How Oil Dependence Truncated Nigeria’s Industrial Development – By: . .

By Banji Oyelaran-Oyeyinka

It’s the devil’s excrement. We are drowning in the devil’s excrement. –Juan Pablo Pérez Alfonso, founder of OPEC.

All in all, I wish we had experienced the water. –Sheikh Ahmed Yamani, Minister of Petroleum, Saudi Arabia

OOrdinarily, finding “treasure” tends to bring joy to the finder. 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 diverse countries in the world due to a pathological dependence on oil export earnings. The COVID-19 pandemic has revealed the dangers of such addiction in a way never seen before. Nigeria’s colonial past yoke of being a supplier of raw materials rather than a processor of commodities has resulted in a net crude oil exporter and commodity importer mired in the perennial debate over ‘fuel subsidies’ . The legacy of oil dependence has also resulted in a Nigerian production ecosystem dominated by foreign oil multinationals whose sole purpose is to explore, extract and export non-value added resources in situ. Dependence on oil has done little to boost growth in the rest of the economy. The contribution of the manufacturing sector to GDP has stagnated at less than 10% for decades. The country has achieved neither an agricultural (green) revolution nor an industrial revolution.

How does this happen? Dependence on oil triggers a strong exclusionary effect on other sectors leading to underdevelopment of manufacturing capacity for industrial exports and export of processed agricultural products. This pathology of addiction is significant and troubling. This has led to a severe, long-lasting fiscal contraction and other economic challenges, including unemployment, inflation, and imbalance of payments manifesting in currency shortages.

Allow me to address the first of the three pathologies that characterize oil-dependent countries. Nigeria shipped $33.5 billion worth of goods in 2020. The biggest export is crude oil, a commodity that accounts for three quarters (75.4%) of its exported goods by value. With a population of 206 million, the total value of exports translates to approximately $160 per person. Compare a country like Malaysia. In 1990, Malaysia’s exports were 32.8 billion. Nigeria is where Malaysia’s export capacity was 30 years ago. This country with a population of 33 million, exported goods worth $234 billion in 2020, which translates to about $7,100 per capita. In other words, Malaysia has progressed; he did it thanks to a strong Vertical diversification from its modest agricultural base (rubber and oil palm) by investing explicitly in the capacities of the high technology sector, in particular electronics. She did not neglect her agriculture but rather through horizontal diversification, industrialized its agricultural sector. Malaysia’s main export products by value in 2020 were electronic integrated circuits, refined petroleum oils, palm oil, vulcanized rubber garments or accessories, and solar energy diodes or semiconductors. Oil’s contribution to Malaysia’s exports has been declining over time.

On the other hand, the pathology of Nigeria’s oil dependence has become entrenched over time. Nigeria’s oil exports in 2019 accounted for 94.1% of total exports, with oil rents amounting to 9% of GDP. The undiversified structure of the Nigerian economy reveals the country’s limited export income. 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 agro-industry and other weak/medium manufacturing sectors (textiles, garments, leather processing, goods consumption, etc.), employs relatively few people. The oil sector is an enclave, geographically delimited.

According to OPEC, Nigeria spent Import of $264.57 billion 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. This manifests itself in part, in the so-called resource curse. It refers to the paradox of a country that finds a treasure like oil or/and mineral resources, but the country experiences low or stagnant economic growth. This is the classic paradox of poverty in the midst of plenty. More insidious, the resource curse leads to 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, the manufacturing industry. Disturbingly, decades after the discovery of oil, the country does not produce the materials and equipment used in exploration and production; the sector therefore has a limited horizontal interconnection with the national economy. Domestic manufacturing inputs are minimal in the petroleum sector, particularly in the refining of petroleum products.

Indeed, Nigeria is a Consumption Nation. That’s not a Nation of production (manufacture). Dependence on oil has truncated Nigeria’s industrialization and by implication its development. How is it? The faster the manufacturing sector grows, the faster the GDP (wealth) growth of a country. This is why Nigeria ranks 99th on UNIDO’s Competitive Industrial Performance Index (CIP), while South Africa ranks 52nd in 2020.

Third, there is the pathology of inequality, including social divisions, economic income, and political voice amid abundant natural resources. In terms of quality of life, in 2019, the country ranked 161st on the Human Development Index. The same is true for the twelve African oil-exporting countries. Clearly, without exception, sub-Saharan Africa’s mineral and oil producers score low HDIs, they all experience widespread and economically debilitating inequalities that fuel conflict and division as we witness in banditry and kidnapping .

By contrast, Asian countries have grown wealthy over the past five decades by manufacturing and exporting high-quality goods and services to others. Nigeria will remain poor unless it truly organizes 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, including Nigeria, continues to export raw materials to Asia and the West.

How did a potential treasure find 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 treasury includes 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.

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Professor Banji Oyelaran-Oyeyinka is Senior Special Advisor on Industrialization to the President of the African Development Bank.

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