Industrialisation and economic growth

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

Industrialisation and economic growth in Nigeria by Oluwarotimi John Ogundele (2010) 1

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DEDICATION

To God Almighty; who is the Repository of knowledge.


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


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


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


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.


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:


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.


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.


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


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


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


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


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


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.


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


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.


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


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


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.


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.


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


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 = AKαL1-αKβ (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+βL1-α (2.6)


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


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


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.


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.


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


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.


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


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


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


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.


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


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.


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


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.


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


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.


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.


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.


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).


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


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


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/Removedb

Model Variables Entered Variables Removed Method

1 Ragr, Rlab, Rmin, Rman, Rcap

a . Enter

a. All requested variables entered. b. Dependent Variable: Rrgdp

Model Summaryb

Model R R Square Adjusted R Square

Std. Error of the

Estimate D.W

1 .921a .848 .810 2.52052 1.892

a. Predictors: (Constant), Ragr, Rlab, Rmin, Rman, Rcap

b. Dependent Variable: Rrgdp


ANOVAb

Model Sum of Squares df Mean Square F Sig.

1 Regression 708.620 5 141.724 22.308 .000a

Residual 127.060 20 6.353

Total 835.680 25

a. Predictors: (Constant), Ragr, Rlab, Rmin, Rman, Rcap

b. Dependent Variable: Rrgdp

Coefficientsa

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 Correlationsa


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 Statisticsa

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


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

Predicted Rrgdp


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