CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
It has been debated that the fastest way through which a nation can achieve sustainable economic growth is neither by the level of its endowed resources, nor its vast human resources, but technological innovation, enterprise development and industrial capacity (Olamade et al, 2014).Despite the vast oil wealth, the World Bank Development indicators (2014) has shown that majority of Nigerians are poor with 84.5% of the population living on less than two dollar a day on a survey conducted in 2010 up from 63.1% reported in 2004 survey. The issue of poverty can only be traced to mono-economic practice and underutilization of the nation’s endowed resources, especially in manufacturing sector which could have opened up a lot of opportunities in job creation and economic growth.
The path to economic recovery and growth may require increasing production inputs; land, labour, capital and technology, and/or increasing their productivity (Kayode and Teriba, 1977). Increasing productivity should be the focus, because many other countries who have found themselves in the same predicaments have resolved them through productivity enhancement schemes. For instance, Japan from the end of the World War II and the United States of America from the 1970s have made high productivity the centre point of their economic planning and the results have been resounding. Also, middle income countries like Hong Kong, South Korea,Singapore and India have embraced boosting productivity schemes as an integral part of their national planning and today they have made significant landmarks into the world industrial markets. Also, another path to recovery requires an urgent rebuilding of deteriorated dilapidated infrastructure and making more goods and services available to the citizenry at affordable prices. This would imply a quantum leap in output of goods and services.
Given the importance of high productivity in boosting economic growth and the standards of living of the people, it is necessary to evaluate the productivity of the Nigerian manufacturing sector. This will be useful in ascertaining the relative efficiency of firms, sub-sectors and sectors. An in-depth knowledge of the relative efficiency of industries in relation to economic growth and development could go a long way to aid government in planning its programmes and policies, especially in deciding on which industries should be accorded priority. In the light of the foregoing, there cannot be a more appropriate time to evaluate the role of the Nigerian manufacturing sector in the economic growth and the development of the country than now.
The near total neglect of agriculture has denied many manufacturers and industries their primary source of raw materials. The absence of locally sourced inputs has resulted in low industrialization. Some of the constraints faced in this sector include; High interest rates, unpredictable government policies, Non-implementation of existing policies, lack of effective regulatory agencies, infrastructural inadequacies, dumping of cheap products, unfair tariff regime, low patronage. It is in the light of the foregoing that this study seeks to evaluate the role of the manufacturing sector in gearing economic growth in the Nigerian economy.
Historically, no country of the world ever experience economic growth and development by engaging in substantial agriculture that is by exporting only raw materials without having an industrial sector, and in modern terms an advanced service sector. Industrialization acts as a catalyst that accelerates the pace of structural transformation and diversification of economy, enable a country to fully utilize its factor endowment and to depend less on foreign supply of finished goods or exporting of only raw materials for its economic growth, development and sustainability. Industrialisation should be seen as a single global process, in which individual countries follow different paths depending on their initial conditions and moment of their entry into the race (Pollard, 1990). Manufacturing is the core mover of industrialization and it plays a key role in the global economy. The emergence of modern manufacturing had led to the dramatic changes in the structure of the world economy and to sustained increases in the growth of labour productivity and economic welfare (Maddison, 2001, &2007). Manufacturing plays a unique role because it has strong linkages with all other sectors of the economy and is the fundamental base for the economic health and security of a nation. Interestingly, about a fifth of global income is generated directly from manufacturing industry, and nearly half of household consumption relies on goods from industrial processes. The demand for manufactured goods continues to rise as people around the world enter the global consumer class. The manufacturing sector currently contributes 17 percent of the world’s US$ 70 trillion economy, and accounts for 70 percent of global trade (National Industrial Revolution Plan, 2014). Productivity is higher in the manufacturing sector than in the agricultural sector and the transfer of resources from agriculture to manufacturing provides a structural change bonus (Szirmai, 2009). Research shows that as economies mature, the role of manufacturing evolves and its impact on the economy changes. Poor countries start of by employing the bulk of their population in agriculture however for these countries to transition into middle income/developed markets, they must create a robust industrial and services sector, which are the drivers of mass employment, improved skills and better wages, providing the foundation for long-run sustainable economic growth and advancement (Lewis, 1979). The development of some Asian countries as from the second half of the 20th century was anchored on a virile manufacturing sector. China is currently the second largest economy in the world and they are also the manufacturing factory of the whole world, which has significantly improved the standards of living of her people in the last three decades.
In the light of the foregoing, one can infer the importance of the manufacturing sector, as it serves as prime mover or main engine of economic growth and development. The Nigeria’s manufacturing landscape is indeed very broad and it is a country that is blessed with both natural and human resource. However, not all sectors have reached the sufficient level of scale to have a significant effect on national economic activity. Although, Nigeria’s Manufacturing sector produced range of goods such as milled grains, vegetable oil, meat products, dairy products, sugar refined, soft drinks, beer, cigarettes, textiles, footwear, wood, paper products, soap, paint, pharmaceutical goods, ceramics, chemical products, tyres, tubes, plastics, cement, glass, bricks, tiles, metal goods, agricultural machinery, household electrical appliances, radios, motor vehicles, and jewellery and consumer goods such as soft drinks, cement, paints, soap and detergents etcetera (Library of congress country studies; CIA world factbook, 1991). But over many years, the Nigeria’s manufacturing sector has failed to undergo the critical structural transformation necessary for it to play a leading role in economic growth and development. The manufacturing sector is obviously not yet robust enough to be tagged glowingly as Nigeria’s engine of growth and the technological base for manufacturing is lacking in many sectors. It is untrue that food, cement, and textile sub-sector are all doing remarkably well, although the cement manufacturing got a significant boost courtesy to AlikoDangote’s heavy investment in the sub-sector recently, and as well the textile industry in reality, is still gasping, with most of the factories across the country that were once functional yet to be revived from their present moribund state (P.M. news Nigeria). Pathetically, the skilled manpower necessary to guarantee competitiveness in today’s dynamic and globalized world is insufficient systematic issues mostly related to insufficient power supply, poor transport system, inadequate infrastructure, political instability, insecurity, unavailability of finance and rampant corruption have led to escalating costs and non-competitive operations. Consequently, the sector is unable to attract the necessary investment for economic growth and remains a small player in the economy (National Industrial Revolution Plan, 2014).
In recent years, Nigeria’s manufacturing sector has been operating under very unfavourable environments and contributes little to both the nation’s Gross Domestic Product and foreign exchange earnings, and also the share of employment and government revenue generated have been drastically low.
Figure 1.2 Manufacturing sector’s contribution to GDP (%) from 1981 – 2013
Source: Anachusi (2015): Data from CBN statistical bulletin
Nigeria’s limited manufacturing sector is striking evident when considering trade flows. Regrettably today, the manufacturing sector contributes just little to export revenue but accounts more for imports which has caused the country to be used as a dumping ground for all sorts of imported goods from the foreign industrial countries and the Asian tigers (Aluko, Akinola and Fatokun, 2004). And many firms had closed down due to lack of patronage of their products both in Nigeria and outside the country. The country’s trade balance on manufactured items is therefore causing a severe drag on Nigeria’s balance of payments (National Revolution Plan, 2014). Oil overwhelmingly dominates the nation’s trade at over 90 percent of total exports but drives a very small portion of other industrial activities including refineries (CBN Statistical Bulletin, 2013). However, oil continues to be the mainstay of the economy, but recently uncertainties have increased on the future direction of the global upstream oil industry due to discoveries of large hydrocarbon all over the world which has caused the oil price to dwindle (National Revolution Plan, 2014).
To achieve all these goals, the Nigeria government starting from 1950s before the country got her independence adopted several monetary and fiscal policies together with institutional reform measures which were undertaken to attract manufacturing growth but a review of the development plans reveals that the same issues that haunt Nigeria’s manufacturing sector has lingered on for decades. Nigeria being a country that is driven by Vision 20:2020 (To be among the twenty biggest economies of the world in the year 2020), introduced five year plan in 2014 which is called National Industrial revolution Plan (NIRP) with the goal of building Nigeria’s competitive advantage, broadening the scope of industry, and accelerating expansion of the manufacturing sector. Therefore there is a need for extensive survey research considering the importance of manufacturing and the recent happenings in the country like the exchange rate volatility, the dwindling oil price (which is the main source of Nigeria’s revenue), increase in interest rate, the failure of the previous industrial policies and the change in government. The research is inspired beyond doubt to explore the effect of the manufacturing sector on economic growth in Nigeria
1.2 Statement of the Research Problem
The inability of Nigeria to stimulate greater investment in manufacturing despite her substantial endowment in natural resources was mainly the result of lack of coherent and sustained strategies of economic transformation. The manufacturing sector in Nigeria is in a weak state and its contribution to the country’s economic growth is abysmally low. Terrorism has caused many multi-national manufacturing industries to move to the neighbouring countries and most small enterprises have closed down, while rationalisation and staff layoffs are being experienced in many medium and large-scale establishment. As depicted in the UNIDO survey, 30% of firms have closed down; only 10% are operating at a sustainable level (UNIDO, 2008).
There have been considerable studies that are carried on the impact of manufacturing sector on economic growth where scholars used several variables of economy as a units of analysis (see Adugna, 2014; Rioba, 2014; Inakwu, 2013; Obamuyi, Edun, Kayode, 2012; Szirmai and Verspagen, 2011; Awad, 2010; Elhiraika, 2008; Mahdavi and Fatemi, 2007; Libanio, 2006). Although, as revealed by Adugna (2014), Rioba (2014), Inakwu (2013), Szirmai et al (2011), Elhiraika (2008), Mahdavi et al (2007), and Libanio (2006) respectively that manufacturing has a positive and significant impact on economic growth but only Inakwu (2013) explored the Nigeria’s case. Obamuyi et al (2012) posit that the relationship between manufacturing and economic growth cannot be establish during the period of the study. The higher growth of the manufacturing sector can have multiple effect on the national economy (Adugna, 2014). Based on the findings of Awad (2010), Manufacturing has a significant impact on economic growth in the long-run but has no significant impact on economic growth in the short-run.
The upshot is that the findings of these scholars on this topic is contradictory, confusing and making it difficult to have a conclusion. Also most studies on manufacturing focuses on challenges and prospects, banking sector reform, its productivity, performance, capacity utilization, fiscal policy, monetary policy, environment and globalisation, while studies on economic growth concentrates on the impact of FDI, deficit and macroeconomic variables, capital stock, capital formation, industrialisation and its determinants. Almost all the literature that explored the effect of manufacturing on economic growth were used to analyse the Western, Middle East, Asia and African countries as a whole and the few that investigated Nigeria’s case did not capture recent development in the country like Inakwu (2013) analysed periods of 1981 – 2010. Therefore, the analysis needs to be extended in order to cover at least some recent development in the country. However, manufacturing have valuable significant effect on economic growth in every country of the world but results vary from country to country, but in Nigeria, there is little attention to study the relationship between manufacturing sector and economic growth. These research gaps are what this study intends to fill by exploring and providing more empirical evidence on the effect of Nigerian manufacturing sector on her economic growth.
1.3 Research Questions
This research work attempts to address the questions;
1.4 Objectives of the Study
The broad objective of this study is to explore the effect of manufacturing sector on economic growth in Nigeria. The study has the following specific objectives:
1.5 Research Hypotheses
This research work is guided by the following hypotheses which are stated below;
Hypothesis 1:
Ho: there is no positive relationship between manufacturing production and Nigeria’s economic growth.
Hypothesis 2:
Ho: gross fixed domestic investment does not have significant effect on Nigeria’s economic growth.
Hypothesis 3:
Ho: labour force does not contribute significantly to economic growth of Nigeria.
Hypothesis 4:
Ho: inflation rate does not have significant effect on the growth of Nigeria economy.
Hypothesis 5:
Ho: exchange rate does not have significant influence on Nigeria’s economic growth.
1.6 Significance of the Study
The significance of this research work lies in the fact that;
1.7 Organisation of the Study
This study is divided into five chapters. The first chapter provides background to the topic and justifying reasons for the study. The second chapter presents related literature that has been done on the topic. The third chapter, which is research methodology presents how to carry out the research, this includes model specification, estimation technique, sources of data etc. The fourth chapter deals with data presentation, results and analysis. The fifth chapter, which is the final chapter, presents the summary of findings, conclusion, recommendation and suggestion for further studies based on the finding.
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