The Implications Of Cybercrime On Economic Development Of Nigeria

Project and Seminar Material for Criminology And Security Studies

Abstract

Over the years, the alarming growth of the internet and its wide acceptance has led to increase in security threats. In Nigeria to- day, several internets assisted crimes known as cybercrimes are committed daily in various forms such as fraudulent electronic mails, pornography, identity theft, hacking, cyber harassment, spamming, Automated Teller Machine spoofing, piracy and phishing. Cybercrime is a threat against various institutions and people who are connected to the internet either through their computers or mobile technologies. The exponential increase of this crime in the society has become a strong issue that should not be overlooked. The impact of this kind of crime can be felt on the lives, economy and international reputation of a nation. Therefore, this paper focuses on the implication of cybercrime on the Nigerian economy.

Chapter One

Introduction

1.1. Background to the Study

The global economy is faced with myriads of economic and social problems that increase in magnitude and dimension daily. Suicide bombings and killings, terrorism and insurgencies, drug trafficking, smuggling, money laundering, systemic corruption etc are some of those crimes that threaten the corporate existence of many countries of the world today.

Generally, Section 2 of the Nigeria Criminal Code defines crime as ―An act or omission which renders the person doing the act or making the omission liable to punishment under the Criminal Code or any act or law in force. It follows, therefore, that a person cannot be convicted of a criminal offence unless that offence is defined and a penalty, therefore, prescribed in a written law, (Section 36, Sub-section 12 of the Constitution of the Federal Republic of Nigeria, 1999).

The gravity of crime makes offences to be categorized into simple, misdemeanour and felony. However, different laws enacted to guide and moderate social, economic and political lives of citizens have also categorized offences into social, economic, financial, religious and political crimes. However, of particular interest to the researcher are crimes that are economic in nature referred to as cybercrime s.

Section 46 of the Economic and Financial Crimes Commission ‘s Act, 2004, defines cybercrimes as ―non-violent criminal and illicit activities committed with the objective of earning wealth illegally either individually or in a group or organised manner thereby violating existing legislation governing economic activities of government and its administration and includes any form of fraud, money laundering, smuggling, currency counterfeiting, tax evasion, corruption, embezzlement etc. These constitute the typologies of cybercrime.

The origin of cybercrime that is the very first instance, in which someone committed a crime across computer network, is impossible to know. What is possible to know is the first major attack on a digital network which can then be used as a reference point of event in the evolution of cyber based crimes. In 1971, John Draper, a phone phreak, discovered a whistle which produced the same tones as telephone switching computers of the time. Phone phreak is a term used to describe computer programmers obsessed with phone networks, the basis of modern day computer networking. He built a “blue box” with the whistle that allowed him to make free long distance phone calls, and then published instruction on how to make it. With this development, the instances of wire fraud rose significantly. Again in 1973, a teller at a local New York bank used a computer to embezzle over $2 million dollars. It was in 1978 that the first electronic bulletin board system came online and quickly became a preferred method of communication for the cyber world. It allowed fast, free exchange of knowledge including tips and tricks for hacking into computer networks. In1981, Ian Murphy, popularly known as Captain Zap to his fans, was the first person convicted of a cybercrime. He was alleged to have hacked into the AT&T network and changed the internal clock to charge off-hours rates at peak times. He received 1,000 hours of community service and 2.5 years of probation, a mere slap on the wrist compared to today’s penalties, and was the inspiration for the movie Sneakers.

Again in1982, Elk Cloner, a virus, was written as a joke by a 15-year-old kid. The said various is considered as one of the first known viruses to leave its original operating system and spread in the “wild”. It attacked Apple II operating systems and spread by floppy disk. Hacking became known in 1983 when movie War Games was released. The movie depicts a teenage boy who hacks into a government computer system through a back door and nearly caused the world to World War III. Precisely in 1988, Robert T. Morris who was. a graduate student at Cornell, released a self-replicating worm. The worm was said to have infected more than 600,000 networked computers. The first large-scale case of ransom ware is reported in 1989. The virus once downloaded, held computer data hostage for $500(https://.le-vpn.com/history-cyber-crime-origin evolution). In1993, Kevin Paulson was caught and convicted for the offence of hacking into the phone systems. He took control of all phone lines going into an LA radio station in order to guarantee winning a call-in contest. At one point he was featured on America’s Most Wanted, when the phone lines for that show went mysteriously silent. When the FBI began their search he went on the run but was eventually caught. He was sentenced to 5 years in Federal penitentiary and was the first to have a ban on Internet use included in his sentence.

Cybercrime really began to take off in the early 2,000’s when social media came to life. The surge of people putting all the information they could into a profile database created a flood of personal information and the rise of ID theft. Thieves used the information in a number of ways including accessing bank accounts, setting up credit cards or other financial fraud. The number and types of online attacks increase exponentially. The latest wave is the establishment of a global criminal industry totalling nearly a half-trillion dollars annually. These criminals operate in gangs, use well-established methods and target anything and everyone with a presence on the web. Specifically, in 2002, Shadow Crew’s website was launched. The website was a message board and forum for black hat hackers. Members could post, share and learn how to commit a multitude of cybercrimes and avoid capture. The site lasted for 2 years before being shut down by the Secret Service. 28 people were arrested in the US and 6 other countries ((https://.le-vpn.com/history-cyber-crime-origin-evolution). The instances of hacking, data theft and malware infections skyrockets became so rampant in 2007. Currently, the number of records stolen, machines infected rise into millions as well as the amount of damages caused into billions. The Chinese government is allegedly most accused of hacking into US and other governmental systems.

The history of cybercrime in Nigeria can also be traced back to the colonial era. The consular court system disrupted the traditional administration, which the white colonialists met. In its place was appointed the highly flawed indirect rule under which appointment of personnel was arbitrarily made. Oftentimes, appointees were unknown people, different from the traditional heads and chiefs. Many of the appointed people were of questionable character who often became intoxicated by power, leading them to abuse and misuse of office, including showing favours to criminals. Therefore, the colonial heritage, legal traditions, religion, and geographical factors seem associated with cybercrime and other measures of government dysfunction.

In the Post-Colonial Era of the Civilian and Military Regimes, the First and Second Republics were characterised by electoral malpractices involving the use of money to buy votes, employment of thugs to intimidate political opponents, hiring of assassins to eliminate opponents, hijacking of electoral boxes and materials, the printing of fake voting cards, misappropriation of public funds and corruption. The military and civilian regimes accused each other of corruption and this was the major reason for rejection and takeover of government. The military regimes ruled by decrees and through it perpetrated all manner of cybercrime s. Today, with the advent of the internet, it is said that the worst civilian regime is better than the best military regime. The overall implication of this is that the once cherished culture of probity and honesty in public affairs soon yielded place to a culture of graft and the standard of public morality continued to deteriorate, giving way for serious cybercrime.

Corresponding to the Colonial and Post-Colonial Era was an industrial policy known as the Import Substitution Industrialization (ISI) that advocated the replacement of foreign imports with domestic production as an attempt to reduce foreign dependency through industrialized products, thus producing development and self-sufficiency through the creation of an internal market. ISI was gradually abandoned because this strategy appears not to have created the necessary foundation for an industrial revolution as it failed to develop capacities for export manufactures and even failed to produce enough to serve expanding domestic demand (Ogujiuba, Nwogwugwu & Dike, 2011).

By 1980s, the economy took a different turn, partly due to declining oil revenues, structural indebtedness etc. This precipitated the adoption of the Structural Adjustment Programme (SAP) from July 1986 on the insistence of IMF and the World Bank, of which trade liberalization aimed at the Global South was a major element. It was expected that a liberalized trade regime would stimulate industrial output expansion and enhance a better performance of the economy. However, contrary to expectations that SAP policies would shift production and trade towards outward orientation, the industrial sector seems not to have made any significant contribution to export earnings (Tamuno, & Edoumiekumo, 2012). The SAPs conceived and implemented for West African countries by IMF and the World Bank created loss of jobs and diminishing employment opportunities, reversal of industrial development, exclusion of majority of the population from vital social and welfare services (especially education and health care) and a fragile state. These developments produced favourable environment for entrenchment of cybercrime witnessed today. Globalisation and indeed information and communication technology that integrated Nigerian economy into the global economy have thus, provided economic offenders with a tool for both committing cybercrime and laundering the proceeds that their acts generate (Swank, 2002).

Fruitful attempts have been made to measure cybercrime. There is Corruption Perception Index developed by Transparency International in 1995. This index has a band of 0 to 100. An index closer to zero signifies a very corrupt country, while an index closer to 100 signifies a country almost free from corruption. The table below represents Nigeria ‘s level of corruption relative to the rest of the world.

Furthermore, statistics on Illicit Financial Outflows (IFFs) as a measure of cybercrime was developed by Global Financial Integrity using two known models such as World Bank Residual Model and IMF Trade Mis-invoicing Model. IFFs refer to unrecorded capital outflows that derive from criminal, corrupt (bribery and theft by government officials) and illicit commercial activities (Baker, 2005).

Khan and Blenkenburg (2012) posit that the components of IFFs include proceeds of theft, bribery and other forms of corruption by government officials; proceeds of criminal activities including drug trading, racketeering, counterfeiting, money laundering and terrorist financing; and proceeds of tax evasion and laundered commercial transactions.

Cybercrime have risen in size and magnitude in recent times. Parton, Rajarao and Skalak (2009) observe that cybercrime has become a global phenomenon thriving even in a downturn. Cost of cybercrime globally is estimated to be US$ 388 billion for 2011 (Ernesto, 2012), while World Bank estimates that Worldwide bribery totals at least $1 trillion per year, just over 3% of world income in 2002 (Kunicova and Ackerman, 2003). In the same vein, money laundered every year is estimated at about 2.0 to 5.0 per cent of world Gross Domestic Product (GDP) (IMF, 2004; Parton et al, 2009), whereas GFI estimates that IFFs from Africa across 1970 through 2012 is at some $1.8 trillion while that from Nigeria is $217,738.1 billion respectively (Khan and Blankenburge, 2012).

Comparing IFFs with some macroeconomic indicators such as National Debt and External Reserve in Figure 1 below reveal some interesting features. Their behavior is almost similar but with a significant change from 1999 through 2013 corresponding to the period of the uninterrupted democratic dispensation. This sort of relationship elicits attention, more so, when Nigeria is ranked 1st in the list of African countries where IFFs are the most.

Figure 2 below indicates the slope of both IFFs and RGDP over 1970 through 2013, which reveals some interesting features. The variables almost exhibited similar behaviour all through the period but with large noticeable upward trend from 1999 through 2013. Whereas, RGDP surpassed IFFs from 1980 through 1998, IFFs surpassed RGDP from 1999 through 2013.

It agitates the mind of the researcher that cybercrime strongly persisted despite governments efforts to curb them. The wide gap noticed between cybercrime and economic growth in Figure 2 above especially within the uninterrupted democratic dispensation period perhaps holds some implication for the Nigerian economy especially as it concerns her hard earned democracy, which is believed to drive most economies of the world today. Nwabude (2014) theorized that democracy and economic progress are compatible. Furthermore, this sort of relationship in Figure 2 above makes it imperative to take a critical study of the nature of the relationship between cybercrime and the Nigerian economy especially within the uninterrupted democratic dispensation as this would shed light on why cybercrime have persisted despite government ‘s efforts to curb them.

1.2. Statement of the Problem

An economy is perceived to be growing if there is a quantitative sustained increase in a country ‘s per capita output or income accompanied by an expansion in its labour force, consumption, capital and volume of trade (Todaro and Smith, 2011). The authors noted that the factors that drive economic growth among others include international trade, financial development, macroeconomic policy setting, research and development, the accumulation of physical and human capital etc.

Economic growth is often measured statistically by a country ‘s GDP, which measures all market activities, all final goods and services exchanged for money. However, there are some economic activities that go unobserved in the calculation of the GDP such as most work done by women, including child rearing, household work, growing food for family consumption; it does not count volunteer work, charitable activities; it does not measure social peace, illegal activities such as crime and its proceeds. There is the possibility that these unobserved factors could affect the size and behaviour of the Nigerian economy.

Theoretical literature on cybercrimes and economic growth has generated a rich debate over the last few years. Scholars studying cybercrime have theorized both how cybercrime can reduce economic growth and also how it can increase economic growth. On the one hand, scholars such as Ekundayo, Obasaju, AdedoyinIsola and Iseolorunkanmi (2013), Rotimi & Obasaju (2013), Ezema and Ogujiuba (2012) and OECD (2012) have argued that cybercrime are detrimental to economic growth. They point out that cybercrime modifies government goals and divert resources from public purposes to private ones, thereby resulting in deadweight loss to society.. On the other hand, Colombatto (2003), Wedeman (1997) and Lui (1985) theorize that it is possible for cybercrime to be beneficial to economic growth by circumventing pervasive and inefficient regulations at low cost as well as speed up the bureaucratic process. Specifically, Wedeman (1997) observe that many corrupt countries have rapid growth rates. However, Ahmad, Ullah and Arfeen (2012) and Powell, Manish and Nair (2010) find cybercrime to be growth-enhancing at low levels of incidence and growth-reducing at high levels of incidence.

Empirical studies on Nigeria, for instance, the works of Mauro and Carmeci (2007), Nageri, Gunu and Falilat (2013) and Ekundayo et al (2013) have consistently reported a negative linear relationship between economic growth and cybercrime except the works of Ahmad et al (2012) and Aidt, Dutta and Sena (2008) who found nonlinear relationship between economic growth and economic crimes in a panel of countries. It is, however, not certain if a non-linear relationship exists between cybercrime and economic growth in Nigeria as no empirical investigation on the relationship between economic growth and cybercrime have come to this conclusion.

The first step towards determining why cybercrime have persisted despite government ‘s efforts to curb them lies in the determination of the nature of the relationship between cybercrime and growth of the Nigerian economy, which has left a wide gap in most empirical works reviewed. This failure to determine the nature of the relationship between economic growth and cybercrime has also affected the choice of methodology employed by previous empirical works on Nigeria. This study is an attempt to offer a better methodology in the estimation of this relationship.

Furthermore, a significant challenge faced by empirical works on Nigeria is the choice of proxy for cybercrime s. Most of the empirical works reviewed used corruption perception index, which is subjective in nature with very short time points, as proxy for cybercrime and suggested that the direction of causality is from cybercrime to economic growth and not vice versa. Definitely, a variable that is largely objective in nature and has larger time points is preferable to the one that is subjective.

Therefore, this study aims at providing robust econometric analysis, which deepens the understanding of the relationship between cybercrime and economic growth in Nigeria both in the short run and long run within the uninterrupted democratic dispensation period of 1999 to 2013 using a state-space time-varying methodology. It is believed that this will shed brighter light on the impact of cybercrime on economic growth.

1.3. Objectives of the Study

In the conduct of this research, the following specific objectives will be achieved:

To determine the long run relationship existing between cybercrime and economic growth in Nigeria
To verify the short run impact of cybercrime on economic growth in Nigeria
To ascertain the existence of bi-directional causal relationship between cybercrime and economic growth in Nigeria

1.4. Research Questions

This study revolved around the answering of the following research questions:

How does cybercrime relate with economic growth in Nigeria in the long run
How does cybercrime relate with economic growth in Nigerian in the short run
What is the causal relationship between cybercrime and economic growth in Nigeria

1.5. Hypotheses.

As a further guide to the conduct and advancement of this study, the researcher verified the following hypotheses stated in both their null and alternative forms:

Ho: There is no long run relationship between cybercrime (illicit financial outflows as proxy) and economic growth (Gross Domestic Product as proxy)
H1: There is a long run relationship between cybercrime (illicit financial outflows as proxy) and economic growth (Gross Domestic Product as proxy)
H0: There is no significant short run impact of cybercrime (illicit financial outflows as proxy) on economic growth (Gross Domestic Product as proxy) in Nigeria
H1: There is a significant short run impact of cybercrime (illicit financial outflows as proxy) on economic growth (Gross Domestic Product as proxy) in Nigeria
Ho: There is no bi-directional causal relationship between cybercrime (illicit financial outflows as proxy) and economic growth (Gross Domestic Product as proxy) in Nigeria
H1: There is a bi-directional causal relationship between cybercrime (illicit financial outflows as proxy) and economic growth (Gross Domestic Product as proxy) in Nigeria

1.6. Significance of the Study

The study is significant in the following ways:

For the different arms of government, this study will form one of the major yardsticks for evaluating the performance of government within the uninterrupted democratic dispensation period and also form the basis of policy formulation to improve democratic governance.

This study will serve as a reference material for econometric modelling of cybercrime in Nigeria and a tool in hand for further research.

The study would become a useful tool to calibrate policies for combating cybercrime and developing the political will towards implementing these policies. Indeed, when implementing a cost-benefit analysis, it may be convenient to increase the contrast level of cybercrime when the economic cost of crime is greater.

The study would also serve as a policy tool in the hands of policy makers such as the Ministry of Finance, Central Bank of Nigeria and National Planning Commission towards the formulation and implementation of policies that ensure prudent financial management and best international practices across all the sectors of the Nigerian economy, thus enabling them to run a sound fiscal and monetary policies.

1.7. Scope of the Study

The study spans through 1999 to 2013. However, data for the study were quarterly data, thus increasing the time periods to 60, and ensuring greater degrees of freedom. The issues discussed are limited to crime but particularly cybercrime of which illicit financial outflows (IFFs) was used as proxy. This proxy for cybercrime was adopted because of the components of IFFs, which deal with major cybercrime prevalent in Nigeria as defined in Chapter Two of this research. A study of the Nigerian economy cannot be adequately completed within this work. Therefore, the researcher limited its work to economic growth. This implies that Nigerian economy for the purpose of this research is construed as economic growth. Data for the study and analysis of data relate to Nigeria only. Moreover, because of the possibility of non-linear relationship between cybercrime and economic growth, state space method that measures non-linear relationships when time series data possess break dates and are subject to regime changes while accounting for time-varying coefficient of cybercrime was employed. The possibility of transforming non-linear parameters of the model to linear parameters through logarithmic transformation also enabled the researcher to employ Ordinary Least Square technique, thus adding more research value to the study.

Chapter Five

Summary of Findings, Conclusion and Recommendations

5.1. Introduction

This chapter presents at a glance the major findings of this study and the contributions to knowledge. The researcher proffered some recommendations based on the findings of this study.

5.2. Summary of Findings.

Having tested the hypotheses of this research with a view to achieving the objectives of this research, the findings of this research are summerised as follows:

The study found a significant non-linear long-run relationship between cybercrime and economic growth.
The study also found a significant non-linear short-run relationship between cybercrime and economic growth.
The study also established a bi-directional causal relationship between cybercrime and economic growth.
The study also found that cybercrime within the period under review grew significantly surpassing any other period.

5.3. Conclusion

The study sought to investigate the impact of cybercrime on the Nigerian economy. In doing this, the nature of the relationship between cybercrime and economic growth was found to be non-linear with significant long-run relationship. Cybercrime variable was found to be the most significant of all the variables of the model for economic growth and so deserves serious attention more than it has received in the recent past because the consequences on the economy has been found to be devastating in the long run. Therefore, any nation that allows cybercrime to thrive will pay dearly for it through an economy of highly impoverished citizens which in turn diminishes the ability of future generations to sustain themselves. The father of modern economics, Adam Smith, recognized this fact when he said: ―No society can surely be flourishing and happy, of which by far the greater part of the numbers are poor and miserable‖.

As Haken (2011) pointed out that the costs of this financial haemorrhage have been significant for African countries. In the short run, massive capital outflows and drainage of national savings have undermined growth by stifling private capital formation. In the medium to long term, delayed investments in support of capital formation and expansion have caused the tax base to remain narrow. Naturally and to the extent that illicit capital flight may encourage external borrowing, debt service payments also increased and further compromised public investment prospects. Furthermore, World Bank (2013) observe that illicit capital flight has had adverse welfare and distributional consequences on the overwhelming majority of poor in numerous countries in that it heightened income inequality and jeopardized employment prospects.

A call for value re-orientation is, therefore, inevitable as all hands must be on deck to rout this deadly cancer-worm that has prevented Nigeria from taking its pride of place in the comity of nations. It is then that the national opulence will increase, which is capable of trickling down to the lowest ranks of the people. Above all, government must as a matter of serious concern, show more commitment to infrastructural development, especially energy which is believed to booster industrial growth that would increase employment, income and reduce poverty.

5.4. Recommendations

The summary of findings makes recommendations inevitable at this stage. The following recommendations are proffered bearing the justification of this study in mind:

Infrastructural development (power, road etc.) is critical to industrial growth and this should be pursued vigorously by the government. This will boost income, employment and the standard of living of the people as well as ensure effective reduction of cybercrime s.
Engaging the youth in skill acquisition and empowerment programmes in addition to creating an enabling environment (power, roads, tax policies multiple taxation, credit facilities, building industrial clusters) for small and medium scale enterprises to thrive are strongly recommended
Strengthening of existing institutions through capacity building is strongly recommended. This will ensure that Nigerians effectively take over key sectors of the economy from the expatriates (multi-national corporations are more or less conduits for money laundering and bribe payers) who have no stake in the prosperity of the nation.
The education sector in Nigeria must be re-organised and re-positioned in such a manner that it delivers critical knowledge and skills that promotes self-reliance.

5.4.1. Agenda for Further Studies

It is recommended for further research, ―Impact of Illicit Financial Outflows on Nigeria‘s Financial Stability‖. This will further shed more light on the dynamic nature of cybercrime and also permit a deeper understanding of the impact of cybercrime on the Nigerian economy. Definitely, this insight will help those who manage the finances of the Nigerian nation, that is, the Ministry of Finance and Central Bank of Nigeria, to introduce and implement policies that would check illicit financial outflows and be on top of the monetary policy of government. It is only then that Nigeria can hope to achieve her dream of a robust economy and her vision 202020.

5.5. Contribution to Knowledge

The following are the contribution to knowledge:

This study has provided an empirical/econometric model of economic growth and cybercrime in Nigeria with the nature of the relationship between the two variables established. Contrary to previous studies, this relationship was found to be non-linear exhibiting no systematic time trend. It was also found that cybercrime have long run relationship with economic growth with infinitesimal short run relationship. Furthermore, contrary to previous studies, this study found a bi-directional causal relationship between cybercrime and economic growth in Nigeria.

All these new contributions to existing knowledge have illuminated the position of the Nigerian economy in the great debate of whether cybercrime are growth enhancing or growth reducing and have also enabled robust policy recommendations to be proffered.

Project Material Download