IMPACT OF INDUSTRIALISATION ON ECONOMIC GROWTH IN NIGERIA

224 50 Years of Nigeria s Nationhood: Issues and Challenges for Sustainable Development CHAPTER ELEVEN IMPACT OF INDUSTRIALISATION ON ECONOMIC GROWTH IN NIGERIA Usman R Dan and Lazarus Zungwe Wanjuu INTRODUCTION Countries develop their industrial sectors because of many reasons. Industries have more backward and forward linkages to the other sectors of an economy. They exhibit increasing returns to scale and their ability to diffuse technology in the economy is wider than the primary sector. Industries are very important in a developing country like Nigeria because their marginal revenue products of labour are higher than the marginal revenue product of labour in the agricultural sector. Thus, the releasing of labour force from agricultural sector to the industrial sector increases the marginal product of labour in the agricultural sector and increases the overall revenue and output of the society (economic-growth). Therefore, industrialisation is a sin qua non for sustainable economic growth in Nigeria and it is what the present regime needs to achieve its transformation agenda. Most of the studies on industrialisation and economic growth in Nigeria lack empirical content. This study is carried out to fill in this vacuum. It is in this light that this study is carried out. The tendency of the industrial sector to stimulate more economic growth has prompted many economists to formulate

Impact of Industrialisation on Economic Growth in Nigeria 225 theories to encourage industrialisation. Famous among the early theories formulated are: Leibenstein s (1957) theory of critical minimum effort thesis; Nelson s (1956) theory of low equilibrium trap; Rosenstein Rodan s (1943) theory of the big push; the doctrine of balance growth; Hischman s (1958) doctrine of unbalance growth; the import substitution strategy; and export promotion strategy. Overtime, the influences of these theories on policy decisions have been varied. The first three of the theories emphasize market constraint as a main barrier to industrialisation and advocated state intervention to help minimize this constraint through massive investment of resources. The middle two acknowledges market constraint but advocated piecemeal approach to minimising the market constraint. The last two theories also identified market constraint as the main factor impinging industrial growth in developing countries and advocated the taping of existing domestic market and external market in tackling the constraint to industrialisation. Policies of the first theory were applied by the erstwhile USSR, China and countries in Eastern European to develop through huge investment in public resources; while the last method was first applied by Japan, later by the Asian Tigers and more recently by the Newly Industrialised Countries: Malaysia, South Africa, Indonesia, etc. (Clunies-Ross, fosyth and Huq, 2010). To examine the impact of industrialisation in Nigeria, the study hypothesis that industrialisation does not stimulate economic growth in Nigeria. To carry out this analysis, the study introduces the subject of the study, giving the study s background in section one. The rest of the work is classified into section two, i.e. review and theoretical framework; section three summarises the research methodology used; section four presents estimated results and analyzes the results; and finally section five concludes the study and gives policy recommendations. THEORETICAL FRAMEWORK AND LITERATURE REVIEW The theoretical framework used in this study is based on aggregate production function based on endogenous growth

226 50 Years of Nigeria s Nationhood: Issues and Challenges for Sustainable Development model developed by Jones and Manuelli (1990) which avoid diminishing returns to capital. The model is presented as follows: y= f(k, l) 1 Where: y is per capital output; k is capital industrial output ratio; and l is labour industrial output ratio. The aggregate production function has constant average and marginal product of capital and it does not exhibits convergence property (Barro and Sala-i-Martin, 2004). The term industrial growth or more simply industrialisation has two distinct meanings. It can be conceived as a shift in a country s pattern of output and work force towards manufacturing or secondary industry (Clunies- Ross et al., 2010). It can also be defined in terms of income levels reaching a certain threshold. It is on the basis of this that countries are classified into, low-income; lower middle income, higher middle income, lower upper income, higher upper income and high-income countries. This is a broader dimension of industrialisation. In a work of this nature, it is conventional to use the first definition above. It is against this background that Sullivan and Sheffin (2003) define industrialisation as the process of societal and economic change that transforms a human group from agrarian to industrial one. In their view, industries bring about change in three ways: modernisation, development of large scale energy and metallurgy production. These aspects are closely link with economy growth. They also assert that industrialisation bring with it the sociological process of rationalisation. Economic growth has been conceived as increase in per capital income over a period of time (Clunies Ross, et al., 2010; Jhingan, 2005). Abbott (2003) considers the following as key positive factor stimulating industrialisation: good governance, good legal frame work, availability of natural resource, relative low cost skilled labour, and technology. Overtime, various strategies have been used to promote industrial growth. These are balanced growth, unbalanced growth, import substitution and export promotion. Under

Impact of Industrialisation on Economic Growth in Nigeria 227 balanced growth strategy, attempts are made to ensure that the growth in investment expand at the same rate with the market in terms of purchasing power. To make sure that firms have enough market, it is advocated that enough investments should be made in all sectors at the same time. In unbalanced growth model, attempts are made to ensure imbalances in the economy. The imbalances are deliberately created to create opportunities for investment for the private sector to stimulate investment and industrialisation. Both balance growth and unbalance growth could not create enough opportunity for industrialisation to take place. There were no enough opportunities for business forms to mass produce and enjoy economies of scale. To overcome this problem, the strategies of import substitution and export promotion became handy. In import substitution, firms produce and sell in domestic economy goods which were earlier imported. The advantage of this strategy is that there is an existing market outlet for the goods produced. The problem with the method is that since the firms produce for domestic market, they do not prepare for market competition and so they are not efficient and so they are at disadvantage when in competition with foreign companies. They, therefore, rely on state protection. A variant of the above strategy is export orientation. In this strategy, goods are produced for sale in foreign countries. This method is aimed at competing with foreign made goods; it produces at efficient and cost efficient manner. It is the method used by Japan, the Asian Tigers, and more recently, Malaysia, Indonesia, China, South Africa, Turkey, Philippines, Mexico, Costa- Rica and Elsalvador. In support of this approach, Clunies-Ross, et al., (2010) said that the world had a lot of opportunities for developing countries. The world presented a huge potential market for simple, fairly, standardised manufactures, such as textile and clothing. The price elasticity of demand for all these goods is high. If a low income country can produce these goods at reasonable low price, it can have a huge market at its disposal. Bolaky (2011) summarizes most of the empirical and theoretical arguments in favour of industrialisation. He posits that

228 50 Years of Nigeria s Nationhood: Issues and Challenges for Sustainable Development there is a positive correlation between the level of industrialisation and per capita income for developing countries. Empirical evidences demonstrate that there is higher marginal product of labour from industrial sector than in agricultural sector and so the transferring of resources from agricultural sector to the industrial sector raises total productivity in the economy. There are studies relating to industrialisation and economic growth. Blomstrom, Lipsey and Zegan (1994) posit that industrialisation through foreign investors can exert a positive effect on economic growth rate. They argued that industrialisation s contribution to economic growth rate is dependent on the threshold level of income. This means that, below the threshold level of income, the contribution of industries to economic growth is not significant and above the threshold, it is significant. The explanation is that, it is only countries that have reached a certain income level that can benefit effectively from the packages of those industries and foreign investors. Such packages are new technologies, human capital development and managerial skills. Borensztein, DeGregoria and Lee (1998) carry out a study using panel data of 69 developing countries over a period of two decades 1970 1989, investigating the impact of industrialisation on economic growth. They used a basic estimating equation of growth with real GDP as a dependent variable and foreign investment, measure of schooling and initial GDP as their independent variables. They find that industrialisation has positive impact on growth but this is only realised when their measure of schooling is above a certain critical level, which is estimated at 0.52. Below this critical level or threshold, industrialisation and foreign investment exert a negative impact on growth, thus confirming the complementarily of industrialisation, foreign investment and human capital development. Shafaeddin (2005) analyses economic performance of a sample of developing countries that have undertaken economic reforms since the early 1980s with the objective of expanding exports and diversification in favour of manufacturing sector. The

Impact of Industrialisation on Economic Growth in Nigeria 229 results obtained were much varied. Forty per cent of the sample economies experienced very rapid expansion of exports of manufactured goods. In a minority of these countries, mostly East Asian, rapid export growth was also accompanied with fast expansion of industrial supply capacity and upgrading. In contrast, the experience of the majority of the sample countries, most of them in Africa and Latin America, has not been satisfactory. In fact, half of the sample countries have faced deindustrialisation. Slow growth of exports and de-industrialisation has also been accompanied by increased vulnerability of the economy, particularly the manufacturing sector, to external factors particularly as far as reliance on imports is concerned. A number of industries which had been dynamic during the import substitution era continued, however, to be dynamic in terms of production, exports and investment. The industries which were near maturity when the reform started, such as aerospace in Brazil, benefited from liberalisation as the competitive pressure that emerged made them more efficient. Shafaedddin argues that trade liberalisation is essential when an industry reaches a certain level of maturity, as long as it is done selectively and gradually. If it is done based on western world consensus, it is more likely to lead to the destruction of the existing industries, particularly of those that are at their early stages of infancy without necessarily leading to the emergence of new ones. Furthermore, any new industry that comes up would be in line with static, rather than dynamic, comparative advantage. The low income countries will be locked in production and exports of primary products, simple processing and at best assembly operation or other labour intensive ones with little prospect for upgrading. Dodzin and Vamvakidis (2004) examine the impact of international trade on the allocation of production resources across sectors in developing economies. Estimates from a panel of 92 developing countries in the period 1960 2000 suggest that an increase in openness to trade leads to an increase in the industrial value added share of production, at the expense of the agricultural share. Therefore, trade leads developing countries to

230 50 Years of Nigeria s Nationhood: Issues and Challenges for Sustainable Development industrialisation, in contrast to what the infant industry argument would imply. Abiola (2010) examines the relationship between saving and investment and between investment and economic growths in Nigeria using time series data for the period of 1975-2007. The method of analysis involved ordinary regression analysis and the result demonstrates that saving stimulates investments and that investment stimulates economic growth in Nigeria in the period of the study. Kaya (2010) investigates the effect of the latest wave of economic globalisation on manufacturing employment in developing countries. The study is concerned with classic debate on the benefits of industrialisation and how this affects developing countries. The study uses a comprehensive dataset on 64 developing countries from 1980-2003. The results generally demonstrate that manufacturing employment increased in most developing countries. First, this study finds that the level of economic development measured by GDP per capita is the most important factor influencing the size of manufacturing employment. Second, economic globalisation also influences manufacturing employment in developing countries, but mainly through trade. The sizes of exports and low-technology exports have a significant positive effect on manufacturing employment in developing countries. Finally, the analysis provides limited argument for world systems/dependency theories. Raw materials exports do not significantly increase manufacturing employment while foreign direct investment has a negative impact in some models. This study concludes that the latest wave of economic globalisation contributes to the increase in manufacturing employment in developing countries, although it is not the most significant factor shaping the size of manufacturing employment in these countries. METHODOLOGY The data used for this study was obtained from the Central Bank of Nigeria (CBN) Statistical Bulletin (2010) and from the UNCTAD

Impact of Industrialisation on Economic Growth in Nigeria 231 (2011) Statistics database online. The primary variables of interest are GDP, industrial output and industrial capital sourced from CBN and population and labour force sourced from UNCTAD. The estimation of how industrial output affects economic growth is performed with macroeconomic variables of capitalindustrial output ratio and labour-industrial output ratio as explanatory variables and per capita output as explained variable. To avoid the problem of spurious regression, unit root test was first conducted to ascertain whether the series are stationary or not. The augmented Dickey-Fuller (ADF) test of stationality was used, and it is estimated as: ΔY t = α + δt +ρy t-1 + t ΔY t-i + Ut 2 Where: Δ is the first difference of the series Y; i is the lag order; t is the time period. The Johanson test is used to establish VAR model which can be defined by the following vector error correction (VEC) model: k 1 ΔY t-1 = г 0 + г 1 ΔY t 1 + г 2 ΔY t-2 +... + г k ΔY t-k + πy t-k + βz t + e t 3 Where: Δ is the first difference operator; Y t is a p 1 vector of trending variables. Г 0 is the deterministic part of the VAR model; Z t is a dummy variable that takes the value zero when there is peace and 1 when there is war; Π is the coefficient of the error term; and e t is the random error term. The study employed the following model in studying the relationship between economic growth and industrial output in Nigeria. Per capita Output = β 0 + β 1 Per capita Output t-1 + β 2 Capital/Industrial output t-1 + β 3 Capital/Industrial Output t-2 + β 4 Labour t/ Industrial Output + β 5 ecm+ u t 4 The a priori assumptions of the model are: β 0, β 1, β 2, β 3, β 4 >0; and β 5 is less than or greater than 0

232 50 Years of Nigeria s Nationhood: Issues and Challenges for Sustainable Development RESULTS The results of this study are presented in three tables: Table 11.1 shows unit root test using Augmented Dickey-Fuller ADF test; Table 11.2 shows co-integration test using Johansen test; and Table 4.3 shows the VEC model of regression result. These tests were carried out using E-Views Version 4.0. Table 11.1 Unit Root Test Based on ADF Variable At level with intercept and trend At first difference with intercept and trend y=gdp/population -2.230464-5.075787** K=KAP/INQ 1.071955-4.887689** l=labour/inq -4.727472** Note: ** Significant at 1% (and 5%) level of significance. The ADF unit root test shows that for two of the variables, the null hypothesis of no unit root in the data has been rejected; and the two variables are stationary after first differencing. The third variable is stationary at level value. It is also important to test for cointegration to find out if there is a long run relationship among the three variables. Table 11.2: Johanson Cointegration Test (Using Trace statistic) Null Hypothesis Alternative Hypothesis Maximum Eigen Statistic 5% critical Value Trace Statistic г=0 г=1 61.84228 29.68 35.65** г=1 г=2 31.52383 15.41 20.04** г=2 г=3 10.48346 3.76 6.65** Note: ** denotes rejection of null hypothesis 1% level of significance.

Impact of Industrialisation on Economic Growth in Nigeria 233 From the above co-integration result, the null hypothesis has been rejected in respect to the three variables. We concluded that there is co-integrating vector in the three variables. The rejection of the null hypothesis implies that we have to apply vector error correction (VEC) model in establishing the relationship among the variable. Table 11.3: Normalised Co-efficient of First Co-integrating Vector Variable Coefficient Standard T-Statistic Errors CONSTANT 748.185 100.346 7.456 CAPITAL/IND.OUPUT t-1-0.7115 0.0912-7.8006 PER CAPITAL OUTPUT t-2 0.0949 0.1042 0.910 CAPITAL/IND.OUPUT t-2 244.041 727.94 0.3352 LABOUR / IND.OUTPUT t -258678 35445-7.2979 Ecm 0.7115 0.912-7.801 Adjust R 2 = 0.622; AIC = -14.337; SIC = -14.64 The above VEC model was specified after having used overpersimonous model and observing the outcome. The result shows that capital-industrial output ratio decreases per capita GDP; the labour /industrial output ratio also contributes negatively to per capita GDP. This can be interpreted as meaning the human capital and income levels have not reach the threshold to make industries contribute reasonably to economic growth. This finding is in line with the findings of Blomstrom, Lipsey and Zegan (1994) and Borenstein, DeGregoria and Lee (1998). CONCLUSION AND RECOMMENDATIONS The main finding of this study is that industrialisation has a negative impact on economic growth in Nigeria. The policy implication is that policy measures should be put in place to improve human capital development so as to make people capable of using modern technology and to diffuse it in the

234 50 Years of Nigeria s Nationhood: Issues and Challenges for Sustainable Development society. This will go a long way to help not only in improving industrial output but improve the overall productivity of all the sectors and ensure sustainable development. To achieve this, government should create a good environment for industrial growth through: - Provision of good governance mechanism and a good legal framework to protect property rights. - Improve the judicial and the security system to minimise the crime rate terrorism in the country. - Improve on social and economic infrastructure, especially electricity supply and the transport system and good and functional education. This can reduce the cost of production, improve diffusion of technology and make Nigerian manufacturers more competitive

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