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Berkeley ENVECON 131 - ADDRESSING THE NATURAL RESOURCE CURSE

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NBER WORKING PAPER SERIESADDRESSING THE NATURAL RESOURCE CURSE:AN ILLUSTRATION FROM NIGERIAXavier Sala-i-MartinArvind SubramanianWorking Paper 9804http://www.nber.org/papers/w9804NATIONAL BUREAU OF ECONOMIC RESEARCH1050 Massachusetts AvenueCambridge, MA 02138June 2003We are grateful to Francesco Trebbi for valuable research assistance. Thanks are due to Doug Addison, ChrisLane, and Dani Rodrik for helpful comments and discussions. Errors remain our own.The views expressedherein are those of the authors and not necessarily those of the National Bureau of Economic Research.©2003 by Xavier Sala-i-Martin and Arvind Subramanian. All rights reserved. Short sections of text notto exceed two paragraphs, may be quoted without explicit permission provided that full credit including© notice, is given to the source.Addressing the Natural Resource Curse: An Illustration from NigeriaXavier Sala-i-Martin and Arvind SubramanianNBER Working Paper No. 9804June 2003JEL No. O1, O4, O5, O55, O57, Q0ABSTRACTSome natural resources – oil and minerals in particular – exert a negative and nonlinear impact ongrowth via their deleterious impact on institutional quality. We show this result to be very robust.The Nigerian experience provides telling confirmation of this aspect of natural resources. Waste andcorruption from oil rather than Dutch disease has been responsible for its poor long run economicperformance. We propose a solution for addressing this resource curse which involves directlydistributing the oil revenues to the public. Even with all the difficulties of corruption andinefficiency that will no doubt plague its actual implementation, our proposal will, at the least, bevastly superior to the status quo. At best, however, it could fundamentally improve the quality ofpublic institutions and, as a result, transform economics and politics in Nigeria.Xavier Sala-i-Martin Arvind SubramanianDepartment of Economics International Monetary FundColumbia University 700 19th Street, NW420 West 118th Street, 1005 Washington, DC 20431New York, NY 10027and [email protected] I. INTRODUCTION Nigeria has been a disastrous development experience. On just about every conceivable metric, Nigeria’s performance since independence has been dismal. In PPP terms, Nigeria’s per capita GDP was US$1,113 in 1970 and is estimated to have remained at US$1,084 in 2000. The latter figure places Nigeria amongst the 15 poorest nations in the world for which such data are available. Nigeria, unfortunately, fares much worse on measures of poverty and income distribution. Between 1970 and 2000, the poverty rate, measured as the share of the population subsisting on less than US$1 per day increased from close to 36 percent to just under 70 percent (Chart 1A). This translates into an increase in the number of poor from about US$19 million in 1970 to a staggering US$90 million in 2000 (Chart 1B).1 Similarly, the income distribution also deteriorated very sharply. Chart 2 plots the distribution of income for four years, 1970, 1980, 1990, and 2000. It is striking that over time the two tails of the distribution have become fatter, signifying that more and more people have been pushed towards poverty (the left hand side of the distribution) and towards extreme wealth (the right hand side). To illustrate: whereas in 1970 the top 2 percent and the bottom 17 percent of the population earned the same total amount of income, in 2000 the top 2 percent had the same income as the bottom 55 percent. Table 1 reports the growth rate of GDP and its volatility for Nigeria. In terms of growth since 1960, Nigeria fared worse than the average country but better than oil producing countries. It is also noteworthy that Nigeria’s economy was substantially more unstable—reflected in the standard deviation and coefficient of variation of growth rates—than other countries, including other oil producing countries.2 These developments, of course, coincided with the discovery of oil in Nigeria. Chart 3 depicts the revenues that Nigeria has obtained from oil since1965. Over a 35-year period Nigeria’s cumulative revenues from oil (after deducting the payments to the foreign oil companies) have amounted to about US$350 billion at 1995 prices. In 1965, when oil revenues per capita was about US$33, per capita GDP was US$245. In 2000, when oil revenues were US$325 per capita, per capita GDP remained at the 1965 level. In other words, all the oil revenues—US$350 billion in total—did not seem to add to the standard of 1 These calculations are based on Sala-i-Martin (2003). We use the original definition of poverty line of the World Bank, which is one dollar a day in 1985 prices. 2 It turns out that the greater instability—relative to other oil producers—is not a consequence of oil’s greater weight in GDP: in the sample, the share of oil in GDP for oil producing countries was 9.5 percent compared with 8.1 percent for Nigeria.living at all. Worse, however, it could actually have contributed to a decline in the standard of living? This paper has three objectives developed in three sections. First, in Section II we use cross-section empirical analysis to demonstrate that stunted institutional development—a catch-all for a range of related pathologies, including corruption, weak governance, rent-seeking, plunder, etc.—is a problem intrinsic to countries that own natural resources such as oil or minerals. The resulting drag on long-run growth from having resources can be substantial. Second, in Section II we establish that Nigeria’s poor economic performance stems largely from having wasted its resource income. Finally, in Section IV we propose a solution for Nigeria to accelerate institutional change, which would involve distributing the bulk of the oil revenues directly to the people. In the absence of measures to improve the quality of institutions and avoid the problems created by oil rents, we remain deeply pessimistic about Nigeria’s long-run prospects. The final section concludes. II. THE NATURAL RESOURCE CURSE: REVISITING THE EMPIRICAL LITERATURE Is the detrimental impact of oil on development unique to Nigeria or is it—the oft-cited “natural resource curse”—a more general phenomenon? From a policy perspective, while it is important to know if a curse exists, it is perhaps more important to know the mechanism by which it casts its spell. Identifying the mechanism allows a better stab to be made at


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