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Economy | Nigeria Economy

The Uphill Battle of Industrialization in Nigeria

Mar 28, 2023   •   by   •   Source: FDC Ltd   •   eye-icon 181 views

Deindustrialization in Nigeria has been occurring since the 1980s, as the country shifted from an industrial-based economy to focus on services and consumption. Since the mid-1980s, manufacturing output as a percentage of GDP has declined by about 16% to 8.4%today, while services have become increasingly important, contributing 55.4% to GDP from 47%. 

 

Over the years, the Nigerian government has implemented policies to encourage investment in the manufacturing sector. In spite of this, Nigeria is still at the bottom of the development ladder as the industrial sector, the second largest employer of labor (12.24% as of 2020), is now comatose. For example, Nigeria ranks the eighth most industrialized country in Africa, way behind South Africa and Morocco.

 

Industrialization in Nigeria is driven by several factors including the country’s dependence on crude oil and the mismanagement of public funds. Moreso, numerous industries are collapsing due to defective trade policies, poor infrastructures, corruption, lack of access to finance, unfavorable business climate and the pressure of globalization on the Nigerian economy



Unfortunately, the result of a failing industrial sector is the growing reliance on importation that continues to worsen Nigeria’s balance of trade and stifle output growth. Industrialization is critical to Nigeria's long-term development, and expanding the manufacturing sector will help to build a more resilient economy. According to Kaldor's first growth law, an economy's growth rate is positively related to the growth rate of its manufacturing sector. 

 

The Current State of the Manufacturing Sector 

Conservational economics requires that a country’s economic activities go through three stages: agriculture, industry, and services, in that order. However, Nigeria skips this hierarchy, paying less attention to the link (industry) between the agriculture and service sectors. Unlike some newly industrialized Asian countries like Indonesia and Singapore, Nigeria’s industrial sector remains underdeveloped and unregulated, making it hard to gainfully engage in international trade and attract investments to boost forex earnings. 

 

In fact, according to Rostow’s stages of growth model, the prerequisite for the "take-off stage" is a significant investment in the industrial sector. In Nigeria, there has been massive fluctuations in the performance of the industrial sector in the 2000s as compared to the 1980s and 1990s. For instance, industrial sector contribution as a percentage of GDP stood at 39.245% and 37.71% for 1981 and 1992 respectively, compared to 20.56% and 19.02% for 2021 and 2022 respectively.2 Meanwhile, the manufacturing sector’s contribution to GDP has declined steadily in the last five years. 

 

The development of the manufacturing sector (which is a component of the industrial sector) is an important link between agriculture and services. It provides the connection between the production of raw materials and their transformation into finished goods and services, with the capacity for forward and backward integration. 

 

However, the underperformance of the manufacturing sector has kept Nigeria in the “preconditions for takeoff stage” of Rostow’s stages of growth. This makes the country more vulnerable to external shocks. For instance, the Russia-Ukraine war hit the Nigerian economy hard as inflation climbed to a 17-year high of 21.9% (February 2023).



The manufacturing sector, in particular, faced a lot of challenges ranging from the bloated cost of importation of raw materials to the spike in energy costs. 

 

Rising energy costs and importation issues aside, Nigerian manufacturing firms also suffer from acute shortages of infrastructure such as good roads, potable water, and, in particular, inadequate power supply. Electricity outages have forced companies to opt for diesel[1]powered generators for operation. Sadly, diesel price has remained elevated at about N800/liter due to the impact of the Russian[1]Ukraine war and persistent fuel scarcity in Nigeria. The woes above coupled with persistent forex scarcity where manufacturers resort to the expensive parallel market for 95% of their forex needs,4 weak consumer demand, high cost of doing business, and lack of access to technology, are the key factors constituting impediments to the growth of the manufacturing sector. 

 

Comparative Analysis 

Industrialized countries in Africa like Morocco are good case studies for Nigeria. In Morocco, the process of industrialization began in the late 1950s with the creation of the first industrial zones. Now, Morocco is a diversified economy with a high level of industrial activity, especially in the automotive and aeronautics industries. The manufacturing sector’s contribution to the GDP of Morocco has shown steady growth since the early 1990s. Manufacturing output increased from 10% of GDP in 1991 to approximately 15% in 2021. 



Morocco has had a more successful industrialization process than Nigeria, as evidenced by its rising GDP per capita, as well as its large manufacturing sector (accounting for more than 15% of its GDP). Morocco's industry comprises a number of sectors, including automotive, electronics, textiles, and food processing. 

 

In comparison, Nigeria's manufacturing sector only accounts for about 9% of its GDP, and its industry is mostly dominated by oil production and the crude oil refining sector, which is currently challenged with underinvestment, oil theft and pipeline vandalism. 

 

In terms of industrial policies, Morocco has a more comprehensive approach to industrialization than Nigeria. Nigeria industrial policies have not recorded significant success in the past years. The previous industrial policies such as the Nigeria enterprise and promotion decree of 1972 and Export expansion grant scheme of 1986 including the import substitution policy in the 1970’s, targeted to move the country from an agrarian economy to an industrialized nation recorded a massive failure due to poor execution, policy failure, poor management and lack of local skills. 

 

Morocco, on the other hand, implemented several strategies to encourage industrial growth, including the adoption of a new investment charter, tax incentives, special economic zones, and improved access to infrastructure. This allowed foreign investors to establish factories in Morocco, which in turn created jobs and attracted more foreign investment. FDI inflows into Morocco have grown by 12.3% to $3.01bn in the last five years.

 

The Moroccan government also invested heavily in infrastructure, particularly in transportation and communication, which enabled the manufacturing sector to become more competitive and efficient. 

 

In addition, the automotive sector has been a major contributor to the country’s growth. With investment from foreign companies like Renault and PSA Peugeot Citroen, the sector has seen significant growth since the 1990s. The sector accounts for 29% of the country’s total exports. The automotive sector’s contribution to Morocco’s GDP is also expected to rise to 24% in 2023.8 Other important industries include food processing, textiles, and construction. Morocco has also seen a rise in the number of technology-based firms and is increasingly focusing on renewable energy. 

 

Due to Morocco's competitive advantage in terms of its skilled labour force, strong infrastructure, and access to the European market, Morocco has recorded higher levels of foreign direct investment than Nigeria. Nigeria has more limited access to the global market, and its foreign investment levels are significantly lower due to insecurity, political uncertainty and poor macroeconomic conditions. 

 

Overall, Morocco has had a more successful industrialization process than Nigeria due to its higher levels of foreign investment, diversified economy, and comprehensive industrial policies. The contribution of manufacturing to the economy of Nigeria places the country behind Morocco and the Newly Industrializing Countries (NICs) of South-east Asia like Indonesia and Malaysia. Many Asian countries popularly referred to as Asian Tigers that are revered today attained such status through industrialization by implementing a market[1]oriented economy, encouraging foreign investment, and investing heavily in infrastructure.

 

Looking Forward 

Manufacturing is the key to unlocking productive jobs, bigger export revenues and sustainable development. 

 

However, Nigeria is yet to fully explore its potential and achieve the much-desired level of industrialization stated in the National Development Plan 2021-2025. Past industrial policies have not been efficient because of poor implementation and mismanagement. As such, the government has to take big steps to revive the manufacturing sector, by addressing the many challenges hindering growth like epileptic power supply, insecurity and forex scarcity. Doing this will speed up the country’s industrialization process.




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