CHAPTER ONE

INTRODUCTION

1.1      Background of the study

Nigeria gained an extra US$390 billion in oil-related fiscal revenue over the period 1971 – 2005 (Budina and Wijnbergen, 2008). What has the nation got to show for this? Despite such windfall, Nigeria has an increasing proportion of impoverished population and experienced continued stagnation of the economy (Okonjo-Iweala and Osafo-Kwaako, 2007). The country, like many other oil-rich countries (ORCs) economically underperforms many resource poor countries (Karl, 2004). Her oil wealth has not been tapped to launch her onto economic heights; rather, she suffers from what Robinson, Torvik and Verdier (2006) describe as a resource curse a paradox of poverty amidst plenty resources. Why? One popularly identified bane of the country’s economic situation is the Dutch Disease Syndrome (DDS) the structural economic imbalance resulting from poor management of oil revenue, and perhaps its shocks. Windfalls that result from volatile oil price surges/shocks overwhelmingly flow through the economy; expand the oil sector and penalize the non-oil sector (Mieiro and Ramos, 2010). The resulting decline in the non-oil sector reinforces sharp decline in the economic growth rate when the price of crude oil falls. Budina, Pang and Wijnbergen (2007), however, point out that DDS alone does not explain the slow growth of the Nigerian economy, especially her non-oil sector; rather, they identify volatility (or shocks) of oil price and its effect on other macroeconomic variables as the bane.