Muhammadu Buhari won the Nigerian presidential election based on his promises to clean up one of the world’s most corrupt countries. Alas, similar hopes attended the rise of outgoing presidentGoodluck Jonathan, who initially fooled many of us watching Africa but wound up turning Nigeria into a case study in how not to manage an oil economy.

Whether out of weakness or his own venality, Mr. Jonathan failed to stop government officials from pilfering billions in oil revenue each year. Despite an early reputation as Mr. Clean, he fired a central banker who estimated that officials were stealing as much as $20 billion in oil profits each year, and he tolerated an energy minister widely accused of covering up the pilfering.

As a result Nigeria saved nothing during the boom in oil prices that ended last year. While other oil states including Saudi Arabia and Russia are getting by on a cushion of savings, Nigeria is running out of money. Cash reserves are falling dangerously low. GDP growth is likely to fall this year to below 5% from 6.5% in 2014.

Mr. Buhari, counseled by former Obama adviser David Axelrod,campaigned on the vague promise of “change.” His opposition party, the All Progressives Congress, dethroned the ruling People’s Democratic Party, which had held the presidency since 1999. Yet it is not clear what Mr. Buhari will do.

He will take over a country gripped by “the curse of oil,” which has corrupted most poor states that discovered it. My researchers looked at the growth in average real income in 18 large oil-exporting nations since the year they started producing oil. Income in 12 of the 18 countries has fallen, compared with average U.S. income. In one country income has stagnated, and in three it has increased marginally. Ninety-percent of these oil-rich nations are stagnating or falling behind.

The dynamics of the curse are well known. The discovery of oil sets off a scramble among elites to secure shares of the profits, rather than investing to build roads, power plants and factories. Foreigners pump in money to buy the oil, which drives up the value of the currency, in turn making it difficult for local factories—what few exist—to export their goods. The oil windfall tends to destroy every local industry other than oil.

That is the story of Nigeria. Since it started pumping oil in 1958, Nigeria’s relative average income (now about $1,900) has dropped by half, from about 8% to about 4% of average U.S. income.

The country spends 15% of GDP on investment, including infrastructure, property, plant and equipment—which is a pitifully low figure for a poor state and one of the lowest for any emerging nation. That weak investment explains why Mr. Jonathan failed to deliver on promises to improve the power supply, leaving the country prone to frequent outages and forcing companies to maintain expensive generators.

Without reliable electricity, few dare to build factories. The Jonathan government talked up the planned launch of five new manufacturing plants, including a car factory, but the industrial base is still anemic. Manufacturing accounts for 3% of Nigeria’s GDP, by far the lowest among the major emerging markets, and fourth lowest in Africa, right below war-torn Ethiopia.

The reliance on oil makes Nigeria vulnerable to outside shocks. When the price of oil collapsed in 2014, Nigeria relied on oil for 90% of its exports, and its already weak foreign-exchange reserves started to drain fast. In response, the central bank devalued the currency, which in a more diversified economy could boost exports and stabilize the nation’s finances. But in Nigeria, there was no significant jump in exports because, outside of oil, they hardly exist.

The ripples will be felt across the economy. Nigerians rely on imports for 70% of consumption goods, from food to clothing. Most analysts expect another significant devaluation, perhaps 10%-15%. That will drive up import prices and inflation, which is already around 8%.

Oil accounts for only 14% of Nigeria’s GDP, but for nearly all of its exports and 70% of government revenue. So if oil prices remain between $50 and $60 a barrel, Nigeria will run sizable trade and government budget deficits this year. The government deficit could come in as high as 6% of GDP.

Nigeria wouldn’t be so vulnerable if it had saved some of the oil windfall. Under Mr. Jonathan, Nigeria’s foreign reserves fell to $33 billion from about $50 billion, and its sovereign-wealth fund is only $1 billion. These critical pools of savings amount to 8% of GDP, compared with more than 90% in Saudi Arabia, and more than 280% in Kuwait. The failure to save is the essence of the mismanagement of Mr. Jonathan, who has done poorly even by the low standards of oil economies.

The Nigerian election was hyped as the largest and most important ever for the region’s biggest economy, whose fate now rests with Mr. Buhari. He will lead a country where one in three people is under 18, a population that could grow into a dynamic workforce or a vast pool of discontent. The outcome depends in good part on whether Mr. Buhari can deliver “change” by fixing the corrupt saving and investing habits of an oil-cursed economy.

Article originally published via

Mr. Sharma is the head of emerging markets at Morgan Stanley Investment Management and the author of “Breakout Nations: In Pursuit of the Next Economic Miracles” (Norton, 2012).