curse of resource wealth

Oil has been both a blessing and a curse to Nigeria. It is the most coveted of all natural resources, it generates money, affects world politics, creates leverage for diplomacy, and, if revenues are well managed, it can transform a poor country into a rich one within a short time. Oil gave Nigeria all these opportunities, an autonomy it never had before and the ability to rapidly change its society, dominate the West African region, become a continental power, and pursue a radical foreign policy. At the same time, however, oil dependence produced the effects that are in line with the ‘curse of resource wealth’ concept applied to a developing economy. Within the scope of this research, we will review the effects of such situation on Nigeria, focusing on 1970s period, and try to assess what can be done in order to make the country’s resources work for its further development. 

Nigeria entered a politically stable and prosperous phase in the 1970s with substantial revenues from crude oil. Three successive military regimes, those of Yakubu Gowon, Murtala Mohammed, and Olusegun Obasanjo managed this prosperity.[1] This paper examines the oil industry, focusing on the achievements and failure of the 1970s, in addition to the major events in the last years of Gowon's administration. The administration of Gowon turned the military into a political force and used oil revenues to minimize the trauma of war. The patterns for the continuing forms of impact of oil developed in the 1970s.

Nigeria has oil in great abundance. Low in sulfur and light in consistency, the oil is also of the highest quality, attracting the best prices in the world market.[2] The major production center is in the Niger Delta, with substantial offshore reserves in the Gulf of Guinea. As with the trade in slaves and palm oil, geographical proximity to the European and American markets also gives Nigeria a competitive edge, compared with the Middle East. Multinational corporations seek a stake in the country's oil, the United States purchases a large percentage of its oil im ports from Nigeria, and other countries such as France promote economic relations with Nigeria.

In 1971 Nigeria joined the Organization of Petroleum Exporting Countries (OPEC), an association of oil exporters and developing countries.[3] Since the 1960s, OPEC has played a role in influencing prices and supply, although it weakens itself with its inability to effectively punish members that fail to implement collective decisions. OPEC's fortunes are unstable. It reached its peak in the early 1970s when it controlled over 50 percent of world production. This enabled it to create an oligopoly, allowing Nigeria to experience a boom in 1973. Its influence waned in the 1980s, as its production slumped to 30 percent in the mid-1980s. In the 1990s its contribution has risen to 40 percent, but it retains only limited international clout.[4] While Nigeria is an important member of OPEC, it also undermines the organization by exceeding its production quota and ignoring instructions to sell at an optimal price. Nigeria produces up to 8 percent of OPEC's output.

Revenues from oil transformed Nigeria in the 1970s into the thirtieth wealthiest nation in the world, a regional power, an emerging industrializing country, and an assertive country with a prosperous middle class and a rising number of millionaires. The country experienced a rapid economic growth, more than ever before, reaching a rate of 8 percent per annum.[5] Public fiscal expenditures, imports, exports, investments, and money supply all expanded in the 1970s.

Substantial oil money was accumulated between 1970 and 1973, and a boom followed in 1973 and 1974 due to OPEC's pressure which quadrupled oil prices. The prices of Nigeria's light crude rose from $3.8 per barrel in October 1973 to $14.7 per barrel in January 1974. Oil revenues as a whole rose from N1 billion in 1973 to N4 billion in 1974.[6] In 1975 prices declined because of the slump in world demand, and by 1976 the boom had ended. However, production never ceased as oil had become the primary revenue source, constituting half of the total revenue in 1971, rising to 81 percent in 1974, and even more in later years. It was the principal export: in 1970, oil exports constituted 58 percent of total exports, rising to 94 percent in  1976.[7]

Government fiscal operations increased rapidly, tenfold during the span of a decade. Budget surpluses were recorded from 1970 to 1975, in addition to huge balance of payments surpluses. Thereafter, budget deficits became the norm, brought about by inaccurate projections of oil income, the need to finance the new states, and also to meet the requirements of two development plans. At the same time, balance of payments recorded deficits. External assets increased in the early 1970s, from N180 million in 1970 to N3.7 billion in 1975.[8]

In 1974 Nigeria had sufficient external reserves to finance two years of imports. This gain was soon wiped out, as foreign reserves began to decline from 1977 due to excessive import of luxury items and technology for development, and a decline in the demand for oil. In 1978 the government had to borrow $1 billion from the Euro-dollar market and the World Bank, starting a process that was eventually to turn the country into a major debtor nation.[9] (By 1979 as the oil euphoria was about to end, the government was already talking of abandoning a number of projects and scaling down the size of many more.

The currency became strong and attained a high level of international respect in the 1970s. Huge fiscal expenditures and foreign reserves led to a large increase in the domestic money supply at a staggering rate of almost 40 percent a year with an abnormal rise of 74 percent in 1975 due to massive wage increases. The economy recovered from the civil war at an impressive speed and immediately exhibited a remarkable growth rate. National output increased at 8 percent per annum, and real investment grew at 35 percent between 1970 and 1975.[10] The government embarked upon an indigenization program to transfer the control of businesses to Nigerians, but the benefits reached only a few, thus widening the gap between the rich and poor.

Two development plans revealed the country's wealth and confidence as bold attempts were made to expand all aspects of social and educational institutions, and establish new capital projects including three steel mills, two refineries, petrochemical plants, fertilizer projects, paper and pulp companies, and cement factories. The first of the plans under Gowon, the Second National Development Plan (1970-1974), aimed at reconstructing the facilities damaged during the war in addition to promoting social and economic development. Among the achievements of the plan were the restoration of some farms, airports, industries, and roads damaged during the war, and an expansion in schools, from primary to university level. The federal government was able to finance the new states, embark upon low cost housing projects, start seven new universities, and initiate in 1973 the National Youth Service, which compelled university graduates to work in states other than their own.

Sectoral growth was not uniform. The oil industry, manufacturing, building, and construction witnessed a phenomenal growth of over 10 percent while agriculture declined by 1 percent yearly. High tariff protection to ensure import substitution allowed the growth of the manufacturing sector. By 1970 foreigners controlled manufacturing, owning 63 percent of paid-up capital, while the government owned about 27 percent and the public 10 percent.[11] The indigenizaton program was expected to increase the participation of Nigerians in various businesses. Small businesses were to be operated only by Nigerians while larger ones would have 40 percent equity participation by Nigerians through shares.

When the decree was revised in 1977, equity participation was increased to 100 percent in many sectors while in the large industrial and commercial enterprises it was increased to 60 percent. However, equity sharing did not mean that Nigerians gained control, while indigenous ownership did not necessarily translate to better management. Indeed, manufacturing retained some of its old features. Important tools were still imported while Nigerian entrepreneurs avoided investments in the iron, steel, and engineering industries which required heavy capital input.

Industries were confined to a few cities and they concentrated on consumer goods. Throughout the 1970s they were protected by high tariffs. Benefiting from a strong Naira, merchants and industrialists resorted to the use of imported materials, either at the expense of existing local materials or without regard for developing local substitutes. In addition, they did not export manufactured products, thus failing to contribute significantly to diversification.[12]

Infrastructure was slow to catch up with the huge spending, thus creating high social costs and disruption to economic activities. In the development plans, energy and transport sectors took enormous shares. The road network, admittedly, improved greatly. While energy and telephone services received a boost, however, they were never sufficient or efficient as demand continued to mount, again due to the increase in the middle class population and a phenomenal growth in residential and commercial buildings.

The highlights of the continuing forms of the effects of oil unfolded in the 1970s. To start with, a comprador relationship grew up between the oil-extracting multinationals and the Nigerian state. Notable multinationals such as Mobil and Shell were granted licenses to drill oil. Granting the licenses and collecting revenues has become the primary role of the state. Thus, although the state controls oil, it depends on external technology, expertise, and firms for its extraction. For the tiny elite that awards the contracts, it is lucrative to collect kickbacks from the multinationals. Millions of Naira of state money can disappear, and highlyplaced leaders can take huge cuts from oil companies.[13] Although lacking direct state power, a local elite also has to work for the multinationals in different but lucrative careers.

Oil wealth came at a time of political stability and greater centralization of power in the federal government. The major arena of capital accumulation shifted to the center. Although the regions also benefited, access to the multinationals and enormous revenues settled in the center. This in itself became a source of instability. Coups and countercoups, bitter competition for federal power, and access to the corridors of power were all important in ensuring control of oil revenues. Those with power sought to retain it. Gowon changed his mind about relinquishing power until he was forced out. All but one of his successors did the same, initially promising to leave, but later changing their minds after realizing the benefits and corruption that came with oil. The multinationals and other foreign interests began to support only the regimes and leaders that allowed them to exploit the country, or at least only those who were willing to grant the most generous concessions.

Nigeria's relations with the multinationals are generally friendly, to the annoyance of left-wing labor unions and intellectuals. During the colonial era, British firms enjoyed a monopoly which Shell turned into an advantage up to the present. Shell D'Arcy, an Anglo-Dutch consortium, pioneered exploration in Nigeria. Oil was discovered in 1956 and Shell moved quickly to establish exploration rights in virtually all the known productive fields. Competing oil companies did not gain any inroad until much later when they were granted off-shore concessions. The Shell Petroleum Development Corporation (SPDC), the Nigerian subsidiary of the Royal Dutch/Shell multinational, is both productive and lucrative. It has produced more oil than other companies; in the 1970s, 1.3 million barrels per day out of the total production of 2.3 million; in later years it has maintained production of almost 50 percent of the OPEC quota of 1.8 million barrels per day. At the very least, it makes a profit of $1 per barrel.[14]

Indigenization was extended to the oil industry. Unlike the nationalization advocated by the left, indigenization was merely designed to allow Nigerians greater access to the management levels of the oil com panies and a greater share of profits. The country would use part of the oil revenues to minimize dependence by acquiring a 100 percent share in all new concessions, and 35 percent in existing oil concessions. The 35 percent was later changed to 60 percent.[15]

In addition, in 1971 the government established a holding company, the Nigerian National Oil Company (NNOC), to manage and supervise oil extraction and provide guidelines to multinationals and local subsidiaries. Five years later, the NNOC and the Ministry of Mines and Power merged to become the Nigerian National Petroleum Corporation (NNPC), with wide-ranging powers and active involvement in oil production and sale. In later years the Ministry and the NNPC became two agencies, a cumbersome arrangement that led to a number of conflicts. The NNPC was also responsible for domestic refineries, petrochemical industries, and pipeline networks.

There were, however, signs of trouble in the 1970s associated with the dominance of multinational companies, the dependence on oil revenues, and the management of these revenues. To start with the multinationals, the state did not establish a strong mechanism to monitor them, to ensure that they did not cheat and collude with leading political figures to divert public funds into private hands. The industry has always operated as an autonomous unit with limited connections to other spheres; its technology is imported with little or no connection to local industries. Only limited efforts are made to transfer technology, while the high cost of imported technology has a negative impact on the country's balance of payments. The employment effect remains small as the industry is not labor intensive.[16]

Its operations are restricted to a corner of the country, and it has its own support and security system and limited interaction with local people. Oil companies have adopted a strategy of satisfying the men in power, not the masses. Their contributions to welfare programs were very low in the 1970s. They are not interested in gas which is flared into air. Oil leaks are more prevalent than elsewhere, seriously damaging the environment. The government ignored the early signs of environmental degradation; by the 1980s oil leaks had become a routine occurrence, far worse than in other oil-producing countries.[17]

Revenues from oil have created a "mono-crop economy."[18] Oil is central to the economy, the revenues from it have ensured dependence on imports while mismanagement has turned Nigeria into a debtor nation. Until 1965 agricultural products sustained the country. Thereafter, oil became the primary export with the result that such viable products as cocoa and peanuts were gradually neglected. Incentives for diversification were reduced and the country became a mono-crop economy relying on oil exportation. The market is volatile, oil prices shifting with little or no notice. The two development plans grossly exaggerated oil revenues and the government had to resort to severe adjustments to deal with an "oil bust" and price reduction. The economic growth driven by the boom was miscalculated in terms of the extent to which the country was stable, and it failed to account for unpredictable swings. Even today, long-term government planning is financially unstable, even without taking into consideration the additional factor of gross mismanagement.

The country became a rentier state, that is a state whose revenues rely exclusively on royalties. Grave consequences have followed. Unlike an economy dependent on production and taxation, royalties come from the outside, not from within, and from a sector unconnected to the rest of the economy. In spending the royalties, the rentier state can ignore its people, thinking that it owes them less responsibility since it is not the people's money or tax. Neither does it have to justify revenue allocations to projects and states. When the people are angry and take to protest, production losses and labor withdrawal do not necessarily cripple the economy as long as the state collects its "rents" from abroad.

The rentier state becomes stronger and more autonomous with the ability to procure weapons with which to weaken or destroy opposition forces. The ability to increase or decrease oil production also gives the rentier state the control to determine its income and plan its expenditure accordingly. Public finance can be dominated by short-term concerns, rather than the long-term needs of the nation. Short-term needs can provoke the rentier state into maximizing wealth creation by increasing production, or borrowing with the anticipation of paying later with royalties. When there is a windfall, as in 1973 or 1980, the state scrambles for ways to spend the money, again ignoring long-term considerations.[19]

The 1970s were an era of massive spending, as reflected in conspicuous consumption and countless projects of the government and the middle class. The government in fact boasted in 1973 that it had so much money that it could not finish spending it and sowed in the minds of its middle class the idea that opportunities were both abundant and unending. Thinking that development could be purchased overnight, the government embarked upon a grandiose series of projects and its policies encouraged price-distortions.

The bureaucracy at both the federal and regional levels expanded far beyond the real needs of the government. From half a million public servants in 1973, the figure increased to one and a half million in 1981 without corresponding increases in productivity. In an attempt to spread the benefits of oil money and purchase public support for the administration, wages were increased by over 100 percent in 1975. This was known as the "Udoji Award."[20] Large sums of money were paid as arrears of pay, and generous benefits, notably lowinterest-rate car allowances, were added. Inflation reached double digits, compounded by the government's deficit financing and the demand for imported goods. The consumer price index increased enormously from 150 in 1970 to 423 in 1977. Food prices increased in some cases by 500 percent.

A task force on inflation had to be established, strikes for more wages were prohibited, and control measures were taken to enforce reasonable rent and food prices, but to no avail. The government aggressively encroached on the private sector, taking over or creating new enterprises and parastatals. With so much money pumped into them and little to show in return, most became avenues for the privileged elite to enrich themselves. Enterprising individuals wisely calculated that it was better to struggle to join a government enterprise rather than create their own.

Allocation to defense continued to rise. The Gowon regime was unable to demobilize soldiers with the army reaching 250,000 men in 1977.[21] For peacetime, this was too large. Without a modernizing role to play, without contributing to the economy, and with an insatiable appetite for scarce resources, the army became a parasite. Defense expenditure increased from N314.5 million in 1970 to N1116.70 million in 1975, 7.6 percent of the GDP, much higher than that of many other countries.[22] This does not take into account the wages and benefits of military men in political offices. Using the privilege of being in power, the military sacrificed the demands of the people and the long-term interest of the country to squander money on itself, pursuing a professional agenda that is uncorrelated to the country's wealth or the extent of any external threat.

The contribution of agriculture to national output fell below 30 percent. Agriculture stagnated, a major problem considering the fact that it employed the majority of the labor force. The production of export crops had virtually collapsed by 1977. The emphasis on oil, unsuccessful government policies, increasing rural-urban-migrations, the use of outdated technology, and the Sahelian drought of 1972-1973 were some of the reasons for the agricultural decline.[23] Urban areas consumed the bulk of the oil revenues, leading to a serious marginalizaion of the countryside.

The consequence was a sharp decline in food production which compounded inflation. The food production index declined to below that of the pre-civil war years, food demand outstripped supply, and the nation failed to feed itself. The country took to food imports which increased at the rate of 25 percent per year.[24] Urban dwellers relied on imported sugar, wheat, milk, meat, fish, and rice. The price level of domestically available food soared, while food imports impacted negatively on the balance of payments. Rural dwellers, who did not see much of the gains from oil, now had to suffer from the failure of agriculture as they had to use their limited amount of money to buy imported necessities at inflated costs.

Increasing domestic food production became a top priority, although by the end of the 1970s, little had been achieved. Among the measures taken were the supply of technology and fertilizers to farmers at reduced prices, the reform of the marketing boards, and the introduction of guaranteed prices to farmers whenever they sold their crops. There were two nationwide food campaigns, the first in 1972 with the National Accelerated Food Production Program and the other in 1976 with Operation Feed the Nation. The latter mobilized thousands of university graduates to work in villages. Neither campaign brought down inflation and food prices or reduced food imports.

Enormous sums of money were spent to establish River Basin Development Authorities in different locations with the aim of setting-up extensive food plantations in fertile areas and assisting neighboring farmers with irrigation and flood control. In 1978 a Land Use Decree was enacted to make large tracts of rural land available for large-scale farming.[25] The decree vested land in the government. This provided opportunities for those who had made some money in government to invest in farming. However, since they had other investments and cash reserves, failures on the farm did not cause their economic downfall. They were quick to retreat to politics in order to recoup their losses.

Reforms were also embarked upon to boost export crop production, again with limited success. New commodity boards were expected to work in the interest of farmers, rather than act as an agency of revenue collection for the government. The pricing policy that had favored the government - produce sales tax and export duty - was abolished, so that the farmers could gain more money and thus produce more. It is apparent that for Nigeria to capitalize on its oil abundance, the country’s government needs to take more active steps in balancing its economy from within.