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THE IMPACT OF INDUSTRIALIZATION ON ECONOMIC GROWTH

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THE IMPACT OF INDUSTRIALIZATION ON ECONOMIC GROWTH

 

CHAPTER ONE
INTRODUCTION  
1.1    Background to the Study
Industrialization has been regarded as a veritable channel of achieving lofty and desirable goals of improved technology and improved quality of lives of the citizens of the country. Countries develop their industrial sectors for many reasons:
(i) industries have more backward and forward linkages to the other sectors of an economy;
(ii) they exhibit increasing returns to scale; and
(iii) they have the ability to diffuse technology in the economy wider than the primary sector.
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, 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 and hence contributes to economic-growth. Therefore, industrialization is an ideal policy option for sustainable economic growth in Nigeria and it is what the present regime needs to achieve its transformation agenda.
Based on the above, Nigeria has designed policies to attract manufacturing and industrial activities during the colonial and postcolonial periods. In the jcolonial era, the focus was to extract raw materials from Nigeria to foreign based industries. Like the rest of African countries, the colonial government in Nigeriawas 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). In the post-Independence Nigeria, the indigenous government that emerged was very ambitious not only to industrialize, but also to ensure indigenous participation. This led to the emergence of Indigenization policy along with Import substitution strategies. Nigeria had practiced this from 1960s to the early 1980s. It was noticed that the twin policies of import substitution and indigenization could not yield the expected industrialization in Nigeria.
Two main problems were encountered here. One, the Nigerian citizens to whom import substitution and  indigenization policies favour lack the financial capacity, the technical knowhow, the entrepreneurial ability and the managerial acumen.Second, import substitution necessarily entails inefficiency of local industries because they are not established to face foreign completion and so were over protected. To industrialize, it became necessary to abandon these twin policies. In 1985, Nigeria adopted the Structural Adjustment Programme (SAP) that was supposed to restructure the Nigerian economy, encourage both local and international investors to invest in Nigerian economy. The implementations of the policy, rather than improving the Nigerian economic performance, worsen the situation, leading to under capacity utilization of the economy.
SAP was finally abandoned in the 1990s for private sector to take the leading role in the manufacturing and the industrial sectors of the economy.Government has agreed to take up boosting local technology expertise and promoting small scale industries. It is not yet clear how government intends to improve local technology and encourage small and medium scale industries for stimulating industrial growth in Nigeria. Now that the Nigerian government has decided to play the role of motivating industries through provision of infrastructure and improving the environment where businesses are done, it is not clear how this can affect industrial growth in Nigeria. After one and a half decades, there seems to be no remarkable improvement but rather industries have folded up without new ones coming up. What is the way forward?
1.2 The Statement of the Problem
The tendency of the industrial sector to stimulate more economic growth has prompted many economists to formulate theories to encourage industrialization. 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 these theories(the theory of critical minimum effort thesis, the theory of low equilibrium trap and the theory of the big push) emphasize market constraint as a main barrier to industrialization and advocated state intervention to help minimize this constraint through massive investment of resources. The middle two (the doctrines of balance growth and unbalance growth) acknowledge market constraint but advocated piecemeal approach to minimizing the market constraint. The last two theories (import substitution strategy and export promotion strategy) 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 industrialization.  
Policies of the first theory (the theory of critical minimum effort thesis) were applied by the erstwhile USSR, Chinaand countries in Eastern European to develop through huge investment in public resources; while the last method (the export promotion strategy) was first applied by Japan, later by the Asian Tigers (Singapore, Hong kong, South Korea and Taiwan) and more recently by the Newly Industrialized Countries: Malaysia, South Africa, Indonesia, etc. (Clunies-Ross, fosyth and Huq, 2010). Given the above scenario, can we say that the present levels of industrialization efforts in Nigeria have contributed in stimulating economic growth in Nigeria? What are the impact of labour force, capital stock, and human capital on Nigeria economic growth? These are the questions this study is supposed to address.  
1.3    Research Questions          
This study is designed to answer the following questions:
i.     Has industrial growth in Nigeria stimulate economic growth in the country?
ii.    What is the impact of human capital development on economic growth in Nigerian economy?
iii.   Has labour input contributed to economic growth in Nigeria?  And
iv.   Does capital stock influence economic growth in Nigeria?    
1.4    Statements of Research Objectives
The broad objective of the study is assessing the impact of industrialization on economic growth in Nigeria. The specific objectives of the study are: To examine the impact of industrialization on economic growth in Nigeria; To assess the impact of human capital on economic growth in Nigeria; To highlight the impact of labour force on economic growth in Nigeria; and To highlightthe effects of capital stock on economic growth in Nigeria.    
1.5    Significance of the Study
The study in the area of impact of industrialization on economic growth in Nigeria is the area has scanty empirical works (Usman and Wanjuu, 2011). This work is designed to fill the vacuum that exists in this area. In the above cited study, the study lays emphasis on the relationships between industrial output, labour, capital stock, on one hand, and the level of output on the other hand.          
Our study attempts to relate industrial output, labour capital stock and human capital to the level of output in Nigeria. Previous studies have not included the human capital element in estimating the relationship between industrial output and economic growth in Nigeria. So this study is an improvement over the previous works.   Another area of improvement is the specification of the equation. In the work of Usman and Wnajuu (2011), for instance, the level industrial output as a proportion of the GDP value was expressed in terms of output per worker. As observed by Ghali (1997), Where output is expressed as a proportion of the GDP, the result of the regression analysis is always negative, a sort of misspecification of the model. This study corrects these defects by specifying the industrial output in their absolute terms, as independent variable to the GDP.       
1.6    Statement of Hypotheses
The null hypotheses formulated to guide this study are:
i: Industrial output does not contribute to economic in Nigeria;
ii: Human capital has no impact on economic growth in Nigeria;
iii: Capital stock does not contribute to economic growth in Nigeria;
iv: Labour force does not contribute to economic growth in Nigeria;  
1.7    Scope and Limitations of the Study
The scope of the study is to assess the impact of industrialization on the Nigerian economy. The study also assesses the impact of capital stock, human capital, and labour force on economic growth in Nigeria. The limitations of the study are: The period selected to be used for the investigation covers the period of 1980-2010; and The variables used to carry out the study are restricted to industrial output, labour force, capital stock and human capital.

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