2.1 Economic Growth in Nigeria
Economic growth is essentially the sustained aggregate increase in the production activities of an economy relative to commodities and services over a period of time (usually measured in years). Economic growth is defined from a population standpoint as the ratio of the entire amount of goods and services produced in an economy in a given year to the total population of the country in question. Either real or nominal words might be used to express the economic growth statement. For instance, real economic growth is defined as the overall rate of increase in goods and services after accounting for inflation. When there is an overall amount of increase in goods and services without deflation, nominal economic growth occurs (Owan et al., 2020).
Prior to gaining independence in 1960, Nigeria's economy was driven by trade and exports because the country lacked a strong industrial sector. Following independence, Nigeria's economy was centered on agricultural pursuits as a means of support. Despite fluctuations in global pricing, agriculture demonstrated its effectiveness by providing 65% of the GDP (Jide, 2017). Therefore, revenues from agriculture were generated to enable the import of capital goods and raw materials from other countries through international trade. Peasant farmers provided an abundance of food that was suitable for both home and international trade. Jide (2017) continued by stating that infrastructure improvements were made by the governments with the money made from the marketing boards' surplus for future economic growth. The objective of the policy was to increase export activity in order to ensure development (Ekpo and Umoh, 2014).
After the civil war, there was a change in the export structure as activities shifted from being focused on agriculture to being based on oil, which implied a major and dramatic loss in the contribution of the agricultural sector to the economy (Olaleye, Edun, and Taiwo, 2013). The government removed tariffs on the export and sales of agricultural commodities as a way to safeguard the economy from threats posed by variations in global oil prices and as a way to increase large-scale exports of agricultural products. However, in order to discourage imports and boost indigenous agricultural output, substantial import duties were implemented. Between the years 1970 and 1980, this strategy was widely used. The government's foreign earnings from oil exports grew between 1976 and 1981 as a result of the huge commercial scale oil output. The foundation of the economy, agriculture, used to generate far less revenue from exports than did oil. As a result, the government grew and various physical facilities were constructed, including highways, airports, seaports, shipping lanes, a national electricity grid system, etc.
Nigeria's desire to achieve sustained economic growth led to the implementation of several fiscal and monetary policies. Nigeria's monolithic economy, which depends significantly on oil revenue, has been greatly influenced by exogenous influences, most notably by developments in the global oil market. Due to Nigeria's inability to significantly lower its poverty rate, the country's historical record of rapid economic expansion has proven to be a fantasy. Huge oil revenue has caused the oil industry to receive greater attention, while the non-oil sector, with its wealth of potentials, is ignored (Owan et al., 2020).
Crude oil accounts for 20% of Nigeria's gross domestic product. Additionally, crude oil accounts for between 80 and 90 percent of government revenue and foreign exchange revenues. This suggests that Nigeria's economy is unstable, making it sensitive to changes in the global oil price that cause economic volatility (Joshua, Happy, and Dankumo, 2016). It is impossible to overstate the contribution of non-oil sectors to lowering unemployment, eradicating poverty, and fostering economic growth and national development (Raj, 2002), as these non-oil industries can bolster efforts to improve the living conditions of the poor (Tunde, 2012). Due to declining oil prices on the global market, there have been swings in the real GDP growth rate of the oil sector between 1982 and 2015, although the real GDP growth rate of the non-oil sector has been stable (Joshua, et al., 2016). Compared to 2012, when it increased by 5.8%, the non-oil GDP increased by 8.4% in 2013. According to a researcher, this success may be attributed to the industrial sector's 21.7% growth, which was followed by the trade/services sector's 14.2% and 6.6% growth rates and the construction sector's 21.7% growth (Joshua, et al., 2016).
2.2 Trends of Economic Growth in Nigeria
Since 2015, economic expansion has been modest. Growth was steady at 2% in the first half of 2019 after averaging 1.9% in 2018. Private consumption has remained stagnant in the face of high inflation, which continues to restrain domestic demand. Due to persistent insurgency in the Northeast and continuous farmer-herdsmen disputes, agricultural growth is still below potential.
Table 1 and figure 1 below shows the trends of economic growth in Nigeria from 1981 to 2018. During 1981 – 1985, GDP was N14,565.20 billion. During the 1986 – 1990, GDP increased to N16,663.52 billion then increased again to N19,815.91 billion between the periods of 1991- 1995. Within 1996 to 2000, GDP rose again to N22,287.52 billion and then rose again within 2001 – 2005 to N31,686.04 billion. Between 2006 and 2010, GDP increased again from its initial value to N46,679.76 billion. GDP increased again between 2011 – 2015 to N63,367.27 billion and increased again to N68,744.08 billion between 2016 – 2018. The trend of GDP shows that there has been an increase in the value of GDP with in period studies in this study.
Table 1: Trends of Gross Domestic Product in Nigeria from 1981 - 2018
Year
|
GDP (N Billion)
|
1981-1985
|
14,565.20
|
1986-1990
|
16,663.52
|
1991-1995
|
19,815.91
|
1996-2000
|
22,287.52
|
2001-2005
|
31,686.04
|
2006-2010
|
46,679.76
|
2011-2015
|
63,367.27
|
2016-2018
|
68,744.08
|
Source: Author’s Computation from CBN statistical bulletin (CBN, 2018)
2.3 Overview of Manufacturing in Nigeria
In the modern world, a country's manufacturing sector is used to gauge its economic efficiency (Amakom, 2012). However, following the late 1950s discovery of crude oil in Nigeria, the country shifted away from its leading developing industrial production base and placed heavy emphasis on crude oil production (Englama, et al. 2010); this not only jeopardized its economic activities but also made the country's unemployment rate worse. The underutilization of these potentials has exacerbated widespread poverty, low standards of living at the individual level, and rising unemployment in the country as a result of persistent mono-economic practice and blatant disregard for other sectors of the economy like agriculture, tourism, mining, and the manufacturing industry. Nigeria, a giant of Africa, has long been regarded as a nation blessed with abundant human and material resources.
An element of the industrial sector is manufacturing (processing, quarrying, craft and mining). Therefore, manufacturing entails transforming raw resources into final consumer goods, intermediate goods, or producer goods. Like other industrial operations, manufacturing opens up employment opportunities, supports agriculture, diversifies the economy, and increases the country's foreign exchange, which in turn helps local labor develop skills. It reduces the danger of becoming overly dependent on international trade and promotes resource usage to the maximum. A measure of how well the other industrial sector components are employed is the level of production. Nigerian industrial activity organization has gone through four (4) distinct stages of growth. The first is the "Pre-Independence" period, during which manufacturing was confined to the main processing of raw materials for export and the creation of straightforward consumer goods by foreign multinational corporations eager to establish a presence in a developing market. Manufacturing during this time was primarily resource-based, but there were some import substitutes and an imported raw material base. The second is the immediate "Post-colonial era" of the 1960s, which was marked by more active import substitution and the start of a fall in the processing of raw materials with an eye toward export. This import substitution strategy, which was initially intended to lessen overdependence on foreign trade and save money, turned out to be more of an assemblage of various things than a manufacturing strategy. Fourth is the (Decade of the 1970s). This was notable because the government exercised almost a total monopoly in the following industries: basic steel production, petroleum refining, petrol chemicals, liquidated natural gas, edible salt, flat steel plants, machine tools, pulp and paper (basic), yeast and alcohol, and fertilizer. This was due to the advent of oil and the enormous resources it provided for direct government investment in manufacturing (nitrogenous and phosphoric). The time was characterized by the indigenization program's limitations, which led to strong economic activity but poor results since government efforts to diversify into atypical products like steel, gasoline chemicals, fertilizer, and vehicle assembly failed miserably. Due to the sharp decline in the price of oil on the global market, the last phase (the decade of the 1990s) is characterized by the division of government revenue (Bennett et al., 2015).
As a result, numerous impromptu attempts to manipulate the economy were made. On realizing the flaws in the import substitution method, these efforts include adopting an export promotion plan. This technique has even been reinforced during the SAP (Structural Adjustment Programme) era, especially as it relates to non-oil export, leading to the expansion of various types of export production incentives. Additionally, a strategy of balanced development was prioritized in order to encourage stronger connectivity within the manufacturing sector due to lopsided development, but its results have been more theoretical than practical (Bennett et al., 2015). Manufacturing does appear to be a preferred sector in Nigeria, which is likely a result of the widespread perception that manufacturing is the major engine for quick structural transformation and national independence.
2.4 Trends of Manufacturing Output in Nigeria from 1981 – 2018
Table 2 and figure 2 below shows the trends of manufacturing output in Nigeria from 1981 – 2018 in Nigeria. The trend shows that between the period of 1981 and 1985, the value of manufacturing output stood at N30.27 billion. Between 1986 and 1990, the value of manufacturing output in Nigeria rose to N60.51 billion. Between 1991 and 1995, the trend of manufacturing output rose again to N250.82 billion. The value rose again to N589.67 billion between 1996 and 2000 and to N1,152.50 billion between 2001 and 2005. Between 2006 and 2010, the value of manufacturing output increased again to N2,438.96. Again between 2011 and 2015, the trend of manufacturing output in Nigeria rose to N5,922.73 and to N9,307.16 between 2016 and 2018. The trends of manufacturing output in Nigeria shows that there has been an upward trend in manufacturing output in Nigeria between the period examined in this study.
Table 2: Trends of Manufacturing Output in Nigeria from 1981 - 2018
Year
|
MGDP (N Billion)
|
1981 - 1985
|
30.27
|
1986 - 1990
|
60.51
|
1991 - 1995
|
250.82
|
1996 - 2000
|
589.67
|
2001 - 2005
|
1,152.50
|
2006 - 2010
|
2,438.96
|
2011 - 2015
|
5,922.73
|
2016 - 2018
|
9,307.16
|
Source: Author’s Computation from CBN statistical bulletin (CBN, 2018)
2.5 Trends of GDP and Manufacturing Output in Nigeria from 1981 – 2018
Table 3 and figure 3 below shows the trends of GDP and manufacturing output in Nigeria from 1981 to 2018. Table 2.3 below shows that between 1981 and 1986, the value of GDP and manufacturing output stood at N30.27 billion and N14,565.20 billion. Between 1986 and 1990, both manufacturing output and GDP rose to N60.51 billion and N16,663 billion respectively. A positive relationship was also established between manufacturing output and GDP in Nigeria between 1991 and 1995 when manufacturing output increased to N250.82 billion and GDP rose to N19,815.91 billion. Between 1996 and 2000, both manufacturing output and GDP saw their value rose to N589.67 billion and N22,287.52 billion respectively. Again between 2001 and 2005, the value of manufacturing output rose to N1,152.50 billion while GDP also rose to N31,686.04 billion. Both manufacturing output and GDP also saw their value rise to N2,438.96 billion and N46,679.76 billion between 2006 and 2010. Both manufacturing output and GDP maintain their upward trends as manufacturing output rose to N5,922.73 billion while GDP rose to N31,686.04 billion between 2006 and 2010. The upward trend between manufacturing output and GDP was maintained again between 206 and 2010 as manufacturing output increased to N2,438.96 billion while GDP increased to N646.678.76 billion. Between 2011 and 2015, the values of both manufacturing output and GDP increased again to N5,922.73 billion while GDP increase to N63,367.27 billion. Manufacturing output value rose to 9,307.16 billion between 2016 and 2018 while GDP value increased to N68,744.08 billion. There have been a positive relationship between manufacturing output and GDP in Nigeria throughout the periods examined in this study. This ,ay as well be concluded that manufacturing output play a significant role in determining the growth of GDP in Nigeria.
Table 3: Trends of GDP and Manufacturing Output in Nigeria from 1981 – 2018
Year
|
MGDP (N Billion)
|
GDP (N Billion)
|
1981 - 1985
|
30.27
|
14,565.20
|
1986 - 1990
|
60.51
|
16,663.52
|
1991 - 1995
|
250.82
|
19,815.91
|
1996 - 2000
|
589.67
|
22,287.52
|
2001 - 2005
|
1,152.50
|
31,686.04
|
2006 - 2010
|
2,438.96
|
46,679.76
|
2011 - 2015
|
5,922.73
|
63,367.27
|
2016 - 2018
|
9,307.16
|
68,744.08
|
Source: Author’s Computation from CBN statistical bulletin (CBN, 2018)
2.6 Theoretical Review
2.6.1 The Solow-Swan Growth Model
A class of long-run economic growth models based on neoclassical economics is known as the Solow-Swan growth model or exogenous growth model. Neo-classical growth theories focus at productivity, capital accumulation, population expansion, and technical advancement to try and explain long-term economic growth. The 1946 H-D model was expanded upon in the Solow-swan growth model, which also included the concept of productivity growth. The efforts of Robert Solow and T.W. Swan, who independently devised very straightforward growth models, made significant contributions to the model. The statistics on US economic growth that Solow's model could fit were somewhat successful. Solow was the first economist to create a growth model that made a distinction between different capital vintages. According to Solow's model, new capital is more valuable than old (vintage) capital because new capital will be more productive than old capital because it is made using known technology, which advances through time.
The Solow-swan growth model's main tenet is that in a closed economy, capital is vulnerable to diminishing returns. The effect of the most recent unit of capital accumulated on output will always be less than the most recent one given a fixed supply of labor. Diminishing returns states that at some point, the quantity of new capital created will only be barely enough to make up for the amount of current capital lost due to depreciation, assuming for simplicity no technological advancement or labor force expansion. Assuming no more technical advancement or increase in the labor force, the economy stops expanding at this time. The short-run rate of growth reduces as diminishing returns take effect and the economy converges to a constant "steady-state" rate of growth, but the core logic still holds true even if non-zero rates of labor growth are assumed (that is, no economic growth per-capita). Regarding "effective labor," assuming non-zero technological advancement is essentially similar to assuming non-zero workforce growth: a new steady state is established with constant output per worker-hour needed for a unit of output. However, in this instance, the "steady-state" per capita output is increasing at the same rate as technical advancement (that is, the rate of productivity growth). Total factor productivity, also known as the Solow residual, is a commonly used indicator of technological advancement because it captures the effects of productivity variations within the Solow development model.
2.6.2 Tobin Q-Theory of Investment
Tobin proposed the Tobin Q-Theory of investments in 1969, according to which investments are made up to the market worth of assets equals the cost of replacing those assets. Furthermore, the Q- theory and the neoclassical theory are logically comparable when a marginal adjustment cost function is added to the profit function. In some aspects, Keynes in 1936 foresaw the Q-theory of investment as proposed by Brainard and Tobin (1968) and Tobin (1969). He asserted, for instance, that stock markets will give investors guidance and that "there is no purpose in establishing up new firm at a cost larger than at which an existing one can be purchased. It has been noted that investment increases productive capacity, which also explains much of and contributes to long-term economic growth (Donwa and Odia) (2009).
2.6.3 Schumpeter Theory
The idea on financial sector development that is currently valued in emerging nations dates back to Schumpeter Joseph, who emphasized the banking sector's function as a financier of profitable ventures and, consequently, as an engine for economic progress. However, according to modern growth theory, the financial sector can influence long-term growth in two ways: by influencing the rate of technical advancement and capital accumulation (which includes both human and physical capital) (De Gregorio, 1996). These effects are a result of the financial institutions' role as intermediaries, which enables the financial sector to mobilize savings for investment, facilitate and encourage foreign capital inflows (including FDI, portfolio investment and bonds, and remittances), and optimally allocate capital among competing uses so that it is put to its most advantageous use. His thesis is based on the development of the entrepreneurial sector and its function as the main engine of economic expansion. According to Schumpeter, market competition among participants causes a drive to look for new ways to advance technology, new business models, and other advantages that would boost profit margins and directly affect the standard of living of the entrepreneur. "Creative destruction" is how Schumpeter refers to the process through which new innovations supplant older ones. This dynamic is fueled by the inevitable copying of new innovations, which reduces profit margins and gives people additional incentives to look for new innovations. This is the central notion of capitalism, according to Schumpeter.