Recession as Opportunity for Reversing Resource Curse (I)
And, sadly, it came to pass. It is well predicted that most countries blessed with natural resources, even in the best of times, perform worse economically than countries not so endowed; and that, when times are tough, countries that are dependent on natural resources come to an assured grief. There is a popular name for this strange but common condition: resource curse.
It sounds metaphysical, it seems counter-intuitive even, but it is a position supported by enough evidence. And there can’t be better evidence than this: a Nigeria that is in the choke-hold of economic recession right after 15 years of consistently high oil prices, with over N70 trillion of oil revenues earned by the federation.
A recession might be a dramatic inflection point, but the brutal fact is that our country has never really been in sound economic health. A long spell of rising oil prices in much of our over four-decade addiction to oil had put us on a permanent high, masked the hollowness of our economic well-being, blind-sighted us to the dangers dancing in plain sight, and induced a costly work-avoidance in our leaders. Now that we are at this terrible pass, it will be tempting to just focus all our energy at getting growth back to positive zone. Without a doubt, getting out of recession should be the first order business. But doing only that will show us up, again, as a people eternally incapable of learning. This should be the time to finally wean ourselves of the unhealthy dependence on crude oil for most of our exports and government revenues; a time to reset the foundations of our economy and even of our politics; a time to get a permanent cure for what deeply ails us.
Clearly, natural resources do not come embedded with supernatural curses, as the positive experiences of Norway, UAE, Malaysia and Botswana have shown. But it is also clear how natural resources end up as blights, and not blessings, just as it is clear what to do to reverse the curse. So the problem is not lack of knowledge. The problem is that resource-endowed countries either do not do enough to prevent the sad prophecy from fulfilling itself or do not do enough to ‘cure the curse’ after it has manifested. And these countries fail to take both preventive and curative measures because countries blessed with natural resources are prone to certain risks and disposed to certain choices that create delusions, dependencies and distortions, which inexorably turn natural resources to impeders, rather than enablers, of development.
One known risk is that the prices of natural resources fluctuate. This creates revenue instability for countries that depend on resource rents to fund their budgets. Since this is known, the sensible thing would be for such countries to save enough when the prices are up as insurance against when the prices are down, and to use the windfall to create other more stable streams of income and to invest in the productive capacities of their people. But most resource-dependent countries rarely do that, as a surge of easy money induces the delusion of everlasting riches. Such countries get unreasonably high when prices of their natural resources are high and set themselves up for an inevitable fall when prices inevitably tumble.
Three episodes in four decades of our history provide good illustration. In 1972, a barrel of crude oil sold for a yearly average of $1.82. By 1974, oil price leapt to $11 per barrel, then to $29.19 in 1979, and then to $35.52 in 1980. But by the time the price of oil marginally dropped to $29.04 in 1983, our economy was already in trouble. It is important to look at the figures again: we were not in trouble when oil was $1.82 in 1972, but we were in a deep mess 11 years later when oil was $29.04.
A second episode: at the outset of democracy in 1999, oil sold for less than $20 per barrel (in actual fact, our Brent sold for a monthly average of $15.23 in May 1999) . In the 15 years between 1999 and 2014, oil prices rose steadily (except for 2008/2009), soaring to almost $150 per barrel at a point. However, by the time oil prices fell just below $100 in September 2014, we were on the way to distress district, close to the dark place we were just 30 years earlier. It is important to underscore this again: when oil was selling for $20 per barrel we got by but when it started selling for a little below $100, it was another season for weeping and gnashing of teeth, with most states and even the federal government struggling to pay salaries. What happened with the two episodes is that we got deluded into thinking high prices would last forever, we stretched public finances to breaking point, and we saved little for the rainy day.
But there is a third episode: oil prices tumbled from a high of $147 in June 2008 to $38 in December 2008. Yes, the dip was short. But we survived that slump largely because we had reserves in excess of $60 billion, which tied us over that bust time. Interestingly, the savings were largely accumulated at a period when oil never rose above $70 per barrel, when our oil supply was constrained on account of militancy in the Niger Delta and when $12 billion was paid to get debt forgiveness. But crude oil per barrel sold for an average of $77.38 in 2010, $107.46 in 2011, $109.45 in 2012, and $105.87 in 2013. However, by the time oil prices slipped to yearly average of $96.29 in 2014 and $49.49 in 2015, we did not have the kind of cover we had six years earlier not just because we didn’t save enough but also because we had also over exposed ourselves, as will be illustrated shortly. If the time between the first and the third episodes is long enough to induce amnesia, the space between 2008 and the onset of the current slide in oil prices is short enough to remind us of the risk we are constantly exposed to. But we failed to learn.
Another known risk that turns natural resources to curses is that resource-rich countries are prone to corruption, low levels of accountability, and high incidence of profligacy. Because of the nature of resource rents, it is easier for those in authority in extractive economies (as opposed to tax economies) to corner and capture public resources and expend them anyhow. Beyond the predisposition to graft and the wastefulness, resource rents concentrate and consolidate public resources in a few hands, nurture a ruling elite more interested in private gains than the common good, foster a rentier, patronage, and predatory political ethos, fuel intense competition for power, conflicts, poverty and inequality, inverse the relations between citizens (the principals) and those in authority (the agents), and distort the interaction between state and society. All these conduce to opaque and unaccountable management of the revenues from natural resources. Even before the ongoing revelations and probes, reports by the Nigeria Extractive Industries Transparency Initiative (NEITI) had provided more than ample evidence of the mind-boggling mismanagement of Nigeria’s main source of revenue.
The other well known risk that resource-rich countries are exposed to is a dependency condition called the Dutch Disease. It manifests this way: massive inflows of foreign exchange on account of the high price of a natural resource raise the comparative value of the local currency and turn the economy into a high-cost one. This means that other sectors, like manufacturing and services, that the country can earn foreign exchange from become uncompetitive and are crowded out; and imports also become cheaper, eventually knocking off local industry.
A double but dangerous dependency is thus created: the country depends solely on the natural resource for foreign exchange; and depends on imports for almost all its needs. While consistently high prices will mask the trouble, onset of low prices will burst the bubble. This is where, sadly, Nigeria has found itself today. The 1,851% increase in the price of oil between 1972 and 1980 infected us with the Dutch Disease, so much so that we depend on crude oil for 85% of government revenues and about 95% of exports. And we import almost everything, including, shamefully, refined petroleum products (which constitute about 40% of forex demands.)
This composite picture should show why Nigeria is in trouble today: little savings from a long boom time, and a 75% plunge in the price of a product that accounts for more than 80% of government revenues and foreign exchange in a country where so much revolves around government and in an import-dependent economy; fall in monthly forex earnings from $3.2 billion to about $400 million sometime this year; decline in oil production from 2.2 million bpd to a little over 1 million bpd; and the growth in monthly import bill from N148.3 billion in 2005 to N917.6 billion in 2015 (519% increase). While it can be validly argued that recession could still have been averted, the oil and dollar dependence created a downward spiral: fall in the value of the naira, cost-push inflation (since most things including industrial inputs are imported), drop in disposable incomes, which is compounded by the fact that most states are owing salaries, and the resultant negative impact on demand and ultimately on production. True, oil and gas sector now accounts for only 9% of our GDP, but our unhealthy dependence on it for government revenues and foreign exchange imbues the sector with a disproportionate heft. This we need to fix in a systematic and sustainable way.
We can easily spend our way out of this recession or bump up production in high growth areas. Oil prices and production may even rise again, making the get-out-of-recession task easier. But all these will not cure us of the oil curse. Hopefully, the present pain will permanently bury doubts about the need for a robust stabilisation fund and the imperative of strengthening transparency and accountability mechanisms like NEITI. But we also need to permanently puncture the lie that we are a rich country just because we have oil. It is a trite fact that the wealth of nations is not buried under the soil.
Countries become rich when their people and their companies produce value-adding, highly-sought, cutting-edge goods and services. But beyond fixing the defective structure of our economy, we also need to reinvent our politics. A governance model that is defined by extraction, sharing and consumption surely cannot lead to development. And by the way, development doesn’t happen: it is created. Rahm’s Rule should thus be our article of faith: “you never want to let a serious crisis to go to waste.” The crisis of this recession has thrown a massive opportunity our way, the opportunity for a total reset. It will be a shame if, again, we fail to seize this chance to heal our country.