Dutch Disease And Mismanagement Of Resources In Nigeria

Availability of natural resources is often taken to naturally contribute if not be a major contributor in a nations economy prowess. This enviable position often given to natural resources in the chess place of economic growth is not unconnected to the fact that natural resources especially fossil fuel plays a serious role in world economy. Unfortunately, the economic potentials of natural resources do not in every case translate into an actual economic growth neither does it guarantee a good sense of resource management. This reality is what gave birth to the term Dutch Disease. The term is commonly used to denote a situation where the presence of natural resources rather than being a source of greater industrialization actually weakens and render, most often, any existing industrialization capacity weaker. In such a situation, non extractive resources and service related industries either remain stagnant or de-industrialized.

Nigeria which is the primary concern here is a typical non extractive developing economy prior to the discovery and actual extraction of fossil fuel at the dawn of independence. With arable land in the north and swampy coast of the south, agriculture offered Nigeria the opportunity to develop a strong agro industrial based economy until the discovery of the fossil fuel. Whereas over 90% of Nigerian income comes from extraction of natural resources today, the reverse was the case in the economic development history of Nigeria until early 1960s. The expected investment and consequent development in the agricultural sector did not happen. Why was this the case? It may be over simplifying the issue just by saying that it is a common feature of Dutch disease or merely recourse to mismanagement of resources.

Obviously mismanagement of resources cannot be divorced from the economic dilemma of Nigeria as it relates to non development of non extractive industry with the discovery of fossil fuel. However, mismanagement resources cannot take place in a vacuum. Hence, in this work, it is my main interest to ask what made Nigerian economic development caught up in web of Dutch disease. Efforts will be made also to see the connection if any, that the mismanagement of resources has with the discovery of fossil fuel in Nigeria. It is my aim to proffer any possible solution to redress the trend of mismanagement of resources in the Nigerian economic development.

In reaching the above stated objectives, this work is divided into four chapters. Chapter one addresses the general overview of Nigeria with associated agricultural endowment possessed by various components of the nation before the exploration of fossil fuel. Chapter two will focus on the discovery and extraction of fossil fuel in Nigeria and its potentials as well as real impact on the developing economy. In chapter three, I will try to locate the factors responsible for the mismanagement of resources in the wake of extraction activities in Nigeria. The fourth chapter is the last one and deals with proffering ways of putting the Nigerian economic development squarely on a development part once again and thereafter concludes.

2 Theory of Dutch-disease

Numerous researchers, like Gylfason (2001), Sachs and Warner (1995), and Sala-i- Martin (1997), all found a negative connection between natural resource abundance and economic growth. Classical economic theory would predict that abundant natural resources should be good for the economy but the opposite seems the case here in most developing countries with natural resources. The tern Dutch disease, Paradox of the plenty and Resource curse are economic terms used in describing the negative connection between natural resources abundance or any large capital inflows into an economy and economic growth.

The term `Dutch disease´ was first seen in print form in the Economist( 26 November 1977, pp. 82-3), when the discovery of natural gas in the early 1960s had severe effects on the Dutch manufacturing industries by causing the Dutch real exchange rate to appriciate. This appreciation of the real exchange rates makes the local manufactures less competitive in the international market which results to low export, which on the other hand leads to the gradual detororiation of the manufacturing sector.

For most Nigerians, especially those living in the Niger-Delta, Nigeria’s oil wealth is actually ‘oil of poverty’ or a curse, because it has produced only poverty, underdevelopment and conflicts since its commercial exploitation began in the late 1950s. Such a conclusion is not aberrant as ‘it is now almost conventional wisdom that (natural) resources are a curse for developing countries’ with abundance of natural resources causing poor growth and raising the incidence intensity and duration of conflicts . The negative conclusions about the developmental role of resources is a far cry from earlier post World War hopes and the promise that resource endowment would ‘lift’ many countries out of poverty; as ‘not only would resource exploitation generate fiscal revenues and jobs, but also the necessary investment capital for an economic take-off. Windfall resource revenues, in other words, should prove a bonanza’ .

In the case of Gulf states oil boom, labour immigration offsetted the effects of Dutch disease while shifting the symptoms to the labour exporting country. The labour exporting country had a lot of money being sent home by the labourers in the Gulf states which artificially boosted the exchange rate and as a result of the home countrys`manufacting industry paying more to secure labour locally. The symptoms of Dutch disease does not nessacirilly occour as a result of world price boom or major resource discovery but also from any large capital inflows into an economy.

But ‘for every Venezuela and Nigeria, there is a Norway or a Botswana’ (Robinson et al 2005:7). Research on ‘paradox of plenty’ has prompted, in recent times, a renewed interest in political factors as key explanatory variables, or as key components of the resource curse mechanism in developing countries. For example, it has been argued that ‘poor economic growth is itself a political product, the consequence of what politicians do with resource rents’ (Englebert 2000; Ron 2005:447) and of presence or absence of ‘political institutions which promote the accountability of politicians’ (Robinson 2005:6). Thus, if resource booms create underdevelopment, it cannot be because ‘they induce inefficiency in the rate at which they are extracted, but because politicians make policy mistakes which are in fact rational political strategies, in response to the incentives induced by resource rents’ (Robinson et al. 2005:6). As argued by Rosser, Put differently, scholars have been asking the wrong question: rather than asking why natural resource wealth has fostered various political pathologies and in turn promoted poor development performance, they should have been asking what political and social factors enable some resource abundant countries to utilize their natural resources to promote development and prevent other resource abundant countries from doing the same (Rosser 2006:10

2.2 Further theories

2.3 Theoretical implementations for the policy

CHAPTER THREE: NIGERIA

Nigeria is a country with varying climatic conditions. It is tropical in the center, equatorial in the South and arid in the North. It lies between 3oE and 15oE, and between 4oN and 14oN in Western Africa. Nigeria has borders in the North with Niger and Chad, Republic of Benin in the West, Republic of Cameroon in the East and the Atlantic Ocean in the South. Nigeria has a total land mass of 923,768Km² that is made up of 910,768Km² of land and 13,000Km²water. Figure (1) below is the geographical map of Nigeria. Nigeria is a country endowed with a lot of mineral resources like fossil fuel (crude oil, natural gas, coal and lignite), radioactive minerals (Uranium, monazite and zircon), metallic minerals ( tin, columbite, iron, lead, zinc, gold), non-metallic minerals (limestone, marble, gravel, clay, shale, feldspar) and arable land.

Figure 1: Geographic Map of Nigeria

Source: Pearson Education, Inc.

Table 1: Physical and Socio-economic Characteristics of Nigeria

Characteristics

2007

Location

West African Sub Sahara

Total Area

923,768Km²

Land Area

910,768Km²

Population Estimate (2006 Census)

140 Million

Population growth rate

2.4

Languages

English ( Official), Hausa, Ibo, Yoruba and more than 200 others

Adult Literacy (%)

68% (2003 est.)

Life Expectancy at birth ( Years)

52.0

Share of Agriculture (%)

37.19

Share of Industry (%)

20.07

Petroleum (%)

12.58

Mining and Quarrying (%)

0.30

Manufacturing (%)

7.18

Services (%)

41.75

GDP per Capita Income ( US$)

47.70

GDP/PPP (In Million US$) (2005 est.)

$132.9 billion; per capita $1.000

GDP Growth Rate (%)

5.6

Human Development Index

0.402

Source Pearson Education, Inc 2008

Table 1 depicts the physical and socioeconomic characteristics of Nigeria as of 2008.

3.2 DISCOVERY OF CRUDE OIL IN NIGERIA

The discovery of oil in Nigeria to a large extent altered the nation´s economic landscape with its concomitant political consequences. As earlier as 1908, various oil explorations had started in Nigeria but it was not until 1958 that crude oil became officially a source of foreign exchange earner for Nigeria. Oloibiri in the present Bayelsa state of Niger Delta region was where oil was explored first in commercial quantity. Within this time, there was a daily output of 6000 barrel of crude oil. Let us note that all the oil exploration was at this stage being carried out by foreign companies such as Shell Petroleum Development Company (SPDC), Mobil, Agip etc. It is crucial also to emphasize that it was only crude oil extraction that was taking place within this period as the capacity of refining the crude oil was not in place.

The impact of the oil exploration as a source of government´s income, at this time was not much as agriculture retained the primary source of national income. As Robinson pointed out, “in the early 1960s, revenue from oil accounted for less than 10% of Nigeria´s revenue base”. This assertion becomes undoubtedly clear when it is considered that the period in question was the early stage of major exploration activities. We have noted earlier that prior to discovery of oil agriculture was the main base of the nation´s economy as well as employing the most work for in the labour market.

However the prospect of large deposit and role oil would occupy in the Nigerian economy became evident starting from the early 1970s. The Nigeria civil war coincided with the rise in the world oil price, and Nigeria was able to reap instant riches from its oil production. Nigeria joined the Organization of Petroleum Exporting Countries (OPEC) in 1971 and established the Nigerian National Petroleum Company (NNPC) in 1977, a state owned and controlled company which is a major player in both the upstream and downstream sectors. From an insignificant 4.1% of the early 1960s, revenue from oil climbed to 98% within the first half of 1980 before dropping to 83.5% within the year 2000 and 85% in 2007.

Notwithstanding the endemic problems of civil unrest, political instability, border disputes, corruption and poor governance, international oil companies have always seen Nigeria as an attractive area for upstream investment. A number or reasons account for this among which are the quality of Nigerian Oil which is free of sulphur and the fact that Nigeria is well located in supplying oil markets in North America. The United State of America is currently the leading importing country of Nigerian oil. The Niger Delta, the Anambra Basin, the Benue Trough, the Chad Basin and the Benin Basin are where most of the oil exploration has taken place. The Niger Delta which includes the continental shelf and which makes up most of the proven and possible reserves retains the most prospective basin. Virtually all oil production from the earliest exploration time to current mining time has been concentrated in this basin.

3.3 NATURAL GAS

Natural gas is another confirmed fossil fuel Nigeria has in abundance. Unlike crude oil, its exploration has not peaked but it is estimated that Nigeria has around 3.5 trillion meters of gas reserves both oil and non oil related. Through the establishment of Nigeria Liquid Natural gas (NLNG), Nigeria has started an active exploration of natural gas as another major source of exchange earner. In fact it is being projected to be the major source of exchange earner for the nation above oil in few years. As in the case of crude oil, over 60% of the confirmed reserve is within the east of the Niger Delta. It is one of the world largest confirmed gas reserve and largest in Africa.

3.4 OTHER NATURAL RESOURCES

Nigeria is equally endowed with other natural resources such as tin, iron, ore, coal, limestone, bitumen, lead and zinc. They have been confirmed to be in commercial quantities and have the potential of making significant impact on the nation´s exchange earning. Exploration of these aforementioned resources has not been maximally effective. A number of reasons account for either absolute neglect or under performance in commercially maximizing the potential of these resources. The resultant low share of these solid minerals in the nation´s GDP which is within 1% can be attributed to over dependence on oil and the underdeveloped nature of the sector, resulting from inadequate and inefficient policies for mineral exploration development.

However there is a renewed effort by the Nigerian government to reposition the mining industry. In that direction, Ministry of Solid Mineral Development was recently created to oversee and review the activities and proffer a more profitable way of harnessing the enormous wealth in the mining industry. For a long time, mining has been on an informal level and illegally carried out. This denies the government the relevant rents and endangering the environment as mining activities were not regulated.

3.5 EFFECTS OF OIL, GAS AND OTHER EXPLORATION ACTIVITIES ON NIGERIA´S ECONOMY

The immediate effect of oil on the nation´s economy was an increase in the national income. The rise in world demand of oil in early 1970s increased the nation´s oil revenue. With this increase in the national income, the government embarked on a number of projects and took some steps to direct and plan economic growth and development. There was a progressive expansion of education with a view to reducing illiteracy and provide the necessary skills and labour for development. Nine additional universities were created in the 1970s and another sixteen in the 1980s in addition to five already in place in a bid to prepare the nation manpower for the envisaged economic development.

There was equally massive investment in the construction industry. Construction of road networks to link up the cities and rural areas were possible through the revenue accruable from the oil. In the major cities, there were big investments in construction of both residential housing and government offices as well as communication networks. Hydroelectric dams were built for electricity generation and secondary industries such as automobile assembly plants were established to create more employment opportunities for the growing population.

In a bid to position the industrial future of the country, there was a huge investment in steel industry such as Ajaokuta Steel Industry. This was established with a view to providing the local industries with the necessary tools needed for industrialization. The articulation was that for any economy to grow, steel industry is a condition that must be met. Hence, even against the advice of the World Bank, the Nigerian government proceeded with the help of the Russians in establishing the steel industry.

However, the effects of oil discovery are not all pleasant. One of the major tragedies of oil discovery in Nigeria is the collapse of the agricultural sector. There was, with the discovery of oil and a gradual dismantling of agricultural industry. Pre-oil Nigeria´s economy was powered by agriculture. According to Ugochukwu and Ertel, “despite the rapid growth of oil industry during 1970s, agriculture still accounts for 40% of GDP and provides employment, both formal and informal, for a large majority of the population”

Exploration activities have been a major contributor in the environmental pollution and degradation since discovery of oil in Nigeria. Most of the areas hosting oil extraction activities are generally polluted hence making life difficult for both human and aquatic species. Gas flaring has been a source of concern to the environmentalists. For a long time until recently over 60% of gas production is flared. This obviously contributes in no small measure in the global warming.

There is the problem of social injustice in the sense that the Niger Delta region which hosts all the oil exploration activities is backward in terms of social and infrastructural developments. What is has led to is the continuing civil conflict in a quest to address what is perceived as an injustice. The Movement for the Emancipation of the Niger Delta (MEND) began a wave of attacks and kidnappings of foreign oil workers in early 2006, knocking out close to a quarter of Nigeria’s oil output in a matter of weeks.

Continued bombings of oil pipelines and abductions of oil workers by armed gangs in the creeks have cut Nigeria’s crude oil output sharply over the past three years.

Many foreigners have been kidnapped since MEND began its attacks. Most hostages are later released unharmed, but oil production has dropped below 2 million barrels per day, compared to 2.4 million bpd before the attacks and a potential 3 million bpd.

The unrest has forced oil giants such as Royal Dutch Shell, ExxonMobil and Chevron to move all but their most essential foreign staff out of the region, while the drop in oil output has eaten into Nigeria’s foreign earnings, compounding the effects of the global economic slowdown. The Igbo effort to secede from Nigeria, which led to the 1967-70 civil wars, was deeply rooted in ethnic tensions and Nigeria’s colonial past; but the rebellion was encouraged by the presence of oil, and hence the belief that independence would be economically beneficial for the Igbo people.

CHAPTER FOUR

THE MISMANAGEMENT OF RESOURCES IN NIGERIA

4.1 DUTCH DISEASE AND ITS EFFECTS ON MISMANGEMENT IN NIGERIA

Having a well performing economy before the discovery of crude oil, Nigeria was expected to lift her economy to a faster economic prosperity and development however the reverse has been the case since 1980s. Xavier-Sala-i-Martin and Arvind Subramanian posit that

“Nigeria has been a disastrous development experience. On just every conceivable metric, Nigeria´s performance since independence has been dismal. In PPP terms, Nigeria´s per capita GDP was US$1,113 in 1970 and is estimated to have remained at the US$1,084 in 2000. The later figure places Nigeria amongst the 15 poorest nations in the world for which such data is available.”

The problem obviously is not lack of resources for we have seen the abundance resources namely; agriculture, crude oil, solid minerals and human capital the country posses. This fact calls to mind what Sachs and Warner view as a problem of natural resource rich nations;

“One of the surprising features of economic life is that resource-poor economies often vastly outperform resource-rich economies in economic growth”.

For Sachs and Warner, Nigeria´s experience is not accidental because,

“the oddity of resource-poor economies outperforming resource-rich economies has been a recurring motif of economic history. In the seventeenth century, resource-poor Netherlands eclipsed Spain, despite the overflow of gold and silver from the Spanish colonies in the new world.”

In deed for many such as Sachs and Warner it is not strange that Nigerian economy has not performed in such a way to lift millions of Nigerians out of abject poverty and deprivation. The over reliance of resource rich nations and an increase in demand of oil shift capital away from other sectors such as the manufacturing sector thus depriving these sectors the needed facilities in maintaining production. The implication of this is that the export intensity of natural-rich nations is reduced while their import intensity is increased. This weakens capacity building as well as skills development which are very essential for economic growth.

However, there are others who have raised doubt about the plausibility of the adverse effect of abundant natural resources to economic growth. To this group, abundant resources in themselves do not necessary imply lower rate of economic growth but links the lower economic growth to consequential effect of institutional deficiencies such as corruption. The fact is that there are nations whose economic growth recorded positive results after discovery of natural resources such as Norway and Botswana. Moreover, a good case can be made that Australia, Canada, Finland, Sweden and the United States owe much of their economic growth to rich natural resources base.

The problem of lower economic rate in other countries such as Nigeria, with abundant natural resources must be located somewhere else not in the resources themselves. It is in this reasoning Jean-Philippe C. Stijns argues that abundance natural resources have nothing to do with the negative growth rate of natural resource rich nations. For him,

“The story behind the effect of natural resources on economic growth is a complex one that typical growth regressions do not capture well.”

In effect the attempt to explain away regression in economic growth rate of any natural resource rich nation is missing the mark as there are other factors involved other than the resources themselves. Using measures of resource abundance as against export intensity of Sachs and Warner, Stijns posits,

“Actual data on fuel and mineral reserves show that natural resource abundance has not been a significant structural determinant of economic growth between 1970 and 1989.”

He goes on to say,

“… in terms of economic development, what matters most is what countries do with their natural resources. I conjecture that this conclusion can be traced back to the type of learning process involved in exploiting and developing natural resources.”

Not only that Stijns rejects the basic theory of Sachs and Warner, he argues further that what actually matters is in what way is the resources employed and in harnessing these resources what knowledge is taken into consideration. Hence the fact that a country possesses natural abundant resources is not a prelude to lower economic growth when compared to less natural resource endowed nations. In other words, when a natural resource rich nation, fails to use judiciously and make use of appropriate knowledge and skills in harnessing the natural resources, there would not be any growth to be expected from the natural resources.

Still there is another school of thought who believes that the idea of resource cause is neither here nor there but merely a game of chasing shadow. To that group belong Daniel Lederman and William Maloney who have argued that

“… a negative central tendency does not characterize natural resource abundance…”

And that

“Various channels through which the curse is thought to operate,…, in many cases, the channel is either not convincingly present, or in fact, applies to many other factors of production.”

In fact the position of Lederman and Maloney is captured in this way,

“There are important issues of measurement of relative endowments, of potential heterogeneity in the effects of such endowments on development and growth, and some of the international econometric evidence that appears to support the curse hypothesis has been based on the use of weak proxies, and even on nonstandard manipulations of influential data points.”

The import of the immediate above is that the claim of resource curse remains at best elusive as no satisfying answer can be deduced from the above positions that Dutch disease is really the cause of Nigeria´s poor management of her national resources in such a manner that the growth of the nation´s economy is hampered. Nevertheless, there is an acceptance of the fact that some nations richly endowed with natural resources have recorded an enormous growth economically than others so endowed. The question therefore is still, why?

It becomes pertinent therefore to consider how the resources are being used, in other words, how are the revenue accruing from the resources being employed and used by the government. In this way, the failure of Dutch disease in offering a satisfying explanation for the poor economic performance of some resource rich nations (as we have noted that there are resource rich nations who perform very well economically) and the failure of other explanations will be circumvented and the reason(s) why the wealth generated by the resources are not making the needed economic impact. It is therefore the position of Kolstad and Wiig that rather than considering “Dutch disease” as the direct cause of poor economic performance of natural rich nations, it is better to look at the application of the wealth of these resources by the political authorities in the economic life of their nations. Hence they proffer that,

“Centralized political economy models of the resource curse centre on the decisions of politicians governing resource rich economies. The decision analyzed is the allocation of resources between activities of self-enrichment, and activities that increase the productive potential of the economy.”

It seems plausible therefore that the problem of poor performing natural resource rich economies can be traceable to decisions as how the revenues are allocated rather than seeing the natural resources are primarily the curse in the progressive economic developments. It is only in this sense that it can be seen that the fundamental factor or factors responsible for the associated resource curse is the revenue of which rich natural resources is a poor substitution. In the case of Nigeria, a country still in the process of institutional building it seems that the discovery of oil and other natural resources increases the possibility of mismanagement. This is because the institutional framework is still weak which in turn encourages dysfunctional behaviours among the political class. Implicit in this reasoning is that under performing economies of natural resource rich nations is an indirect consequence of misapplication of the wealth accruing from the resources. In other words, judicious and diligent application of the same wealth can and does bring about a robust economic growth as can be seen in countries such as Norway which has a supportive institutional framework. Kolstad and Søreide have identified corruption, rent seeking, and patronage as factors the current analytical models of the resource curse emphasized upon. Addressing some known institutional failures and the way they militate against a healthy economic growth in Nigeria becomes our interest now.

4.2 THE INDIRECT PROBABLE EFFECTS OF NATURAL RESOURCES

As noted above, corruption, rent seeking and patronage are already known possible effects of natural resources within a political framework that is inefficient such as Nigeria’s. To say that corruption is at the base of Nigeria´s poor economic performance despite her rich natural resources is an understatement.

4.2.1 Corruption: The central political economy definition has been the use of legislated powers by government officials for illegitimate private gain. Distortions and inefficiency are direct products of corruption and the perpetrators do everything possible to close their tracks. What this leaves behind is all sort of distortions in investment plans and executions. Corruption within the economic system of Nigeria especially as it relates to wealth being generated from the oil sector is the major reason for Nigeria´s lack of economic progress since oil was being extracted starting from late 1950s in commercial quantity. For Xavier and Arvind

“Over a 35-year period Nigeria’s cumulative revenues from oil (after deducting the payments to the foreign oil companies) have amounted to about US$350 billion at 1995 prices. In 1965, when oil revenues per capita were about US$33, per capita GDP was US$245. In 2000, when oil revenues were US$325 per capita, per capita GDP remained at the 1965 level. In other words, all the oil revenues-US$350 billion in total-did not seem to add to the standard of living at all. Worse, however, it could actually have contributed to a decline in the standard of living?”

Almost within the same period, the United Nations office on Drugs and Crime reports that

“By some estimates close to US $400 billion was stolen between 1960 and 1999. Sani Abacha, the former military Junta alone is estimated to have stolen the equivalent of 2 – 3 per cent of the country’s GDP for every year that he was President.”

These are periods when the social and infrastructural developments were abysmally low yet as represented by the colossal corrupt activities of the Sani Abacha alone, 2 – 3 of annual GDP of the nation was being diverted to a private pocket.

In the same UNDC report, it was stated that

“Nigeria is Africa’s biggest oil exporter, but its natural resources make it particularly vulnerable to corruption. The oil-rich Niger Delta is a case in point. Corruption deters much-needed foreign investment, which keeps countries mired in poverty and its people deprived. Huge revenues from oil or gas reserves mean low taxes, but also low accountability and a lack of transparency, as well as limited public services.”

This explains in concrete terms how corruption can not only distort investments but also scare investments and encourages lack of accountability within dysfunctional political institutions which Nigeria at present still represents.

4.2.2 Rent Seeking: Ross Shepherd has defined economic rent as,

“an excess distribution to any factor in a production process above the amount required to draw the factor into the process or to sustain the current use of the factor”.

What the above definition implies is that in rent seeking a lot skill, energy and time is needed in order to secure a considerable share of the rents. This discourages investment in productive industries as what is sought after in rent is not a means of creating new production opportunities but rather a share of existing revenue. In other words, it is an indirect competition between a productive sector of an economy and non productive sector. The skills, energy and time are all productive factors rendered dormant in the struggle for rent which is merely redistributive activity. When this struggle is within a dysfunctional political institution, such that the activities of rent seekers cannot be controlled by the establishment, it becomes very destructive. For Mehlum et el.,

“Rent-seeking outside the productive economy pays off when institutions are bad: dysfunctio