Impact of Oil Dependence on the Nigeria’s Economic Growth
CHAPTER ONE
Objective of the Study
The objectives of this work are
- To examine the impact of oil sector on Nigeria economy.
- To examine the relative contribution of oil revenue on total government income and government capital expenditure.
- To evaluate the findings and make a necessary recommendation.
CHAPTER TWO
THEORETICAL LITERATURE REVIEW
Mainstream Economist View on Resource Dependence
According to the mainstream economist, a country should produce and export based on their comparative advantage. The theory of comparative advantage suggests higher economic benefit of one country than the other thereby producing at a lower cost. Other countries will also benefit if they produce a product of which they have advantage on, hence accepting the advantage cost of the other trading country. This is what mainstream beliefs in for specialization, trade and international division of labor. This is why some countries produce agricultural products while others produce industrial goods (O’toole 2007).
The H.O principle of comparative advantage states that countries produce and export the good of which they have in abundance. In this model we consider two goods, two factor and two countries and also assume both countries have similar technology, similar preferences and also engage in free trade of goods and different factor endowment (Feentra 2003). Mainstream economist belief that when two countries have different factor endowment, they should export the commodity of which they have comparative advantage on, which will lead to specialization and also efficient use of resources thereby bringing about gains from trade (WTO 2010). A country with capital abundance should export capital intensive goods and import labor intensive goods according to H.O model, while a country with labor abundance should export labor intensive goods and import capital intensive goods (Clarke et al. 2009).
The attempt to prove the theory has been going on for years by many economists meanwhile; most of the test did not perform well. Notwithstanding economists are still working to explain the theory by adjusting variables to improve the result.
Leontief (1953) tries to authenticate the validity of the comparative advantage principle by studying the US economy. He used the economic data on input and output reports and trade data to estimate the H.O Samuelson model. He measures the direct and indirect use of labor and capital in all the exporting sectors, so as to know the number of labor and capital needed in the production of one million dollars of the United States’s exports and import. Leontief finding shows that each employee works with capital worth $18200 in producing imports and $13700 in producing exports. Therefore Leontief discovery was not consistent with the H.O theory because in 1947 the United State was capital abundant and his findings came to be known as Leontief paradox. Nonetheless Stern and Maskus (1981) modified the Leontief model to account for natural resources. Therefore the labor intensive goods Leontief added in his model where actually natural resource intensive goods, hence the error was fixed.
CHAPTER THREE
RESEARCH METHODOLOGY
Sources and Type of Data
The data used for this research were obtained from the World Bank WDI and United Nations Statistical Database (UNSTAT). The study will employ time series from 1973 to 2013.
The United Nations Statistical Database (UNSTAT)
- The Import sector value added to GDP in US Dollars; The services sectorcontributions to GDP in US Dollars; The Export sector contribution to GDP in US Dollars World Bank (WDI);
- The share of oil rents in GDP; The Naira/Dollar exchange rate
CHAPTER FOUR
RESULT AND FINDINGS
Unit Root Tests
Prior to the implementation of the ARDL technique, regressing a non-stationary time series results to misleading inferences (Libanio, 2005), therefore all variables must be tested for stationarity. The unit root test is used to verify the integration order and it is an essential requirement for the presence of co-integration (Nelson, John and Reetu, 2005). To investigate the existence/absence of unit root in each variable we use the ADF test, thereby determining the integration order. We can now specify the long run linkages by choosing the integration order for each variable i.e. I(0) or I(1).
CHAPTER FIVE
CONCLUSION AND POLICY RECOMMENDATION
5.1 Conclusion
The paper investigates the relationship between oil dependence and per capita GDP for Nigeria by applying the ARDL bounds testing approach to co-integration and using annual data time series from 1973-2013. Conclusively oil dependence presents a negative significant effect on the economy and this effect is transmitted from the exchange rate to the balance of payment, down to the manufacturing sector. The manufacturing sector remains impeded because the government cannot sustain a single productive developmental strategy due to the high level of dependence on volatile oil price, making diversification more challenging to implement. Import and export however were not significant but import had a positive relationship while export was negatively related with the GDP per capita, this is due to the complete reliance on oil revenue. In addition, the importation implies capital outflow but the effect of the capital outflow is lessened by the foreign exchange coming from oil, therefore there is no relationship in the long run. Thus import might be endogenous. Nevertheless, the positive relationship of import may be because of the endogeneity when there is an economic boom or a rise in GDP and thus positive relationship between import and GDP might imply causality running from GDP to imports. Based on the empirical result, the services sector equally has a significant and positive relationship with the growth of the economy and this is due to the indirect industrialization were by productive resources and funds move from the manufacturing and agricultural sector to the services sector which gains more spending effect from a boom in oil sector in the long run. A boom in oil sector strengthens the services sector. As such it will gain the effect of spending that is prompted by the boom in the oil sector because of the substitutability in imports. Domestic demand will increase by the spending effect although it would lead to a reduction in the agricultural goods production due to the crowding out effect.
Recommendation
Looking at the current global fall in oil prices, in order to be less dependent on crude oil for economic sustainability, it is now essential for Nigeria to diversify its sources of foreign exchange earnings.
In order to diversify the economy, the need to adjust the non-oil tax revenue as a source of sustainable revenue for development should not be underestimated.
Federal government should use excess crude oil account (ECA) efficiently in this time of crisis. The funds should be used to finance critical infrastructure for long term development and growth.
Another most important recommendation of this study is that government should come up with policies that would encourage the private sectors to actively participate in the non-oil sectors (telecommunication, whole sale & retail trade and real estate sector), expansion of Foreign Direct Investment and sterilization of oil rents overseas by fostering incentives so as to reduce the oil price shocks and the negative effects of crude oil prompted capital inflow in the Nigeria’s economy.
Also an adjustment policy should be implemented to tighten the government expenditure and shore up the non-oil incomes so as to compensate for diminishing oil revenues.
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