Academic journal article Journal of Sustainable Development

How Important Is Oil in Nigerias Economic Growth?

Academic journal article Journal of Sustainable Development

How Important Is Oil in Nigerias Economic Growth?

Article excerpt


This study assesses the importance of oil in the development of the Nigerian economy in a multivariate VAR model over the period 1960-2009. Empirical evidence shows that the five subsectors are cointegrated and that the oil can cause other non oil sectors to grow. However, oil had adverse effect on the manufacturing sector. Granger causality test finds bidirectional causality between oil and manufacturing, oil and building & construction, manufacturing and building & construction, manufacturing and trade & services, and agriculture and building & construction. It also confirms unidirectional causality from manufacturing to agriculture and trade & services to oil. No causality was found between agriculture and oil, likewise between trade & services and building & construction. The paper recommends appropriate regulatory and pricing reforms in the oil sector to integrate it into the economy and reverse the negative impact of oil on the manufacturing sub sector.

Keywords: VAR model, Causality, Oil, Impulse response functions, Development, Nigeria

(ProQuest: ... denotes formulae omitted.)

1. Introduction

In the last decades of the 20th century, there was a counter-intuitive relationship between natural resources abundance and economic development (Auty, 2001). Developing countries with abundant natural resources underperformed compared with those that are deficient in natural resources (Ranis, 1991; Lal & Myint, 1996; Sachs & Warner, 1995, 1999; Auty, 2001). Specifically, the per capita incomes of the resource poor countries increased at rates two or three times faster than those of the resource abundant countries. The growth rate equally widened significantly since 1970s. The apparent paradox between natural resource abundance and economic growth as well as development has led to increasing research works into the so called resource curse (note 1) phenomenon.

Nigeria is a natural resource abundant country. In particular, over the past fifty years, the country's oil subsector has grown phenomenally. Both production and exports have increased enormously since commercial production in 1958. For example, crude oil production increased from 395.7 million barrels in 1970 to 776.01 million barrels in 1998. The Figure increased to 919.3 million barrels in 2006. The Figure however decreased to 777.5 million barrels in 2009. In the same way, crude oil exports increased from 139.5 million barrels in 1966 to 807.7 million barrels in 1979. The volume of crude oil exports dropped to 390.5 million barrels in 1987 but increased to 675.3 million barrels in 1998. The trend continued for most years after 2000. In the same way, oil revenue increased from N166.6 million in 1970 to N 1,591,675.00 million and N6,530,430.00 million in 2000 and 2008 respectively.

The huge revenues from oil, of course, presented net wealth and thus provided opportunity for increased expenditure and investment; however, the huge revenues complicated macroeconomic management and also made the economy highly oil dependent. Asides, in spite of the huge rents from oil, the economy still grapples with many problems including high and rising unemployment rate, declining manufacturing production, high and rising level of poverty and poor infrastructural development (note 2). The dismal performance of the Nigerian economy in the face of huge rents from oil has rekindled interest on the importance of oil in the growth and development process in Nigerian. Hence, the objective of the paper is to examine the contribution of the oil sector to the Nigerian economy over the period 1960-2009. Specifically, we examine whether or not cointegrating relationship exists between oil and other non oil sub sectors; and determine the direction of causality between the various sectors of the Nigerian economy.

The rest of paper is structured as follows. First, the second section provides a very brief summary of the theoretical perspectives on resource abundance and economic growth. …

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