Industrialization is a considered as a child of necessity in every nation’s economy for it accelerates the process of both Economic growth and Economic of development .The importance of the industrial Sector in the economic development cannot be over-emphasized. Thus, the fortune of every economy lies in it industrial sector which make it the HEATBEAT of economic development.
It is usually argued that industrialization is capable of increasing the pace of economic growth and ensuring swift structural transformation of the economy. Paradoxically, most developing countries have failed to achieve industrial development despite several industrial policies and reforms. In Nigeria, the drive to transform her economy from non-industrialized state to an industrialized one has been the pre-occupation of successive administrations that has piloted the affairs of the nation since independence till date. Unfortunately, despite the abundant natural endowment (both human and non-human) of the country, efforts at creating a vibrant and sustainable real sector growth and development have proved abortive. Worst of all, over the years there has been a steady decline in the sectoral contribution of the industrial sector to national productivity and hence economic development has been disappointingly low while poverty level has increased tremendously.
Immediately after political independence, there was urgent need to achieve economic emancipation as well. This prompted the government to adopt the import substitution industrialization (ISI) as a development strategy. The aim was to reduce the dependence on imported consumer goods and create employment opportunities for the teaming Nigerian work force. And since then, successive governments at different point in time have evolved serious industrial policies to suit the prevailing economic realities of such times. Till date, though the policies and strategies have changed, the objectives of government, namely, employment creation and production of consumer goods for the teaming population have remained uppermost in her development planning.
After the successful installation of the democratic government in 1999, there was high hope that the pace of economic development and industrialization was going to take a different turn. The reestablishment of democratic governance in 1999 was followed by aggressive enthusiasm by the government in redirecting development policies in the country. To some Nigerians, democracy was perceived as the major ingredient of economic growth and development. This thinking is, however, not strange in the theoretical debate on democracy-development nexus. Several literature have discussed the fact that democracy is in fact a pre-requisite for economic development. For example, Halperin et al (2005) make a very important point concerning the benefit of development through participation, and accountable systems of government over time, as compared to authoritarian systems and argue that the better performance of democracies can be attributed to their relatively greater propensity for establishing institutions of shared power, information openness, and adaptability. They showed that democracies have experience more stable and steady growth patterns than autocracies over time.
B. Features of the Nigerian Industrial Sector The Nigerian industrial sector is characterized with a number of features. First, in terms of special pattern, established reports from various studies show that industries in Nigeria are concentrated in some areas, especially in big cities and in state capitals. Ajayi (2009) has shown that industries are concentrated mostly in the major cities in Nigeria. His study on the pattern of the distribution of manufacturing industries at the city level indicates that there is a marked concentration of manufacturing establishments in the southern part of the country, especially Lagos, Ibadan and Benin. Other locations of relative high concentration of industrial establishments are Kano and Kaduna in the North, and Enugu and Port Harcourt in South East.
Second feature of the Nigerian industrial sector is the existence of production sub-contracting linkages. The Nigerian experience according to Ajayi (1998, 2002) shows that production subcontracting linkages started in the early 1960s. Initially the rate of adoption of production subcontracting as an industrial production technique in Nigeria was characterized by insignificant growth. Subsequently there was rapid growth. However, there has been marked variation in the adoption of production sub-contracting by industrial groups over the years (Ajayi 1998, 2002). An important point to note here is the fact that the number of sub-contractor engaged in sub-contracting activities, varied markedly especially in food, beverages and tobacco, chemicals and pharmaceuticals and textiles, wearing apparel and leather industry groups. This new industrial production technique is believed by industrialists to be very sacrosanct in production activities as it helps bring down the cost of production. The spatial distribution of production sub-contracting activities is significantly explained by the pre-existing characteristics of locations where sub-contractors are found. Here, the number of industrial establishments is the most significant explanatory variable (Ajayi: 1998, 2003b).
Third important feature of industries in Nigeria and in many other developing countries is their inability to revolutionalize production. This is primarily because of the domination of the industrial sectors in these countries by multinational companies. But as noted by Walstedt (1980), there has been increased state involvement in industrial enterprise. He argued that state industrial enterprises are established for certain standard reasons. The first is that running industrial enterprises is too risky for indigenous private investors. The second is the mistrust of indigenous private investors whose enrichment might create private power bases. The third according to Walstedt (1980) is nationalism.
He argued that, public enterprises view themselves as an extension of the state rather than as independent business entities.
In addition to these features, the industrial sector in Nigeria like most other developing countries is dominated by industries producing construction materials, clothings, textiles, footwear and processed foods using simple assembly processes (Cody and Huges, 1980; Schultz 1973; Egwaikhide 1997). This view was also supported by Adejugbe (1979), who opined that, Nigeria’s manufacturing industries consists largely of assembly plants with little backward linkages in the economy, since most of the inputs are imported. Adenikinju and Chete (2002), further state that, the degree of dependence on imported inputs is still high due to factors they consider, revolved around the inadequate supply of locally available materials, the unreliability of contract suppliers the poor quality of what is available and failure to meet user specifications. These, couple with poor funding of science and technology education in the country manifest in low wages, low technology, production of light consumer goods, and resources and labour intensive industrial sector.
In summary, the Nigerian industrial sector have tended to be characterized by routine production activities, spatial pattern of distribution; where industries tend to be concentrated mostly in the cities especially state capitals, production sub-contracting linkages, inability to revolutionalize production, due mainly to low technology, simple assembly processes, low wages, production of light consumer goods and resource and labour-intensive industries.
THE MAJOR INDUSTRIAL POLICIES IN NIGERIA SINCE 1960-2010 IMPORT SUBSTITUTION INDUSTRIALIZATION ( ISI, 1960`S). Achieving sustainable growth in industrial production has been a key pillar of Nigeria’s economic reforms. In the early 1960s up to late 1970s the country pursued an inward-looking. In the early 1960s up to late 1970s, industrial policies in the country were inward-looking. The major policies that come to mind include the ISI strategy and the indigenization policy. The former, ISI, was directed at increasing local production of manufactured goods, generation of employment, preservation of the country’s foreign exchange and expansion of the country’s domestic market for goods locally manufactured. One thing is, however, obvious.
Industrial production experienced a tremendous boost as the index of industrial production rose from 41.3 in 1970 to 120.3 in 1979 (CBN, 2005).
In real terms, percentage of manufactured in GDP increased from 4.8 percent in 1960 to 8.6 percent in 1979. Compound growth rate of industrial production rose to 9.7 percent between 1970 and 1975 before declining to 6.8 percent in 1976-1980 (Ndebbio, 1991). Figure 2 shows the trend in manufacturing output share of Gross Domestic Output (GDP) from 1970 to 2009. The share of the manufacturing sector has been on the decline since the 1980s.
This was the first Industrial strategy embarked upon by the Nigeria government immediately after attaining independence. It has the following aims and objectives;
Increasing local production of manufactured goods.
Generation of employment.
Preservation of the country’s foreign exchange.
Expansion of the country’s domestic market for goods locally manufactured.
To lessen over -dependence on foreign trade.
To save foreign exchange by producing those items that was formerly imported.
2. THE NIGERIAN INDIGENIZATION POLICY (1972-1977). The Nigerian Enterprises Promotion decree (NEPD), 1972 or Nigerian Indigenisation Policy (1972) often regarded as a bench-mark industrial policy came in the wake of the desire to make Nigerians own and control the industrial enterprises in the country. As noted by Ndebbio et al (1991), the indigenization Decree was to give Nigerians the opportunity to demonstrate the ability to assume ownership, control and management of a greater part of the nation’s economy.
Its main objectives were to:
The transfer of ownership and control to Nigerians in respect of those enterprises formally wholly or mainly owned and controlled by foreigners.
create opportunities for the Nigerian indigenous businessmen;
maximize local retention of profits;
increase the level of intermediate and capital goods production;
ensure increased participation of Nigerians in the wealth of their nation; and
Create employment opportunities for Nigerians to ensure increased level of self reliance in the supply of industrial output.
The 1972 Act that resulted in the indigenization policy was amended, repealed and replaced by the Nigerian Enterprises promotion Act, in 1977.This Act gave birth to the indigenization policy of 1977. The 1972 contained II schedules, while the 1977 act contained III schedules. Schedule I of 1977 contained 40 Enterprises, schedule II contained 57 and schedule III contained 39. In 1981 To be precise, the number of Enterprises in each schedule was revised .By this, schedule I had 36 Enterprises, schedule II, 576 Enterprises and schedule III, 456 Enterprises respectively.
This policy, however, suffered setbacks owing largely to insufficient capital, lack of skill manpower and activities of unscrupulous Nigerians who connived with foreign investors to undermine the policy. Consequently, there was distortion in the industrial sector and production index indicated a downward trend. Compound growth rate of industrial production between 1981 and 1986, when the effects of this policy actually manifested, was in the negative, -1.8 percent. It should also be recalled that the huge oil windfall recorded in the mid-1970s actually ceased to flow during this period. The foreign reserve of the country was severely depleted and many industries that relied on imported inputs had to either shut down or operated below full capacity.
4. STRUCTURAL ADJUSTMENT PROGRAMME (SAP, 1986) The IMF engineered Structural Adjustment Policy (SAP) was quick at addressing the issues with the promulgation of the New Industrial policy 1989. This policy tended to reverse some of the provisions of the Nigerian Indigenization Policy and opened up the economy for foreign investors. The policy also provided for empowerment of domestic businesses through the National Economic Reconstruction Fund (NERFUND). The introduction of SAP resulted in very negligible and mild recovery, with mining recording the highest compound growth rate of 0.30 percent. Whatever was gained during the SAP era was destroyed during the Abacha regime. The destruction was so deep that many years of economic reforms and democracy have not yet been able to fully repair the damage.
This policy came to being in order to right -wrong the weaknesses and ineffectiveness of earlier industrial policies. Its aims and objectives include;
To promote investment.
To stimulate non-oil exports and providing a base for private sector led development.
To promote efficiency of Nigeria`s industrial sector.
Privatization and commercialization of the economy toward the promotion of industrial efficiency.
To develop and utilize local technology by encouraging accelerated development and use of local raw materials and intermediate inputs rather than depend on imported ones.
5. TRADE AND FINANCFIAL LIBERALIZATION POLICY (1989) This policy was enacted purposely to foster competition and efficiency in the financial sector. Its aims and objectives include;
To foster competition among the domestic firms and between the domestic imports competing firms and foreign firms with view to promote efficiency.
Reduction of levels of both tariff and non tariff barriers.
Scarping of commodity marketing boards.
Marketing determination of exchanging rate as well as deregulation of interest rates was meant to foster efficiency and productivity.
6. SMALL AND MEDIUM INDUSTRIES EQUITY INVESTMENT SCHEME (SMIEIS, 2000/2001)
The scheme was instituted in response to the Federal Government’s concern and policy measures for promotion of small and medium enterprises, as vehicles for rapid industrialization, sustainable economic growth and development, poverty alleviation and employment generation (Anyanwu et al 2003). The scheme was a voluntary initiative, which requires all banks to set aside 10 percent of their after-tax profit, for equity investment in small and medium enterprises in Nigeria, as part of their contribution towards stimulating economic growth, developing local technology and generating employment. This was set up so as to help in the co-ordination of the scheme with a guideline that 60 percent of the SMIEIS fund should go to core real sector, 30 percent to services, and 10 percent to micro enterprises through NGO`S . The objectives of SMIEIS are as follows;
Increasing per capita income / output and initiating /constituting changes in the structure of business and the society through growth, increased output and employment opportunities.
Enhancement of Regional economic balance through industrial dispersal.
Moderating rural/ urban migration.
Easily adaptable to local technology.
Promotion of effective resource utilization.
to facilitate the flow of funds for the establishment of new small and medium investment (SMI) projects.
To develop and package viable industries with Nigerian entrepreneurs
To provide venture capital and management that would spearhead the restructuring and
Financing of the small and medium scale industries (SMI)
To stimulate economic growth, develop local technology and generate employment.
Although, the scheme has recorded significant improvement in terms of sectoral and geographical distribution of investments, it has also been bedeviled with slow pace of aggregate investment. Other setbacks include high cost of pre-investment activities, such as feasibility studies, assets valuation, etc, which entrepreneurs feared might become wasted fund, if they are not considered; reluctance of banks to make a paradigm shift from short-term financing to long term financing; continued poor state of physical infrastructures, among others.
7. BANK FOR INDUSTRY (BOI- 2000) The bank was introduced as a development institution to accelerate industrial development through the provision of term loans, equity finances and technical assistance to industrial enterprises. The bank has the combination of the following institutions;
Nigerian Industrial Development Bank (NIDB)
Nigerian bank For Commerce And Industry (NBCI).
Industrial And Insurance Brokers (IDIB)
Leasing Company of Nigerian Limited (LECON) e.t.c.
Other aims and objectives of this bank include;
Making a considerable impact in terms of long term loans.
To assist in employment generation.
Industrial dispersal and promotion of indigenous entrepreneurship.
8. NATIONAL ECONOMIC EMPOWERMENT AND DEVELOPMENT STRATEGY (NEEDS, 2004) In an effort to further consolidate the possible achievement by the preceding policy, the Federal Government in 2004 launched an entirely home-groomed package, National Economic Empowerment and Development Strategy (NEEDS). Under this development policy, the private sector was identified as the engine of growth. The private sector is the executor, investor and manager of businesses. While the government is the facilitator and regulator, helping the private sector to grow, create jobs, and generate wealth (NEEDS, 2004).
As contained in NEEDS document, the overriding objectives of this development policy included:
To accelerate the pace of industrial development by increasing value added at every stage of the value chain.
To encourage forward and backward linkages in a few niches.
To provide enabling environment for private sector leadership.
To promote the establishment of efficient small and medium size enterprise sector to enhance sustainable economic development.
To facilitate the development of an industrial sector that is internationally competitive.
The success and/or failure of NEEDS will to a very large extent depends on the successes and/or failure of subsequent industrial policies that evolved thereafter, since NEEDs package is believed to be a “mother package” through which other industrial policies within this period anchored their existence.
9. NATIONAL INTEGRATED INDUSTRIAL DEVELOPMENT (NIID, 2007) The continued search for appropriate industrial policy in Nigeria took another turn when the government in 2007 instituted another policy, the National Integrated Industrial Development (NIID) blueprint, as a service framework developed by the United Nations Industrial Development Organization (UNIDO) in collaboration with the Federal Ministry of Industry and other stakeholders. The framework, according to CBN (2007), comprised four integrated programmes, namely:
Industrial governance and public private sector partnership;
Strengthening industry’s institutional support base; a cluster development initiative to grow the small and medium enterprises (SME’s), using common facilities;
Environmental and energy; addressing the challenges of low power generation and utilization through rural renewable energy; and
Rural private sector agro-industrial development.
Under this new initiative, the Lagos, Kano, Aba and Port Harcourt (LOKAP) industrial action plan was developed to address the problem of infrastructural decay and to focus efforts in addressing the needs of these four industrial cities. The framework also made a provision for the construction of one park in each of the six geo-political zones of the country to boost the development of SMEs.
On-the-spot assessment of this policy has shown that it has not achieved much success. One of such failures is bureaucratic bottleneck in terms of policy implementation. For instance, the slow pace of work at various National Integrated power project sites is a clear testimony to the policy failure. Also, some proposed sites have become fallowed, prompting trespasses by local residents. Another problem is slow pace in the disbursement of loans meant for small and medium scale enterprises by banks. Lastly, the “cluster concept” conceived by this policy is only operational on paper. The designated industrial parks lack operational facilities such as adequate power supply; lack of good transport network; inadequate water supply for both human and industrial uses; lack of sewage system and so on.
9. INDUSTRIAL PARK DEVELOPMENT STRATEGY (IPDS, 2009). The current industrial policy (referring to 2009) pursued relentlessly by the present government is the industrial park development strategy (IPDs). This is a ‘cluster concept” strategy aimed at driving non-oil growth through the creation of industrial parks and special economic zones. As a medium-term strategy, industrial parks are designed in areas with basic infrastructural facilities needed for establishing an industry, thus making such areas more investment friendly. Where the park is near the sea port, it can be made an export processing zone, thus allowing tenants to bring in machinery and raw materials free of duty, provided a certain percentage of the output goes back into export.
As fascinating as the ‘cluster concept’ seems to portray on paper, it is also beset by a number of possible challenges. One of such problems is the bureaucratic bottlenecks in the provision of basic physical infrastructures in the areas where industrial parks are located. Such delays are capable of obstructing both the taking-off process, as well as, the operational activities of such parks, which in turn could overturn the intended objective of industrial development. Poor electricity generation and distribution is another problem that has strongly hindered industrial development in the country in recent times. The erratic power supply situation in Nigeria is far from being over, despite several efforts by the governments to solve it.
SOME OF NIGERIA’S INDUSTRIAL POLICY INCENTIVES As part of government’s drive to encourage investments and promote industrial development in Nigeria, various incentive packages have been designed and implemented for the industrial sector of the economy. These incentives are usually in form of fiscal measures like tax deductions and allowances.
TAX HOLIDAY: – This simply means the exemption of infant or new industries from the payment of profit tax for some years of operation such as five year. The aim is to protect them from international competition and enable them build up enough funds for expansion purposes.
First to enjoy this incentive are companies with pioneer status. Such industries are granted five to seven years of tax holidays from the period of their take-offs. For industries involved in Research and Development (R
In The Ad As Model Economics Essay
Macroeconomics is the branch of economics which studies economic activities including economics issues or economic problems at the level of an economy as a whole. It considers the aggregate performance of all the markets in the system. Its variables are Aggregate Demand and Aggregate Supply. AD is the aggregate expenditure on the purchase of the domestically produced goods and services during the accounting period. AS refers to the flow of the goods and services in the economy during the accounting year. (Jain T.R. 2009). Overtime the levels of unemployment, inflation and economic growth in an economy tend to fluctuate; these fluctuations are caused by the business cycle which has four phases: peak, Recession, rough and recovery which affects the economic activities.
Considering the economy where the level of production is below the natural level which means that the economy is in recession. It is a general slowdown in the economic activity, the economic output declines which lead to the unemployment to rise and inflation declines. The causes of recession are determined by both the AD and AS curves. Fall in AD is determined by decline in any of these components: the consumption spending, investment spending, government spending and the net exports spending (Froyen R. 2002). If this happens then according to Keynesian theory (Keynes J. 1936) there will be fall in GDP and the effect of the real GDP depends upon the slope of the AS curve which shifts lefts as the higher prices would increase the cost of production which will shift the short run AS and cause lower GDP and higher inflation .The other effects of recession include a declining demand for output leading to higher level of productivity , even the rise in unemployment would be caused as factory workers would be forced to leave their jobs by the firms, fall in business confidence and profits affecting exports and imports, increasing the government spending. Counties get affected by global recession .For example, a recession in EU could cause a fall in the demand for UK exports which will reduce AD and cause a short term fall in UK’s Real GDP but the effects can be reduced if the domestic demand for goods in UK remains high. (Pettinger T. 2011)
Economists believe that if there is any fall in the GDP it is suppose to be temporary and will return to its natural level when the labour market adjusts the wages which would affect the price. Any fall in AD, would led to short term fall in the real GDP. However, in the great depression of 1930s, Keynes was very critical about these assumptions and brought forward his view that the negative growth for a long period doesn’t clear the market automatically as the prices and wages are sticky, the stickiness of these in the downward direction prevents the economy from experiencing full employment. According to him in recession there is a fall in the consumer confidence which causes rise in the saving ratio which means people tend to spend less of the disposable income and save more which causes further fall in the AD curve (paragraph paraphrased from Arevuo M. 2012).
The AS relation between the price level and the output is positive and the AS curve is upward sloping as will be illustrated in Figure 1. Another characteristic is that the expected price level which works through the wage setting leads to an increase in the actual price level (Romer D. 1996). As the equilibrium in the labour market requires the real wage implied by the wage setting be in accordant with the wage implied by price setting with the assumption that the actual price level is equal to the expected price level.
The AD relation between the price level and output is negative and the AD curve is downward sloping as will be illustrated in Figure 1. AD curve is derived from the equilibrium in the goods market and the financial market. Goods market is the buying and selling of goods and services and is represented by IS curve whereas the money market is the interaction between the demand and supply of money which is set by the central bank of a country and is represented by LM curve. This IS- LM model leads to the derivation of the AD curve and is used to foresee the economy’s response to the fiscal and the monetary policy (Danby C. and Charusheela S. 1998).
Figure 1: Effects of the adjustment process on the price level and output when economy is in recession.
Source: The above self made diagram is enumerated from Blanchard Olivier, Macroeconomics international edition. (See appendix A)
In the figure 1, the equilibrium is given at the point A where the AD and the AS curves intersect, the output and the price level are given by Y1 and P1. Because, the economy is in recession the natural rate of output Y2 is higher than the output Y1 and the gap between the YI and Y2 is called the recessionary gap, the price level P2 is also higher than P1. As the output is lower than the natural level, the unemployment rate is above its natural rate and the tight labour market leads to lower wages and these lower wages lead to lower prices than expected by the wage setters. Now, at price level P1, where the economy is in recession increase in money leads to an increase in the real money stock M/P .Overtime, the adjustment takes place where the economy moves down along the AD curve and this continues till the time the output reaches its natural level at A2 where output is high with low price. Therefore, the basic mechanism through which the economy returns to its natural level in long run is the adjustment process .It works through the price as the price is falling overtime in recession this leads to an increase in the real money which reduces the interest rate, this reduced interest rate leads to higher demand as consumers will demand more at low prices which shifts the AD curve from AD to AD1 in Figure 1 bringing the equilibrium to A1 which is the natural level of the economy. (Paragraph paraphrased from Blanchard O. 1997)
To recover from recession, changes in any of the variable either the AD or AS relation leads to changes in the output and prices .In this case, the output will have to be increased by the right shift of the AD curve and this can be done by the changes in the fiscal and the monetary policy. The central bank can use tight or easy monetary policy and open market operation in which buying and selling of bonds is done to make changes in the supply of money (Ratajczak D. 1987). As the economy is in recession, the central bank can also use expansionary monetary policy which is illustrated in the diagram below:
Figure 2: Effect of the monetary expansion on the interest rate and output.
Source: The self made diagram above is enumurated from Blanchard Oliver, Macroeconomics international edition (See appendix B )
In figure 2, the interest rate and the output is shown by i1 and Y1. The point if equilibrium where the IS and LM curve intersect is at point A which correlates Point A in figure 1 .In monetary expansion the central bank increases the money supply which shifts the curve downward from LM to LM1 and downward movement occurs on the IS curve forming new equilibrium at point A1 which also correlates to point A1 in figure 1.This increase in money supply leads to increase in money stock (M/P) assuming that the price doesn’t change this shifts the LM curve further from LM1 to LM2 .But , to recover from recession the price level increased in figure 1 to reach the natural level of output ,so the LM curve shifts back from LM2 to LM1. Therefore, the interest rate decreases and the output increase at point A1 with interest rate i2 and level of output Y2.
Expansionary monetary policies are designed to increase the money supply by the central bank. This increases the Aggregate Demand which will lead to increase in price level and will increase the profit potential for business as now businesses would now respond to the increase in profit by increasing the output and reducing the unemployment rate which means that the employment level would rise (Maurice M. 2012) .The interest rate is cut down which reduces the cost of borrowing and people wish to spend more.
To conclude, the AD-AS model determines the equilibrium price level and equilibrium level of real GDP. Considering what happens in this situation when the level of production is below the natural level i.e. economy is in recession. With adjustment process, the AD curve shifts upward to reach the natural level of output and there is movement along the AS curve. In recession even when the central bank increases the money supply by cutting the interest rate to stimulate the demand means that the lower the interest rate lower will be the cost of borrowing and therefore people will tend to spend and invest more. But, this policy can also prove to be inefficient as the firms may be reluctant to invest as they don’t see any increase in the demand in spite of cheap borrowing . Moreover, it gets difficult to increase the aggregate demand during recession.