How to avoid Dutch disease: The case of Nigeria

By Editorial Board - 17 July 2015 at 10:42 am

Managing Nigeria’s excess oil revenue has never been easy. From Sani Abacha to Olusegun Obasanjo, many of Nigeria’s presidents have famously looted the country’s coffers made rich by oil money. From Nigeria’s independence in 1960 to the year 2006 an estimate $380-400 billion has been stolen by the country’s leaders. Of course, the fault is not in the oil itself or the “resource curse,” but in the country’s ruling officials.

Strictly speaking, the Dutch disease is the terminology applied to the crowding out of a traditional export by a new booming one. More generally, a nation develops the Dutch disease syndrome in the event of a “windfall” of income that leads to damaging or destructive consequences in the economy, to include the harm of a traditional flow of income in the nation.

The windfall could come in the form of increases in the price of exportable goods (to include natural resources), but also possibly could include a rise in foreign aid, investment or loans from other countries or institutions. What initially gave rise to the Dutch disease syndrome was when nations started trading with each other.

The present name “the Dutch disease” comes from an economic situation that arose in the Netherlands in the 1960s after the finding and exploiting of vast deposits of natural gas in the North Sea. Thereafter there was a massive rise in the nation’s income (foreign exchange values) and a tremendous appreciation of the nation’s currency, the Dutch guilder, which led to a reduced competition among those who traded in other parts of the economy besides oil and gas. The spike in oil business led to the decline of other exports. By the middle of the 1970s the Dutch disease took on an undesirable form in other oil exporting nations and in some developing and aid-dependent nations.

The Dutch disease takes root in a nation in the wake of a boom in the export of a commodity. Divided into the sectors, the economy looks something like this: the booming export sector, the lagging traditional export sector and the sector without exports. The Dutch disease spreads when the tradable goods sector is pushed out by the booming export sector. The slow traditional goods might include cotton, palm produce, cocoa, copper, coal, rubber, textiles and other manufactured goods. The booming sector could be gold, coffee, crude oil, and etc. Non-tradable items (non-export goods) includes those items that are made for domestic consumption exclusively; food, clothing, building materials, and etc. With crude oil booming, non-oil products can be crowded out by the oil business and non-tradable goods.

This happens when the oil windfall gives rise to domestic demand for such things as non-tradable goods and increases domestic prices which gives way to an increase in the exchange rate, reducing competitiveness in other export businesses. Thereby we will see a reduction in other business exports in terms of quantity and quality. A windfall of oil can lead to shifts in terms of the production and labor economy. Capital and labor might move from non-oil business to oil (to keep a steady rise in reserves and production) and non-tradable goods (in order to make use of the increasing domestic demand). This goes to show why a windfall in the oil business may hurt other parts of the economy while generation a boom in oil and non-tradable goods.

Sometimes, although rarely, the Dutch disease can lead to “Immiserising Growth syndrome”—a situation in which a rise in the production of an exported commodity by a nation causes the deterioration of a nation’s welfare. Such is the case when the result of export-driven growth on the trading of a nation is of a caliber to more than offset growth benefits. Such a case is rare; that of self-defeating expansion.



So, how does a nation avoid such a terrible curse that ultimately has the power to uproot and destroy the existing economic infrastructure of the nation? Could Nigeria have possibly avoided the calamitous situation that has been brought upon them by the discovery and export of oil? Would they need outside help and regulation to do so or could they correct the problem on their own and of their own free will?

First the incentive much exist within a country in order to heal its problems. The national character of Nigeria is such that, in all probability, sorrowful though it may be, the problem will not likely be fixed in the near future. Until either the oil has run out or an outside factor, such as the invention of a new energy source, slows or perhaps even stops the production of oil which in turn will decrease the world oil production Nigeria, it seems, will continue to rely on oil as its main source of income.

Why will the curse never be lifted from Nigeria as long as it continues to rely on oil as its main source of revenue? Because in Nigeria there is the long tradition of politicians and governments controlling the oil export business and pocketing the proceeds. Many, if not most politicians in Nigeria get into politics in order to become rich because they have seen their political predecessors loot the country’s coffers without worry for consequences. The politicians invariably hand off their high offices to their loyal followers who wouldn’t dare prosecute them as they are greedy themselves and will continue in the tradition of the prior government.

You need in place a national character, an ethos, which cares about the welfare of the entire nation, that doesn’t turn a blind eye to the starvation and disease that is domestically rampant. People will come out of that national character and work to build institutions that follow the rule of law to create sound wealth distribution that exists in countries such as Norway. Corruption breeds corruption, and once it is widespread, it is very hard to root out.

But all hope is not lost, Nigeria still has other valuable economic potential; there are at least three mineral resources in the 36 states which could greatly contribute to the economy of the country. Under the previous administration Nigeria’s GDP expanded to such an extent that it overtook South Africa. A plan was also put in place to make Nigeria one of the world’s largest rice producers. These actions show that Nigeria has planned for the decline in oil revenues replacing them with other assets, keeping the economy in tact. If the political will is continued by the new administration to adjust the country’s reliance on oil to a more diversified economic base then Nigeria is bound to cope with the falling oil prices, which may just be the push it needs to stay on track with reforms.

Editorial Board

Editorial Board

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