The Oil Shocks in Nigeria in the 20th Century

This paper investigates whether the Dutch Disease occurred in Nigeria during the late 20th century following significant oil discoveries. This was done by investigating the spending and the resource movement effect using regression analysis in accordance with the Error Correction and Partial Adjustment models. The spending effect shows that under a fixed exchange rate regime the Dutch Disease can be nullified. Under a floating exchange rate, the exchange rate appreciates which is indicative of the Dutch Disease being present. Controlling for the change in exchange rate regime, which occurred in 1986 following an upward pressure on the Naira, results in the effect of the oil shock on the Real Effective Exchange Rate to become insignificant while the regime dummy remains significant. This means a spurious regression was run and no inferences can be taken from this result. When examining the resource movement effect, the manufacturing sector contracts in accordance with the Dutch Disease model but the Agricultural sector’s size remains stable. The assumption in the core Dutch Disease model of perfect labor substitutability seems not to hold empirically. This paper concludes that when using the resource movement effect as an indicator, the Dutch Disease is present following the oil shock in 1998 to 2002. In accordance with Balassa (1964), Samuelson (1964), Dornbusch (1980) and Edwards (1988), this paper takes the view that when looking at economic phenomena one should focus on the change in economic fundamentals. The appreciation of the exchange rate is merely a means to an end. Therefore it’s concluded that the Dutch Disease is present following the 1998 to 2002 oil shock under a floating exchange rate, Looney’s finding of effective policy against the Dutch Disease holds empirically and the Dornbusch overshooting phenomenon is found under a fixed exchange rate regime.