Download Exploring the Natural Resource Curse

Master programme in Economic History
Exploring the Natural Resource Curse:
Norway and Nigeria - rich in oil,
but very different still
Felicia Ardenmark Strand
[email protected]
Abstract: This thesis investigates the phenomenon of the natural resource curse by making use of
the resource rich countries Norway and Nigeria. The resource curse is a phenomenon where
resource rich countries paradoxically have lower growth rates than resource poor countries, in
spite of the growth potential offered by resource rents. Among factors contributing in creating
this effect Abundance, Crowding out and Corruption are often mentioned. These three factors
were investigated in connection to data and facts on Norway and Nigeria in order to establish if
the resource curse exists in the two countries. Both countries were found to be resource
abundant, however due to a difference in the share of resource rents in GDP only Nigeria could
be concluded as resource dependent. Crowding out was found in both countries, but in different
sectors. Finally corruption was concluded to have affected the Nigerian economy greatly and to
be virtually non-existent in Norway. Based on these findings Norway was concluded to have
escaped the resource curse, while Nigeria suffers from it. The main reason behind the difference
between the two countries is concluded to rest partly in the fact that Nigeria relies more heavily
on oil as a provider of financial means to the economy, but at the same time these substantial
rents fail to make any impact on the lives of the average population.
Key words: The Natural Resource Curse, Abundance, Crowding out, Corruption
EKHR71
Master thesis (15 credits ECTS)
August 2013
Supervisor: Ellen Hillbom
Examiner: Tobias Axelsson
Table of contents:
List of Tables: ........................................................................................................................... 2
List of Graphs: .......................................................................................................................... 2
1. Introduction .......................................................................................................................... 3
1.1 Purpose .......................................................................................................................................... 4
Question 1: ...................................................................................................................................... 4
Question 2: ...................................................................................................................................... 4
Question 3: ...................................................................................................................................... 4
2. Background ........................................................................................................................... 5
2.1 Nigeria ........................................................................................................................................... 5
2.2 Norway .......................................................................................................................................... 7
2.3 The specific characteristics of oil resources .................................................................................. 9
3. The natural resource curse ................................................................................................ 11
3.1 Previous research......................................................................................................................... 11
3.1.1 The importance of geography ............................................................................................... 11
3.1.2 The importance of institutions .............................................................................................. 13
3.1.3 Differences and similarities .................................................................................................. 15
3.2 Analytical framework: The natural resource curse...................................................................... 16
3.2.1 Abundance and growth ......................................................................................................... 17
3.2.2 Crowding out ........................................................................................................................ 18
3.2.3 Corruption ............................................................................................................................ 20
4. Methodology and Data ....................................................................................................... 22
4.1 Research and design .................................................................................................................... 22
4.2 Sources ........................................................................................................................................ 22
4.2.1 Abundance ............................................................................................................................ 22
4.2.2 Crowding out ........................................................................................................................ 23
4.2.3 Corruption ............................................................................................................................ 24
5. Analysis ............................................................................................................................... 26
5.1 Abundance ................................................................................................................................... 26
5.2 Crowding out ............................................................................................................................... 30
5.3 Corruption ................................................................................................................................... 35
6. Concluding remarks ........................................................................................................... 40
References ............................................................................................................................... 42
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List of Tables:
Table 1: Percentage share of total employment in Nigeria 1986 and 2004 p.33
Table 2: Percentage share of total employment in Norway 1986 and 2004 p.33
Table 3: Corruption Perception Index results for Norway and Nigeria 1998-2012 p.36
List of Graphs:
Graph 1: GDP-growth in Nigeria 1961-2010 p.6
Graph 2: GDP-growth rates in Norway 1961-2010 p.8
Graph 3: The share of oil rents of GDP in Norway and Nigeria from 19712010 p.27
Graph 4: Net oil exports given in average thousand barrels exported per day for Norway and
Nigeria between 1980-2012 p.29
Graph 5: The percentage of GDP that stems from natural resources for Nigeria, Gabon and
Equatorial Guniea in the time period 1970-2010 p.30
Graph 6: Different sectors’ percentage shares of total merchandise exports in Norway 19612010 p.31
Graph 7: Different sectors’ percentage shares of total merchandise exports in Nigeria 19612010 p.32
Graph 8: Percentage shares of trade in services, total natural resource rents and merchandise
trade for the Norwegian economy 1970-2010 p.34
Graph 9: Percentage shares of trade in services, total natural resource rents and merchandise
trade for the Nigerian economy 1970-2010 p.35
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1. Introduction
It would be logical to assume a connection between riches in natural resources and economic
growth. In spite of this the opposite relationship has often been found in resource rich
countries over time. This phenomenon of resource richness and low rates of economic growth
is denoted “the natural resource curse”. Norway and Nigeria are two modern examples of
resource rich countries; both are rich in oil. However, it is no secret that Nigeria is perceived
as suffering from the resource curse, while Norway is not. Norway tends to rank well in
measurements of economic development and population welfare, measurements of corruption
and is a relatively stable country, while Nigeria ranks among the poor countries of the world,
suffers from high corruption and has undergone several military coups. In 2010 Norway
scored 8.5 in the corruption estimating index provided by Transparency International where
10 implies near to no corruption, whereas Nigeria’s score was 2.4. (Transparency
International, 2013) Norway has shown rather steady positive GDP growth rates since the
discovery of oil in the 1970’s. Nigeria’s GDP growth on the other hand has at times fluctuated
very sharply during the same time period, ranging from -15 percent to 25 percent. (World
Bank, 2013) Recent studies have shown that 70 percent of the Nigerian population have to
survive on less than one dollar per day. Logically Nigeria should, as Norway presumably has,
be able to draw on the potential for economic growth offered by the resource richness in a
way that benefits the entire population and increases economic growth and economic
development; however this has not been the case. Nigeria, like many other resource rich
countries, can instead be argued as having become poorer due to its riches in natural
resources. (Adegbulu, 2010, p.14)
This thesis explores commonly attributed symptoms or effects of the natural resource curse in
connection to Norway and Nigeria. Three such aspects have been chosen from the literature:
Abundance (or resource dependence), Crowding out and Corruption. These effects will form
the foundation of the research questions. In answering my chosen questions I will strive
towards exploring published articles, books and papers on the subject. First a background
section will provide an insight into the debate of the importance of geography compared to the
importance of institutions in achieving economic growth. This will be included in order to
gain insight to the relevant theories regarding economic growth before closer considering the
theories on the natural resource curse. The background section will also provide basic
information necessary for analysing the two countries. Such factors will concern geographical
attributes, and a brief history.
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In the analytical framework the sub-topic of the natural resource curse within the subject of
economic growth and development is explored. This section will go deeper into the three
effects that I have chosen to study in order to later be able to place this into the context of
Norway and Nigeria. The methodology section will explain the methods employed to answer
the research questions. Finally the research questions will be answered separately before some
concluding remarks.
1.1 Purpose
The aim of this thesis is to provide an interesting contrast between the countries Norway and
Nigeria to shed some light on the natural resource curse. What makes Norway and Nigeria
different from one another? This will be investigated through considering and investigating
the three chosen factors commonly marked as signs of the resource curse: abundance or
economic dependence on a resource (in this case oil), underdevelopment in other economic
sectors than the one focused on extraction of the resource (crowding out) and corruption.
These three factors have been chosen out of associated symptoms of the natural resource
curse cited in several published articles and papers. The answers will enable a conclusion
regarding the presence of the natural resource curse in Norway and Nigeria. Once this has
been concluded a brief discussion on why Norway and Nigeria differ will be held. This will
be carried out using what insights have been gained by studying Norwegian and Nigerian
country facts and related theories on the natural resource curse.
Question 1:
To what degree are the Norwegian and Nigerian economies dependent on oil revenues, and
how does this affect the economy?
Question 2:
Can other industries apart from the oil extracting industry be considered as crowded out
(underdeveloped) in Norway and Nigeria respectively?
Question 3:
To what degree is there corruption in Norway and Nigeria and to what extent does corruption
hinder economic growth in the two countries? What role does corruption play in the natural
resource curse?
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2. Background
2.1 Nigeria
Due to its riches in resources Nigeria should be preforming rather well in terms of economic
growth. Nigeria has large amounts of farmable land, gas and oil, and the Nigerian oil is
considered among the purest and most expensive in the world. (Nationalencyklopedin, 1994)
Geographically Nigeria has a relatively long coastline, and shares boarders with Benin, Niger,
Chad and Cameroon. The Nigerian climate is tropical, making tropical diseases like malaria
common. In early 2012 Nigeria was listed as the world’s eight most populated country,
making it not only rich in natural resources but also in labour. Nigeria with its 155 million
people encompasses a lot of diverse ethnic groups and religions and is the most populated
African country. (Sachs, 2012a) Before Nigeria became a British colony it consisted of many
different republics, kingdoms and empires populated by several diverse groups of people.
(Hagher, 2011) These prevailing differences and diversities still make Nigeria somewhat
difficult to govern and violent clashes between Christians and Muslims are an example of
such conflicting interests. (Sachs, 2012a)
Nigeria gained its independence from Britain in 1960. (Hagher, 2011) At the time of
independence the Nigerian economy was dominated by a large agricultural sector, allowing
Nigeria to sustain itself with agricultural and farming products. The discovery and
exploitation of oil started in the early 1970’s and greatly affected the structure of the
economy. Agriculture transitioned from being the dominating industry to being neglected,
bringing Nigeria to shift from a self-sustaining agricultural country into one dependent on
imports. The Nigerian society is largely focused on oil related activities and underdeveloped
in terms of other economic activities and exports. In spite of this the oil industry employs a
comparatively small part of the population and most people continue to work within the
(inefficient) agricultural sector. (Nationalencyklopedin, 1994) In 1983 33.6 percent of
employed people in Nigeria worked within the agricultural sector. By 2004 this share had
increased to 46.9 percent. (World Bank, 2013) This stands in contrast to many other
developing countries which have gone through industrial revolutions that diverted resources
from inefficient modes of production and inefficient sectors into other more efficient ones.
Thereby the economic growth and international competitiveness increases, as illustrated this
transition has failed to appear in Nigeria. (Nationalencyklopedin, 1994)
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Nigerian oil exports increased during the first oil boom. This can be seen when comparing
Nigeria’s oil exports in 1972 to 1974. During this period Nigerian oil exports increased by 25
percent. The great oil price increases of the first oil boom allowed Nigeria to make industry
and infrastructure investments, which contributed in making Nigeria one of the more
successful African economies of the late 1970’s. The second oil boom had the opposite effect
on Nigerian oil exports; causing a decrease by about half during the period 1979-1981. As oil
prices began to decline during the 1980’s Nigeria faced negative GDP growth rates, creating a
financial deficit. (Robinson & Torvik, 2006,) That the decreased oil exports in 1979-1981
negatively affected the Nigerian GDP-growth is confirmed when looking at Graph 1 below. In
1979 there is a sharp decline in GDP-growth to negative growth, from which the country
recovered in 1982 (briefly). This corresponds to written theory on the underdevelopment of
Nigerian exports and goes to suggest a connection between oil exports and GDP-growth. It is
also important to note that the Nigerian GDP-growth increased sharply around the time of
discovery and exploitation of oil. The large fluctuations in growth (ranging from -15 percent
to 25 percent) are also interesting to note for future discussions. (World Bank, 2013)
Graph 1: GDP-growth in Nigeria 1961-2010
Economic growth in Nigeria
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
Nigeria
-5.0%
1961
1964
1967
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
2009
0.0%
-10.0%
-15.0%
-20.0%
Source: World Bank, 2013
Before the early 2000’s Nigeria only experienced democracy between the periods of 19601966 and 1979-1983. Outside these periods Nigeria was run by a military more interested in
taking care of their own interests than those of the Nigerian people. The bad governance is
reflected in the in the poor developmental statistics of Nigeria, ranging from high oil profits
failing to reach the people, high corruption rates ranking as the 139th most corrupt country out
of a total 174 countries in Transparency Internationals Corruption Perception Index (CPI)
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from 2012 and poor results in development indices such as the HDI. The stagnation of the
economy during the 1980’s partly created by a decline in oil prices also contributed in
creating tensions among the Nigerian people. Since the fall of its last military regime Nigeria
has transitioned towards a more democratic regime, which has led to many reforms and a long
battle to fight corruption. (Hagher 2011)
2.2 Norway
Norway is a relatively small country with a population of about five million people and is one
of Europe’s most sparsely populated countries. Norway is a constitutional monarchy; with a
parliamentary democracy ruled by a prime minister. As opposed to Nigeria, Norway has been
an independent country since 1905 with an experience in stability even before political
independence. Norway shares borders with Sweden, Finland and Russia and is located in the
cold climate of the northern hemisphere. Agricultural conditions aren’t optimal in Norway,
mainly due to a shortage of farmable land combined with its cold climate. Only 3 percent of
Norway is currently used as farmland. As in most other industrialized countries the
agricultural production in Norway has declined in importance in modern time. Norway is one
of the world’s leading countries in fishing; however the fishing industry contributes fairly
little value to the GDP (0.7 percent in 2011). (Landguiden, 2012) Norwegian industries have
experienced similar transitions as in other industrialized countries during the last few decades.
Great industries previously of large importance to the economy, such as the ship building and
clothing industries, declined after facing competition from other newly industrialized
countries. In spite of such declines Norway has remained a highly developed industrial nation
with comparatively high rates of economic growth since the beginning of the 1970’s. Other
successful branches of the Norwegian industry are companies devoted to the development of
software, telecommunication systems, kitchenware, generators and navigational equipment.
(Nationalencyklopedin, 1994)
The high GDP growth rates of Norway, higher than in most other developed countries, can
largely be attributed to the discovery of oil. Oil was discovered in Norway in 1969, and the
exploitation started in 1971. Presently Norway is one of the largest oil exporters in the world,
and as a result has become one of the world’s wealthier countries. However, this was not
always the case, prior to the early 1970’s the economic growth of Norway was lagging in
comparison to its neighbouring countries. The timing of Norway’s take-off in economic
growth, together with the fact that the other (in many aspects similar) Scandinavian countries
maintained rather stable levels of economic growth, establishes a logical connection between
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the exploitation of oil and Norway’s subsequent growth burst. The importance of oil to the
Norwegian economy has increased since its discovery during the early 1970’s. In the early
1980’s export earnings from oil reached one third of Norway’s annual export earnings. Oil
revenues have been of great importance to Norwegian development. The great revenues made
on oil enabled Norway to make both social investments and infrastructure investments. Social
care is often characterized as highly developed in Norway. Norway is known for its high
living standards, comparatively low inequality, good health care and active welfare state
which provides for its people in times of need. (Rød Larsen, 2006) In the last decade natural
gas has become of increasingly large importance to Norway and is expected to exceed the
share of oil in GDP by 2020. Norwegian GDP/capita is among the highest of the world.
(Landguiden, 2012)
Graph 2: GDP-growth rates in Norway 1961-2010
Economic growth in Norway
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
Norway
1.0%
-1.0%
1961
1964
1967
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
2009
0.0%
-2.0%
-3.0%
Source: World Bank, 2013
However, increasing oil revenues have also constituted a challenge to the Norwegian
economy. High revenues combined with correspondingly high economic growth rates have
been theorized to result in a stagnated growth of other parts of the economy since costs and
prices in the economy have been driven up by the high oil revenues, thereby making other
domestic industries less competitive. Furthermore the sharp decline in oil prices in 1986 and
the effects brought on the Norwegian economy (illustrated in Graph 2 above) made clear the
Norwegian economic dependence on oil revenues. (Nationalencyklopedin, 1994) When
considering Graph 2 it is important to note that while Norwegian GDP-growth seems to have
fluctuated greatly it hasn’t strayed beyond 0 more than twice in the observed 39 years. It can
also be noted that the negative effects speculated on Nigerian GDP-growth in connection to
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the oil shocks can be seen in the graph illustration Norwegian GDP-growth too. Around the
time of the second oil boom 1979-1981 GDP-growth in Norway dropped sharply, which can
be speculated as being connected to lowered oil exports at the time.
2.3 The specific characteristics of oil resources
There are specific characteristics of oil that affect growth levels and economic activities of a
country. This section mentions and explores such key characteristics to gain further relevant
insight to the upcoming analysis. Some characteristics commonly attributed to the commodity
oil are its price volatility, the costly nature of exploring, exploiting and transportation together
with the tendency towards high levels of corruption connected to oil industries. The
potentially harmful impact of oil on the economy is not geographically restricted to any
particular region; it can be found in several regions of the world ranging from the Middle East
to Africa or Asia. However, some geographical conditions might make it easier for an oil
industry to develop, such as closeness to a coastline, something which both Norway and
Nigeria possesses. (Ross, 2001)
The nature of oil means that both exploring and exploiting require substantial investments and
technical skills. Only those able to afford such investments and in possession of sufficient
technical skill can pursue exploitation. In other words oil exploitation is often carried out by
large companies or governments. The large costs can be theorized as an underlying reason
behind some oil countries being richer than others. When the government has sufficient funds
and skill level to pursue exploitation, then it will assume profits made and the benefits of the
people might be greater. Such speculation has been made when comparing the oil extraction
in Norway to that of Nigeria. Norway has financial means to invest in the exploitation itself
while Nigeria has largely relied on oil companies. That this should continue to be of
importance is refuted by economist Shaxson (2007) who argues that larger oil producing
countries in Africa (such as Nigeria) negotiated better deals with oil companies during the
1970’s when OPEC was formed. This means that Nigeria today gets more than 50 percent of
the value of its oil as state revenues, suggesting that the root of the difference lies elsewhere,
in governance according to many. (Shaxson, 2007) Norway is not a member of OPEC.
(Landguiden, 2012)
On the note of bad governance in connection with oil Pendergast, Clarke and Von Kooten
(2001) argue that the extraction of oil and other minerals attract more rent-seeking behaviour
than agriculture. This is due to extraction of fossil fuels, metals or minerals being more
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spatially concentrated than agriculture, making large shares of rents easier to appropriate.
Such behaviour is avoidable with good institutions, property rights and civil law. If however,
the proper systems are not in place at the point of discovery then resource abundance is likely
to result in corruption, lawlessness and rent-seeking behaviour. Further the very investment
dependent nature of oil extraction combined with the high value of the final product breeds
corruption. In this sense oil highly differs from agriculture; an industry composed of many
small producers who individually don’t make a lot of money. The potential of oil related
corruption to award substantial amounts of money make it the more attractive to engage in.
(Pendergast, Clarke & Von Kooten, 2001)
On the other hand the point-sourced nature of oil (with few companies/extractors) simplifies
taxing. This stands in contrast to resources which require less technical skill and investments
to extract, such as lootable-diamonds. The nature of such resources often results in more black
markets, which are more difficult to tax. For oil this means that a lot of oil rents go into the
pockets of the government, however due to the often high presence of corruption this need not
mean a fair distribution among the people. On the subject of corruption and oil, oil has also
proven to correlate to the time politicians in non-democratic governments serve in office.
These politicians in oil rich countries serve longer in office compared to non-democratic
politicians in non-oil countries. A contrasting result is also achieved when comparing to nondemocratic politicians in countries rich in more lootable resources (such as lootable diamonds
and minerals), which are negatively correlated to the time served in office. This can serve as
an explanation to the long tradition of dictatorship of Nigeria. The rich oil resources may have
contributed in prolonging the rule of military leaders for most of Nigeria’s modern history.
(Andersen and Aslaksen, 2013)
The volatile nature of oil prices can also affect the economy. Oil price volatility has been
shown to have a negative and significant effect on GDP growth rates, long term investments,
industrial production and durables consumption in tests. Among other reasons this can be
attributed to investors’ unwillingness to commit due to an uncertainty regarding future
incomes. Low investment rates are commonly connected to corresponding low rates of
economic growth. (Eldar & Serletis, 2010, p.1139)
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3. The natural resource curse
3.1 Previous research
This section provides insight into debates within the subject of economic growth relevant to
the resource curse. There are two major opposing views on which factors are significant to
economic growth and represent the key behind economic development. Authors such as Sachs
and Warner emphasize the role of geography, while the opposing side argued by authors such
as Acemoglu, Robinson and Johnson favours the role of institutions. This theoretical
background will be explored to enable a comparison and application to the cases of Norway
and Nigeria at a later stage.
3.1.1 The importance of geography
Some economists emphasize geography and geographical factors as essential to economic
growth. One such prominent author is Jeffrey Sachs who stresses the importance of
geography rather than the importance of sound institutions. Geographical factors which
contribute in making countries poor are a low suitability for farming, suffering from tropical
disease, being land-locked (thereby making transportation more costly and difficult) and
climate. Climate and the existence of tropical diseases like malaria can be damaging to
economic growth in the sense of making agriculture harder to pursue, and an increased
disease burden of a country may result in higher infant fatalities, loss of labour and decreased
tourism. All of these factors will decrease growth. Possession of a coastline is one
geographical factor of significance to an oil country. Being land-locked could strongly affect
a country with great oil resources due to the nature of oil making transport more suitable via
pipelines or ships. Therefore greater sea access decreases transportation costs and facilitates
export. This means a simplification in the oil industry development. Both Norway and Nigeria
have a coastline, something which has lowered their transportation costs and facilitated the
development of an oil industry. (Sachs, 2001b)
The importance of geography is illustrated by poorly governed countries which are rich in
spite of poor institutions or corrupt government. One such country is Vietnam while resource
rich Bolivia is not doing nearly as well. This is explained by a difference in geography rather
than differences in institutions. Vietnam is a corrupt, yet thriving country, due to its
possession of a coastline enabling deep sea ports. Bolivia on the other hand lacks a coastline
and close proximity to other thriving economies (such as in South Asia) looking to expand
their businesses. (Sachs, 2001a) Another interesting country comparison is that of Botswana
and Sierra Leone. Both are rich in diamonds, but Botswana is a more developed country. This
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has largely to do with geographical factors, such as larger diamond assets than Sierra Leone
and the involvement of the South African company De Beers. This makes it highly interesting
for South Africa to supervise the exploitation process. From this can be gathered that large
successful neighbouring countries may serve as setting good examples. South Africa has
served as such an example for Botswana, but Nigeria is the major economy among its
neighbouring countries and therefore lacks a good example to follow. It is also interesting to
note the difference in where the diamonds are found. In Sierra Leone diamonds are extracted
from rivers and more accessible areas, while in Botswana diamonds are recovered from mines
which require more skill and machinery. This makes diamonds from Sierra Leone more
lootable, just like the point sourced nature of oil revenues making revenues easy to
appropriate. (Sachs, 2012b) The answer is not quite as simple as institutional differences
where less developed countries are poorly governed and successful countries are well
governed. According to Sachs the problems run deeper than just poor governance and will
require active aid and money to be solved. (Sachs, 2001a, p. 8)
Rather than emphasising the importance of institutional conditions for innovation, Sachs
(2012b) chooses to stress that it is not so much innovation which matters, but the ability to
adapt innovations and implement them. This in turn can greatly be affected by geographical
conditions, such as climate, location and resource richness, which may hinder the
implementation of innovations. Some innovations that are suitable for use in one part of the
world may not be functional in another. (Sachs, 2012b) For instance, many stress that the
availability of cheap coal in Great Britain was that which enabled and facilitated its industrial
revolution. This technique is less likely to have been developed or used in a country with
smaller amounts of coal that would have driven up the cost of such fuelled production
processes. (Allen, 2011) Thus geographical conditions which may hinder the diffusion of
modern technologies and innovations are more likely to greatly affect a country than the
institutional climate. (Sachs, 2012b)
Geographical factors related to the development of resource rich countries often concern their
proneness to be more closed-off economies in terms of trade. This comes as a result of trying
to balance the overemphasis on primary resources and exports. Therefore a country may be
tempted to promote and protect its other industries through protectionist strategies. (Auty,
1997) Protectionism has been a popular strategy for developing countries to protect and
nurture domestic industries in order to achieve economic growth, but as of late it has received
much criticism. The criticism stems from a perceived connection between open trade and the
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achievement of economic growth. In tests open economies have proved to have higher GDP
growth rates, and to be more developed as a consequence of trade forcing them to commit to
restructuring processes that the society may need. Without international competition reforms
necessary to the economy are not forced to the same extent. Therefore protectionist trade
strategies can be considered a disfavour. (Sachs & Warner, 1995b) Open trade is often
favoured in resource scarce countries due to their tendency to focus on manufacturing
activities. Free trade results in greater export possibilities for manufactured goods and greater
import possibilities for resources which the country may need, but lacks itself. Resource
scarce countries can’t afford to waste resources on inefficient activities, and therefore they
have to pursue strategies to explore more efficient means of production. (Auty, 1997) A failed
attempt at industrial success is what Nigeria suffered in the early 1980’s. As oil exports began
to decline during the second oil boom it became increasingly difficult for Nigeria to maintain
its industries, eventually leading to the creation of a financial deficit. (Robinson & Torvik,
2006)
Jeffrey Sachs has in several papers strongly refuted the dismissal of geographical importance
in papers written by authors such as Acemoglu, Johnson and Robinson. Sachs (2003) argues
that the factors chosen when testing for geographical significance, such as distance from the
equator, are entirely inappropriate. At best distance from the equator can be viewed as a poor
substitution for climate. There are other factors, such as malaria proneness, which would
better reflect climate in showing the effect of geography on economic growth. (Sachs, 2003)
Other variables used by Sachs to study the importance of geography range from distance to
the closest port, percentage of land within 100 kilometres to the sea, and the share of land in
the tropics. (Sachs & Warner, 2001) Sachs argues that theoretical reasoning also provides
good evidence that Acemoglu’s hypothesis is wrong in dismissing the importance of
geography. Achieving economic growth is a complex relationship between geography,
institutions and policies. (Sachs, 2003)
3.1.2 The importance of institutions
Many who talk of institutions refer to the definition offered by Douglass North: “Institutions
are the rules of the game in a society or, more formally, are the humanly devised constraints
that shape human interaction.” (North, 1990, p. 3) It is often distinguished between two types
of institutions in society: economic and political. Economic institutions are connected to the
economic incentives in society, such as property rights and market structure. Without
satisfactory property rights few will want to create or invest in society; and in that sense
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society fails to provide the right incentives. (Acemoglu & Robinson 2008a) Economic
institutions are determined by the political institutions chosen by society. A political
institution may be how society is governed (e.g. monarchy, democracy or dictatorship).
However, society as a whole may not always agree about questions of this sort, which may
result in conflicts of interest between different groups. The most powerful group will establish
its preferred institutions, maybe not in the best interest of the country as a whole, possibly
resulting in inefficient institutions. (Acemoglu & Robinson 2008b) The fact that past
institutional choices have an effect on income today is illustrated through the calculations on
what Nigeria’s income would be if it had institutions of the same quality as Chile. These
calculations show that if Nigeria had the same institutional quality as Chile the present
Nigerian national income would be up to seven times as high. (Acemoglu & Robinson 2008a,
p.5)
Dysfunctional institutions will need to be reformed in order to achieve improvements in
economic development. Altering dysfunctional institutions is difficult, but Acemoglu and
Robinson (2008b) argue that changes to economic and political institutions are likely to be
more successful if carried out simultaneously. This is explained by the persistent and
reinforcing nature between political and economic institutions making it difficult to achieve
change in one if the other remains unchanged. (Acemoglu & Robinson 2008b) Robinson and
Torvik (2006) further suggest institutions which hold politicians accountable for their actions
as an improvement, since that would place constraints on a politicians’ power to engage in
rent seeking activities. Strong constraints holding politicians responsible have a higher
likelihood of ensuring that resource rents benefit the interests of many, rather those of a small
group. (Robinson & Torvik, 2006) In such a way the resource curse can be caused by weak
institutions.
Acemoglu and Robinson (2010) conclude that Africa is poor due to a missing connection
between political and economic incentives. This is illustrated by poorly functioning markets,
lacking property rights, and a state which fails to provide public goods, much of which will
greatly affect the dealing with and distribution of resource revenues. A poorly functioning
institutional framework can also be argued as inhibiting local entrepreneurship and
innovation, thereby limiting competitiveness and growth of other industries. That this would
somehow be related to geographical related factors such as illness is unfounded. Further it is
difficult to argue causality in the relationship between illness and poor economic development
14
of a country. Did poor economic growth cause people to get ill, or did the illness cause poor
economic growth? (Acemoglu & Robinson, 2010)
3.1.3 Differences and similarities
What essentially separates the geographical theories from the institutional theories is that
geographical theories concern forces of nature while the theories regarding institutions are
primarily concerned with human behaviour and humanly devised creations. While the
geography hypothesis emphasizes factors such as climate and disease burden, the institutional
hypothesis brings forward rule of law, varying levels of technology, varying sizes of
investment in human capital and differences in politics instead. (Acemoglu, Johnson &
Robinson, 2003)
Both theories share the point of view that differences which cause some countries to be poor,
while others are rich will require action or active aid. Essentially both views share the opinion
on which areas need to be addressed, what they differ in is the opinion on how they need to be
addressed. Acemoglu emphasizes the importance of institutions which provide the proper
incentives to encourage innovation and other activities that are commonly attributed to
growth. Resource richness may hinder the development of such sound institutions in the sense
that politicians will have a greater interest in pursuing rent seeking activities instead. Sachs on
the other hand argues that it is not the process of innovation itself which is most important to
developing countries, but rather the diffusion of existing technologies and innovations.
Diffusion and the introduction of new technologies need not be hindered by a corrupt
government (as illustrated by the example of Vietnam), but can potentially be made difficult
by geographical conditions. Lack of coastline and proper infrastructure decreases a country’s
prospects of exports and a low supply of fuels such as oil may make certain energy intensive
production processes difficult to pursue. Abundance in resources may also contribute in
making it uninteresting to pursue an introduction of new innovations and technologies, since
the economy to a large extent can sustain itself on resource rents. (Sachs, 2012b)
Considering these differences it becomes apparent that the two views of factors significant to
economic growth have become somewhat polarized. Acemoglu dismisses the importance of
geography completely, while Sachs at least in part acknowledges that corruption or weak
institutions may have an impact, if not to the degree suggested by Acemoglu. Both authors
accuse the other’s theories to be a simplification of reality. From this it can perhaps be
concluded that a mixture of the two points-of view might give a better real world reflection.
15
This would suggest some merit to the ideas of institutionalists like Douglass North, which lies
more in between and isn’t quite as dismissive as the other theories. It is also possible that
what is most important to the economic growth and development of a country – institutions or
geography – may vary over time. It is possible to theorize that geographical factors may be of
greater importance when oil is first discovered, but that institutionally related factors increase
in importance as the oil industry begins to develop. (Sachs, 2012b)
3.2 Analytical framework: The natural resource curse
The natural resource curse is a phenomenon where resource rich countries perform worse than
resource poor countries in terms of economic growth. This somewhat paradoxical relationship
has been observed in several instances over time, in modern times it can be seen in several
African countries, such as Zambia and Nigeria. Both countries are abundant in natural
resources, but with little economic growth. Such countries provide a contrast to countries with
comparatively scarce natural resources and high rates of economic growth, such as Singapore
and South Korea. This relationship has intrigued many economists since its discovery, since
logically the relationship should be the reverse. Abundance in natural resources should
provide an advantage through a large inflow of capital that can be invested in projects aimed
at improving infrastructure, increasing education, improving public health or other factors
commonly associated with increased levels of economic growth and development. Instead the
opposite relationship is often detected: where some resource rich countries even have negative
rates of economic growth. With this said it is important to note that the commonly observed
negative relationship between natural resources and economic growth is not deterministic.
There are countries which can be considered as exceptions, one of which is Norway. Norway
with its large oil resources is, unlike Nigeria, often considered world leading in many aspects.
Norway’s differences from Nigeria can be seen not only in indices such as the HDI aimed at
measuring human welfare, but also when studying other indices such as the CPI which
estimates corruption. (Acemoglu & Robinson, 2008a) Studying why Norway and Nigeria
differ in many aspects is interesting since their resource abundance stems from the same
resource: oil. As was mentioned in Section 2.3 oil has been argued to have a negative effect
on economies, in spite of increased financial means suggesting a connection to higher
economic growth. Instead many oil rich countries are among the poorest countries of the
world, Nigeria counting among those while Norway is an exception. (Ross, 2001)
This section will provide the theoretical framework for the resource curse. In this paper three
aspects connected to the resource curse will be commented upon in relation to the countries:
16
Abundance (Question 1), Crowding out (Question 2) and Corruption (Question 3). These
three aspects and how they relate to the resource curse will be explained in order to later be
applied to Norway and Nigeria.
3.2.1 Abundance and growth
Many have tested for a relationship between growth of real GDP per capita (dependent
variable) and share of resources/primary goods in total exports (independent variable). Such
tests have shown a negative relationship between the two variables; a large share of natural
resources in total exports often means low growth levels. (Kronenberg, 2004) In discussing
the negative relationship between oil rents and economic growth it is important to distinguish
between countries that are resource abundant in absolute terms and in relative terms. A
country can have a large amount of resources without resource rents necessarily constituting a
large share of its GDP. This relates to the difference between resource abundance and
resource dependence. In a resource dependent country the rents from resources are likely to
compose a large share of GDP and other sectors of the economy are likely to be
underdeveloped. A country which is resource abundant is not necessarily resource dependent.
(Pendergast et al., 2001)
Being oil dependent, or dependent on any natural resource, is dangerous in the sense that it
exposes the country to several negative effects and risks. One such risk often connected to oil
is price volatility. (Sachs & Warner, 2011) Another associated risk to dependency on oil is the
spatially concentrated revenues (to a limited number of extractors) which encourage rentseeking behavior and make revenues easier to squander. (Pendergast et al., 2001)
Historically the possession of vast natural resources has been of larger importance than it is
today. The decrease in importance largely stems from falling transportation costs, which have
contributed in making import costs a mere fraction of what they were a century ago. This
means that the countries without great assets of natural resources can import what they need
from other countries at much lower prices than before. An example of this is Japan which in
spite of not having large steel assets still managed to become successful in the shipbuilding
industry during the 1970’s. Therefore the disadvantage is not nearly as large as it used to be,
but might rather be reversed due to the slippery slope from resource abundance to resource
dependence. A resource dependent country will tend to rely too heavily on the resource
extraction sector for economic providing. This may result in several other undesirable effects,
one of which is commonly referred to as “crowding out”. (Sachs & Warner, 1995a)
17
3.2.2 Crowding out
Another often mentioned effect of the resource curse is crowding out. Crowding out describes
the process by which the discovery natural of a natural resource and its consequent
exploitation crowds out some other activity. This other activity is usually manufacturing.
Since the economy can sustain itself on the large rents gained from the extraction of resources
it may thus become too dependent on the resource extracting sector. (Kronenberg, 2004) A
resource rich country has no real need to pursue other more efficient or productive industries
and means of production. Some sectors, industries and activities are considered more
productive than others. Processes like industrialization and modernization bring about the
phasing out of unproductive activities and a transitioning to some more internationally
competitive, productive activity. It is often thought that the revenues made on resources may
hinder such processes by enabling the economy to sustain itself on unproductive activities.
Resource poor countries on the other hand can’t afford to waste resources on activities and
strategies that aren’t efficient, and so they pursue other roads which are often thought to lead
to a larger manufacturing sector. (Auty, 1997) Thereby modernizing effects, structural shifts
or transitions may be hindered or delayed in economies with large resource rents. One
example includes the delay in investments made on education. Another is the shift from an
agricultural society dependent on primary exports to a society more focused on
manufacturing. (Ross, 2001)
Crowding out is considered negative for a range of different reasons, mainly related to the
benefits attributed to the manufacturing industry and a diversified economy. Manufacturing is
thought important due to being commonly associated with positive externalities and spill-over
effects. This differs from the resource extracting sector which is rarely associated with
positive externalities. Rather than creating positive spill-over effects, a focus on resource rents
is commonly connected to several negative effects, such as corruption, conflicts,
inefficiencies and exposure to price volatility. The non-sustainable nature of natural resources
also means a necessity to invest resource rents in other sectors to be able to maintain
sustainable growth rates. However, if the resource rents are invested wisely they may
indirectly create positive externalities, thereby escaping this aspect of the resource curse. The
resource curse can thus turn into a blessing if resource rents are used wisely. (Ross, 2001) The
manufacturing industry has a tendency to reinvest a larger share of profits than the extractive
industries. This reinvestment tendency can be traced to a stronger drive to increase
productivity and remain competitive, a positive circle which can be thought of as driving
18
economic growth of the economy. By not having a large manufacturing sector some of the
increased technological progress, often attributed to the manufacturing sector, will inevitably
be lost. (Kronenberg, 2004)
Another theory related to crowding out is the so-called Dutch disease. The Dutch disease is a
phenomenon of negative impacts observed upon the discovery of natural gas in the
Netherlands during the 1960’s. (Davis and Tilton, 2005, p.238) More specifically, the Dutch
disease is connected to increasing exchange rates, where the value of the domestic currency
increases as a consequence of revenues made on the resource exploitation. (Pendergast et al.,
2001) A more expensive currency will make other exports more expensive, thereby reducing
the international competitiveness of the manufacturing sector. Since the manufacturing
industry is commonly connected to positive externalities the loss of these positive
externalities may result in long-term negative effects on the economy. (Kronenberg, 2004) It
is when taking the positive externalities associated with the manufacturing sector into account
that the Dutch disease can be thought of as deserving the name “disease”. If assuming no loss
of positive effects and that no negative effects can come to stand from over-focusing on
exports of primary products, then there shouldn’t be a problem as long as the country’s
comparative advantage lies within exports of the resource in question. It is the loss of positive
externalities and the creation of negative effects attributed to focusing on primary resources
that make it harmful to the economy. (Sachs & Warner, 1995b) In other words the Dutch
disease is known for diminishing the traded goods sector to the point where it almost
disappears due to foreign competition. (Rød Larsen, 2006)
This relates to Jeffrey Sachs’ and Andrew Warner’s theory regarding openness and trade.
Protectionism is often used as a means of minimizing the negative effects of the Dutch
disease. The intention is that protectionism should spare domestic industries of foreign
competition and in that way make them thrive. (Sachs & Warner, 1995b) The effect of
protectionism is that the resource extracting (primary) sector of the economy is forced to
support the protected industry. Protected industries have proven to lack incentives and
develop slowly in comparison to unprotected industries, thereby making the result of
protectionism differ from the desired effect. (Auty, 2001)
A focus on resources often leads to increased corruption levels. This is due to the point
sourced nature of resource rents where the bulk of the rents usually go to a small group of
19
people. This creates further problems, since this group rarely reinvests the rents made in
activities that increase productivity. (Kronenberg, 2004)
3.2.3 Corruption
Nicholas Shaxson (2007) states that “the poorer and weaker a country is before the oil
discovery, the more likely it is to be harmed by it”. (Shaxson, 2007, p.1123) Many, among
them Shaxson himself, attribute the paradox of the resource curse to poor governance and
corruption. It should be kept in mind that there is no commonly agreed upon definition of
corruption as it is a complex and broad matter which encompasses many different behaviours
and effects. (Shaxson, 2007)
A focus on the extraction of resources such as oil and minerals often leads to a higher
concentration on the revenues and production patterns of the resource. Such a phenomenon is
denoted a “point sourced economy”. This stands in contrasts to the agricultural sector which
often has smaller amounts of revenue spread over a larger share of the population. The
concentration of revenues makes them easier for certain groups to appropriate, thereby
resulting in negative effects for the economy. (Mavrotas, Murshed, & Torres, 2011) The
resource curse can be argued as including two effects: the income effect and the displacement
effect. The income effect results in a larger national income, while the displacement effect
diverts resources from productive activities into unproductive rent seeking such as corruption.
When the displacement effect is dominating the resource curse appears, which explains why
some countries suffer from it while others don’t. (Mehlum, Moene & Torvik, 2006) The
displacement effect refers to corruption. The impact corruption has on a society is negative in
two ways. One is the negative action that corruption is: essentially a misuse of power for
increased private gain. This could mean taking money from the people, resulting in an
inefficient redistribution. (Robinson & Torvik, 2011) Inefficient redistribution, as a
consequence of corruption and grabber friendly institutions, brings various problems, such as
a weak rule of law where the government is unable to provide basic security. This may mean
a stimulation of violence, looting, an increase in rebel groups, and civil wars in some cases.
(Mehlum et al., 2006) The other less obvious effect of corruption on society is the diverting of
resources (human capital) which could have been put to productive use, but instead engages in
unproductive activities that are damaging to society. (Robinson & Torvik, 2011) This can
hinder reforms necessary to improve society, due to the blocking by certain groups in order to
protect the rents made on inefficient policies. That mineral-rich countries are more corrupt
than others is something which may be attributed to the fact that the often frail institutions
20
can’t handle such large inflows of money that exports of the minerals bring. Weak
institutions, allow a minority to monopolize power and money that should have benefited
many. This process breeds corruption, and with corruption comes a loss of trust. (Kronenberg,
2004)
Mehlum et al. (2006) argue that the existing institutions determine how rents are distributed
and decide how interesting it is to engage in corruption. In this context a distinction between
two types of institutions can be made: producer friendly institutions and grabber friendly
institutions. The grabber friendly institutions allow resources to be drawn from productive
sectors and activities into unproductive activities, such as corruption. Grabber friendly
institutions are enabled and can be recognized by a weak rule of law, corruption or a
malfunctioning bureaucracy. The fact that resources are dedicated to unproductive activities
makes economic growth decrease. Based on this theory natural resources can be viewed as
putting the existing institutions to the test. The resource rich countries unaffected by the
resource curse had good institutions before the discovery of resources. The countries suffering
from the resource curse had bad (grabber friendly) institutions that failed the test, meaning an
inability to deal with resource rents appropriately. Rather than leading to riches corruption
and malfunctioning bureaucracy arose as a consequence. (Mehlum et al., 2006)
Oil states are likely to be rentier states. The rentier effect implies that a government might
avoid being held accountable for its actions through maintaining low tax rates. Ross (2001)
defines a rentier state as “a state that receives substantial rents from foreign individuals,
concerns or governments” meaning that the government has little need to tax its citizens to
gain funds. (Ross, 2001, p. 329) Without taxes the people have smaller claim on the
government and less interest in further engaging in how the money of the state is spent. (Ross,
2001) It has also been shown that a higher rate of depletion leads to elevated corruption rates.
(Busse & Gröning) Nigeria can be classified as an example of a rentier state. It is often
claimed that rentier states are less democratic and that their governments are worse at
achieving economic growth. (Ross, 2001)
21
4. Methodology and Data
The three research questions will be regarded separately. The chosen determinants of the
natural resource curse are: Abundance (Question 1), Crowding out (Question 2) and
Corruption (Question 3). These will be investigated separately for both countries. The
presence or absence of the three factors related to the resource curse will enable a conclusion
regarding whether or not Norway and Nigeria suffer from the resource curse. This will then
facilitate a discussion of what makes Norway and Nigeria differ from one another, and what
the underlying reason for Norway (presumably) not suffering from the natural resource curse
is, while Nigeria does suffer from the curse. The available statistics varied.
4.1 Research and design
The chosen format of this thesis involves working with both quantitative and qualitative data.
Much of the data is qualitative and obtained from papers. Quantitative data from sources such
as the World Bank was added in order to be able to answer the research questions. The
qualitative data obtained from papers will provide the foundation and framework for the
thesis. The quantitative data obtained from the World Bank and U.S. Energy Information
Association (eia) will then contribute to the framework by providing a real world image
which can either conform or contradict the presented theories. This will then enable a
comparison between Norway and Nigeria as to whether the two countries appear to suffer
from the natural resource curse, and where potential differences can be said to stem from.
4.2 Sources
4.2.1 Abundance
Abundance, or share of resource rents in GDP, has been investigated by using data obtained
from the World Bank. The World Bank is not a bank in the traditional sense, instead it
collects data and in certain cases aids with financial and technical help in development
projects. This work is carried out as a part of its strategy to decrease worldwide poverty and
increase development. (World Bank, 2013) As an independent organization of institutes and
researchers the World Bank is known for its databases and reliable and extensive statistics.
Data on oil rents as a share of GDP was available from 1971-2010 without gaps, which
encompasses both the first and the second oil boom and falls after the discovery of oil in
Norway. This data will be used in order to discuss natural resource abundance versus natural
resource dependence. If a large share of GDP is represented by the resource in question (oil) it
can be argued that the country is resource rich. How the different degrees of resource
22
abundance affect the economies of Norway and Nigeria will be further investigated in the
analysis by use of this data. In order to further strengthen the analysis a comparison of
resources as a share of GDP in two other Sub-Saharan oil exporters (Gabon and Equatorial
Guniea) was included. This was done in order to establish if Nigeria was unique when
comparing to other Sub-Saharan African countries. Data was missing from Equatorial Guniea
during 1978-1984. Extrapolation was used to compensate for this. Norway and Nigeria as oil
exporters is also compared in a graph (in terms of thousand barrels of oil exported per day) to
strengthen the argumentation. This was made possible using data from the U.S. Energy
Information Administration (eia). (U.S. Energy Information Administration, 2012)
4.2.2 Crowding out
For the section investigating the crowding out of other industries data was obtained from the
World Bank. Part of this data entailed the percentage shares of different sectors within exports
of goods. The data was given in shares of total exports which enabled a comparison of how
the size of different sectors within exports has changed over time. Exports were divided into
fuels, food, agricultural raw materials, manufactures and ores and metals according to UN:s
SITC (Standard International Trade Classification). The category “food” encompasses that
which is traditionally meant by food such as livestock, beverages, tobacco, and vegetables.
Fuels are not limited to oil; but also include coal, gas and electricity. Agricultural raw
materials include skins, wood and textile fibres among other things. Examples of goods in the
ores and minerals group include crude fertilizers, metal scraps, metalliferous ores and nonferrous minerals. Manufactured goods entail basic manufactures, machinery, transport
equipment, chemicals and other miscellaneous manufactured goods for instance. As can be
noticed when reading the descriptions of the groups many are considered primary production.
However it is still of interest to distinguish between the different types to see what sectors
have dominated in what time and how the discovery of oil has affected the composition of
exports. (United Nations Statistics Division, 2013)
The share of these groups in total exports of goods (merchandise) have been studied between
the years 1961-2010 in order to investigate a possible crowding out effect. Due to some gaps
in the data I extrapolated the values for 1980, 1982, 1988-1990 and 1992-1995 for Nigeria
and 1986-1987 for Norway. This was done by computing the average of the year prior and
after the gap. It is not judged that this should have had a significant distorting effect on
results. The results were illustrated in Graphs 2 & 3 and are presented together with the
analysis relating to Question 2 in section 5.2.
23
To further strengthen the analysis the share of total labour within the various sectors was also
investigated using data from the World Bank. Due to lacks in data the results will only be
presented as a comparison of two years, 1986 and 2004. The results of this are presented in
Tables 1 & 2. This is still judged to be relevant, since the two observed years are 18 years
apart. The share of services, natural resource rents and merchandise goods (after deducting
natural resource rents) is also presented in two graphs in order to give and image of the
Norwegian and Nigerian GDP’s. The data was obtained from the World Bank. The results of
this are presented in Graphs 8 & 9.
4.2.3 Corruption
For the investigation of corruption the CPI (Corruption Perception Index) by Transparency
International was used. This index is traditionally held in high regard by prominent
institutions such as the World Bank, however there are some criticisms. Some of these
criticisms are presented together with a brief presentation of the CPI and Transparency
International below. Due to the relatively recent interest in assessing corruption levels in a
country I was unable to find statistics prior to 1998. This means that prior to 1998 there will
be a comment on the likelihood of corruption in both countries based on determinants of
corruption and the country history.
Transparency International is a Berlin-based non-government organization (NGO) which is
famous for its index “CPI” (Corruption Perception Index) aimed at measuring corruption in
countries. When using indices that estimate corruption it is important to remember that
corruption cannot be quantifiably measured. The CPI is based on the perception of corruption
in a country, meaning that it is founded on people’s subjective views. CPI is computed
making use of assessments and surveys on corruption which are compiled by various
esteemed institutes. This needs to be kept in mind when considering the values; however the
CPI and Transparency International are internationally held in high regard by several
prominent institutions. With this in mind I have chosen this index for the estimations of
corruption. The index ranges from 0-10 where 10 is the best score which can be obtained,
indicating a highly clean country in terms of corruption. (Wang & Rosenau, 2001)
Some critics argue that the definition of corruption used for the CPI is too narrow.
Transparency International uses the definition “the misuse of entrusted power for private
gain”. (Shaxson, 2007, p.1126) This definition concerns behaviour, such as bribery. However,
bribery is merely one form, a symptom one could argue, of the more systemic issue of
24
corruption. The choice to focus CPI on internal corruption within a country means a domestic
focus on something which is a global issue. Switzerland known for its banks and shady bank
accounts, ranks as one of the less corrupt countries in the world terms according to the CPI,
which may raise some doubts. The CPI ranks Nigeria as a highly corrupt country, however
not Switzerland presumably houses some stolen funds of the Nigerian people. (Shaxson,
2007)
25
5. Analysis
This section continues to explore the difference between Nigeria and Norway, in terms of why
Norway has (presumably) managed to escape the resource curse while Nigeria hasn’t. This is
done by applying the previously mentioned theories to the two countries. The factors will be
investigated separately.
5.1 Abundance
The term “Abundance” comes from a paper written by Sachs and Warner (1995a), in which
they found that a large share of resource rents in GDP had a negative impact on economic
growth. (Sachs & Warner, 1995a) It is important to distinguish between resource abundance
and resource dependence. Resource abundance is not harmful; however resource dependence
can be dangerous in the sense that it exposes countries to several negative effects and risks,
such as price volatility. Oil price volatility will have great effects on the economy if oil
revenues are the nation’s primary source of income. Both Norway and Nigeria have
experienced negative effects of oil price volatility in the past. In spite of this there is still a
large difference when comparing the abundance of Norway to that of Nigeria, which is seen
in Graph 3. As shown by the graph below Nigeria’s share of oil rents in GDP have only
strayed below 20 percent during the beginning of exploitation, while Norway’s share has
stayed around or below 10 percent during the observed time period, making the Nigerian
share constantly at least twice the size that of Norway during the observed period. Oil rents
constitute a much larger share of GDP in Nigeria than in Norway, which makes Nigeria more
exposed to oil price volatility. While changes in oil price will affect both countries it will
undoubtedly affect Nigeria to a greater degree since it relies more heavily on its oil revenues
than Norway. (Sachs & Warner, 2001)
26
Graph 3: The share of oil rents of GDP in Norway and Nigeria from
1971-2010
60.0%
50.0%
40.0%
30.0%
Nigeria
Norway
20.0%
10.0%
2010
2007
2004
2001
1998
1995
1992
1989
1986
1983
1980
1977
1974
1971
0.0%
Source: World Bank, 2013
Graph 3 makes use of data obtained from the World Bank to illustrate how the percentage
share of oil rents in Norway’s and Nigeria’s respective GDP changed during the time period
1971-2010. The graph clearly shows that oil rents compose a larger share of GDP in Nigeria
than in Norway. As can be seen there have been times (early 1980’s) when Nigeria’s share of
oil rents in GDP has been five times the size of Norway’s share. Nigerian oil rents have also
fluctuated more over the course of time than the Norwegian oil rents have, but the general
pattern is fairly similar when taking into account that all changes are greater in Nigeria. The
graph fits well with the previously mentioned numbers on Nigerian oil rents. Nigeria’s oil
rents did indeed increase during the time of the first oil boom (1972-1974), and it’s possible to
distinguish a drop in oil rents as a part of GDP during the time of the second oil boom (19791981) as was previously mentioned. Logically this can be deduced as relating to the drop in
Nigerian oil exports during the same time period. The drop in oil revenues after the second oil
boom is largely what brought on the Nigerian negative growth rates in the early 1980’s and
contributed in creating Nigeria’s large financial deficit. This is good evidence of what the cost
of resource dependence may be and how Nigeria has suffered those consequences in the past.
(Robinson & Torvik, 2006)
Abundance has not proved to have a negative effect on GDP growth in itself. Rather, if the
economic structure of society is diverse, then abundance has proven in tests to have
significant positive effects on growth. It is when abundance transitions into dependence and
the economy comes to rely too heavily on resource rents that it becomes negative. This is
27
prevented by promoting a more diverse economy, with different sectors that can serve as a
cushion in times of high price volatility or a lack of resources. (Mavrotas et al., 2011) While
Norway has diversified into other sectors and invested a large share of its oil rents abroad, the
same can’t be said for Nigeria. This means that Nigeria as an economy has exposed itself to
oil price volatility and is more sensitive to changes in oil price. Changes in oil price will
undoubtedly affect Nigeria to a greater degree, thereby making the distinction between
resource abundance and resource dependence relevant. (Sachs & Warner, 2001)
It has also been found that a large share of oil rents in GDP is related to an increased chance
of conflicts and civil war. (Pendergast et al., 2001) The process of dividing resource rents may
result in conflicts due to difficulties in determining distribution and fair shares. In diverse
countries such as Nigeria, which encompasses many differing groups (with differences such
as ethnicity, religion, political factions), the risk of inner conflicts is elevated by the discovery
of oil. This can be illustrated in the sub-divisions of Nigeria since its independence in the
1960’s. In 1960 Nigeria consisted of three regions, today those three regions have been
divided into 36 states. Conflicts among minorities in states have led to this increased division,
since the minorities have demanded to become their own states when feeling that they’re not
getting an appropriate share of oil revenues. Shaxson (2007) states that empirically there is
evidence that divided societies perform worse than more homogenous societies in terms of
economic growth. However, the elevated frequency of conflicts in developing countries has a
negative impact on governance, often resulting in a weaker quality of the institutional
framework. Such conflicts are still common in Nigeria, and fights regarding oil rents are far
from over. (Shaxson, 2007)
In Graph 4 below the differences in thousand barrels of oil exported per day can be seen. Here
it becomes clear that Norway has exported more barrels per day than Nigeria for the last 20
years, and thereby could be seen as the larger producer of the two, in spite of Nigeria
presently exporting more. However, in spite of this it is still unlikely that Norway should be
the richer of the two as a result of exporting larger volumes of oil. (U.S. Energy Information
Administration, 2012) While Norway may export more oil in volume, that which is exported
still constitutes a smaller share of its GDP as was illustrated in Graph 3. This would imply
that Norway still is not as resource dependent as Nigeria. For most of the observed period
Norwegian oil exports barely surpassed 10 percent of GDP. Nigeria on the other hand ranged
between incomes that composed 30-50 percent of GDP, implying that even though the
28
volumes exported were smaller the revenues made were still highly significant to the
economy. (World Bank, 2013)
Graph 4: Net oil exports given in average thousand barrels exported per
day for Norway and Nigeria between 1980-2012
3500
3000
2500
2000
Norway
1500
Nigeria
1000
500
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
0
Source: U.S energy Information Administration, 2012
Graph 5 compares the degree of natural resource dependence by comparing Nigeria to some
other sub-Saharan oil producing countries. By looking at the graph it becomes clear that
Nigeria is not as extreme in its resource dependence as it might seem when compared to
Norway. In fact, as can be seen in Graph 5, Nigeria is rather stable in its share of natural
resources in GDP compared to Gabon and Equatorial Guniea, which both have spikes where
the share of natural resources in GDP surpass 70 percent. This means that Nigeria is not
unique among Sub-Saharan countries in its resource dependence. (World Bank, 2013) In spite
of Nigeria’s substantial resource rents earned on oil it still experiences many of the financial
difficulties of the other sub-Saharan African countries. This is something which not the least
can be seen in the fact that 70 percent of the Nigerian population survived on less than one
dollar per day in 2004. That Nigeria can earn so much money on oil and still have a
population that poor would strongly suggest an inability to take care of the rents earned,
which will be further discussed when answering question 3. (Adegbulu, 2010, p.14)
29
Graph 5: The percentage of GDP that stems from natural resources for Nigeria,
Gabon and Equatorial Guniea in the time period 1970-2010
90.0%
80.0%
70.0%
60.0%
50.0%
Nigeria
40.0%
Gabon
30.0%
Equatorial Guinea
20.0%
10.0%
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
2009
0.0%
Source: World Bank, 2013
All this goes to suggest that resource dependence has great effects on the economy of a
country. While Nigeria clearly relies heavily on its resource rents, Norway is more of a
borderline case. Both countries have however gotten to experience the downside of relying
too much on the rents provided by resource exports. This is most apparent when studying
Nigeria, due to its share of resource rents in GDP being consistently more than twice that of
Norway’s. Thus it can be concluded that resource dependence affects a country in several
different ways, two of them being exposure to price volatility and increased risk of conflicts.
This goes in line with the discovery of Sachs and Warner (1995b) that a focus on resource
extraction has a negative effect on GDP growth. This result proved relevant, even when
accounting for the effect of price volatility, thereby concluding that a complete focus on
resource extraction is not viable. In none of the investigated cases GDP growth was stronger
after the resource boom was completed than before its initiation. (Sachs & Warner, 1995b)
5.2 Crowding out
As can be seen in Graph 6 the share of manufactured exports has fluctuated in Norway
between the years 1961-2010. For the initial ten years studied manufactured goods composed
the largest share, but after the oil discovery in the 1970’s fuels soon surpassed. A breaking
point can be identified around the year 1979 where fuel exports became larger than the
exports of manufactured goods. In spite of this Norway still has somewhat diversified exports,
even though the share of manufactured goods have dropped from its height around a 60
percent share in the early 1970’s, to a mere 20 percent today. Manufactured goods in total
30
exports did decrease around the time of the oil discovery in Norway; however correlation
between the two events can only be speculated. This drop still offers some proof to the theory
of crowding out, implying that the discovery and increased focus on oil may have caused
manufactures to decrease.
Graph 6: Different sectors’ percentage shares of total merchandise exports in Norway
1961-2010
100.0%
90.0%
80.0%
Food
70.0%
Fuel
60.0%
50.0%
Manufactures
40.0%
Agricultural raw
materials
30.0%
20.0%
Ores and metal exports
10.0%
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
0.0%
Source: World Bank, 2013
In Graph 7 below merchandise exports for Nigeria is broken down into the same subsections
as for Norway. Nigerian fuel exports are larger than any other included exports, just as in
Norway. However, the degree to which the fuels exported exceed other exports is far greater
in Nigeria. Aside from this there are further differences. Fuel exports dramatically increased
to levels ranging between 90-100 percent of total exports after the discovery of oil in the early
1970’s. The crowding out theory mainly concerns the manufacturing sector, and how the
manufacturing sector is likely to suffer from increased exports of natural resources. However,
as is illustrated in Graph 7, the manufacturing sector has never been large in Nigeria. This
does not mean that the development of a manufacturing industry wasn’t prevented by the
growing oil extracting sector, but based on the graph alone all that is seen is that
manufacturing seems to have remained at a relatively constant share of merchandise exports
during the period. Exports of food on the other hand have decreased sharply since the oil
discovery, but food and the agricultural industry are rarely mentioned in theories concerning
crowding out. Instead a decline in agriculture is often suggested as something leading to
further development (often meaning a shift of labour into more profitable and efficient
31
industries), and associated with positive externalities. (World Bank, 2013) It can be gathered
that Nigerian leaders have failed at trying to diversify the Nigerian economy, something
illustrated in Graph 7, and in the fact that up to 95 percent of foreign exchange earnings in
Nigeria stemmed from oil exports during the investigated period. (Agibiboa, 2010)
Graph 7: Different sectors’ percentage shares of total merchandise exports in Nigeria 19612010
100.0%
90.0%
80.0%
Food
70.0%
60.0%
Fuel
50.0%
Manufactures
40.0%
30.0%
Agricultural raw
materials
20.0%
Ores and metal exports
10.0%
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
0.0%
Source: World Bank, 2013
Agricultural decline can nevertheless be said to have been of significance to the Nigerian
economy, and perhaps offer the greatest evidence of a possible affliction of Dutch disease.
Around the early 1980’s the share of agriculture in Nigerian GDP had sunk to a mere fraction
of its 68 percent in 1965. (Sala-i-Martin & Subramanian, 2003, p.15) In spite of this the
agricultural sector is still the largest employer in Nigeria, though its output has decreased
rather significantly. The decline in output is mainly due to the use of old techniques and an
introduction of new farming techniques that has failed to occur. According to the Statistical
Bureau in Nigeria about 60 percent of the Nigerian population is presently employed by the
agricultural sector. The large share of employed labour within agriculture in Nigeria also
poses a problem to development in the sense that agriculture has very low profit margins. This
is likely to mean an inefficient use of labour, but also that other sectors of the economy aren’t
developing properly. In spite of being rich in land Nigeria has grown to be a large importer of
food since the discovery of oil, and is currently far from able to sustain itself with food.
Before the discovery of oil Nigeria was the world’s largest exporter of palm oil and peanuts,
32
however presently Nigeria only makes use of an approximate half of its farmable land. (The
economist, 2013)
Table 1: Percentage share of total employment in Nigeria 1986 and 2004
Sector
Agriculture
Services
Industry
1986
46.9%
43.7%
7.5%
2004
44.6%
41.7%
11.5%
Period
Source: World Bank, 2013
Table 1 compares percentage shares of employment in Nigeria years 1986 and 2004 and
shows little change in the last 20 years. Employment has increased slightly within industry
and decreased for agriculture and services. The size of the service industry is an indicator of
the transition from agriculture to industry and then from industry to services was interrupted.
The Nigerian economy transitioned straight from agriculture to services instead, something
which may have resulted in a loss of the benefits brought by a larger industry focus. This lack
of industrialization could be argued as a weak link for many developing countries dependent
on natural resources. The loss of positive externalities connected to manufacturing and an
industry focus are likely to only exacerbate the resource curse and its negative effects. The
lack of industry focus is also likely to have prevented the Nigerian manufacturing industry
from flourishing. This cannot be seen when looking at Norway, since Norway has had a large
manufacturing industry, which becomes clear when studying Graph 6 and considering the
Norwegian export history. This is also reflected in Table 2 which illustrates the percentage
share of employment in Norway years 1986 and 2004. Industry and agriculture employed
larger shares of the population in 1986, but by 2004 those shares had declined in favour of
services. This goes to illustrate that Norway did not skip the industry-phase, and thereby the
benefits often attributed to industry are unlikely to have gone lost. (World Bank, 2013)
Table 2: Percentage share of total employment in Norway 1986 and 2004
Sector
Agriculture
Services
Industry
1986
7.2%
65.9%
26.7%
2004
3.6%
75.5%
20.8%
Period
Source: World Bank, 2013
That the share of manufactures in Norwegian exports (as Graph 6 shows) has decreased to
about half the share of exports compared to before the discovery of oil, suggests some
crowding out. The lack of modernizing effects theorized as connected to a small
33
manufacturing sector according to the crowding out theory is more tangible in Nigeria, a
country with poor infrastructure, a large share of population still employed in agriculture and
low rates of literacy. (Hagher, 2011) Norway on the other hand, as previously mentioned,
places higher in development ratings, and does not appear to suffer from any obvious lack of
modernization. The positive externalities that are thought to go lost with manufacturing
haven’t gotten lost in Norway, a country which is doing well in many country comparisons.
(Landguiden, 2012)
The almost 100 percent share of oil in total exports further suggest (as was discussed in
Question 1) that Nigeria is not just an oil abundant economy – it is an oil dependent economy.
That crowding out has taken place can be assumed in the case of Nigeria, since the other
studied sectors of the economy have shrunk to an almost non-existent share of exports.
Norway on the other hand has a more diversified economy than Nigeria. This is further
strengthened when comparing Graphs 8 and 9 which illustrate the percentage shares of
services, resource rents and merchandise trade (deducting natural resource rents) in GDP.
Graph 8 which depicts the Norwegian economy shows that natural resource rents have been
of varying importance to the economy, without constituting the largest share of GDP. The
general picture reflected is that of an economy which as a whole is not as dependent on
resource rents as the Nigerian economy. (World Bank, 2013)
Graph 8: Percentage shares of trade in services, total natural resource rents
and merchandise trade for the Norwegian economy 1970-2010
60.0%
Trade in services (%
of GDP)
50.0%
40.0%
Total natural
resources rents (% of
GDP)
30.0%
20.0%
Merchandise trade
without natural
resource rents (% of
GDP)
10.0%
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
2009
0.0%
Source: World Bank, 2013
34
Graph 9: Percentage shares of trade in services, total natural resource rents
and merchandise trade for the Nigerian economy 1970-2010
60.0%
Trade in services (%
of GDP)
50.0%
40.0%
Total natural
resources rents (% of
GDP)
30.0%
20.0%
Merchandise trade
without natural
resource rents (% of
GDP)
10.0%
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
2009
0.0%
Source: World Bank, 2013
Graph 9 illustrates the division of the Nigerian economy. Natural resource rents are the
dominating share of GDP and services are the smallest sector. The image is approximately as
balanced as the Norwegian, in the sense that the shares are of about the same size. The
difference is the fact that the order is reversed and Nigerian GDP shares fluctuate mote
sharply than Norwegian GDP shares. That the resource extracting industry is the largest again
goes to show that Nigeria is more exposed to the dangers of relying too heavily on resource
extraction. The evidence provided illustrates that crowding out can be said to have occurred in
both Norway and Nigeria. With this in mind the negative effects of crowding out are more
apparent in Nigeria than in Norway. In Nigeria the manufacturing industry failed to develop
and in Norway it decreased in size once oil exploitation began. Thus other industries can be
said to have suffered from the focus on resource extraction, even though the effect may have
been largest in Nigeria, where manufacturing can perhaps be said to have suffered the most
due to barely having developed at all. (World Bank, 2013)
5.3 Corruption
The table below shows the CPI scores for Norway and Nigeria between the years 1998-2012.
It is hard to obtain data on indexes estimating corruption levels, so the period before 1998 will
be commented upon without referring to any index. Prior to the beginning of the CPI in 1998
Nigeria had suffered several military coups and was run by a non-democratically elected
government for the larger part of the studied time period. (Hagher, 2011) Norway, on the
35
other hand, as a constitutional monarchy has been ruled by a democratically elected
government for more than a century. This illustrates that the state of the two nations differed
greatly. This can be offered as the fundamental cause behind the difference in handling
resource rents. While it is well documented that Norway established an oil fund and invested
its resource rents into projects widely regarded as sensible, Nigeria failed to turn its resource
rents into something good. (Landguiden, 2012)
Table 3: Corruption Perception Index results for Norway and Nigeria 1998-2012
Year
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Score
Nigeria
1.9
1.6
1.2
1
1.6
1.4
1.6
1.9
2.2
2.2
2.7
2.5
2.4
2.4
2.7
Norway
9
8.9
9.1
8.6
8.5
8.8
8.9
8.9
8.8
8.7
7.9
8.6
8.6
9
8.5
Rank
Nigeria
81
98
90
90
101
132
144
152
142
147
121
130
134
143
139
Norway
8
9
6
10
12
8
8
8
8
9
14
11
10
6
7
Total amount of countries
85
99
90
91
102
133
145
158
163
179
180
180
178
182
174
Source: Transparency International, 2013
It has been argued that Nigeria was not a corrupt country in the early years of independence,
but rather that the corrupt values came to stand after the long years of military rule. The
closed, rank-based system of the military is thought to facilitate corruption and increase the
difficulty of making allegations of corruption. Claims regarding corruption towards another
would quickly result in a loss of power and position. This structure of non-voicing of
problems with corruption can be seen through the prosecution of journalists for trying to
compose investigative stories regarding corruption among high officials. (Adegbulu, 2010)
The failure of Nigerian politics can easily be seen when investigating the development of the
country in areas such as infrastructure, literacy and life expectancy. During the period 19601998 Nigeria was still a very poor country, which shows its inability to turn the riches made
on resources into good investments aimed at improvements to the country. The negative
effects of Nigerian corruption can be seen in the poverty of the Nigerian population. In 2004
36
70 percent of the Nigerian population was getting by on less than one dollar per day.
Development reports since point to the fact that the poverty gap has increased, rather than
decreased. This is in spite of Nigeria being one of the ten largest oil exporters of the world.
(Adegbulu, 2010) The failure to invest resource rents wisely makes it highly probable to
assume a high degree of corruption in Nigeria during the investigated time period. It is likely
that the resource rents were diverted elsewhere in a manner classified as corruption. In
Norway on the other hand resource rents are well-documented to have been used sensibly and
in ways that have given tangible results, thus making it less likely that substantial shares of oil
rents have disappeared. Therefore it is concluded that based on past performance and
historical facts Norway is likely to have suffered from little corruption, whereas it is probable
that Nigeria was highly corrupted. (Transparency International, 2013)
As illustrated in Table 3 the amount of countries included in the CPI has varied over time, and
nearly doubled since the index began. Norway has persistently been part of the top ranking
countries with scores close to ten, which is the maximum. Nigeria on the other hand has not
performed as well, but has rather had scores around two and ranked among the worst
performing countries. (Transparency International, 2013) This fits in well with the previously
explored image of Nigeria as a country with grabber-friendly institutions afflicted by
symptoms closely associated with corruption over time. Nigeria’s large ethnic diversity may
have led to increased competition between different ethnic groups over resource rents. Nigeria
has also suffered several military coups. (Hagher, 2011)
Corruption is theorized by many as highly linked to the natural resource curse. Finding large
assets of a valuable resource has led to many cases of embezzlement and corruption. This is
theorized to have its origin in the fact that the afflicted countries don’t have the proper
institutions in place to handle the exploitation and the profits that are brought as a result of the
discovery. The lack of proper institutions relates strongly to Nigeria in the sense that at the
time of oil discovery Nigeria was still a newly independent country which struggled to find its
footing in a developing region. That Nigeria was suffering from internal rifts and military
coups is likely to have contributed to the failure to develop sound institutions to oversee that
the exploitation of oil proceeds became beneficial to the population as a whole. (Mehlum et
al., 2006) Norway on the other hand, as a stable nation at the time of the discovery had stable
and sound institutions in place. This is illustrated by the establishment of its oil fund, which
was created with the purpose of safeguarding the oil riches for future generations and times of
need, instead of squandering it all at once. Perhaps this would suggest that the timing of an oil
37
discovery is not unimportant. Had Nigeria been given a chance to establish a stable rule and
good institutions after independence the present economic situation might have been very
different. With this in mind, corruption is highly relevant to the natural resource curse.
However, this does not mean that the abundance of natural resources is sure to bring
corruption, since some countries (like Norway) are regarded as having prevented the
development of large corruption. (Rød Larsen, 2006)
However, keeping this in mind the question is if corruption really is the hindrance to
economic growth it is frequently made out to be. Jeffrey Sachs (2001a) uses Vietnam as an
example of this. Vietnam is one of the south Asian countries with high growth rates, yet it is
still commonly acknowledged that Vietnam suffers from corruption. If corruption carries such
significance to economic growth: How come Vietnam has managed to achieve its high growth
levels in spite of it? This makes it relevant to consider how severe corruption is. Though few
would argue that corruption isn’t negative, some like Sachs, would argue that it is not the
definite horror it’s commonly made out to be. Corruption cannot be said to hinder all
economic growth and development, but rather (as seen in the example of Vietnam) it is
possible to achieve economic growth in spite of it. Therefore it is necessary to consider more
factors as possible detriments to economic growth, and not just assume that corruption is the
only answer to why certain resource rich countries, such as Nigeria, fail to turn their resource
rents into sensible investments. (Sachs, 2001a)
After years of corruption Nigeria now suffers from a bad image worldwide. This makes it
difficult to attract much needed investors to other non-oil related projects that could help
boost the economy and aid in achieving economic growth. (Adegbulu, 2010) The famous
writer Chinua Achebe once wrote “corruption in Nigeria has passed the alarming and entered
the fatal stage; and Nigeria will die if we keep pretending she is only slightly disposed”,
which is perhaps a most fitting description to the situation in Nigeria. (Achebe, 1983, p.58)
Since Nigeria receives such substantial incomes on oil revenues it seems almost impossible
that its population can be so poor. Undoubtedly, as has been concluded by many authors, the
funds gained on oil exports are diverted elsewhere in such a manner that corruption becomes a
detriment to economic growth. Thus corruption is of great importance to the (low) growth rate
of the Nigerian economy, without having affected the Norwegian economy to the same extent.
From this it can be concluded that corruption does play a large part in the resource curse,
since it largely is that which Nigeria is afflicted by, but which has spared Norway. Norway
can be said to be spared from the resource curse, with some few exceptions, while Nigeria is a
38
typical example of the resource curse. Thereby it can be concluded that corruption plays a
large role in the resource curse, but how corruption affects society itself is rather dependent
on the state of the society. A country which is stable at the time of discovery, with few
conflicts and sound institutions (like Norway) has better chances of achieving economic
growth and escaping the resource curse. A country like Nigeria on the other hand, which
possessed none of these mitigating qualities, is much more likely to suffer from corruption, as
has been documented. (Acemoglu & Robinson 2008a)
39
6. Concluding remarks
In answering my three chosen questions it became clear that in spite of sharing richness in oil,
Norway and Nigeria differ greatly. Both Norway and Nigeria can be considered as having an
abundance of oil, even though the share of oil rents in GDP is larger in Nigeria than in
Norway. The differences between the two countries become more apparent when looking at
oil dependence. Norway has a more diverse economy with different sectors, in spite of oil
representing a fairly large share of total exports. Therefore the Norwegian economy is less
sensitive to fluctuations in price levels. Norway has also strived to invest oil rents (its “oil
fund”) in a diverse number of countries and industries, so as to minimize the crowding out
effect, Dutch disease possibility and increase the profitability of the fund itself. This stands in
great contrast to Nigeria. When looking at the composition of Nigerian exports it becomes
clear that oil represents almost a 100 percent of Nigerian exports. When looking at total
exports the manufactured sector is almost non-existent and the agricultural sector has also
decreased in size.
The differences continued when investigating corruption. Norway with its low levels of
corruption can be viewed as an example illustrating how good institutions can offset the
possibly negative impact of resource abundance on an economy. Nigeria however is known
for its high levels of corruption, often illustrated by the great revenues made on oil scarcely
benefitting the people. It is estimated that Nigerian oil revenues in total between the years
1965-2000 amounted to 350 billion dollars (in constant 1995 dollar levels). However, in spite
of this Nigeria hardly put the revenues made to good use. Corruption is still high, welfare is
still reportedly low and the country is still counted among the less developed countries of the
world. (Sala-i-Martin & Subramanian, 2003, p.4)
It’s difficult to say exactly what the reason behind Norway and Nigeria performing so very
differently is. As illustrated some authors point to the relevance of geographical factors, such
as climate, whereas others emphasize the importance of institutions of society. In all
likelihood the answer lies somewhere in between. While it is true that Nigeria is
geographically located in a different region than Norway, with a different climate and
different neighbours, it is also true that Norway was a more stable and established society
before the oil discovery. Norway already had institutions in place able to deal with oil rents
appropriately, whereas Nigeria was run by a non-elected military regime. From this viewpoint
the discovery of resources can be thought as a test to the existing institutions. If institutions
40
are good, then geographical disadvantages can be compensated for and the rents will benefit a
larger share of society. However, with dysfunctional institutions the money will breed
corruption and only benefit a few. With this being said the investigated aspects of the resource
curse fit together like pieces of a puzzle, and must all be addressed. While it is important not
to get too dependent and making sure of this by diversifying the economy, it is also important
to take good care of the resource rents earned. In this sense the underlying reason for Norway
and Nigeria being two countries which on paper would have similar opportunities, but in
reality perform so very differently, probably lies somewhere in between the institutional and
geographical views. Both views have merit, and in my opinion they offer the most merit when
combined. Neither institutional nor geographical weaknesses should be ignored, but ideally
addressed together. However, this being said perhaps Jeffrey Sachs was right to argue that “a
complete answer to what is behind the curse of natural resources therefore awaits a better
answer to the question about what ultimately drives growth”. (Sachs, 2001, p.833)
41
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