Unravelling the Natural Resource Curse

 

Nigeria is a country that is rich in natural resources such as oil, natural gas, coal, and minerals. However, despite its abundant natural resources, the country has been struggling with economic development for several decades. One of the major reasons for Nigeria's economic woes is the phenomenon known as the natural resource curse. In this article, let us examine the natural resource curse and its impact on the Nigerian economy by exploring the challenges faced, and proposing strategies to mitigate the adverse effects and foster sustainable growth in Nigeria.

The natural resource curse is a phenomenon where countries that have an abundance of valuable natural resources experience economic stagnation or even decline instead of economic growth. The curse is generally caused by too much of the country’s capital and labor force concentrated in just a few resource-dependent industries. By failing to make adequate investments in other sectors, countries can become vulnerable to declines in commodity prices, leading to long-run economic underperformance.

The Natural Resource Curse - the origin story

The origins of this curse can be attributed to several interrelated factors:

The "Dutch Disease": this term was coined from the experiences of the Netherlands in the 1960s when the discovery of natural gas caused the appreciation of the Dutch currency, impacting the competitiveness of other sectors like manufacturing and agriculture. It essentially affected the Dutch economy in two ways: it cost more for other countries to purchase the local goods; it increased imports because the greater value of the local currency meant they could import more goods cheaper. In the Nigerian context, the oil boom led to the Nigerian currency being stronger than the US Dollar and British Pound. The Head of State, General Yakubu Gowon was quoted as saying, "Nigeria's problem was not money but rather how to spend it"... The Nigerian baby boomer generation really enjoyed!

Resource dependency: The curse often emerges in countries that heavily rely on one or a few primary commodities for their export earnings and government revenue. The abundance of these resources can create a situation where other sectors of the economy are neglected or underdeveloped, leading to an imbalanced and vulnerable economic structure.

Price volatility: Natural resources, including oil, gas, minerals, or agricultural commodities, are subject to price volatility in the global market. Fluctuations in prices can lead to revenue instability, fiscal challenges, and economic downturns, particularly in countries that are heavily dependent on a single resource. The inability to effectively manage and stabilize revenues from these resources exacerbates the curse.

Rent-Seeking and Corruption: The presence of valuable natural resources can create rent-seeking behavior, where individuals or groups seek to gain control over resource revenues for personal gain, rather than investing in productive sectors. This rent-seeking behavior often leads to corruption, weak governance, and the mismanagement of resource revenues, exacerbating the negative effects of the curse.

Weak Institutions and Governance: The natural resource curse is often associated with weak institutional frameworks, including ineffective governance structures, limited transparency, and inadequate regulatory mechanisms. These weak institutions are more prone to corruption and mismanagement, leading to the misallocation of resources, lack of accountability, and hindered economic development.

Lack of Economic Diversification: The absence of diversified economic activities prevents countries from reducing their dependence on natural resources. Limited diversification inhibits the development of other sectors, such as manufacturing, services, and agriculture, which could contribute to long-term sustainable growth.

Economic Impact of the Natural Resource Curse

The economic impact of the resource curse is clearly evident in Nigeria today and previous articles in this newsletter have highlighted various elements of the economic malaise in the country. Future articles will also discuss other aspects of the economy therefore, let us not dwell too much on analysis paralysis.

However, in Nigeria, the natural resource curse is most evident in the oil industry. Oil accounts for over 90% of Nigeria's exports and approximately 80% of its government revenue. This heavy reliance on oil makes the Nigerian economy vulnerable to fluctuations in the global oil market. When oil prices fall, Nigeria's revenue falls, leading to economic recession and financial instability.

Oil revenue vs GDP growth

Furthermore, the government has been accused of mismanaging oil revenues for decades, leading to corruption and a lack of investment in other sectors of the economy. This has created a situation where the oil industry dominates the economy, leaving other sectors such as agriculture and manufacturing underdeveloped.

Another factor contributing to the natural resource curse in Nigeria is the lack of investment in infrastructure and human capital. Despite being rich in natural resources, Nigeria's infrastructure is inadequate. The infrastructure deficit has been earmarked at around $3 trillion over the next 30 years. Furthermore, human capital development is poor. This has hindered the development of other sectors of the economy and made it difficult for the country to diversify its economy. This is exacerbated with the recent exodus of the middle class in Nigeria in the popular colloquial term known as "japa", which is a Yoruba word for escape from hardship.

Breaking the curse

It is important to note that the natural resource curse is not something that is predictable and cannot be changed. Some resource-rich nations have successfully managed their resources and transformed their economies, while others have fallen victim to the curse. For example, one of the world’s largest offshore oilfields was discovered in Norway in the 1960s. However, they diversified their economy using proceeds from oil sales to set up what is now one of the largest sovereign wealth funds in the world. This fund owns almost 1.5 percent of all shares in the world’s listed companies. The fund owns hundreds of buildings in some of the world’s leading cities and receives a steady flow of income from lending to countries and companies. Therefore, their economy is insulated from global economic issues and price fluctuations.

Typically, countries that do not have the luxury and abundance of natural resources tend to be better at managing their economy by having multiple streams of income and being more accountable for that income.

To overcome the natural resource curse, Nigeria needs to diversify its economy, improve its institutions, and invest in infrastructure and human capital.

Economic Diversification: The key areas that need to be improved include the following:

• Agriculture and Agribusiness: Unlocking the potential of agriculture to reduce dependence on oil, improve food security and create jobs.
• Affordable Housing: Affordable housing can serve as a foundation for poverty eradication in Nigeria in several ways including safe and secure housing, job creation and unlocking the credit system.
• Manufacturing and Industrialization: Promoting local industries, value addition, and export-oriented manufacturing.
• Services and Information Technology: Investing in the service sector, particularly ICT, to drive innovation and job creation.
• Small and Medium-sized Enterprises (SMEs): Supporting SME development to foster entrepreneurship and economic resilience.

Institutional Reforms and Governance: Addressing corruption and improving governance are crucial to mitigating the natural resource curse. This includes:

• Transparency and Accountability: Strengthening institutions, promoting transparency in resource revenue management, and combating corruption.
• Legal and Regulatory Framework: Implementing effective regulations to govern resource extraction and attract responsible investment.
• Human Capital Development: Enhancing education and skills training to create a competent workforce for a diversified economy.

Infrastructure Investment: Inadequate infrastructure has impeded Nigeria's economic progress. Nigeria desperately requires the following:

• Energy Infrastructure: Expanding electricity generation capacity and improving distribution networks.
• Transportation and Logistics: Developing transportation infrastructure to facilitate trade and connectivity.
• Telecommunications and Broadband: Enhancing digital connectivity to drive innovation and e-commerce.

Nigeria's natural resource curse is a significant challenge that has hindered its economic development for several decades. Addressing the curse requires proactive measures to mitigate its effects and promote economic diversification. These measures may include investing in non-resource sectors, enhancing competitiveness through targeted policies, promoting value addition and local content in resource extraction, improving governance and transparency, and strengthening institutions to manage resource revenues effectively. By addressing these areas, the country can foster a more resilient and diversified economy, reducing its vulnerability to external shocks and promoting sustainable economic development. However, knowing the issues is one thing, but having the political will and resolve to do it is the major conundrum that previous administrations have not been able to solve effectively.

Thanks for taking time out to read this article. Please feel free to send me a message or comment on the article. I am always happy to discuss other perspectives and explore different philosophies.