Nigeria: Dealing with the resource curse in a hopeful continent

The Swiss Global Economics

March 2014

The Macro Picture• Economic growth in Nigeria will accelerate this year, driven by

sectors outside its dominant energy industry, while inflation will continue its downward path.

• The economy is set to grow 7.3 percent this year, up from 6.4 percent in 2013.

• Inflation will end the year at 7 percent, down from 7.9 percent at the end of 2013, continuing a two-year downward trend supported by tight monetary policy.

• Nigeria plans this year to recalculate its gross domestic product, which could push it above South Africa as the continent’s biggest economy, although the rebasing has missed several deadlines already.

• Economic growth is expected to improve further in 2014, driven by agriculture, trade, and services.

• Inflation should continue to decline, with lower food prices from higher rice and wheat production and supported by a tight monetary policy and a budget execution that maintains medium-term consolidation objectives.

A history of Nigeria…exports

The Curse

Inequality

Poverty

Big improvements since 2000

But on the back of rising oil prices

A “perfect storm”

• How can more be less? • What are the underlying forces at play?

– Economic– Social– Political

• What has changed more recently? How to make progress?

• Intellectual tools: macro, micro, institutions

empathy• What did people experience since independence?• Fast social transformation -- urbanization• Ethnic and religious conflict, the Biafra civil war• Rising inequalities• Corruption big and petty• Army control, coups• Public servants, crony capitalism• Young democracy – civil society activism• Big expansion of the scope of the private sector• A large, diverse, and vibrant country

Structures of Governance

• Group dynamics – Biafra and aftermath– Geographical question– Elite coalition, army, oil, states

• Delta conditions, flare-up, and peace plan• Mahmood Mamdany’s historical analysis:

– Indirect rule– bifurcation and agriculture– Big men

Key questions relevant for future too

Economics

• Benefits reduced– Low investment– Agric shrinks– Low quality of public

expenditure• Can more be less?

– Volatility leading to bankruptcies

– Miss out on dynamic sectors

Politics

• Negative sum games– Wars– Grabbing equilibria– Social development

Volatility -- households

• Smooth consumption (at or below average) preferable to swings– Why: marginal utility of income, risk aversion

• Can smoothing be engineered? – Financially? – Other coping mechanisms?– State led safety nets– Urban migration

Volatility -- firms

• Economy wide impact of oil price volatility: creates volatility in XR, IR, unemployment, inflation (a business cycle of boom and busts)

• Firms: Limited access to capital markets means very high exposure to risk: risky and thus low investment; moves to trade and to non tradable services

• Gaming by large concerns– Limited liability – banking crisis of 2007– Too large to fail – states, banks– Rent-seeking versus wealth creation

Volatility and rents – macro

• Can be smoothed (counter-cyclical policies) but not easy, requires fiscal and monetary instruments, plus lots of political discipline

• Gov. Budgets: irreversibilities – wages; hubris and over-reach – public investments wt low capacity utilization

• Dutch disease and impact on agriculture• Missed out on dynamic industries like

manufacturing

Pro-cyclical spending

Correlations between Government spending & GDP 2000-2009

procyclic

al

procyclic

al

.

In the last decade, about 1/3 developing countries

switched to countercyclical fiscal policy:Negative correlation of G & GDP.

Frankel, Vegh & Vuletin (2012)

Spending on what?

Dutch disease

agriculture

Urbanization and food imports

Governance effects at the heart

• Rentier effects– Fight over resources, grabbing games – Authoritarian bargain and spending – Competitive democracy and electoral fiscal cycle– Taxation and representation

• Repression effects– Military rule

• Modernization effect– Institutions deformed: Abuja, civil service, PEs, states, army– Group formation – wealth creation vs lobbying activity

• Volatility – Affects the terms of the autocratic bargain – Coordination failures (tragedy of the commons)

Effect of Elections on Budget Deficits:Developed vs. Developing Countries

Electoral cycle

Inefficient public enterprises

State and Center Contributions to Total Debt in India

Check-list: The Natural Resource Curse

Seven possible channels that some have suggested could lead to sub-standard economic performance

• Wealth Fund -- Commonly suggested model:– Norway’s National Petroleum Fund (now “Pension Fund”)

– When oil prices are high, save it in a fund to offset depletion of reserves.– Internationally diversified.

• Even better model:– Botswana’s Pula Fund– Professionally managed; no political interference.

• Extractive Industries Transparency Initiative (UK, 2000)– International oil companies “publish what you pay.”

• World Bank plan to safeguard Chad oil revenue– revenue would have gone to Citibank escrow account in London; – law dedicated 70-90% for spending on health, ed., & roads,– 10% for “future generations fund”– Chad backed out

• Collier (2007): International charter: members pledge formal revenue audits.– The World Bank or IMF holds the kitty.

What reforms seem most relevant for Nigeria today?

• Oil stabilization fund (how to make it stick?)• Oil dividend in Delta (and how?)• Diversification: support for agriculture (in a

decentralized framework)• Decentralization (can budget constraints be

hardened?)• Public Private partnership (PPP) for

electricity/gas (principal-agent)• But also: reforms within the ruling party

Key Lessons

• Size and variability of budget deficits in developing countries driven in part by interaction of de jure and de facto institutions

• Emphasizing principal-agent problems leads to a policy focus on reducing rent seeking and increasing citizen information

• Emphasizing collective action problems leads to a policy focus on political parties and coalitions

• Analyzing “political supportability” of reforms requires assessing political parties’ internal rules and norms and external coalitions

Which case fits Nigeria best?

An opportunistic agenda

• State capacity: at state level, taking advantage of example of Lagos state, electoral competition, and rise of agriculture

Growth and (just in time) incremental reforms cutting across capacity and governance and focusing on stabilization (oil Fund), corruption (banking system, budget process), security (ethnic clashes), PPP in gas and electricity

• Institutional transformation: at ruling partly level, given risks of ethnic competition, upcoming elections, rise of civil society

Bottom up reforms: in the Delta region, implementation of the direct transfer agreement,