Transcript PRESENTATION NAME

Nigeria: Dealing with the resource
curse in a hopeful continent
The Swiss Global Economics
March 2014
The Macro Picture
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Economic growth in Nigeria will accelerate this year, driven by
sectors outside its dominant energy industry, while inflation will
continue its downward path.
The economy is set to grow 7.3 percent this year, up from 6.4
percent in 2013.
Inflation will end the year at 7 percent, down from 7.9 percent at
the end of 2013, continuing a two-year downward trend supported
by tight monetary policy.
Nigeria plans this year to recalculate its gross domestic product,
which could push it above South Africa as the continent’s biggest
economy, although the rebasing has missed several deadlines
already.
Economic growth is expected to improve further in 2014, driven by
agriculture, trade, and services.
Inflation should continue to decline, with lower food prices from
higher rice and wheat production and supported by a tight
monetary policy and a budget execution that maintains mediumterm consolidation objectives.
A history of Nigeria…exports
The Curse
Inequality
Poverty
Big improvements since 2000
But on the back of rising oil prices
Crude Oil Price
(fob contract)
140
120
100
80
60
40
20
0
1970
1975
1980
1985
1990
1995
2000
2005
2010
A “perfect storm”
• How can more be less?
• What are the underlying forces at play?
– Economic
– Social
– Political
• What has changed more recently? How to
make progress?
• Intellectual tools: macro, micro, institutions
empathy
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What did people experience since independence?
Fast social transformation -- urbanization
Ethnic and religious conflict, the Biafra civil war
Rising inequalities
Corruption big and petty
Army control, coups
Public servants, crony capitalism
Young democracy – civil society activism
Big expansion of the scope of the private sector
A large, diverse, and vibrant country
Structures of Governance
• Group dynamics – Biafra and aftermath
– Geographical question
– Elite coalition, army, oil, states
• Delta conditions, flare-up, and peace plan
• Mahmood Mamdany’s historical analysis:
– Indirect rule
– bifurcation and agriculture
– Big men
Key questions relevant for future
too
Economics
Politics
• Benefits reduced
– Low investment
– Agric shrinks
– Low quality of public
expenditure
• Can more be less?
– Volatility leading to
bankruptcies
– Miss out on dynamic
sectors
• Negative sum games
– Wars
– Grabbing equilibria
– Social development
Copper Price ($/mt)
12000
10000
8000
6000
4000
2000
0
1970
1975
1980
1985
1990
1995
2000
2005
2010
Iron-Ore ($/bbl)
160
140
120
100
80
60
40
20
0
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
Volatility -- households
• Smooth consumption (at or below average)
preferable to swings
– Why: marginal utility of income, risk aversion
• Can smoothing be engineered?
– Financially?
– Other coping mechanisms?
– State led safety nets
– Urban migration
Volatility -- firms
• Economy wide impact of oil price volatility:
creates volatility in XR, IR, unemployment,
inflation (a business cycle of boom and busts)
• Firms: Limited access to capital markets means
very high exposure to risk: risky and thus low
investment; moves to trade and to non tradable
services
• Gaming by large concerns
– Limited liability – banking crisis of 2007
– Too large to fail – states, banks
– Rent-seeking versus wealth creation
Volatility and rents – macro
• Can be smoothed (counter-cyclical policies)
but not easy, requires fiscal and monetary
instruments, plus lots of political discipline
• Gov. Budgets: irreversibilities – wages; hubris
and over-reach – public investments wt low
capacity utilization
• Dutch disease and impact on agriculture
• Missed out on dynamic industries like
manufacturing
Pro-cyclical spending
Correlations between Government spending & GDP
2000-2009
procyclical
procyclical
Frankel, Vegh & Vuletin (2012)
In the last decade,
about 1/3 developing countries
switched to countercyclical fiscal policy:
Negative correlation of G & GDP.
Spending on what?
Dutch disease
agriculture
Urbanization and food imports
Governance effects at the heart
• Rentier effects
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Fight over resources, grabbing games
Authoritarian bargain and spending
Competitive democracy and electoral fiscal cycle
Taxation and representation
• Repression effects
– Military rule
• Modernization effect
– Institutions deformed: Abuja, civil service, PEs, states, army
– Group formation – wealth creation vs lobbying activity
• Volatility
– Affects the terms of the autocratic bargain
– Coordination failures (tragedy of the commons)
Effect of Elections on Budget Deficits:
Developed vs. Developing Countries
Electoral cycle
Inefficient public enterprises
State and Center Contributions to Total
Debt in India
Check-list: The Natural Resource Curse
Seven possible channels that some have suggested could
lead to sub-standard economic performance
• Wealth Fund -- Commonly suggested model:
– Norway’s National Petroleum Fund (now “Pension Fund”)
– When oil prices are high, save it in a fund to offset depletion of reserves.
– Internationally diversified.
• Even better model:
– Botswana’s Pula Fund
– Professionally managed; no political interference.
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Extractive Industries Transparency Initiative (UK, 2000)
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World Bank plan to safeguard Chad oil revenue
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International oil companies “publish what you pay.”
revenue would have gone to Citibank escrow account in London;
law dedicated 70-90% for spending on health, ed., & roads,
10% for “future generations fund”
Chad backed out
Collier (2007): International charter: members pledge formal revenue audits.
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The World Bank or IMF holds the kitty.
What reforms seem most relevant for
Nigeria today?
• Oil stabilization fund (how to make it stick?)
• Oil dividend in Delta (and how?)
• Diversification: support for agriculture (in a
decentralized framework)
• Decentralization (can budget constraints be
hardened?)
• Public Private partnership (PPP) for electricity/gas
(principal-agent)
• But also: reforms within the ruling party
Key Lessons
• Size and variability of budget deficits in developing
countries driven in part by interaction of de jure and de
facto institutions
• Emphasizing principal-agent problems leads to a policy
focus on reducing rent seeking and increasing citizen
information
• Emphasizing collective action problems leads to a policy
focus on political parties and coalitions
• Analyzing “political supportability” of reforms requires
assessing political parties’ internal rules and norms and
external coalitions
Which case fits Nigeria best?
An opportunistic agenda
• State capacity: at state level,
taking advantage of
example of Lagos state,
electoral competition, and
rise of agriculture
Growth and (just in time) incremental
reforms cutting across capacity and
governance and focusing on
stabilization (oil Fund), corruption
(banking system, budget process),
security (ethnic clashes), PPP in
gas and electricity
• Institutional transformation:
at ruling partly level, given
risks of ethnic competition,
upcoming elections, rise of
civil society
Bottom up reforms: in the
Delta region,
implementation of the
direct transfer agreement,