How Oil-dependence Truncated Nigeria’s Industrial Development

Banji Oyelaran-Oyeyinka

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

Ordinarily, finding a “treasure” tends to bring joy to the one who found it. Oil discovery has become Nigeria’s developmental achilles’ heel. In popular parlance, a resource curse. Six decades after independence, Nigeria remains one of the poorest countries in the world. It has evolved into one of the least economically-diversified country in the world because of a pathological dependence on oil export earnings. The Covid-19 pandemic exposed the dangers of such dependence in ways never experienced in the past.

The yoke of Nigeria’s colonial past of being a supplier of raw materials rather than a processor of commodities resulted in a country of a net exporter of crude petroleum and importer of products mired in perennial debate about “fuel subsidy”. The legacy of oil-dependence also translated to a Nigerian production ecosystem dominated by foreign oil multinationals whose sole purpose is to explore, extract and export resources with zero value-addition in situ. Relying on oil has done little to stimulate growth in the rest of the economy. The manufacturing sector contribution to GDP has stagnated at below 10 percent for decades. The country has achieved neither an agricultural (green) nor an industrial revolution.

How does this come about? Oil-dependence sets in motion a strong exclusionary effect on other sectors leading to the underdevelopment of manufacturing capacity for industrial exports, and export of processed agricultural goods. This pathology of dependence is significant and troubling. It has resulted in severe perennial fiscal contraction and other economic challenges including unemployment, inflation, and payments imbalance manifesting in foreign exchange shortages.

Let me advance the first of 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 represents three-quarters (75.4%) of its total exported goods by value. With a population of 206 million people, the total export value translates to roughly $160 for every person. Compare a country like Malaysia. In 1990, Malaysia’s export was $32.8 billion. Nigeria is at where Malaysia export capability was 30 years ago. That country, with a population of 33 million people, exported goods worth $234 billion in 2020, which translates to roughly $7,100 for every resident.

In other words, Malaysia progressed; it did so through a strong Vertical Diversification from its modest agricultural base (rubber and oil palm) by investing explicitly in high tech sectors’ capabilities, especially electronics. It did not neglect its agriculture but rather through horizontal diversification, industrialized its agricultural sector.

Malaysia’s biggest export products by value in 2020 were electronic integrated circuits, refined petroleum oils, palm oil, vulcanized rubber clothing or accessories, and solar power diodes or semi-conductors. Petroleum oil contribution to Malaysia’s export declined over time. On the other hand, Nigeria’s pathology of oil dependence became entrenched over time. Nigeria’s oil exports in 2019 were 94.1% of total exports, oil rents amounted to 9% of GDP. The poorly diversified structure of the Nigerian economy reveals a constrained export revenue of the country.

The oil and gas sector make only a small contribution to GDP despite generating the majority of export earnings. By nature, the Oil and Gas sector is a highly technology and capital-intensive industry relative to agribusiness and other low/medium manufacturing sectors (textiles, garments, leather processing, consumer goods etc.), employs relatively few people. The oil sector is an enclave, geographically delimited.

According to OPEC, Nigeria spent $264.57bn importing petroleum products during the five-year period 2015 to 2020, which means that Nigeria’s petroleum products imports exceeded its exports by $43.56bn during the period.

The second pathology is the paradox of industrial underdevelopment. This manifests in part, in the so-called resource curse. It refers to a paradox of a country that finds treasure like oil or/and minerals resources yet, the country experiences poor or stagnant economic growth. It is the classic paradox of poverty in the midst of plenty. More insidious, the resource curse results to a situation where a country’s means of production are concentrated in a single industrial sector, in this case, oil production to the detriment of tradable especially, manufacturing. Disturbingly, decades after oil discovery, the country does not produce the materials and equipment used in the exploration and production; the sector therefore has limited horizontal inter-connection to the domestic economy. There is minimal domestic manufacturing input in the oil sector, especially in the oil product refining.

Effectively, Nigeria is a Consumption Nation. It is not a Production (Manufacturing) Nation. Oil-dependence truncated Nigeria’s industrialization and by implication its development. How is that? The faster the growth of manufacturing, the faster the growth of a nation’s GDP (wealth). This is why Nigeria ranks 99th on UNIDO’s Competitive Industrial Performance (CIP) index while South Africa, ranked 52nd in 2020.

Third, is the pathology of inequity, including, social/divisions, economic/income, and political/voice amidst natural resources abundance. In terms of quality of life, in 2019, the country ranked 161st on the human development index. The same applies for all the twelve oil-exporting countries in Africa. Clearly, without exception, minerals and oil producers in sub-Saharan Africa score low HDIs, they all experience widespread and economically debilitating inequality that fuels conflict and divisions such as we are witnessing in banditry and kidnapping.

In contrast, Asian nations have become rich over the last five decades by manufacturing and exporting high quality goods and services to others. Nigeria will remain poor unless it truly engineers economic diversification. For example, 70% of global trade in agriculture is in semi-processed and processed products. Africa is largely absent in this market while the region, Nigeria included, remains an exporter of raw materials to Asia and the West.

How did a potential treasure find turned to a curse? To be sure, oil abundance is not by itself a curse or a blessing. What determines the development trajectory of such a treasure include the nature of a country’s political economy, policies and the institutional context within which the country operates. Oil in Nigeria became a curse for four reasons among others.

First, elite greed for power and money. Politicians expend oil revenue to extend patronage and entrench cronyism as the next election not the next generation is their mission.
Professor Oyelaran-Oyeyinka, is Senior Special Adviser on Industrialization to the President, African Development Bank. He is a Professorial Fellow, United Nations University-MERIT, the Netherlands and a fellow, Nigerian Academy of Engineering.

Second, as oil revenue services a patronage system, the State has no incentive to please citizens and less so to invest in say 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 Voracity effect/cost of government: politicians living and spending oil revenue lavishly while majority of the citizens languish in poverty.

Last, there is a lack of long-term vision for economic development and economic diversification. In sum, rent seeking policies have resulted in resource curse that fuel corruption and citizens’ grievance, triggering of civil conflict, ethnic fractionalization particularly in the context of dysfunctional institutions. For now, the country is stuck on low-growth equilibrium trap engendered by too long a reliance on “easy-come-easy-go” oil money. Up until now, this country has treated natural resources as an everlasting resource and for such reason, failed to diversify its economy. This has to change urgently.

More critically, the time of reckoning has finally arrived because Nigeria, like all oil-dependent nations will face gradually declining investment flows in their hydrocarbon industry as pressure to meet global emission targets intensify.

It is not too late. The country has abundant land and other agricultural resources to become an agribusiness super-hub in the next ten years. Let all elites agree to an agenda of building the Special Agro-Industrial Processing Zones (SAPZs) in all states of the federation.

Professor Oyelaran-Oyeyinka, is Senior Special Adviser on Industrialization to the President, African Development Bank. He is a Professorial Fellow, United Nations University-MERIT, the Netherlands and a fellow, Nigerian Academy of Engineering.