16 April 2003
Improving Nigeria’s Development Prospects, Fundamentally
Mass media - Articles XSM
Financial Times

Tags: Africa | Capitalism | Freakonomics | International

Nigeria has been the metaphor par excellence for a failed development experience. Average incomes are amongst the lowest in the world. Poverty is endemic, with more than two-thirds of the population living on less than US$2 per day. And the distribution of income is more skewed in favor of the rich than anywhere else in the world: the top 2% percent of the citizens earn the same total income as the bottom 55% percent.

What can be done to change the record of a country that, along with South Africa, holds the key to the elusive African renaissance? This is an opportune time to ponder this question as Nigeria is on the cusp of consolidating its democratic transition. An unprecedented second consecutive democratic election, if successfully concluded over the coming days, would go a long way towards decisively burying the ghosts of dictatorships past.

But on the morning after, as the victors contemplate the daunting challenge of transforming the Nigerian economy, what should be on their minds?  They could, of course, resolve to provide visionary leadership and implement the familiar litany of reforms: prudent macroeconomic policy, privatization, trade liberalization, better governance, etc. But would this really work? Would the new leadership be able to deliver where previous ones—dictators and democrats alike—have failed? Even under the recent democratic government, and allowing for the sorry inheritance left by 40 years of mismanagement under military rule, the track record on reforms was disappointing at best.

Our advice to the new leadership would be to focus on one key issue: managing the revenues from oil. Actually, we would propose that the government stop managing these revenues and turn over a large fraction directly to the people as is done in the US state of Alaska and the Canadian province of Alberta. At the earliest opportunity, the new leadership should convene a conference of all national and regional leaders and secure agreement on a constitutional provision whereby each household would be guaranteed a share of oil revenues, with the amount determined by prevailing prices and quotas. What is the rationale of this radical proposal and how might it be implemented?

Our recent research demonstrates that Nigeria’s poor economic performance is, above all, a story of the mismanagement of revenues from oil. Based on evidence from a cross-section of countries, we find that that natural resources such as oil and minerals are indeed a “curse,” exerting a sizable drag on long-run economic growth. More importantly, we find that the real curse of possessing oil is not so much that it gives rise to the famous dutch disease —the misallocation of resources away from traded sectors— or that it generates uncertainty due to the volatility stemming from price fluctuations.  Rather, we find natural resources corrode the domestic public institutions that are so critical for long-run growth. The revenues from oil generate a whole series of related pathologies—rent-seeking, patronage, corruption, plunder—that undermine good governance to a degree that an economy such as Nigeria’s can ill afford.

It is imperative therefore that oil revenues be taken out of public hands to the greatest degree possible and handed over to the private sector. This solution is rendered more urgent by the prospects of the future exploitation of Nigeria’s vast reserves of natural gas. Nigerians celebrate the discovery of these reserves. Sadly, we fear that natural gas may only aggravate and prolong the “curse.”

Our proposal would have a number of advantages. Above all, it would create the right incentives for governance. Currently, oil accounts for a substantial share of total government revenues. As such, the government has little incentive to provide services efficiently because the discipline exerted by the need to tax the public is largely absent: oil revenues are manna from heaven and keep flowing regardless of what the public sector delivers.

Moreover, while Nigeria is formally a democracy, the balance of power between citizens and public officials, including those at state and local government levels, is inordinately skewed in favor of the latter by virtue of their easy access to oil revenues. This perpetuates politics, even democratic politics, as patronage. It is probably no secret that Nigerians, for example,  view many state governors as emperors rather than as officials responsive to the citizenry at large. Empowering citizens by giving them money could rectify this imbalance and go some way toward improving accountability and the functioning of democracy.

Finally, our proposal also offers a way out of the ongoing and sterile debate between international donors and Nigeria on the issue of debt relief.  Nigerian officials and the public rightly wish to see the burden of external debt lifted, especially since a sizable part of the debt was “odious” (contracted by dictators) and in which there was a large degree of creditor complicity.  But donors, even those who accept the economic and moral arguments, are wary about providing debt relief.  They justifiably fear that any savings from relief may well be used or rather misused as other public resources have been. Under our proposal, the savings from debt relief would also be distributed directly to the private sector, alleviating donor’s legitimate concerns while at the same time responding to Nigerian grievances.

The implementation details of our proposal need to be worked out by the Nigerian political process. For example, a decision needs to be made as to whether the transfers go each citizen or each household (a yearly check for each person in the family may have undesirable consequences on fertility as parents start having children simply to collect the check). Also, they need to decide whether all intended beneficiaries have equal share of revenues or those who face the environmental consequences of oil exploitation, for example in the Nigerian delta, receive a higher amount. Another question is how much of the revenues should be transferred, and how can transfers be effected in a country the size, the complexity and the financial backwardness of Nigeria. Even with all the difficulties of corruption and inefficiency that will no doubt plague its actual implementation, our proposal will, at worst, be vastly superior to the status quo. After all, the terrible current situation is the result of staggering corruption and waste over the last 40 years. At best, however, our proposal could fundamentally improve the quality of public institutions and, as a result, transform economics and politics in Nigeria for decades to come. But the time to act is now.