An Assessment of the Impact of the Manufacturing Sector on Economic Growth in Selected Countries in West Africa
Chapter One
Objective of the study
The objective of the study is to ascertain the impact of the manufacturing sector on growth in Nigeria. The following specific objectives will also assessed;
- To ascertain the contribution of the manufacturing sector to Nigeria’s economy
- To determine the impact of manufacturing capacity on the gross domestic product of the nation
- To ascertain the growth rate of manufacturing capacity utilization on the Nigeria economy
CHAPTER TWO
REVIEW OF RELATED LITERATURE
THEORETICAL REVIEW
Kaldor (1966) postulated that manufacturing is the engine of growth for any nation who vies to promote growth and development in its economy. According to the author, manufacturing is subject to increasing returns, both dynamic and static whereas petty services and land based activities are subject to diminishing returns. Similarly, he argued that manufacturing sector tend to expands by drawing labour from other sectors of the economy in which diminishing returns exists. In this case, productivity automatically rises due to the fact that the average product of labour exceeds the marginal product. Hence, the more the output of the manufacturing sector grows, the more the productivity growth grows faster in the economy, which in turn serves as the key determinants of gross domestic product and standard of living of people (Pacheco-López&Thirlwall, 2013). Thomas (2003) revealed that there is three principal themes in any manufacturing sector, which they identified to include that manufacturing evolved into solution base- high innovation; it is also committed to technology and innovation, which is the key for sustaining competitiveness and growth in the level of productivity. Similarly, manufacturing sector accelerate productivity and innovation in which the spillover effects spread to other sectors of the economy. In other words, manufacturing sector is a growth-led sector as it leads to increase in economic growth via increasing returns, which is a macroeconomic phenomenon because it resulted from increasing returns to scale. Kaldor (1966) stated three laws, which expresses how economic growth is affected by the manufacturing sector in an economy. The author identified that a rise in the output of manufacturing sector leads to improved national output of a country; similarly, economic growth is a manufacturing-base and finally, he postulated that the developed and fastest growing economies in the world today are the industrializing nations in which the contribution of the manufacturing output to gross domestic product (GDP) is expanding rapidly. Kaldor’s law as cited in Teshome (2014) also postulated that increase in the productivity of labour is based on the output of the manufacturing production. Pons-Novell &Viladecans-Marsal (1998) expressed that manufacturing output growth has positive nexus with gross domestic product (GDP) growth rate, which means that industrial sector leads to higher productivity than other productive sectors of the economy. This is because, industrial sector incorporate technology progress that promote growth in the economy as a whole. According to neoclassical proposition of Solow (1956), the relationship between manufacturing and growth is discussed under the diminishing marginal productivity of capital, constant returns to scale, technical progress that are exogenously determined and substitutability between labour and capital. Solow argued that investment and savings are very important factors responsible for immediate growth in economy. In the long run, Solow identified progress and sophisticated technology as the key factor responsible for growth and development in an economy, even though technology was treated as exogenous to the economy. The approach of the neoclassical growth even though favours capital-labour as indixes of growth in the economy, the growth in technology considered exogenous remained unexplored (Olorunfemi et al.,2013).Banjoko, Iwuji&Bagshaw(2012) revealed that manufacturing sector had since its emergence with industrial revolution been transformative for all economies via its spillover effects to other sectors. Oyati (2010) stated that developed countries that could harness its powers attained higher profitability, prosperity significant growth in their economies. For example, the experiences of the developed countries and emerging economies of India, Singapore, China, Malaysia and North Korea showed the positive nexus between economic growth and manufacturing sector (Banjoko et al., 2012). Similarly, developing nations who are oriented agrarian and services in the past also formulated several initiatives to sustain growth and development of the manufacturing sectors.
THE CLASSICAL GROWTH THEORY
The conception of the modern economic growth can be traced to the criticisms of the Mercantilists theory of economic growth by the Scottish and physio rats such as Adam Smith and David Ricardo alongside the foundation of the modern political economy as a discipline (Abdullahi, 2015). The physio crats postulated that productive capacity allows for growth and that increasing of capital, which promote capacity can improve the wealth of nations. According to smith, agricultural development results to increase in commerce and construction works (Imoisi, 2013). To Smith, as agricultural surplus arises due to economic development, there will also arise the demand for manufactured goods and commercial services. This will in turn, leads to the establishment of manufacturing industries and commercial progress. Smith also argued that population growth is endogenous, which largely depended on the accessibility and capacity to raise workforce. More so, investment was also seen as endogenous factor that is stimulated by savings rate while land growth evolved by enhancement of technology of old land or invasion of new land (Imoisi, 2013). In overall, technological improvement stimulates economic growth. Smith also opined that division of labou rpromotes growth. He saw international trade and machinery developments as engine of growth that leads to specialization in any economy. Accordingly, division of labour is limited by the extent of market (Brendt& Morrison, 2011). The theory further demonstrated that savings creates investment that in turn, results to improved growth; hence, income allocation is one of the major determinants of how slow or fast a country grows. To Ricardo, the output of a nation is distributed among profits, rent and wages respectively. Thetheory emphasized on the importance of accumulation of capital via agricultural development and other sources of profit rates and savings. Ricardo however, postulated that trade is a profit to a nation, because if a national can purchase good more cheaply abroad, it implies that more profitable work needed at home. The basic assumptions of the Ricardiantheory that involve diminishing returns to land and the Malthusian principle of population are typically important to the understanding of the problems facing the overpopulated and developing economies like Nigeria (Abdullahi, 2015).
CHAPTER THREE
Research Methodology
To examine the impact of manufacturing sector on economic growth in Nigeria from 1985 to 2020, stationarity test via the application of Augmented Dickey-Fuller (ADF) unit root test, Auto Regressive Distributed Lag (ARDL) model and Pairwise Granger causality technique were utilized in the analysis. The unit root test is carried out to determine the order of integration among the variables of the study. The ARDLbound model is used to investigate the short run and long run coefficients of the variables. The Pairwise Granger causality on the other hand is utilized to investigate causality between manufacturing sector and Nigeria’s economic growth. The variables used in the research include real gross domestic product (RGDP), manufacturing capacity utilization (MCU), manufacturing output (MO), government investment expenditure (GINVEXP), broad money supply (M2) and interest rate (INR). Data for the variables are sourced from the Central Bank of Nigeria (CBN) statistical bulletin and National Bureau of Statistics (NBS) of various publications ranging from 1985 to 2020.
CHAPTER FOUR
Empirical Results and discussion
This section of the research shows estimation results and consequently, discusses the results based on the study’s objectives.
CHAPTER FIVE
CONCLUSION
This study is an investigation of the impact of manufacturing sector on economic growth in Nigeria for the period 1985-2020. Auto Regressive Distributed Lag (ARDL) model and Pairwise Granger causality technique were utilized in the analysis. The variables used in the study include real GDP, manufacturing sector capacity utilization (MCU), manufacturing sector output (LMO), government investment expenditure (LGINVEXP), broad money supply (LM2) and interest rate (INR). Unit root test was conducted by applying the Augmented Dickey-Fuller (ADF) unit root test. The results showed that all the variables except INR were non-stationary at level; however, after first differencing, all the variables became stationary at 5% critical value. The ARDL model results indicated both long run and short run relationships exist among the variables of the study.
The results also revealed that manufacturing sector capacity utilization (MCU) has positive and insignificant influence on real GDP while manufacturing sector output (LMO) has positive and significant influence on real GDP in the economy. Similarly, it was shown in the results that government investment expenditure (GINVEXP) has negative and significant effect on real GDP whereas broad money supply (LM2) affects real GDP positively and significantly. It was also showed that negative and insignificant relationship exists between interest rate (INR) and real GDP in the economy. These results imply that 1% improve on manufacturing sector capacity utilization and manufacturing sector output will rise real GDP of Nigeria by 0.001% and 0.35% respectively while any economic policy that is able to increase government investment expenditure and interest rate by 1% will results to a decrease in real GDP by 0.035% and 0.002% respectively. More so, a rise in broad money supply by 1% will lead real GDP to increase by 0.06%. Furthermore, the results of the Pairwise Granger causality test indicated unidirectional relationship runs from real GDP to manufacturing sector capacity utilization (MCU) and manufacturing sector output (LMO); and from broad money supply (LM2) to real GDP while no causality runs between real GDP and government investment expenditure (LGINVEXP) and interest rate (INR).
Recommendation
The study recommended that government should intensify efforts toward promoting socio-economic infrastructural, macroeconomic and institutional framework of the nation in order to bring in a good relationship between external and domestic institutions with the main objective being to effectively harness the mobilized funds towards productive manufacturing sector in the country. In doing so, manufacturing sector output will improve more, leading to higher increase in the contribution of the sector to real gross domestic product of Nigeria.
References
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