A Wealth Of Sorrow; Why Availability Of Abundance Of Oil Is A Curse To Nigeria. Help Put It After The State Code

In Nigeria, oil has been more of a curse than a blessing. Weak institutions of state and poor governance in managing the vast revenues have led the country to fail to realise its full potential in a textbook example of what academics know as the “resource curse”.

First coined by Prof Richard Auty in 1994, the term refers to the inability of nations to use their windfall wealth to improve their population’s lot and bolster their economies. The rich natural resources bring corruption and poverty to a nation, rather than positive economic development and, counterintuitively, these countries end up with lower growth and development than those without natural resources.

The subject of extensive research, the resource curse, or “paradox of plenty”, points to an inverse relationship where wealth brings a detrimental impact. Nigeria – the largest oil producer in Africa, the sixth-largest global exporter, holds the tenth-largest proven oil reserve in the world – is arguably such a “cursed” nation.

Dependent on their natural resource exports, these countries have on average, lower growth rates, lower levels of human development, and more inequality and poverty. They also have been found to have worse institutions and more conflict than resource-poor economies.

It arises predominantly due to poor political governance and weak institutions, coming from the distinct phenomena around oil exploitation rather than possession – and is shaped by the multinationals, national and foreign governments, the foreign financiers and investors, alongside the structures of states and private actors in oil exporting countries.

Resource wealth can have a devastating impact. Oil-exporting nations such as Nigeria, Venezuela, Angola and DRC have seen livelihoods and economies devastated, but there have been many countries throughout history, such as Norway, Canada and Botswana who have bucked the curse through strong state management and institutions that can stand against corruption.

This is crucial, because the key thing the resource curse is indicative of is corruption: a global phenomenon that is the single greatest obstacle to economic and social development, significantly so in less-developed countries. Worldwide, an estimated $2tn is siphoned away annually by corruption. This amount could eradicate poverty, educate all the world’s children, cure malaria and bridge the global infrastructure gap.

A protest against a fuel subsidy removal in Lagos, January 2012

A protest against a fuel subsidy removal in Lagos, January 2012. Nigeria is the largest oil producer in Africa but suffers from the ‘resource curse’. Photograph: Akintunde Akinleye/Reuters.

As defined by Transparency International, corruption is an “abuse of entrusted power for personal or private gain.” In 1996, the World Bank’s then president James D Wolfensohn called it a cancer and challenged all countries to strive for transparency and accountability to combat the pernicious impact of corruption on society, defining the consequences as redirecting resources from the poor to the wealthy, inflating business costs, discouraging foreign direct investment (FDI), draining public expenditure, misdirecting aid and undermining equitable national development.

Corruption erodes the integrity of people and institutions. A synthesis of social, political and economic forces, it disempowers sovereign states, undermines democratic institutions and contributes to instability fuelled by the distrust and resentment of citizens. It attacks democracy by distorting electoral processes, perverting the rule of law and building new bureaucratic hurdles whose only reason for existing is to solicit bribes.

Numerous reasons are behind corruption – self-interest, fear, greed and desire for power – but its consequences are always the same, enduring and deleterious.

To absorb an influx of petro-dollars is a complex issue for any nation. Countries with these windfalls struggle to responsibly process the excess liquidity. Often they initiate large, capital-intensive projects without meaningful due diligence or feasibility studies, sacrificing wise investment. Expenditure on lesser prioritised projects takes precedence. They accelerate existing projects accompanied by lavish expenditure. Then, faced with rising inflation as a result of unmatched productivity, they race to absorb the liquidity and therefore relax financial discipline and propriety. The combined effect of these factors leads to the appreciation of the currency, which hastens the worsening performance of the economy and renders the non-oil sectors uncompetitive as exchange rates soar. This particular phenomenon, sometimes known as the “Dutch disease”, resulted in the near demise of the non-oil sectors in the Netherlands.

Studies have shown that following an oil boom, an imbalance results as the non-oil sectors are left underdeveloped. As demand rises for capital and labour, the booming oil sector draws away those same factors from essential but less-lucrative sectors, such as agriculture, leaving them enfeebled. The windfall, having created a concomitant abundance and ensuing vast revenues, higher wages, and better returns on investments, leads to administrations finding themselves in new territory. Incompetence and inexperience in managing state finances creates higher incentives to attract corruption.

A woman washes her child in the Makoko riverine slum in Lagos, Nigeria November 2020. The oil-exporting nation has seen its economy devastated. Photograph: Pius Utomi Ekpei/AFP/Getty Image.

Newfound wealth creates expectations by citizens and demands for resources increase, not just from state bodies but also from civil society. The middle class demands more social spending, unions demand higher wages for the same jobs, and the unemployed demand the creation of jobs. Bureaucracies are formed and quickly become ineffective or incompetent, contributing to accumulating foreign debt and operating at trade deficits.

An economic trap or “rentier state” evolves. The state earns most or all its total revenue from the rents paid by foreign individuals, companies or governments. This leads to non-oil sectors shrinking, inflation spiralling, imports increasing in quantity and costs, more expenditure on political vanity projects, subsidies and welfare programmes to counter increased cost of living and the depletion of foreign exchange.

With astute management and determination other countries have beaten the resource curse and steered their economies to success. So far, Nigeria has failed in much of its population’s eyes. Whether it is fated to become a failed state, only time will tell.

Kenneth Mohammed, MA Corruption and Governance, The Centre for the Study of Corruption at the University of Sussex, is a senior adviser at Intelligent Sanctuary Nigeria is the largest oil producer in Africa and the sixth largest exporter in the world. Yet, Nigeria is unanimously presented in the literature as the classical exemplifier of the resource curse. The paradox is evident just by looking at some statistics. The country produces 2.4 million barrels of crude oil daily and according to the Oil & Gas Journal , it holds the tenth largest proven oil reserves in the world, with the second largest reserves in Africa after Libya. The country’s proven oil reserve as of 2015 stood at 37.14 billion barrels [14] . But according to the UN’s 2007 Human Development Index (HDI) Nigeria was amongst some of the poorest nations in the world and is ranked 158th out of 177 countries assessed in the index. This position has not change significantly in the last decade.

Before the oil boom era in the early 1970’s, the government was very dependent on revenues from the agricultural sector. Nigeria was one of the key exporters of diverse agricultural products, such as groundnut, cotton, cocoa, palm oil, timber, hides, and skins, which are used in most manufacturing industries domestically and internationally. Nigeria’s agricultural industry used to employ over 70% of the population and was the world’s largest palm oil exporter.

The agriculture industry in Nigeria’s current economy has effectively been replaced by the oil industry in terms of revenue. Despite the significant oil revenue, the structural development has been poor and has even worsened the administrative position in Nigeria due to the level of corruption and oil policy implementation. The oil wealth was not invested to support the agriculture nor manufacturing sector, which has led to neglect and has therefore attracted factors of production away from agriculture and manufacturing, leading to a manifestation of what is termed as Dutch disease resulting in a resource curse.

In general, before the oil-boom, the economy was characterised by the predominance of subsistence and commercial activities, with a narrow production base, ill-adapted technology; lopsided development owing to the bias of public policies, openness and excessive dependence on external factor inputs, continuous siphoning of surpluses from the economy, and especially weak institutional capabilities. The discovery of oil in 1956 and its subsequent exploitation transformed Nigeria’s political economy radically over half a century. During the first decade ofits discovery, oil did not play a significant role in the economy, as it only amounted to less than 10% of GDP. Yet agriculture, as the key productive sector of the Nigerian economy since the 1970s, was gradually crowded out by the growing oil sector, and the development of non-oil sectors was almost non-existent. In recent years, oil has provided approximately 80% of the government revenue and 95% of export earnings.

As indicated before, Human Development Indicators are quite low in Nigeria with the average HDI value being as low as 0.515 in 2014 resulting in the country being ranked at 152 out of 188 countries. In spite of the fact that, between 2005 and 2014 Nigeria’s HDI value increased by about 10% from 0.467 to 0.514, and over 1980 and 2014 life expectancy increased by 7.2 years, mean years of schooling increased by 0.7 (2005-2014), and expected years of schooling increased by 2.3 years, Nigeria’s HDI value has placed the country in the low human development group. This is evidence of the serious negative effect of oil wealth over Nigeria’s economy, which has been caused by the lack of promotion of a higher standard of living, education, income, and quality of life. Hence, the natural resources in Nigeria could be deemed as more of a curse than a blessing.

WRITTEN BY: OYEBAMIJI MARIAM OYINKANSOLA

State Code: OS/23A/2971