The Petrolization of Nigeria’s Economy and Her Current Discontent
In 1908 the first major oil exploration in Nigeria was conducted by Nigerian Bitumen Corporation, a German company. The search was unsuccessful. It took twenty-nine years for another serious undertaking to discover the presence of oil in 1937; this time the effort was led by a Dutch, and a British company – Shell and British Petroleum(BP). The companies formed a consortium known as Shell-BP Petroleum Development Company, and in 1939 received an Oil Exploration License from the federal government of Nigeria to drill for oil. In 1956 Shell-BP drilled the first productive oil well in Oloibiri, a town in the delta region of the country, and by 1958, the company successfully pumped and exported five thousand barrels of crude oil. Ever since, however, production levels have steadily increased, albeit with both minor and major disruptions due to conflicts, and bureaucratic inefficiencies. By 1968 every oil company in Nigeria was owned and managed by foreign firms; but in 1969 the federal government enacted an initiative, Decree N0. 51, that enabled it to gain full control of the oil industry. This decree, upon implementation, vested ownership in the federal government of all petroleum discovered within the territorial competence of the country. Once achieved, Nigeria joined OPEC in 1971.
By the mid 1970s, the oil sector, still relatively in its infancy, remained completely in the hands of foreign firms, notably Shell, with 42% share of total crude production; others, in order of importance, were SAFRAP (French) with 21%, and Gulf Oil (USA) with 15 percent. During this period increasing oil production and the accompanying oil boom in the international arena made it possible for Nigeria to embark on numerous state-sponsored infrastructure development. But as the federal government pursued its social agenda the percentage of oil revenue that went to oil producing states steadily declined from 50% in 1970 to 20% between 1975 and 1979; between 1992 and 1999, it had declined to 3 percent (UNDP, 2006:15). However, in 1999 a revised national constitution increased the share of oil revenue going to oil producing states to 13%; unfortunately, the bulk of this revenue never went to improve the welfare of individual states or their inhabitants; instead it was misappropriated at state and local government levels (Collier, 2001).
Rising oil revenues in the early 1970s made attempts at industrialization possible; this period also witnessed improvements in health and education sectors. But because the projects embarked upon were capital intensive and poorly designed, they did not have desired development effects and did not lead to expected diversification of the economy. The squandering of realized oil revenue led to higher borrowing and a remarkably high debt burden as international interest rates rose in the late 1980s, and oil revenue dropped. In a quick-fix response the federal government introduced structural reform policies in 1986, and predicated their implementation on a sharp devaluation of the national currency that subsequently caused domestic prices to rise with devastating impact on the middle class; the prevailing level of poverty did not fare better. In due course, partly because of the failings of the central government and an entrenched patronage system of resource allocation, social infrastructure began to deteriorate; the healthcare and education sectors bore the heaviest burden through drastic cuts in funding. By the second half of the 1980s the percentage of the population living in extreme poverty rose form 35% in 1970 to 70% by mid 1990s (World bank, 2001). According to recent surveys, more than 50% of the population now lives on less than $1 per day, and more than 80% lives on less than $2 per day (UNDP, 2008:35).
In the late 1980s it was clear to all concerned, but especially to development experts, that Nigeria was quickly becoming a prime example of the ‘curse’ that natural resources can bring. Paul Collier (2009) was persuasive on this:
“Indeed 50 years of substantial oil production have not resulted in sustainable socioeconomic development in the country. The poverty rate is extremely high, with 50% of the population living on less tan $1 per day; in fact, the current poverty rate exceeds that of the period before the first oil boom of the 1970s, which was 35%. The social and transport infrastructure is in a desolate condition, and the country is marked by chronic internal instability and periodic flare-ups of violent conflict.”
The absence of quality drinking water, access to healthcare, and erratic electric supply make for serious development problems. Widespread unemployment is also a significant symptom of economic distortions that accompany oil-dependent economies. The oil industry in general is capital intensive and less reliant on human labor for its operations. In the case of Nigeria, this reality is exacerbated by the fact that crude oil from the country is shipped to foreign-based refineries, thus depriving the economy an important avenue for additional employment of labor and capital. As a consequence the entire oil industry employs approximately only 35000 workers in a country of over 130 million people.
Since the formation of OPEC in 1960 under the auspices of Juan Pablo Alfonso of Venezuela, developed economies as well as oil-rich but yet to be developed ones, witnessed an unprecedented transfer of wealth made possible by the cartelization of oil producing countries. With proper guidance by this cartel oil prices in the international market quadrupled in 1973; this ushered in the first oil boom, and the revenue windfall forever changed both the material well being of recipient states and the geopolitics of oil. To the developed economies of the world dependent on oil as a major source of energy, the spectacular rise in crude prices represented an external ‘shock’ to their respective economies; to the oil-exporting states it was a bonanza that held the potential for economic growth and prosperity. But in less than a decade of this unprecedented wealth transfer, all oil-exporting countries within OPEC suffered a similar fate: bureaucratic inefficiencies, capital flight, production bottlenecks, crippling graft and corruption, overvalued currencies, and decline in Gross Domestic Products; their aspirations for a development trajectory fueled by industrialization made possible by oil revenues were shattered. The effect of this bonanza on oil producing states has been the subject of debate across academic disciplines (Karl, 1999).
In the case of Nigeria economic under-performance may be readily traced to these culprits: the multiplicity of states in a short time span without requiring that each state be economically viable, bad leadership and compromised social institutions, bureaucratic corruption, reliance on one natural resource (oil) to develop the economy, the absence of an effective industrial policy, and a policy of ‘free’ and unregulated international trade and exchanges. The fact that the country is comprised of ethnic groups with remarkably different histories, social institutions, and no common unifying factor such as language, culture or religion may also not be ignored as a contributor to its current economic and political state of affairs. For the concept of a nation implies integration of acquired or native divergences—the formation of a sense of belonging that forms the basis of nationality which ultimately suppresses sub-national loyalties. Indeed for many inhabitants of the newly created states, there is no identification with the state as a source of collective identity. This absence of a unifying symbol becomes acute when elevated to the national level, thus creating a shifting vacuous political community that lacks an anchor and a united sense of direction requisite for sustained development.
The discovery of oil in commercial quantities fueled the impetus to create more states on the mistaken assumption that it would enable the country to efficiently allocate its resources in different regions of the country, taking advantage of each region’s natural and technical endowments to propel robust and comprehensive economic growth. This assumption was predicated on the belief that each ethnic group, by advancing its own social and economic interest, would use resources derived from the central government more efficiently. Moreover, creating and giving more autonomy to individual states would serve the beneficent goal of de-centralization of political and economic power; shifting power, as it were, from the federal government to individual states that know how best to serve the needs of its citizenry. This assumption, while reasonable, was severely misplaced; the requisite social institutions were wanting.
The problem with this model of development is that it failed to recognize the real possibility of dependency on the center for continuous fiscal support; for economic dependency tends to erode the will for self-sufficiency. That this is the current reality is no surprise, for the states, realizing that the federal government is a reliable and guaranteed source of financial aid, did not see the need to be self-sufficient. But worse, individual states allowed existing industries in their respective regions before the sub-division to fall into disuse, and ultimately ceased to exist. Northern states, known for their proficiency in the production of groundnuts, hides and skins simply abandoned the sector; southern states, where palm oil, palm nuts, and rubber were formally produced in abundance, and sustained subsistence and commercial productivity, found it unprofitable to expend wind-fall resources on these endeavors … it was simply less stressful to collect needed revenue from the federal government. In a very real sense, Oil revenue has now effectively displaced all other sources of national income. Essential agricultural and primary commodities that once sustained the newly independent country became subjects of imports; the economy was not fully petrolized.
The damaging consequence of this chosen path to development is the disincentive for self-reliance. The policy of state creation did not include, as a pre-condition for statehood, proof of economic viability. As a result almost thirty of the thirty-six states that now exist cannot support important state functions without financial support from the federal government; but more importantly, the limited revenue from oil is used to duplicate state functions, i.e. to pay for the services of more governors, and their administrative staff, more commissioners and associated agencies. At the end, these duplicative services dissipate the limited revenue from oil, and fail to meet the stated objective of targeted investment and development; they also provide more avenues for bureaucratic corruption, and outright theft of state resources. How to end this vicious cycle would be the subject of future articles.