Institutional Quality and Economic Diversification in Oil-Rich Economies: A Case Study of Nigeria

Abstract

This paper examines impact of four indicators of institutional quality: government effectiveness, rule of law, political stability and control of corruption on two perspectives of diversification: oil and gas rents as a share of GDP, which measures the relative size of oil resource and non-oil resource sectors’ concentration of GDP; and oil exports as a share of total merchandise exports, which measures oil export concentration otherwise export diversification away from oil. Data on these variables were obtained over the period 1996 to 2016. Examination of the data indicated that Nigeria has been more successful in diversifying sectoral composition of her GDP, while export remains stubbornly concentrated on oil. Regression analysis of the data using a reduced form equation and Error Correction Technique shows that: effectiveness of government, strong rules of law, political stability and less corruption are associated with greater GDP and export diversification away from oil. Hence the paper concludes that getting institutions right is key to GDP and export diversification vis-à-vis non-oil resources development in Nigeria.

Keywords: institutional quality, export revenue, diversification, Nigeria.