LAFIA JOURNAL OF ECONOMICS AND MANAGEMENT SCIENCES
Volume 1 Number 1, November 2016
Copyright ©
2016
By Lafia
Journal of Economics and Management Sciences
All right reserved. No part of this book may be
reproduced or transmitted in any form or any means without prior permission in
writing from the copyright owner.
ISSN: 2550-732X
INDUSTRIALIZATION AND ECONOMIC GROWTH IN
NIGERIA
Kida M. I1 and ANGAHAR J.S2
1 Department of Economics, Federal University Lafia
mohammedkida@gmail.com
2Department of Economics, Kwararafa University Wukari,
Taraba State
jacobangahar@gmail.com
Abstract
This study empirically evaluated the impact of
industrialization on economic growth in Nigeria. Because of the link between
industrialization and economic growth, both theoretical and econometric
analysis were used to examine the contribution of industrialization to economic
growth in Nigeria, using GDP as the dependent variable and crude petroleum and
natural gas , manufacturing and solid mineral as independent variables from
1981-2013. The study adopted ordinary least squares (OLS) in formulating the model.
The methods of analysis included, Augmented Dickey-Fuller (ADF) Unit Root test,
Johansen Co-integration test and Error Correction Method (ECM). The results
show that crude petroleum and natural gas, manufacturing and solid mineral,
significantly contribute to economic growth. On power of the model is as high
as 99%. The study recommends that creating a conducive environment to achieve
strong performance of the industrial sector. Sustaining efforts at generating
local materials for infant industries and support the campaign of local
contempt initiative.
Keywords: Industrialization, Manufacturing, Economic Growth,
Crude Petroleum, Solid Minerals.
Introduction
The share of poor
people in the global population has declined during recent decades. According
to Chen and Ravallion (2004), one-third of the population of the world lived in
poverty in 1981, whereas the share was 18 per cent in 2001. The decline is
largely due to rapid economic growth in population- rich countries like China
and India. There are, however, remarkable differences between countries and
between regions in the developing world. Some regions and countries, notably in
East Asia, are rapidly catching up to industrialized countries. Others,
especially in Sub-Saharan Africa, are lagging far behind and the share of poor
people in the population has even increased in some countries. Industrial development had an important role
in the economic growth of countries like China, the Republic of Korea (Korea),
China, and Indonesia. Along with accelerated growth, poverty rates have
declined in these countries. Some countries have managed to achieve growth with
equity, whereas in others inequality has remained high. In this chapter, the
growth stories of seven countries – China, India, Korea, Taiwan, Indonesia,
Mexico and Brazil – are described and discussed. The main emphasis is on
describing their growth processes and strategies, the role of industrial
development, the contribution of a range of policies to growth performance, and
the impact of growth on poverty and income inequality.
According to Bolaky
(2011), industries are 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, 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 President Goodluck Jonathan’s regime needs to
achieve its transformation agenda.
Generally, the
manufacturing sector which plays a catalytic role in a modern economy has many
dynamic benefits crucial for economic transformation is a leading sector in
many aspects. It creates investment capital at a faster rate than any other
sector of the economy. Available evidence showed that the share of
manufacturing value in the Gross Domestic Product (GDP) was 3.2% in 1960. In
1977, its share of GDP increased to 5.4% and in 1992 grew to 13%. The share of
the manufacturing in GDP fell to 6.2 in 1993, while overall manufacturing
capacity utilization rate fluctuated downwards to 2.4% in 1998 (Chete and
Adewuyi, 2004).
A country is
industrialized when at least one-quarter of this Gross Domestic Product(GDP) is
produced in its industrial output arises in the manufacturing section of
industrial sectors, and when at least one length of its total population is
employed in the industrial sectors of the economy.
The manufacturing
sector is to be dominant in terms of contribution to the Gross Domestic Product
of any economy especially that of Nigeria (Ayodele & Falokun, 2003). An
industrial sector that does not contribute at least one-quarter of the
country’s GDP is widely viewed as a major challenge enhancing a country’s
economic growth. Nigerian manufacturing sector is faced with capacity
underutilization and this has posed a threat to the economic growth and
development of the country. (Adewale, 2002).
Based on the above,
Nigeria has designed policies to attract manufacturing and industrial
activities during the colonial and postcolonial periods. In the colonial era,
the focus was to extract raw materials from Nigeria to foreign based
industries. Like the rest of African countries, the colonial government in
Nigeria was 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).
Concept of
industrialization
Industrialization is
the process in which a society or country (or world) transforms itself from a
primarily agricultural society into one based on the manufacturing of goods and
services. Individual manual labor is often replaced by mechanized mass
production and craftsmen are replaced by assembly lines Cap (2002). The process by which traditionally nonindustrial sectors (such as agriculture, education, health) of an economy become increasingly similar to the manufacturing
sector of the economy. Sustained economic
development based on factory production, division of
labour, concentration of industries and population in certain geographical areas, and urbanization. Friedman
(2006)
Concept of
Manufacturing
Manufacturing is the
production of merchandise for
use or sale using labour and machines, tools,
chemical and biological processing, or formulation. The term may refer to a
range of human activity, from handicraft to
high tech, but is most commonly applied to industrial production,
in which raw materials are
transformed into finished
goods on a large scale. Such finished goods may be used for
manufacturing other, more complex products, such as aircraft,
household appliances or
automobiles,
or sold to wholesalers,
who in turn sell them to retailers,
who then sell them to end users and
consumers
Friedman
(2006)
Manufacturing takes
turns under all types of economic systems.
In a free market economy, manufacturing is usually directed toward the mass production of
products for sale to consumers at
a profit. In a collectivist
economy, manufacturing is more frequently directed by the state
to supply a centrally planned economy.
In mixed market economies, manufacturing occurs under some degree of government
regulation. Friedman (2006)
Manufacturing, the
single most important sub-sector of industry, accounts for nearly two-thirds of
industrial GDP. Within manufacturing, the most important sub-sectors are food
processing, basic metallurgy, machinery and equipment, and chemical products. The
production of motor vehicles, aircraft, certain electronic products and
machinery and equipment are world class. Some of these industries are
recipients of generous public incentives (World Trade Organization, 2004).
Concept of
Minerals
A mineral is a
naturally occurring substance, representable by a chemical formula,
that is usually solid and inorganic, and has a crystal structure.
It is different from a rock, which can be an aggregate of minerals or non-minerals
and does not have a specific chemical composition. The exact definition of a mineral is under debate,
especially with respect to the requirement a valid species be abiogenic, and to
a lesser extent with regard to it having an ordered atomic structure.
Theoretical
Framework
Industrial
development is a driver of structural change which is key in the process of
economic development. Megan and Joshua (2013) suggest that economic development
requires structural change from low to high productivity activities and that
the industrial sector is a key engine of growth in the development process.
Virtually all cases of high, rapid, and sustained economic growth in modern
economic development have been associated with industrialization, particularly
growth in manufacturing production (Szirmai 2009). In a 2 sectors analyses: a
small industrialized economy and an agricultural sector. The industrialized
sector is typically located in a few urban pockets and operates, more or less
like any modern industrial economy (modern or urban sector), technologically
advanced. Larger agricultural sector contains primitive modes of production,
vast majority of population are very poor-living at or near subsistence consumption (primitive, traditional, rural
or subsistence sector); low wages, very low productivity close to zero. Workers
in the industrial sector earn higher wages than those in rural sector, wage gap
related to productivity gap. Assumption of duality an analytical convenience.
While developed countries may have traits of dualism, the claim behind the dual
economy literature is that such dualism is much sharper than LDCs
Rostow's
model is one of the more structuralist models
of economic growth, particularly in comparison with the "backwardness" model developed by Alexander
Gerschenkron, although the two models are not mutually exclusive.
Rostow argued that economic take-off must initially be led by a few individual economic sectors.
This belief echoes David Ricardo's
comparative advantage thesis and criticizes Marxist revolutionaries'
push for economic self-reliance in that it pushes for the "initial"
development of only one or two sectors over the development of all sectors
equally. This became one of the important concepts in the theory of
modernization in social
evolutionism.
Rostow's model is a
part of the liberal
school of economics,
laying emphasis on the efficacy of modern concepts of free trade and
the ideas of Adam Smith.
It disagrees with Friedrich
List's argument which states that economies which rely on
exports of raw materials may get "locked in", and would not be able
to diversify, regarding this Rostow's model states that economies may need to
depend on raw material exports to finance the development of industrial sector
which has not yet of achieved superior level of competitiveness in the early
stages of take-off. Rostow's model does not disagree with John Maynard
Keynes regarding the importance of government control over
domestic development which is not generally accepted by some ardent free trade
advocates. The basic assumption given by Rostow is that countries want to
modernize and grow and that society will agree to the materialistic norms of economic growth
Source: Rostow (1960).
Empirical
Review
Dollar
and Kraay (2004), who examined impacts of increased trade on growth and
inequality, found changes in growth rates to be highly correlated with changes
in trade volumes. No systematic relationship between changes in trade volumes
and changes in household income inequality was found, and they conclude that on
average greater globalization is a force for poverty reduction. Still, the
impact of trade liberalization is likely to vary between countries, depending
for instance on factor endowments, and liberalization creates both winners and
losers. Similarly to international trade, the impact of foreign direct
investments on income inequality is likely to vary between countries.
Any foreign direct investment (FDI)-inequality
relation depends e.g. on the sectorial composition of FDI, its impact on demand
for unskilled workers, the skill bias of technical change induced through FDI,
and the regional distribution of FDI (see e.g. Cornia, 2005). China’s reforms
started in the late 1970s and early 1980s with agricultural reform, which
decollectivized agricultural land and privatized land-use rights. Investments
in rural infrastructure were increased, mandatory delivery of output to the
state by farmers was reduced, and farmers were enabled to have a more market-oriented
output mix (Ahya and Xie, 2004).
Due to reforms, agricultural growth averaged
almost 10 per cent per year during19801984 and 6.2 per cent per year in the
1980s as a whole (Ahya and Xie,2004), decreasing poverty in rural areas.
Successful reform in the agricultural sector contributed substantially to
reform and expansion of the manufacturing sector. Due to increased productivity
in agriculture, surplus labour became available to migrate to the manufacturing
sector. Furthermore, due to increased income, farmers were able to increase
their expenditure on goods and services produced by the domestic manufacturing
sector (Dutta, 2005).
Methods of
Data Analyses and Model Specification
The methods of
analysis or estimation techniques include Ordinary Least Square (OLS) method,
Augmented
Dickey-Fuller (ADF) Unit Root test, Johansen Co-integration test and Error
Correction Method (ECM). The estimation technique follows a three-step modelling
procedure;
i. The stationarity of data must be
established and the order of integration determined. ii. After establishing the stationarity of
data, Johansen co-integration test is applied. .
iii. When the variables are found to be
co-integrated, an over-parameterized model. (ECM1) is developed which involves
leading and logging of the variables, after which a parsimonious model (ECM2)
is built which introduces short run dynamism into the model.
The test of the
hypotheses would be done at 5% level of significance and as such, the
generalization of the study findings would be limited to this extent.
Ho: Industrial
development does not contribute significantly to Nigerian economy growth.
The study
hypothesized that industrialization does not have a significant effect on the
economic growth of Nigeria. The model proxied Gross Domestic Product (GDP) as
the endogenous variable to measure economic growth while crude petroleum and
natural gas (CPNg), solid minerals (SMi), and
manufacturing (MFi) represents the exogenous variables.
The econometric form
of the model is specified as;
GDP = f (CPNgSMiMFi)
The econometric
equation becomes;
GDP =b0+
b1CPNg + b2SMi + b3MFi
+ui…………… (i) Where; b0= Intercept of relationship in
the model/constant b1 – b3=
coefficient of each exogenous variable ui
= Error term
From equation (i),
the model becomes;
∆Log GDP t-1 = b0 + b1ΣLog
CPNg t-1 + b2ΣLog
SMi t-1 + b3ΣLog MFi t-1 ++ ΣECM t-1 + Σ
t
…………….. ..........
(ii)
Where;
ΣECM
= Error Correction Term t-1 = Variable
lagged by one period
Σt = White noise residual.
The hypothesis for
the co-integration test is stated thus;
Null hypothesis (H
0): b1= b2= b3 = 0 (No
Co-integration)
Alternative
hypothesis (H1): b1≠ b2 ≠ b3 ≠
0(Co-integration exists)
This
econometric method would be used because it is very reliable and widely used in
researches to correct stationarity.
Estimates
and Analyses
Table 1: Results
|
Model
|
Unstandardized
Coefficients
|
Standardiz ed
Coefficient
s
|
T
|
Sig.
|
95.0% Confidence Interval for
B
|
||
|
B
|
Std. Error
|
Beta
|
Lower
Bound
|
Upper
Bound
|
|||
|
1 (Constan
t)
|
-614.342
|
307.723
|
|
-1.996
|
.055
|
-1243.707
.449
363.365
2.571
|
15.022
|
|
CPN
|
.735
|
.140
|
.277
|
5.246
|
.000
|
1.022
|
|
|
SM
|
432.758
|
33.929
|
.641
|
12.755
|
.000
|
502.152
|
|
|
MF
|
5.272
|
1.321
|
.100
|
3.991
|
.000
|
7.974
|
|
Table 2:
Result II
|
Mod
el
|
R
|
R Square
|
Adjusted R Square
|
Std.
Error of the
Estimate
|
Change Statistics
|
|
Durbin-
Watson
|
|||
|
R Square
Change
|
F Change
|
df1
|
df2
|
Sig.
F
Change
|
||||||
|
1
|
.998a
|
.995
|
.995
|
949.3093
|
.995
|
2002.7 11
|
3
|
29
|
.000
|
1.98
|
a. Predictors: (Constant), MF, SM, CPN
Table 2:
Result II
|
Mod
el
|
R
|
R Square
|
Adjusted R Square
|
Std. Error of the
Estimate
|
Change Statistics
|
|
Durbin-
Watson
|
|||
|
R Square
Change
|
F Change
|
df1
|
df2
|
Sig.
F
Change
|
||||||
|
1
|
.998a
|
.995
|
.995
|
949.3093
|
.995
|
2002.7 11
|
3
|
29
|
.000
|
1.98
|
a. Predictors: (Constant), MF, SM, CPN
b. Dependent Variable: GDP
Normality
Test for Residual
The Jarque-Bera test
for normality is an asymptotic, or large-sample, test. It is also based on the ordinary least square
residuals. This test first computes the
skewness and kurtosis measures of the ordinary least square residuals and uses
the chi-square distribution {Gujarati, 2004}.
The hypothesis
is:
H0: X1 = 0 normally
distributed.
H1: X1 ≠ 0 not
normally distributed.
At 5% significance
level with 2 degree of freedom.
JB = 16.077
While critical JB >
{X2{2}df} = 5.99147
Unit Root Test
This tests the
relevant variables in equation 2 which are stationary and equally to determine
their order of integration. We equally use the Augmented Dickey fuller (ADF)
test to find the existence of unit root in each of the time series. The summary
of the ADF unit root test is presented in table two below.
Table 2:
Summary of ADF unit Root test Result
|
Variables
|
Data diff.
|
1st
|
1%
|
5%
|
10%
|
status
|
|
GDP
|
1.36
|
|
-3.90
|
-2.93
|
-2.60
|
1(1)
|
|
CPNg
|
-1.13
|
|
-4.31
|
-2.51
|
-2.93
|
1(1)
|
|
SMi
|
1.90
|
|
-6.79
|
-3.60
|
-2..93
|
1(1)
|
|
MFi
|
-3.60
|
|
-3.61
|
-2.93
|
-2.60
|
1(0)
|
Source: Authors
calculation using e- views
The result reveals
that all the variables were not found stationary at levels. This can be seen by
comparing the observed values (in absolute terms) of the ADF test statistics at
the 1%, 5%, and 10% levels of significance. In the table above the result shows
that GDP, CPN, anf SM are all stationary after taking their first difference.
Since all these stated variables were stationary at first difference and on the
basis of this, the null of non stationarity is rejected and it is safe to
conclude that the variables are stationary. This implies that the variables are
integrated of order one i.e I (I). For MF the variable was stationary at levels
that is order of I (0).
Co-
integration Test Results and Analysis
Trace statistics and
maximum Eigen value using methodology proposed by Johansen and Juselius (1990).
Having confirmed the stationarity of the variables at 1(1) we proceed to
examine the presence or non-presence of co-integration among the variables,
when co-integrating relationship is present, it means that the variables have
long run relationship. In the cointegrating result the likelihood ratio (LR)
indicates a 2 co-integrating equations.The Johansen co-integrating test
revealed that the likelihood ratio rejects the Null hypotheses of R=0 and R=1
of no cointegration and accepts the alternative hypotheses of a long run
relationship. Overall a long run relationship exists among the variables.
Conclusively, the result shows that industrialization is an important factor
indicator that influences the level of economic activities in Nigeria.
Discussion
of Findings
It is important at
this point to state the implication of our findings. An examination of model
indicated that changes in industrial output exerted a significant influence on
the country’s Gross Domestic Product in the study period (1981-2013). And also
CPN, SM, MF influences significantly on the GDP. Ochiama (2007), Agba and Ushie
(2009) posit that, Nigeria’s per capita production of electricity dwindles as
her population increases and cannot support industrial activities. The effects
of epileptic and insufficient electricity supply in the country are grievous as
most factories are close down, while small and medium enterprises (SMEs) are
unable to effectively operate in Nigeria. Consequently, some firms are
compelled to generate power and this not without consequence; it increases the
cost of production and the final consumer bears the burden. Corruption is also
one of the most vital obstacles to industrialization in Nigeria. High level
corruption among government official have enormous impact on infrastructural
development in the country (Agba, Ikoh, Ushie&Agba, 2008). Corruption
threatens electricity supply in the country, it was widely reported that billions
of Dollars was spent during President Obasanjo‟s tenure on power projects, and
what Nigerians got in return was “blackout” while the bank accounts (both local
and foreign) of contractors swollen (Agba, e tal, 2009). Corruption could also
be responsible for the lack of adequate finance for the industrial sector,
since monies from Banks for Industry (BOI) ends up in wrong hands. However
Ukaegbu (1991) argue that, lack of finance cannot necessary be a challenge to
industrialization, since the number of Nigeria millionaires grew remarkably
over the years; rather investors prefer commerce to industry. He also observes
that inadequate labour is not impediment to industrial development, since many
graduates in science, engineering and technical education are unemployed in
Nigeria. Ukaegbu posit that the claim that inadequate physical infrastructure
militate against industrialization is erroneous and a kind way of neglecting
the fact that “infrastructure are the products, and not the agents of
industrialization”. These arguments strengthened our position in this research
that foreign competition and the superficial transfer of technology among
others occasioned by globalization pose the greatest challenge to
industrialization in Nigeria.
Conclusion
and Recommendation
Based on the above
revelation in this study, we conclude that the industrial output has a
significant impact on economic growth and development in Nigeria. Furthermore,
the analysis reveals that CPN, SM, MF has a positive impact on economic development
in Nigeria though significant but varies. To achieve the level of economic
growth and development that is desired, the government have to strive to reduce
the challenges of manufacturing. Industrial sector is continues to be the
backbone of economic growth and development based on this fact, and revelation
from the empirical analysis conducted on this sector in Nigeria, we make the
following recommendations:
1. Creating a conducive environment to achieve strong
performance of the industrial sector.
2. Government should increase investment in solid
minerals in order to boost the activities of mining in Nigeria.
3. There is also the need for proper allocation and
management of existing industries so as to ensure roper and positive linkage
effects on the economy.
4. Development of strong institutional structures to
support the growth and development of industries in the country.
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