Lessons Nigeria can learn from South Africa’s Shift from the Goldmine to Avoid the Oil Trap

Author: Adegbaju Adeola Emmanuel | adeola.emmanuel283@gmail.com

One significant threat looming over Nigeria is the over-reliance of its economy on oil revenue. With the gradual transition of the world from non-renewable energy to clean energy, one might naturally presume that the government would take the diversification of the economy more seriously, but unfortunately, this is not the case. For decades, successive governments have pledged and formulated plans to diversify the nation’s economy away from its mono-reliant state. However, none have achieved this goal, partly due to leadership approaches characterized by a lack of long-term planning and prioritization of short-term gains, which is gradually leading the economy into the woods.

Just like South Africa, once shackled to the whims of the gold market, Nigeria risks being trapped in a similar cycle, where its economic prosperity hangs precariously on the volatile price swings of one single commodity, “oil.” The COVID-19 pandemic exposed this vulnerability when oil prices plummeted due to a global economic shutdown, which slashed the demand for oil globally. This forced the government to cut its budget by 20%, reducing its benchmark price for oil from $57 to $30, which resulted in a budget deficit that consequently led to a negative GDP growth of 1.8% of the country’s economy in 2020.

Despite a history of similar events, Nigerian leaders have shown a persistent inability to learn from their mistakes. Recent statistics revealed that crude oil still amounts to the largest export commodity of the nation, amounting to 79.63% of the total commodity exported in 2023. Similarly, the Nigerian budget for 2023 remained heavily reliant on oil revenue to finance it. Due to this, a shortfall of 487 billion naira from the projected 1.3 trillion naira in income from oil revenue resulted in a budget deficit, thereby covering only 21% of the total budget.

Nevertheless, there is hope. South Africa’s proven success in diversification presents a clear path for Nigeria to break free from its dependence on oil and build a future that is both robust and enduring. The purpose of this article is not to downplay government efforts; instead, it emphasizes the critical need and urgency for Nigeria to diversify its economy and proffer solutions on how it can be done.

From Gold Dependency to Economic Diversification: South Africa’s Evolution.

Many people unfamiliar with history might not realize that South Africa’s now-diverse and thriving economy was once heavily reliant on the gold industry. This golden chapter began in 1886 with the discovery of the Witwatersrand gold reef, the largest ever found. This discovery ignited the frenzy now referred to as the “gold rush”, transforming the region into a global mining hub.

Soon after this discovery, gold became the cornerstone of South Africa’s economy, accounting for almost half of the country’s exports and attracting foreign direct investment. This newly found wealth fueled rapid urbanization and infrastructure development in South Africa, transforming Johannesburg from a small village to a “city of gold,” which was a testament to the economic boom experienced.

However, this gold-fueled boom masked an underlying fragility due to the economy’s dependence on a single resource. This vulnerability soon manifested. A stark example is the 1930s gold bust, triggered by the Great Depression’s plummeting demand. The price of gold fell from $20.67 to $10.50 per ounce, leading to a sharp decline in gold output, crippling industries, widespread hardship, and social unrest.  Similarly, the 1970s collapse of the Bretton Woods system exposed this vulnerability again. The gold price soared to $850 per ounce in 1980 before crashing to below $300 by 1985, triggering a severe recession as the mining sector contracted and the country faced international sanctions and political violence due to apartheid.

Recognizing the pitfalls of their mono-economy, South African leaders embarked on a bold diversification project in the latter half of the 20th century. This shift wasn’t merely a change in policy; it was a national imperative. The architects of this transformation understood that true prosperity required the nurturing of a more diverse and resilient economy. In achieving this, the government focused on building strategic pillars which helped to critically build its now diverse economy. Some of these areas includes:

• Infrastructure and Industrial Development: The government invested heavily in transportation, energy, and communication infrastructure, laying the foundation for a diversified economy. They also focused on developing key industries like steel, chemicals, and machinery, reducing reliance on imported goods.
• Tourism and Service Industries: Recognizing the potential of its natural beauty and diverse culture, South Africa developed its tourism sector, generating revenue and creating jobs. Additionally, they focused on expanding financial services, healthcare, and other service industries, diversifying the economic landscape.
• Export-Oriented Manufacturing: Recognizing the need to compete globally, South Africa incentivized export-oriented manufacturing, particularly in sectors like automobiles and textiles. This generated foreign exchange, created jobs, and fostered technological advancement.
• Skilled Workforce and Innovation: To support these initiatives, South Africa invested in education and training, creating a skilled workforce capable of adapting to the demands of a knowledge-based economy. Additionally, they actively promoted research and development, fostering innovation and technological advancement.

Due to the successful implementation of these various proposed plans by the government, the economy became less reliant on gold, with new sectors like manufacturing and tourism contributing significantly to GDP. This improved the overall resilience of the economy and created a more sustainable economic foundation.

Navigating Economic Transformation: Insights for Nigeria from South Africa’s Journey.

The parallels between Nigeria’s overdependence on oil and South Africa’s historical reliance on gold are striking, akin to two sides of the same coin. Both nations enjoyed immense wealth and rapid development fueled by their respective resources. However, both also faced the harsh realities of boom-and-bust cycles and the dangers of neglecting other sectors. Therefore, learning from South Africa’s experiences presents a crucial opportunity for Nigeria to break free from the “oil trap” and forge a more resilient, diversified future. Nigeria can adapt South Africa’s diversification strategies to its own context in several key ways:

• Promoting Agriculture, Manufacturing, and Technology Sectors: Over-reliance on oil has stifled other sectors in Nigeria. Diversification efforts should focus on promoting agriculture, particularly high-value crops and processed foods, to leverage its fertile land and create jobs for the unemployed. Similarly, fostering light manufacturing and technology-driven industries like software development can unlock new export opportunities and reduce reliance on imported good, thereby strengthening the value of the national currency.
• Investing in Critical Infrastructure and Diversifying Energy Sources: Just like South Africa’s investments in transportation and communication, Nigeria needs to prioritize critical infrastructure development. This includes power grids, roads, and ports to facilitate efficient movement of goods and people. Simultaneously, diversifying energy sources beyond oil is crucial. Investing in renewable energy like solar and wind power can enhance energy security, reduce dependence on volatile oil prices, and combat climate change in line with the Sustainable development goals (SDG).
• Developing a Robust Education System and Promoting Entrepreneurship: South Africa’s investment in education played a pivotal role in its diversification success. Nigeria needs to replicate this by strengthening its education system, focusing on Science, Technology, Engineering, and Mathematics (STEM) fields to create a skilled workforce that can adapt to the demands of the modern economy. Additionally, fostering entrepreneurship through incubation centers, access to finance, and regulatory streamlining can unleash innovation and create new businesses across diverse sectors.
• Proactive Planning, Long-Term Vision, and Effective Policy Implementation: Learning from South Africa’s challenges, Nigeria must prioritize proactive planning and set a clear, long-term vision for diversification. This vision should be translated into concrete policies with transparent implementation mechanisms and robust monitoring systems. Effective collaboration between government, private sector, and civil society is crucial for successful execution of these policies.

To conclude, an apt proverb says that wishful thinking alone won’t propel progress. Similarly, for Nigeria to escape the oil trap, mere imitation of strategies won’t suffice. It demands a fundamental shift in mindset coupled with decisive action. Our leaders must demonstrate unwavering commitment and prioritize long-term development goals to ensure a smooth transition. Through such dedication, Nigeria can shed its past limitations and blossom into a prosperous nation within a few years, offering a sustainable future for its citizens.