrows settlement reserves from them, which it can then use those borrowed settlement reserves to buy rupee bonds. Then, HBL agrees to buy back those rupee-bonds from the Central Bank in a few days or weeks later at a slightly higher price. The difference in price is the interest rate the central bank charges for the settlement reserves. If the bonds are bought back the next day, that’s called the overnight reverse repo rate.

As a result, a central bank that issues its own currency cannot run out of settlement reserves denominated in that currency. AKA, central banks can print settlement reserves. But printing money is NOT the same as printing value.

Making financial claims in your own currency (issuing debt) is easy. But creating real resources, foreign exchange, willing savers, and a stable demand for those financial claims isn’t.

This probably sounds abstract, so let’s build from the ground up.

5.2 Is a developing country limited by bank deposits from domestic customers?

Not really. A commercial bank does not necessarily need to have enough deposits from customers before it lends.

Let’s say Pakistan’s government sells a 100M-rupee bond to a Pakistan commercial bank (HBL). HBL buys the bond using its settlement reserves, which get transferred to the treasury’s reserve account at the central bank. Now the government has 100M rupees to spend for military corruption paying a construction company. The treasury now tells the central bank to transfer its 100M in reserves to the construction firm’s bank account (Askari Bank). Once that clears, the increment on Pakistan’s banking system looks like this:

Assets:

• +100M government bond that a commercial bank, HBL, bought

Liabilities:

• +100M deposit belonging to a construction firm’s commercial bank account at Askari Bank

The government deficit created a financial asset that we call a bond. The government’s deficit literally created new money in the private sector.

You said reserves before… Do banks have reserves?

Yes, commercial banks have two tiers of money:

• Tier 1: Bank deposits (Retail money): This is what you, I, and the construction firm use in commercial banks. In U.S. it would be a bank like Citi, Wells Fargo, or Capital One. In Pakistan it would be HBL or Askari.

• Tier 2: Settlement Reserves (Wholesale money): This is special digital money created by the Central Bank (like the Federal Reserve in the U.S. or SBP in Pakistan). Only banks and the government can hold settlement reserves. Settlement reserves are the cash used by banks to settle payments with each other. If you wire $100 from Bank A to Bank B, Bank A lowers your deposit balance by $100, and then uses the Central Bank’s clearing system to send $100 in settlement reserves to Bank B.

You are probably thinking “Wait… Bank A pays Bank B using reserves? Why doesn’t it just use your money when you wire $100?”

Banks don’t just wire your money to each other. We need to understand what a bank balance is. “Your money”, the money you deposited to a bank, is actually the bank’s debt. A deposit is one bank’s IOU. A bank doesn’t put that cash in a box with your name on it. Instead, Capital One adds $100 to its asset column, and writes a $100 IOU to you in its liability column.

When you open your banking app and it says $100, that’s the bank’s promise to pay you $100 if you ask for it. Your money in your checking account or savings account is really you lending to a bank and then you receive interest.

Bank A can’t pay a Bank B using its IOU. What if Bank A goes bankrupt? Bank B wants to paid in a risk-free claim. That’s the whole point of Central bank settlement reserves.

The Central Bank sits above all the commercial banks. Just like how you have an account at Capital One, Capital One and Bank of America both have accounts at the Central Bank. The digital money in those Central Bank accounts is the reserves I mentioned before. Reserves are IOUs from the Central Bank itself, AKA the Commercial Banks are lending to the Central Bank. Because the Central Bank prints the money, its IOUs are considered risk-free.

So when you hit “send” to wire $100 to your buddy, this is what actually happens:

1. Capital One deletes $100 from your account (canceling the “loan” you gave it, which is your checking account).

2. Capital One sends $100 in its reserves via the Central Bank to Bank of America

3. Bank of America receives those reserves, and types $100 into your friend’s account (creating a brand new IOU to your friend).

I hope you get by now that there isn’t some warehouse of cash that became empty. If a bank’s settlement reserves become scarce, the central bank can just create reserves. So now you understand that banks are not mechanically limited by pre-existing customer deposits (retail money); worst case, the central bank can just create settlement reserves (wholesale money). Pakistan’s Central bank can make rupees, Ghana’s central bank can make cedis, and America’s central bank can make dollars.

But, what Pakistan or Ghana’s Central bank can NOT do is create dollars.

#5.3 So if there’s no mechanical constraint of banks running out of cash, what’s the catch?

The Philippines or Pakistan can issue 100M pesos or rupees, but imagine if The Philippines, Pakistan, or any other country borrows 100M again, and again, and again, and again…. From all of this, the banks and pension funds accumulate more government bonds.

Then the government will use those bonds to pay for goods and services from private firms or state-owned enterprises (SOEs) or just give money to households, so then the private firms, SOEs, and households will have more money in their bank deposits.

Now here’s where the constraints come in. The question is:

Do those banks and pension funds want to hold all these government bonds at the existing government bond interest rate?

AND

Do businesses, corporations, and households want to hold their local currency deposits at their existing bank interest rate?

Because if banks, businesses, and households don’t, something adjusts. There’s three types of adjustments that take place:

1. Inflation (The deposit adjustment): If households have more cash than they want to save, they try to spend it. They want cars, houses, groceries, and more. If the economy cannot produce enough real goods and services to absorb that spending, then prices rise. The value of the currency weakens compared to goods and services.

2. Rising Interest Rates (The bond adjustment): If banks and pension funds feel overwhelmed by the sheer volume of government bonds being issued, they will demand a higher rate of return to keep buying them. The bond price will fall since there’s lower demand, and as a result the government will have to promise a higher rate of return for banks and pension funds to keep buying them. Since the domestic government bond yield is the benchmark rate for the domestic economy, if domestic government bond yields rise, then interest rates will rise across the entire economy.

3. Currency Depreciation (The Exchange Rate Adjustment): If people and businesses have too much local currency and have a huge demand for foreign goods, then they might try to trade their local currency for dollars or euros. The mass selling of local currency to get dollars or euros then weakens the local currency compared to the dollar/euro.

The government can create infinite local money, but it can’t force households, businesses, and traders to value that money at the same rate. The ultimate constraint on government borrowing isn’t “do we run out of deposits”, but rather it is the households, banks & pension funds, and traders’ willingness to absorb that newly created money without triggering more incremental inflation, higher interest rates, or a weaker currency. If the developing country’s government wants to continue creating money without having all 3 of those issues (or capital controls), that’s exactly where foreign borrowing comes in.

Now, foreign borrowing isn’t a magic pill. Foreign borrowing doesn’t delete these constraints. But it can relieve two of them temporarily: it brings FX into your country to import goods and reduce the amount of financing the domestic bond market needs to absorb.

#5.4 Why Developing Countries borrow: The country actually needs dollars

If Sri Lanka wants to pay Sri Lankan teachers, the government can issue 100K Sri Lankan rupee-bonds, some domestic banks and pension funds buy the bonds, and then the government can pay the teachers. That’s a domestic financial problem.

But if Sri Lanka needs to import diesel, Sri Lanka buys via a Singapore-based commodity firm like Vitol Asia. The commodity firm, however, does not accept Sri Lankan rupees as payment. Not just diesel, Sri Lanka also can’t use rupees to import medicine, industrial machines, or pay off foreign loans. Sri Lanka will need foreign exchange (FX) for that.

But here’s the constraint, Sri Lanka CANNOT create Foreign Exchange (FX). Sri Lanka’s central bank can’t create US dollars, only the Federal Reserve can. Sri Lanka’s central bank can’t create yen, only the Bank of Japan can.

So Sri Lanka has to obtain FX (usually US dollars). How can Sri Lanka get dollars? It can through

• exports

• tourism

• remittances

• Foreign Direct Investment (a foreigner goes to a Sri Lanka bank, exchanges their euros for Sri Lankan rupees, now the Sri Lankan bank has FX while, the foreign investor buys 10% ownership or more of a Sri Lankan asset).

• Portfolio Investment (a foreigner goes to a Sri Lankan bank, exchanges their euros for Sri Lankan rupees, then buys stocks (under 10% ownership) or bonds in Sri Lanka)

• OR Borrow in foreign currency (they usually borrow in USD dollars via a badly named debt instrument called a eurobond)

That’s why Sri Lanka borrows in foreign currency… To import foreign goods.

If it can’t do any of that, it can spend its foreign reserves from its central bank. That’s Sri Lanka or any developing country’s hard constraint. For foreign reserves, you really should think of it like a warehouse of cash that can be depleted.

Sri Lanka ran into this constraint in 2022. Sri Lanka had $7.5B in reserves in 2020 and had $1.6B in reserves by Nov 2021.

Now, knowing that Sri Lanka had $1.6B in reserves remaining is a meaningless stat unless you know how much Sri Lanka hemorrhages on FX per month. Like is $1.6B a lot for Sri Lanka?

To contextualize, we’d look at months of reserves by import coverage. When we use this, we see Sri Lanka was in an awful spot. Sri Lanka went from 3 months of import coverage in 2020 to 30 days of import coverage in 2022.

When you have less than 3 months of FX, you are in crisis territory. Why? Well, international trade doesn’t happen overnight. When a country orders coal/wheat/oil, it operates on a logistical timeline. It takes time to negotiate a contract, have a cargo ship travel across the ocean, and unload cargo. To facilitate this, domestic banks issue letters of credit to foreign suppliers, promising that the dollars will be there when the ship arrives.

If a country has under 3 months of reserves, foreign banks and suppliers pencil out the math and realize the country might run of out of dollars/yen/euros before the ship even docks. They may stop accepting letters of credit, meaning the country literally can’t import new goods.

In 2022, Sri Lanka couldn’t even import essential imports like fuel and energy, and Sri Lanka defaulted on foreign debt. Notice how Sri Lanka wasn’t suffering from a shortage of rupees. Instead, Sri Lanka lacked “claims on goods produced outside Sri Lanka”, which is what dollars represented. Sri Lanka lacked dollars…

So what about the counterfactual? What if Sri Lanka said “I’ll never borrow in dollars!”

That’s fine. But then Sri Lanka’s foreign budget constraint becomes harder. Because imports, foreign interest payments, and external payments, must be financed by exports, tourism, remittances, FDI, or foreign reserves drawdowns.

If Sri Lanka wants to import $20B of imports, but only has $10B in sustainable FX income, it can’t fill that $10B hole by printing rupees. No one takes rupees as international payment. The top 5 currencies for settling trade as of May 2026 are dollars, euros, pounds, yen, and the Canadian dollar.

If Sri Lanka prints rupees, then Sri Lankans receive more rupees and exchange rupees for dollars. When you sell your rupees for dollars, you put downward pressure on the rupee, and put upward pressure on the dollar. Then three things could happen:

1. Central Bank intervention: The Central Bank will sell dollars and buy rupees to maintain the exchange rate so the rupee doesn’t get weaker (Until it runs out of FX).

2. Allow Depreciation: The government could not interfere at all. With so many people exchanging rupees for dollars, the rupee depreciates until imports become too expensive

3. Capital/Import Controls: The government bans selling rupees for dollars, or will ban certain imports.

The point is a country can’t indefinitely buy more from the world than it has the international cash to pay for. Foreign borrowing allows developing countries to temporarily escape that constraint by saying “lend me dollars today, and I'll give you dollars tomorrow”. That’s all what foreign loans are.

If lenders think the country won’t repay foreign debts, the country will need to borrow at prohibitively high rates or just be locked out of financial markets. At that moment, the country can only regain credit access through some combo of debt restructuring, policy adjustments, and outside financing; an IMF plan is usually part of that process.

But let’s talk about another reason why developing countries borrow in foreign loans while they still have credit access.

Reason #2 Many times it’s cheaper to borrow in dollars than to borrow in local currency

In 2012, Zambian President Michael Sata started his term and wanted a big infrastructure push.

His government issued a $750M, 10 year eurobond. At auction, Zambia was able to borrow 5.6%.

The counterfactual would have been local borrowing. If Zambia issued a 10 year Zambian domestic government bond, then the government would have to borrow at 15.7%. That gap is why the finance ministry was tempted by eurobonds. The Zambian finance minister wanted to borrow relatively cheaply for energy, roads, rail, hospitals, and other infrastructure.

But of course there’s a catch. The exchange rate.

In 2012, ~5 Kwacha (or 5K old ZMK, Zambia redenominated its currency and removed 3 zeros in January 1st, 2013) was 1 dollar. In local currency, Zambia received 3.75B kwacha at a 5.6% interest rate instead of 3.75B kwacha at a 15.7% interest rate.

But for the foreign investor, they are being paid the $750M in dollars. Sadly, over 10 years, the kwacha depreciated to the dollar. This happened because over the 10 years, there was more Zambian demand for the dollar, than global demand for Zambian kwacha.

By 2022, 17 kwacha equaled one dollar. So now, that $750M in borrowed, which was 3.75B kwacha owed in 2012, ended up being roughly 12B kwacha owed by 2022.

In fact depreciation was so terrible, and the Eurobond loan didn’t lead to Zambia being able to generate enough FX to service the debt. Zambia was at emergency levels of reserves by 2017. Covid made it worse. By November 2020, Zambia missed its payment on a $43M eurobond payment and defaulted.

So in reality, the comparison isn’t really 5.6% vs. 15.7%. It’s more like, 5.6% + unknown depreciation risk vs. 15.7% locally.

Frankly, there’s a lot more to this. The depth of a country’s local financial system, banking regulations, capital controls, pension fund bond allocation, foreign participation in local bond markets, and central bank policy also affect how much a government can borrow domestically and at what cost. But I’ll discuss all that another time.

Babangida’s finance ministry warned him that Nigeria was “on the verge of external bankruptcy”. Global oil prices were still falling, foreign debt payments consumed ~33% of Nigeria’s export earnings, and foreign exchange (FX) reserves dwindled to just 2 months of import coverage. In concrete terms, hospitals struggled to import basic medicine, and factories could not import the raw components they needed to stay open.

Unlike Buhari, Babangida did not promise quick prosperity. He candidly told Nigerians that the country was broke and would need three years of sacrifice before a turnaround.

He declared a 15-month economic emergency, banned rice & corn imports to preserve Nigeria’s scarce (FX) reserves, and dismantled Buhari’s corrupt oil-for-goods barter trading, which relied on secret contracts, weak inspections, inflated invoices, discounted oil, and military-connected middlemen.

Recap: When Nigerians tried homegrown solutions instead of the IMF

Crude oil is the lifeblood of Nigeria’s economy, driving ~95% of Nigeria’s FX earnings and 80% of Nigeria’s government revenue. ~80% of the oil was bought by the West. Between the end of the civil war to 1981, Nigeria earned ~$100B from selling oil. During that boom, Nigeria’s annual federal revenues exceeded $20B, and the World Bank reclassified Nigeria from low income to middle income.

But, when Western economies slid into recessions in the early 1980s, global oil prices crashed. The revenues that Nigeria used to subsidize emerging industries, employ government workers, defend the naira, & build infrastructure quickly evaporated.

In previous articles, I covered how civilian president Shehu Shagari (1979-1983) and military leader, Muhammadu Buhari(1983-1985) each tried to hack their way out of the global oil price crash without an IMF loan & reform program. Both their strategies failed catastrophically:

• Shagari’s Print, Borrow, & Burn strategy: Shagari trimmed the national budget, but oil government revenue shrank faster than Shagari could cut. Nigeria’s central bank printed naira to directly finance Nigeria’s deficits, adding inflationary pressure. To suppress inflation & defend an artificially strong naira, Shagari burned through Nigeria’s $10B in FX reserves and leaned on letters of credit from foreign banks to flood Nigeria with relatively cheap foreign goods. By 1982-1983, the war chest emptied, inflation spiked, Nigeria missed payments on foreign loans, and then international banks stopped lending to Nigeria.

• Buhari’s Brute Force gamble: After overthrowing Shagari, Buhari inherited almost no FX reserves and little access to foreign credit. Buhari tightened import restrictions, cut budgets, and bartered Nigerian oil directly for goods. Starved of foreign parts & raw materials due to a lack of FX, industrial joint-ventures like Steyr-Nigeria or Volkswagen-Nigeria missed production targets, became unprofitable and laid off staff.

By the time Babangida seized power, the compounding failures of both governments left Nigeria trapped between a sovereign debt crisis and crashing global oil market.

The Lethal Combo Babangida Inherited

Nigeria was in a classic balance-of-payments crisis. The nation relied on imports for 70% of its food & raw materials, but lacked the FX to pay for them since oil prices were falling. On top of this, Nigeria had over $22B in foreign debt.

Debt Crisis: Stock vs. Flow

But $22B is just the “stock”, the immediate danger came from the annual “flow” of debt payments. Nigeria had 2 months of foreign reserves to cover imports (under 3 is crisis level) and Nigeria’s debt service devoured one-third of foreign currency earnings (over 25% is crisis levels).

If a country borrows in a foreign currency, it must repay the loan in that currency. Nigeria can’t print dollars, just naira. It could print naira and buy back dollars, but flooding the market with local currency devalues the naira’s exchange rate to the dollar.

If Nigeria wanted to pay off foreign debt without devaluing its currency, it must earn more foreign currency, whether its export services (e.g. tourism), primary income (e.g. remittances), or exporting goods.

Since debt service ate so much of Nigeria’s declining export earnings, Nigeria fell behind on paying trade letters of credit. Western banks claimed that Nigeria was already 120 days behind repaying short-term debts and responded by freezing new letters of credit for Nigerian importers.

Shagari and Buhari had both rejected IMF reforms during an oil-price collapse and both failed. Babangida decided to experiment with an IMF-style reform.

The Nigeria Series so far:

• Overview of Nigeria: I

• Pre-Colonial North & South Nigeria: II, III, IV, V, & VI

• British Conquest, Rule, & Independence: VII, VIII, IX, X, & XI

• The 1st Republic & Civil War: XII & XIII

• Military Rule: Gowon (XIV), Murtala-Obasanjo (XV)

• The 2nd Republic & Debt Crisis: XVI & XVII

• Military Rule (Again): Buhari (XVIII)

From Bad to Worse: Nigeria’s Second Oil Shock

Not only did Babangida inherit a mess, but global oil prices were about to collapse further.

After years of reducing output to prop up oil prices after the mid 1981 price collapse, Saudi Arabia’s Oil Minister, Sheik Ahmed Zaki Yamani, declared that Saudi Arabia would expand oil production, flooding an already oversupplied market.

At the same time, non-OPEC producers in the North Sea (UK & Norway) had more than double the production of the exact premium low-sulfur crude that Nigeria exported, stripping Nigeria of its ability to dictate prices for its own crude.

The increased oil supply, especially from Saudi Arabia, pushed oil prices down from $28 toward $18 and lower.

Desperate for FX to service its debt, Nigeria abandoned its OPEC quota of 1.3M barrels a day and sold every drop it could pump. But Nigeria’s higher production couldn’t offset the collapsing price.

The revenue numbers capture the devastation. In 1980, Nigerian federal revenue exceeded $20B. By 1986, thanks to the Saudi-driven oil price war, Nigeria’s revenue collapsed to $5B.

This 2nd 1980s oil crash slashed Babangida’s planned $15.6B budget in half, destroying Nigeria’s naira government revenue and the FX earnings needed to import goods & service foreign debt.

Babangida’s Political Massaging

Babangida was about to impose painful reforms, so he started with a charm offensive. To contrast himself with Buhari’s iron fist, he repealed Decree No. 4, which criminalized journalism that embarrassed the government, freed jailed reporters and 100s of political prisoners, reined in the NSO (Nigeria’s secret police), and appointed several critics of Buhari to his cabinet.

In 1986, Babangida appointed a Political Bureau (Politburo) of academics and civil servants to sketch out the 3rd Republic. He also announced that Nigeria would return to democracy again by 1990 (he eventually delayed it to 1992) , restoring it in stages: first local elections, followed by a constituent assembly, a new constitution, two federally recognized political parties, state elections, a national census, federal elections, and finally a new president. He planned to maintain a US-style Federal constitution just like the failed 2nd Republic.

The Bureau suggested that Nigeria should copy U.S.’s two party system with a center-left and center-right party, believing that having more than two was mayhem for Nigeria in previous times.

Babangida accepted the two-party frame and built the two parties: The Social Democratic Party on the Left and the National Republican Convention on the Right.

Also, the bureau wanted more states. In September 1987, Babangida created two: Akwa Ibom, carved from cross River, and Katsina, carved from Kaduna. Then there was the Federal Capital Territory.

Now Nigeria had 21 states. But, more states meant more state capitals, more offices, more contracts, more elite jobs, more patronage, and more claims on the federation account.

The first test came with local elections in December 1987, and it was a mess. The National Electoral Commission badly mismanaged the vote. Ballot shortages prevented many Nigerians from voting, while stolen ballot boxes and attempted rigging triggered violence in Lagos. One candidate allegedly stabbed his rival in Ondo (Yoruba Southwest), while police arrested people in Bendel (Edo South Central) and Bauchi (Muslim North) with piles of voting cards and ballot boxes.

The IMF Choice

To survive, Nigeria needed a financial lifeline.

The IMF offered a $2.4B loan with conditionalities that would also unlock financing from the World Bank ($1.5B). Then after some debt restructuring, & rescheduling, commercial banks would be willing to lend another $1B.

The conditionalities were:

Babangida understood the political landmines. Most Nigerians viewed the IMF not as a neutral lender but as a “neocolonial” institution. In a strategy to build rapport with the Nigerian public, in October 1985, Babangida invited a public debate on whether Nigeria should take its first IMF loan or not.

Inviting Debate (October 1st - Dec 1985)

The IMF loan debate exploded in public life. For three months, Nigerians argued in street corners, taxis, markets, state TV, and in the pages of Nigeria’s 16 daily newspapers.

The answer from bishops, professors, business executives, labor unions, university students, traditional tribal rulers, elite Nigerians, and ordinary Nigerians was an overwhelming hell no.

Most Nigerians viewed the IMF loan as an attack on Nigeria’s sovereignty and assumed the military government would just steal the funds anyway.

As a result, Babangida read the room and rejected the IMF loan. But there’s a difference between an IMF loan vs. IMF reforms. Nigeria was still frozen out of international lending, and foreign creditors wanted the IMF to certify that Babangida’s reform plan was credible.

As a result, Nigeria accepted a precautionary IMF standby arrangement while never drawing the money. Pay attention to the “Amount Agreed” vs. “Amount Drawn” below. The amount drawn is zero each time. During the Babangida era, Nigeria applied for three IMF credit cards, but never spent a cent with them.

Because IMF loans are delivered in tranches tied to strict compliance, taking the money meant answering to Washington. By refusing the cash, Babangida escaped the IMF’s leash: the IMF still set targets and monitored his progress, but it couldn’t threaten to cut off money that Babangida never spent. Instead he ran his own structural adjustment program (SAP) that he said “our structural adjustment program was produced by Nigerians for Nigerians.”

Even though Nigeria didn’t take an IMF program, the IMF still approved Nigeria’s SAP, which was the greenlight Nigeria needed to restructure debts with global lenders.

In December 1986, the Paris Club, a group of mainly Western lending governments, agreed to reschedule $7.5B of Nigeria’s medium & long term debt over 10 years and give Nigeria a 5 year grace period. Also, the London Club, a group of Western commercial banks, agreed to restructure $2.8B in Nigeria’s unpaid letters of credit.

The funny part is that while he publicly rejected the IMF loan to appease the masses, he quietly swapped the IMF loan for a $500M, low interest rate World Bank (WB) loan. His “homegrown” SAP was really a way to unlock World Bank financing, which eventually expanded to a $4.2B lifeline by 1989.

A WB official described the maneuver “a political masterpiece. If he had done exactly the same thing under the aegis of the IMF, there would have been riots or a coup d’etat.” Imposing politically explosive reforms while spinning them as “Nigerian sovereignty” was one of the many reasons why Babangida was called an “evil genius”.

#1 SAP Spending Cuts

Babangida’s spending cuts included a 20% wage cut for high-earning public sector employees, including the military. Some military officials hated the salary slash and tried to overthrow him in December 1985, but the plot failed.

The oil price collapse and spending cuts also affected Universities. In 1986, students in Ahmadu Bello University in Zaria protested over shortages of lecturers and books, deteriorating campuses and few jobs awaiting graduates. In May 1986, the protests escalated and the police shot students, killing 15 people.

#2 SAP Devaluation: The Second Tier Foreign Exchange Market

The centerpiece of Babangida’s homegrown SAP was solving the currency crisis. The IMF wanted a straightforward devaluation. Instead, Babangida’s finance minister, Kalu I. Kalu created a two-tier market.

In order to explain this, I’ll explain the system before SFEM.

Before SFEM: The Import License Cartel

Imagine trying to buy tickets to a sold-out concert. The official box office sold tickets for $10, but only insiders had that cheap price. Everyone else must buy the tickets from alleyway scalpers for $40. Before 1986, this is how getting access to US dollars worked in Nigeria.

The Nigerian Central Bank artificially made the naira stronger than the dollar. (In 1984, $1 was ₦0.8 naira on the official rate, while the black market rate was $1 was ₦3.25). As the 1980s oil price crash dried up Nigeria’s FX dollar supply, the government rationed its remaining FX via “import licenses”.

That turned political access into free money. Anyone with a relative or friend inside the Ministry of Trade could secure an import license to buy $1M at the official rate (₦0.8 to $1), paying ₦800K. If he flipped the $1M at the black market rate (₦3.25 to $1), ₦800K becomes ₦3.25M, netting ₦2.45M profit just from insider access.

Also, depending on the license, the Nigerian bureaucrat could sell the license itself for $1M, have a few Mercedes, and afford holidays & school for their kids in England. The import license system minted millionaires out of hundreds of Nigerians.

Meanwhile, factories without political connections could not get the import license to acquire the FX needed for machines, spare parts, or raw materials. Nigeria had demand for manufactured goods, but its FX system starved firms of the inputs needed to make them.

SFEM Solution

Babangida’s Second Tier Exchange market blew up the import license cartel without the IMF’s suggestion of floating the currency.

While the SFEM technically split the official FX market into two-tiers, it created a chaotic system of three competing exchange rates in Nigeria:

• 1st Tier (The VIP Line): The artificially cheap rate, reserved for the government ($1= ₦1.3) to pay off foreign debt and funding embassies.

• 2nd Tier (The Public Auction - SFEM): Banks bid for a limited pool of FX via weekly Central Bank auctions. This was a subtle devaluation; the first auction was 1 dollar = 4.6 naira.

• The Black Market Rate: The true, unregulated & weakest naira to dollar rate

Also, to formalize some black market activity into the formal banking system, Kalu legalized foreign exchange “domiciliary accounts”, allowing Nigerians to legally hold dollars in domestic banks and convert them to naira at the SFEM rate.

After SFEM launched, the official rate and black rate started to converge.

The New Hustle: “Round-Tripping”

Sadly, SFEM didn’t end rent-seeking. Instead, it directed the old import-license arbitrage to a new hustle called “round-tripping”.

Any gap between the three rates created an arbitrage opportunity (free money). Banks obtained dollars at Central Bank auction, supposedly for importing businesses, and then sold some of those dollars to the black market for naira profit. The graphic below shows the different round-tripping permutations:

The arbitrage was out of control. So, in 1987, Babangida tried collapsing Tier 1 and 2 into a single unified, auction-based foreign exchange rate.

While unifying rates briefly reduced the spread between the official auction rate and the black market rate to as low as 3.6%, this strategy didn’t fix Nigeria’s fundamental issue: demand for FX outstripped Nigeria’s FX supply & earnings.

By 1988, the government spent well beyond its budget (more salaries, contracts, subsidies to state-owned firms). The extra naira was converted to dollars to pay for imported food and manufactured goods, so demand for dollars surged in Nigeria. In 1988, Nigeria had a month of FX remaining. The strong dollar demand made the black market naira rate depreciate and the CBN refused to let the official rate converge with it. By 1989, the nominal effective exchange rate was worth roughly a tenth of its 1985 value. Overall, the whole scheme was really just a long-winded, slow method to devalue the currency, in order to decrease the number and scale of the riots.

Result of devaluation

Urban consumers and import-dependent factories suffered as the naira cost of imported goods skyrocketed. Factories responded by raising prices, cutting production, laying off workers or closing.

For consumers, the prices for foreign cars tripled and the purchasing power of middle class savings in Lagos and wages collapsed when expressed in dollar terms.

When we look at inflation, in 1986, Nigerian inflation was 5.72%, by 1989, inflation was over 50%.

Also due to the devaluation, Nigeria’s dollar denominated payments exploded. Instead of debt taking up 25% of budget, it exceeded 50%. Other aspects of government spending were sacrificed.

The positive side was that devaluation allowed less dollars to be spent propping up the naira. By 1989, Nigeria had over 3 months of FX reserves again and by 1990, Nigeria had 5 months.

#3 SAP Fuel Subsidy Cuts

Fuel subsidy cuts added to inflation too: fuel prices doubled in 1986, rose 6% in 1988, then 43% in 1989, each cut triggering deadly riots & protests. See petrol prices below:

#4 SAP Trade Liberalization

Babangida ended the 30% import surcharge, cut banned import items from 74 to 16, and reduced tariffs (from 200% to 40% in Jan 1988).

For factories that could obtain FX more easily now, lower tariffs reduced the cost of importing machinery and industrial components. But, the reforms also exposed local producers to foreign competition before Nigeria solved its electricity, transport, financing, and productivity problems.

Nigerian manufacturing was already struggling since the 1980s, but trade liberalization continued the decline. On paper, Nigeria’s manufacturing value-add plunged from $33B in 1981 to $8.1B by 1989.

But this drop is mainly currency devaluation, so measuring factory output in USD is a tad misleading.

If you measure in constant naira or by capacity utilization instead, the picture changes: mild recovery during the SAP period, though well below the 1981 peak.

While trade liberalization and a weaker naira impacted Nigeria’s import-dependent urban factories, the same devaluation, combined with removing state price controls, sparked a boom in the rural farming sector.

#5 SAP Agriculture Liberalization

In 1986, Babangida repealed the Commodity Board Decree of 1977 and the Price Control Decree of 1970, which dismantled the six national commodity marketing boards (Cocoa, Groundnut, Rubber, Palm Produce, Cotton, Grains).

How Agriculture worked Prior to Liberalization

These government-controlled boards were created during colonialism and post-independence governments appropriated and expanded them. The boards were state-run monopsonies: they acted as the sole legal buyers of agricultural exports, forcing farmers to accept state-mandated farm-gate prices that sat well below the world-market values so the government would capture the bulk of export revenue.

The government farm-gate prices were so low that it killed the farmers’ incentive to expand. A farmer might continue producing with existing land and family labor, but increasing output required more workers, equipment, transport, and risk. If the farm-gate price was lower than these additional costs, then expansion made no economic sense. Here’s some numbers:

• Global cocoa price: $2200 per ton

• Marketing board’s farm-gate price: $400 per ton

• Marginal cost with family labor: $300 per ton (profit $100 per ton)

• Marginal cost after hiring workers, buying pesticides, and planting trees ($450 per ton), the farmer won’t do it, the government price is too small (profit: -$50 per ton)

Even when boards raised farm-gate prices, the price wasn’t high enough to make expansion rational for farmers.

Economic Liberalization

After Babangida abolished the boards, farmers could sell directly to private traders, processors, and exporters at market-driven prices. Cocoa farmers, for example, saw their net margins go from losing ₦105 per hectare in 1985, pre-liberalization, to a profit of ₦1,586 per hectare in 1989 post-liberalization. For large corn farmers gross margin per hectare rose from ₦608 to ₦1311.

Production of several export crops exploded, especially rice & cotton:

If we take a magnifying glass, we see that Nigeria’s rice production growth came because farmers cultivated more land, not because they were more efficient with their existing plots. By 1989, Nigeria produced more rice than North Korea, but Nigerian yields are only ~60% of North Korea’s.

Lastly, Babangida increased spending on construction on farm-to-market roads, which was severely lacking in Nigeria and most of Black Africa. This was just low-hanging fruit.

Considering that agriculture employed two-thirds of the Nigerian work force, this period had benefits for the average Nigerian farmer.

At this time, Asia pulled further away from Nigeria. But Nigerians were still much richer than other Black Africans.

Concluding Thoughts

Nigerian popular memory blames the SAP for ruining the country, but Nigeria’s rot long preceded the SAP. The mid-1981 oil crash started the fall, and then the 1985 Saudi price war destroyed Nigeria’s oil revenues. By the time the SAP launched in 1986, per capita consumption had already plummeted 40% from its 1981 peak.

Overall the reforms were mixed. The SAP dismantled corrupt import license cartels, reduced cross-border fuel smuggling, and sparked an agricultural boom by abolishing the marketing boards. At the same time, currency devaluation, budget cuts, and fuel subsidy cuts devastated middle-class urban centers and university students. Tariff liberalization exposed domestic factories to global competition it wasn’t ready for yet.

Ultimately, the negatives wrote the national story, creating a generational public distrust of “neoliberalism”. Next time: Privatization, religious tensions, and Babangida’s famous broken promise in returning Nigeria to democracy.

Sources

1. Dictatorland by Paul Kenyon

2. A History of Nigeria by Toyin Falola & Matthew M. Heaton

3. LOC: Nigeria

4. The Oxford Handbook of Nigerian Politics by Patrick Ukata & A. Carl LeVan

Two years ago, I wrote a primer on SEZs. This is the follow up. See the original piece here:

If you need a reminder, a special economic zone is a designated region by the government that has a more friendly business environment to encourage more development. These zones have different legal and commercial regimes than the rest of the country. You can say that Britain’s colonial outpost in Hong Kong in the 1800s was an SEZ.

The British colonized Hong Kong in the 1800s after flooding China with opium during the “Opium Wars”. Under British rule, Hong Kong developed much higher living standards and operated under different laws than the mainland. Hence it was a “special economic zone”. When China opened up its economy more in the late 1970s/early 1980s under Deng Xiaoping, Hong Kong was one of the biggest “foreign” investor initially to mainland China! So special economic zones must always be successful right?

The Success Rate of Special Economic Zones

Special Economic Zones (SEZ) are generally described as successful if they attract additional firms and generate new jobs. The go-to example that everyone thinks of is Shenzhen. Shenzhen used to be a poor fishing village. But when Deng Xiaoping turned it into a special economic zone, modeled after the Irish Shannon Free Zone, it became a mega-dynamic city.

Increasingly, you have many organizations and people thinking that the road to development is just to make more special economic zones, attract foreign direct investment (FDI), and then the nation will be rich. Some of those SEZ advocates think the only reason why many local countries don’t have SEZs is because those nations are ruled by idiots, corrupt pro-status quo fools, or ideological socialists who refuse to pick the low-hanging fruit which could make their nation richer. While bad leadership exists, the harder truth is that SEZs can fail even when governments sincerely try to copy the Shenzhen model. The hard reality is that the failure rate of a special economic zone in generating incremental economic activity is 60%. Today we’ll find out why.

Case 1: Enclaves vs. Engines

The fundamental issue is that SEZ benefits are highly visible and concentrated, while its costs are dispersed and hidden.

If you walk into a booming zone and see 1000s of people making jeans or assembling electronics, the policy looks like a success (especially when you compare the zone to a neighboring poor village). Look below at the SEZ in Haiti. It is the Caracol Industrial Park.

BUT, it’s misleading to compare the zone with neighboring areas. SEZ have fiscal and regulatory incentives along with already higher than average government spending in electricity, roads, and water that will give that zone an upper hand compared to the rest of the country. So, looking at the success of an SEZ by job creation is not a rigorous analysis of whether a SEZ is good. A rigorous analysis tells us if the zone is bringing incremental gains, with the comparison being the imagined counterfactual of not having the zone in the first place.

It’s also misguided to judge a zone based on hitting export or investment goals since performance could come at the expense of other areas. Lastly, a good analysis asks what the zone costs the rest of the economy.

The Haitian SEZ, which was made in 2012 under president Michel Martelly, was supposed to create 65K direct jobs. It never came close to that number. At its absolute peak, it created 15K jobs. In addition, these jobs were overwhelmingly minimum-wage garment assembly jobs. There were also almost no spillover effects to the rest of the economy. The foreign firms did not source parts from Haitian suppliers, but rather imported all their goods.

Caracol was funded by foreign grants (the US government and the Inter-American Development Bank), Haiti didn’t pay anything. The donors spent $300M to make the park and power plant. Also, there was land displacement. Roughly $1M was spent compensating the evicted 366 families from the 600 acres of agriculture land. The foreign firms that operated on the zone had a 15 year tax holiday.

Sadly, there was zero spillover/linkage effect to the rest of the economy.

Before I continue, let me explain what I mean by “linkages”. You can’t transform an economy without it. There are two types:

• Backward linkages: foreign firms buy materials and services from local suppliers (Locals providing inputs for foreign firms)

• Forward linkages: foreign firms sell goods and services to local firms (Foreign firms providing inputs for local firms).

It’s hard to get both. Sometimes backward linkages don’t happen because local inputs are not up to the standards expected by foreign firms. Also skills transfer that may occur through labor mobility are limited, especially if the workers are low skilled.

The foreign firms that operated in Haiti (like South Korean SAE-A) imported goods almost entirely from China, so there was almost zero domestic supplier contracts.

Now let’s see another case.

Case 2: The Cannibalizing SEZ

If you throw enough spending, any government can make a specific plot of land look successful. But equating the number of workers in an SEZ factory with “newly created jobs” is often a statistical mirage. Sometimes, SEZs don’t generate incremental economic activity but rather, they can cannibalize activity from the rest of the country. There are times when domestic firms relocate to an SEZ to get lower taxes, but they aren’t really expanding the output. When that happens you are starving the government of tax revenue without adding incremental value.

A great example is comparing India and China. In 2005, Manmohan Singh was the Prime Minister and he pushed the SEZ act through parliament.

Singh and his commerce minister, Kamal Nath thought they were replicating China’s success in Shenzhen and thought they were on the road to creating the factory of the world with their SEZ law. Supporters of the bill would frequently say “just look at the results in China!” to advocate for it.

The success didn’t happen the same way. Let’s see why.

Land

In China, land is state owned. When Deng Xiaoping turned Shenzhen from a fishing village into an SEZ, the state simply commanded it. The government acquired massive tracts of land (Shenzhen is roughly ~33K hectares) and built entire cities with integrated ports, highways, and power grids.

In India, land was a highly contested fight club. The Indian government and private developers tried to acquire large tracts of farmland for multi-product manufacturing SEZs. But what happened was that it triggered violent protests from farmers, like the Nandigram protests in West Bengal in 2007.

West Bengal farmers violently clashed with police. The farm land was supposed to be acquired to make a chemical hub SEZ, having firms like the Salim Group in Indonesia.

The protests were so bad that Singh’s government compromised hard. Singh’s government froze the creation special economic zones for three months, capped the size of zones, and stripped land acquisition powers away from state governments. As a result, it was now politically impossible to make a Chinese-style mega zone in India.

Size

The result was that the amended SEZ law now created very small SEZ zones. If you want a multi-product SEZ with complete supply chains, you need at least 4K hectares. India didn’t really get that. Instead the minimum hectares kept reducing from 1K to 500 to 50 hectares. In addition, the government had an exemption for the information technology and IT Enabled Services sector, allowing IT-specific SEZs to be made on just 10 hectares. Instead of getting 4K+ hectare multi product SEZs, India got small zones that basically attracted already- Indian IT firms.

Democracy, specifically, the right of anyone’s voice to be heard and listened to in a protest, damaged Singh’s vision. Instead of attracting new foreign manufacturing firms to build massive, job-creating industrial cities like Shenzhen, the law was curbed sharply by local peasant farmers. And then, India’s domestic tech giants used the watered-down law to pay lower taxes. As a result, already-Indian firms like Infosys, TCS, WNS, and Wipro bought 4 to 10-hectare plots right down the road from their existing offices in Pune, Chennai, and Bangalore, walled them off, and declared them “Special Economic Zones”, and moved their staff inside to claim a 10 to 15-year tax holiday.

The SEZs did not cause incremental growth of skill development, it just created a real estate and tax arbitrage vehicle for domestic software firms.

Case 3: Misallocation: Bribing firms into Bad Geography

Businesses naturally gravitate to efficient locations, places with deep talent pools, proximity to good ports, and good existing infrastructure. Think of how tech firms and VCs flock to Silicon Valley.

When a government creates a special economic zone in a suboptimal location to force regional development, it has to offer massive tax breaks to compensate for the awful geography. These incentives act as a bribe, subsidizing the inefficient allocation of resources. If the location was actually optimal, then the companies would already be there. I’ll give an example with China (yes China has failures too). In this example, I’m comparing Chinese-Singapore SEZ in Suzhou (Sue-Joe) vs. Chinese-Kazakhstan SEZ in Khorgos/Horgos. Both SEZs had many issues, but Suzhou turned out more successful than Khorgos.

The Suzhou industrial park in eastern China was a success because it leverages its natural geographic advantage. It sits 80 km from Shanghai in the Yangtze River Delta, with deep talent pools and access to global shipping lanes.

It attracted genuine high-tech manufacturing such as Samsung, Philips, and Bosch. It is now a global hub for semiconductors, biomedicine, and nanotechnology. People who live in Suzhou make a median salary of ~¥110K or $16K, which rivals European countries like Portugal, Czechia, Latvia, Lithuania, Poland and Greece.

When you do an autopsy on this economic zone, you realize what made this successful. Many policy makers think an SEZ just needs “hardware” (roads, ports, power). But in Suzhou, the policy makers realized that foreign investors care just as much about software (legal frameworks, customs-efficacy, anti-corruption, and intellectual property protection).

In 1994, Vice Premier Li Lanqing (lawn-ching) teamed up with Lee Kuan Yew to make a joint venture in Suzhou.

Lee Kuan Yew invested money and exported his governance model.

Singapore trained 1000s of Chinese officials in Singaporean bureaucracy. If a foreign multinational wanted to make a microchip plant in Suzhou they didn’t deal with China’s slow and corrupt 1990s bureaucracy, they dealt with SIPAC (Suzhou Industrial Park Administrative Committee), a Chinese administrative body built around Singapore-style “software”.

Suzhou actively recruited foreign firms and made backward linkages so it wouldn’t be importing 100% of all goods like in Haiti.

The zone management aggressively helped the local Chinese small-medium enterprises (SMEs) upgrade their quality standards so they could supply these foreign giants. Suzhou deliberately attracted big corporations like Samsung, and then tried to build a cluster of Chinese & Singaporean suppliers to help them.

So think of it like this, instead of Samsung importing plastic castings or metal screws from a Japanese firm, they were motivated to buy them from a Chinese SME right outside the zone. This is the magic technology and spillover effect. Local Chinese firms learned world-class manufacturing standards which permanently upgraded the domestic economy.

Unlike Haiti’s SEZ, Suzhou moved up the value chain. After they mastered basic electronics assembly in the 1990s and 2000s, they focused more on biopharmaceuticals, AI, and nanotech. They partnered with global universities to build research institutes in the zone.

If you think Suzhou was smooth sailing, you are mistaken. In fact this zone almost died. Between 1994-1999, Suzhou was bleeding money: Singapore invested over $140M and the park faced average annual losses of ~$24M. The Suzhou local officials even lied and said the project was profitable when the Singaporean officials said it wasn’t. In 1999, Lee Kuan Yew was upset with the project and realized that the central government and local officials are not always totally aligned.

The joint venture was split 65% Singapore and 35% China. Because the local Suzhou municipal government only owned a minority stake, they didn’t care if they succeeded. In fact, the local Chinese mayor secretly built a competing zone right next door called the Suzhou New District (SND), which was 100% Chinese.

When foreign investors arrived at the airport to look at the Singaporean park, local Suzhou officials would intercept them, drive them to the 100% Chinese owned SND, and offered them cheaper land and lower taxes. The local government was cannibalizing the Chinese-Singaporean project.

But in 1999, the Chinese Communist Party saw this and hated what the Suzhou mayor was doing. In 2001, the CCP flipped the ownership structure to being 65% Chinese and 35% Singaporean, giving the local Suzhou officials the majority of the profits. After this, the local Suzhou government stopped sabotaging the Chinese-Singaporean Suzhou park, and redirected all their best resources to it. The Chinese-Singapore park turned a profit that same year and exploded in profits since. After 20 years, the Suzhou park had a positive cumulative net present value.

However, Khorgos/Horgos had deep issues. Horgos sits in Xinjiang (West China) on the Kazakh border. This was supposed to be the crown jewel of the Belt and Road Initiative called “New Dubai”, but it has had a rocky start at the moment.

The Communist Party of China (CPC) offered 5 years of no taxes. Because the Communist Party of China did not force firms to actually build factories or hire local Chinese workers (like Suzhou did), the program was immediately hijacked. Over 20K firms registered there, and over 2K film, entertainment and media studios flocked to Khorgos to register as a shell company purely for tax arbitrage. Barely anyone built actual factories there.

A rich actor or director would rent a fake desk in Horgos, register their production studio there, funnel their domestic movie profits through that address that paid 0% corporate tax. The Chinese media nicknamed the city “Horlywood” because every major movie’s end credits listed Horgos based shell firms. In 2018, the jig was over. The CPC realized Horgos was bleeding government revenues without creating a single job. The CPC changed the rules demanding that firms have one address for their company. As expected, there was a mass exodus of firms from Khorgos, hollowing out the tax haven.

Khorgos could still function as a dry-port for the Belt & Road Initiative, but the tax-haven aspect of the SEZ was a massive failure of poor incentives.

Case 4: The Hidden Infrastructure Bill and Crowding Out

A “successful” SEZ does not come free. It’s heavily subsidized. The above-average roads, the uninterrupted power grids, and modern water systems built inside the zone come at a steep opportunity cost: the capital spent pouring the asphalt, steel, and engineering in the SEZ is capital denied to the rest of the country’s infrastructure.

Furthermore, governments usually borrow heavily to build these multi-billion dollar zones, which means absorbing the country’s finite pool of credit. When a government does this, it triggers the crowding-out effect. It starves domestic firms of cash they need because the government is sucking up the money for the SEZ. This happens through two main mechanisms, depending on how free market the country’s financial system is.

Free Market Mechanism: Driving up Interest rates:

In a more market-oriented developing country (think Ghana, Sri-Lanka, Kenya, or Egypt), the government pays for mega-project SEZs by issuing bonds and then investors buy them. Usually, these countries don’t have enough domestic investors to fund a multi-billion dollar SEZ. As a result, these governments use a mix of domestic borrowing (borrowing in local currency from domestic investors) and external borrowing (borrowing in US dollars from foreign investors). Both of these choke lending to the local small-medium sized business. But in different ways.

• Domestic bond squeeze: To fund the local costs of the SEZ (land acquisition, connecting roads), the government issues domestic bonds. Domestic commercial banks buy these bonds instead of issuing commercial loans to SMEs. Because the banks have tied up their capital to government bonds, the supply available of loanable funds shrinks, and local commercial interest rates go up.

• External debt squeeze: To pay for foreign contracts and import heavy machines, the government takes on massive external US dollar loans. If the new SEZ fails to generate enough exports (which would give the central bank US dollars) to pay back the loan, then investors panic. The country’s sovereign credit rating will tank and the local currency will crash. To prevent capital flight and defend the currency, the central bank will hike up the short term baseline interest rate to attract investors. Commercial banks immediately pass this massive rate hike onto SMEs.

State-Directed Mechanism (Credit & Currency Rationing)

In developing countries where the government controls the financial system (think Ethiopia, Vietnam, Bangladesh, and China), the government doesn’t have to tempt banks with high-yielding bonds or rely strictly on foreign borrowing (they will still borrow in foreign currency if they need to though). The government just directs where the country’s cash goes through two mechanisms: credit rationing & currency rationing:

• Credit rationing: The government legally forces domestic banks or if the banks are government-owned, tells the banks to use their cash deposits to fund state mega-project SEZs. Local SMEs are left to fight over whatever loans remain.

• Currency rationing: Because the central bank has a limited amount of foreign exchange reserves, it hoards those foreign exchange reserves (usually US dollars) for the construction imports for the SEZ. A local manufacturer who needs dollars to import a machine from Germany outside the zone is deprioritized compared to a foreign Chinese/Italian firm who needs to be paid so he can make the SEZ’s power stations, wastewater plants, and highways.

Here’s an example of failures vs. successes. Dukem in the Eastern Industrial Zone was Ethiopia’s first special economic zone. The whole zone was entirely developed and financed by a private Chinese consortium called the Jiangsu Qiyuan group and the Export-Import Bank of China .

This whole plan was relatively successful. Qiyuan Group asked the Ethiopian government permission to secure a long-term lease on the land and build the zone themselves. Because the Chinese provided the roads, power lines, and factory sheds, the Ethiopian state didn’t have to issue bonds, trigger a debt crisis, or hoard US dollars to build it. It attracted foreign investment without crowding out domestic SMEs. The Chinese brought the bulldozers, asphalt, and power.

So Ethiopia got the roads, the textile factories, and the FDI off the government’s balance sheet.

However, the Hawassa Industrial Park was a different story. In the 2010s, Ethiopia decided to finance their own SEZ. Hawassa was a state-owned mega project. The Ethiopian government via its government-owned, Industrial Parks Development Corporation decided to build it.

The Ethiopian government hired the Chinese state contractor, the China Civil Engineering Construction Corporation to lay the roads, build the eco-friendly water treatment plant, and make the factory sheds. The Ethiopian government paid the Chinese contractor in US dollars. To get those dollars, the Ethiopian government spoke to the Central Bank governor to pull central bank reserves to pay the Chinese. As a result of taking foreign reserves, the local Ethiopian manufacturer who isn’t in an SEZ was suffocated from getting foreign currency to import basic machinery. Besides siphoning dollars away from the locals, Ethiopia needed more dollars, so Ethiopia raised a $1B eurobond (foreign borrowing) in 2014. Sadly, the parks weren’t generating the export growth to generate enough dollars to continue to make interest payments on the eurobond. Frankly, the Hawassa park was just one problem, of a broader external debt and foreign exchange issues that Ethiopia had, compounded by the Tigray War. By December 2023, Ethiopia defaulted on a $33M eurobond payment.

Conclusion

Special Economic Zones helped transform China, but as we’ve seen, they are not an economic cheat code. When executed terribly, they are a fast track to developing enclaves with no forward or backward linkages (Haiti), cannibalizing your own tax revenue (Chennai, India), subsidizing fake shell companies (Horgos, China), or killing your local firms so you can funnel your reserves to pay foreign contractors (Ethiopia).

The success of an SEZ is measured by what spills over outside the zone. If an SEZ doesn’t encourage technology transfers, upgrade local supply chains, and integrate with the broader domestic economy, then it’s not really an engine for national development.

The TLDR is basic: a successful SEZ accelerates “learning-by-doing”. A good zone makes local workers learn new skills, helps local suppliers match global standards, and drives local firms learn to compete globally. If none of that spills outside the zone, then the zone is more of a fenced-off enclave or a tax shelter scheme for local firms rather than a development engine.

Recap

Last time, we witnessed a real-time experiment: could Nigeria manage a financial meltdown without an IMF loan?

When oil prices collapsed in mid-1981, Nigeria’s 2nd Republic suffered. President Shagari opened IMF talks, but walked away from the IMF’s harsh suggestions: deep budget cuts, trade liberalization, and currency devaluation.

Instead of the IMF’s advice, Shagari tried his own homegrown alternative. He cut spending for many projects and let teacher and civil servant salaries go unpaid for ~8 months, which only reduced the fiscal deficit from 60% of government revenue (1981) to 50% (1982), because oil revenue was crashing faster than Shagari could cut spending. By 1983, oil revenues kept crashing, the deficit exploded to 90% of government revenue.

To cover the shortfall, again ignoring IMF advice, the central bank printed naira to fund Shagari’s government. Directly printing money via the central bank normally sparks inflation, since there’s more cash chasing the same pile of goods, so sellers raise their prices. But Shagari leaned on the overvalued naira to mask over inflation. How? The official exchange rate priced the naira far above its real worth. By the end of 1983, the central bank still treated one naira as worth $1.33, while on the black market, 1 naira was barely worth 35 cents. Anyone connected enough to get dollars at the official central bank window was buying dollars for roughly a quarter of their real price.

The cheap-dollar system did two things at once:

1. The importers received foreign currency from the central bank in exchange for their naira. This removed the traders’ naira from circulation.

2. The importers flooded the Nigerian shelves with cheap foreign imports, keeping prices relatively stable.

So there was less naira floating around, and there were foreign goods on the shelves to buy. Inflation was “relatively” tamed. But the masking inflation trick only worked as long as the Central Bank of Nigeria had reserves to burn.

When reserves were almost depleted, the shield vanished. A 3rd piece of IMF advice that Shagari ignored was trade liberalization so that higher prices would ration the scarce foreign exchange. Shagari did the opposite and rationed FX via import licenses. Those licenses often went to politically connected people who resold their licenses for profit rather than to manufacturers who needed raw materials & intermediate parts. So between the nearly depleted FX reserves and the politically captured import licenses, factories were starved of the FX they needed for spare parts or intermediate goods, gutting Nigeria’s burgeoning industrial sector. On top of that, the Nigerian government defaulted on its trade letters of credit, amassing billions in arrears.

Shagari’s homegrown alternative to the IMF during the oil price crash delivered the worst of every world: drained FX reserves, piling debt arrears, a gutted industrial base, and 20%+ inflation.

The rot drove two social shifts. The first was "Japa", Nigerians fled the country for the West. The second was a grotesque split-screen economy, where politicians lounged in mansions with imported Mercedes and Peugeots, multiple TVs, and private electricity generators, while villagers and the urban unemployed sank into squalor.

The final straw came when Shagari rigged his reelection. With the economy in ruins, Major General Muhammadu Buhari launched a coup, suspended the 2nd Republic’s constitution, and seized power. Given the state of the country, many politicians and journalists at the time called it a “justifiable coup.”

Our Nigeria Series so far:

• Overview of Nigeria: I

• Pre-Colonial Northern & Southern Nigeria: II, III, IV, V, & VI

• British Conquest, Rule, & Independence: VII, VIII, IX, X, & XI

• The First Nigerian Republic & Civil War: XII & XIII

• Military Rule: Gowon (XIV), Murtala-Obasanjo (XV)

• The Second Nigerian Republic & Debt Crisis: XVI & XVII

Buhari Inherits a Broke Petrostate (1983-1985)

Buhari & Babatunde Idiagbon took over a bankrupt nation suffocating from high inflation, meager foreign reserves, and a dying manufacturing sector. He opened with a fatal unforced error, promising 100M Nigerians a “rapid return to prosperity” while global oil prices were still in the gutter. He set expectations dangerously high.

Here’s the issue: over 95% of Nigeria’s Foreign exchange (FX) earnings came from crude oil. Nigeria sells oil, gets FX, and the FX lands at the Central Bank, which has three obligations: pay foreign creditors in FX, sell FX to importers so they can buy foreign goods, and convert FX to naira for the federal, national account. That oil dollars-to-converted-naira is the government’s main source of revenue, funding the federal, state, and local governments.

Lower global oil prices means lower export sales and government revenue. As export revenue shrank, foreign debt service ate into export sales, and by the time Buhari took over in 1983, debt service already took a quarter of export revenue. That share of export revenue never got converted into naira and never became government revenue. Debt service was shrinking the government’s budget at the source. Every dollar wired to creditors was a dollar that never reached the Nigerian national account.

Dead Broke and Defiant: The IMF Standoff

When Buhari came into power, Nigeria had roughly 1 month of foreign exchange reserves remaining. You are in a balance of payments crisis when you have under 3 months, and once you factored in Nigeria’s short term foreign loans, then Nigeria was underwater.

Buhari wanted debt relief and debt rescheduling (longer repayment runway), so he opened talks with the IMF. Despite the desperation, Buhari stubbornly stalled and refused the IMF bailout’s terms. The IMF wanted Nigeria to cut its expensive food and fuel subsidies and devalue the naira to make its non-oil exports globally competitive. Buhari publicly rejected the IMF’s demand for a massive overnight currency devaluation as a political non-starter that would crush the working class with inflation.

Instead of the IMF’s plan, the central bank quietly engineered a gradual, ad-hoc devaluation. From 1983 to 1985, the official central bank shifted from 0.72 naira to 0.894 naira to $1 USD. But it wasn’t nearly enough. On the black market, the true barometer of the currency’s worth, the dollar was much stronger than the naira: doubling from 2 naira to 4 naira.

This half-measure delivered the worst of both worlds. The creeping devaluation was just enough to make imported food more painfully expensive for everyday Nigerians, but the official rate remained too overvalued to make Nigerian exports competitive abroad.

To stop the bleeding of FX, Buhari imposed draconian rationing. The civilian foreign exchange allowance was slashed to a strict $380 per month (30% lower than Shagari’s final budget). The brute-force restrictions worked, dragging total annual imports down from over $10B+ a year to ~$8B a year by the end of Buhari’s era.

The OPEC Hustle

Buhari knew the root of Nigeria’s crisis was low oil prices, but Nigeria lacked the leverage to demand higher prices. The true power in OPEC was Saudi Arabia, pumping ~5M barrels a day and keeping prices low to keep the West hooked on cheap crude oil. Nigeria was tied with Indonesia as the 4th largest producer at 1.3M barrels and could not force a price hike.

So Buhari pivoted from price to volume. He successfully lobbied Saudi Oil Minister Ahmed Zaki Yamani for a lifeline. In late 1984, when the rest of OPEC agreed to cut production to increase oil prices, Nigeria was granted a special exemption to maintain its output at roughly 1.3 to 1.4M barrels per day. Buhari effectively free-rode the cartel, except prices didn’t really recover due to non-OPEC competition from the USSR, Norway, UK, U.S.’s Alaska, & Mexico.

Combined with his brutal import cuts, this “OPEC hustle” inched Nigeria’s FX reserves up from a disastrous one month of coverage in 1983 to two months by 1985. It was an improvement, but Nigeria was still firmly in the crisis zone.

To survive on little foreign reserves, Buhari was forced to bypass cash entirely and established international barter arrangements. Nigeria would trade crude oil directly to European countries for clothes, food, or pharmaceutical drugs.

Manufacturing Issues

Desperate to cut reliance on imports, Buhari tried to force more manufacturing supply chains inside Nigeria. In 1984, Buhari raised local content requirements for manufacturing from 15% to 50%. But it was a mandate with no teeth. Unlike the strict, disciplined industrial policy of South Korea, Buhari provided no incentives to build local supply networks, and no penalties for failing to do so. Simultaneously, he expanded Shagari’s import restrictions, starving an industrial sector that ran on imported parts and materials.

The reality on the ground was grim: Nigerian factories lacked the FX to import what they needed, and local suppliers couldn’t fill the gap. Factories couldn’t produce, and the plants bled money. Across the nation, most manufacturing plants operated at under 25% capacity and some halted completely.

For example, the multi-million-dollar sugar mill was operating at 15% capacity. Also, Steyr-Nigeria was supposed to produce 8K trucks & 5K tractors annually, but failed to hit those targets even after six years of operation.

Steyr-Nigeria and other firms made no profit at all during the Buhari era.

To survive the crisis, mass layoffs swept through the industrial sector. Between 1981 to 1985, major joint ventures like Peugeot-Nigeria, Steyr-Nigeria, and Volkswagen-Nigeria slashed their workforces from over 700 staff to roughly 500.

Subsidizing Failure & Stalled Mega-Projects

The federal and state governments owned large stakes in these plants, so government absorbed the losses, and the FX cash crunch even forced Buhari to halt funding for the Ajaokuta Steel Mill entirely, especially amid allegations that over $100M meant for it had been stolen.

The result of the manufacturing losses and poor operational capacity was that Nigeria’s manufacturing value add was slashed by more than 50% between 1981 to 1985.

Austerity

Buhari rejected the IMF and no one was willing to lend to Nigeria. So Buhari had two options to manage deficits:

1. Directly Print More Money: He could authorize the central bank to simply credit the government’s accounts in this recessionary period (countercyclical spending). But that would have been economic suicide. His predecessor, Shagari did this strategy, but he managed to mask the inflationary effects of direct money-printing because he had a six-month cushion of FX reserves to absorb the impact. Buhari had no such cushion. Direct money printing would have triggered massive inflation, far surpassing the 23% rate Buhari inherited.

2. Slash Budgets: Severe austerity to reduce deficits.

Buhari went for option #2.

Buhari’s budget cuts laid off 10K+ civil servants (5% of the civil service), reduced capital expenditures, and cut educational subsidies. Buhari continued Shagari’s freeze on public sector wages, slashed spending on supplies, spare parts, and routine maintenance, and eventually froze private sector wages.

As inflation outpaced frozen salaries, real (inflation-adjusted) wages across the nation collapsed. Rural incomes also plummeted as state-owned, commodity marketing boards continued to implicitly tax farmers too much.

Military “Bargain Prices”

Shagari masked inflation by lighting FX reserves on fire. Buhari’s substitute was brute force: he sent soldiers to beat up any merchant caught selling at “high prices”.

Despite knowing price controls were foolish, Buhari’s military government announced price controls for essential commodities, known as “essenco” in 1984. On paper, the strategy worked: official inflation plummeted from 23% in 1983 to under 8% by 1985.

While price controls “worked”, the obvious drawback was the shortages in goods. The government and the public quickly blamed widespread hoarding on “greedy traders”. But the truth was far more nuanced: hoarding was a completely logical, defensive reaction by merchants trying to survive a combination of massive import cuts and government-enforced price controls.

Greedy Traders?

Before Buhari put his price controls, retail prices in open markets were sky-high. The public saw these prices and immediately assumed merchants were “profiteering”. What they couldn’t see was that the supply chain to bring goods into Nigeria was a corrupt & expensive “bribe chain”. For a merchant to import anything, they had to survive a grueling financial gauntlet:

1. The Black Market License: To import goods to Nigeria, you needed a license from the Commerce Ministry. Because the government rationed these to save foreign currency, politicians handed them to friends/family/loyalists/cronies instead of actual businesses. The well connected insiders then sold these licenses to real merchants on the black market at an astronomical markup. By the time an actual merchant bought the license second handedly, they already paid a massive bribe or was in deep debt to purchase the license.

2. The “Form M” Labyrinth: To pay the foreign supplier, the merchant needed approval from the Central Bank of Nigeria to convert their naira into FX, navigating a mountain of red tape called “Form M”.

3. Port Extortion: When the cargo ships finally arrived in Lagos’ port, custom officials and dock workers (knowing goods were scarce and time-sensitive) routinely held the containers hostage, demanding heavy under-the-table bribes just to offload the freight.

By the time a merchant actually got all the goods to their stall, their cost basis was massive. To turn any profit, or simply break even on the bribes and debt they accrued, they had to charge steep prices. The markup wasn’t “greed”, but rather it was the bribe chain made visible.

Because the public only saw the final price tag, they cheered when Buhari’s soldiers marched into markets, raided merchant warehouses, and forced Nigerian merchants (many of them women) to sell sugar, flour, vehicles, detergents, at “bargain prices”. The public didn’t realize the military was driving the merchants to bankruptcy. The merchants were being ordered to sell at negative unit economics.

These government price controls were the signal for merchants to hoard. Faced with financial ruin if they sold at the military price mandate, merchants tried to be smarter in how they hid goods. As open-market shelves went empty, goods moved entirely to the black market. There, merchants bypassed price controls and sold to desperate buyers at a massive premium. Buhari's attempt to force affordability at gunpoint simply created severe scarcity and drove the basic necessities of life further out of reach.

War Against Indiscipline (WAI)

Buhari believed Nigeria’s economic collapse was ultimately a moral failure. He thought if he could stamp out corruption and instill order, the country would get back on track. To achieve this, he launched a social engineering campaign called “War Against Indiscipline” (WAI).

WAI had five stages:

1. Instilling orderliness

2. Improving national work ethic

3. Promoting national unity

4. Fighting corruption

5. “Sanitizing” the cities

In practice, WAI was very stringent. Civilian brigades directed traffic and cleaned up Lagos, while soldiers whipped or jailed citizens who skipped bus lines, cheated, hoarded, or littered. Civil servants who arrived late to work were publicly humiliated and forced to do frog jumps. Buhari’s military government instituted the death penalty for selling cocaine, committing arson, counterfeiting, or oil smuggling. Armed robbers faced death by firing squad.

War on the Elite

Initially, the public loved the crackdown because it wasn’t just aimed at the streets; Buhari went after the elite. He cleansed the civil service, froze bank accounts of political parties after banning them, and arrested hundreds of corrupt former government officials from the 2nd Republic, locking them away in the infamous Kirikiri prison. Through special military tribunals, the regime recovered hundreds of millions of dollars of looted funds.

The most cinematic episode of WAI was the Dikko affair. Umaru Dikko, former President Shehu Shagari’s brother-in-law and ex-Transportation Minister, had allegedly looted $1B in a rice import license scheme before fleeing to his $600K home in London. Buhari claimed that Dikko financed a coup plot and hired mercenaries to try to blow up Nigeria’s oil refineries.

In a black-ops mission, Nigerian agents partnered with Israeli mercenaries (despite Nigeria and Israel not having diplomatic relations at the time. Nigeria wouldn’t restore relations with Israel until 1992) to kidnap Dikko. They drugged him and attempted to ship him out of Britain in a crate.

The plot was foiled when a British customs officer opened up the crate and found Dikko unconscious inside. The Nigerian agent and the three Israelis were all jailed in the UK. Due to Nigeria trying to arrest people on British soil, Britain expelled Nigerian diplomats in the UK, and Nigeria retaliated in kind. Dikko was never brought home to Nigeria via kidnapping.

The Great Naira Swap

While the Dikko kidnapping failed, Buhari executed a highly effective, nonviolent strike against corrupt elites in April 1984. He announced a new naira currency.

Every old note had to be exchanged for a new one within a matter of weeks. To ensure no one could cheat the deadline, Buhari closed Nigeria’s land borders. The target wasn’t the everyman, but the 2nd Republic politician sitting on fortunes in embezzled naira, much of it stashed in warehouses across the border or abroad.

A banknote is only worth something if the issuing authority honors it. By reprinting the notes and closing the country, Buhari turned billions of looted naira into worthless paper. The corrupt elites could not transport their hoards back into Nigeria in time to swap them. The stolen cash simply died in suitcases.

WAI becomes "War Against the Innocent”

For all the fanfare, WAI failed to cure Nigeria’s rot. The bureaucracy still demanded bribes, and WAI enforcement units quickly realized they had unchecked power and became extortive themselves. Some cynical WAI commanders called WAI “War Against the Innocent”.

The hypocrisy became too glaring. For example, WAI championed environmentalism with Buhari passing decrees protecting endangered species, but neglecting the oil spills in the Niger-Delta.

Eventually, Nigerians grew resentful, sensing that Buhari was far harsher on the minor indiscipline of regular people (like cutting a line or urinating in public) than bringing the true corrupt elites to face justice.

As public sentiment soured, Buhari had less tolerance for criticism. His National Security Organization (NSO) arrested journalists and critics.

Finally, seeking a populist distraction from a collapsing economy, Buhari repeated Shagari’s playbook and expelled 700K Black African migrants (Ghanaians, Cameroonians, Chadians and Nigeriens). This was a popular policy, as migrants were scapegoated for "stealing jobs” or “urban crime”.

Buhari Falls

By 1985, Nigerians were exhausted. Buhari had reduced the fiscal deficit. But people were poorer, factories were weaker, real wages had collapsed, debt service was higher, and shortages persisted. The military government was violent, rigid, and had no democratic timetable. Inside the military, the mood turned against him.

General Ibrahim Babangida overthrew Buhari in a coup. Babangida accused Buhari of being “too rigid and uncompromising”. He released some journalists, repealed laws criticizing the government, and reopened stalled talks with the IMF.

Concluding Thoughts

So was Buhari good or bad?

The honest answer is that Buhari inherited a disaster and then mismanaged expectations with the Nigerian public.

He did not cause the oil crash, the debt overhang, or the corrupt import-license economy. By the time Buhari arrived, Nigeria was already broke.

To Buhari’s credit, he achieved what Shagari couldn’t. He took elite corruption seriously, nudged FX reserves slightly upward, and ruthlessly shrank the fiscal deficit from 91% of government revenue to 25% by 1985. But, austerity came at brutal human costs: slashing healthcare, education, and infrastructure to improve financial books.

Ultimately, Buhari’s foundation theory of government failed. He genuinely believed that Nigeria could be saved by discipline. That if you disciplined budgets, jailed corrupt politicians, and whipped the queues, then Nigeria would do well. But, you could argue he didn’t have time since he didn’t even rule for two years.

I would argue that the problem wasn’t morality. The problem was math. Nigeria depended on oil for FX. With global oil prices collapsing, foreign debt service swallowed an ever-growing share of what was left, rising from a quarter of export earnings when Buhari took office in 1983 to over a third by the time he was overthrown. Meanwhile, he stubbornly defended an overvalued naira by burning reserves that starved factories of the dollars they needed to import foreign parts. His government was simply not good at allocating scarce FX.

It’s almost a religious recitation in the developing world “if we just remove corruption, then our country can get back on the right track!” Buhari’s rule was widely seen as the least corrupt regime Nigeria had seen since Murtala, the 53 suitcases scandal notwithstanding. It didn’t matter. You can jail corrupt politicians and still run a broken exchange-rate policy. You can beat up “greedy” merchants and still have empty shelves. You can promise a “rapid return to prosperity” while presiding over the hollowing out of your industry.

By 1985, Nigeria had fallen behind countries it used to lead. China, Pakistan, and India all pulled ahead, though by African standards Nigeria still sat above Congo or Ethiopia.

Through the oil-price collapse, both Shagari and Buhari ignored the IMF, and both their homegrown solutions were subpar. Will Babangida finally listen to the IMF, take their loan, and turn the economy around? Find out next time.

Sources

1. Soldier’s Paradise: Militarism in Africa after Empire by Samuel Fury Childs Daly

2. The Oxford Handbook of Nigerian Politics by Patrick Ukata & A. Carl LeVan

3. Nigeria: Library of Congress: A Country Study

4. Dictatorland: The Men Who Stole Africa by Paul Kenyon

In the late 1980s, federal regulators in Texas faced an unusual problem: what are they supposed to do with thousands of half-built condos financed by bankrupt thrift banks. The buildings had no buyers, no tenants, and mounting maintenance costs. What was the solution? Federal regulators decided to burn them down. It was cheaper to demolish and torch the properties than to maintain them while waiting for a market that would never recover.

This was the end stage of the Savings and Loans Crisis, a $124B financial disaster that had been building since the 1960s.

(If you want to read part 1 on how the Savings & Loans Institution (also known as thrifts or S&Ls) was even created and rebuilt by President FDR click here. If you want to read how Nixon, Ford, and Carter continually put band-aids on a dying industry, read here.)

In short in part II, Nixon and Ford repeatedly bailed out thrifts. Meanwhile, Carter tried deregulation with the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA), which raised deposit insurance from $40K to $100K, killed interest rate caps on thrifts, and allowed thrifts to invest 20% of their portfolios in consumer loans, credit cards, and business loans. Now it’s Reagan’s turn.

Ronald Reagan (1981-1989)

During Reagan’s early months, he signed the Economic Recovery Tax Act of 1981. This law reduced the depreciation schedule from 30+ years to a 15-year accelerated depreciation. For those who don’t know accounting, depreciation is a non-cash expense. I’m simplifying the law, but in general let’s say the physical building of a property is worth $1.5M, Reagan’s depreciation law allows you to deduct $100K per year from your expenses. If you earned $90K from your property, you can legally report that you made -$10K from your property, allowing you to write off losses. This was done to spur business investment.

The second major thing his administration did was that the Federal Home Loan Bank Board (FHLBB) authorized troubled thrifts to issue “income capital certificates” that the Federal Savings & Loans Insurance Co. (FSLIC) would buy. This wasn’t real money; accounting rules simply allowed thrifts to count these certificates as capital. It was a paper bailout to disguise insolvency.

The real math was ugly. Thrifts needed a $25B cash injection. The FSLIC had only $6B in reserves, meaning a real bailout would require an additional $19B in taxpayer and bondholder funds.

To sidestep a visible taxpayer bailout, the FHLBB authorized “Regulatory Accounting Principles” (RAP). These principles allowed thrifts to defer immediate losses and count “Goodwill” as tangible capital. This was accounting magic to mask technical insolvency, allowing zombie thrifts (thrifts with negative net worth) to continue operating with full government backing.

In addition, Reagan signed the Garn-St. Germain Depository Institutions Act of 1982. If Carter’s DIDMCA had started deregulation, then Garn-St. Germain turbocharged it into a casino. The cope hope was that thrifts could gamble grow their way back to solvency. This did not happen.

Thanks to Reagan, thrifts could now make risky commercial real estate loans, buy high yield junk bonds, and fund other speculative ventures. Between 1982 to 1985, thrift industry assets grew 56%, not necessarily because the real economy was booming, but because zombie thrift banks were doubling down on high-stakes bets.

This created a moral hazard. Because Carter’s DIDMCA law raised deposit insurance to $100K, the risk of a thrift failing had shifted entirely from depositor to taxpayer. Insolvent thrifts had nothing to lose, which invited sweeping fraud.

Brokered Deposits and the “Zombie Growth”

With interest rate caps removed and the government guaranteeing every penny up to $100K, a new financial innovation scheme emerged on Wall Street: Brokered Deposits.

A Wall Street firm like Merrill Lynch would take $50M from a pension fund in NY, slice it into 500 chunks of $100K each, and scatter them across thrifts offering the highest above-market rates. Every slice of $100K was fully insured by the FSLIC, so the pension fund took zero-risk, the Wall Street firm took a broker’s fee, and an insolvent thrift in Dallas got an instant infusion of cash.

This severed the link that defined thrifts since the 1830s. A thrift no longer grew on local community trust and reputation; but rather, it grew on yield. A zombie thrift bank in a tiny town with negative net worth could be bankrolled by Wall Street firms as long it advertised juicy, above-market rates. A dying thrift could attract millions overnight because no depositor cared whether the institution was sound when the government was on the hook.

But now, thrifts had millions in “hot money”, but the thrift faced a structural trap. To pay out 14% to depositors, they couldn’t just issue 7% home mortgages anymore, and rarely any homeowner wanted a 18% mortgage interest rate. Thrifts had to chase high-yielding “long shots” that exceeded the 14% rate the thrift offered: risky commercial real estate, junk bonds, and speculative land plays. And thanks to accounting forbearance (the government ignoring bad balance sheets), thrift owners often gave loans to “friends” for fraudulent & nonsensical real estate projects.

How Fraud Worked:

The thrift, Empire Savings, provides the quintessential case study. Empire’s assets ballooned from $39M to $270M in 11 months through aggressive, fraudulent lending, mainly from speculative real estate.

The scheme worked like this:

1. Developers would buy a piece of raw land and continually flipped it back and forth to artificially inflate its appraised paper value from $3M to $30M.

2. The thrift would issue a massive construction loan based on that fake valuation. In this case, loans would be 70% of the land’s value. 70% of 30M is $21M.

3. Actual development costs were actually worth a fraction of that amount, maybe $2.5M.

4. The remaining $18.5M was cleanly pocketed up front by developers as “incentives” and split with thrift owners via kickbacks and massive 1% origination fees (1% of 21M is $210K per deal).

These giant, fraudulent loans actually made the thrift’s balance sheet look incredibly healthy on paper, because loans, while being a liability for the borrower, are assets for financial institution. Bigger assets made thrift’s soaring liabilities (the volatile brokered deposits) look comfortably covered. This artificial solvency allowed thrifts to attract more Wall Street-brokered deposits, repeating the loop until developers stopped making interest payments exposing the worthless loans underneath. In many cases, developers used the loan proceeds to make interest payments, a trick that bought time until default. Many of these real estate projects weren’t completed and had no tenants to pay down the debt. When Empire collapsed, taxpayers paid $300 million through the FSLIC.

Empire wasn’t an isolated case. In fact, Empire was one case out of legion.

The 1986 “Double Whammy” (Taxes & Oil)

The fraud scheme worked until 1986. The thrift industry hit a brick wall made of two simultaneous disasters.

Reagan’s Tax Reform Act of 1986

In 1986, Reagan undid his initial tax bill. As said before, after 1981, the U.S. tax code was a giant subsidy for real estate speculation. High-earning professionals (like a doctor in New York) could use “passive losses” from investing in a half-empty condo in Dallas (collecting no rent but still incurring costs like depreciation, property taxes, insurance, & maintenance, making the condo loss making) to offset their personal income tax bills. Reagan’s 1986 tax reform killed those deductions and extended depreciation schedules, which reduces the non-cash depreciation expense you can claim each year. Essentially, to pay for the 1986 tax cuts, Reagan raised revenues by killing “passive loss” deductions. The investment logic of having a loss-making real estate investment offset their day-job salary to reduce their income taxes died overnight. Thousands of investors dumped their holdings simultaneously, and property values cratered. The collateral backing thrift loans was suddenly worth a fraction of the loan amount.

The Oil Price Collapse. In the same year, the oil market imploded. Non-OPEC production had risen in the North Sea (UK and Norway) and Prudhoe Bay (Alaska). OPEC members like Nigeria and Venezuela were cheating on their production quotas, pumping extra oil to service sovereign debts. When Saudi Arabia, the “swing producer”, flooded the market after 1985, nearly doubling output from 2.4 million to 5 million barrels a day, oil prices crashed. As a result, the oil industry in oil-states (Texas, Oklahoma, Louisiana), which needed higher prices to justify drilling, laid off engineers, rig workers, and geologists en masse. The loyal demand for housing in these states evaporated.

Texas was ground zero for both shocks.

The tax code killed the investors; the oil bust killed the tenants. Thrifts that took brokered deposits and poured money into speculative Texan real estate and construction loans were now holding loans that no one could repay on properties that no tenants were renting. With Texas not attracting tenants for empty real estate, no one was paying off their thrift loan. By 1988, 40% of all thrift failures had occurred in Texas. At auction, regulators recovered at best 75% on $400 billion in defaulted assets. With maintenance costs piling up on vacant properties (fencing, guards, insurance, taxes, repairs) and no tenants to collect rent from, the FSLIC decided it was cheaper to demolish and burn unfinished condos than maintain them.

Between 1986 and 1991, over 1K thrifts died.

George H.W. Bush (1989-1993)

By 1989, when George H.W. Bush took office, a major political scandal erupted: the “Keating Five”. Five U.S. senators (4 Democrats + Republican John McCain) were accused of improperly pressuring federal regulators to save Charles H. Keating Jr, the chairman of the Lincoln Savings & Loan Association, which was then under federal investigation by the FHLBB.

Lincoln Savings was an absurd case of fraud, growing from $1B to ~$5B in assets in less than a decade, fueled by junk bonds, speculative real estate, and systematic investor deception. When Lincoln collapsed 1989, taxpayers federally insured $3.4B in savings deposits.

~23K Lincoln bondholders, many retirees, were defrauded after being misled that these high-risk securities were safe, government-insured savings products. Keating cultivated political influence by providing political contributions and luxury travel, including Bahamas trips and resort stays, to the five senators and their associates. While none of the senators were convicted, several of them were reprimanded by the Senate Ethics Committee. The scandal turned the S&L crisis from a boring regulatory story into a public outrage.

Bush decided the bleeding had to stop. He passed the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 1989. The main thrift regulator, the Federal Home Loan Bank Board, and the main insurer, the FSLIC, were both abolished. The Resolution Trust Corporation was created and funded to shut down 747 failing thrifts holding over $400 billion in dead loans. The crisis finally ended on December 31, 1995, when the RTC closed under Clinton. The total cost to taxpayers: $124B.

Concluding Thoughts

The entire story of thrifts was the slow death of an outdated financial model.

Thrifts made sense in the 1830s when American capital markets were primitive, long-term mortgages barely existed, and ordinary households had few ways to pool savings. The industry nearly died during the Great Depression, and the New Deal then rebuilt it around a simple formula: short-term deposits funding long-term fixed-rate mortgages, protected by deposit insurance and interest-rate controls. That system worked in a stable post-WWII world. It stopped bank runs, expanded homeownership, and helped create suburbia.

But by the 1960s and 1970s, banks, money market funds, and treasury securities offered savers better returns than regulated thrifts could legally pay. Depositors pulled their money. Thrifts remained stuck holding mortgages issued at 5-7% while savings rates climbed to double digits. Their assets were bleeding in value as interest rates climbed up and their liabilities were walking out the door as banks and other financial institutions offered more competitive products. The industry was economically dead long before it was politically dead. If you are a Gen-Z or millennial in the United States, you may have only thought thrifts were cheap clothing stores from a Macklemore song. Frankly, by the 1960s, thrifts weren't doing anything unique anymore. I don't need a regulated utility like a thrift to give me a mortgage. I can just go to a bank.

At that point, American Presidents could do the following:

1. Bailout thrifts

2. Pretend Insolvency didn’t exist

3. Allow thrifts to gamble their way to back to solvency

4. Let Thrifts Die

5. Recapitalize thrifts by making the government absorb losses. The government would buy the thrift’s below-par mortgages (mortgages paying 6% in a 12% interest rate environment), and replace them with government bonds paying market rates.

America chose options 1 through 4 in that order over the decades. Now using cognitive empathy, let’s come up with different narratives of who to blame.

Market-Friendly Hat

If I put my tech bro/libertarian hat on, the clear fault is the U.S. government. The New Deal locked thrifts into a business model that depended on capped savings rate deposits to fund long-term fixed-rate mortgages on razor-thin margins where the taxpayer would insure deposits. This only works when inflation is low, rates are stable, financial competition doesn't exist, and capital markets are underdeveloped. The New Dealers weren't enlightened monarchs. They were answering "how do we restart housing now?" not "will this institution make sense in 40 years?" By the 1966 credit crunch, this model was dead.

Also, LBJ, Nixon, and Ford politicized housing finance. Carter created forbearance. And Reagan built an incentive structure where it was obvious that crooks would exploit it.

Imagine a casino hands you chips and tells you: “Keep everything you win, and if you lose, the casino will cover it.” No rational person bets small. You shove everything to high bets, because a win is yours and a loss is someone else’s. That was a zombie thrift’s exact incentive. With government-guaranteed deposit insurance covering the downside and shareholders keeping the upside, by-the-book lending was the only guaranteed way to stay dead. Also, Reagan’s deregulation to let insolvent firms gamble with state-backed insured money isn’t “free market.” It’s “if it’s heads I win, if it’s tails taxpayers lose.”

And the fraud? Frankly, fraud was a rational response. Extreme risk gives you a lottery ticket while insurance covers the downside. If you are insolvent, by-the-book lending guarantees you a slower death: start at -100, grind your way to -85 over five years, and you’re still a zombie, because dead was zero.

But the problem with the market-friendly hat is that I am blaming the very government-insured guarantees and interest-rate controls that ended the bank runs in the Great Depression. The logic is sound, but I am handwaving away the social problems those guarantees existed to solve.

Social Democrat Hat

If I put my social democrat hat on, I would blame Reagan’s deregulation. I would care more about the social goals of government policy than the bad incentives my regulations created. The government did something valuable by stabilizing home finance, expanding homeownership, and ending panic thrift withdrawals. Then inflation, interest rate spikes in the 70s, and Reagan’s deregulation killed the system.

Under this view, the Republican bailouts under Nixon and Ford weren’t big enough. What thrifts needed was recapitalization, or possibly nationalization. America at that time needed to take on debt of roughly a quarter a trillion (which exceeded America’s total government revenue in the early 1970s) and buy all the mortgages from the thrifts. That would have given thrifts a clean start. There should have never been Carter-style forbearance or Reagan deregulation creating fraud and the death of an entire industry. The problem wasn’t government, the problem was insufficient policy design and inadequate regulation.

The issue is that “better policy design” and “inadequate regulation” are handwave words. It assumes politicians optimize for long-term policy, when in both Democrats (LBJ) and Republicans (Nixon), we see that the American political economy is geared more for avoiding blame and political considerations than good sustainable policy.

In the 1960s, LBJ was politically attacked since the government was essentially borrowing money and using taxpayer dollars to buy mortgages. He took Fannie Mae off the government balance sheet to avoid that political attack. Nixon did bailouts not because he believed in thrifts but because he could extend and pretend and give the problem to future presidents. Also, no one was going to spend a quarter trillion dollars to recapitalize thrifts at any point from the 1960s to 1980s. It would have been political suicide during the Vietnam war and would have been hated by the American taxpayer. Regulators and Presidents aren’t enlightened monarchs. You couldn’t make bad math work for an industry once interest-rate shocks happened.

The Global Pattern

The sad part is, America is not unique in this. The S&L crisis was a combo of “pretend and extend” or “gamble to solvency or death”. Other countries have similar stories. I’ll give three:

Japan in the 1990s:

Japan’s “Lost Decades” banking crisis is basically the “pretend and extend” aspect of the American S&L Crisis, except you keep insolvent banks alive for decades and live with the sluggish growth of bankrupt banks.

The Eurozone Debt Crisis from 2008 to 2018:

Italian banks held Italian government bonds, Spanish banks held Spanish bonds, Portuguese banks held Portuguese bonds, and Greek banks held Greek bonds. Everyone initially thought they were safe until Greece defaulted, Italy’s debt servicing costs exploded due to rollover risk (Italy had to refinance old debts at ~4% interest rates into new debts at ~7%), Spanish banks looked fragile due to a real estate bubble burst, Portugal had a mix Greek, Spanish, and Italian problems. Bond prices fell, interest rates spiked, and mark-to-market losses appeared (when assets lose value hard, so there’s a difference between what bonds are worth on paper and what they could actually be sold for). Instead of allowing banks to recognize losses (which would have been a doom loop), the EU just pretended the banks weren’t insolvent. Greece defaulted and needed IMF loans, Italy continues to manage the crisis, Spain got a real estate crash and partial EU cleanups, and Portugal had a restructuring & an IMF loan. This was a clear “pretend and extend”.

Zombie LGFV & Zombie in China, 2018 to present:

China sits somewhere between Japan's Lost Decades and the American thrift crisis but with far more control. The Chinese central government is allowing state-owned banks to "pretend and extend" for insolvent Local Government Financing Vehicles (LGFVs), similar to Japan and Nixon-era America. But the difference between China and America or Japan is that China has capital controls. Chinese households can't easily pull yuan out of banks, convert yuan to dollars/euros/pound sterling and then park foreign currency into foreign assets. As a result, capital controls give China more time to fix its crisis than the U.S. or Japan ever had. China allowed some visible failures like Evergrande's death in 2024 rather than indefinite bailouts, so that's less total denial than Japan. But, where China resembles “gamble to solvency or die” like Reagan-era America is that the Communist Party of China wants to grow local governments out of insolvency, but instead of Texan real estate, they want them to lend into winning EV companies, renewable batteries, aerospace, semiconductors, and advanced manufacturing.

What The Thrift Crisis Left Behind

The real reason I spent so much time discussing the Savings & Loans Crisis is because it provided the legal & financial architecture and the psychological playbook for the 2008 Great Financial Crisis (GFC). You cannot understand GFC without understanding why the government created Fannie Mae, Freddie Mac, & deposit insurance or why Wall Street created Mortgage-Backed Security market in the first place.

The biggest difference, of course, is that normal Americans largely ignored the Savings & Loans Crisis. Thanks to Carter, deposits were insured up to $100K, so even if a thrift died from some fraudulent condo deal in Texas, that had almost no impact on your middle class family in Ohio or Wisconsin. The multi-billion-dollar pain was socialized through taxes & bond issuances, not lost consumer deposits.

But the thrift crisis left behind a culture of regulatory arbitrage.

By the 2000s, the thrift industry was largely obsolete, but firms like Washington Mutual, Countrywide, and IndyMac still chose to have thrift charters because the Office of Thrift Supervision (OTS) was a friendlier and less intrusive regulator than getting a national bank charter, regulated by the Office of the Comptroller of the Currency (OCC), a state-charter regulated by the Federal Deposit Insurance Corp(FDIC), or a bank holding company regulated by the Federal Reserve.

This allowed these thrifts to load up lending to un-lendable people (subprime mortgages) with minimal interference. We’ll talk about the Great Financial Crisis soon.

Previously, I wrote about Nigeria’s return to democracy under Shehu Shagari. His team built a patronage machine fueled by contract skimming, import license bribery, and foreign exchange arbitrage.

Nigeria’s finances lived and died by global oil prices. During this period, 81% of Nigeria’s government revenue and 96% of its foreign currency earnings came from selling oil. After the Iranian Revolution oil price-spike in 1979-1980, Nigeria’s economy boomed. Nigeria’s foreign reserves jumped from $5.5B to $10B from 1979 to 1980.

Flush with cash in 1980, Shagari allowed state governments to take foreign loans without federal approval, opening the door for massive abuse. Then, in 1981, Shagari started Nigeria’s 4th development plan, a massive spending push to support industrialization.

The timing was catastrophic.

By mid-1981, oil prices began to slide as Saudi Arabia and non-OPEC producers expanded production and triggered price wars with Nigeria. Compounding this, the 1982 Western recession crushed global oil demand, crushing Nigeria’s government revenues.

Caught between soaring spending and plunging revenues, Nigeria plummeted from running near-balanced budgets into catastrophic deficits exceeding 60% of government revenue.

By 1982, oil prices declined even more, and Nigeria was in a severe, double digit recession.

That same year, Shagari passed the 1982 “austerity” bill, but it wasn’t deep enough. The fiscal deficit decreased from 60% to 50% of government revenue, nowhere near a balanced budget. This is because Nigeria’s government revenues were falling faster than Nigeria could cut spending.

So the question is: if Nigeria was running massive fiscal deficits exceeding 50% of government revenue 1981 onwards, how did Nigeria finance its spending?

Our Nigeria Series so far:

• Overview of Nigeria: I

• Pre-Colonial Northern & Southern Nigeria: II, III, IV, V, & VI

• British Conquest, Rule, & Independence: VII, VIII, IX, X, & XI

• The First Nigerian Republic & Civil War: XII & XIII

• Military Rule: Gowon (XIV), Murtala-Obasanjo (XV)

• The Second Nigerian Republic: XVI

I. International Lenders Shut the Door

From 1981 onward, Nigeria’s fiscal deficits exceeded 50% of its government revenue and had to be financed somehow. After Mexico’s August 1982 default triggered the Third World Debt Crisis, international banks shut the door lending to developing countries. The Central Bank of Nigeria (CBN) became the financier of last resort.

Central Bank Direct Debt Monetization

Nigeria financed these deficits through direct debt monetization, known locally as “Ways and Means”. When the Nigerian government’s oil & tax revenue couldn’t cover its spending, the CBN covered the difference by crediting the government’s account with freshly created naira. No bonds issued, and no investors involved.

In U.S., Switzerland, Norway & the E.U., direct debt monetization is illegal. In those countries, central bank independence is built on a firewall: governments must sell bonds to private investors first (banks, insurance companies, pension funds), and only after institutional investors buy bonds can the central bank buy bonds from those investors on the secondary market. Nigeria had no such firewall.

Direct debt monetization had been legal since the CBN’s creation in 1958, during British Nigeria’s self-rule years before independence. Direct Debt monetization was envisioned as a temporary stopgap to cover revenue shortfalls. But by 1981, it was a permanent financing tool.

In theory, directly monetizing deficits by printing money at this scale should have created immediate inflationary pressure. It didn’t, at least not right away, and understanding why is the key to the whole Shagari-era fiscal story.

Exporting Inflation Via Foreign Reserves

When the CBN printed billions of naira to cover the Nigerian government’s shortfalls like an overdraft at a bank, the CBN enabled the government to pay increases of civil servant wages and fund patronage spending. But much of that demand was spent on imported goods because Nigerian domestic production was insufficient. To buy foreign rice, cars, and electronics for the Nigerian market, importers took their naira to the Central Bank and exchanged it for dollars, pound sterling, or etc. to pay foreign suppliers. Each of these transactions did three things simultaneously:

1. Enabled the import of foreign goods (at a strongly overvalued exchange rate, 1 naira was $1.63 USD in 1981)

2. Pulled naira back out of domestic circulation

3. Drained the Central Bank’s foreign reserves

The CBN was effectively “exporting away inflation” by burning through foreign exchange reserves (FX). As long as Nigeria had FX to sell to importers in exchange for naira, Nigeria’s printed excess naira could be absorbed by imported supply instead of pushing up domestic prices.

The binding constraint was foreign reserves. From 1980 to 1981, Nigeria’s foreign reserves drained from $10B to slightly under $4B.

How serious is $4B in reserves? Since Nigeria imported $22B annually ($1.83B per month), $4B covered ~2 months of imports. Anything under 3 months is crisis territory. So Nigeria went from half a year of runway in 1980 to ~2 months by 1981.

With the CBN directly monetizing deficits and the Nigerian government hiking government wages in 1981, demand rose faster than domestic supply and inflation rose from under 10% to over 20%. But the full inflationary impact was cushioned. The counterfactual would be: had Nigeria not used FX reserves to import foreign goods, the same money printing and wage increases would have chased Nigeria’s insufficient domestic supply, and inflation would have surged well above 20%. Instead of the counterfactual, in reality, much of the new money flowed into import demand, and the Central Bank met that demand by selling dollars from its reserves, reabsorbing naira and limiting how much naira remained in circulation.

To slow down the bleeding of reserves and to prioritize critical goods, in 1982, Shagari’s government restricted imports, rationed foreign exchange, and raised tariffs on many foreign goods. Imports reduced from $22B to $18.9B that year.

The foreign reserve drain shield, the 1982 austerity (a wage freeze, public hiring embargo), and recession-killed demand together outweighed direct money printing’s upward pressure, dropping inflation from 20%+ to ~8%.

But lowering inflation came at the cost of depleting reserves. Nigeria’s foreign reserves collapsed from ~$4B to $1.6B in 1982. Since Nigeria imported $18.9B a year or $1.6B per month, Nigeria had 1 month reserves of import coverage.

To make matters worse, not all of Nigeria’s FX reserves were spent admirably. Political insiders abused the strong official exchange rate to convert naira into pound sterling & dollars, funneling the drained reserves into London properties.

By 1983, Shagari added more import licenses to restrict imports and preserve what little FX remained, but the dam already broke. Once foreign exchange became too scarce, Nigerian importers couldn’t get letters of credit they needed to bring imported goods in the country. Imports collapsed and also food production shrunk since the 1983 Sahelian drought decimated Northern Nigeria’s food production. Meanwhile, the CBN kept printing more naira to directly finance deficits. With no more foreign reserve shield, the extra printed naira chased a shrinking supply of domestic goods, pushing up domestic prices and inflation shot up again to 23%.

The worst part was, if you factor in Nigeria’s short term foreign loans, Nigeria didn’t even have one month of import coverage. The country was effectively bankrupt.

IMF Talks

Besides rising inflation, due to falling oil revenues and no foreign exchange remaining, Nigeria was building up foreign debt arrears. Back when oil prices were high in 1979-1980, Nigeria could import ~$20B worth of goods a year through short-term trade credit from foreign suppliers and banks. When oil revenue collapsed in 1981 and Nigeria’s foreign reserves were being depleted, Nigeria couldn’t pay those bills. By 1982, those unpaid balances accumulated as $5B arrears in short-term foreign debt obligations.

Then by 1983, Nigeria owed $7.5B in overdue invoices and foreign banks refused to lend to Nigeria until Nigeria cleared the payment backlog.

As a result, Shagari opened talks with the World Bank and IMF. The World Bank offered a $300M structural adjustment loan and the IMF offered a $2.5B extended fund facility. But Shagari refused to take the IMF loan. The IMF conditions involved:

1. Cutting capital project spending (especially on the new capital, Abuja)

2. Devaluing the Naira deeply (The CBN had already been devaluing, but it remained very overvalued compared to its black market rate).

3. Slashing fertilizer and fuel subsidies

4. Implementing deeper budget cuts

5. Liberalizing trade (reduce tariffs, import licenses, remove import controls)

The reforms aimed to rebuild FX reserves and close the deficit Nigeria was financing through debt monetization. Put more directly: Nigeria was living beyond its means and had become un-lendable.

You can argue Shagari refused because devaluation would make imported food too expensive for Nigerians or that trade liberalization would gut domestic manufacturing. Both are true. But the more cynical take: devaluation would destroy the FX arbitrage profits enriching Shagari’s allies and removing import licenses would prevent Shagari’s allies from importing goods, hoarding them, and then sell them on the black market at high markups. The most cynical take: Shagari did not want an IMF deal before the next election.

Instead of the IMF, Shagari’s team met with a consortium of 26 out of the 28 international banks that Nigeria owed in July 1983. 26 banks forgave $1.5B of the $7.5B in overdue invoices, and converted the remaining overdue invoices into a $6B new loan with interest. Frankly, this didn’t help that much.

Whatever motive you attribute to Shagari, the domestic crisis didn’t pause. One of his most self-inflicted wounds was that his import restriction list was poorly devised. Nigeria bought 75% of its industrial inputs abroad, so banning imports gutted the factories that needed them.

Many of Nigeria’s industries were operating at 25% capacity or less, starved of intermediate goods, spare parts, and raw materials.

II. The Industrial Mirage

On paper, previous administrations helped Nigeria build a diversified industrial economy. The Kaduna refinery processed crude. The Delta Steel Company, built by a German-Austrian consortium began producing steel billets in 1982. Peugeot and Volkswagen plants assembled cars in Nigeria. Mercedes-Benz in Anambra, Fiat in Kano, Steyr-Daimler-Puch(in Bauchi), and British Leyland (Ibadan) all opened joint ventures with the federal and state governments to produce trucks, buses, land rovers, and tractors across multiple states.

So why did none of it survive or expand? Because most of these plants were not fully integrated manufacturing operations, but import-dependent assembly hubs, dependent on imported machines, components, and industrial inputs. This became obvious during Nigeria’s foreign exchange crisis. Since Nigeria depended on foreign inputs, without foreign exchange, Nigerian manufacturing capacity ground to a halt.

The Kaduna oil refinery imported heavy crude from Venezuela since Nigerian Bonny Light wasn't suitable for lubricants, asphalt, and bitumen. The Peugeot and Volkswagen plants didn't make engines or chassis; they imported most of the parts from France and Germany and bolted them together like Legos.

Why Local Supply Chains Never Developed

A successful import-substitution strategy builds local supply chains. That would have meant Nigerians gradually learning to cast engine blocks, stamp body panels, and build parts of the automotive supply chain. Instead, factories imported kits from abroad, bolted them together in Kaduna, and stamped "assembled in Nigeria" on the hood. The factory was physically in Nigeria but the supply chain was still tied to the country abroad (France, Germany, Austria, Italy, etc.).

The Peugeot plant in Kaduna shows exactly how the breakdown worked. When Peugeot Nigeria sold a car domestically, the business was paid in naira. But when the plant needed shipment of parts from Peugeot France, the firm wanted payment in French francs or dollars. Peugeot Nigeria would go to the Central Bank of Nigeria, which pulled its foreign currency reserves and wired it to Peugeot’s bank in France. When the Central Bank only had meager amounts of foreign exchange in 1982, those wires stopped. Peugeot France refused to ship more parts until the last batch was paid for. Workers at the Kaduna plant showed up for their shifts, but there were no engines, doors, or steering wheels to assemble. Despite domestic demand and plenty of naira in the bank, the factory shut down due to lack of foreign exchange. Peugeot’s Kaduna plant, which sold 50K cars in 1980, closed in June 1983.

The pattern repeated across Nigerian firms. Nigerian Leyland cut to a three-day work week. Steyr-Nigeria could not turn a profit from 1983 onwards and production declined ~75% between 1980 to 1983. The Soviet state-owned firm, Tyazhpromexport, stopped sending steel engineers to make blast furnaces at the Ajaokuta Steel Mill. Tens of thousands of manufacturing workers in Nigeria lost employment.

The South Korean Counterfactual

South Korea started at the same place. In 1968, Hyundai was bolting together imported Ford Cortina kits in its Ulsan plant under license, just like Peugeot Kaduna in Nigeria.

But the difference was Park Chung-hee’s government had local content production incentives. Under Chung-hee, local content manufacturing rose from 20% in the mid-1960s to over 90% by the late 1970s, backing firms that hit localization targets with tax breaks and subsidized credit. Seven years after Cortina kits arrived, Hyundai launched the Pony in 1975, South Korea’s first domestically developed car, mostly made of Korean parts while the design was still done by Japan’s Mitsubishi.

In 1982, Nigeria had a 15% local content requirement. The Peugeot plant in Kaduna continuously relied on importing kits from France before it shut down in the FX crisis.

Between Nigeria’s FX crisis and the import ban, Nigerian manufacturing collapsed. Nigeria’s manufacturing value-added fell from $33B in 1981 to $20.5B in 1983, a 38% drop in 2 years.

This meant that factories were idle, machines were turned off, industrial workers lost their jobs.

III. Agricultural Crisis

In the late 1970s, Nigerian and World Bank consultants conducted a food self-sufficiency study revealing that Nigeria had a national food deficiency of 2.6M tons of grain that would double in 2 years. So in 1980, Shagari’s government created an ambitious $13.5B, five year “Green Revolution” program to boost agricultural production.

The program established 11 river basin development authorities to build dams, reservoirs, and irrigation networks. Some progress occurred, but it mostly funneled contract corruption while peasant farmers were not receiving enough fertilizer, seeds, credit, and feeder roads.

The Bakolori Dam irrigation scheme exemplified the program’s issues.

The government seized peasant farmland and destroyed their crops without compensation. Thousands of farmers protested. The police retaliated by burning villages and killing/wounding hundreds of people.

Meanwhile, Shagari’s plan distributed subsidized fertilizer, improved seeds, and farming machinery to politically connected commercial farmers while the village farmers were neglected.

Maize was the one success, responding well to fertilizer and better seeds. Rice and black-eyed peas saw meager gains. Everything else suffered from neglect, poor climate fit, or labor intensity (planting/weeding/harvesting) that didn’t exist as much since many village workers moved to urban areas.

But, judged by its own goals, the Green Revolution failed: food imports as a share of total imports rose from 17% pre-program to 22% by 1983.

Export crops fared worse. Nigeria, once a groundnut export leader with peanut pyramids, experienced a complete structural death in export volume.

Cotton and groundnut oil were also dying. The overvalued currency made Nigerian non-oil exports non-competitive and the marketing boards essentially overtaxed farmers.

IV. “Ghana Must Go”

By 1982, Shagari’s political situation was deteriorating, and he wanted to win the 1983 election.

One of Shagari’s most notorious, but popular, policies was his expulsion of foreign Africans from Nigeria.

During the 1970s oil boom, Nigeria’s cities were Black Africa’s best labor market. Burkinabe, Malians, Beninese, Togolese, Nigeriens, Chadians, Cameroonians, and Ghanaians migrated to Nigeria to work as nurses, chauffeurs, construction workers, and security guards, including one of my uncles.

As the economy deteriorated and Nigerians lost their jobs, Shagari’s government scapegoated the millions of foreign Africans who came during the boom years. On January 17, 1983, Shagari gave undocumented immigrants two weeks to leave. Approximately 2M illegal immigrants were expelled, where half were Ghanaian. Many were beaten or extorted on the way out. Some refugees died from drowning, starvation, or exhaustion on the trek.

V. Foreign Policy Issues

Shagari’s biggest successes were securing the Economic Community of West African States (ECOWAS) mutual defense pact in 1981 and de-escalating after a border clash with Cameroon over the Bakassi Peninsula.

However, Shagari’s biggest failure was his policies on Gaddafi’s Libya & Chad.

Libya

Gaddafi had territorial ambitions on Northern Chad’s Aouzou Strip
(which he thought had uranium, but never uncovered it) and had broader designs on annexing Chad entirely.

Nigeria saw itself as big brother of its neighbors. When Chad’s civil war resumed in 1980 between Goukouni Oueddei’s pro-Libyan government and Hissène Habré’s nationalist rebels, Shagari moved hard against Muammar Gaddafi’s expansionism.

Shagari expelled Libyan diplomats in Lagos, called for sanctions on Libya, and accused Gaddafi of funding subversive activities in Nigeria. In a striking shift for a country that prided itself on non-alignment, Nigeria allied with France and its former colonies allies Senegal and Ivory Coast on Libya.

The OAU Mission Failure

In late 1981, after global pressure forced Libya to withdraw from Chad, Shagari helped sponsor an Organization of African Unity (OAU) peacekeeping force to keep peace between Chadian factions, with French logistical support. The OAU mission was a fiasco. Senegal, Zaire(Congo), Togo, Benin, Guinea, and Nigeria pledged to send 6K troops. But Benin, Guinea, and Togo bailed out due to financial constraints. Nigeria ended up carrying most of the financial and logistic burden, providing 60% of the army units right when Nigeria’s foreign reserves were collapsing. With deployments delayed and its forces ill-equipped, Habre’s rebel forces took over the Chadian capital anyway in 1982. The Nigerian military concluded that Shagari made Nigeria look incompetent.

Lake Chad & Buhari’s Insubordination

After Habre took over, Nigeria and Chad came to the brink of war in April 1983 over their shared border along Lake Chad. Chadian forces occupied several Nigerian islands on Lake Chad, resulting in direct military clashes with over 100 casualties and air bombardments on villages.

The Nigerian military response was led by Major General Muhammadu Buhari.

Buhari closed the Nigerian-Chadian border, blockaded Chad from Nigerian food & fuel, recaptured the Nigerian islands on Lake Chad, and chased Chad’s forces deep into their territory, all while ignoring President Shagari’s orders.

The crisis was eventually resolved through negotiations, prisoner exchanges, and border demarcations. But the Lake Chad incident revealed that by mid-1983, Shagari lost control of the Nigerian armed forces.

VI. The Stolen Election of 1983

By August 1983, Shagari had three options for staying in power:

A. Deliver economic improvement quickly (impossible with falling oil prices)
B. Run on his record (political suicide)
C. Rig the Election

He chose C.

Shagari’s party, the NPN, colluded with the Federal Election Commission (FEDECO) to inflate voter registries in states the party planned to carry. Some local rolls listed absurd voting tallies. NPN-aligned thugs intimidated opposition candidates and supporters. In Ibadan, operatives stormed the opposition (UPN) headquarters and tore up gubernatorial nomination forms.

The August vote returned Shagari with 47% in a country where the economy had contracted, factories closed, and inflation returned to 23%. The result was implausible on its face. Awolowo, the UPN leader, called it “daylight robbery”.

The gubernatorial elections were worse. In the Yoruba Ondo State, FEDECO declared the NPN candidate the winner over the incumbent UPN governor. Ondo voters knew this was fabricated. Riots then followed, government buildings burned, and over $100M worth of property was destroyed. Some people were doused in gasoline and burned alive, with Oyo and Ondo seeing the worst of it. The Nigerian Supreme Court eventually overturned the Ondo result, but the damage to FEDECO’s credibility was complete.

After winning his rigged election, Shagari was finally ready to engage with the IMF for a loan. Too late. By then, many Nigerians thought democracy was hogwash.

In December 1983, Shagari was ousted by a group of senior officers who all eventually became heads of state (Muhammadu Buhari, Ibrahim Babangida, and Sani Abacha). Nigeria’s second republic was officially dead, Buhari took over and the IMF agreement was never signed. We’ll cover Buhari next time.

Concluding Insights

The Second Republic collapsed even faster than the First. The First Republic lasted 6 years. The Second lasted slightly over 4.

This was a truly awful time for the average Nigerian. The country went from chasing Indonesia in 1979 to falling behind post-Mao China, Pakistan, and India. Nigerians were still richer than Ethiopians or Zairians (Congo), but crashing toward their levels.

The political class refused to act. Contract kickbacks, FX arbitrage, and capital flight reinforced each other and created incentives to resist reform. The people who had the power to devalue the naira were the same people profiting from the overvaluation. The people who could have reformed import licensing were the same people selling licenses. The system was only broken to outsiders. For insiders, it was a well-oiled machine.

Shagari inherited an oil-addicted economy, and after 1981, global prices collapsed. So it wasn’t his fault. But his foreign policy plunder, half-hearted austerity, peasant farmer neglect, and rigged elections weren't inevitable. They were choices. For those who blame the IMF, remember Shagari only initiated the application for an IMF loan, the transaction was never completed.

The causal issue was a drop in oil prices that he refused to respond to seriously.

The military watched all of this and drew its own conclusions. They committed a coup.

Sources

1. The Nigerian Oil Economy by J. K. Onoh

2. LOC: Nigeria

#Q1 “Hey Yaw, I live in Canada and I am thinking of moving to the US. Can you give me a rundown of their economies? Canada is so resource-rich and has higher human capital than America, so why is Canada lagging?”

Let’s start by talking about Canada’s natural and human resources. Both are pretty top notch.

Natural Resources:

Canada is the 5th biggest crude oil exporter ($106B), slightly behind the UAE and slightly ahead of Iraq. Canada is also the 3rd largest exporter of iron ore ($6.73B), 6th largest exporter of coal ($7.5B), 4th largest gold producer, 8th largest exporter of copper ($3.5B), and the 2nd largest exporter of uranium ($3.21B), exporting more uranium than all of Africa combined:

Human Capital:

Canadians, on average, are more numerate than the average OECD country, while Americans are on average behind.

If you rewind to 2012, the average Canadian was slightly richer than the average American, and Canadians were ~25% higher than Brits.

But after 2012, America blew past Canada and the UK caught up with Canada.

Some readers will object and say “Don’t use GDP per capita!”, use “gross national income (GNI) per capita!” or say “Use PPP! Currency fluctuations between the USD, CAD, and GBP are explaining the variation!”

Well I have news for you. Even if I switch to gross income per capita, adjust GDP per capita by purchasing power parity, or do both then Canada never converges with America at all. I was actually being generous to Canada by using market exchange rates.

Regardless, the question is: “what happened to Canada”?

The Mirage of the Commodity Boom

First, it’s worth noting that Canada is mainly a commodity exporter. The 2000-2014 was the China fueled commodity boom that caused global commodity prices to soar.

To put the sheer scale of China’s rise into perspective: between 2011 and 2013, China used more cement than the US did in the ENTIRE 20th century.

Canada, as a net commodity exporter (especially oil), benefited from China’s commodity rush and it strengthened their currency as a tailwind. Back then, since this was Pre-US shale revolution, America was a net oil importer, so high oil prices were a headwind for America’s currency. As a result, the Canadian dollar was trading above or at parity with the US dollar, which was partly why Canada was able to come out slightly richer than the United States.

But after 2014, China’s commodity boom ended and America’s shale revolution flooded oil supply, cratering oil prices and weakening Canada’s currency to the dollar.

Dismantling Excuses

While currency fluctuations explain some of the drop, it doesn’t entirely explain why Americans in 2024 make over 30% more than Canadians. Let’s look at both nations’ per capita growth from 2014 to 2024, and decompose the factors:

• Scenario 1: The US Dollar view: Measured in USD, America’s income growth over that decade was 63%, while Canada’s was 7%. (Objection: “But the Canadian dollar weakened against the US dollar by 24% over the same time period! That’s not fair!”)

• Scenario 2: The Local Currency view: Let’s look at nominal growth in their respective local currencies: America’s growth in dollars was still 63%. But Canada grew from C$56,643 to C$76,564, 35% growth. So even in local currency, America grew nearly twice as fast. (Objection: “What about inflation?”)

• Scenario 3: The Real, Inflation-Adjusted View in local currency: US’s inflation adjusted growth was 20% over the decade, while Canada’s inflation adjusted growth in its own currency was 3%.

So even after stripping out population growth (since we looked per capita), currency fluctuations (measured growth in its own currency), and inflation (measured both in chained constant dollars). America still just grew faster than Canada.

We see that growth reflected in disposable income between American states and Canadian provinces. The richest provinces in Canada have lower household income per capita than some of the middling or poorest states in United States.

The petro-state, Alberta, has similar incomes to North Dakota, Ontario is similar to Florida, and British Columbian families have lower incomes than Kansans.

So why is this? There are many reasons, but I’ll start with a small diagnosis.

Diagnosis: A Stable, Complacent Oligopoly in Canada

Canada’s economy is full of industries where there’s very little “creative destruction” and you have a few stable firms that are allowed to dominate market share due to Canada’s regulations. Over time, the incumbency advantage is too overriding and the big firms become complacent & stop investing in innovation. I could give so many examples, but I’ll just use airlines and banking to make my point on “stable oligopoly”. Then I’ll talk about the complacency next.

Airlines:

Canada: Canada’s airline passenger market is a duopoly. Air Canada & West Jet dominate 80% of the air passenger market in Canada.

In the United States, America’s market is more competitive. In US, American, Delta, United, and Southwest control 80% of the US market. Furthermore, America has a secondary market of Ultra-Low Cost Carriers (ULCCs) like Frontier and Allegiant. The ULCCs act as a permanent drag on prices compared to the big 4.

Banking:

Canada: RBC, TD, Scotiabank, BMO, and CIBC control 90% of the financial services market in Canada.

Canadian banking law effectively shuts foreign banks out of retail deposits, which is the bulk of what most Canadians think of as “banking”.

America is nowhere near as consolidated as Canada in Banking. The big 4 (JPMorgan & Chase, Bank of America-Merrill Lynch, Citigroup, Wells Fargo) have slightly under 50% of all US deposits. The difference is America has 1000s of regional banks, community banks, and credit unions.

I can keep doing this for other industries, but the point is that Canada has these regulatory protectionist moats so it doesn’t get eaten up by the United States.

Complacency in Canada

In short, the way Canada is regulated creates very stable markets, with relatively little risk taking or R&D spending. The regulation acts as protection for Canadian firms to not get swallowed up by American firms. But the lack of competition has led to lower investment into new technologies. Canada’s R&D spending as a % of GDP is atrociously low compared to the United States.

The terrible R&D spending and the major protection of markets from external competition contribute to lower labor productivity. The causality also works in reverse, as well. Poor labor productivity leads to more protectionism as a solution (firms & workers in struggling sectors lobby as a shield) and thinner margins from less productivity means less cash to invest in R&D.

The deputy governor of the Bank of Canada called Canada’s lack of productivity an “emergency”.

Q2: “Hey Yaw, I like how you explain things. Can you explain an economic concept that most people misuse in common parlance?”

Sure, I’ll talk about labor productivity. I’ll actually connect this to the Canada question. Canadian workers are generally less productive than American workers.

This sounds subjective, but it’s a fact, especially once you understand what “labor productivity” means.

Between 2003 and 2023, Canadian labor productivity only increased 15%, which beats UK’s 8% but less than the US. America, which started at a higher base, in 2003, increased labor productivity 30%.

What is Labor Productivity?

Labor productivity means “output per unit of labor input”. It’s worth noting that labor productivity does not really mean “American workers work harder than Canadians” or “American workers complete more tasks than Canadian workers”.

It’s more like saying "American workers generate more profits for their companies than their Canadian counterparts”. Once you see it that way, I am sure when I say “Americans are more productive than Canadians” provokes less of a knee-jerk reaction.

Labor productivity on the aggregate level is GDP divided by total hours worked. At the firm level, labor productivity is:

Now let’s define value added. For any business, the revenue of a company is used to buy intermediate inputs, pay wages, the maintenance of property, factories, & equipment, pay interest on debt, pay taxes, rent, and the rest is business profit. Let’s break down what I just said in an equation:

I am going to truncate this equation.

• Instead of saying “raw materials, energy, logistics, & purchased services”, I’ll say “intermediate inputs”

• Instead of saying “depreciation, interest, & rent” I’ll say “capital costs”

• I’ll also just simplify “pre-tax profit” to “profit”

• Instead of listing all the taxes I’ll just say “taxes”

Now, let’s subtract intermediate inputs from both sides. Look at the equation now:

Now you know what value added means. You can see that Value added is revenue minus intermediate inputs. Or, I can measure value-added by:

This basically means, every “value added”, goes to the employee’s share (Wages), paying for machines/buildings/creditor’s share/rent (Capital Costs), the government’s share (Taxes), and the investor’s share (business profits).

Divide by hours worked and you get labor productivity.

When you understand that equation, you realize that working longer hours actually decreases your productivity score (because hours are in the denominator).

Higher productivity in America usually comes from capital deepening (better tools, more machines, faster computers). Capital deepening increases value add per worker as it increases capital costs. More productive workers means the worker can make more revenue for the firm.

Secondly, Americans are working in more highly productive sectors than Canadians are. Again, when I say “high-productivity” that does not mean “American workers work harder”, it means “America has more industries that make more money with less costs per worker”.

Let’s look at productivity at different industries.

In 2024, Google made $350B in revenue with 183,323 employees. On average, each Google employee generates Google $1.9M in revenue.

If we subtract the intermediate inputs, in this case the $146.3B cost of sales (i.e. traffic acquisition costs paid to distribution partners [Apple, Mozilla, Samsung, mobile carriers, web publishers via AdSense], content acquisition costs, data center costs, etc), then Google’s Value added was $203.7B. Divide value add by the number of employees, and Google’s value add per employee is $1.1M.

If you divide Google’s value add per employee by 2000 hours (40 hrs per week * 50 working weeks per year), you see that Google workers on average generate, $556 of value added per hour worked.

We can do the same math for Ford. Ford makes half the revenue of Google with roughly the same amount of intermediate inputs and employees.

Ford made $185B, intermediate costs of raw materials, parts from suppliers, energy costs, etc. were $158B. This means Ford’s total value added was $27B. Divide this number by its 171K employees, and Ford’s value added per employee is $158K per worker. Divide by 2000 hours again, and the average Ford worker generates $79 of value added per hour worked.

The average Google worker is “7x more productive” than the Ford worker. Now, that’s not because Ford workers are lazy, it’s just that Google is literally in a higher productivity industry. There’s less intermediate costs to generate revenue.

Now if we iterate this to a bunch of top companies in the United States and Canada, we get a picture of productivity:

Generally speaking, the gap between America and Canada has two big explanations. Firstly, America has high-productivity sectors that Canada doesn’t even have, like semiconductor design and pharmaceuticals. Secondly, in general, American top firms make more money (and thus higher productivity) than their Canadian counterparts. That is true whether we look at retail (Walmart vs. Loblaw), technology (Google vs. Shopify), and telecommunications (Verizon vs. Rogers).

If you look at the chart below, you will see how underweighted Canada is in high productivity sectors (tech, semiconductor, pharmaceuticals) and how overweighted in low-productivity sectors (construction, food, beverages, & tobacco, and real estate).

The TLDR is America has big tech (Google/Amazon/Meta), big pharma (Eli Lilly/J&J/Pfizer), and big semiconductor design (Nvidia/Qualcomm/AMD), while Canada lacks those industries and has too many low productivity sectors such as mining, construction, logging, public-sector employment, and food & beverages.

This mismatch is one of the many drivers of America’s brain gain from Canada. Canada’s top talent usually flocks to the United States to work in highly-skilled, highly paid industries like in tech, AI, and other industries. America has the firms but doesn’t have enough domestic talent. Canada has the talent but not enough domestic firms.

There’s so much more I could talk about, like Canadian housing issues (which are even worse than America’s) or Canada’s chronically higher youth unemployment rate compared to the US. In April 2026, Canada’s was over 14%, while in America it was 9.5%. But, I’ll stop here for now.

Q3: Walk me through how you write your African country series.

One thing is, I don’t have academic training in history. My background is actually in aerospace engineering. I worked as an aerospace engineer then did real estate finance, followed by an MBA and my current work in product data science.

But I think my unconventional background is exactly my “moat”. I don’t approach history purely through a traditional academic lens; I look at it the way an engineer looks at a complex system. When I research African history, I break it down into its structural components across four phases: Country Overview, Pre-colonial history, Colonial history, and Post-Independence History. My source material and approach shift across these eras, adapting to what data and information exists.

Here’s how the stack breaks down:

• The overview: This is the easiest part. I pull demographic, financial, and resource data from a standard stack: UN Population Prospects, UN’s Food & Agricultural Organizational Stats, World Bank, IMF Article IV Economic reports, Trading Economics, Our World in Data, UN Trade & Development Stats, Transparency International, and MIT observatory for Economic Complexity. Then after pulling the information, it’s just storytelling from there.

• Pre-Colonial History:

  • Know the Map: I start by mapping the specific pre-colonial states using historical map timelapses on “Map of Africa” videos on YouTube as a visual checklist (which are not comprehensive but a good start!).

  • Build the Skeleton: Then, I build a skeleton from encyclopedia-style books like the UNESCO General History of Africa, Library of Congress Country Studies, and Fortunes of Africa.

  • Learn the Region: Then I look at regional books like a “An Economic History of West Africa” or “A History of West Central Africa to 1850”. Next, I tailor the deep dive, with some pre-colonial books.

  • Get Specific: For Rwanda, that meant reading about the pre-colonial Rwandan Kingdom in the book, A History of Rwanda: From the Monarchy to Post-Genocidal Justice. For Nigeria, it’s reading books on the pre-colonial Kingdoms in the South ( Igbo, the Benin Kingdom, and the Yoruba) and in the North (Bornu, a whole book on the North which discussed the Hausa, and the Sokoto Caliphate). For Tunisia, I track the Berbers, Carthage, Rome/Byzantine eras, Islamic Conquests, the Mediterranean and Trans-Saharan slave trades, and more.

  • Know about the different forms of slavery: The Transformations in Slavery: A History of Slavery in Africa by Paul Lovejoy covers the Trans-Atlantic, Trans-Saharan, Indian Ocean, Red Sea, and the Internal African slave trade in different African societies. Also, The Shell Money of the Slave Trade talks about how African coastal Kingdoms would exchange slaves for Maldivian cowrie shells, which served as the “reserve currency” in West Africa.

• Colonial History: The Encyclopedia books still have great info on colonial history, but I lean on the specific books. “A History of Rwanda” is still very good on pre-colonial history. For Nigeria, I used “A History of Nigeria” & “Nigeria: Background to Nationalism”, and for Tunisia, I read a “History of Modern Tunisia”. I also supplement the books with NYT Archive articles from 1880-1960, Colonial Annual Reports, and JSTOR articles, when I want a deeper dive on a specific topic in that period.

• Post Independence: The data gets richer, and the books get more specific. I shift to deep dives on specific leaders (Like I read Ernest Harsch’s Thomas Sankara: A Revolutionary in Cold War Africa for my Sankara article), and for 1970-1980s Nigeria I read Oil and Nationalism in Nigeria 1970 to 1980 and The Nigerian Oil Economy: From Prosperity to Glut, plus the World Bank’s comparative Nigeria-Indonesia study. At this point, since every country has to report their stats to the World Bank & IMF, you can also read World Bank archives or IMF Article IV economic report to see what macroeconomic trends, loans, and other stuff on what the country was doing at the time. In addition, I look at Washington Post, Reuters, AP, Financial Times, and Bloomberg articles on the country as we get closer to the modern day. A final supplement is that I also pull from broader continental books that have country-level case studies like Dictatorland, The Fate of Africa, How Africa Works, and Dead Aid.

As a sanity check, I reach out to my MIT Africa alumni WhatsApp group, and speak to individuals who are from that country and ask them to read. If the person has good feedback or thinks I missed something vital I add it. But it gives me confidence to post something knowing that I can go to someone from Uganda, give them the article and then they say “Yep that checks out” or “Oh my goodness! I didn’t know that!”

Q4: “What do you do for a living? How translatable are the skills you use in writing your substack to your job?

I am a product manager at a well-known entertainment-technology company, though my role is not a “traditional” product manager job.

From what I have noticed, Product Management is a very broad job across tech firms. Usually, when I think of product management, it involves planning roadmaps for new features, defining success metrics, coordinating feature delivery timelines with different teams, and running “standups” with engineers (which involves checking on their work progress). In the previous company I worked at, I did all of that.

But, that’s not what my job is today. AI has really transformed what my job has become. Here are three things I do at my job:

• Building Databases(25%): I designed and built a unified experimentation database consolidating thousands of A/B tests from different sources across the company. I had to figure out how to structure the data and classify it so all the data would fit nicely in a unified database. The whole point of this data is to feed into a reporting system for experiments. We call this an “Extract-Transform-Load” (ETL) pipeline. I extract raw data, transform and clean it up, and load it in a structured destination. In case you wonder what tools I use, I use python & SQL to do a lot of this. I build everything on Databricks, with Claude Code as my good friend.

• Data Analytics & Data Science(50%): The more traditional product managers that I work with will need me to do a deep dive analysis on an experiment or a launch they did. I help figure out what was successful or unsuccessful about that launch. I’ll have to think about counterfactual actions, understand the product flow intimately, and breakdown the analysis by different attributes of the customer (tenure, tier, engagement, geography). Sometimes, I’ll do more predictive modeling like linear/logistic regression, random forests, or gradient boosting.

• Creating or Making Requirement Docs for Dashboards (25%): Depending on my bandwidth, I will either make a dashboard on Looker or Tableau for a more traditional product management team, or I will build requirements of what a dashboard should look like and then pass it on to a more dedicated dashboard team.

In other companies, what I do would probably not be called product management. Right now, I do the data architecture of a data engineer, the predictive modeling of a data scientist, the deep analysis of a data analyst, and the stakeholder communication & requirement writing of a technical product manager.

I genuinely enjoy this kind of work more than traditional product management, and I can see myself doing this for as long as this job exists.

The synergies between my Substack and my job are real. I use Claude Code to build my own databases of country data. I model counterfactuals for some of my articles. I write requirements docs for myself when I'm trying to organize what I want to build. The visualization muscles transfer in both directions.

Recap

Last time, I discussed how military leaders Murtala and Obasanjo transitioned Nigeria back to democracy. They drafted a new constitution modelled on the American presidential system instead of the British parliamentary one. They created more states to give minorities representation (19 total at that time), gave women in the Muslim North the right to vote, indigenized more of the economy from foreign businesses (especially in oil), and fostered a diversified manufacturing base in textiles, cement, oil refining, machine tools, cars and more. Oil prices were high, and optimism in democracy and development was widespread. The mood was so bullish that even when oil prices dipped in 1978, Obasanjo plugged the gap with ~$2B Eurodollar loan from Western commercial banks, assuming future oil revenues ($15B in 1979) would comfortably cover the debt.

What could go wrong? A lot.

A lot actually… In this article, I’ll set up the “rise” and how the machine was built. In the following article, I’ll talk about the fall. If you want to see the full journey see the links below.

Our Nigeria Series so far:

• Overview of Nigeria: I

• Pre-Colonial Northern & Southern Nigeria: II, III, IV, V, & VI

• British Conquest, Rule, & Independence: VII, VIII, IX, X, & XI

• The First Nigerian Republic & Civil War: XII & XIII

• Military Rule: Gowon (XIV), Murtala-Obasanjo (XV)

Shehu Shagari (1979-1983)

I. A Presidency Born Under a Cloud

The protagonist for this article is Alhaji Shehu Shagari, the only President of Nigeria’s Second Republic. He was a Muslim Fulani from Sokoto, the heart of the pre-colonial Sokoto Caliphate, and a former school teacher, just like the head of state of the 1st Republic, Alhaji Tafawa Balewa.

He had served in nearly every federal cabinet since independence. He was, in other words, a classic Northern establishment figure.

But he came to power under a dispute. To prevent ethnic hegemony by any of the big three that dominated the 1st Republic (Igbo Southeast, Yoruba Southwest, Hausa North), the new constitution required the winning presidential candidate to win not just a plurality, but secure at least 25% of the vote in two-thirds of Nigeria’s 19 states. Two-thirds of 19 is 12.67. Shagari cleared the 25% mark in exactly 12 states, leaving him 0.67 shy.

The runner up, Obafemi Awolowo, argued that the threshold should round up to 13, meaning an electoral runoff was required. The dispute went to the Supreme Court in (Awolowo v. Shagari).

The Nigerian Supreme Court ruled in favor of Shagari. Since Shagari had won 19.94% in Kano, Shagari’s best-performing loss, and 19.94% exceeded one-sixth (16.67%, one quarter of two-thirds of a state), the Court ruled that Shagari mathematically satisfied the requirement for that fractional 13th state.

The ruling settled the election legally, but not politically. Many of Awolowo’s supporters saw this as strained reasoning designed to avoid a runoff. Shagari took office with the system behind him, but with clear skepticism from parts of the country.

II. The Similarities Between the 1st & 2nd Republic

Despite a new constitution, Nigeria’s political elite imported many of the same ethnic rivalries, patronage systems, and alliances that destroyed the 1st Republic.

The old ethnic coalitions rebranded to meet the new rules requiring parties to present a national character:

• Northern-based: Shagari’s National Party of Nigeria (NPN) drew heavily from the Fulani & Hausa establishment that had dominated the 1st Republic’s Northern People’s Congress. NPN expanded its support to include non-Igbo minorities in the Niger Delta, middlebelters in Benue, and Muslim Yoruba in Kwara. Shagari’s VP was an Igbo and his party secretary was a Yoruba.

• Igbo-led: Nnamdi Azikiwe’s Nigerian People’s Party was a successor of his National Convention of Nigerian Citizens (NCNC) of the First Republic.

• Yoruba-led: Obafemi Awolowo’s Unity Party of Nigeria (UPN) largely reprised his Action Group of the 1st Republic.

Why did the old-guard politicians come back? Military rule under Gowon, Murtala, and Obasanjo had frozen politics for over a decade. When elections returned, only the old guard had the networks, recognition, and organizational capacity to compete.

With the same players came familiar tensions. Just as in the First Republic, a fragile Northerner-Igbo coalition formed between Shagari and Azikiwe and Awolowo’s Yoruba-led party was the opposition. And just as before, the North-Igbo alliance fractured. Once disputes over patronage, appointments, and regional influence emerged, there was little to hold it together. Azikiwe defected to the opposition, mirroring his exact playbook from two decades prior.

2nd Republic Nigeria functioned like a 19th Century America’s Spoils System political machine. State offices were treated as the 'spoils' of a conquered territory. Every government position, from minister to local council chairman, was treated not as a public service job, but as a prize. The officeholder's first obligation was not to govern the public, but to take state money, hand out inflated contracts with kickbacks, and invent jobs specifically to feed the specific ethnic and political machine that put them in power.

So when oil revenue hit $21B in 1980, Shagari’s political machine was lining up to divide a windfall.

III. The Anatomy of the Petro-Patronage Machine

The new constitution’s “Federal Character” principle required that public service appointments, military commissions, and government positions reflect Nigeria’s regional diversity. The constitution said nothing about contracts/procurement, but politicians extended that logic informally: inflated contracts with kickbacks became vehicles to reward allies and consolidate electoral & political support. Oil revenues were weaponized for construction contracts for party allies, staff appointments for ethnic constituents, school admission slots for supporters’ children, and approving ribbon-cutting infrastructure schemes, hospitals, and universities in designated areas.

Layer 1: Contract Skimming

Nigerian politician and historian Yusufu Bala Usman said that Shagari’s administration was a “government for contractors, by contractors, and of contractors.” An official 1980 Ministerial enquiry found that government contract costs, inflated by kickbacks, were allegedly 200% higher than in Kenya. Construction costs were allegedly 3x those in East or North Africa and 4x higher than Asia.

The mechanics were simple. A road that should cost one price was quoted at two or three times as much. Politicians approved it. The difference between the quoted and actual cost was shared between the politician and contractor via kickbacks.

The construction of the new capital, Abuja, made this scalable. New roads, ministry buildings, and housing estates in the new capital created a constant pipeline of contracts to skim.

This created a closed political loop: the government handed out overpriced, kick-backed contracts, cronies extracted the profits, and in return, those cronies financed campaigns and mobilized voters to keep Shagari’s party in power.

Beyond contracts, officials raided government coffers. Audits later revealed millions to tens of millions of dollars missing for telecommunications, federal housing, and youth service programs.

Layer 2: The Import License Tollbooth

To legally import goods, merchants needed an Import License from the Ministry of Commerce and foreign currency from the Central Bank. The state-owned Nigerian National Supply Company (NNSC) was tasked to import and distribute “essential commodities” (rice, milk, sugar) at affordable, government-set prices backed by the 1977 Price Control Act.

However, instead of issuing these licenses to actual logistics companies or food distributors, NNSC officials handed “allocation papers” to political cronies (party loyalists, local chiefs) who owned no shops or trucks. These insiders hoarded the subsidized goods in private warehouses to manufacture artificial scarcity. Then they sold the goods at a massive markup on the black market, circumventing the price controls meant to protect consumers.

The most flagrant maneuver was Umaru Dikko’s scheme as the Minister of Transport. Because rice was one of the most widely consumed foods in Nigeria, the government bypassed the NNSC entirely and created the Presidential Task Force on Rice, putting Dikko in charge. His task force received ~200K bags of rice; but less than half were sold to traders at the official ₦38/bag price. Journalists from the Sunday Times later discovered bags stamped “Presidential Task Force” on sale in Cotonou, Benin Republic, smuggled out of Nigeria by connected operators.

The consequences for ordinary Nigerians were devastating. A 50kg bag of imported rice arriving at Lagos port wholesale at $52 was retailing in the city at $180, a 250% markup. Due to Nigeria’s deep agricultural neglect, Nigeria had gone from 99% rice self-sufficiency in the 1960s to a 62% deficit in domestic production by the early 1980s, so consumers had no domestic alternative. Senator Mohammed Girigiri Lawan told the New York Times: “the shortage of rice is definitely contrived and promoted by a few privileged Nigerians in high positions.”

Merchants without political connections had to buy the license itself as a commodity, paying bribes they passed through to consumers. Staples like vegetable oil reached local markets at 300% markups. The import license system became a lucrative tollbooth for political insiders, forcing the average citizen to foot the bill.

Layer 3: The Foreign Exchange (FX) Arbitrage Machine

This layer was the most self-reinforcing, because it created political incentives against the very reforms that could have fixed the other two. In the 1980s, the Central Bank of Nigeria artificially kept the naira stronger than the dollar. 1 naira was $1.63 dollars in 1981.

Because the Nigerian Central Bank kept the naira massively overvalued, a parallel black market emerged where the naira traded at a much weaker rate. During the Shagari era, for most of his term, the official rate of the naira was artificially twice as strong as what the market thought it was. By the end of Shagari’s term, the black market rate was roughly 4x the official rate.

The gap between the official rate and the black market rate was an open invitation to steal. A politically connected insider would trade his naira for US dollars from the Central Bank at the cheap official rate, then immediately sell the dollars for naira at the black market rate, pocketing the massive spread. No goods were imported. No factory was built. No service was rendered. It was pure currency arbitrage.

An overvalued currency was not just apparent in the gap between the central bank rate and the official rate, but the gap was also apparent when looking at Nigeria’s real exchange rate (REER).

A rising REER means Nigeria’s currency become more expensive, adjusted for inflation, compared to Nigeria’s main trading partners (U.S, UK, France, West Germany, Netherlands, Japan, Switzerland).

Nigeria’s inflation was higher than its trading partners, but Nigeria refused to depreciate its exchange rate to compensate. So Nigerian goods became progressively more expensive relative to foreign goods.

Contrast this with Indonesia, another oil-exporting former colony. Jakarta depreciated its currency (it was weaker in 1983 than 1980), so its manufactured goods remained more internationally competitive. Nigeria was shooting itself in the foot by not devaluing.

This is crucial for understanding why Shagari wouldn’t devalue. The conventional answer is that devaluation makes imported food and fuel more expensive, which is politically suicidal in a country that imports nearly everything. That was real, but it wasn’t the main reason.

Devaluation would have narrowed the gap between the official and parallel exchange rates, destroying the revenue stream that the political insider class was making via arbitrage. The more overvalued the naira became, the wider the spread grew, the more profitable the arbitrage, and the stronger the political incentive to resist reform. The people who benefited from the overvalued naira were the same people who would have had to approve the devaluation.

The proceeds didn’t stay in Nigeria. Elites converted their gains to hard currency (dollars, pound sterling, Swiss franks) and parked them in London properties and foreign bank accounts. Dikko combined contract kickbacks, import license bribes, and dollar arbitrage to become a dollar billionaire, then fled to London after the 1983 coup.

Shagari tried an anti-corruption campaign called the “Ethical Revolution”, but it was a joke. Shagari was perceived as too weak since he allowed his allies to raid government coffers unpunished on a pervasive scale.

The machine was stable as long as oil revenue kept flowing. But the whole edifice, the contract kickbacks, the license hoarding, the FX arbitrage, depended on a Central Bank stuffed with foreign reserves. When those reserves drained, the machine wouldn’t just stop extracting. It would grind the rest of the economy to a halt.

IV. The 2nd Republic’s Finances

To understand what happened to Nigeria under Shagari, we need to take a look at the Nigerian government’s financial statements.

Nigeria’s Fiscal Position

When you look at the graph, you’ll see that 1979 & 1980 were good years, but 1981 onward was terrible.

The Boom (1979-1980)

When Shagari took office, Nigeria’s public finances were genuinely healthy. In 1980, the federal government collected roughly $21.8B and spent $22.4B, a trivial deficit of ~3% of revenue. Foreign reserves were climbing, almost doubling from $5.5B to $10.2B from 1979 to 1980.

The oil worker strike and the temporary closure of the Kharg Island export terminal during the 1979 Iranian Revolution had knocked Iran’s production from ~6M barrels a day to near zero. Eventually, Iranian oil stabilized to ~2M during the Iran-Iraq War, but the supply shock rocketed global oil prices from $15 to $39.50 per barrel (~$71 to ~$159 in 2026 dollars). The oil price spike helped Nigeria.

Shagari’s government assumed the windfall was permanent. They drew up the unprecedented 4th National Development Plan at a ₦70.3B (~$114B).

The plan was built on the assumption that Nigeria would pump 2.2 barrels a day at even higher prices of $55 per barrel. These numbers would prove to be cartoonishly pollyannish.

Over the next three years, two forces dismantled Nigeria’s finances:

Force 1: The Oil Market Turns on Nigeria

Non-OPEC Competition: First, high prices post-Iran Revolution spurred non-OPEC producers to develop expensive, hard-to-reach oil fields. Oil from Alaska, the Gulf of Mexico, and the North Sea (UK and Norway) started to flood the market. Crucially, North Sea oil from the UK and Norway was the exact same quality as Nigeria’s premium “Bonny Light” crude and was closer to European refineries.

While Nigeria stubbornly tried to sell at roughly $35 per barrel at a minimum, both British National Oil Corporation and Norway’s Statoil, undercut Nigeria’s price, eventually down to $31 by 1982.

OPEC Competition: Second, OPEC had an internecine war. Libya, Algeria, and Nigeria wanted high oil prices. Saudi Arabia wanted a modest price around $32. Saudi’s fear was that sustained high oil prices would push the West away from Middle Eastern oil and into permanent conservation and fuel-switching, which they already started to do (Americans were buying, smaller, more fuel efficient cars in the mid 1970s, France ramped up its civilian nuclear energy production, etc.). Overall, the developed world consumed less oil in 1981 than it did in 1973.

So Saudi Arabia pumped 10.3M barrels per day, roughly 2M above its OPEC limit, to create an oil market surplus, which lowered prices and kept many Western countries addicted to cheap oil.

Saudi’s heavier, sourer crude wasn’t a perfect substitute for Nigerian Bonny Light. But it didn’t need to be. America’s complex refineries (hydrocrackers, desulfurization units) could process Saudi crude to Nigerian crude products (gasoline, jet fuel, diesel) at $32 per barrel, $5 to $6 dollars cheaper than what Nigeria was offering, Nigeria shot itself in the foot by refusing to lower prices. Americans bought Saudi oil over Nigerian.

The 1982 Western Recession: In the West, high oil prices after Iranian-Revolution brought high inflation, which led to consumers and workers having high inflation expectations.

To crush consumers’ high inflation expectations, Western central banks (Federal Reserve, Bank of England, Banque de France) aggressively hiked interest rates to a recession in 1982, which raised unemployment rapidly and crushed high inflation expectations in the West.

Why does a recession in the West matter for Nigeria? Because Nigeria’s economy lived and died by a simple formula:

95% to 98% of Nigeria’s exports and its source of foreign currency came from selling oil to mainly Western countries.

When Nigeria’s biggest buyers had a downturn, global demand for oil fell, and so did oil prices.

“The position in which we have found ourselves is almost inescapable” Shagari lamented. “because, being part and parcel of the world economy, there is no way in which we can fully be insulated from the global economic blizzard.”

In a move to raise prices via supply restriction, on March 1982, OPEC held an emergency meeting in Vienna and, for the first time in its history, instituted mandatory production ceilings. But even with production ceilings from OPEC, non-OPEC supply (Mexico, Alaska, Norway, UK) flooded the market, keeping prices down. UK produced more oil than Nigeria during this time.

The result: Nigeria’s production was dropping (from 2.1 million barrels per day in 1980 to 1.44M in 1981, to 1.2M in 1982 & 1983) and price was dropping (from a peak of ~$38 in 1981 to $29.2 per barrel by late 1983) due to competition, price-wars and falling Western demand.

With lower production & price, Nigeria’s revenue collapsed from $22B in 1980 to $9B by 1983. Nigeria produced 1.2M per day at roughly $30 per barrel. Far below the 4th Development Plan’s assumption of 2.2 million barrels at $55 per barrel.

Force 2: Refusal to Cut Spending Enough

Even as revenue collapsed, Shagari didn’t cut enough spending to match. Caving to labor strikes in 1981, he increased minimum wages and state payrolls. In 1980, Nigeria’s fiscal deficit was 3% of government revenue ($600M). By 1983, Nigeria’s fiscal deficit hit an apocalyptic 91% of government revenue ($8.2B).

When Shagari finally passed an “austerity” budget in 1982, he cut what was "politically cheap" (aka hurts the masses). He abandoned the $2.5B Port Harcourt rail project, let the power grid decay by not raising electricity tariffs enough to cover costs, and froze future government hiring.

But he couldn’t seriously cut what was “politically expensive” (hurts elite patronage). He failed to deeply reduce inflated contracts to political patrons in building the new capital Abuja, he barely reduced fuel subsidies from 15.3 to 20 kobo per litre), and did not do mass layoffs of civil service workers. Politicians and politically connected businessmen continued driving imported limousines while normal people suffered blackouts.

Mathematically speaking, current expenditure (the salaries, the patronage, the operational costs of running 19 state governments) actually rose as a % of government revenue over the same period since revenues shrank faster than spending.

The math became catastrophic.

In 1981, the fiscal deficit (revenue -spending), was roughly 60% of government revenue. The 1982 “austerity” only reduced the deficit to 52% of government revenue. In 1983, the fiscal deficit was 91% of government revenue.

Concluding Thoughts

The tragedy of Nigeria’s Second Republic is that its political design and its economic reality were on a fatal collision course from day one. The military had handed over a country riding the euphoric high of the 1970s oil boom, and the civilian elite responded by building a political machine (fueled by contract skimming, import license hoarding, FX arbitrage, and more) designed exclusively to consume that windfall.

Shagari’s government built a patronage system for a $55-a-barrel world at 2.2M barrels per day. When the global oil market turned in 1981, battered by Saudi price wars, North Sea oil, and Western recessions, the Nigerian state was fundamentally incapable of adjusting.

The crisis was triggered by global forces, but the collapse was a choice. The 1982 austerity measures proved exactly what the concept of the "Spoils System" predicts: a government will let the national power grid rot, freeze the wages of the working class, and halt national development before it ever cuts off the cash flow to its political patrons. Shagari chose to protect the elites and punish the masses. The worse part is Shagari didn’t even take an IMF loan. In fact, he rejected the IMF program.

By 1983, Shagari’s administration was staring down an untenable 91% fiscal deficit. The government was spending nearly twice what it earned. But a deficit that massive doesn't just sit quietly on a spreadsheet; it has to be financed. The money to keep the patronage machine running had to come from somewhere, and the bills for the imported rice, the inflated contracts for the new capital construction, and the contractors' limousines were coming due.

The machine was stable only as long as the Central Bank of Nigeria had the foreign reserves to paper over the cracks. When those reserves finally dried up, it would tear the rest of the country apart.

Next time, we will explore how the Central Bank resorted to printing money, the devastating collapse of Nigeria's "industrial mirage”, the violently stolen election of 1983, and military’s return.

Sources

1. A History of Nigeria by Toyin Falola & Matthew M. Heaton

2. The Oxford Handbook of Nigerian Politics by Patrick Ukata & A. Carl LeVan

3. The Nigerian Oil Economy (Routledge Library Editions: Energy Economics) 1st Edition by J. K. Onoh

4. The Land Has Changed by Chima J. Korieh

5. The Fate of Africa: A History of the Continent Since Independence by Martin Meredith

6. Library of Congress: Nigeria

Intro

Imagine thinking that you have so much oil money that your head of state can (allegedly) tell the USA "to go to hell" over their foreign policy.

After Gowon was ousted in the mid-1970s, Nigeria’s military felt the country had “come of age” as oil revenues exploded.

Under the military regimes of Murtala Mohammed and Olusegun Obasanjo, Nigeria tried to do three things at once: fund African liberation, industrialize at home, and transition to civilian rule.

But beneath this golden-age swagger, the very oil fueling Nigeria's rise was quietly poisoning its roots.

Our Nigeria Series so far:

• Overview of Nigeria: I

• Pre-Colonial Northern & Southern Nigeria: II, III, IV, V, & VI

• British Conquest & Rule: VII, VIII, IX & X

• The Fight for Sovereignty: XI

• The First Nigerian Republic: XII

• The Nigerian Civil War: XIII

• Military Rule under Gowon: XIV

Recap

Last time: During the Gowon reign, oil revenues surged while agriculture was neglected (which employed most of the country at the time), non-oil exports plunged, and corruption flourished. Nigeria flipped from a net food exporter to a net food importer. When Gowon postponed the 1976 elections, a group of military officers removed him, installing Murtala Mohammed as head of state.

By 1975, Nigeria was a “dual economy”. ~64% of the labor force were peasant farmers, 28% were household workers, and only 8% of the labor force were paid wage employees. Urban civil servants & private sector professionals (lawyers, civil engineers, pilots) lived a middle to upper middle class life. But if you were a rural farmer or an urban slum dweller, your life was awful.

Murtala Mohammed (1975-1976)

Economy

Murtala Mohammed inherited a petrostate where over 80% of Nigeria's government revenue came from selling oil. The state was flush with cash, boasting a staggering ₦43B (roughly $70B USD at the time) third development plan.

Murtala went on an “anti-corruption” jihad. The optics of his anti-corruption crusade looked great to the Nigerian public, who saw him as a “mover and shaker”:

• The Purge: Over eight weeks, he fired all 12 military governors, removed federal commissioners, and dismissed 11,000 civil servants accused of corruption or laziness. 10 out of the 12 ousted state governors had illegally amassed fortunes amounting to ~$15M.

• A New Capital: He announced the capital would move from Lagos to Abuja, located at the geographic center to avoid ethnic favoritism.

• A New Map: To balance ethnic fault lines, Murtala split Nigeria from 12 states into 19.

Sadly, Murtala’s 201-day regime wasn’t all perfect. Murtala's purges only rotated who profited. Nigeria's real problem wasn't corrupt individuals; it was structural. Political power controlled access to economic rents. Oil revenues flowed into state coffers, and officials decided allocation through contracts, import licenses, foreign exchange, and public spending. Holding office was the primary path to wealth. His replacements inherited the same incentives and simply built new patronage networks.

Foreign Policy:

Flush with oil money, Murtala pivoted Nigeria toward an aggressive, Afrocentric foreign policy.

• Israel: Continuing the post-1973 trend, Murtala kept diplomatic ties severed with Israel and supported the controversial UN Resolution labeling “Zionism is a form of racism and racial discrimination”.

• Organization of African Unity (OAU): Murtala provided technical and financial aid to many poorer African countries.

• Southern Africa: Murtala was a hawk against white-minority rule, funneling oil money to liberation movements across the continent: the MPLA in Angola, ZANU and ZAPU in Zimbabwe, the ANC and PAC in South Africa, and SWAPO in Namibia. He was one of the first countries to condemn the creation of the South African Bantustans and led the 1975 UN General Assembly to refuse to recognize them. He used the Federal Radio Corporation of Nigeria to broadcast anti-apartheid programming to Nigerian households.

Angola: After Portugal's Carnation Revolution granted independence to Angola in 1974, three factions went to war:

• Popular Movement for the Liberation of Angola (MPLA) backed by the Soviet Union, Cuba, and the Rest of the Warsaw Pact.

• Liberation of Angola (FNLA) supported by the United States and Zaire(Mobutu’s Congo).

• National Union for the Total Independence of Angola (UNITA) led by Jonas Savimbi, supported by South Africa

The OAU wanted a government of national unity. But Murtala broke with the OAU’s position, recognized the MPLA as the legitimate government, and provided ₦14M in aid. The logic was simple: MPLA had the capital, UNITA was South Africa’s proxy, and FNLA was seen as too inept to rule.

This infuriated American President Gerald Ford, who did not like it when Nigeria accepted a Soviet & Cuban backed government, but Murtala did not care what America thought.

Assassination: Murtala's anti-corruption purge and his support for the communist MPLA in Angola made him enemies within his own military. In February 1976, a group led by Colonel Bukar Sukar Dimka attempted a coup and killed Murtala. But Dimka never consolidated power. Forces loyal to Murtala's government rallied, Dimka fled, was arrested, and was executed by firing squad. Murtala only ruled for roughly half a year.

Murtala’s deputy, General Olusegun Obasanjo, took over and continued his predecessor’s policies.

Olusegun Obasanjo (1976-1979)

Unlike Murtala who was a Muslim Hausa Northerner, Olusegun Obasanjo was a Christian Yoruba Southerner. Despite being the complete opposite ethnically and religiously, their ideology was very similar.

Indigenization: “Nigeria for Nigerians”

Obasanjo deepened the Nigerianization of the economy that Gowon had started. Sadly, Gowon’s earlier attempts at “Nigerianization” were toothless: foreign firms used “fronting” (hiring Nigerians as nominal owners) or exploited flimsy loopholes to keep control.

In 1977, Obasanjo updated the Indigenization Decree, splitting the economy into three tiers:

• Schedule 1 (100% Nigerian ownership required): The Service sector (retail, film, light commercial activity)

• Schedule 2 (60% Nigerian ownership required): Consumer & light manufacturing, insurance, and banking. Foreign banks like Barclays, First National Bank of Chicago, Bank of America, and more were forced to sell 60% of their Nigerian subsidiaries to locals or the Nigerian government.

• Schedule 3 (40% Nigerian ownership required): This was for heaviest and most technical industries.

Obasanjo also stepped up enforcement with the Enterprise Promotion Board and closed loopholes. By 1977, 43% of businesses in Nigeria were Nigerian-owned, the highest ever at that time. This policy triggered a boom in the Lagos Stock Exchange (renamed the Nigerian Stock Exchange in 1977) as many foreign shares flooded the market.

But there was a catch. While the policy created a new "ownership class," it didn't necessarily create a more productive economy. Assets were largely transferred to politically connected elites rather than a broad middle class. Some Western firms, like Citibank, simply packed up and left rather than hand over control.

Oil

Obasanjo also increased ownership in oil exploration. By 1979, Nigeria owned 60% to 80% of the joint venture firms with ELF, AGIP, Shell BP, GULF, MOBIL, Texaco, and Pan Ocean.

More importantly, he created the Nigerian National Petroleum Corporation (NNPC). Unlike its predecessor, the Nigerian National Oil Corporation (NNOC), the NNPC could borrow whenever it wanted without asking the Federal Council for permission.

At the same time, the Price Control Act of 1977 formalized the fuel subsidy. It made selling petrol above a government-set price illegal. Combined with the NNPC's new borrowing power, Nigeria was now locked into subsidizing domestic fuel. This policy was extremely popular at the time, but would become a fiscally destructive, politically untouchable nightmare for decades.

Agriculture

Agriculture remained completely neglected under previous administrations. A measly 6% of the budget was allocated to farming, far below the 10% to 20% in developing Asian nations.

Obasanjo tried expressing concern with a program called "Operation Feed the Nation". The military directed schools and government offices to promote home gardening, deployed National Youth Service members as agricultural extension agents, subsidized fertilizer, expanded extension services, and directed the Nigerian Agricultural and Cooperative Bank to increase lending at low interest rates. Radio campaigns urged Nigerians to "go back to the land." The government even encouraged civil servants to farm as a side hustle.

The results? A disaster for traditional staples. Production of yams, groundnuts, cocoa, and rubber continued to crash.

However, there were some successes. Cassava and palm oil were resilient, and rice and wheat exploded upwards (though it’s hard to tell with wheat since it started from a small base).

Why were the results lackluster?

1. Price Suppression: Commodity marketing boards paid farmers so low that it dissuaded production.

Notably palm oil was the only cash crop that increased in production in spite of palm oil farmers being taxed more.

2. Neglect of the Smallholder: Most Nigerian farming was (and is) rain-fed "hoe-and-cutlass" work. While the government supported (poorly managed) “showpiece" mechanized farming estates, the majority of smallholder farmers were starved of credit, insecticide, and irrigation. Commercial banks almost never lent to small-scale farmers, extending credit almost exclusively to medium and large private farmers.

3. Infrastructure Gap: Even surplus harvests were wasted. With no reliable cold chain and terrible rural roads, a farmer in Anambra could grow plenty of yams and watch much of it rot before reaching Lagos.

The land tenure system, which was a mess of local customs, made things worse. In the North, rural farmers accessed state-owned land through their village head, district head, or emir. In the southeast, Igbo states had high population density and a shortage of farmland. Obasanjo tried addressing this with the Land Use Act of 1978, which vested all land in state governors. In theory, this was supposed to make land easier to acquire for large-scale farming. In practice, it was a disaster for the smallholder. It stripped away customary rights and created a bureaucratic nightmare. It helped the urban elite who knew how to navigate the governor's office to secure "Certificates of Occupancy."

Import Substitution & Industrial Policy

Nigeria continued its import substitution strategy: tariffs & import bans as defense, subsidies and local content requirements as offense. High tariffs forced private firms to make joint ventures with the Nigerian government, state governments, or private Nigerian investors.

Nigeria already had manufacturing in textiles (Aba textiles) and brewing, with firms like Nigerian Breweries, Lever Brothers Aba (soap manufacturing), and Aba Associated Industries (consumer goods & packaging). But under Obasanjo, Nigeria was expanding to other industries.

Obasanjo and his predecessors built out an industrial base that looked impressive on paper. Steel plants were being built at Ajaokuta (built by the Soviet firm Tyazhpromoxport) and Delta, alongside rolling mills in Batagarawa, Jos, and Oshogbo. Cement plants operated in Ewekoro and Ashaka.

In 1978, Obasanjo nationalized the oil refinery in Port Harcourt that used to be a joint venture with Shell-BP, and Obasanjo commissioned the state owned Warri Refining and Petrochemical Company.

The Indian firm Hindustan Machine Tools formed a joint venture with the Nigerian federal government in Osogbo. It was a state owned firm named Nigerian Machine Tools Limited and it produced machine tools (hacksaw machines, vertical milling machines, drilling machines, etc).

The Federal Superphosphate Fertilizer Company was made in Kaduna in the 1970s so Nigeria could make domestic fertilizer.

Lastly, many European brands made joint ventures with the Nigerian federal and state governments.

1. French Peugeot made cars in their plant in Kaduna (the North) in 1972

2. German Volkswagen made Beetles and Passat cars in Lagos (Southwest)

3. German Mercedes-Benz made commercial trucks and buses in Enugu, Anambra (Southeast) in 1975

4. Austria Steyr made tractors and trucks in Bauchi (Northeast) in 1979

5. British Leyland made trucks, buses, and Range Rovers in Ibadan (Southwest) in 1979

The Nigerian workers were not building car engine components. The assembly plants bought "Completely Knocked Down" (CKD) kits from Europe, and then Nigerians bolted the parts together like a Lego kit. The strategy worked as long as Nigeria had the foreign exchange to import car parts.

Why Nigerian Industry Couldn’t Compete Globally

Nigeria built out an impressive industrial base on paper, but none of it could compete internationally. Three structural forces explain why:

1. Execution & Graft: Many projects were "white elephants." They were launched for political optics rather than economic logic, leading to massive cost overruns and projects like Ajaokuta Steel that never produced a single ingot. (The Ajaokuta plant still hasn’t produced an ounce of commercial steel and Delta was abandoned in the 1990s).

2. Dutch disease & the Naira trap: Oil exports flooded Nigeria with foreign currency, and Nigeria’s central bank had a policy of selling foreign currency to maintain a strong naira.

But why does a "strong" currency kill local factories? It comes down to the Real Exchange Rate. Think of the nominal exchange rate as the number you see when you look up rates on google, but the Real Exchange Rate is the "shopping cart" rate, it measures how much a basket of Nigerian goods actually costs compared to the rest of the world.

When the oil boom hit, it caused massive domestic inflation. The cost of labor, rent, and electricity in Lagos skyrocketed. Normally, a country protects its factories from this by devaluing its currency, ensuring its exports stay cheap for foreigners. But Nigeria refused. By keeping the Naira artificially strong at the bank while inflation raged at home, a Nigerian-made shirt suddenly became relatively expensive for a buyer in London or New York compared to an Indonesian one.

See chart below:

• Between 1970 and 1979, Nigeria’s real exchange rate appreciated (from 156 units to buy a basket of goods to 106 units).

• Meanwhile, Indonesia, which also had an oil windfall, deliberately depreciated its currency (from 91.8 to 109 units).

A strong naira made imports cheap, but made Nigerian exports uncompetitive. Non-oil exports either stagnated or collapsed entirely. In the graph below, you’ll see that Nigeria was selling less agro-manufactured goods and other manufactured goods than it did in the 1970s.

3. The High Wage Trap: Nigeria was a relatively high-wage developing economy. Again, the best comparison is Indonesia: both had oil booms, large populations, too many ethnic groups to count, and colonial legacies.

The key metric to look at is agricultural land use per capita.

Nigeria’s ratio is .88 hectares per capita in 1975; Indonesia had 0.26. For every piece of land in Nigeria, there was roughly 1 farmer. In Indonesia there were roughly 4 farmers. This means that Nigeria was relatively land abundant. Both countries were roughly 80% rural at the time.

Land scarcity matters enormously for wages. In labor economics, the reservation wage is the minimum pay a person will accept to leave their current situation and take a new job. In Indonesia, with 4 people crowded into a single hectare, the 3rd and 4th person added almost no value (economists call this "zero marginal productivity"). When a textile factory opened offering wages slightly above subsistence, those surplus workers gladly took it. In Nigeria, with almost 1 hectare per person, there was virtually no surplus labor. To pull a Nigerian off the farm, a factory had to offer far more than subsistence.

The premium pay for urban employment was supercharged in 1974 when Gowon’s Udoji awards gave a massive increase in public sector wages. Since the government was the largest employer, the private sector wages were forced upward to compete.

These phenomena impacted the urban-rural wage differentials. In Nigeria in the 1970s, an urban worker made anywhere from 2.6x to ~5x a rural worker.

Meanwhile, in Indonesia, the urban wage premium was more modest. In Java, urban workers made ~2x a rural worker. Outside Java, the wage premium was 1.2x-1.4x.

The result was that Nigeria’s labor market was widely uncompetitive. Nigerian manufacturing wages were roughly 4x Indonesian wages and 3x Indian wages. Nigerian wages were so high that migrants from Ghana, Togo, and Benin flocked to Nigeria for work (like my uncle).

A Nigerian textile mill or car assembly plant could not compete with Asian goods on cost. A shirt in a developing Asian country could cost 25% to 50% of a Nigerian one. For Nigeria to keep industries alive, it needed high tariffs, import bans, and subsidies. Indonesia used its low wage advantage to boost exports in textiles and light manufacturing, with a managed devaluation of the rupiah to keep exports competitive. Nigeria's central bank did the opposite.

As a result, due to Nigeria’s land abundance, Nigeria was a high-cost, high wage developing economy trying to industrialize while competing against land-scarce, low-cost, low-wage Asian economies.

Foreign Policy

West Africa: Obasanjo attempted to mediate the Chadian civil war, but to no avail. Due to Chad’s divided population, it continued to be a proxy war between France and Gaddafi’s Libya.

Zimbabwe: In Rhodesia, two Black liberation movements, ZAPU and ZANU, were fighting Ian Smith's white minority regime. Obasanjo backed both. In 1979, Smith negotiated an internal settlement that led to elections & black rule, but the constitution reserved significant privileges for the white minority. ZAPU and ZANU boycotted, and Obasanjo saw the vote as cosmetic change. When Margaret Thatcher planned to lift sanctions on the new Zimbabwe-Rhodesia, Obasanjo yanked contract bids from British firms to fix the Apapa port in Lagos, threatened to cut off oil sales, and nearly left the Commonwealth. His retaliation paid off. In April 1980, ZANU won a free election and Robert Mugabe became prime minister.

South Africa: Obasanjo created the South African Relief Fund and spearheaded a UN resolution condemning apartheid. After the Soweto massacre of 1976, Nigeria offered refuge to the children of Soweto, gave Black South African students scholarships, and offered to train ANC and PAC fighters at the Nigerian Defense Academy. South African freedom fighters came to see Nigeria as the "Mecca of the liberation movement."

Then came an extraordinary episode. Before the Iranian Revolution, the Shah sold oil to Apartheid South Africa despite condemning the regime. South Africa received 90% of its oil from Iran. After the Iranian revolution, Ayatollah Khomeini cut off oil sales to South Africa. Shell and BP, who jointly owned South Africa's largest refinery, quietly stepped in. BP shipped North Sea crude to South Africa and replaced what it needed for the British market with Nigerian oil. Nigeria was unknowingly subsidizing Apartheid South Africa's oil supply. When the British Anti-Apartheid lobbying group informed Obasanjo of this scheme, he nationalized BP's Nigerian operations, renaming it African Petroleum. He did the same with Barclays (Union Bank) and Standard Bank (First Bank) after reports surfaced of their financial ties to Apartheid South Africa. As a result, BP lost access to over 300K barrels a day of Nigerian crude.

Israel: Obasanjo was notably less anti-Zionist than Murtala. He withdrew Nigeria's support for the notion that "Zionism is a form of racism" and blocked Arab representatives from passing anti-Israel resolutions. He refused to let the PLO under Yasser Arafat open an office in Lagos in 1978.

America: Obasanjo hated the Nixon & Ford administration since he felt they were too accommodating to Apartheid South Africa. US State Secretary, Henry Kissinger, from the Ford administration was banned from entering Nigeria.

But, Obasanjo was a fan of Jimmy Carter. They prayed together when they had diplomatic meetings. Thanks to Carter, Obasanjo preferred Nigerian students study in the West rather than the Soviet Bloc, and he recruited American University professors to temporarily teach at Nigerian universities. Also, America increased arms sales to Nigeria during this period.

However, Nigeria and America still had disagreements. Carter wanted a gradual reform of South Africa to make an inclusive democracy, while Obasanjo wanted utter annihilation of the Apartheid regime with American sanctions. In addition, Carter disliked the Cuban presence supporting communist regimes in Angola, Ethiopia, and Mozambique, Obasanjo, while not a communist, supported the communist governments simply because they controlled the capital of the country.

The Transition to Civilian Rule

Obasanjo designed a new constitution meant to prevent a repeat of the First Republic. To win the presidency, a candidate didn't just need a plurality of the national vote; they also needed at least 25% of the vote in two-thirds of the states (at least 13 of 19). He also switched the constitution from the UK parliamentary model to a US-style presidential system, reasoning that a parliamentary system was unsuitable for ethnically fragmented societies.

Concluding Thoughts

Indonesia & Nigeria both had oil booms but had different paths. Indonesia devalued its currency and fed its surplus labor into export factories. Nigeria kept the naira strong, and its land abundance meant manufacturing wages were naturally high, since workers with decent farmland demand a premium to leave it. Indonesia's land scarcity meant the opposite: too many workers on too little land kept wages rock-bottom. One country used oil to bootstrap manufacturing. The other used oil to subsidize the illusion of it. That illusion bought Nigeria geopolitical power, but it couldn’t competitively export T-shirts or sofas, and it couldn't survive a drop in oil prices. You’ll see the consequences when I discuss civilian rule next time.

Sources

1. The Nigerian Oil Economy: From Prosperity to Glut by J.K. Onoh

2. How Africa Works by Joe Studwell

3. Nigeria: A Country Study, Library of Congress

4. The Political Comparative Study Economy of Poverty, Equity, and Growth: Nigeria and Indonesia by David L. Bevan, Paul Collier, and Jan Willem Gunning

Making a Nuke

It starts in a laboratory in Berlin in 1938, where two chemists (Otto Hahn and Fritz Strassmann) bombarded uranium and didn’t understand their own results. They wrote to their former colleague, Lise Meitner, a Jewish physicist who had fled Nazi Germany to Sweden. Meitner and her nephew Otto Frisch analyzed the data and realized the uranium nucleus had fractured in half. They coined the term “nuclear fission.”

Within months, physicists across the West and Japan rushed to their labs. In Paris, Frédéric Joliot-Curie (Freh-deh-reek Zhoh-lee-oh Koo-ree) and his team made the next crucial breakthrough: when a uranium atom splits, it releases two or three extra neutrons, meaning a self-sustaining nuclear chain reaction was possible. Splitting atoms could be weaponized.

Joliot-Curie published his findings in Nature for the whole world to read. Every major power now had the theoretical blueprint. But theory is only half of a bomb. You also need uranium.

In 1939, Nazi Germany, which already annexed the Sudetenland a year earlier (the German-speaking part of Czechoslovakia), invaded the rest of Czechoslovakia. This mattered for many reasons, but one under-appreciated reason was that Czechoslovakia contained the Jachymov mines, Europe’s only major source of uranium ore at the time. Hitler now had both the science and the raw material.

Germany’s Program:

German physicists read Joliot-Curie's paper immediately. The Nazi regime convened a secret group of scientists, the Uranverein (Uranium Club), to begin weapons research. After Germany invaded Poland in September 1939, the military took over the project.

UK’s Program:

The UK had Jewish refugee scientists from Germany and Austria. Two of them, Otto Frisch and Rudolf Peierls, realized that if you strip out the rare isotope Uranium-235 from the more common Uranium-238, the critical mass for an explosion wasn’t tons, but rather the size of a golf ball.

An atomic bomb was not a theoretical curiosity anymore; it was an engineering problem. Britain launched the first formal nuclear weapons program, codenamed Tube Alloys.

America’s Program:

Jewish scientists who had fled Nazi Germany warned FDR that Hitler was secretly pursuing a bomb and that America needed to act. This became known as the “Einstein-Szilárd letter.” President Roosevelt created the Advisory Committee on Uranium in 1939. By 1942, it had grown into the Manhattan Project.

The Soviet Union’s Program:

A Soviet physicist named Georgy Flerov was keeping up with international physics journals. In 1942, he noticed something strange: the top American, British, and German physicists working on nuclear fission had all stopped publishing. Rather than assuming they had hit a dead end, Flerov reasoned that the three powers placed a gag order on nuclear physics because they were secretly building a bomb. He wrote to Stalin, who authorized a Soviet nuclear program. It was a genuine physics effort from the start, but Soviet espionage dramatically accelerated it. The most consequential intelligence came after 1944, when Klaus Fuchs began passing detailed blueprints from inside Los Alamos.

Japan’s Program:

Japan began nuclear weapons research in 1941 and, characteristically, ran two competing programs that refused to cooperate. Why two programs? Because the Japanese Army and Navy hated each other. The Army and Navy’s institutional hatred ran deep, rooted in the old, clannish Samurai rivalries of the Meiji Restoration: the Choshu clan had built the Army, and the Satsuma clan had built the Navy.

The Imperial Japanese Army had its Ni-Go project and the Imperial Japanese Navy had its F-Go project. The two services actively withheld intelligence from each other and undermined each other's political allies. Neither program came close to success. Japan lacked the industrial resources, sufficient uranium, and by late in the war, any respite from Allied bombing to sustain the work.

What Tipped the Outcome

By 1942, the physics was largely settled. Building a bomb was now an engineering problem, and an enormous one. To enrich uranium or breed plutonium, you need massive industrial facilities, millions of gallons of water, and staggering amounts of electricity.

Britain could not do this. It was fighting for its life, getting bombed by the Luftwaffe nightly, and was virtually bankrupt.

America was untouched by bombing, had vast empty deserts for testing, and a massive electrical grid. So Churchill agreed to merge Tube Alloys into the Manhattan Project. In August 1943, the two countries signed the Quebec Agreement, and Britain shipped its best physicists to Los Alamos to work under Oppenheimer.

Canada and French scientists also contributed to the Manhattan Project. Joliot-Curie's colleagues in Paris, Hans Halban and Lew Kowarski, had identified heavy water as an ideal moderator for nuclear chain reactions. When Germany invaded France in 1940, the two scientists fled to England carrying 185 kg of heavy water, nearly the world's entire supply. Their research eventually migrated to the Montreal laboratory in Canada, which became the Allied center for heavy water reactor research.

Most of the Manhattan Project's uranium came from the Shinkolobwe mine in the Belgian Congo (now the Democratic Republic of Congo), with additional sources from the Eldorado Mine in Canada and the Colorado Plateau in the United States.

Two Paths to a Bomb

Building a nuclear weapon is hard. It requires building infrastructure at the scale of a small city. There are two paths, and each produces a different type of atomic bomb.

1. Uranium Path: Natural uranium is overwhelmingly Uranium-238, which does not sustain a chain reaction. Only about 0.7% of natural uranium is the fissile isotope, Uranium-235. To build a bomb, you need to "enrich" the uranium by separating U-235 from U-238. Because the two isotopes are chemically identical, this is an agonizingly difficult process. Today, scientists convert uranium into a gas (uranium hexafluoride) and spin it at supersonic speeds inside centrifuges. The slightly lighter U-235 drifts toward the center while the heavier U-238 moves outward. It takes thousands of centrifuges running in sequence (called a "cascade") for months to produce enough weapons-grade material (90%+ U-235).

BUT, during WWII, centrifuges kept breaking under the stress. Instead, America relied on massive, brute-force industrial methods at Oak Ridge, Tennessee: Gaseous Diffusion (an insanely energy-inefficient process of filtering the gas through microscopic barriers) and Electromagnetic Separation (using giant magnetic machines). It took months of running these facilities just to get enough weapons-grade material (90%+ U-235) for a single bomb.

Below you will see a picture showing different levels of uranium enrichment.

2. Plutonium Path: Plutonium doesn’t exist in nature, you need to cook it up in a nuclear reactor. When Uranium-238 absorbs a neutron in a controlled reactor, it gradually transforms into Plutonium-239, which is fissile. The reactor needs a moderator to slow the neutrons and sustain the reaction. The Americans used graphite at their Hanford reactors; the Canadians and French scientists used heavy water. After the reactor runs long enough, you extract the highly radioactive spent fuel rods and chemically separate the plutonium from the remaining uranium and waste products. This reprocessing step is one of the most dangerous parts of the entire process.

In 1945, America used both paths. The Hiroshima bomb ("Little Boy") was a uranium atom bomb (gun type design). The Nagasaki bomb ("Fat Man") was a plutonium atom bomb (implosion design).

Slamming the Door Shut

After Japan surrendered, American President Truman passed the Atomic Energy Act of 1946, which ended all nuclear information sharing with the UK, Canada, and every other nation.

The law was extraordinarily restrictive. Sharing “restricted data” about nuclear weapons was punishable by death or life in prison. No exceptions were made for allies. The Act also stipulated that any information concerning the design, manufacture, or utilization of atomic weapons was automatically classified the moment it was created. If an independent physicist working at a private university figured out a piece of the puzzle entirely on their own, without any access to government files, their thoughts, calculations, and equations were legally considered government secrets from the exact moment the pen hit the paper.

Little Aside: Relating Nuclear and AI Policy

According to Venture Capitalists Marc Andreessen and Ben Horowitz, the Biden administration told them that it planned to use Truman’s nuclear blueprint for AI.

As they recounted it, one official said: “We classified whole entire areas of physics in the nuclear era and made them state secrets and that research vanished. And we’re absolutely capable of doing that again for AI—we will classify any area of math that we think is leading in a bad direction, and it will end.” Biden’s executive order on AI (EO 14110), signed October 2023, was perceived as a step in that direction by these folks.

But, Trump revoked Biden’s executive order on his first day in office.

America Enraging Allies

Truman’s Atomic Energy Act enraged the British, and for good reason. Roosevelt and Churchill had signed the Quebec Agreement (1943) and the Hyde Park Memorandum (1944), secret treaties that explicitly promised full US-UK collaboration on the bomb and continued sharing of nuclear technology for both commercial and military purposes after the war. Truman either was never briefed on these secret agreements by Roosevelt, who famously kept critical information close to the chest, or he knew and chose to break them in the name of national security. Either way, America's closest nuclear ally was cut off overnight.

The Monopoly Breaks

America’s monopoly on the atomic bomb did not last long. A handful of scientists and technicians inside the Manhattan Project had been Soviet spies all along: Klaus Fuchs, Theodore Hall, David Greenglass, George Koval. This is not a defense of McCarthyism, but you would not have any legitimacy of an anti-communist Red Scare if American communists had not literally handed the blueprints of the ultimate weapon to America’s greatest enemy.

The Soviets were paranoid that their spies were feeding them disinformation, so they largely conducted their own research in parallel. They built a secret city in the Ural Mountains using forced labor from the Gulag system. Before the Soviets found their own uranium in Central Asia, their uranium came from Eastern Europe: the Jáchymov mines in allied Czechoslovakia and the Ore Mountains in Soviet-occupied East Germany. In 1949, they tested their atomic bomb in Soviet Kazakhstan.

The next country to get the bomb was the United Kingdom, which detonated its own weapon in 1952.

The British did not need to steal blueprints; they had helped draw them for the Manhattan Project. After Truman cut off access, Prime Minister Clement Attlee authorized an independent British program. William Penney, one of the lead scientists who had worked at Los Alamos, rebuilt the plutonium bomb from the knowledge and notes his team retained. Britain sourced its uranium from the Belgian Congo (secured during wartime), as well as from Commonwealth allies Australia, Canada, and South Africa.

That same year, America leapfrogged everyone. In November 1952, the U.S. detonated the first hydrogen bomb, completely vaporizing the island of Elugelab. Instead of splitting atoms (fission) like an atomic bomb, a hydrogen bomb smashes atoms together (fusion). It was roughly 700 times more powerful than the bomb dropped on Hiroshima.

The Soviets, still benefitting from their espionage inside Los Alamos, tested a boosted atomic bomb, also known as a “layer cake” bomb in 1953.

By 1955, the Soviets tested their first true hydrogen bomb, achieving nuclear technological parity with the United States.

In 1957, the United Kingdom followed with its own hydrogen bomb (Operation Grapple).

Opening the Door Again

By 1953, Eisenhower realized that Truman’s strategy of “kicking away the ladder” from the 1946 Atomic Energy Act was failing. In a speech at the United Nations called “Atoms for Peace”, he proposed that nuclear technology should be shared internationally for civilian purposes like electricity and medicine.

Eisenhower then signed the 1954 Atomic Energy Act so America could sell civilian nuclear research reactors, nuclear fuel, and training to allied countries. To prevent weapons programs, he helped create the International Atomic Energy Agency (IAEA) in 1957, which is the UN watchdog.

As great as the intention was for this, “Atoms for Peace” had a fatal flaw: nuclear technology is inherently dual-use. The same science required to split atoms to boil water for electricity is the same science used to build a bomb. By handing out research reactors, uranium, and world-class training, the United States inadvertently laid the foundational groundwork for several future nuclear weapons programs.

Between 1955 and 1962, America provided research reactors to Austria, Denmark, Portugal, the Netherlands, Sweden, Turkey, Israel, Brazil, Spain, Italy, Switzerland, Japan, the Philippines, Argentina, South Korea, Taiwan, Thailand, Colombia, Iran, Greece, South Africa, Zaire (Congo), South Vietnam, Indonesia, and Pakistan. (Every linked country either attempted, explored, or eventually acquired nuclear weapons capabilities.)

The Soviet Union provided research reactors to China, Poland, Hungary, Romania, Czechoslovakia, Yugoslavia, Bulgaria, Egypt, East Germany, North Korea, Iraq, Libya, Vietnam, and Cuba.

Also, once UK achieved thermonuclear parity, Eisenhower decided it was absurd to keep secrets from a country that already knew them. He saw no point in forcing the British to duplicate American research when the real threat was the Soviet Union. In 1958, Eisenhower amended the Atomic Energy Act to allow the sharing of nuclear weapons design information with allied nations that had made “substantial progress” on their own. That same year, the U.S. and UK signed the Mutual Defense Agreement, restoring the partnership Truman had severed.

France

This infuriated Charles de Gaulle. France did not yet have an atomic bomb, let alone a hydrogen bomb, and now the Anglo-Americans were sharing secrets exclusively with each other. The humiliation of the 1956 Suez Crisis/2nd Arab-Israeli War, where America sided with the Soviets and Egypt to force France, the UK, and Israel to withdraw, convinced de Gaulle that relying on American security guarantees was dangerous.

France accelerated its independent nuclear program and detonated its first atomic bomb in the Sahara desert (French Algeria) in 1960.

France already had premier nuclear scientists. After all, Joliot-Curie proved nuclear chain reactions were possible back in 1939. Also, some French scientists had worked in the Manhattan Project. For raw materials, France had domestic uranium from the Limousin region, and it sourced ore from its colonial holding in Madagascar (Gabon would follow in 1961 and Niger by 1971, both after independence).

China

The 5th country to build an atomic bomb was China in 1964.

China's motivation was straightforward: America had threatened to nuke China four times in the 1950s.

• Nuclear Threat #1: Truman threatened to nuke China during the Korean War (when China backed North Korea), phrasing it “diplomatically” as using “every weapon that we have.”

• Nuclear Threat #2: In 1953, Eisenhower told China (through India since America did not recognize Mao’s China at the time) that if China didn’t agree to an armistice in the Korean war, then Eisenhower would nuke them.

• Nuclear Threat #3: In 1954-1955, during the first Taiwan Strait Crisis, China was shelling Taiwanese controlled islands (Quemoy and Matsu). Eisenhower said he would use tactical nuclear weapons if China attempted to incorporate Taiwan island.

• Nuclear Threat #4: In 1958, when China resumed shelling islands in the 2nd Taiwan Strait Crisis, Eisenhower once again moved nuclear-capable bombers and artillery into the region to force Beijing to back down.

If America threatens you with nuclear annihilation four times in a decade, then you needed your own deterrent. The 1950 Sino-Soviet alliance theoretically obligated Moscow to defend China, but Mao knew the Soviets would not risk World War III on China's behalf, and any military help they offered came with demands that violated Chinese sovereignty (like making Manchuria a quasi-Soviet colony from 1950 to 1954). Outsourcing China's survival to a foreign power was a death sentence. Mao needed his own bomb.

China's program started with Soviet help. In 1954, the Soviet Union agreed to give full assistance to China in nuclear physics and atomic energy; in return China would sell uranium to them. Soviet engineers helped China discover and mine uranium deposits in their nation, and built China a research reactor in Beijing. In 1957, the Soviets signed an agreement to provide China with a working prototype of the atomic bomb.

But cracks were already forming. Mao wanted a Soviet nuclear powered submarine, but Khrushchev declined. Khrushchev unilaterally denounced Stalin without consulting the rest of the communist bloc, undermining the global socialist movement. He also pursued détente with Washington while America was still threatening to annihilate China, and treated China as a junior partner rather than a sovereign ally. The Sino-Soviet split ended Soviet nuclear assistance. The Soviets tore up their agreement to provide the bomb prototype and pulled their equipment and engineers out of China.

Mao pressed ahead anyway. Even as tens of millions starved during the Great Leap Forward/Three Years of Natural Disasters, China poured staggering amounts of GDP and electricity into the nuclear program in Xinjiang and other regions. To Beijing, the bomb was not a vanity project but a way to prevent annihilation by America or the Soviet Union.

China was dirt poor, but its human capital was far above what other developing countries had at the time. Many of its top physicists had been educated at Caltech, Purdue, University of Michigan, or my alma mater, MIT. (Ironically, the paranoia of the McCarthy-era Red Scare had deported several of these brilliant minds, like Qian Xuesen, right back to Mao.) Doing the math entirely on their own, China refined uranium at a processing plant in Inner Mongolia and enriched it at a gaseous diffusion plant in Lanzhou. Three years after detonating its first atomic bomb, China tested a hydrogen bomb in 1967, a year before France tested its own hydrogen bomb in August 1968.

At this point, all five winners of WWII had nuclear weapons: the United States, the Soviet Union, the United Kingdom, France, and China. Things were getting out of hand, especially since America and the Soviet Union almost ended human civilization in October 1962 in the Cuban Missile Crisis. That event terrified both Kennedy and Khrushchev so deeply that they immediately installed the Washington-Moscow hotline, signed the Limited Test Ban Treaty in 1963 (with UK as well), and desperately rushed to draft the NPT to ensure no rogue states could ever trigger a global apocalypse. So America, the Soviet Union, and Britain worked on creating the Nuclear Non-Proliferation Treaty (NPT).

The Non-Proliferation Treaty

In 1968, the Nuclear Non-Proliferation Treaty (NPT) opened for signature.

The basic bargain was this: the five countries that already had nuclear weapons would be recognized as nuclear-weapon states, and everyone else would agree not to develop them in exchange for access to civilian nuclear technology and a vague promise that the nuclear powers would eventually disarm. Article IV in NPT guarantees the inalienable right for all countries to use nuclear energy for civilian purposes.

France and China initially refused to sign, holding out until 1992. While they delayed signing, China and France helped other nations obtain nuclear reactors. (i.e. Israel, Iraq, South Africa, Pakistan, and Algeria). We will talk about other nations’ secret nuclear programs in a future post (including Switzerland, Argentina, Taiwan, Libya, Iran, and more). Fun fact, before the 1980s, France had nearly zero-safeguards or inspections for nuclear weapons programs when they sold nuclear reactors. France even sold weapons-grade uranium to some clients!