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Recession as Opportunity for Reversing Resource Curse - Part 1

And, sadly, it came to pass. It is well predicted that most countries blessed with natural resources, even in the best of times, perform worse economically than countries not so endowed; and that, when times are tough, countries that are dependent on natural resources come to an assured grief. There is a popular name for this strange but common condition: resource curse. It sounds metaphysical, it seems counter-intuitive even, but it is a position supported by enough evidence. And there can’t be better evidence than this: a Nigeria that is in the choke-hold of economic recession right after fifteen years of consistently high oil prices, with over N70 trillion of oil revenues earned by the federation.  

A recession might be a dramatic inflection point, but the brutal fact is that our country has never really been in sound economic health. A long spell of rising oil prices in much of our over four-decade addiction to oil had put us on a permanent high, masked the hollowness of our economic well-being, blind-sighted us to the dangers dancing in plain sight, and induced a costly work-avoidance in our leaders. Now that we are at this terrible pass, it will be tempting to just focus all our energy at getting growth back to positive zone. Without a doubt, getting out of recession should be the first order business. But doing only that will show us up, again, as a people eternally incapable of learning. This should be the time to finally wean ourselves of the unhealthy dependence on crude oil for most of our exports and government revenues; a time to reset the foundations of our economy and even of our politics; a time to get a permanent cure for what deeply ails us.

Clearly, natural resources do not come embedded with supernatural curses, as the positive experiences of Norway, UAE, Malaysia and Botswana have shown. But it is also clear how natural resources end up as blights, and not blessings, just as it is clear what to do to reverse the curse. So the problem is not lack of knowledge. The problem is that resource-endowed countries either do not do enough to prevent the sad prophecy from fulfilling itself or do not do enough to ‘cure the curse’ after it has manifested. And these countries fail to take both preventive and curative measures because countries blessed with natural resources are prone to certain risks and disposed to certain choices that create delusions, dependencies and distortions, which inexorably turn natural resources to impeders, rather than enablers, of development.

One known risk is that the prices of natural resources fluctuate. This creates revenue instability for countries that depend on resource rents to fund their budgets. Since this is known, the sensible thing would be for such countries to save enough when the prices are up as insurance against when the prices are down, and to use the windfall to create other more stable streams of income and to invest in the productive capacities of their people. But most resource-dependent countries rarely do that, as a surge of easy money induces the delusion of everlasting riches. Such countries get unreasonably high when prices of their natural resources are high and set themselves up for an inevitable fall when prices inevitably tumble.

Three episodes in four decades of our history provide good illustration. In 1972, a barrel of crude oil sold for a yearly average of $1.82. By 1974, oil price leapt to $11 per barrel, then to $29.19 in 1979, and then to $35.52 in 1980. But by the time the price of oil marginally dropped to $29.04 in 1983, our economy was already in trouble. It is important to look at the figures again: we were not in trouble when oil was $1.82 in 1972, but we were in a deep mess eleven years later when oil was $29.04.

A second episode: at the outset of democracy in 1999, oil sold for less than $20 per barrel (in actual fact, our Brent sold for a monthly average of $15.23 in May 1999) . In the 15 years between 1999 and 2014, oil prices rose steadily (except for 2008/2009), soaring to almost $150 per barrel at a point. However, by the time oil prices fell just below $100 in September 2014, we were on the way to distress district, close to the dark place we were just thirty years earlier. It is important to underscore this again: when oil was selling for $20 per barrel we got by but when it started selling for a little below $100, it was another season for weeping and gnashing of teeth, with most states and even the federal government struggling to pay salaries