For readers who are not fond of the concept, DDS is a paradox explaining the tragedy that could befall a country when there is a positive economic shock which bolster the value of their currency. Economic shocks include events like the discovery of large oil deposits, unanticipated spike in the price of natural minerals, and surge in foreign assistance and direct investments. Economic theory would explain that DDS leads to the emergence of a lagging sector like manufacturing as labour and capital flow to the booming sector like oil and gas; however, since the booming sector will typically employ few labour, the unemployment rate will likely increase. With DDS, manufacturing exports become less price competitive because the local manufacturing sector struggles and with the revenue boom, local consumption is matched with cheaper imports from abroad. The goal of this article is not to expand on the theory of DDS, it is to understand why evidence of DDS are prevalent in some oil-rich countries and not in others.
Countries like Nigeria, Gabon, Sudan, Venezuela, and Iraq are classic examples of oil-exporters where DDS is prevalent or has been. On the other hand, countries like Saudi Arabia, Kuwait, Qatar, United States and Canada, which are major oil-exporting countries do not have DDS experience. There are several reasons for the divide, some of which will be reviewed in this report. One big reason is the neglect of the manufacturing sector. The DDS theory does not advance that the manufacturing sector should automatically cripple when there is a natural resource boom. It points out the likelihood but not the certainty and this is what applies to a country like Nigeria, which had a buoyant agriculture and manufacturing sector prior to the discovery of crude oil deposits. With the revenue boom from oil, government shifted their attention and fiscal resources to the oil and gas sector. This led to a slowdown in infrastructural investments which create enabling environment for manufacturing and agricultural activities to thrive. Fiscal incentives like tax credits, grants, moratorium periods, and pioneer status incentives were more biased to International Oil Companies (IOCs) at the expense of manufacturing companies. This is not the case with countries like the US and Canada, where there is a conscious effort to keep the manufacturing sector afloat.
Another explanation for the divide is the investment in advanced oil and gas technologies. In oil-rich countries with DDS, the venture into oil and gas started with IOCs investing in oil exploration and other upstream activities. In exchange for their investment, they establish profit sharing agreement with the government. Of course, the government would invest here and there, but it is nothing compared to the capital inflow from IOCs. Governments of oil-rich countries with DDS tend not to invest heavily in advanced technologies that would sustain their competitiveness in the energy market. Currently, the global economy is tilting towards green technologies and gas, instead of crude oil. Quite right, oil is going no where for now, but the long-term sustainability of crude oil is doubtable. There are limited reserves of crude oil globally, barring the discovery of new deposits, and this is the motivation for investment in emerging technologies like geothermal technologies, seismic imaging, predictive maintenance, and artificial intelligence. Consider Nigeria as a case study; the country has decrepit refineries, most of which are non-function but are cost-bearing. Extracted crude oil would be exported abroad for refining and then imported back into the country. With such stone-age processes in the sector, the prevalence of DDS is near inevitable.
The absence of a strategic long-term development plan also contributes to the DDS divide among oil-rich countries. A comparison of UAE and Nigeria would be a great case study for this assessment. Nigeria used to be richer than the UAE but economic conditions has since reversed due to the absence of proper economic planning by the former. Revenue boom is a constant whenever there is a natural resource discovery. If the boom is not saved, invested, and ploughed back into infrastructures and revenue-generating schemes; mass poverty and inequality are expected even in the richest countries. While a country like Nigeria can boast of economic plans on print, there is usually poor implementation of the plan. Oil rich countries without DDS tend to have reasonable economic plans that are conscientiously implemented and tracked for performance assessment. This is a factor missing in other oil rich countries with DDS.
There are tons of other reasons why some oil rich countries experience DDS and others do not; but overall, these reasons would somehow be related to the reasons identified above.
Written by Michael Ogunremi.
Featured image credit – istock photos.