Feasibility Study of Natural Resource Management Strategies for Nigeria based on Selected Country Cases of the United Arab Emirates and Norway

Content

1.Introduction

2.Methodology

3.Literature Review
3.1.Resource Curse
3.2.How to escape/avoid the resource curse?

4.The United Arab Emirates
4.1.Economic development
4.1.1.Macro economy
4.1.2.Macroeconomic policies
4.1.3.Other instruments of the Government
4.2.Social development

5.Norway
5.1.Macro economy
5.2.Government Pension Fund Global

6.Nigeria
6.1.Development
6.2.Feasibility study for Nigeria

1. Introduction

When comparing the economic development of resource-poor and resource-rich countries, it seems quite surprising that the majority of resource-abundant countries perform worse than resource-poor countries. A large amount of academic research has been conducted on this unusual phenomenon and it was given the name ‘Resource Curse’. The theory states that there is an inverse relationship between a country’s natural resource endowment and its economic development.

In this study, two countries that have, according to the general academic consensus, despite their resource-abundance had a prosperous economic development and thus supposedly managed their natural resources well.

The United Arab Emirates (UAE) and Norway are often cited examples of how to avoid or escape the natural resource curse. But the question is what their key management strategies are and whether those can be transferred to and implemented in other resource-abundant countries that suffer from the Resource Curse?

In order to find answers to these questions, after analyzing the UAE and Norway, both countries will be compared to Nigeria, known to have a lot of difficulties with its natural resource wealth and consequently struggles economically.

The overall purpose is to check different ways of dealing with natural resources efficiently and examine whether Nigeria could possibly escape the Resource Curse by adopting some of these strategies used by Norway or the UAE.

2. Methodology

In order to resolve the feasibility of selected countries’ strategies to overcome the Resource Curse the writers have to find suitable methods. Attempting to investigate about countries’ social and economic history, various sources have to be used. Firstly, a literature review with research results of main scholars about resource curse will be done to set the theoretical framework of the research paper. The aim is to filter main criteria and symptoms, summarize main solutions from listed sources to gain a brief overview about the topic.

Secondly, research on selected countries will be done following mainly a qualitative approach. The writers will make use of current research papers which discuss the resource issue in these countries explaining how the management of natural resources was or is done. To reach valid and reliable arguments quantitative data will be added. For this purpose statistical data from World Bank, national statistics offices or data from accepted companies will be used.

Finally, weighting the strategies of each country and confirming their feasibility to Nigeria are conducted.

Due to different development stages of the countries it may be challenging to retrieve all necessary quantitative and qualitative data. In case this happens, assumption or estimations have to be used in order to get an unmistakable picture. The writers are aware that completeness cannot be reached within this study work, but rather limitations are set to have a tighter framework to work on.

3.Literature Review

3.1.Resource Curse

The term Resource Curse proposes that a natural resource abundant country is economically worse off than a country without high natural resource endowments. This research project concentrates on the natural resources of oil and gas, since these resources are of crucial importance for the whole world economy. Furthermore, due to a restricted time frame the scope of this research project needed to be limited. There are several economic symptoms and explanations about the Resource Curse's emergence, causes and effects on a country:

CURRENCY APPRECIATION: When a country is blessed with natural resources like oil or gas, it is likely that these products are exported and then the current account surplus implies a huge inflow of foreign currency, which consequently, causes an appreciation of the domestic currency. As a result, other sectors of the economy suffer from reduced profitability and shrunk productive basis of the economy.¹ This phenomenon is also often described as the Dutch Disease. In the 1960s, the Netherlands discovered large natural gas deposits in the North Sea. In the subsequent years, due to increased exports of the natural resource, the inflow of foreign currency grew and thus, the Dutch currency appreciated. Consequently, other sectors of the economy (unrelated to gas) lost their competitiveness in the international markets and profitability stagnated.

VOLATILITY: Resource abundant countries lack the opportunity to influence resource prices on the world market and consequently from fluctuating commodity prices and the quantity of oil money coming in, as well as the timing of the earnings.² The volatile development of oil prices is displayed in the figure below. During the 1970s and 1980s and the beginning of the 21st century huge price surges could be observed. This led to skyrocketing budgets of countries exporting oil. The same happened in reverse to the countries in the mid-1980s and 2009.

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Figure 1: Crude Oil Price in US$ (per barrel, in 2012 US$), Source: British Petrol p.l.c. (2013)

UNEQUAL EXPERTISE/ ASYMMETRIC INFORMATION: In times when resource-rich developing countries did not have any capacities to exploit oil or gas, they were dependent on international corporations to come into the country. With greater experience and bargaining power negotiation results were mainly in favour non-national firms. Recently this changed to the establishment of national corporations to exploit and process the natural resources but asymmetric information situation persists in regard to the national population.³

"LIVING OFF YOUR CAPITAL”: Natural resources are unlike human or capital resources a finite asset, which if fully depleted cannot be recreated and cannot generate any income anymore. These resources belong to the country’s capital and if the revenues are spent as regular income the country's capital is decreasing persistently and ultimately vanishing.

WEAK INSTITUTIONS: The rent-seeking behavior of producers which profit from the natural resources combined with institutional weaknesses (e.g. lack of property right or legal structures) leads the country’s economy to a more unsocial economy and may provoke strikes or even civil wars.⁴

SOCIAL GAP: Overall, the development of GNP per capita has not been parallel to the improved living and social conditions for the society (e.g. indicators like HDI, Gini coefficient, school enrolment, life expectancy or productivity) and due to this fact proves the unequal distribution of natural resource earnings.⁵

CORRUPTION: The likelihood of corruptive behavior either from governmental officials or from oil exploiting companies is high in resource-rich countries as high state earnings or oil profits can foster political campaigns, finance military to defend the rulers' power⁶ or create the financial capabilities to enforce own wills.

UNDERINVESTMENT IN EDUCATION: The importance of labor or education is neglected as the profits are gained from the non-wage part/ capital-intense part of the economy. Basically, school enrolment is inversely related to resource rents and declines the higher the rents are.⁷ Only when a country's economy needs to start diversifying, then the problem of this insufficient investment becomes obvious and severe and may lead to a change.

Other symptoms touch political influences such as democratic structures, military spending, state system and the general power of the state towards the population. While these influences are too essential to be fully ignored, this paper aims at focusing on economic and social developments and thus, mainly considers indicators linked to these areas ignore the prevalent political systems or state systems fully.

3.2. How to escape/avoid the resource curse?

The academic literature proposes several ways how to escape the curse of natural resources or how to mitigate the negative effects:

1. According to Macartan ⁸ (2007b), earnings from resource depletion should be invested rather than consumed, e.g. in financial (financial assets abroad, sovereign wealth fund – “Natural Resource Funds”), physical (e.g. roads, ports, power networks) or human (education spending) capital in order to avoid negative impacts on non-oil industries. The other option is to leave the oil in the ground, at least for a certain period of time. The suggestions are also related to the relative wealth of a country.

“Poor” countries: These states are advised to accumulate their oil income in a national fund and to spend “only” earned interests as infinite income (e.g. finance pensions)⁹
“Rich” countries: The best solution seems to be investment in sovereign wealth funds, as social and technological development level has already reached global top scores.

2. Fair distribution of the benefits within the country should be provided to share the income of the resources equally. Direct cash transfers are regarded as one measure to do so in this respect.

3. National governments should make use of fiscal policy measures, e.g. implement a classic taxation system with value added tax and income tax to establish a participation linkage from the population to the state¹⁰ and more importantly limit the de-stabilizing effects of the revenue volatility due to commodity market prices.

4. Additionally, the implementation of an appropriate monetary and exchange rate policy is advisable. Countries should consider the effects of floating and pegged exchange rate to avoid currency appreciation and influence the competitiveness of the whole economy.

5. Countries suffering from negative effects when dealing with their resource abundance should prepare an exit-strategy with substituting industries early on to avoid economic shocks when oil or other resources are finally depleted.¹¹

In the following sections, the United Arab Emirates and Norway as two countries supposedly having escaped or avoided the natural resource curse will be examined. How they managed their resource wealth successfully and developed relatively better than other resource abundant countries and whether they applied suggestions from the academic literature will be considered.

4. The United Arab Emirates

The United Arab (UAE) is a relatively small country in terms of size and population but holds the 7th largest oil and gas reserves (97,8 thousand million barrel oil, 6,1 trillion cubic metres gas) in the world according to the latest BP Statistical Review of World Energy 2013¹². The reason for investigating about this country is the presumed success in dealing with the natural resources abundance in creating a strong economy and a welfare state based on oil and gas exports. However, this reliance can result in the country to suffer from the symptoms of the Resource Curse. In the following chapter an examination of the UAE will be done to uncover the possible success factors and preconditions which may have contributed to this development. What policies were used and which economic, social and political development could be observed during the last 30 years? Can the development be called a success or merely only “escaping the resource curse”?

4.1. Economic development

4.1.1. Macro economy

The country, consisting of seven independent emirates, was founded in 1971.The emirate Abu Dhabi was the first emirate to find oil and consequently exploitation started in the 1960 prior to founding of the state.¹³ In the following decades the importance of oil exploitation and supplementary industries increased and became the major part of the economy.

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Figure 2: Total natural resources rents (in % of GDP) of the UAE 1975-2012, source: adapted from World Bank (2014c)

Resource rents in % of GDP have fluctuated moderately from 1980s on but also show the significance of this income as the global average is 3.5% of GDP.¹⁴ The share of total GDP has never dropped below 10 percent. Following graph shows the development from 1975 to 2012.

GDP development data are available from 1975 on. Both, annual GDP growth and total GDP provide an overall optimistic picture.

The overall growth of real GDP was 5.4 % during the last decades, however still lower as the GDP development of the East-Asian tigers.¹⁵ If compared to 1975, the statistics show a positive trend of the GDP development with only some negligable downturns, e.g. in the 1980s and 2009. The two graphs below illustrate the progress.

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Figure 3: Real GDP Growth (annual %) of the UAE economy 1975 - 2012, source: adapted from World Bank (2013c)

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Figure 4: GDP of the UAE (constant 2005 US$) normalized 1975 = 100, source: adapted from World Bank (2013c)

Figure 5 below gives an overview of the composition of total GDP. During all decades the agricultural sector can be neglected due to the low significance of maximum 2.34 % of total GDP. Compared to the industry sector there are more fluctuations since 1975, varying from 40 to 74 %.¹⁶ For a country with a resource based economy, a look on the subgroups of the industry sector is advisable. Manufacturing as a part of industry could not be enhanced to a higher level and has stagnated around 10 % of GDP.¹⁷ In comparison, oil and gas has always represented a huge share of the economic activity. This can be seen in both high resource rents and in a large share of the industry sector of total GDP throughout the last 37 years. Although data are available only from 2001- 2012 to prove the significance of the natural resources, it becomes obvious, that they represent a huge share of total GDP and of the industry sector itself.

The service sector has developed in a fast pace in comparison to agriculture or manufacturing. Now, a highly developed banking system and capital market with global actors can be found in this Arabic country. Although suffering from fluctuations it can be asserted that the share has been lifted from less than 30% to above 40% of UAE GDP.

Nonetheless, the non-oil contribution to the GDP has steadily risen up to 71% in 2011 and is by now the largest of all Arab Gulf oil producers.¹⁸

To reduce dependence on resources and their exports diversification in the economy can be observed recently, mainly in the areas of infrastructure projects, financial system, trade hub and tourism.¹⁹

Regarding the exports, it can be observed that in 2011 41% of total exports were "fuels"²⁰. Fluctuations are mostly caused by changing global oil prices. Other products can be marginalized, as no other significant export goods have been developed so far.²¹

Fluctuating world oil prices affect the UAE economy immediately and increase uncertainty for the whole economy (observed during crisis' years of 2008/2009).

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Figure 5: Sectors of the UAE Economy (in % of GDP), sources: adapted from World Bank (2013c) and United Arab Emirates National Bureau of Statistics (2012)

[...]

¹ Soto, R.; Haouas, I. (2012), p.5

² Macartan, H. et.al. (2007a), p.6

³ Soros, G. (2007), p. XIII

⁴ Soto, R.; Haouas, I. (2012), p.6

⁵ Shankleman, J.(2012), p. 118

⁶ Marcatan, H. et.al (2007a), p.11

⁷ Soto, R.; Haouas, I. (2012), p.6

⁸ Marcatan (2007b), p. 326

⁹ Sachs, J. (2007), p. 189

¹⁰ Macartan (2007 b), p.326

¹¹ Sachs, J. (2007), p.191

¹² British Petrol p.l.c. (2013)

¹³ Soto, R.; Haouas, I. (2012), p.2

¹⁴ Soto, R.; Haouas, I. (2012), p.4

¹⁵ Soto, R.; Haouas, I. (2012), p.7

¹⁶ World Bank (2014c)

¹⁷ World bank (2014c)

¹⁸ Bertelsmann Stiftung, BTI (2014b), p.18

¹⁹ Soto, R.; Haouas, I. (2012), p.20

²⁰ World Bank (2014c)

²¹ Soto, R.; Haouas, I. (2012), p.8