ECONOMY - 27 OCT 2017

Valuing Nigeria's Resources

Valuing Nigeria's Resources
Many times, the non-economic values of important resources like Oil are ignored

Nigeria is a blessed country.” If I had a dollar for every time I have heard this sentence, I would give Dangote a run for his money.

Nigerians strongly believe that they live in one of the most endowed countries on the globe, blessed with crude oil, an array of delicious crops, a massive human and wildlife population, gemstones and any other natural resource you can think of.

Put simply, these are all examples of ecosystems. An ecosystem is a complex set of living relationships, natural surroundings and residents of an area, including trees, animals, water, soil, and people. An ecosystem could be as small as a single tree or as large as an entire forest.

Of all the ecosystems Nigeria is endowed with, crude oil is considered its most important. Unfortunately, it has acted as a curse on the country, manifesting through Dutch Disease, corruption, and resource exploitation.

The primary benefits of crude oil, including forex earnings and energy, are what we call “use values” i.e. the economic values that result from the direct consumption of an ecosystem good or service. Unfortunately, the other 'non-use values' of oil-producing regions, which are not directly consumed, such as their natural beauty and wildlife conservation are rarely considered.

So why do we sometimes hear that crude oil is a curse despite so many benefits? Well, because of its non-use values. When we ignore these benefits, it leads to pollution, substantial loss of wildlife, civil unrest and low standards of living. Even as an ecosystem like oil from the Niger Delta rake in billions in foreign exchange, they may be costing Nigeria billions in clean drinking water, loss of lives from pollution and poor health and limited human development.

 

Beyond the Reach of Markets

Oil is not the only ecosystem service to which this issue of non-use value applies. Almost all ecosystems have non-use values that go unaccounted for in economic assessments. These are benefits that arise from non-consumptive uses of ecosystem services such as the satisfaction of merely knowing that they exist, a sort of intrinsic value. For instance, you would derive pleasure from living in a beachfront city, even though you have never visited the beach. In such a case, you place an intrinsic value on the existence of a beachfront city.

Often, these non-use values come in the shape of opportunity costs of owning or possessing a resource, e.g. the availability of wildlife species in oil-producing areas. And usually, non-use values are untradable or just not traded in a market, making them difficult to measure in economic terms. Oil, fish, and even foreign exchange are all sold in markets, and the market price assigns a commercial value to them. However, clean air, unpolluted waters, flooded streets and wildlife viewing are less likely to be traded. As we do not purchase these services, we basically assign zero economic value to them.

Subsequently, we have fallen into the trap of confusing market price and economic value. Markets do not create value, they reveal it, and economic value can exist outside market exchanges – to think otherwise would be to side with the absurd conclusion that no economic value is created in economies where markets do not exist i.e. socialist or planned economies. Moreover, economic benefits are related to preferences, and not all preferences are expressed in markets. As long as a preference and willingness to pay to exist for an ecosystem good, it has economic value.

 

Opportunity Costs and the Importance of Conservation

The distinction between use and non-use value creates a problem for economic policy: if markets do not measure non-use value, we erroneously estimate the total economic value of a resource. Difficulty in ascertaining the economic value of ecosystem goods leaves them undervalued and provides opportunities for wasteful consumption. An inefficiency arises from undervaluing in the case of a good service and overvaluing in the case of a bad ecosystem service.

This is similar to the case of positive and negative externalities. For example, charging an entry fee for a wildlife park solely based on use value may lead to overcrowding because too many people will show up, hence overconsumption. But if we factored in the for non-use values – e.g. the effects on local vegetation, wildlife, and scenery – the entry fee would be significantly higher, thereby reducing the number of visitors and creating 'efficient' consumption.

However, as previously mentioned, non-use values are difficult to measure, meaning that any attempt at estimating the total economic value of an ecosystem (like oil) would be controversial. How would the appeal of conservation match up to the attraction of foreign exchange? 

Despite this, understanding these opportunity costs is important if policymakers want to avoid long-term problems. As a society, it is important that we start asking questions about non-use value. This would ensure that our resources do not turn from blessings to curses. Nigeria is considered blessed because of its ecosystems, oil is one of these, yet oil is a curse because it is being misused. The major challenges comes from us not knowing how to value ecosystems – by emphasising use values while ignoring non-use values. As long as we keep doing so, we will not use ecosystems for sustainable development. 

As Nigeria is striving toward increasing economic development, it is critical that human development, environmental sustainability and social well being are not considered as afterthoughts.

 

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Merlin Uwalaka

Merlin Uwalaka

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