The High-Wage Trap: Why Nigeria’s Oil Wealth Killed Its Factories in the late 1970s
Nigeria's 1st "Golden Age" had many underlying issues
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
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?
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.
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.
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).
Lastly, many European brands made joint ventures with the Nigerian federal and state governments.
French Peugeot made cars in their plant in Kaduna (the North) in 1972
German Volkswagen made Beetles and Passat cars in Lagos (Southwest)
German Mercedes-Benz made commercial trucks and buses in Enugu, Anambra (Southeast) in 1975
Austria Steyr made tractors and trucks in Bauchi (Northeast) in 1979
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:
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).
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.
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.
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Tanzania is the African country I think of as most politically similar to Indonesia, albeit Tanzania is a country I know very little about. In terms of starting resources though I like the comparison of Nigeria to Indonesia.
A comparison of all three could be an interesting project for someone.
As always, a great piece. Your writing is superb. The long period from Gowon to Obasanjo looks similar in the mistakes to the also oil-induced "Saudi Venezuela" of the 1958-1987 period: artificially strong currency, overly optimistic and poorly planed industrialization, import substitution without manufacturing discipline, neglect of the agriculture sector and so on. Of course on e of the great differences is that venezuela had far more oil produced per capita and also had a stronger non-oil economy as starting point. THat meant that the same cronyism and wastefull spending still managed to creat a sizable middle class, even if as a byproduct of rentier spending and investment. THanks for writing to such depth