Industrialisation and economic growth


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Industrialisation and economic growth

  1. 1. DEPARTMENT OF ECONOMICS AND STATISTICS FACULTY OF SOCIAL SCIENCES UNIVERSITY OF BENIN BENIN CITY INDUSTRIALIZATION AND ECONOMIC GROWTH IN NIGERIA By OLUWAROTIMI JOHN OGUNDELE March 2010 After presenting a comprehensive analysis of the classical, neoclassical and endogeneous /new theories of economic growth and examining the theoretical relationship between industrialization and economic growth, this study undertake an econometric test of the hypothesis of a positive relationship between industrialization and economic growth in Nigeria using Nigeria data between 1981 and 2008. Specifically, Ordinary least squares regression techniques was used to estimate the regression equation of economic growth on inputs growth, manufacturing output growth, mining production growth and other explanatory variable, representing growth in agriculture. A detailed analysis of the econometric results permits tentative conclusion concerning the validity of the hypothesis that industrialization have positive impact on growth of National output in Nigeria. Thus, we concluded by making policy recommendations that would enable Nigeria to achieve rapid economic growth through effective implementation of a comprehensive industrialisation strategy. Keywords: Industrialisation, Economic growth, Economic development, Nigeria, GDP, Oil & Gas
  2. 2. Industrialisation and economic growth in Nigeria by Oluwarotimi John Ogundele (2010) 1 This page is intentionally left blank
  3. 3. Industrialisation and economic growth in Nigeria by Oluwarotimi John Ogundele (2010) 2 DEDICATION To God Almighty; who is the Repository of knowledge.
  4. 4. Industrialisation and economic growth in Nigeria by Oluwarotimi John Ogundele (2010) 3 TABLE OF CONTENT Cover page - - - - - - - - 0 Dedication - - - - - - - - - 2 Table of content - - - - - - - - 3 SECTION ONE: INTRODUCTION 1.1 Introduction - - - - - - - 5 1.2 Statement of the problem - - - - - 6 1.3 Objectives of the study - - - - - 6 1.4 Significance of the study - - - - - 7 1.5 Formulation Hypotheses - - - - - 7 1.6 Scope of the study - - - - - - 8 1.7 Methodology- - - - - - - 8 1.8 Definition of Terms - - - - - - 8 1.9 Limitations of the Study - - - - 9 SECTION TWO: LITERATURE REVIEW - - - - 10 2.1 Meaning of industrialization - - - - 10 2.2 Historical overview of industrialization in Nigeria 11 2.3 Industrialization strategies in Nigeria - - 13 2.4 Stages of Nigeria’s industrialization - - - 18 2.5 Industrialization of Economic in Nigeria - - 20 2.6 Effects of industrialization on a nation’s economy - 27
  5. 5. Industrialisation and economic growth in Nigeria by Oluwarotimi John Ogundele (2010) 4 2.7 Challenges of industrialization in Nigeria.- - - 28 SECTION THREE: THEORETICAL FRAMEWORK AND METHODOLOGY 31 3.1 Theoretical framework - - - - 31 3.2 Model specification - - - - - 34 3.3 Method of Data analysis - - - - 35 3.4 Sources of Data - - - - - - 35 SECTION FOUR: PRESENTATION AND INTERPRETATION OF RESULT 36 4.1 Presentation of result - - - - - - - 36 4.2 Interpretation of result - - - - - - - 37 4.3 Policy implications - - - - - - 38 CHAPTER FIVE: SUMMARY, RECOMMENDATION AND CONCLUSION 40 5.1 Summary - - - - - - - 40 5.2 Recommendations - - - - - - 40 5.3 Conclusion - - - - - - -- - 43 Appendix I - - - - - - -- - 43 Appendix II - - - -- - - - - - 45 Appendix III - - - -- - - - - - 48 Bibliography - - -- - - - - - 49
  6. 6. Industrialisation and economic growth in Nigeria by Oluwarotimi John Ogundele (2010) 5 SECTION ONE: INTRODUCTION 1.1 INTRODUCTION It is the aspiration of every national economy to achieve the fundamental macro-economic goals, which include; attainment of full employment level, balance of payment equilibrium, and non-inflationary economic growth (price stability and economic growth). Nigeria has invariably been pursuing the achievement of these broad economic goals. The national economic development aspiration of the Nigerian economy has been that of altering the structure of production and consumption activities, so as to diversify the economic base, reduce dependence on oil and imports, all in bid to put the economy back on a path of self-sustaining, inclusive and non-inflationary economic growth, thereby reducing poverty (Ajakaiye, 2003). Economic growth is the appreciation in the real per-capita income (income per head) of an economy for a given period of time. Some scholars believe that proper pursuit of industrialization leads to growth of the national output. Industrialization as defined by Obioma and Ozughalu (2004) is the introduction and/or expansion of industries in a place, region, country, etc. According to the duo, industrialization brings about economic growth through the increase in productivity and enlargement in market size. In his book, “Growth and Development”,(1994) Thirlwall said, the importance attached to industrialization by developing countries (Nigeria inclusive), lies in the close association that appears in to exist between industrialization and real per-capita-income and between the growth of output as a whole. This latter observed relationship is summed up in the maxim “manufacturing as the engine of growth”. As also noted by Uwubanwen (2002), Developing nations strive to industrialize their economies for many reasons. Among these are the desire to increase national income, productivity and hence the capacity of the economic system to deliver higher levels of wealth and welfare to the people, secure further employment, expand the market for local raw materials, and improve the stability of foreign exchange position through proper import substitution and export promotion industries. It is in recognition of the important roles played by industrialization in the structural transformation of the economy, that the Nigerian government at different times regards genuine industrialization (as shown in the different national development plans) as a mover of the economy towards that state of economic independence (freedom). Hence, over the years, a number of policies, measures and strategies, like the restrictive import tariffs on commodities
  7. 7. Industrialisation and economic growth in Nigeria by Oluwarotimi John Ogundele (2010) 6 majorly consumed by individuals, creation of export zone area; import substitution strategy; local content initiative; granting of pioneer status to some industries; tax holidays, etc, have been embarked upon to encourage industrial development within the ambit of the available resources. 1.2 STATEMENT OF THE PROBLEM Industrialization has been said to give a country and its people a feeling of greater control over the economic levels. It is a means of reducing dependence on import, hence overcoming foreign exchange by expanding and diversifying the import base. Therefore, since industrialization leads to improved productivity and the economic growth, and sustained economic growth enhances structural transformation of the economy (economic development). The risk of industrializing the Nigerian economy has been accepted by successive government of this country. However, as noted by Ekpo (2004), Nigeria has made several efforts at industrialization, yet poverty and unemployment are increasing and income un-equalities widening. At the early period of independence, Nigeria, Singapore, Malaysia, Indonesia, Ghana and South Korea were at the same level of development. But today despite several moves to industrialize the economy, these countries are industrialized These countries are industrialized, their citizens are enjoying quality lives; moving towards full employment levels, but Nigeria is still being referred to as a developing nation, struggling to provide basic amenities to more than 70% of its citizen, while, these new industrialized countries are building a knowledge based economy. It is imperative at this point in time, when the country is aspiring to become one of the best twenty national economies in the world in year 2020 (vision 20:20), for Nigeria’s growth process be critically appraised, viz-a-viz, the significant impact of industrialization on economic growth and as a consequence, economic development of the country. Also as a tool/means of diversifying the oil dependent economy, it therefore becomes the problem of this research to empirically examine, using the available data, the significance of industrialization (if any) on the growth of the Nigerian economy.
  8. 8. Industrialisation and economic growth in Nigeria by Oluwarotimi John Ogundele (2010) 7 1.3 OBJECTIVE OF THE STUDY The main objective of this study is to examine the significance of industrialization in the growth process of the Nigerian economy. The broad objective can thus be specifically stated as follows; i. To develop a model of industrialization and growth for Nigeria ii. To determine the empirical relationship between industrialization and economic growth in Nigeria iii. To determine, empirically, the influence of other factors on growth of the Nigerian economy. iv. To discuss policy implications. 1.4 SIGNIFICANCE OF THE STUDY As this is an economic research, the results and conclusion from this study will be valuable wealth to the country and specifically to the following categories of people; a. Policy makers b. The executives c. The researcher, as it broadens his frontiers of knowledge d. Other researchers and academia e. Industrialists and investors f. The general public, as there is awakening of the need to pursue industrialization vigorously for the growth and development of the Nigerian economy. 1.5 FORMULATION OF HYPOTHESIS In pursuance of the objective of this study, the following hypotheses are formulated:
  9. 9. Industrialisation and economic growth in Nigeria by Oluwarotimi John Ogundele (2010) 8 1. H₀: Industrialization has negative impact on domestic product in Nigeria H₁: industrialization has positive impact on gross domestic product in Nigeria 2. H₀: The different moves towards industrialization have insignificant effect on the economic growth of Nigeria H₁: The different moves towards industrialization have significant effect on the economic growth of Nigeria 1.6 SCOPE OF THE STUDY The scope of this study is shall be restricted to the empirical analysis of Nigerian economy with respect to the significant impact of industrialization and perhaps the industrial output on growth in gross domestic products for the periods of covering 1980-2008 (both ends inclusive). This period has been chosen for this study, because it covers period of import substitution strategies, export promotion industrialization strategies, export promotion industrialization strategies and the period of de-industrialization of the Nigerian economy. It is the belief of the researcher that this choice of scope will allow for the most comprehensive growth in Nigeria. 1.7 METHODOLOGY With the nature if problem under investigation and the objective of the study, this research shall make use of econometric method in the analysis and estimation method of the model and parameters respectively. This will facilitate the specification of the model, parameters estimation and the use of appropriate econometric test. This research shall essentially make use of secondary data majorly sourced from the central bank of Nigeria, Federal bureau of statistics, World Bank, National planning commission and ministry of commerce and industry. 1.8 DEFINITION OF TERMS For complete grasp of this research paper, the following will be briefly defined.
  10. 10. Industrialisation and economic growth in Nigeria by Oluwarotimi John Ogundele (2010) 9 Backward linkage:- The relationship between an industry or firm and the suppliers of the inputs. A change in the output of the industry will be transmitted backward to the supply of its inputs by a change of the demand for inputs. Capacity utilization:- The ratio of actual output to potential output. This can refer to firm, industry, or whole economy and it gives a measure of the proportion of the total capacity that is being used. Industrialization (in developing countries):- The development of industries as a federal development strategy. Industrial policy:- As that part of government macro –economic policy geared towards improving the economic performance industrial economic agents; Firms and industries on the supply side of the economy. Industry- large number of firms (or single firms, in the case of monopoly) competing with each other in the production or distribution of similar or homogenous products. Inward looking strategies- import substitution industrialization strategies. Outward-looking strategies- export promotion industrialization strategies. Primary sector-This includes, crop agriculture, livestock farming, fishing and mining. Secondary sector- This is composed of manufacturing, utilities and construction activities. Tertiary sector- This is composed of the service activities. 1.9 LIMITATIONS OF THE STUDY As interesting as this topic is, the researcher would have researched extensively in this area but time and finance are major constraints. Also, the extent of this research is limited in the area of data collection as only secondary data is readily available, rather than primary data. However, it is hoped that despite the constraints and limitations, the results of the study will be relevant and secure, as far as possible, the purpose for which the study is intended.
  11. 11. Industrialisation and economic growth in Nigeria by Oluwarotimi John Ogundele (2010) 10 SECTION TWO: LITERATURE REVIEW 2.1 MEANING OF INDUSTRIALIZATION Industrialization, as simply defined by Warmington and Weils (1962), is the substitution of power-driven machinery for handicraft methods of production. This definition focus on mechanization, industrialization goes beyond mechanization. Industrialization is frequently considered as the replacement of farming and resource extraction by manufacturing and service activity (Adrian, 2000). Yesufu (1996) defines industrialization, as the process of accelerated institutionalization of manufacturing process or techniques in an otherwise predominantly rural and technologically backward economy. In other words, industrialization is the process of establishing and nurturing manufacturing industry. The definition above narrowed down industrialization to only activities of the manufacturing industries, forgetting mining, quarrying and crude petroleum sub sectors. Wikipedia puts industrialization as the process of social and economic change whereby a human group is transformed from a pre-industrial society into an industrial one. It is a part of a wider modernization process, where social change and economic development are closely related with technological innovation, particularly with the development of large-tech energy and metallurgy production. In the same vein, Todaro and Smith (2006) defined industrialization as the process of building up a country’s capacity of process and raw materials and to manufacture goods for consumption or further production. A comprehensive definition of industrialization is the one given by Uwubanwen (2002). He defined industrialization as the process of developing the capacity of a nation to muster and locate within its border, the overall industrial process involving the production of raw materials, production for intermediate products for further production, fabrication of machines and tools needed for the manufacture of the desire products and of other machine; skills to operate, maintain and reconstruct the machine and tools, skills to manage factories and to organize the production process. Industrialization has been seen as an economic strategy or means (especially by the developing countries) of improving growth of an economy and the structural transformation of the economy, economic development. Industrialization thrives where there exists favourable political-legal framework/environment for industry and commerce, through abundance national resources of various kinds, to plentiful supplies of relatively low-cost, skilled and adaptable
  12. 12. Industrialisation and economic growth in Nigeria by Oluwarotimi John Ogundele (2010) 11 labour (Wikipedia). There are different strategies through which a country can be industrialized. These include; Import-substitution strategy, Outward looking industrialization strategy, Technology transfer, Indigenization based on local resources utilization, High technology intensity strategy, and the Strategy of Industrialization enhancing Dynamic Comparative Advantage, SIEDCA ( as developed by Do Duc Dinh, 2004). Some of these shall be given considerable attention in the subsequent sections of this chapter. 2.2 HISTORICAL OVERVIEW OF INDUSTRIALIZATION IN NIGERIA Before the advent of colonialism in Nigeria; (pre-20th century), the Nigerian economy featured considerable craft industries in the various clans and kingdoms. Prominent among these craft industries that featured in local and interregional trade were artifacts of wood, brass and bronze; leather, hand-woven textiles and bags, iron working, fire-burnt pottery from local clans. These were from four major areas of the country, namely; Akwa-Nri-Igbo-Ukwu, Oyo Kingdom, Benin and the Hausa-fulani clans. As observed by Ajayi (2007), one major characteristic that permeated these small-scale industries was that they featured in the different location in a close link with the available raw- materials, that is, the small scale industries and handicraft enterprises were based on the available raw materials and on local and regional demand. This understandably failed to provide sustainable basis for industrial development of the country. However, with the intrusion of the European imperialists, the craft declined considerably following the superior competition from the modern industry activities, particularly manufacturing. The industrial orientation during this period (pre-independence era) was production or processing of raw materials for export to Europe and the manufacturing of consumer goods for local consumption. The outbreak of the Second World War caused a transformation of the Nigeria industrial sector. There was boom in raw-material export and a sharp increase in the price (a reduction in general purchasing power) and investment potential by indigenous business brought about a growth in the number of manufacturing establishing (that is, as a result of increased demand and price, manufacturing establishments increased) (Ajayi, 2007). Lever-Brothers West Africa limited, Nigeria brewery limited, UAC, the Nigerian textile mill, Meta-box of Nigeria limited, were some of the companies established during the period. Although the production activities of the British imperialists were motivated by their self-seeking economic benefits, this period can thus be said
  13. 13. Industrialisation and economic growth in Nigeria by Oluwarotimi John Ogundele (2010) 12 to have been the foundation of modern day industrialization or better still, industrial development in Nigeria. The post colonial period witnessed the recognition by the Nigerian government of industrialization as a catalyst for economic growth and as an implication (spillover of sustained growth), economic development of the nation. The Nigerian policy maker tried to build a modern industrial economy, as reflected in the various National Development plans, industrial policies and general pronouncement (Ekpo, 2004). The early post-colonial era was characterized by vigorous pursuit of Import-substitution industrialization strategy and the beginning of a decline in the export- oriented processing of raw material. Import substitution strategies remained the major policy stance of the Nigerian economy until the mid 1980s. The strategy was to reduce import as a means of achieving economy independence and as a measure to conserve foreign exchange. In the 1970s, the need to maximize value added to the Gross domestic product and to initiate the establishment of heavy industries in the intermediate and capital goods industries. Different measures were embarked upon, like; credit-incentive, high protective measures, Tax amnesty (Tax holidays), indigenization policies (1972 and 1979), local content initiatives and many others. Consequently, there was reduction in importation of consumer goods, increase in industrial activities performed locally as many heavy industries were established during the 1970s and 1980s, and there was also increase in government revenue through high tariff and custom duties. However, one major failure of all these maneuverings was that the objectives to be achieved were eroded, as while there was reduction in consumer goods, capital and intermediate goods import were on the increase. The industrial sector was import dependent for its inputs. In the mid 1980s, outward looking industrialization strategy was pursued in order for the country to earn more foreign exchange and correct the balance of payment problem that characterized the earlier industrialization attempts. With the Structural Adjustment Programme (SAP), a number of export promotion incentives were incorporated into the SAP policies, including the abolition of export taxes, comprehensive review of custom tariffs, and renewed emphasis on the use of local raw materials for manufacturing, among others. Though the export promotion strategy is said to have been the best industrialization strategy that have been
  14. 14. Industrialisation and economic growth in Nigeria by Oluwarotimi John Ogundele (2010) 13 pursued by developing countries, as it makes use of the nation’s comparative advantage (Dinh, 2004), but has only been able to record marginal success in Nigeria. The 1990s was a period bedeviled with dwindling industrial output; with capacity utilization rate reduced from 43.8 percent in 1989 to a low level of 29.29 percent in 1995; The contribution of the manufacturing sector to the Gross domestic product suffered reduction from 9.92 percent in 1989 to 4.2 percent in 1998; the economy witnessed de-industrialization rather than industrialization despite the robustness and comprehensive nature of the 1989 Industrial policy. The rebirth of civilian rule in Nigeria brought about increased attention given to industrialization as means of attaining rapid economic growth. The period has witnessed increasing capacity utilization rate of manufacturing sector in Nigeria, from 32.4percent in 1998 to 53.38 percent in 2007. There has also been the recognition of the development of small and medium scale enterprises, the setting up of the small scale and medium industries equity investment scheme (SMIESIS) in 2002. This scheme entails Commercial banks investing 10 percent of their before tax profit in equity investment to support small and medium scale enterprises (Ogechukwu, 2008). 2.3 INDUSTRIALIZATION STRATEGIES IN NIGERIA As part of the operation of the Nigerian government for Nigeria to be among the industrialized nations of the world, different strategies and policies have been embarked upon; these include, 1. Import substitution strategy 2. Local resources utilization 3. Indigenization policies 4. Technology transfer policy 5. Export promotion strategy. 2.3.1 IMPORT SUBSTITUTION STRATEGY Import substitution as defined by Todaro and Smith (2006), is a deliberate effort to replace major consumers import by promoting the emergence and expansion of domestic industries such as textile, shoes and household appliances. Import substitution requires the imposition of
  15. 15. Industrialisation and economic growth in Nigeria by Oluwarotimi John Ogundele (2010) 14 protective tariffs and quota to get new industry started. This was the policy stance of the Nigerian government before and after independence as regards industrialization (uwubanmwen, 2002). Nigeria explicitly adopts an import substitution industrialization strategy in 1961, in line with its economic objectives. The assumption behind this strategy appears to have been that import substitution would reduce the amount of import necessary to maintain output at any given level and thereby help to conserve foreign exchange. It was also expected to speed up industrialization as more industrial activities would be performed domestically in the country. This strategy was justified, as noted by Onosode (1993), on two grounds. a) It provides a natural and painless introduction to manufacturing, to the extent that it draws on, if it is not actually based on wholesale adoption of existing technology and processes. b) Import substitution strategy recognized that there are certain basic products of manufacturer which are in universal use and are likely to be replaced by any fundamentally new products. The salient features of the import substitution strategy include the imposition of tariff, expansion in domestic outputs, the use of protectionist measures and policies and stringent constraint on importation of consumer goods. The main instrument employed under the policy was tariff protection variously combined with quantitative restriction and industrial incentives. Tariffs notes were raised substantially on increasing numbers of finished goods, while duties on imported raw materials and capital equipment were reduced. Import licensing requirements, which were already in place at the time of independence, were used to restrict further importation of some finished goods. This strategy recorded considerable achievements as there was increase in government revenue tariff, custom and excise duties, importation of consumer goods was reduced, industrial activities performed domestically, experienced boom, establishment of industries. However, one major failure of this industrialization strategy was the fact that the initial objectives of conserving foreign exchange was eroded as the newly established import substitution industries were making increasing demands on foreign reserves. Consequently, the problem was compounded by the inherent inefficiency of tariff protection, which made it difficult for domestic industries to acquire the capacity needed for competition in
  16. 16. Industrialisation and economic growth in Nigeria by Oluwarotimi John Ogundele (2010) 15 foreign/international markets. The key factor in this outcome is that, the import substitution industrialization strategy pursued relied mainly on imported inputs, particularly raw materials and dependence on imported machinery and equipment which are basic to production in the economy. Thus, makes the country dependent on both importation of capital and intermediate goods (inputs) and the possible effects on balance of payment position of the country. 2.3.2 LOCAL RESOURCES UTILIZATION Sequel to the fact that high import content of manufactured outputs reduces the value added to the gross domestic product by the manufacturing sector, the local content policy was enacted to combat the problem of low value added of the import substitution strategy. This involves the use of available local raw materials and other available resources in production of goods and services. A writer referred to this as ,“import displacement strategy”, that is, producing locally made goods which are different from or at least only similar to former inputs, but which are basically on locally available inputs and technology and on real needs (as distinct from imported consumption pattern) of the economy. It is noteworthy to state that, despite the abundant natural and human resources in the country, the technical know-how for exploiting these resources was a major constraint to the local content initiative. 2.3.3 INDIGENIZATION POLICIES An indigenization programme was carried out in 1970s and together with further phase which were implemented before 1980, it resulted in Nigerian taking over the control of several business hitherto controlled by foreigners. It’s enabling legislation, the Nigeria enterprises promotion Decree of 1972, which reserved certain categories of individual activity, mostly services and manufacturing for Nigerians. It would appear that the policy-maker overlooked the economic side-effects of the indigenization programme especially, it possible negation of the goal of economic independence. Miscarried in a number of respects. In particular, its intention was subverted by foreign firms, which proved to be adept at using Nigerians as front to corner business in the forbidden lines of industrial activity.
  17. 17. Industrialisation and economic growth in Nigeria by Oluwarotimi John Ogundele (2010) 16 Consequently, the import substitution industries which had been established were acquiring the capacity to manufacture for export, but this development was thwarted by the manpower dislocation caused by the indigenization program. Several of the newly established activities experienced manpower problems and several of them failed as a result. The 1979 revision of the decree turned out to be an abortive attempt at using a single policy tool to achieve three (3) distinct objectives simultaneously. Try to accomplish indigenization, diversification and “Nigerianization” of management in one stone to kill two birds. 2.3.4 TECHNOLOGY TRANSFER POLICY This policy was formulated to complement the industrial policy whose strategy was import substitution (Imevbore). The technology policy (1986) relied on transfer of foreign technology development as vehicles for achieving the Nation’s industrial goals and objectives. Dinh (2004) identified different means of promoting technology transfer for a country’s industrial development. These include; setting up of export processing zones (EPZ), and industrial zones (IZ), where better facilities are concentrated built and to attract foreign direct investment (FDI), particularly Joint ventures; build-operate-Transfer (BOT), the unpacked modes of transfer (sub contracts), build-Transfer (BT); and the High-tech parks. Nigeria specifically embarked on Build-Operate-Transfer programme in the heavy industries was attracted due to the different incentives available for investors. However, the success of this programme is limited by action of lag. A situation where the expatriates still occupying their former position in these industries despite the fact that the contract period has elapsed. This is due to the maneuvering by these foreigners who are meant to transfer technology to Nigerians, only transfer part-knowledge and still hold-on to the fundamentals. In the same vein foreign direct investment resulted in massive capital flight. 2.3.5 EXPORT PROMOTION STRATEGY The theoretical support for export promotion strategy can be found in Hecksher-Ohlin factor endowment trade theory. According to the theory, countries are endowed with different factor supplies, resulting in different relative factor prices (e.g. labour will be relatively cheap in labour abundant countries, like Nigeria) and so too will domestic commodity price ratios and factor
  18. 18. Industrialisation and economic growth in Nigeria by Oluwarotimi John Ogundele (2010) 17 combination countries with cheap labour will have a relative cost and price advantage over countries with relatively expensive labour in the production of commodities that make intense use of labour. Therefore, they should focus on the production of these labour-intensive products and export the surplus return for imports of capital intensive goods. The same also applies to countries with cheap capital. As defined by Todaro et al (2006), export promotion refers to government effort to expand the volume of a country’s export through incentives (public subsidies, tax rebates, and different kinds of financial and non financial measures, designed to promote a greater level of economic activity in export industries) and other means in order to generate more foreign exchange and improve the current account of its balance of payment. This is also known as outward-looking industrialization strategy (Weils, 1988). It has also been applauded for making intensive use of a country’s comparative advantage-export orientation. The adoption of the Structural Adjustment Programme (SAP) in 1980 introduced this industrial policy regime. The programme represented a fundamental shift in the basic philosophy of economic management at the national level. Under the new dispensation, export promotion was a major policy focus. And as a major aim of the new management philosophy was to eliminate or at least reduce, economic distortion and the bias against tradable goods and services, intervention reduced and import protection lowered. A number of export promotion incentives were incorporated into the SAP policies, including; I) The abolition of export taxes II) Export license waiver III) Duty drawback, Duty suspension and manufacture in Bond scheme IV) Export adjustment scheme V) Export Expansion Grant Fund VI) Currency retention scheme and many others. However, the achievement of this industrialization strategy were hindered by factors such as policies inconsistency, neglect of policies half way to implementation, and lastly, the strategy was pursued on ad-hoc basis and in most uncoordinated manner.
  19. 19. Industrialisation and economic growth in Nigeria by Oluwarotimi John Ogundele (2010) 18 2.4 STAGES OF NIGERIA’S INDUSTRIALIZATION The industrialization orientation and the industrial sector in Nigeria have gone through different stages and transformation. The transformation in the industrial sector can be divided into three. The first is the phase of uncoordinated industrial policies or strategies. This was the era of the pre independence period, when industrialization strategies were rather based on individual micro-economic agents than on the nation-wide industrial policy. The pre-colonial period witnessed the existence of cottage industries which are located basically on the available raw material in the different regions and the local demand for their products. The wake of colonialism brought about the first widely recognized form of modern industrialization in the country. The processing of raw material with the sole objective of removing waste matter, improving the quality or converting the produce into a form in which it could be more easily stored and transported before being exported (Ajayi, 2007). For example the forest logs were processed as sawn lumber mainly in power-driven sawmills before being exported to Europe. However, the Nigerian industrial scene changed after the end of the Second World War, there was increase in demand for industrial raw materials majorly for post war reconstruction needs and the boom in the raw materials export. This transformation was faced with two major constraints. These were the low level of technology and the small size of the available indigenous workforce. Full scale industrialization involving the production of basic capital goods could not be embarked upon. The stage of the state-led industrial movements was characterized by the import substitution industrialization strategy (1960s to mid 1980s). The main focus was on the economic role of government through direct investment, administration of a protectionist trade regime and the introduction of schemes such as indigenization and preferential credit to nurture indigenous entrepreneurs. The strategy of government during the 1960s was simply involved in attracting and encouraging foreign capital to engage in manufacturing activities. Immediately after the Nigeria civil war (1967-1970), a new approach became evident. The Nigerian government emerged with a new nationalistic vigor; this was embodied in the second National development plan. The government would now pursue a policy of progressive elimination of foreign dominance, both in terms of ownership, management and technical control, even within the framework of import substitution strategies. To this effect the Nigerian enterprises promotion Decrees (1972 and 1979) was enacted. Government investment would no longer be limited to
  20. 20. Industrialisation and economic growth in Nigeria by Oluwarotimi John Ogundele (2010) 19 public utilities and dyeing industries, but would be directed into other dynamic sectors. The government increased participation in industry through new investment and nationalization some categories of foreign-owned businesses expansion of agro-industry, petroleum and petrochemicals, diversification of the textile industry, development of iron and steel industry, and car assembly plants were top of the list. This new strategy was encouraged and facilitated by the 1973-1975 oil booms, which boost government revenue by over 500 percent. Suffice is to say that, given the expansion witnessed in terms of industry establishments, these industries place excessive burden on the foreign reserve and its attendant Balance of payment problem, as they were import dependent for their inputs. Consequently, the last stage is the phase of market-oriented and outward-looking industrialization approach. The introduction of Structural Adjustment Programme in 1986 brought about another structural transformation of the industrial atmosphere of the countries as different policies were introduced to remedy the import dependency problem of the previous industrialization strategies. Deregulation of credit policy, deregulation, diversification, privatization, trade liberalization and export promotion were among the terms associated with SAP. Prior to SAP, the oil market glut of the early 1980s has posed a problem on the national economy at large and the industrial sector in particular. Manufacturing’s contribution to Gross domestic products fell from 11.05 percent in 1980 to a low level of 5.19 percent in 1984, there were poor returns to government heavy investment (especially in diversified portfolio of industrial projects), and many industrial projects I which huge amount have been expended remained largely uncompleted. With SAP, industrialization strategy drifted from the inward-looking strategy to export promotion strategy, whereby production was not only limited to local consumption, but also for export. Perhaps, owing to the adoption of SAP and export promotion strategy, capacity utilization, which was 30 percent at the end of 1986 increased to 36 percent by mid 1987 and to 40.3 percent in 1990 (though this latter reduced, due to policy inconsistency and poor implementation and proper successive plans). However, the situation deteriorated for some highly import dependent industries like electrical/electronics, basic metal, iron and steel, and vehicle assembly where capacity utilization fell below 10 percent (Ajayi, 2007). Up till the present time, industrial policies and
  21. 21. Industrialisation and economic growth in Nigeria by Oluwarotimi John Ogundele (2010) 20 strategies still take close resemblance of the Structural Adjustment Programme’s industrialization strategies. 2.5 INDUSTRIALIZATION AND ECONOMIC GROWTH Economic growth is the increase in the amount of the goods and services produced by an economy over time, that is, the increase in real gross domestic product. The relationship between economic and industrialization can be explained under two headings. 2.5.1 REVIEW OF THEORETICAL RELATIONSHIP BETWEEN ECONOMIC GROWTH AND INDUSTRIALIZATION There exist some theoretical linkages between industrialization and economic growth in Development Economics. In Adam Smith’s theory economic growth (Wealth of Nations), division of labour is considered to bring about the greatest improvement in productivity powers of labour. This improvement in productivity is attributable to the increase in the dexterity of every worker, the significant reduction in the time used in producing goods and the invention of large number of labour-saving machines. The last cause of the increase in productivity emanates from capital and not from labour. Smith regarded capital accumulation/technological advancement as necessary condition for economic development (Jhingan, 2008). This implies that industrialization (which is associated with capital accumulation and technological advancement) ushers in economic growth though increase in productivity, enlargement of market size and increase in people’s choice. In the word of Obioma and Ozughalu (2004), it is not surprising therefore that for the less developed countries of the World, industrialization has come to be regarded as the major key to the development process. The Smith’s theory, though very sound in principle, apparently has limited validity for developing countries. The market size in the less developed countries of the world is very small. Thus the capacity to save and the inducement to invest are low (Jhingan, 2008). The above bring about low productivity, low income and grossly limited choice which impact negatively on economic growth.
  22. 22. Industrialisation and economic growth in Nigeria by Oluwarotimi John Ogundele (2010) 21 The Rostow Stages of economic growth, which indentifies five stage of economic development, namely; Traditional society, the precondition for take-off, take-off stage, the drive to maturity and age of high mass consumption. The traditional stage is characterized by a ceiling on productivity caused by gross limitation of Science. At this stage, an overwhelming proportion of the workforce is in Agriculture and very little mobility or social change as well as great division of wealth and decentralized political power. The transitional stage (pre condition for take-off) is characterized by the creation of preconditions for sustained growth. This stage is also referred to as the stage of precondition for sustained industrialization (Obioma and Ozughalu, 2004). These preconditions have usually required radical change in non-industrial sectors, namely; (i) Build-up of social overhead capital (especially in transport) in order to enlarge the extent of the market, to exploit natural resources productivity and to allow the state to rule effectively; (ii) Technological revolution in agriculture in which leads to increases in agricultural productivity to meet the requirements arising general and urban population, and (iii) An expansion of imports, including capital imports, financed by effectively production and marketing of natural resources for exports (Jhingan, 2008). The take-off stage is associated with an industrial revolution, tied directly to radical changes in the methods of production, having their decisive effects over a relative short period of time. The maturity stage is the period when a society has effectively applied the range of the modern technology to the bulk of its resources. During the period of maturity, new leading sectors replace the old ones. The development of certain industries such as steel is as one of the symbols (Thirlwall, 1994). The stage of high mass consumption is characterized by the migration to suburbia, the extensive use of automobile, durable consumer goods and household gadgets (Obioma and Ozughalu, 2004). The foregoing stage growth theory of Rostow implies that rapid industrialization plays an important role at some stages of economic development or growth. The development of one or more substantial manufacturing sectors (process of industrialization) is one the requirements for take-off. However, as noted by Thirlwall (1994), the theory has been widely criticized for its apparent weakness. Among other things, economists are in doubt as regards the division of economic history into five stages of economic growth as presented by Rostow.
  23. 23. Industrialisation and economic growth in Nigeria by Oluwarotimi John Ogundele (2010) 22 One of the most celebrated theories that relate to structural change is the two-sector surplus labour theory of Arthur Lewis. Among other things, the theory posits that economic development takes place when capital accumulates as a result of the withdrawal of surplus from the subsistence sector to the capitalist sector. The capitalist sector is that part of the economy which uses reproducible capital and pays capitalists for the use thereof. Subsistence sector is the part of the economy which does not use reproducible capital (Obioma and Ozughalu, 2004). The output per capita in the subsistence sector is lower than that in the capitalist. Lewis asserts that the classical theory of perfectly elastic supply of labour at a subsistence wage holds true in the case of many developing countries. Such economies are over populated relative to available capital and natural resources, so that the marginal productivity of labour is negligible, zero or even negative. Given that the supply of labour is unlimited, new industries can be established of the existing industries expanded without limit at the current wage by drawing upon the subsistence sector (Jhingan, 2008). Lewis theory implies as a nation move agriculture society towards industrialized economy, there is increase in productivity and growth of the national economy. Also, according to Traditional neoclassical growth theory, output growth results from one or more of three factors; increase in labour quality and quantity (through population growth and education), increase in capital (through Savings and Investment) and improvement in technology (Todaro and Smith, 2006). Solow specified his model (neoclassical theory of growth) as; Y = Kα (AL)β (2.1) Where Y = GDP, K = Stock of Capital, L = Labour, A = Productivity of Labour, which grows at a given at an exogeneous rate, α = relative share of capital in output and β = is the relative share of labour in output. Solow’s model is sometimes called “exogeneous growth approach”. The function above exhibit a constant return to scale, (α + β = 1), therefore; λY = f(λK, λL) (2.2) Since A is constant, then we assume λ = 1/L Y/L = f( K/L, 1) or y = f(k) (2.3) Where y = Y/L, and k = K/L. Bringing back A into expression 2.3, then
  24. 24. Industrialisation and economic growth in Nigeria by Oluwarotimi John Ogundele (2010) 23 y = Akα f’ > 0 (2.4) From the above expression (4), the output per worker (y) is a function of capital per worker, the more capital with which each worker has to work and the more output that worker can produce. Following from this, ii can thus be inferred that an increase in capital (through Savings and Investment, products industrialization) will lead or bring about an increase in output per worker, that is, growth of output per labour. Consequently, the new growth theory or theory or endogenous growth model, unlike the Solow model, explain technological change as an endogeneous outcome of public and private investment in human capital and knowledge-intensive industries (Research and Development), Such as computer software and Telecommunication (Todaro and Smith, 2006). Using Romer’s model (endogeneous growth model), the relationship between industrialization and economic growth can be explained, thus, technological spillover that may be present in the process of industrialization as one the factors that influence growth of the national output. The technological spillovers imply a situation in which one firm or industry’s productivity gains lead to productivity gains in other firms or industries. Using a simplified version of Romer’s model that keeps his main innovation- in modeling technology spillovers- without presenting unnecessary details of savings determination and other general equilibrium (Todaro and Smith, 2006 ). The model begins by assuming that growth process derives from the firm or industry level. Each industry individually produces with constant returns to scale, so the model is consistent with perfect competition; and matches assumptions of the Solow model. But Romer departs from Solow by assuming that the economy wide capital stock, K, positively affects output at the industry level, so that there may be increasing return to scale at the economy wide level. Formally Y = AKα L1-α Kβ (2.5) Where β = relative share of economy wide capital stock in output. It is assumed that there exist across industries for simplicity, so each industry will use the same level of capital and labour, then, the aggregate production function now becomes; Y = AKα+β L1-α (2.6)
  25. 25. Industrialisation and economic growth in Nigeria by Oluwarotimi John Ogundele (2010) 24 With a little calculus it can be shown that the resulting growth rate for per capita income in the economy would be (when A is assumed constant, that is, no technological progress) g-n =β / ( 1-α- β) (2.7) where g is the output growth rate and n is the population growth rate. Without spillover, as in the Solow’s model with constant return to scale, β = 0, and so per capital growth (growth in capital stock) would be zero, that is, no technological progress. However, with Romer’s assumption of positive of a positive capital externality (technological spillover through industrialization, β > 0 and g-n > 0) Per capita output/income (Y/L) is growing. In summary, Industrialization, thus influence economic growth through, majorly, (a) Capital accumulation and (b) Technological progress. a) Capital accumulation results when some proportion of present income is saved and invested in order to augment future output and income. New factories, machinery, equipment and materials increase the physical capital stock of a nation (the total net real value of all physically productive capital goods) and make it possible for expanded output levels to be achieved. Employing the Production Possibility Frontier, capital accumulation/growth through outward shift in the production possibility curve. Effect of Growth of Capital stock on the production possibility frontier Radio P’ P 0 P P’ Rice
  26. 26. Industrialisation and economic growth in Nigeria by Oluwarotimi John Ogundele (2010) 25 NB: Radio is capital-intensive good, while Rice is Labour-intensive good The production possibility frontier shifts as a result of growth in capital stock (that is, PP to P’P’ movement of the Production possibility curve) b) Technological progress in its simplest form results from new and improved ways of accomplishing traditional tasks such as growing of crops, making cloth or building a house. It can be neutral, labour saving or capital saving technological progress. Whichever type, it causes an outward movement of the Production possibility curve. Effect of Technological change in the industrial sector (Electronics) on Output Radio P’ P 0 P Rice 2.5.2 EMPIRICAL EVIDENCE ON RELATIONSHIP BETWEEN INDUSTRIALIZATION AND ECONOMIC GROWTH The works of Dihn (2004), Kim (1978),Iyoha (2000), Ekpo (2004), Obioma and Ozughalu ( 2004) and Soludo, give us an insight into empirical relationship between industrialization and economic growth. For the purpose of this study, we shall be limited to the consideration of only three of them. Kim (1978) in “Industrialization Strategies in a developing Socialist economy- an evaluation of the Tanzania case”, made use of input-output analysis for his analysis of the impact of industrial output on the gross output of Tanzania. It was discovered that there exist
  27. 27. Industrialisation and economic growth in Nigeria by Oluwarotimi John Ogundele (2010) 26 positive backward and forward linkage effects of industries on the Tanzanian economy. Using 1970 input-output table, exportable crops and mining industries show high values of backward linkage indexes in all the policy categories, but were below national average in terms of forward linkage effects for both income and employment. Here, it was discovered, generally, that an increase in industrial output influence positively both income and employment. Back to Nigeria, Iyoha (2000), Source of economic growth in Nigeria, 1970-1997. The research made use o f Primal model of growth accounting, which uses a neoclassical production in analyzing the sources of economic in Nigeria. It was ascertained that during the four decades being studied, inputs contributed 69.7 percent of total real GDP growth while total factor productivity (TFP), contributed 30.3 percent of observed economic growth. TFP was interpreted as the rate of technological progress (Iyoha, pp.4). Technological progress or innovation is by- product of industrialization or industrial expansion. In the light of the above, Iyoha discovered that the reallocation of labour from agricultural sub- sector to activities with higher value added, especially in the industrial sector has been an important source of growth in aggregate factor productivity, which also influence the growth of Gross domestic products, since 1960. The above support the Arthur Lewis surplus labour theory. In the same vein, the work carried out by the duo, Obioma and Ozughalu (2004) on Industrialization and economic development in Nigeria. They used a system of simultaneous equation, (a multi-equation econometric model) they explained the nexus of interrelationship that exist between industrial outputs and gross domestic product. The two major indices of industrialization- index of mining production and index of manufacturing output and appearing with the expected positive sign, but only significant in explaining economic growth. The relatively poor performance of the index of manufacturing production in the study could be attributed to the fact that the Nigerian economy is anchored on mining sector as a result of the near-complete dependence on one natural resource, that is , CRUDE OIL ( Onioma and Ozughalu).This phenomenon is sometimes referred to as the “Dutch Disease”. Form the foregoing paragraphs, the empirical evidences reviewed above; support the theoretical linkage that exist between industrialization and economic growth and industrial output and gross domestic product.
  28. 28. Industrialisation and economic growth in Nigeria by Oluwarotimi John Ogundele (2010) 27 2.6 EFFECTS OF INDUSTRIALIZATION ON A NATION’S ECONOMY Developing economies pursue industrialization as a result of the attendant importance of industrialization in the process of development of the economy. The following are the positive effects of industrialization; 1) Linkage effects:- There is both forward linkage and backward linkages in the economy as a result of industrial expansion. The supplier of industrial inputs will experience boom in the demand for their products, thus, agriculture output tend to be on increase demand. Industrialization increases the variety of products available to consumer and users of the industrial outputs. 2) Employment effects :- More output implies, at least, increase in inputs (given there is no change in technology). Labour is one of the important industrial inputs, it then mean that, industrial expansion is likely to bring about the increase in employment of labour (an expansion in demand for labour). 3) Price effect :- From the simple law of supply, increase in supply (a shift in supply curve) causes price to reduce. Industrialization tends to increase industrial output, and then means that, there is bound to be glut in the commodity market and its attendant decrease in price. 4) National output effect :- Industrialization increases the combination of the industrial sector to the growth of the national economy. Expansion in industrial sector will be manifested also in growth of the gross domestic product. 5) Balance of payment effect :- The pursuit of export promotion industrialization strategy brings about an increase in foreign reserve as more of the country’s export is demanded. This will improve the Balance of payment position of the country. 6) Economic independence :- It has been said that industrialization one of the critical means of attaining economic independence from the activities of Imperial Capitalist. However, despite the positive side of industrialization, it has been argued that industrialization causes rural-urban migration, exploitation of natural resources, changes in family structure (from extended family to nuclear family) and environmental degradation, through pollution.
  29. 29. Industrialisation and economic growth in Nigeria by Oluwarotimi John Ogundele (2010) 28 2.7 CHALLENGES OF IUNDUTRIALIZATION IN NIGERIA In spite of the conscious and continuous effects of the Nigerian government, the Nigerian industrial sector is still characterized with low valued added, low capacity utilization of below 60 percent, restricted forward linkage and backward linkage, and the attendant low productivity and high production cost due to inefficiency. In the word of the Director General of UNIDO, Kandesh K.Yunkella (2009), “Africa’s (Nigeria inclusive) pursuit of industrialization continues to be hindered by many challenges which must be addressed urgently. These challenges include limited industrial skills and technological capabilities, weak support from institutions, inadequate financing and underdeveloped internal and regional markets. The global financial and economic crisis has also had a negative impact on Africa’s industrialization efforts”, said Yunkella. From the foregoing the following can be identified as the major challenges of industrialization in Nigeria; 1) Poor infrastructural facilities :- The epileptic power supply from the NEPA/PHCN has forced industrial establishments to run on private generators, setting a high cost burden of these industries. The transportation system in the country is not encouraging; this has made some areas, which should have been the markets for industrial outputs, to be cut- off from industrial supply. The implication of the poor state of our infrastructure facilities is that output is restricted and employment opportunity constrained. 2) Technological and industrial skills: - The industrial sector in Nigeria is still in the past, in terms of technological advancement. Compare with other countries like China, Japan and United states, production processes have become automated and its attendant expansion in outputs. Compounding this, is the poor Human capital development 3) Inadequate financing: - Although, there are schemes, Institutions and policies in this direction, their achievements still remain insignificant. An ideal Fund for industrialization should be such that would recognize the peculiarities of an industry’s productive cycle and make the interest rate low enough as to accommodate the long gestation period of manufacturing process. Today, manufacturers are at the mercy of the Commercial banks at cut threat interest rate. 4) Inconsistency in government policies: - Nigeria, due to the democratic nature of government, has experienced changes in policy orientation over the year. Different administration with different policies, this pose a great problem on the environment in
  30. 30. Industrialisation and economic growth in Nigeria by Oluwarotimi John Ogundele (2010) 29 which these manufacturers operate. An example is the imposition country of N500 tariff per bag of imported cement, when the country is adopting an export-promotion strategy or a market-oriented strategy. 5) Underdeveloped Markets: - The markets in Nigeria still remain underdeveloped and the implication is that industrial expansion is subjected to demand constraints. 6) Weak Institutional support: - The bureaucratic of Nigeria institution is another clog in the wheel of industrial development in Nigeria. Consider the bureaucratic and tedious procedure to get import/export license or the Nigeria factor (corruption) involves in the implementation of the “suppose to be good” policies/strategies hamper the process. However, the above challenges can thus be addressed or solved as follows; I) The role of the government should be the one that facilitate the effective working of the market system. II) There is need to recognize the proper development of small and medium enterprises as mechanism for achieving a rapid industrial development in Nigeria. There should also be the establishment and motivation for the New Technology Based Firms (NTBFs). III) There is need to change the curriculum of the higher education system in Nigeria in order to accommodate the current trends in the global world and make graduates globally competitive. The academic environment should be more of practical work rather than the current theoretical training, rendering graduates unemployable, thus reducing the quality of Human capital for industrial development. IV) Infrastructural facilities have been seen as part of the factors that influence Foreign Direct Investment in the industrial sector, considerate attention should be given to project planning and their implementation by the Executive arm of the government. The power supply needs improvement, more than 300 percent improvement, for a proper industrial development in Nigeria. Public private partnership scheme is another better alternative for infrastructural development. V) Development plans, strategies and policies should be of perspective plans/ strategies in nature and these should be consistently and consciously implemented as planned. VI) Finally, the industrial sector of the economy also needs rebranding. Nigerians should patronize “Made in Nigeria” products.
  31. 31. Industrialisation and economic growth in Nigeria by Oluwarotimi John Ogundele (2010) 30 Table 1 Percentage Contribution to Gross domestic product by Industrial sector, Manufacturing subsector and Mining subsector YEAR MANUFACTURING% MINING % INDUSTRY % GDP % 1981 6.74 36.66 43.4 100 1982 7.83 33.84 41.67 100 1983 5.82 32.96 38.78 100 1984 5.19 37.24 42.43 100 1985 5.99 36.34 42.33 100 1986 5.62 34.61 40.23 100 1987 5.88 33.96 39.84 100 1988 6.24 32.49 38.72 100 1989 9.92 33.78 39.69 100 1990 5.5 37.71 43.2 100 1991 6.06 34.67 40.73 100 1992 5.66 34.76 40.42 100 1993 5.88 34.4 39.79 100 1994 5.3 33.46 38.75 100 1995 4.92 33.42 38.44 100 1996 4.75 34.39 39.15 100 1997 4.64 33.96 38.5 100 1998 4.2 33.72 37.91 100 1999 4.32 31.09 35.41 100 2000 4.24 32.74 36.99 100 2001 4.18 31.79 35.97 100 2002 3.79 24.73 28.52 100 2003 3.64 27.75 31.39 100 2004 3.68 25.98 29.66 100 2005 3.79 24.53 28.32 100 2006 3.91 22.13 26.04 100 2007 4.03 19.9 23.92 100 2008 4.13 17.85 21.99 100 Source: CBN and Researcher’s calculation
  32. 32. Industrialisation and economic growth in Nigeria by Oluwarotimi John Ogundele (2010) 31 SECTION THREE 3.0 THEORETICAL FRAMEWORK AND METHODOLOGY 3.1 THOERETICAL FRAMEWORK Developing countries have attached great importance to industrialization as a catalyst in the growth process. This association as Thirlwall (1994) notes is due to technical progress which appears to be more rapid in industry as well as greater economies of scale. Nigeria has apparently been expressing great concern for industrialization as a means of achieving a state of “economic el dorado” over the years since independence. This, no doubt, is in the right direction given the apparent positive correlation between industrialization and economic growth as revealed by most of the theoretical and empirical issues reviewed in the previous chapter. An attempt is made in this chapter to examine empirically the link between industrialization and economic growth using Nigeria’s data. The empirical analysis is predicated mainly on the neoclassical theory of economic growth. According to the Traditional neoclassical growth theory, output growth result from one or more of three factors; increase in labour quantity and quality (through population growth and education); increase in capital (through savings and investment); and improvement in technology (Todaro and Smith,2006). Using the Solow’s exogeneous growth model, the Solow neoclassical growth model for which Robert Solow of the Massachusetts Institute of technology received the Nobel Prize, is probably the best known model of economic growth (Todaro and Smith, 2006). Although in some respects Solow’s model describes a developed economy better than a developing one, it remains a basic reference point for study on growth and development. The basic Solow model describes a closed economy, which allow for substitution between capital and labour. In the process, it assumes that there are diminishing returns to the use of these inputs. The aggregate production function; Y = f(K,L) (3.1) Is assumed to be characterized by constant returns return to scale. For example, in the special case known as the Cobb Douglas production function, at any time t we have; Y(t) = K(t)α [A(t)L(t)]β (3.2) Where Y is the gross domestic product, K is the capital, L is labour and A(t) represents the productivity of labour, which grows over time at an exogeneous rate, α is the elasticity of output
  33. 33. Industrialisation and economic growth in Nigeria by Oluwarotimi John Ogundele (2010) 32 with respect to capital and β is the elasticity of output with respect to labour. Because of constant returns to scale (that is α + β = 1) if all inputs are increased by the by the same amount, say 20%, then output will increase by same amount (20% in this case). More generally; λY = f(λK,λL)…………………………………..(3.3.1) where λ is some positive amount (1.2 in the case of a 20% increase) because λ can be any positive real number, a mathematical means useful in analyzing the implication of the model is to set λ = 1/L so that: Y/L = f( K/L, 1) or y = f(k) (3.3.2) Note that the symbol k is used for K/L and not K/Y as was used in the Ak or Harrod-Domar model. This simplification allows us to deal with just one argument in the production function for example, in the Cobb-Douglas case of equation (3.2) y=Akα (3.4) where y is the output per worker and k is capital per worker and equation (2.4) states that output per worker is a function that depends on the amount of capital per worker. The more capital with which each worker has to work, the more the output that worker can produce. As previously noted, capital accumulation and technological progress are spillovers (by-products) of industrialization (see section 2.5). Say the labour force grows at rate n, per year and labour productivity grows, the rate at which the value of A in the production function increase, at rate ø. Solow also described in the equation that; Δk = sf(k) – (δ+ n)k (3.5) The growth of capital-labour ratio, k (known as capital deepening), and shows that the growth of k depends on savings, sf(k), after allowing for the amount of capital required to service depreciation, δk, and after widening, that is, providing the existing amount of capital per worker to net new worker joining the labour force, nk. Essentially, from equation (3.2), the growth rate of Y can be estimated as; Ry =Ra + αRk + βRl (3.6) (Alege and Ogun, 2004) Where Ry is the growth rate of gross domestic product, Ra is rate of growth of factor productivity, which is assumed to be exogeneous, Rk is the growth rate of capital stock and Rl is
  34. 34. Industrialisation and economic growth in Nigeria by Oluwarotimi John Ogundele (2010) 33 the rate of growth in labour. Under the assumption that total factor productivity grows at the average rate of ø, then equation (6) could be rewritten as; Ry = ø + αRk + βRl (3.7) Equation (3.7) shows that the rate of growth of output is weighted average of the growth rates of factor inputs plus the rate of growth of total factor productivity. (ø is sometimes referred to as Solow residual, since ø = Ry - αRk – βRl, Iyoha 2001). In sum, the prediction of Solow model are such that (i) the economy will move towards a steady equilibrium, (ii) there will be no growth in output or capital stock when the economy reaches its steady state (iii) when the economy moves from one steady state to another, medium term growth per capita output and per capita stock will occur; and (iv) the transition from the steady state to another generates only medium term, not permanent (Alege and Ogun, 2004). Many researchers have pointed out the possibility of incorporating additional explanatory variable(s) in the Solow’s model in order to capture the causes of economic growth. In Mankiw, Romer and Weil (1992) alluded to this possibility, where it makes sense. For the purpose of this study, the augmented Solow model by including in the explanatory variables, other factors that influence growth in Nigeria, will be used. This makes new variables to be included in equation (3.7). In the light of this, industrialization variables and Agricultural production will be added. Industrialization is seen as a panacea to almost all problem of stagnation, and as the means of achieving continuous economic growth (Yesufu, 2001). This is underscored by the Classical/Neoclassical economic notion that industrialization results in mass production, which correspondingly leads to the abundance of goods and services (as an implication increases total output). And for this study, industrialization is proxy by Manufacturing production and Mining production. In the same vein, Agriculture, which belongs to the primary sector, provide other sectors raw- materials, produce for export and generates employment for teeming population. It then follows, that an increase in agricultural production, will lead to increase in gross domestic output through increase in exportable goods, increase in raw-materials (input) supplied to other sectors of the economy and increase in employment level.
  35. 35. Industrialisation and economic growth in Nigeria by Oluwarotimi John Ogundele (2010) 34 3.2 MODEL SPECIFICATION For the purpose of this study and in order to achieve the broad and specific objectives of this study, we adopt augmented form of equation (3.7) and by adding three other explanatory variables, namely; Growth rate of Manufacturing production, growth rate of Mining production and growth rate of Agriculture production. The model can thus be specified as follows; Rrgdp=f(Rlab, Rcap, Rman, Rmin, Ragr) (3.8) Expressing the above in econometric form (for the purpose of econometric analysis), we have; Rrgdp = β0 + β1Rlab + β2Rcap + β3Rman + β4Rmin + β5Ragr+U (3.9) where; Rrgdp = rate of growth of Gross domestic product Rlab = rate of growth of labour Rcap = growth rate of capital stock Rman = growth rate of manufacturing production Rmin = growth rate of mining production Ragr = growth rate of agriculture production β0 = the intercept parameter β1,β2,β3,β4 and β5 = slope parameters U = the stochastic disturbance term Note: Gross fixed capital formation is used as proxy for capital stock and population as proxy for labour; this is as a result non-availability on these variables in Nigeria. A priori Expectation
  36. 36. Industrialisation and economic growth in Nigeria by Oluwarotimi John Ogundele (2010) 35 β0 ≠ 0 β1,β2,β3,β4 and β5 > 0 3.3 METHOD OF DATA ANALYSIS Given the nature of the specified above, the ordinary least Squares (OLS) estimation technique will be used as it presents, among unbiased estimators, the OLS estimators are the best unbiased linear estimators with minimum Variance (Gujurati, 2006). And it has become the most widely used technique. The Durbin-Watson d-statistic will be used in evaluation of presence of serial autocorrelation in the model and the correlation matrix we also be used for evaluating the presence of multi-colinearity between the explanatory variables. 3.4 SOURCE OF DATA The data used are annual time series data that runs from 1981 to 2008. The data are obtained from secondary sources that include the Central Bank of Nigeria’s Statistical Bulletin and Annual Report, National Planning commission, National population commission and Figures from World Bank’s World Economic outlook.
  37. 37. Industrialisation and economic growth in Nigeria by Oluwarotimi John Ogundele (2010) 36 SECTION FOUR 4.0 PRESENTATION AND INTERPRETATION OF RESULT 4.1 PRESENTATION OF RESULT In the empirical analysis of the impact of Industrialization on economic growth in Nigeria, Real Gross domestic products growth rate(Rrgdp) was expressed as a function of Growth rate of Labour(Rlab), Growth rate of Capital stock (Rcab), Growth rate of Manufacturing production (Rman), growth rate of Mining production(Rmin), and growth rate of Agriculture production (Ragr). The data for the different variables were computed for the period 1981-2008. The result of the Ordinary Least squares econometric technique of the model is given in the table below; Table 4.1 Dependent Variable is Rrgdp Independent Variable Coefficients Standard Error T-value P-value Constant Rlab Rcap Rman Rmin Ragr 1.15 0.038 0.001 0.233 0.305 0.299 0.706 0.102 0.019 0.052 0.061 0.046 1.629 0.371 0.065 4.256 5.026 6.478 0.119 0.714 0.949 0.000 0.000 0.000 R2 = 0.848 Adjusted R2 = 0.81 F-statistic(5,20) = 22.308 D-W statistic = 1.892 From the above table the result of estimation can thus be stated as; Rrgdp = 1.15 + 0.038Rlab + 0.001Rcap + 0.233Rman+ 0.305Rmin+0.299Ragr SE = (0.706) (0.102) (0.019) (0.052) (0.061) (0.046) T-val = (1.629) (0.321) (0.065) (4.256) (5.026) (6.478) R2 = 0.85, Adjusted R2 = 0.81
  38. 38. Industrialisation and economic growth in Nigeria by Oluwarotimi John Ogundele (2010) 37 F-statistic = F(5,20) = 22.308 DW-Statistic = 1.892 4.2 INTERPRETATION OF REGRESSION RESULTS According to the estimated model, all the explanatory variables conform to the a priori expectation as to the signs of the model parameters. The estimate of the intercept, β0 =1.15, indicates that the expected growth rate of Real gross domestic product when all the explanatory variables (Rlab, Rcap, Rman, Rmin and Ragr) are zero is 1.15%. The estimate of the coefficient, β1 = 0.038, indicates that a unit increase in growth rate of Labour, on the average, generates 0.038 increase in growth rate of Real GDP. The estimate of the second slope coefficient, β2 = 0.001, implies that a unit change in growth rate of Capital stock will, on the average, cause growth rate of Real GDP to change by 0.001 in the same direction. In the same vein, the estimated β3 = 0.233, indicates that a unit increase in growth rate of manufacturing output generates, on the average, a 0.233 increase in the growth rate of Real GDP. The estimate of the fourth slope parameter, β4 = 0.305 means that an increase in growth rate of mining production by one will, on the average, lead to 0.305 increase in growth rate of Real GDP. And the last slope coefficient, β5 = 0.299 implies that a unit increase in growth rate of Agriculture production will, on the average, generate a 0.299 increase in growth rate of Real GDP. The adjusted coefficient of determination, Adjusted R2 = 0.81 indicates that changes in all the explanatory variables account for about 81% of the changes in growth rate of Real GDP. In other words, the model explains 81% of the changes in growth rate of Real GDP. And only 19% of the changes in growth rate of Real GDP is left unexplained and this can be attributed to the disturbance term. The F-value of 22.308 passed the significant test at the 1% significant level (since Fcal > F0.99 , that is 22.308 > 4.1 given v1= 5 and v2 = 20). Thus, we do not accept the null hypothesis (that the model is not significant) and conclude that the overall regression is significant at 1% level of significance. In other words, we do not accept the null hypothesis that all the coefficients are zero which implies that R2 is significantly different from zero. The goodness of fit is statistically significant and as such the model explained the relationship between growth rate of Real GDP and the various explanatory variables over the sample period 1981-2008.
  39. 39. Industrialisation and economic growth in Nigeria by Oluwarotimi John Ogundele (2010) 38 The T-values show that at the Traditional level of 5% of significance, three of the explanatory variables (Rman, Rmin and Ragr) passed the T-test while the neoclassical explanatory variables (Rlab, Rcap) are not statistically significant at of the above significance level. In other words growth of manufacturing output, growth rate of mining output and growth rate of agricultural output have statistical significant impact on growth rate of Real GDP as measured by β3, β4, and β5 respectively, while growth rate of labour and growth rate of capital stock do no significantly impact on the growth rate of Real GDP at 5% level of significance (since Tβ3, Tβ4 and Tβ5 > T0.25, 20 = 2.086 while Tβ1 and Tβ2 < T0.25, 20 = 2.086). Thus, this account for one of the limitations of the Solow Neoclassical growth theory adaptability to developing economy. The Durbin-Watson statistic value of 1.892 indicates the absence of first order serial autocorrelation in the model at 5% level of significance (dL= 0.979 and dU = 1.873 for n = 26 and K-1 = 5 and α = 0.05). Also a close examination of the correlation matrix reveals the absence of Multicolinearity of the explanatory variable (see Appendix II) 4.3 POLICY IMPLICATION The empirical evidence presented above appears to support the significant impact of industrialization, proxy by manufacturing production and mining production, on growth of the Nigeria’s national economy (that is, economic growth). It is imperative for the Government and industrialist to give considerable attention for development of the industrial sector as it is one of the important movers of the economy to a state of economic El Dorado, by pursuing comprehensive industrial policies. Our results also show that, among the factors that affect growth rate of Real GDP, growth of mining production (bulk of which is crude-oil production) has the giant influence on the growth rate of Real GDP (a proxy for economic growth) in Nigeria. Given the fact that petroleum is an exhaustible resource, the proceeds from petroleum should be diverted to manufacturing and agricultural activities and other economic activities which have high value added and of which raw-material are non exhaustive in nature and thus, have significant positive impact on the growth of the economy, as shown by our findings in this study. The empirical analysis shows that growth rate of manufacturing production has positive impact on economic growth in Nigeria, it then implies that purposive industrialization strategy that
  40. 40. Industrialisation and economic growth in Nigeria by Oluwarotimi John Ogundele (2010) 39 encourages increased manufacturing activities in the country, should be of paramount concern to Policy makers. And As a matter of necessity and as measure toward achieving the Nation’s aspiration to be among the World’s best economy in year 2020, industrialization strategy should be the one that make effective and efficient of the Nation’s abundant resources (drastic increase in capacity utilization) and properly harnessing them for industrial growth and development. One of the implications of our findings for policy is that growth in agricultural production has significant positive influence on economic growth in Nigeria as it has direct relationship with the growth of Real gross domestic product. Agriculture supplies the necessary industrial raw materials and serves as an employment avenue for the teeming population. Government and other stakeholders have strong role to play in pursuing policies that encourage large scale farming as it contribute to the growth of the national economy. Finally, from this study, it is evidenced that Nigeria has not significantly benefit from the positive impact of both growth of Human resources and capital resources over the sample period. Thus, the implication for policy consideration is far reaching, rather than just focusing attention on growth of overall capital stock (capital formation), there is need to focus policy measures productive capital formation. And the need for increase Human capital development, through training and development, in order to increase the contribution of the growth of labour input to growth of the National economy.
  41. 41. Industrialisation and economic growth in Nigeria by Oluwarotimi John Ogundele (2010) 40 SECTION FIVE 5.0 SUMMARY, RECOMMENDATIONS AND CONCLUSION 5.1 SUMMARY In this study, an attempt has been made to establish, empirically, the relationship between industrialization and economic growth in Nigeria. In addition the, the study also evaluate the influence of other factors (capital stock, labour and agriculture), which also generate/ contribute to growth of the economy, on the growth of the national output 5.2 RECOMMENDATIONS As rightly shown in the theoretical and empirical analysis of this study, rapid industrial development is a vital achievement of rapid economic growth in Nigeria. In the light of the above, the following recommendations for achievement of rapid industrial development, especially manufacturing activity growth, and higher contribution of the growth in industrial sector to the growth of the national output are presented below; 1) Encouraging industries with high value added per worker (Capital intensive industries). Value added by an industry is the difference between the value of its outputs and the value of its inputs it buy, from other industries. Value added per worker varies considerably across industries. Nigeria should shift its industrial mix toward these industries with high value added per worker in order to improve national income (since National income is the sum of all industries’ value added). 2) The poor linkage between the agricultural sector and manufacturing sector, between manufacturing sector and service sector and between outputs in general and inputs in the country need to be heightened. Producing intermediate goods that can be used in a various sectors is a more fundamental economic activity than producing goods that simply provide satisfaction to Households. 3) Development planners need to identify and make concerted effort to promote industries with future growth potential. Industries like New technology based industries should be given considerate attention and their establishment should be encouraged.
  42. 42. Industrialisation and economic growth in Nigeria by Oluwarotimi John Ogundele (2010) 41 4) For the achievement of positive economies of scale, there is need for the development of industrial parks in the country. The development of these industrial parks should be economically located as this will help to reduce the high cost of production that characterized the activities of the industrial sector. 5) Considering the imported effects of the current Global economic downturn, Nigerian government, as matter of exigency, should ensure existence of strong macroeconomic shock absorber, in order to cushion the effect of the excesses of other country on the production activity of the country. 6) The industrial policies of the government should be adhere to and consistently followed. Rather than the haphazard policies that have been the trend in the country, policies should be consistently and comprehensively formulated and implemented. 7) The need to harness the benefit of Information technology in production (that is, automation of the production process) cannot be overemphasized. Following the global trend of knowledge based economy, the government, manufactures and other stake holders should put concerted effort towards the achieve of complete automation of the industrial activities, as this will boost the value added per worker in the country. 8) The development of small scale industries should be the concern of Government, Manufacturers, Entrepreneurs and Investors. The establishment of a strong and formidable small scale industry ensure the generation of employment and increase in national output (economic growth). 9) The diversification of the economy from monoculture economy (Oil-dependence) towards a non-oil dependent economy should be of interest to Policy makers and executives. This will heal the country from the “perennial Dutch disease”. 10) Industrial activity does not occur in a vacuum, it then means that, infrastructural facilities and the policy environment should be such that enhance productivity of the sector. 11) Finally the notion that “made in Nigeria goods” is substandard need to be totally eliminated in the country. Nigerians should patronize what is produced in the country.
  43. 43. Industrialisation and economic growth in Nigeria by Oluwarotimi John Ogundele (2010) 42 5.2 CONCLUSION We conclude by saying a Nation that does not produce will reduce. The impact of industrialization on economic growth in Nigeria cannot be undermined the fact the economy is tilted towards crude oil exploration and the chunk of government revenue is from petroleum, purposive industrialization should be of paramount important to government at this point where the economic aspiration of the country is to be among the 20 Best World economies in the year 2020 (Vision 202020).
  44. 44. Industrialisation and economic growth in Nigeria by Oluwarotimi John Ogundele (2010) 43 Appendix I REGRESSION DATA YEAR Rrgdp Rlab Rcap Rman Rmin Ragr 1981.0 1982.0 1983.0 1984.0 1985.0 1986.0 1987.0 1988.0 1989.0 1990.0 1991.0 1992.0 1993.0 1994.0 1995.0 1996.0 1997.0 1998.0 550.54 -2.7 -7.05 -1.1 9.85 2.15 -0.57 7.36 7.67 13.02 -0.83 2.28 1.28 0.22 2.16 4.38 2.82 2.94 2.36 2.88 6.95 3.35 2.54 3.96 3.33 -23.39 2.04 2.3 2.3 2.92 2.84 2.76 2.9 2.81 2.83 2.76 NA -5.9 -22.22 -31.39 -3.83 29.0 34.15 15.32 52.75 49.56 12.63 56.69 36.87 8.94 34.43 43.78 19.04 -0.26 296.97 12.98 -30.93 -11.71 26.22 -3.74 0.4 14.44 2.17 4.93 9.31 -4.44 -3.71 -1.33 -5.18 0.85 0.41 -6.88 911.63 -10.18 -9.48 11.75 6.89 -2.45 -2.42 2.7 11.94 26.19 -8.82 2.52 0.35 -2.69 2.41 7.12 1.51 2.2 791.9 -6.1 8.37 -5.24 17.58 9.71 -3.5 10.27 5.37 4.29 3.75 2.1 1.4 2.47 3.65 4.15 4.29 4.11
  45. 45. Industrialisation and economic growth in Nigeria by Oluwarotimi John Ogundele (2010) 44 YEAR Rrgdp Rlab Rcap Rman Rmin Ragr 1999.0 2000.0 2001.0 2002.0 2003.0 2004.0 2005.0 2006.0 2007.0 2008.0 0.42 5.44 8.45 21.35 10.23 10.48 6.51 6.03 6.45 6.41 2.87 2.79 2.88 2.81 2.81 3.3 3.3 3.19 3.3 3.3 -4.37 42.91 12.41 34.27 73.29 -0.32 -6.8 92.26 23.85 .NA 3.44 3.44 6.99 10.07 5.66 11.9 9.61 9.39 9.57 9.28 -7.4 11.6 5.27 -5.61 23.71 3.43 0.59 -4.35 -4.32 -4.5 5.29 2.95 3.88 55.18 6.98 6.29 7.06 23.39 -6.7 6.54 Source: computed from CBN Statistical Bulletin and National population website
  46. 46. Industrialisation and economic growth in Nigeria by Oluwarotimi John Ogundele (2010) 45 Appendix II REGRESSION Output Created 09-Mar-2010 21:53:59 /MISSING LISTWISE /STATISTICS COEFF OUTS CI BCOV R ANOVA /CRITERIA=PIN(.05) POUT(.10) /NOORIGIN /DEPENDENT Rrgdp /METHOD=ENTER Rlab Rcap Rman Rmin Ragr /RESIDUALS DURBIN. Regression Variables Entered/Removed b Model Variables Entered Variables Removed Method 1 Ragr, Rlab, Rmin, Rman, Rcap a . Enter a. All requested variables entered. b. Dependent Variable: Rrgdp Model Summary b Model R R Square Adjusted R Square Std. Error of the Estimate D.W 1 .921 a .848 .810 2.52052 1.892 a. Predictors: (Constant), Ragr, Rlab, Rmin, Rman, Rcap b. Dependent Variable: Rrgdp
  47. 47. Industrialisation and economic growth in Nigeria by Oluwarotimi John Ogundele (2010) 46 ANOVA b Model Sum of Squares df Mean Square F Sig. 1Regression 708.620 5 141.724 22.308 .000 a Residual 127.060 20 6.353 Total 835.680 25 a. Predictors: (Constant), Ragr, Rlab, Rmin, Rman, Rcap b. Dependent Variable: Rrgdp Coefficients a Model Unstandardized Coefficients Standardized Coefficients t Sig. 95% Confidence Interval for B B Std. Error Beta Lower Bound Upper Bound 1(Constant) 1.150 .706 1.629 .119 -.323 2.622 Rlab .038 .102 .034 .371 .714 -.174 .250 Rcap .001 .019 .006 .065 .949 -.039 .042 Rman .223 .052 .408 4.256 .000 .114 .332 Rmin .305 .061 .482 5.026 .000 .178 .432 Ragr .299 .046 .611 6.478 .000 .203 .395 a. Dependent Variable: Rrgdp Coefficient Correlations a
  48. 48. Industrialisation and economic growth in Nigeria by Oluwarotimi John Ogundele (2010) 47 Model Ragr Rlab Rmin Rman Rcap 1 Correlations Ragr 1.000 .007 .236 -.215 -.267 Rlab .007 1.000 .063 .321 -.068 Rmin .236 .063 1.000 -.060 -.385 Rman -.215 .321 -.060 1.000 -.090 Rcap -.267 -.068 -.385 -.090 1.000 Covariances Ragr .002 3.107E-5 .001 .000 .000 Rlab 3.107E-5 .010 .000 .002 .000 Rmin .001 .000 .004 .000 .000 Rman .000 .002 .000 .003 -9.120E-5 Rcap .000 .000 .000 -9.120E-5 .000 a. Dependent Variable: Rrgdp Residuals Statistics a Minimum Maximum Mean Std. Deviation N Predicted Value -5.8919 18.3194 4.5862 5.32398 26 Residual -4.58309 6.33465 .00000 2.25442 26 Std. Predicted Value -1.968 2.580 .000 1.000 26 Std. Residual -1.818 2.513 .000 .894 26 a. Dependent Variable: Rrgdp
  49. 49. Industrialisation and economic growth in Nigeria by Oluwarotimi John Ogundele (2010) 48 Appendix III Line of Best Fit of Observed Dependent variable and Estimated dependent variable -10 -5 0 5 10 15 20 25 1 3 5 7 9 11 13 15 17 19 21 23 25 Actual Rrgdp PredictedRrgdp
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