THE IMPACT OF INDUSTRIALIZATION ON ECONOMIC GROWTH IN NIGERIA
The objective of this study is to analyze the impact of industrialization on economic growth in Nigeria. Because of the link between industrialization and economic growth, both theoretical and econometric analysis are used to examine the contribution of industrialization to economic growth in Nigeria, using GDP as the dependent variable and industrial output, labour force, capital stock and human capital as independent variables from 1980-2010. The results show that industrial output, capital stock, significantly contribute to economic growth while human capital and labour force do not contribute significantly to economic growth. The detailed results are: in industrial output, an increase in industrial output by 1 unit increases GDP by 2 folds; an increase in capital stock increases GDP by over 100 folds; an increase in human capital does not stimulate increase in GDP because the t-statistic is insignificant; and in labour supply, the same remark on human capital applies. On the whole, the adjusted R2value shows that the explanatory power of the model is as high as 92%. The study recommends that government should develop policy measures to improve formal education that will produce graduates relevant for industrial needs of the country, improve legal frame works to protect human right, and property rights, and improvement on social and economic infrastructure to make the industrial sector competitive.
KEY WORDS: INDUSTRIALIZATION AND ECONOMIC GROWTH.
THE IMPACT OF INDUSTRIALIZATION ON ECONOMIC GROWTH IN NIGERIA
SECTION ONE: INTRODUCTION
1.1 Background to the Study
Industrialization has been regarded as a veritable channel of achieving lofty and desirable goals of improved technology and improved quality of lives of the citizens of the country. Countries develop their industrial sectors for many reasons: (i) industries have more backward and forward linkages to the other sectors of an economy; (ii) they exhibit increasing returns to scale; and (iii) they have the ability to diffuse technology in the economy wider than the primary sector. According to Bolaky (2011), industriesare very essential in a developing country like Nigeria because the marginal revenue products of labour in the industrial sector are higher than the marginal revenue product of labour in the agricultural sector. Based on this, 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 and hence contributes to economic-growth. Therefore, industrialization is an ideal policy option for sustainable economic growth in Nigeria and it is what the present regime needs to achieve its transformation agenda.
Based on the above, Nigeria has designed policies to attract manufacturing and industrial activities during the colonial and postcolonial periods. In the jcolonial era, the focus was to extract rawmaterials from Nigeria to foreign based industries. Like the rest of African countries, the colonial government in Nigeriawas interested in extracting raw materials for its industries at home. For this reason no conscious efforts was made to industrialize Nigeria. It used to be argued that countries should specialize in areas of production that they are best suited. Between the periphery and the centre, the centre had more advantage in industrial output and the periphery in raw materials ( Jhingan, 2008).
In the post-Independence Nigeria, the indigenous government that emerged was very ambitious not only to industrialize, but also to ensure indigenous participation. This led to the emergence of Indigenization policy along with Import substitution strategies. Nigeria had practiced this from 1960s to the early 1980s. It was noticed that the twin policies of import substitution and indigenization could not yield the expected industrialization in Nigeria. Two main problems were encountered here. One, the Nigerian citizens to whom import substitution and indigenization policies favour lack the financial capacity, the technical knowhow, the entrepreneurial ability and the managerial acumen.Second, import substitution necessarily entails inefficiency of local industries because they are not established to face foreign completion and so were over protected. To industrialize, it became necessary to abandon these twin policies.
In 1985, Nigeria adopted the Structural Adjustment Programme (SAP) that was supposed to restructure the Nigerian economy, encourage both local and international investors to invest in Nigerian economy. The implementations of the policy, rather than improving the Nigerian economic performance, worsen the situation, leading to under capacity utilization of the economy.
SAP was finally abandoned in the 1990s for private sector to take the leading role in the manufacturing and the industrial sectors of the economy.Government has agreed to take up boosting local technology expertise and promoting small scale industries. It is not yet clear how government intends to improve local technology and encourage small and medium scale industries for stimulating industrial growth in Nigeria.
Now that the Nigerian government has decided to play the role of motivating industries through provision of infrastructure and improving the environment where businesses are done, it is not clear how this can affect industrial growth in Nigeria. After one and a half decades, there seems to be no remarkable improvement but rather industries have folded up without new ones coming up. What is the way forward?
1.2 The Statement of the Problem
The tendency of the industrial sector to stimulate more economic growth has prompted many economists to formulate theories to encourage industrialization. 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 these theories(the theory of critical minimum effort thesis, the theory of low equilibrium trap and the theory of the big push) emphasize market constraint as a main barrier to industrialization and advocated state intervention to help minimize this constraint through massive investment of resources. The middle two (the doctrines of balance growth and unbalance growth) acknowledge market constraint but advocated piecemeal approach to minimizing the market constraint. The last two theories (import substitution strategy and export promotion strategy) 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 industrialization.
Policies of the first theory (the theory of critical minimum effort thesis) were applied by the erstwhile USSR, Chinaand countries in Eastern European to develop through huge investment in public resources; while the last method (the export promotion strategy) was first applied by Japan, later by the Asian Tigers (Singapore, Hong kong, South Korea and Taiwan) and more recently by the Newly Industrialized Countries: Malaysia, South Africa, Indonesia, etc. (Clunies-Ross, fosyth and Huq, 2010).
Given the above scenario, can we say that the present levels of industrialization efforts in Nigeria have contributed in stimulating economic growth in Nigeria? What are the impact of labour force, capital stock, and human capital on Nigeria economic growth? These are the questions this study is supposed to address.
1.3 Research Questions
This study is designed to answer the following questions:
- Has industrial growth in Nigeria stimulate economic growth in the country?
- What is the impact of human capital development on economic growth in Nigerian economy?
- Has labour input contributed to economic growth in Nigeria? And
- Does capital stock influence economic growth in Nigeria?
1.4 Statements of Research Objectives
The broad objective of the study is assessing the impact of industrialization on economic growth in Nigeria. The specific objectives of the study are:
To examine the impact of industrialization on economic growth in Nigeria;
To assess the impact of human capital on economic growth in Nigeria;
To highlight the impact of labour force on economic growth in Nigeria; and
To highlightthe effects of capital stock on economic growth in Nigeria.
1.5 Significance of the Study
The study in the area of impact of industrialization on economic growth in Nigeria is the area has scanty empirical works (Usman and Wanjuu, 2011). This work is designed to fill the vacuum that exists in this area. In the above cited study, the study lays emphasis on the relationships between industrial output, labour, capital stock, on one hand, and the level of output on the other hand.
Our study attempts to relate industrial output, labour capital stock and human capital to the level of output in Nigeria. Previous studies have not included the human capital element in estimating the relationship between industrial output and economic growth in Nigeria. So this study is an improvement over the previous works.
Another area of improvement is the specification of the equation. In the work of Usman and Wnajuu (2011), for instance, the level industrial output as a proportion of the GDP value was expressed in terms of output per worker. As observed by Ghali (1997), Where output is expressed as a proportion of the GDP, the result of the regression analysis is always negative, a sort of misspecification of the model. This study corrects these defects by specifying the industrial output in their absolute terms, as independent variable to the GDP.
1.6 Statement of Hypotheses
The null hypotheses formulated to guide this study are:
i: Industrial output does not contribute to economic in Nigeria;
ii: Human capital has no impact on economic growth in Nigeria;
iii: Capital stock does not contribute to economic growth in Nigeria;
iv: Labour force does not contribute to economic growth in Nigeria;
1.7 Scope and Limitations of the Study
The scope of the study is to assess the impact of industrialization on the Nigerian economy. The study also assesses the impact of capital stock, human capital, and labour force on economic growth in Nigeria. The limitations of the study are:
The period selected to be used for the investigation covers the period of 1980-2010; and
The variables used to carry out the study are restricted to industrial output, labour force, capital stock and human capital.
SECTION TWO: Reviewof RelatedLiterature.
This section is classified into three sections: the theoretical literature review; the empirical literature review and Theoretical Framework.
2.1 Theoretical Literature Review.
The term industrial growth or more simply industrialization is used in two distinct perspectives. It can be used to mean 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 used to mean income levels reaching a certain threshold. It is on the basis of this latter meaning 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, therefore, a broader dimension of industrialization.
In this work, we adopt the first definition above. It is based on this background that Sullivan and Sheffin (2003) define industrialization 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: modernization, development of large scale energy and metallurgy production. These aspects are closely linked with economic growth. They also assert that industrialization brings with it the sociological process of rationalization.
Economic growth has been defined as the expansion of a country’s potential national output or potential real GNP; the expansion of economic power to produce and more technically, as the outward shift in the production possibility frontier over time (Ukwu, 2004). Similarly, (Clunies – Ross,Foresyth, and Huq), 2010; Jhingan, 2005) defined economic growth as the increase in per capital income over a period of time (Clunies –Ross, et al., 2010; Jhingan, 2005). Abbott (2003) considers the following factors as key positive factors stimulating industrialization: good governance, good legal frame work, availability of natural resource, relative low cost skilled labour, and technology.
Overtime, various strategies have been used as means of promoting industrial growth. These are identified as balanced growth, unbalanced growth, import substitution and export promotion. Under balanced growth strategy, attempts are made to ensure that the growth in investment increases 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 have to be made in all sectors at the same time.
In unbalanced growth model, attempts are made to bring imbalances in the economy. The imbalances are deliberately made to create opportunities for investment for the private sector to stimulate investment and industrialization.
Both balance growth and unbalance growth could not create enough opportunity for industrialization to take place. There were no enough opportunities for business firms 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, fairlystandardised 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.
2.2 Empirical Literature Review
Bolaky (2011) summarizes most of the empirical and theoretical arguments in favour of industrialization. He points out that there is a positive correlation between the level of industrialization 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 industrialization and economic growth. Blomstrom, Lipsey and Zegan (1994) point out that industrialization through foreign investors can exert a positive effect on economic growth rate. They argue that industrialization’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 industrialization 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 industrialization has positive impact on growth but this is only realized when their measure of schooling is above a certain critical level, which is estimated at 0.52. Below this critical level or threshold, industrialization and foreign investment exert a negative impact on growth, thus confirming the complementarily of industrialization, foreign investment and human capital development.
Shafaedin (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 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 de-industrialization. Slow growth of exports and de-industrialization 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 liberalization as the competitive pressure that emerged made them more efficient.
Shafaedddin argues that trade liberalization 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.
The role of restructuring to stimulate industrialization on Nigeria was studied by Adeoye (2005). Using historical data for the period of 1970-2002, the study demonstrate that the various restructuring exercises have not help in promoting the industrial sector in Nigeria. On the contrary, the data available, points to de-industrialization as the industrial sector seems to be on the decline.
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 industrialization, 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 globalization on manufacturing employment in developing countries. The study is concerned with classic debate on the benefits of industrialization 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 globalization 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 globalization 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.