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AN ANALYSIS
OF OIL REVENUE AND MACROECONOMIC PERFORMANCE IN NIGERIA
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
Oil is a
major source of energy in Nigeria and the world in general. Oil being the
mainstay of the Nigerian economy plays a vital role in shaping the economic and
political destiny of the country. Although Nigeria’s oil industry was founded
at the beginning of the century, it was not until the end of the Nigeria civil
war (1967 - 1970) that the oil industry began to play a prominent role in the
economic life of the country (Fashola, 1999).
Oil
abundance, and specifically oil dependence has often been associated with poor
growth, poverty and underdevelopment. Nigeria is considered to be a classic
example of the contradiction between natural resource abundance and perverse
economic development outcomes (or the paradox of plenty). It is Africa’s
highest oil exporter, and the world’s tenth largest oil producing country. It
has realized over US$ 600 billion in oil revenues since 1960, a figure greater
than the resources used by the Marshall Plan in rebuilding Europe after World
War II, and is currently the 8th highest net oil exporter in the world.
Nigeria’s economy is heavily dependent on natural resources: oil and gas
constitutes 98% of total exports, 80% of government revenues and around 20% of
GDP (CBN, 2010). In spite of the enormous economic potentials in Nigeria, it
has largely failed to live up to the ambitious growth projections that followed
the first oil boom in the 1970s. Also, social indicators have displayed no
specific tendency towards improvement such that in 2010, Nigeria was ranked
142nd out of 169 countries by the United Nations Human Development Index.
Furthermore, up to 70% of Nigerians are considered to be ‘poor’ – subsisting
below the national poverty line (NBS, 2012).
It thus goes
without saying that Nigeria has evidently grappled with the paradox of plenty.
The negative impacts of abundant oil revenue from oil abundance include; a
decline in the competitiveness of other economic sectors (caused by
appreciation of the real exchange rate), volatility of revenues from the
natural resource sector due to exposure to global commodity market swings,
government mismanagement of oil revenues, weak, ineffectual and corrupt
institutions. In addition, this massive inflow of revenue fuels greed and
jostling for resources, both of which serve as the bedrock for crises,
conflicts and violence that have come to epitomise most resource-rich countries
(Nigeria inclusive). However, the deleterious economic effects embedded in the
foregoing perverse outcomes have been argued to be muted within the ambit of
well functioning institutions and their accompanying structures and mechanisms.
Along this
line of thought, the seminal work of Rodrik (1999a,b, 2002) on the role of
institutions in economic growth and development has contributed to the
recognition of the role played by the quality of domestic institutions in
shaping policy responses to exogenous shocks (including oil windfalls), and the
redistribution of wealth to reduce poverty and drive economic growth.1 In an
application of this important thesis to Nigeria, the well-known study by
Sala-i-Martin and Subramanian (2003) introduces a measure of ‘institutional
quality’ – defined as the mortality rates of colonial settlers, and the
fraction of the population speaking English and other European languages –
within an Instrumental Variable model of a cross-country econometric analysis,
to arrive at the conclusion that crude oil has a negative and non-linear impact
on growth in Nigeria, through the deleterious impact on domestic institutions. Macroeconomic performance refers to an
assessment of how well a country is doing in reaching key objectives of
government policy. The main aim of policy is usually an improvement in the real
standard of living for their population. The effect of the abundant oil revenue
has not been felt in the standard of living of Nigerians.
1.2 STATEMENT OF THE PROBLEM
There is
already a plethora of academic literature on the issues associated with oil
revenue and macro-economic performance in resource-rich countries. Existing
studies on Nigeria’s experience with oil revenue have also tackled the
macroeconomic implications, (Subramanian and Sala-i-Martin 2003). This study,
however, aims to provide an analysis of oil revenue and macroeconomic
performance in Nigeria. This study is going to proffer suggestions to
policymakers, to help in the design of appropriate policies to manage
appropriately future oil revenue that will be generated. While the extant
studies on the subject with specific focus on Nigeria have hinged on the
macroeconomic implication of oil revenue, the institutional setting has
scarcely ever been given any attention.
1.3 OBJECTIVES OF THE STUDY
The
following are the objectives of this study:
1. To examine the effect of oil revenue on
macroeconomic performance in Nigeria.
2. To examine the level of economic development
in Nigeria.
3. To examine the relationship between oil
revenue and macroeconomic performance
1.5 RESEARCH QUESTIONS
1. What are the effects of oil revenue on
macroeconomic performance in Nigeria?
2. What is the level of economic development in
Nigeria?
3. What is the relationship between oil revenue
and macroeconomic performance
1.5 HYPOTHESIS
HO: There is
no significant relationship between oil revenue and macroeconomic performance
in Nigeria.
HA: There is
significant relationship between oil revenue and macroeconomic performance in
Nigeria.
1.6 SIGNIFICANCE OF THE STUDY
The
following are the significance of this study:
1 The outcome of this study will
enlighten the government of Nigeria, the policy makers and the general
public on the influence of oil revenue
on macroeconomic performance in Nigeria with a view of understanding better how
to manage the revenue generated from abundant oil in Nigeria for rapid and
sustainable development of the country.
2 This research will also serve as a
resource base to other scholars and researchers interested in carrying out
further research in this field subsequently, if applied will go to an extent to
provide new explanation to the topic.
1.7 SCOPE/LIMITATIONS OF THE STUDY
This study
on the analysis of oil revenue and macroeconomic performance in Nigeria will
cover the overview of money generated from crude oil in Nigeria and its effect
on the economy of the nation. It will also cover how the government of Nigeria
has allocated and managed resources generated from oil since the beginning of
oil exploration and production in Nigeria.
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