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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.
The study of minerals is called mineralogy. Friedman (2006)
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 de-
collectivized 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 during1980-
1984 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 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
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
15.022
CPN
.735
.140
.277
5.246
.000
.449
1.022
SM
432.758
33.929
.641
12.755
.000
363.365
502.152
MF
5.272
1.321
.100
3.991
.000
2.571
7.974
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 1st
diff.
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 co-
integrating 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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