The Story of Nigeria’s Cursed Resource

Nandan Sharalaya
Mar 6, 2017 · 19 min read

“Blood May Be Thicker Than Water, But Oil Is Thicker Than Both”-Igbo Proverb

Prior to the 1970’s, a number of development economists held the view that nations endowed with significant natural resource wealth, were poised to embark on a trajectory of rapid economic growth in the coming few decades. The end of the 2nd World War had filled the international community with optimism that these new found resources could prove to be the magic potion in efforts aimed at combating poverty and curtailing the economic inequality between the global south and north. As a country improved its fiscal standing with the sale of its natural resources, the availability of ‘investment capital necessary for an economic takeoff’ could contribute to stimulating an environment that was conducive to technology and knowledge spillovers in other sectors of the economy (LeBillon, 2006).

Simply put, mineral resources had the potential to: (1) generate foreign exchange and fiscal receipts to supplement local budgets (2) aid in local economic development through provision of infrastructure and social services (3) assist in skills and knowledge expansion as well as facilitate the creation of human and social capital (4) stimulate development of complimentary and downstream industries such as contracting, consulting, processing etc.

In explaining the advantages of resource wealth and consequently the secret behind America’s phenomenal growth story, Paul Rhode writes,

“Late nineteenth century California was a resource based economy with limited manufacturing largely because the local market was too small to support much industry…[T]he discovery of oil around the turn of the country raised California to critical mass, starting it on a process of explosive growth.” (Quoted in Krugman, 1991)

Nevertheless, the realities observed over the last few decades have remained a stark contrast to what was earlier envisioned. Dismal economic performance coupled with constant exposure to shocks on account of over dependency on a single resource has stunted growth particularly in resource abundant African and Asian economies. Several studies are now able to quantify and associate poor levels of social development (high rates of infant mortality, declining enrolment numbers in primary and secondary education, low life expectancy, malnutrition etc) with countries in possession of large mineral wealth.

Endemic corruption has also fuelled authoritarianism and poor governance in these economies that possess little or no institutional capacity in managing its mineral wealth and rather than advance democratisation and good governance agendas, mineral wealth has on the contrary nourished autocratic rule effectively placing the states at the centre of recurring civil wars.

A combination of these factors associated with the negative effects of natural resource wealth has led to the coining of a number of terms- ‘Resource Curse’, ‘Paradox of the Plenty’, ‘Shadow State Effect’, ‘Oil doom’ etc to explain this phenomenon. In possibly what is the earliest explanation of the curse, Adam Smith in questioning the economic rationality of resource dependency had argued,

Projects of mining, instead of replacing the capital employed in them together with the ordinary profits of stock, commonly absorb both capital and stock. They are the projects, therefore, to which all others a prudent law-giver, who desired to increase the capital of his nation, would least choose [sic] to give an extraordinary encouragement… (1776, 562) (Smith)

Initial work on the subject had also suggested that the curse was purely an economic manifestation in which natural resource abundant economies suffered declining terms of trade, volatility in export revenues, the ‘Dutch disease’ (appreciation of real exchange rate that affects other sectors of the economy negatively, particularly manufacturing and agriculture that become uncompetitive in the international markets) and the likelihood of discerning the symptoms of the resource curse was particularly high when resource exports accounted for anywhere between 20%-30% of the total GDP.

Nevertheless, the experience of developing economies over the last two decades has called for broadening the explanation of this phenomenon to encompass political and social dimensions as well. These may include the irrational motives of certain political actors for personal gains, pursuit of rampant rent seeking to undermine and bypass existing institutional capacity as well as environmental hazards associated with unregulated exploitation.

In précis, the curse may be said to operate through 4 broad fundamentals. (1) ‘Dutch disease’- a strengthening of the national currency on account of increase in oil exports that affects the competitiveness of other sectors. (2) Epochs of economic instability/exogenous shocks on account of over-dependency on a single resource. (3) Little or no investment in human capital and diversification in other sectors of the economy. (4) Asymmetric equations of power driving business relationships between transnational corporations and the government.

The Conflict in the Niger Delta: Understanding Origins and Explanations of the Curse

Much of the current production operates through joint ventures between the state run Nigeria National Petroleum Company (N.N.P.C) created in 1977 and international oil corporations based in Nigeria. These include Royal Dutch Shell, Chevron Texaco, Exxon Mobil, ConocoPhillips, Total, Stat Oil, Agip, Eni etc. Nigerian oil is preferred over the oil from Middle East for its relatively lower sulphur and high gasoline content and thus commands a greater premium in the international markets (Gulf Oil and Gas Survey, 2011).

While Nigeria joined the OPEC in 1971 and continues to remain the leading oil producer of the continent, it suffers disruptions as high as 500,000 barrels per day. Production capacity has not kept with the demand of the international market as the sector has seen decline in investments on account of increased kidnapping of oil workers, vandalism and attacks on installations.

While Nigeria exports oil and natural gas, the paradox and irony is that it imports 80% of refined petroleum products, an indication of the poor state of its subsidiary manufacturing and processing industries. This has meant that the government foots a huge subsidy bill (close to $3.4 billion) which is paid to importers through the N.N.P.C to settle the difference between prices in the market and subsidised domestic petroleum prices.

Over the last five decades, close to $600 billion worth of oil has been produced in Nigeria but the percentage population of those living below the poverty line has increased from 36% to 70% and 92.4% of the population lives under $2 a day. Corruption is rife with the political elite indulging in large scale embezzlement of funds. Of the total amount of $30–40 billion that has found its way to offshore havens, General Abacha (1994–1998) himself is known to have embezzled an estimated $2-$5 billion over a short period of 4 years.

Till 1970, the potential for theft was reasonably restricted. By the conclusion of the Biafran civil war, oil income accounted for merely $250 million dollars. However, the OPEC oil embargo in 1974 proved to be the game-changer and subsequently propelled the value of Nigeria’s petroleum resources to $11.2 billion.

This event facilitated conditions for a reorientation of the economy that became centred around the production of oil thereby lavishing the political elite with unthinkable prospects for malfeasance with little or no checks and balances. Even though the value of its resources would continue to see an array of troughs and crests in the years to come, mismanagement and negligence became firmly entrenched and deep-rooted in the political ecosystem of Nigeria.

The country has since then plunged into civil strife and ethnic conflicts that has lasted years; the voice of dissent has been silenced on numerous occasions, oil spills and large scale environmental degradation (on account of poor infrastructure and upkeep of state run refineries) have largely gone unreported and compensation has often been denied by erring transnational corporations. On the whole, the balance of power has remained firmly tilted on the side of the transnational-political nexus.

The conflicts arising out of the Niger Delta may be attributable to a host of factors and remains subject to a number of differing interpretations. Some argue that the conflict has predominantly been driven by feelings of frustration and disenchantment within the local communities that have been left marginalised thereby fuelling decades of deep dissent towards the state. Historically, unequal class and power relations were always a dominant feature in the Niger Delta. Insertion of oil into this splintered dynamic might only have only aggravated “pre-existing grievances” (Okonta, 2005).

Escaping The Curse

Nigeria has continued to set up a number of institutions aimed at addressing the curse by strengthening the regulatory environment. However, these reforms have largely failed as these institutions have either coordinated poorly among themselves or have seen massive political interference that has undermined their efficiency.

As the dominant policy narrative in Nigeria consistently laments the inability of the state to evolve towards a regime of good governance, conventional literature on the contrary has largely ignored the evolution and nature of the state and other regional dynamics that have shaped existing political configurations and governmental mechanisms. Understanding ownership structures within the petroleum sector has also largely remained outside the realm of discussion.

In this light, to what degree of effectiveness, can the current reform agenda succeed in Nigeria’s current attempts at overcoming the curse. In lieu of existing complexities masked within the region’s fractured history, has Nigeria in reality been cursed by its resources or more by the poor quality of its institutions?

Appreciating the circumstances under which resource abundant countries may escape the curse is imperative for primarily two reasons. Firstly, it provides a fairer understanding of the developmental trajectory of the resource abundant country in the near future. If rising above the curse necessitates altering the socio-economic power configurations, global geo-political or geo-economic conditions or any other dynamic that is complex and intricate to revise or modify, the developmental trajectory of country in the foreseeable future is likely to be bleak. However, if it hinges on altering a variable that is fairly modifiable, the developmental trajectory could be conjectured to be optimistic and affirmative.

Secondly, recognising these circumstances can facilitate an expansion of our understanding on the permutation of strategies that need to be adopted by policy makers while tackling the curse. The need to adopt a set of policy and institutional stratagem are general narratives in recurring policy discourses. However, these arguments offer diminutive perspectives as to when and how policymakers may be influenced to actually adopt and implement these strategies.

While pursuing a set of superlative reform agendas as suggested above might be ideal, political realities are bound to shroud reforms pursued in a blitzkrieg mode. Advocating a set of ‘track 2’ proposals that appear more feasible and aligned with existing political realities could prove to be relatively more successful in the short term.

What The Outliers Got Right

Other measures include drafting of petroleum laws, training of bureaucrats in economic and legal aspects of the proposed regulatory framework, assistance in formulation of contracts as well as monetary assistance to civil society groups, vigilantes, reformists within a community or society. Corruption is often inversely proportional to the amount of technical knowledge the civil society or bureaucrats possess. Thus, bridging this policy fissure through capacity building is primarily what drives the Institutionalist reform approach in Norway.

Botswana: Botswana’s quality institutions are a result of strong political institutions established from pre-colonial times, limited British colonialism, able and accountable leadership as well as the ability of the political elite to constantly reinforce institutions, a feature that has remained largely absent in Nigeria’s history. Botswana has predominantly proved to be successful in four other aspects. Firstly, it has repeatedly conducted free, fair and democratic elections under the scrutiny of international observers. Secondly, Botswana has proved to be prudent in its fiscal management by following an embedded self-disciplinary rule known as the Sustainable Budget Index (SBI). This predominantly funds development expenditure on education and healthcare.

Additionally, a supplementary fund- the ‘Pula Fund’ is utilised for long term investment in financial assets. Thirdly, Botswana possesses a strong economic and legal regulatory framework. Several institutions have been hailed for their enforcement quality and independence from business interests. Lastly, corruption has been minimal and hence expenditure and formulation of budgets have been transparent. An independent body-‘Directorate of Corruption and Economic Crime’ reports directly to the President and is provided full autonomy for investigation and prosecution through a legislative framework.

Indonesia: Examining diverging fortunes of Nigeria and Indonesia over the last four decades has been the subject of many studies. A distinctive blend of economic policies and institutional capabilities ensured Indonesia was able to effectively navigate the curse and subsequently plot itself on a high development and growth pathway. For starters, Indonesia pursued trade and financial liberalisation much earlier in the 1960’s whereas Nigeria liberalised only in the 1980’s and rolled back this policy by the 1990’s.

Secondly, it became the government’s imperative to invest in Indonesia’s agricultural sector as a result of its vulnerability to fluctuations in world food prices. Indonesia was already a leading producer of rice and thus initial conditions greatly shaped policy pronouncements. On the other hand, Nigeria faced no such need to diversify. Thirdly, the military government in Indonesia saw itself as performing a ‘dual role’ i.e. maintaining security as well as ensuring poverty alleviation. Lastly, geography played in important role in Indonesia’s success.

The political elite in Indonesia foresaw no threat whatsoever from economic liberalisation whereas the political elite based in Northern Nigeria felt economic liberalisation was bound to undermine their supremacy as the business elite based in the south profited. Moreover, Indonesia was strategically placed right in the centre of two competing power-blocs during the cold war. This meant both the power-blocs sought to woo her support by offering economic incentives.

Its position was also strategic in the sense that the East-Asian miracle and growth of its neighbour’s greatly benefitted Indonesia as well through cross border positive externalities. Whereas Nigeria had no such geographic advantage and on the contrary “became consumed by a continuous search for a constitutional formula to hold together the Nigerian Federation….while Indonesia was focusing on food security, exports, and macroeconomic stabilization.” (Benn, Gelb, & Tallroth, 2008)

Roots Of The Problem: Federation Account and the Niger Delta

The extraction of oil from the Niger Delta and the revenue generated makes up for 90% of the total revenue in the Federation Account. This arrangement remains a cause of great unrest for the people of the region. When oil was first discovered in the 1960’s, the derivation principle followed was perceived to be a fair revenue sharing arrangement under which 50% of revenue accrued to the oil producing states and the remaining 50% to the center. However, the subsequent revision of this principle of derivation (from 50% in 1975 to 20% in 1979, 0% in 1982, 2% in 1984, 1.5% in 1992 and 13% in 2001) in a region where 70%-80% of the total population has continued to live below the poverty line constitutes possibly one of the strongest economic explanations for the conflict.

The feeling of frustration and disillusionment largely driven by the under-development of development notion remains the root cause of the conflict. Moreover, this economic arrangement has simultaneously exacerbated not only the existing conflict but also create new sources of conflict. It is repeatedly invoked in popular discourse sentiments adopted by rebel factions like MEND and MOSOP.

By referring to this derivation arrangement as a ‘grave injustice’ to the people of the Niger Delta and ‘the need to stand up against the communal forces of the Northern and Western regions’ that are ‘prospering’ at the cost of the Niger Delta, these factions have been successful in mobiliSing the youth in an armed struggle to ‘liberate’ the Niger Delta from the clutches of what they perceive as the hegemonic and predatory political elite based in the North and the West (Watts M. , 2010).

This economic arrangement has also questioned the very idea of the modern nation state bringing into light unprecedented conflicts between the federal government at the center and state governments as recent attempts at reforming the current derivation arrangement have met with stiff opposition from non-oil producing states. Any attempt in the future at resolving the ensuing conflict would necessitate a review of the existing derivation arrangement.

Uncertainty Over The Utility Of The Excess Crude Account

However, in the present day, there is little clarity on the utility and purpose of this account and considerable dissension exists between the federal government and states. A number of critics have argued that notwithstanding the federal management of this account, the constitution of Nigeria stipulates that resource wealth necessarily belongs to the states and must be moved for expenditure under the Federation Account. This account must fund development and infrastructure projects. Botswana’s Pula Fund and Sustainable Budget Index are models that the E.C.A could seek to emulate. However, this mechanism would need to be embedded under a legislative framework to avoid differing interpretations of its utility.

Negotiating a Level Playing Field in Nigeria’s Interaction with the Global Capitalist System

From 2000–2008, Nigeria lost close to $ 10 billion every year to capital flight whereas transnational oil corporation in the same period continued to report record profits. The earnings of these corporations remain firmly veiled behind opaque international banking and accounting practices. This phenomenon is not restricted to Nigeria. The Tax Justice Network reports, “Since the 1970’s for every dollar in external loans to Africa, roughly 60 cents left as capital flight in the same year”.

Similarly, (Kar & Cartwright-Smith, 2010) show that capital flight has been more a consequence of “proceeds of commercial tax evasion through trade mispricing” and much less to do with the “proceeds for bribery theft by government officials.” This issue has been forever ignored by several institutions its ‘reform toolkit for resource abundant Africa’ and other studies on navigating the perverse effects of the curse. In the view of (Kar & Cartwright-Smith, 2010), antagonistic tax avoidance policies may fittingly be placed among the darker sides of globalisation.

The export patterns in Nigeria are seeing a change on account of increasing shale gas production in the United States that has started importing less from the continent. This has meant Nigerian oil is now finding its way into Asia and South America. Transnational corporations are also divesting from on shore to deep offshore production. With Nigeria’s oil once at the heart of U.S energy security considerations, the country was at the receiving end of a number of unfavourable arrangements. The argument of resource nationalism and the ability of the state to influence and control this relationship commonly overlook a number of dynamics.

Firstly, the access to sophisticated technology, managerial competence as well as its ties to global processes bestows transnational corporations (based in U.S.A and Europe) with a great deal of negotiating leverage when bargaining with state run corporations. Nigeria’s production sharing modus operandi locks it into a partnership with these corporations that control the latest in production technology and is strong links to the global shipping industry.

In this light, the growth of China and unconditional Chinese loans might have created a more even global capitalist arrangement. But China’s blatant disregard for transparency and accountability in Africa might also have compromised and weighed down reforms aimed at strengthening institutions and promoting good governance. For now, Nigeria’s interaction with the global capitalist system is bound to remain a zero-sum equation. Former World Bank Chief and current Finance Minister-Dr. Okwonjo Iweala’s book title ‘Reforming the Unreformable: Lessons from Nigeria’ seems to provide an uncanny indication of the road ahead in Nigeria. While a number of well-meaning reforms are bound to be instituted, its chances at success in the early foreseeable future remain bleak.

Inconsistency Driving Civil Society Engagements

With the advent of the first civilian government in 1999, there was renewed optimism that civil society engagement would be enhanced. While this proposition has proved to fairly successful with a number veritable platforms that allow for scrutiny and civil society engagement, two particular challenges continue to persist. Firstly, the lack of consistency in engaging with civil society has remained a gaping feature of civilian governments since 1999. For example, in the formulation of the National Extractive Industries Transparency Initiative (N.E.I.T.I), responses and views from civil society were solicited and incorporated.

However, the drafting of the recent groundbreaking Petroleum Bill (PIB) has been criticised for little or no civil society engagements. Secondly, the civil society and citizen action groups have been found to be easily corruptible in the recent past. Moreover, what constitutes a civil society platform in the Niger Delta is debatable. Under the umbrella of CSR, transnational oil corporations make regular payments to armed groups for protection of its installations. This has contributed to fuelling intra-community and inter-community conflicts.

Furthermore, in an attempt to exonerate themselves from responsibility of environmental degradation that occurs through oil spills causing widespread river and soil contamination, transnational oil corporations have paid off civil society groups to avoid agitation and have also looked to shift the blame on armed groups as a result of their acts of sabotage and vandalism. This has given rise to widespread sense of relative deprivation and feelings of frustration as the state has sought to ‘oilify’ every conflict in the region as the consequence of greed and predatory interest of local factions.

The Road Ahead

In lieu of existing political realities, a reform agenda driven by Ricardian-Malthusian perspective would emphasise on the non replenishable quality of nature’s gifts. Economic advancement would thus strongly necessitate shifting away from resource exploitation to sectors that function on demands of technology, skills and knowledge. In recent years, Nigeria’s metal, plastic, automobile, retail, telecom and pharmaceutical industries have attracted a great deal of foreign direct investment.

The non-oil economy has grown rapidly at 8% every year. As Nigeria is able to enhance its human and capital stock, condense its transaction and transportation costs as well as facilitate technology transfer by adopting a more cogent national manufacturing agenda supported by a robust legislative framework, the potential for growth of the non-oil economy is immense.

Proactive management of the economy through strategic and timely interventions by the state are also crucial. In the past, economies that have successfully adopted fiscal measures that allow for increased investment by the public sector, a flexible monetary policy that is able to facilitate large scale employment opportunities through a strengthened private sector, competitive exchange rate policies to avoid the Dutch disease and pursued diversification by strengthening manufacturing and agriculture through technological acquisition have proved to be relatively more successful in escaping the curse.

In the short term, reducing trade deficits, checking transfer pricing and mitigating tax avoidances are vital. In the medium term, broadening of the tax base as well as introducing direct taxes could be equally effective a measure. Lastly, the capacity of the state to negotiate fair revenue sharing agreements with transnational corporations is crucial and has proved to be the game-changer in the past in several resource abundant countries.

The need to save and accumulate oil revenues in a separate fund to avoid exogenous shocks on account of market fluctuations has also been highlighted in this essay. Noted economist Jeffrey Sachs lays down an investment-saving mechanism. For low per capita GDP economies like Nigeria, investment in infrastructure as the first step towards diversification could be beneficial. As the country’s per capita GDP improves and transitions towards a middle income economy, investment in social protection, human capital, science and technology are bound to yield positive results. Moreover, as local cluster based industries are strengthened by encouraging forward and backward linkages, the domestic economy is positively impacted as the local population is able to position itself within the extraction value chain.

These measures are no silver bullets in Nigeria’s attempts at escaping the curse. However, they are achievable goals and could potentially succeed in elevating Nigeria from the status of the ‘Resource Cursed’ economy to a ‘Resource Disease’ economy. How then is a ‘Resource Disease’ any better than the ‘Resource Curse’? For starters, it is curable.

The author is a German Chancellor Fellow and is sponsored by the Alexander von Humboldt Stiftung and the Institute for Industrial Organisation at WHU, Otto Beisheim School of Management.