Nigeria Matters

The Oil Is Going: Is Nigeria Growing?

Nigeria’s entire economy revolves around oil – with large reserves meaning the country has, in theory, the potential to build a very prosperous economy. But despite our rich natural resources, poverty is widespread and Nigeria’s basic social indicators place it among the 20 poorest countries in the world. The wealth from oil has not fed through to the wider population, but has often been squandered or lost through corruption.

The Nigerian government depends largely on foreign investors for the exploration, production and marketing of oil. Oil is the engine of the Nigerian economy and provides for more than 90% of the country’s foreign exchange, 94% of government revenues and 46% of GDP. The fact that this country relies mostly on foreign companies to exploit this tremendous resource naturally poses a danger of exploitation.

Poverty is still a growing problem in Nigeria – a country which is estimated to have earned about $280bn from oil during the past 30 years. According to the World Bank, about 66% of the population now falls below the poverty line of about a dollar a day, compared to 43% in 1985. Nigeria’s economy is forecast to grow by 3.5% in 2002 according to the Economist Intelligence Unit (EIU) – a rate of growth that would be the envy of many western nations. But the growth is primarily driven by the energy sectors, and is unlikely to feed through to the wider population.

The state of Nigeria’s oil industry is a prototype of how industry has been mismanaged – and of the difficulty of reform. While Nigeria has been pumping two million barrels of crude oil a day into the international oil markets, its own refineries are in a state of neglect and disrepair and the country has suffered a series of fuel shortages.

Large dependence of Government budget on revenues collected from oil and gas sectors is making both public revenues and public spending vulnerable to great volatility in the presence of large oil prices shocks. At the same time the Government wishes to smooth the path of public spending or even make it countercyclical on order to reduce output volatility.

Having a rich natural resource-base;-oil and gas, provide Nigeria with goods that can be traded, and hence guarantee a certain revenue stream from exports. As poor and less developed the country could be, natural resource revenues hence allow the import of a certain volume of crucial goods (e.g. medicines) they cannot produce themselves, and therefore – at least in theory – could be used to increase significantly the welfare of the population. From a practical point of view, natural resources also provide some shelter against competition. It is a banal point – but worth stating – that in order to compete in natural resources, a country needs to possess the relevant deposits – and neither highly advanced technology, nor an ultra-cheap labour force are going to change that.

The issues of particular interest with regard to the current Nigerian economic situation are the following. Some analysts claims that current taxation of oil sector extracts about 95% of revenues from the price exceeding $40/barrel which makes investment and geophysical prospecting almost infeasible. Hence, research on the optimal taxation of oil sector which will both extract rent to the Government and leaves adequate profit to business is very important. Another important topic is the optimal structure of spending of these revenues – both inter- and intra-temporal. In order to smooth the spending over time the Stabilization Fund was designed. The important question which is still at heart of the debate is the cut-off price, i.e. the price, starting from which all revenues goes to the Fund. The research of how optimal cut-off price should set looks very promising.

On the negative side, it has been argued that the growth potential of natural resource sectors would be comparatively low. This would result from two features. First, natural resources are finite. Second, it is often claimed that natural resource extraction is a low-tech undertaking, and hence the potential for productivity increases in natural resource sectors is very limited. The latter is also one of the most common economic explanations of why there might be a resource curse. Both of these arguments are, however, questionable, at least to some degree. Undeniably, natural resources are ultimately finite (at least when one thinks only about the planet earth).

But between 1970 and 1999, the Nigerian petroleum industry generated about $231 billion in rents, or $1900 for every man, woman, and child. Yet from 1970 to 1999 Nigeria’s real income per capita fell from $264 to $250 a year. Why Nigeria’s remarkable oil wealth has has done so little to raise incomes and alleviate poverty? There have been many important studies of how oil has influenced Nigerian economic and political life. This report draws on both past studies, and recent cross-national studies of mineral-rich countries, to cast light on the political and economic implications of Nigeria’s oil wealth.

It would be difficult to study the role of oil in the Nigerian economy. Since the first oil price shock in 1974, oil has annually produced over 90 percent of Nigeria’s export income. In 2000 Nigeria received 99.6 percent of its export income from oil, making it the world’s most oil-dependent country .Oil production has also had a profound effect on Nigeria’s domestic sector. One way to characterize its impact is by looking at the rents produced by oil – that is, the returns in excess of production costs – in the Nigerian economy. From 1970 to 1999, oil generated almost $231 billion in rents for the Nigerian economy, in constant 1999 dollars. Since 1974, these rents have constituted between 21 and 48 percent of GDP .Yet remarkably, these rents have failed to raise Nigerian incomes and done little to reduce poverty.

Since 1970, Nigeria’s per capita income has fallen by about four percent, in constant dollars. Although Nigerian poverty rates have never been well-measured, there is little indication that they have declined over the last three decades. This lack of improvement is striking, given the size of Nigeria’s oil windfall. Had each year’s oil rents been invested in a fund that yielded just five percent real interests, at the end of 1999 the fund would be worth $454 billion. If divided among the general population, every man, woman, and child would receive about $3,750, equivalent to about 15 years of wages. Oil has also had a deep influence on the Nigerian government.

Since the early 1970s, the Nigerian government has annually received over half of its revenues – sometimes as much as 85 percent – directly from the oil sector. These oil revenues are not only large, they are also highly volatile – that is, they can fluctuate drastically in size from year to year, causing the size of government, and the funding of government programs, to fluctuate accordingly. For example, from 1972 to 1975, government spending rose from 8.4 percent to 22.6 percent of GDP; by 1978, it dropped back to 14.2 percent of the economy.

However, the total quantity of a natural resource is not particularly relevant at least up to the decades before its total depletion. What is important is the quantity of known natural resource deposits that can be exploited profitably at current technology levels and expected long- term average prices. Since there has been considerable technological progress in resource extraction, for most commodities the volume of exploitable deposits has not been falling in recent decades. It is also untrue that a specialization in natural resources inevitably implies low levels of technological know-how. Resource extraction – as it gradually moves to deposits that are more difficult to exploit – has become quite intensive in the use of specific high technology (e.g. oil platforms).

The major reason for the Obasanjo government decided to privatize the economy was to attract foreign investment. Reconstruction of the Nigerian economy did as earlier mention, require substantial capital which the government was in no position to provide. That government was however caught between the potential disadvantages in conjunction with allowing foreign investment and the potential benefits to be accumulated from such activity.

Considering the tumultuous political situation the government was, and still is, reluctant to allow foreign investment in certain sectors for social and political reasons; monopoly substitution, foreign ownership, ownership of strategic national interests by private investors, and the fear of being criticized by political supporters are all sensitive matters in a political economy in unbalance. The benefits of foreign investment in form of increased income and opportunity, access to foreign capital, technology and management expertise, access to global markets, and enhanced efficiency are however crucial in order for the Nigerian economy to move on .

Substantial FDI is indispensable to satisfying the basic needs of the population, efficiently exploiting the country’s resources and achieving rapid, balanced and sustainable economic growth in a context of provincial and regional diversity. But as noted, the foreign owned activities must be conducted in a socially responsible manner in order to be of mutual benefit to the country and the corporation involved. I personally doing not agree that FDI specifically is needed in order to achieve the factors, but rather FI in one form or the other. It will most likely be easier for the government to control joint ventures and production sharing agreements than direct independent investment.

The Great Leap Forward was begun in 1957 by Chairman Mao Zedong to bring the nation quickly into the forefront of economic development. Mao wanted China to become a leading industrial power, and to accomplish his goals he and his colleagues pushed for the construction of steel plants across the country. The rural society was to keep pace with the dream by producing enough food to feed the country plus enough for export to help pay for industrialization. As a result of the Communist revolution, landowners had been stripped of their property, and by 1957 peasants already were forced to work in agricultural cooperatives. These changes were intended to improve conditions for everyone by collectivizing agriculture and establishing communal eating facilities where peasants could eat all they wanted free of charge. This utopian dream turned into a nightmare as the central leadership grew increasingly out of touch with reality, Yang found through his study of government records and personal accounts.

At the beginning of the Great Leap Forward, Mao proclaimed that China would overtake Britain in production of steel and other products within 15 years. Other Chinese leaders, including Deng Xiaoping, supported Mao’s enthusiasm, according to documents Yang studied in China. A year later, Mao radically revised the timeline for catching up to Britain — what was to be accomplished in 15 years now had to be done in just one more year.
Frequent changes in the timetable were symptomatic of the Great Leap, which, in retrospect, was fantasy incarnate. Even more exaggerated targets were subsequently presented, and then frequently revised upward, for steel, grain, cotton and other products. Any semblance of serious planning was abandoned. In pursuit of its goals, the government executed people who did not agree with the pace of radical change. The crackdown led to the deaths of 550,000 people by 1958.

The government also plunged the country into a deep debt by increasing spending on the development of heavy industry. Government spending on heavy industry grew in 1958 to represent 56 percent of state capital investment, an increase from 38 percent in 1956. People were mobilized to accomplish the goals of industrialization. They built backyard furnaces for iron and steel and worked together on massive building projects, including one undertaken during the winter of 1957-58 in which more than 100 million peasants were mobilized to build large-scale water-conservation works.

Local leaders competed with one another to see who could create the most activity. In the rush to recruit labor, agricultural tasks were neglected, sometimes leaving the grain harvest to rot in the fields, Yang said. In the frenzy of competition, the leaders over-reported their harvests to their superiors in Beijing, and what was thought to be surplus grain was sold abroad. Although in theory the country was awash in grain, in reality it was not. Rural communal mess halls were encouraged to supply food for free, but by the spring of 1959, the grain reserves were exhausted and the famine had begun.

No one is sure exactly how many people perished as a result of the spreading hunger. By comparing the number of deaths that could be expected under normal conditions with the number that occurred during the period of the Great Leap famine, scholars have estimated that somewhere between 16.5 million and 40 million people died before the experiment came to an end in 1961, making the Great Leap famine the largest in world history.

People abandoned their homes in search of food. Families suffered immensely, and reports of that suffering reached the members of the army, whose homes were primarily in rural areas. As soldiers received letters describing the suffering and the deaths, it became harder for leaders to maintain ideological discipline. Chaos developed in the countryside as rural militias became predatory, seizing grain, beating people and raping women. From famine to reform!

It is unlikely that all other sources of energy (gas, coal, hydro, nuclear and minor sources) will be able to replace even 50% of current oil use, because the projects are so big they need to have started already; but because oil is presently cheap, they can’t be ‘justified’. When they can be justified, they will be much more expensive due to the now high price of oil. Economic downturn – due to the high price of oil – will make the vast sums of money needed less readily available. Because the ameliorating effect of large projects to increase coal and gas production, build more hydro and nuclear plants, install energy saving devices, solarize, and so forth won’t be there, energy will be more expensive than it would otherwise have been.

The adjustment will be large anyway. It will be much larger than it might have been if any foresight had been shown by politicians, or if educators had examined the issues in schools and colleges. When countries ‘have to’ explore wide-scale decentralization, conservation, solar adjunction and a thousand little projects that together might make a relative lot, it will be so close to ‘the bedrock’ that reaction time may not be long enough, and rather sudden and traumatic adjustment might result.

How much oil prices rise will influence consumption demand, and how can devalued oil upgrade Nigeria’s economy? It may last many hundreds of years when it is permanently very expensive, and therefore relatively little used. When these permanently high prices cut in is guesswork. A guess based on the peak of production depends on estimates of that peak. In the range from 2004 to 2006, a best case says oil won’t be permanently expensive until about 2018. A worst case scenario says permanently expensive oil at or about 2011.

These facts are eloquent. It is not the present regime of Umaru Musa Yar’Adua, without the consent of the rulers of old Nigeria—the imperialists, landlords and bureaucrat-capitalists—who “dug up the ground” and exhausted the resources of the people, can give us hope that can become a catalysts of change out-of-the present oil-base economy, what we would have achieved in our national construction can usher a milestone into the a beginning for a nationwide economic reform. We still have to overcome many difficulties and shortcomings in our work. We must be modest and prudent and guard against arrogance and impetuosity. We must devote greater efforts to building our great motherland and giving support to the struggles FOR NIGERIA’S ECONOMIC REVIVAL. This is our glorious task. Our country is somewhat stronger than it was before, but it is still not very strong. We need to build it up for another 20 or 30 years at least in order to make it really strong.

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