Nigeria, SWFs, and the Resource Curse? Two New Papers

This is a joint post with Stephanie Majerowicz.

Nigeria, perhaps the world's poster child for the oil curse, is the latest country to deploy a sovereign wealth fund as a tool to try to better manage national income. At the same time, Nigeria is struggling with depleted savings and growing fiscal concerns, even in a time of high oil prices. Will the sovereign wealth fund help Nigeria get back on track? What are the chances it won't be raided by politicians with short-time horizons, as in the past? Could cash transfers help? Two new background papers from CGD's Oil2Cash Initiative look at these questions from different perspectives.

  • In What Role for Sovereign Wealth Funds in Africa's Development?, Adam Dixon and Ashby Monk look at how a growing number of African countries are turning to SWFs "to smooth resource price volatility, make long-term fiscal policy, manage currency appreciation, facilitate intergenerational savings, and, perhaps most importantly, minimize corruption and tame the political temptation to misuse the newfound wealth." While they argue that such funds can be extremely useful, some very clear governance conditions apply if the benefits are going to be reaped. They point to Nigeria's experience with the Excess Crude Account to show the limits of sequestered funds alone.
  • Aaron Sayne and Alexandra Gillies look at the Nigerian oil revenue problem from another angle in The Prospects for Cash Transfers in the Niger Delta: A Skeptical View. As the title suggests, they explore whether small regular payments to residents of Nigeria's oil-producing regions might be one palliative option. The principle of "derivation," whereby these regions are entitled to extra allocations within the federal budget system, is already well-established in Nigeria. Sayne and Gillies conclude, however, that the governance and conflict risks of such a system might outweigh the potential benefits. They worry that payments might further entrench a culture of patronage, without the transformative effects that the Niger Delta likely requires if it is to break the stranglehold of the current powers that would prefer to maintain the status quo.

Nigeria's challenges in managing oil may be so complex and so entrenched that neither cash transfers nor the mere establishment of a SWF are by themselves promising solutions. However, if the newest SWF is to avoid the fate of the ECA, and if oil revenue is ever going to contribute to the broader development of Nigeria, it is clear that something has got to change.

These two new papers are important contributions to our analysis of the resource curse and oil2cash's exploration of possible approaches. Watch this space for more work on related issues.