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50 Years of Nigeria’s Nationhood: Issues and Challenges for Sustainable Development
CHAPTER ELEVEN
IMPACT OF INDUSTRIALISATION ON
ECONOMIC GROWTH IN NIGERIA
Usman R Dan and Lazarus Zungwe Wanjuu
INTRODUCTION
Countries develop their industrial sectors because of many
reasons. Industries have more backward and forward linkages to
the other sectors of an economy. They exhibit increasing returns
to scale and their ability to diffuse technology in the economy is
wider than the primary sector. Industries are very important in a
developing country like Nigeria because their marginal revenue
products of labour are higher than the marginal revenue product
of labour in the agricultural sector. Thus, the releasing of labour
force from agricultural sector to the industrial sector increases the
marginal product of labour in the agricultural sector and increases
the overall revenue and output of the society (economic-growth).
Therefore, industrialisation is a sin qua non for sustainable
economic growth in Nigeria and it is what the present regime
needs to achieve its transformation agenda.
Most of the studies on industrialisation and economic growth
in Nigeria lack empirical content. This study is carried out to fill in
this vacuum. It is in this light that this study is carried out.
The tendency of the industrial sector to stimulate more
economic growth has prompted many economists to formulate
Impact of Industrialisation on Economic Growth in Nigeria 225
theories to encourage industrialisation. Famous among the early
theories formulated are: Leibenstein’s (1957) theory of critical
minimum effort thesis; Nelson’s (1956) theory of low equilibrium
trap; Rosenstein – Rodan’s (1943) theory of the big push; the
doctrine of balance growth; Hischman’s (1958) doctrine of
unbalance growth; the import substitution strategy; and export
promotion strategy. Overtime, the influences of these theories on
policy decisions have been varied. The first three of the theories
emphasize market constraint as a main barrier to industrialisation
and advocated state intervention to help minimize this constraint
through massive investment of resources. The middle two
acknowledges market constraint but advocated piecemeal
approach to minimising the market constraint. The last two
theories also identified market constraint as the main factor
impinging industrial growth in developing countries and
advocated the taping of existing domestic market and external
market in tackling the constraint to industrialisation.
Policies of the first theory were applied by the erstwhile USSR,
China and countries in Eastern European to develop through huge
investment in public resources; while the last method was first
applied by Japan, later by the Asian Tigers and more recently by
the Newly Industrialised Countries: Malaysia, South Africa,
Indonesia, etc. (Clunies-Ross, fosyth and Huq, 2010).
To examine the impact of industrialisation in Nigeria, the
study hypothesis that industrialisation does not stimulate
economic growth in Nigeria. To carry out this analysis, the study
introduces the subject of the study, giving the study’s background
in section one. The rest of the work is classified into section two,
i.e. review and theoretical framework; section three summarises
the research methodology used; section four presents estimated
results and analyzes the results; and finally section five concludes
the study and gives policy recommendations.
THEORETICAL FRAMEWORK AND LITERATURE REVIEW
The theoretical framework used in this study is based on
aggregate production function based on endogenous growth
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50 Years of Nigeria’s Nationhood: Issues and Challenges for Sustainable Development
model developed by Jones and Manuelli (1990) which avoid
diminishing returns to capital. The model is presented as follows:
y= f(k, l)
1
Where: y is per capital output; k is capital industrial output
ratio; and
l is labour industrial output ratio.
The aggregate production function has constant average and
marginal product of capital and it does not exhibits convergence
property (Barro and Sala-i-Martin, 2004).
The term industrial growth or more simply industrialisation
has two distinct meanings. It can be conceived as a shift in a
country’s pattern of output and work force towards
manufacturing or secondary industry (Clunies- Ross et al., 2010). It
can also be defined in terms of income levels reaching a certain
threshold. It is on the basis of this that countries are classified
into, low-income; lower middle income, higher middle income,
lower upper income, higher upper income and high-income
countries. This is a broader dimension of industrialisation.
In a work of this nature, it is conventional to use the first
definition above. It is against this background that Sullivan and
Sheffin (2003) define industrialisation as the process of societal
and economic change that transforms a human group from
agrarian to industrial one. In their view, industries bring about
change in three ways: modernisation, development of large scale
energy and metallurgy production. These aspects are closely link
with economy growth. They also assert that industrialisation bring
with it the sociological process of rationalisation.
Economic growth has been conceived as increase in per
capital income over a period of time (Clunies –Ross, et al., 2010;
Jhingan, 2005). Abbott (2003) considers the following as key
positive factor stimulating industrialisation: good governance,
good legal frame work, availability of natural resource, relative
low cost skilled labour, and technology.
Overtime, various strategies have been used to promote
industrial growth. These are balanced growth, unbalanced
growth, import substitution and export promotion. Under
Impact of Industrialisation on Economic Growth in Nigeria 227
balanced growth strategy, attempts are made to ensure that the
growth in investment expand at the same rate with the market in
terms of purchasing power. To make sure that firms have enough
market, it is advocated that enough investments should be made
in all sectors at the same time.
In unbalanced growth model, attempts are made to ensure
imbalances in the economy. The imbalances are deliberately
created to create opportunities for investment for the private
sector to stimulate investment and industrialisation.
Both balance growth and unbalance growth could not create
enough opportunity for industrialisation to take place. There were
no enough opportunities for business forms to mass produce and
enjoy economies of scale. To overcome this problem, the
strategies of import substitution and export promotion became
handy. In import substitution, firms produce and sell in domestic
economy goods which were earlier imported.
The advantage of this strategy is that there is an existing
market outlet for the goods produced. The problem with the
method is that since the firms produce for domestic market, they
do not prepare for market competition and so they are not
efficient and so they are at disadvantage when in competition
with foreign companies. They, therefore, rely on state protection.
A variant of the above strategy is export orientation. In this
strategy, goods are produced for sale in foreign countries. This
method is aimed at competing with foreign made goods; it
produces at efficient and cost efficient manner. It is the method
used by Japan, the Asian Tigers, and more recently, Malaysia,
Indonesia, China, South Africa, Turkey, Philippines, Mexico, CostaRica and Elsalvador. In support of this approach, Clunies-Ross, et
al., (2010) said that the world had a lot of opportunities for
developing countries. The world presented a huge potential
market for simple, fairly, standardised manufactures, such as
textile and clothing. The price elasticity of demand for all these
goods is high. If a low income country can produce these goods at
reasonable low price, it can have a huge market at its disposal.
Bolaky (2011) summarizes most of the empirical and
theoretical arguments in favour of industrialisation. He posits that
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50 Years of Nigeria’s Nationhood: Issues and Challenges for Sustainable Development
there is a positive correlation between the level of
industrialisation and per capita income for developing countries.
Empirical evidences demonstrate that there is higher marginal
product of labour from industrial sector than in agricultural sector
and so the transferring of resources from agricultural sector to the
industrial sector raises total productivity in the economy.
There are studies relating to industrialisation and economic
growth. Blomstrom, Lipsey and Zegan (1994) posit that
industrialisation through foreign investors can exert a positive
effect on economic growth rate. They argued that
industrialisation’s contribution to economic growth rate is
dependent on the threshold level of income. This means that,
below the threshold level of income, the contribution of
industries to economic growth is not significant and above the
threshold, it is significant. The explanation is that, it is only
countries that have reached a certain income level that can
benefit effectively from the packages of those industries and
foreign investors. Such packages are new technologies, human
capital development and managerial skills.
Borensztein, DeGregoria and Lee (1998) carry out a study
using panel data of 69 developing countries over a period of two
decades 1970 – 1989, investigating the impact of industrialisation
on economic growth. They used a basic estimating equation of
growth with real GDP as a dependent variable and foreign
investment, measure of schooling and initial GDP as their
independent variables. They find that industrialisation has
positive impact on growth but this is only realised when their
measure of schooling is above a certain critical level, which is
estimated at 0.52. Below this critical level or threshold,
industrialisation and foreign investment exert a negative impact
on growth, thus confirming the complementarily of
industrialisation, foreign investment and human capital
development.
Shafaeddin (2005) analyses economic performance of a
sample of developing countries that have undertaken economic
reforms since the early 1980s with the objective of expanding
exports and diversification in favour of manufacturing sector. The
Impact of Industrialisation on Economic Growth in Nigeria 229
results obtained were much varied. Forty per cent of the sample
economies experienced very rapid expansion of exports of
manufactured goods. In a minority of these countries, mostly East
Asian, rapid export growth was also accompanied with fast
expansion of industrial supply capacity and upgrading.
In contrast, the experience of the majority of the sample
countries, most of them in Africa and Latin America, has not been
satisfactory. In fact, half of the sample countries have faced deindustrialisation. Slow growth of exports and de-industrialisation
has also been accompanied by increased vulnerability of the
economy, particularly the manufacturing sector, to external
factors particularly as far as reliance on imports is concerned. A
number of industries which had been dynamic during the import
substitution era continued, however, to be dynamic in terms of
production, exports and investment. The industries which were
near maturity when the reform started, such as aerospace in
Brazil, benefited from liberalisation as the competitive pressure
that emerged made them more efficient.
Shafaedddin argues that trade liberalisation is essential when
an industry reaches a certain level of maturity, as long as it is
done selectively and gradually. If it is done based on western
world consensus, it is more likely to lead to the destruction of the
existing industries, particularly of those that are at their early
stages of infancy without necessarily leading to the emergence of
new ones. Furthermore, any new industry that comes up would
be in line with static, rather than dynamic, comparative
advantage. The low income countries will be locked in production
and exports of primary products, simple processing and at best
assembly operation or other labour intensive ones with little
prospect for upgrading.
Dodzin and Vamvakidis (2004) examine the impact of
international trade on the allocation of production resources
across sectors in developing economies. Estimates from a panel of
92 developing countries in the period 1960–2000 suggest that an
increase in openness to trade leads to an increase in the industrial
value added share of production, at the expense of the
agricultural share. Therefore, trade leads developing countries to
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industrialisation, in contrast to what the infant industry argument
would imply.
Abiola (2010) examines the relationship between saving and
investment and between investment and economic growths in
Nigeria using time series data for the period of 1975-2007. The
method of analysis involved ordinary regression analysis and the
result demonstrates that saving stimulates investments and that
investment stimulates economic growth in Nigeria in the period of
the study.
Kaya (2010) investigates the effect of the latest wave of
economic globalisation on manufacturing employment in
developing countries. The study is concerned with classic debate
on the benefits of industrialisation and how this affects
developing countries. The study uses a comprehensive dataset on
64 developing countries from 1980 - 2003. The results generally
demonstrate that manufacturing employment increased in most
developing countries. First, this study finds that the level of
economic development measured by GDP per capita is the most
important factor influencing the size of manufacturing
employment. Second, economic globalisation also influences
manufacturing employment in developing countries, but mainly
through trade. The sizes of exports and low-technology exports
have a significant positive effect on manufacturing employment in
developing countries. Finally, the analysis provides limited
argument for world systems/dependency theories. Raw materials
exports do not significantly increase manufacturing employment
while foreign direct investment has a negative impact in some
models. This study concludes that the latest wave of economic
globalisation contributes to the increase in manufacturing
employment in developing countries, although it is not the most
significant factor shaping the size of manufacturing employment
in these countries.
METHODOLOGY
The data used for this study was obtained from the Central Bank
of Nigeria (CBN) Statistical Bulletin (2010) and from the UNCTAD
Impact of Industrialisation on Economic Growth in Nigeria 231
(2011) Statistics database online. The primary variables of interest
are GDP, industrial output and industrial capital sourced from CBN
and population and labour force sourced from UNCTAD.
The estimation of how industrial output affects economic
growth is performed with macroeconomic variables of capitalindustrial output ratio and labour-industrial output ratio as
explanatory variables and per capita output as explained variable.
To avoid the problem of spurious regression, unit root test was
first conducted to ascertain whether the series are stationary or
not. The augmented Dickey-Fuller (ADF) test of stationality was
used, and it is estimated as:
t
ΔYt= α + δt +ρYt-1 +

ΔYt-i + Ut
2
k 1
Where: Δ is the first difference of the series Y; i is the lag order; t
is the time period.
The Johanson test is used to establish VAR model which can be
defined by the following vector error correction (VEC) model:
ΔYt-1 = г 0 + г1ΔYt−1 + г2ΔYt-2 + . . . + гkΔYt-k + πYt-k + βZt + et
3
Where: Δ is the first difference operator; Yt is a p×1 vector of
trending variables. Г0 is the deterministic part of the VAR model;
Zt is a dummy variable that takes the value zero when there is
peace and 1 when there is war; Π is the coefficient of the error
term; and et is the random error term.
The study employed the following model in studying the
relationship between economic growth and industrial output in
Nigeria.
Per capita Output = β0 + β1Per capita Outputt-1 +
β2Capital/Industrial outputt-1 + β3Capital/Industrial Outputt-2 +
β4Labourt/Industrial Output + β5ecm+ ut
4
The a priori assumptions of the model are:
β0, β1, β2, β3, β4 >0; and β5 is less than or greater than 0
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50 Years of Nigeria’s Nationhood: Issues and Challenges for Sustainable Development
RESULTS
The results of this study are presented in three tables: Table 11.1
shows unit root test using Augmented Dickey-Fuller ADF test;
Table 11.2 shows co-integration test using Johansen test; and
Table 4.3 shows the VEC model of regression result. These tests
were carried out using E-Views Version 4.0.
Table 11.1 Unit Root Test Based on ADF
Variable
y=GDP/Population
K=KAP/INQ
l=LABOUR/INQ
At level with intercept At first difference with
and trend
intercept and trend
-2.230464
-5.075787**
1.071955
-4.887689**
-4.727472**
Note: ** Significant at 1% (and 5%) level of significance.
The ADF unit root test shows that for two of the variables, the
null hypothesis of no unit root in the data has been rejected; and
the two variables are stationary after first differencing. The third
variable is stationary at level value.
It is also important to test for cointegration to find out if there
is a long run relationship among the three variables.
Table 11.2: Johanson Cointegration Test (Using Trace statistic)
Null
Hypothesis
г=0
г=1
г=2
Alternative
Hypothesis
г=1
г=2
г=3
Maximum Eigen 5%
critical Trace
Statistic
Value
Statistic
61.84228
29.68
35.65**
31.52383
15.41
20.04**
10.48346
3.76
6.65**
Note: ** denotes rejection of null hypothesis 1% level of
significance.
Impact of Industrialisation on Economic Growth in Nigeria 233
From the above co-integration result, the null hypothesis has
been rejected in respect to the three variables. We concluded
that there is co-integrating vector in the three variables. The
rejection of the null hypothesis implies that we have to apply
vector error correction (VEC) model in establishing the
relationship among the variable.
Table 11.3: Normalised Co-efficient of First Co-integrating Vector
Variable
Coefficient
T-Statistic
748.185
-0.7115
0.0949
244.041
-258678
Standard
Errors
100.346
0.0912
0.1042
727.94
35445
CONSTANT
CAPITAL/IND.OUPUTt-1
PER CAPITAL OUTPUTt-2
CAPITAL/IND.OUPUTt-2
LABOUR / IND.OUTPUT t
Ecm
0.7115
0.912
-7.801
7.456
-7.8006
0.910
0.3352
-7.2979
Adjust R2 = 0.622; AIC = -14.337; SIC = -14.64
The above VEC model was specified after having used overpersimonous model and observing the outcome. The result shows
that capital-industrial output ratio decreases per capita GDP; the
labour /industrial output ratio also contributes negatively to per
capita GDP. This can be interpreted as meaning the human capital
and income levels have not reach the threshold to make
industries contribute reasonably to economic growth. This finding
is in line with the findings of Blomstrom, Lipsey and Zegan (1994)
and Borenstein, DeGregoria and Lee (1998).
CONCLUSION AND RECOMMENDATIONS
The main finding of this study is that industrialisation has a
negative impact on economic growth in Nigeria. The policy
implication is that policy measures should be put in place to
improve human capital development so as to make people
capable of using modern technology and to diffuse it in the
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50 Years of Nigeria’s Nationhood: Issues and Challenges for Sustainable Development
society. This will go a long way to help not only in improving
industrial output but improve the overall productivity of all the
sectors and ensure sustainable development.
To achieve this, government should create a good environment
for industrial growth through:
- Provision of good governance mechanism and a good legal
framework to protect property rights.
- Improve the judicial and the security system to minimise the
crime rate terrorism in the country.
- Improve on social and economic infrastructure, especially
electricity supply and the transport system and good and
functional education. This can reduce the cost of production,
improve diffusion of technology and make Nigerian
manufacturers more competitive
Impact of Industrialisation on Economic Growth in Nigeria 235
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