How Oil Dependence Truncated Nigeria’s Industrial Development

It’s the devil’s dung. We drown in the devil’s feces
– Juan Pablo Pérez Alfonso, founder of OPEC.
All in all, I would have liked to have discovered the water
– Cheikh Ahmed Yamani, Minister of Petroleum, Saudi Arabia

Usually, finding “treasure” tends to bring joy to those who find it. The discovery of oil has become the Achilles heel of Nigeria’s development: in popular parlance, a resource curse. Six decades after independence, Nigeria remains one of the poorest countries in the world. It has become one of the least economically diversified countries in the world due to a pathological dependence on oil export earnings. The COVID-19 pandemic has exposed the dangers of such addiction in ways not seen in the past. The yoke of Nigeria’s colonial past of being a supplier of raw materials rather than a processor of raw materials has made a country a net exporter of crude oil and an importer of commodities mired in the perennial “subsidy” debate. fuels ”. The legacy of oil dependence has also resulted in a Nigerian production ecosystem dominated by foreign multinational oil companies whose sole purpose is to explore, extract and export non-value added resources in situ. The use of oil has done little to stimulate growth in the rest of the economy. The manufacturing sector’s contribution to gross domestic product has stagnated at less than 10% for decades. The country has achieved neither an agricultural revolution (green) nor an industrial revolution.

How is it possible ? Dependence on oil triggers a strong exclusionary effect on other sectors leading to the underdevelopment of manufacturing capacities for industrial exports and the export of processed agricultural products. This pathology of addiction is important and disturbing. This has resulted in a long-lasting fiscal contraction and other economic challenges, including unemployment, inflation and the disequilibrium of payments manifested in currency shortages.

Allow me to put forward the first of the three pathologies which characterize oil-dependent countries. Nigeria shipped $ 33.5 billion worth of goods in 2020. The largest export is crude oil, a product that accounts for three-quarters (75.4%) of its total exports by value. With a population of 206 million people, the total value of exports translates to around $ 160 for each person. Compare a country like Malaysia. In 1990, Malaysia’s exports amounted to $ 32.8 billion. Nigeria is at the level where Malaysia’s export capacity was 30 years ago. This country with a population of 33 million, exported goods worth 234 billion dollars in 2020, which represents about 7,100 dollars for each resident. In other words, Malaysia has made progress; it did so through strong vertical diversification from its modest agricultural base (rubber and oil palm) by explicitly investing in the capacities of high-tech sectors, in particular electronics. It has not neglected its agriculture but rather through horizontal diversification, has industrialized its agricultural sector. Malaysia’s top export products by value in 2020 were electronic integrated circuits, refined petroleum oils, palm oil, vulcanized rubber clothing or accessories, and solar energy diodes or semiconductors. Oil’s contribution to Malaysia’s exports has declined over time.

On the other hand, the Nigerian pathology of oil dependence has taken root over time. Nigeria’s oil exports in 2019 accounted for 94.1% of total exports, oil rents amounted to 9% of GDP. The undiversified structure of the Nigerian economy reveals limited export earnings for the country. The oil and gas sector makes only a small contribution to GDP although it generates the majority of export earnings. By nature, the oil and gas sector is a high tech and capital intensive industry compared to agribusiness and other low / medium manufacturing sectors (textiles, clothing, leather processing, consumer goods, etc.) and employs relatively few people. The oil sector is an enclave, geographically delimited.

According to OPEC, Nigeria spent $ 264.57 billion to import petroleum products during the five-year period 2015 to 2020, which means that Nigeria’s petroleum product imports exceeded its exports by 43, $ 56 billion during the period.

The second pathology is the paradox of industrial underdevelopment. Part of this manifests itself in the so-called resource curse. It refers to the paradox of a country that finds treasures like oil and / or mineral resources, but the country experiences weak or stagnant economic growth. This is the classic paradox of poverty in the midst of plenty. More insidiously, the resource curse results in a situation where the means of production of a country are concentrated in a single industrial sector, in this case oil production to the detriment of tradable goods, in particular manufacturing. Disturbingly, decades after the discovery of oil, the country is not producing the materials and equipment used in exploration and production; the sector therefore has limited horizontal interconnection with the national economy. Domestic manufacturing input is minimal in the petroleum sector, particularly in the refining of petroleum products.

Indeed, Nigeria is a nation of consumerism. It is not a producing (manufacturing) nation. Dependence on oil has truncated Nigeria’s industrialization and consequently its development. How is it? The faster the growth of the manufacturing sector, the faster the growth of a country’s GDP (wealth). This is why Nigeria ranks 99th on the UNIDO Competitive Industrial Performance Index, while South Africa ranks 52nd in 2020.

Third, there is the pathology of inequity, including social, economic / income and political / voice divisions amid the abundance of natural resources. In terms of quality of life, in 2019, the country ranked 161st on the Human Development Index. The same is true for all 12 African oil-exporting countries. Obviously, without exception, oil and mineral producers in sub-Saharan Africa have low HDIs. They all experience widespread and economically debilitating inequalities that fuel conflicts and divisions such as we see in banditry and kidnappings.

In contrast, Asian countries have gotten richer over the past five decades by manufacturing and exporting high quality goods and services to others. Nigeria will remain poor unless it truly designs economic diversification. For example, 70% of world agricultural trade is in semi-processed and processed products. Africa is largely absent from this market while the region, Nigeria included, remains an exporter of raw materials to Asia and the West.

How did a potential treasure that was found turn into a curse? Of course, the abundance of oil is not in itself a curse or a blessing. What determines the development trajectory of such a treasure is the nature of a country’s political economy, policies and the institutional context in which the country operates. Oil in Nigeria has become a curse for four reasons among others.

First, the elites’ greed for power and money. Politicians spend the oil revenues to expand patronage and entrench cronyism because the next election, not the next generation is their mission. Second, since oil revenues are in the service of a patronage system, the state has no incentive to please citizens let alone invest in, say, the tax administration. This is why Nigeria has the lowest tax-to-GDP ratio (6%) in the world. The average for Africa is 17%. The third is the greed / cost effect of government: politicians live and spend generously on oil revenues while a majority of citizens languish in poverty. Finally, there is a lack of long-term vision for economic development and economic diversification. In summary, rent-seeking policies have resulted in a curse of resources that fuel corruption and citizen grievances, triggering civil strife, ethnic fractionation, especially in the context of dysfunctional institutions. For now, the country is stuck in a low-growth equilibrium trap created by too long a dependence on money from “easy-to-come” oil. So far, this country has treated natural resources as an eternal resource and, for this reason, has failed to diversify its economy. This needs to change urgently.

More importantly, the time to take stock has finally come as Nigeria, like all oil-dependent countries, will face a gradual decline in investment flows into its hydrocarbon industry as the pressure to meet the targets for oil and gas industry increases. global emissions are intensifying.

It is not too late. The country has abundant land and other agricultural resources to become a super agro-industrial hub over the next ten years. That all the elites agree on a program for the construction of special agro-industrial processing zones in all the states of the federation.

Professor Oyelaran-Oyeyinka writes from Abidjan; he can be reached via [email protected]

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