Eastern Illinois University The Keep Masters Theses Student Theses & Publications Fall 2019 The Impact of Dutch Disease: The Case of Nigeria Halimat Atinuke Laguda Eastern Illinois University Follow this and additional works at: https://thekeep.eiu.edu/theses Part of the Growth and Development Commons, Natural Resource Economics Commons, and the Other Economics Commons Recommended Citation Laguda, Halimat Atinuke, "The Impact of Dutch Disease: The Case of Nigeria" (2019). Masters Theses. 4669. https://thekeep.eiu.edu/theses/4669 This Dissertation/Thesis is brought to you for free and open access by the Student Theses & Publications at The Keep. It has been accepted for inclusion in Masters Theses by an authorized administrator of The Keep. For more information, please contact [email protected]. THE IMPACT OF DUTCH DISEASE: THE CASE OF NIGERIA Halimat Atinuke Laguda Eastern Illinois University 2019 Thesis Committee Dr Ahmed Abou-Zaid (Advisor) Dr. A Desire Adom Dr. Ali Moshtagh Abstract Nigeria, over the years, has been showing a rapid appreciation of the domestic currency, a rise in real wages and the service sector and a slow-down in the industrial production which are all signs of presence of Dutch disease which predicts that a country with large natural resource rents may experience a de-industrialization and a lower long term economic growth. This paper analyses the impact of Dutch disease in Nigeria Ordinary Least square method, Two-Stage Least Square and Autoregressive Distributed Lag with a system of equation from 1981 to 2017 and found that the real wage rate emphasizes on the labor supply in the economy which checks put one of the assumptions, there is also a decline in the manufacturing sector over the years. Recommendations to Nigeria will, therefore, be to provide more funds to the agricultural sector by giving out loans to interested parties, privatization of the downstream production of oil and diversification of the economy. Acknowledgement First, I would like to thank Almighty God for how far he has brought me in Life and for the successful completion of my master’s degree in Economics. A special acknowledgment goes to my supervisors Dr. A. Desire Adom and Dr Ahmed Abou-Zaid for their immerse support, guidance, time and effort in assisting me to complete my thesis. I also like to thank the thesis committee member Dr. Ali Moshtagh for his thoughtful inputs in my paper. To my parents, Mr and Mrs Laguda, I say a big thank you for supporting me financially and encouraging me to get this degree. In addendum, my sincere gratitude goes to my brothers Olanrewaju Laguda and Oladayo Laguda and my husband Ayodeji George for all their immeasurable support and care throughout my journey at EIU. Finally, I would like to thank my colleagues especially George Anaman, Temiyemi Akinsuyi, Samira Issaka, Freda Opoku-Agyeman, Salim Nuhu, and Tara Adeeko and all my friends and abroad for all the love and support throughout my time at EIU. 3 Table of Contents CHAPTER ONE ............................................................................................................................. 6 INTRODUCTION .......................................................................................................................... 6 1.1 Background ............................................................................................................................... 6 1.2 Justification of Study ................................................................................................................ 8 1.3 Objectives of the Study ............................................................................................................. 8 1.4 Hypothesis................................................................................................................................. 9 1.5 Organization of the Study ......................................................................................................... 9 CHAPTER TWO .......................................................................................................................... 10 LITERATURE REVIEW ............................................................................................................. 10 CHAPTER THREE ...................................................................................................................... 24 BACKGROUND ANALYSIS OF DUTCH DISEASE IN NIGERIA......................................... 24 3.1 Background of Nigeria ............................................................................................................ 24 3.2 Background of Nigeria’s oil and gas ...................................................................................... 27 3.3.1 Symptom 1: Appreciation of the domestic currency ........................................................... 33 3.3.2 Symptom 2: Rise in real wage of the economy ................................................................... 34 3.3.3 Symptom 3: Rise in the service sector ................................................................................. 34 3.3.4 Symptom 4: Slow-down in industrial production ................................................................ 35 CHAPTER FOUR ......................................................................................................................... 36 METHODOLOGY AND DATA .................................................................................................. 36 4.1 Methodology ........................................................................................................................... 36 4.1.1 Model Specification ............................................................................................................. 37 4.2 Data and Sources..................................................................................................................... 39 CHAPTER FIVE .......................................................................................................................... 42 RESULTS AND POLICY RECOMMENDATIONS .................................................................. 42 5.1 Instrument Validity (Sargan Test) .......................................................................................... 42 5.2 Summary Statistics.................................................................................................................. 42 5.3 Unit Root Test Results ............................................................................................................ 49 5.4 Ordinary Least Squares ........................................................................................................... 50 5.5 Autoregressive Distributed Lag Model ................................................................................... 53 5.6 Policy Recommendation ......................................................................................................... 59 CHAPTER SIX ............................................................................................................................. 62 4 CONCLUSION ............................................................................................................................. 62 REFERENCES ............................................................................................................................. 64 APPENDIX ................................................................................................................................... 68 List of Figures Figure 1: Author’s calculations using World Bank data ............................................................... 25 Figure 2: Source: Central Bank of Nigeria, Statistical Bulletin (2017) ........................................ 29 Figure 3: World Development Indicators .................................................................................... 33 Figure 4: World Development Indicators .................................................................................... 34 Figure 5: World Development Indicators .................................................................................... 34 Figure 6: World Development Indicators .................................................................................... 35 List of Tables Table 5. 1 Sargan Test............................................................................................................ 42 Table 5. 2 The Summary Statistics ........................................................................................ 43 Table 5. 3 Unit Root Test ....................................................................................................... 49 Table 5. 4 Ordinary Least Squares ......................................................................................... 50 Table 5. 5 System Equation ................................................................................................... 52 Table 5. 6 Autoregressive Distributed Lag Model ................................................................ 53 Table 5. 7 System Equation: Autoregressive Distributed Lag Model ................................... 56 5 CHAPTER ONE INTRODUCTION 1.1 Background The term “Dutch Disease” was first used in Netherlands when they feared that the end was close for the manufacturing sector when natural gas was discovered in the 1960s. The Dutch disease theory was developed after the Netherlands found large sources of natural gas in the North Sea in the 1960s. Large capital inflows from increased export revenues caused demand