Recession as Opportunity for Reversing Resource Curse (I)
Its been a long break since I highlighted an article and you can pardon me for being absent from the blogosphere. A lot has been happening right? How are you all doing? Today I will post an article by cerebral and erudite Waziri Adio who is the Executive Secretary of the Nigeria Extractive Industries Transparency Initiative (NEITI). You can reach him on (waziri.adio@thisdaylive.com). Here he triest to diagnose (yet again) the famous "Resource Curse" and Nigeria's path out.
Enjoy,
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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.
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