INDUSTRIAL SECTOR GROWTH AND ECONOMIC PERFOMANCE IN NIGERIA

ABSTRACT

 

This research work set out to investigate industrial sector growth and economic performance in Nigeria. The study employed multiple regression models and Granger causality model using secondary data from 1981 to 2015. Results show that the coefficient of crude petroleum and natural gas, solid mineral variables and manufacturing sub-sector growth are positive and statistically significant. From the Granger causality result, bidirectional causality does not exist between economic growth and industrial sector performance in Nigeria. However, there is a unidirectional causal relationship between industrial sector performance and economic growth at lag 4 and lag 6. However, there is no significant structural break in economic growth especially between military and democratic rules in Nigeria. Also, the Engle-Granger cointegration suggests that there is a long-run relationship. Also, the ECM result suggests that about 15% of the short-run disequilibrium in the model would be corrected in the next period. The study concludes that industrial sector growth is a significant factor affecting economic growth in Nigeria and recommends that industrial sector growth should be boosted by appropriate package of incentive to induce entrepreneurs and investors to undertake profitable investment particularly for export oriented industries.

 

 

 

 

 

 

 

 

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

The critical role of the industrial sector is predicated on the fact that it acts as an engine of growth bybroadening the productive and export base of the economy, reducing unemployment and stemming rural-urbandrift as well as helping to reduce poverty, (Umoro and Eborieme, 2013). Nigeria is an open economy. Accordingly, developments ininternational circles have profound implications on the path the country is going in terms of the development ofher industrial sector. It has been the goal of trading with countries to obtain improved and more secureaccess to markets abroad. This is intended to provide the country with the opportunity to explore economies ofscale beyond the limit of the domestic market and facilitate access to foreign exchange with which to financecritical imports needed for development (Adenikinju 2002). It is true that trade and trade policies are importantdeterminants of economic performance. International trade offers opportunities for greater specialization,increased capacity utilization and import of goods and services. Within the Nigerian context, there has been aconsiderable amount of discussion on the inter-relationship between trade policy reforms, economic performanceand industrial growth.

In the development literature, industrialization has been accepted as the major driving force of the modern economy. In most modern economies, industrial sector serves as the vehicle for the production of goods and services, the generation of employment and the enhancement of incomes. Hence, Kayode (1989) described industry and in particular the manufacturing sub-sector, as the heart of the economy.

In the light of the above, Nigeria has employed several strategies which were aimed at enhancing the productivity of the sector in order to bring about economic growth and development. For instance, the country adopted the import substitution industrialization strategy during the First National Development Plan (1962-1968) which aimed at reducing the volume of imports of finished goods and encouraging foreign exchange savings by producing locally, some of the imported consumer goods (CBN, 2003). The country consolidated her import substitution industrialization strategy during Second National Development Plan period (1970-74) which actually fell within oil boom era. At this time, manufacturing activities were so organized to depend on imported inputs because of the weak technological base of the economy. However, as a result of the collapse of the world oil market in the early 1980s, there was a severe reduction in the earnings from oil exports. Consequently, the import-dependent industrial structure that had emerged became unsustainable owing to the paucity of earnings from oil exports which could not adequately pay for the huge import bills.

Various policy measures were adopted to ameliorate the above situation, such as the stabilization measures of 1982, the restrictive monetary policy and stringent exchange control measures of 1984, all proved abortive. This led to the introduction of the Structural Adjustment Programme (SAP) in 1986 (CBN, 2003). One of the main reasons for the introduction of SAP was to reduce the high dependence of the economy on crude oil as the major foreign earner, by promoting non-oil exports, particularly manufactured goods. But the contribution of the manufacturing sub-sector to GDP has declined steadily, due to a number of factors. As a result, government introduced many other economic policies. Despite these efforts of the government, the performance of the industrial sector is still not clear. The study therefore seeks to determine the industrial performance in Nigeria for sustainable economic development.

The realization that industrialization is a sine qua non in a nation’s desire to achieve the degreeof self-reliance which can guarantee the stability needed for economic development hasattracted the interest of governments to laying a solid foundation for the development of theindustrial sector. However, to ensure that industrialization leads to beneficial economic andsocial development, industrial growth has to be regulated and guided through appropriatepolicies. Towards this end, Nigeria since independence has adopted a number of strategies ofindustrialization in her development efforts. Some of these strategies include ImportSubstitution Strategy, Export Promotion Strategy and Local resource-based Strategy. Inpursuance of these objectives, the government has initiated a number of incentives aimed atpositively influencing the performance and productivity of the industrial sector. Some of theseincentives include tax holidays, tariff protection, import duty relief, total ban on certain foreigngoods, provision of accelerated depreciation allowance, direct government participation, exportincentives, approved user scheme, establishment of special industrial development financialinstitutions, building of industrial estates (export processing zones) and Industrial RawMaterial Research and Development Council (IRMRDC) (Egbon 1995, Egwaikhide, 1997; Ayodele, and Falokun, 2003; Udah, 2010). From the above it is glaring that Nigeria’s quest to become self-reliant and an industrialized economy has resulted to the adoption of liberationpolicies over the years towards opening it to industrialized world. It is therefore imperative toexamine economic liberalization policy implemented in 1986 through the adoption of thestructural adjustment programme and the successive reforms aimed at further liberalizing theeconomy. With the liberalization policy, it is expected that Nigerian economy would be furtheropen to the rest of the world with the attendant economic growth. But the reverse is the case asthe country is still faced with epileptic power supply, low manufacturing capacity utilisation,infinitesimal marginal productivity in the agricultural sector and monumental infrastructuraldecay. More importantly this precarious situation has been in the face of increasing indexes ofaggregate industrial production, manufacturing production and mining production. Forinstance, the index of manufacturing production for the period 1970Q1-1986Q2 increased onthe average by more than double from 42.8 percent to 89.31percent. While the indexes ofmining production and industrial aggregate grew marginally from 102.08 percent and 100.41percent to 116.36 percent and 107.24 percent respectively, that of electricity grew by more thandouble from 49.42 percent to 137.54 percent (CBN 2007;2012). Also, the growth of sectoralGDP shows that the industrial sector recorded negative growth of -3.4 in 2008 and increaseddramatically to 5.6 percent in 2010. Thereafter, it declined such that by 2012 its growth was only 1.2 percent in comparison to the agricultural sector which grew at the rate of 6.3 per centin 2008 and an average of 5.7 percent between 2009 and 2011 (CBN 2012). The abovedevelopments have been in the presence of liberalized financial sector and external trade;increased capital accumulation and foreign private investments and importantly, increasedefforts by government to further liberalize the economy thus raising puzzles.

 

The Nigerian economy has had a truncated history. In the period 1960-70, the Gross Domestic Product (GDP) recorded 3.1 per cent growth annually. During the oil boom era, roughly 1970-78, GDP grew positively by 6.2 per cent annually – a remarkable growth. However, in the 1980s, GDP had negative growth rates. In the period 1988-1997 which constitutes the period of structural adjustment and economic liberalisation, the GDP responded to economic adjustment policies and grew at a positive rate of 4.0. In the years after independence, industry and manufacturing sectors had positive growth rates except for the period 1980-1988 where industry and manufacturing grew negatively by – 3.2 per cent and – 2.9 per cent respectively. The growth of agriculture for the periods 1960-70 and 1970-78 was unsatisfactory. In the early 1960s, the agricultural sector suffered from low commodity prices while the oil boom contributed to the negative growth of agriculture in the 1970s. The boom in the oil sector lured labour away from the rural sector to urban centres (Ekpo and Umoh, 2016).

The contribution of agriculture to GDP which was 63 percent in 1960, declined to 34 per cent in 1988.Not because the industrial sector increased its share but due to neglect of the agricultural sector. It was therefore not surprising that by 1975, the economy had become a net importer of basic food items. The apparent increase in industry and manufacturing from 1978 to 1988, was due to activities in the mining sub-sector, especially petroleum. Capital formation in the economy has not been satisfactory. Gross domestic investment as a percentage of GDP, which was 16.3 per cent and 22.8 per cent in the periods 1965-73 and 1973-80 respectively, decreased to almost 14 per cent in 1980-88 and increased to 18.2 per cent in 1991-98. Gross National Saving has been low and consists mostly of public savings especially during the period 1973-80. The current account balances before official transfers are negative for 1965-73,1980-88 and 1991-98.

The economy never experienced double-digit inflation during the 1960s. By 1976, however, the inflation rate stood at 23 per cent. It decreased to 11.8 per cent in 1979 and jumped to 41 percent and 72.8 per cent in 1989 and 1995, respectively. By 1998, the inflation rate had, however, reduced to 9.5 per cent from 29.0 per cent in 1996.

Unemployment rates averaged almost 5 per cent for the period 1976-1998. However, the statistics especially on unemployment, must be interpreted with caution. Most job seekers do not use the labour exchanges, apart from the inherent distortions in the country’s labour market. Based on some basic indicators, it appears that the economy performed well during the years immediately after independence and into the oil boom years. However, in the 1980s the economy was in a recession. The on-going economic reform programme is an attempt to put the economy on a recovery path with minimal inflation.

 

1.2 Statement of the Problem

Successive governments in Nigeria, since independence have been quite consistent, at least in theory, through anexpression in annual budgets, in pursuance of an industrial policy that aims at ensuring economic growth anddevelopment. Beginning from the import substitution industrialization [ISI] policy of the immediate post-independent era to the policy of the development of export-oriented industries in the 1980s, the momentum hasnot subsided at the policy development level. Despite the implementation of four development plans from 1962-

1985, as well as rolling plans that came with the Structural Adjustment Programme [SAP] in 1986, through the1990s, the industrial sector of the Nigeria economy has not been transformed to reflect the objective of the sector.It still requires a radical structural transformation from its current role of mere assembling of importedcomponents to an integrated industry with the domestic economy as its base and propeller.

Some theories believed that increasing governmentexpenditure promotes industrial growth, while some othertheories asserted that increasing government expenditureleads to dwindling economy. It is observed that theprevailing factors are the problems of externalities and market failure, lack of well-developed factors and productsmarkets, worsening terms of trade and domination by themultinationals producing at a decreasing cost which hasa compounding negative impact on domestic industrialperformance. With all these problems besetting theeconomies of the third world countries (Nigeria inclusive),it therefore became topical issue whether marketmechanism alone can perform all the adjustment functionsneeded in the economy. Also, it was discovered fromliterature that most government administrations in Nigeriaembarked on unproductive expenditures which are did notaid industrial growth and economic development. Although, several studies such as Adenikinju and Chete (2002), Udegbunam (2002), Bakare and Fawehinmi (2011), Tamuno and Edoumiekumo, (2012), among others, have examine the relationship between economic liberalization and Nigerian industrial sector based on straight line regression using aggregated variables, none has accounted for the possible structural break that may have occurred as a result of the policy changes in 1986 and thereafter. This study therefore examines the impact of industrial performance on the Nigerian economy as awhole, and the various subsectors of manufacturing, mining and quarrying, and power with the aim of accounting for the possible structural break the 1986 policy shift may have caused. This study provides further insight to how various subsectors of the Nigerian real sector fared before liberalization and what the situation is with liberalization, thus justifying the need for future liberalization policy.

It is onthis basis that the research work identified the following researchquestions:

 

1.3 Research Questions

1. What has been the impact of crude petroleum and natural gas growth on the performance of Nigerian economy?
2. What has been the impact of solid mineral growth on the performance of Nigerian economy?
3. What has been the impact of manufacturing sub-sector growth on the performance of Nigerian economy?
4. Is there any causal link between industrial sector growth and economic growth in Nigeria?
5. Has there been any structural breakin economic growth due to industrial sector performance between 1981 and 2015?

 

1.4 Objectives of the Study

The broad objective of the study is to empiricallyinvestigate the relationship betweenindustrial sector growth and economic performance in Nigeria, while the specific objectives of thestudy are to:

1. Investigate the impact of crude petroleum and natural gas growth on the performance of Nigerian economy.
2. Establish the impact of solid mineral growth on the performance of Nigerian economy.
3. Determine the impact of manufacturing sub-sector growth on the performance of Nigerian economy.
4. To examine whether there is any causal link between industrial sector growth and economic growth in Nigeria.
5. To investigate whether there has been any structural break in economic growth due to industrial sector performance between 1981 and 2015.

 

1.5 Research Hypotheses

Ho₁: Crude petroleum and natural gas growth has no significant impact on the performance of Nigerian economy.

Ho₂: Solid mineral growth has no significant impact on the performance of Nigerian economy.

Ho₃: Manufacturing sub-sector growth has no significant impact on the performance of Nigerian economy.

Ho₄:There is no causal link between industrial sector growth and economic growth in Nigeria.

Ho₅: There has beenno structural break in economic growth due to industrial sector performance between 1981 and 2015.

 

1.6 Scope and Delimitation of the Study

The scope of the study is limited to the period between1981 and 2015. This would enable the study to look at differentaspects of the industrial sector growth and economic growth in Nigeria.

 

1.7 Significance of the Study

Unfortunately, rising government expenditure has nottranslated to meaningful growth and development inNigeria, as Nigeria is still ranked among the poorestcountries in the world. In addition, many Nigerians stillwallow in abject poverty, while more than 50% liveon less than $1US (US dollar) per day. This paper will identify thebasic relationship hindrances between industrial sector growth and economic growth in Nigeria, which will serve as agood information for investors in Nigeria.

This study therefore would provide useful information for government and policy makers especially those involved in formulating policies that will enhance industrial performance in the country. This study contributes to existing literature by analyzing the impact and the interaction between economic liberalization and other variables such as foreign direct investment, financial deepening, degree of openness, gross capital formation, energy consumption and labour force growth have enhance or dampen the performance of the Nigerian industrial sector as a whole, and the manufacturing, mining and querying and power subsectors respectively.

 

1.8 Definition of Terms

Industry is the production of goods or related services within an economy. The major source of revenue of a group or company is the indicator of its relevant industry. When a large group has multiple sources of revenue generation, it is considered to be working in different industries.

Industries can be classified in a variety of ways. At the top level, industry is often classified according to the three-sector theory into sectors: primary or extractive, secondary or manufacturing, and tertiary or services. Some authors add quaternary (knowledge) or even quinary (culture and research) sectors. Over time, the fraction of a society’s industry within each sector changes.

Industries can also be identified by product, such as: construction industry, chemical industry, petroleum industry, automotive industry, electronic industry, meatpacking industry, hospitality industry, food industry, fish industry, software industry, paper industry, entertainment industry, semiconductor industry, cultural industry, and poverty industry.

Industrial may refer to: Industry, a segment of the economy involving the manufacturing and transportation of products.

Economic growth is the increase in the inflation-adjusted market value of the goods and services produced by an economy over time. It is conventionally measured as the percent rate of increase in real gross domestic product, or real GDP. It is an increase in the amount of goods and services produced per head of the population over a period of time.