Revisiting the resource curse in Nigeria

Halász, Kristóf (2016) Revisiting the resource curse in Nigeria. MA/MSc thesis, BCE Társadalomtudományi és Nemzetközi Kapcsolatok Kar, Világgazdasági Intézet.

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Abstract

Nigeria is one of the fastest growing economies in the world looking forward to be in the top 10 largest ones by 2050. The Sub Saharan country is facing with serious challenges and threats such as enormous population growth, insurgencies or poverty. Nevertheless, in the light of the recent, dramatic oil price decline and the country’s dependence on oil the author dedicated this thesis to introduce and analyse the struggle of resource curse with the example of Nigeria. We were arguing that Nigeria still fits the criterion of resource curse and by establishing well-functioning institutions it is able to quit oil dependency. In order to provide a better understanding and theoretical background of the topic of natural resource abundance and the case of Nigeria we have reviewed literature, looked into the history and current situation of the country and built an econometric model. The thesis has found that rich natural resource endowment is neither necessary nor sufficient condition of successful economic performance given the particular local circumstances. Institutions play a key role in determining whether rich natural capital is a blessing or a curse. With the help of literature and studies we have shed a light on the possible channels of resource curse. The Dutch Disease model suggests that the booming resource sector deteriorates manufacturing and leads to real exchange rate appreciation, increased government spending from higher income and de-industrialization. Rent seeking is another characteristic of resource abundant economies. It is encouraged by weak legal- and political institutions as well as small but powerful groups in society. Dysfunctional institutions are also manifested in corruption, civil riots, and lack of democracy. Since these economies are well endowed with natural resources they tend to be overconfident leading to poor economic decisions. They neglect development of human capital, overspend during windfalls and focus on short term gains instead of pursing long term social good. Furthermore, resource curse can challenge dependent economies through volatile commodity prices. This can lead to budget deficits, capital controls and lack of foreign exchange. In order to better understand and quantify the relationship between resource curse and growth we have built an econometric model. Multiple regression was run to predict Nigeria’s GDP per capita from industry-, services value added, FDI, REER, current account balance, oil rents, Brent oil price, CPI, regulatory quality and government revenue between 1996 and 2014. The imitations and imperfection of the model call for cautious interpretation. Due to lack of available data we were challenged by a low number of cumulative N number. Data was originating from various databases. Additionally, conditions of linear regression model were not entirely met. In spite of these, with a 0,98 adjusted R2 value the model had a high explanatory power and it proved to be significant at 5% significance level. The analysis revealed that primarily FDI, CPI, services- and industry value added contribute the most to GDP per capita. On the contrary oil rents are negatively influencing it. In general, the observed variables proved to be considerably volatile. The thesis has found that the commodity boom of the 2000s, global financial crises of 2008, and the recent oil price decline played a crucially decisive role in the country’s economy. They have confirmed that Nigeria is continuously exposed to boom and bust cycles. Although circumstances have changed since the 1970s and 1980s, considering literature and our analyses we have concluded that Nigeria still fits the criterion of the resource curse. Moreover, by fighting corruption and building strong institutions it can improve and sustain long term growth. Nigeria’s oil dependent economy is a threat to its future and roadblock of development. Given the imperfection of the model the author recommends to correct and further develop the model. Regarding Nigeria it is advised to further pursue diversification of the economy and export portfolio. The Sub Saharan country should focus on key areas that enable development such as building better infrastructure, developing human capital, encouraging manufacturing and improving access to financing. The country has to focus on transparency and build an accountable government that enforces laws, improves inefficient bureaucracy and cares for the long term prosperity of its citizens. As our model suggested, fight against corruption should be a priority task of both the government and private sector. Additionally, Nigeria should attract more FDI by establishing policy stability, curbing inflation and stabilizing exchange rate movements. Finally, the current revenue sharing formula should be revised so as to ease the tensions in the Niger Delta and give less room for grabbing by the government.

Item Type:MA/MSc thesis
Subjects:Economic development, sustainable development
ID Code:10759
Specialisation:Nemzetközi gazdaság és gazdálkodás
Deposited On:13 Mar 2018 14:02
Last Modified:13 Mar 2018 14:02

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