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Manufacturing TransformationComparative Studies of Industrial Development in Africa and Emerging Asia$

Carol Newman, John Page, John Rand, Abebe Shimeles, Måns Söderbom, and Finn Tarp

Print publication date: 2016

Print ISBN-13: 9780198776987

Published to Oxford Scholarship Online: August 2016

DOI: 10.1093/acprof:oso/9780198776987.001.0001

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PRINTED FROM OXFORD SCHOLARSHIP ONLINE (www.oxfordscholarship.com). (c) Copyright Oxford University Press, 2020. All Rights Reserved. An individual user may print out a PDF of a single chapter of a monograph in OSO for personal use. date: 03 April 2020

Industrial Policy in Nigeria

Industrial Policy in Nigeria

Opportunities and Challenges in a Resource-rich Country

Chapter:
(p.115) 6 Industrial Policy in Nigeria
Source:
Manufacturing Transformation
Author(s):

Louis N. Chete

John O. Adeoti

Foluso M. Adeyinka

Femi Oladapo Ogundele

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780198776987.003.0006

Abstract and Keywords

The structure of the Nigerian economy is typical of an underdeveloped country. Between 2011 and 2012, the primary sector, in particular the oil and gas sector, dominated GDP, accounting for over 95 per cent of export earnings and about 85 per cent of government revenue. The industrial sector accounts for 6 per cent of economic activity, while in 2011, the manufacturing sector contributed only 4 per cent to GDP. The economic transformation agenda, otherwise known as Nigeria Vision 20:2020, sets out the direction for current industrial policy in Nigeria. The industrialization strategy aims at achieving greater global competitiveness in the production of processed and manufactured goods by linking industrial activity with primary sector activity, domestic and foreign trade, and service activity.

Keywords:   Nigeria, oil, gas, export earnings, industrial policy, foreign trade

6.1 Introduction

Nigeria is the largest economy in Africa; in 2013 its population was in excess of 170 million, with GDP of over US$500 billion (World Bank 2014). The continent’s biggest oil exporter is also home to large natural gas reserves. The economy has recorded considerable acceleration in growth; real GDP grew by 6.3 per cent, 7.6 per cent, and 7.4 per cent in 2009, 2010, and 2011 respectively. Despite this, poverty is persistently high, and the structure of the economy is that of a typically underdeveloped country.

Over half of GDP is accounted for by primary sectors, with agriculture continuing to play an important role. The oil and gas sector is the major driver of the economy, which in 2011 made up over 95 per cent of export earnings and about 85 per cent of government revenue. The sector contributed 14.8 per cent to GDP in 2011—in contrast, the industrial sector accounts for a tiny proportion of economic activity (6 per cent) while the manufacturing sector contributes only 4 per cent to GDP.

The political landscape since Nigeria gained independence from Britain in 1960 has, like that of much of the rest of Africa, been turbulent. This, coupled with the significant emphasis on the oil economy, has contributed to the meagre performance of the manufacturing sector over the last fifty years. Following independence, the first military regime took power in 1966, leading to a civil war which lasted until 1970. The post-war economy was dominated by the oil sector, with industrial policy focused on import substitution (IS). (p.116) The economy grew by 6.2 per cent annually between 1970 and 1978. The year 1979 marked the beginning of the second attempt at democratic governance. However, following the oil crisis and global recession, the Nigerian economy entered into a period of negative growth in the first half of the 1980s. The year 1986 saw the introduction of the World Bank (WB)–International Monetary Fund (IMF) economic structural adjustment programme (SAP) and the economy began to recover, experiencing real GDP growth of 4 per cent annually during 1988–97. In 1999, democratic rule returned and has remained in place since. Recovery was slow, particularly for the manufacturing sector, whose contribution to GDP declined from 4.9 per cent in 1999 to only 4 per cent in 2005 (Adeoti 2010).

In this chapter we explore the evolution of the industrial sector in Nigeria over the last fifty years. Section 6.2 provides an overview of the policy framework for industrial development from the 1960s to the present day. Section 6.3 describes the structure of the manufacturing sector. Special attention is also placed on economic zones, given their emphasis in current industrial policy in Nigeria. In Section 6.4, the current industrial policy framework is described in detail. Focus is placed on macroeconomic policy, trade policy, and the institutional and regulatory framework. Section 6.5 concludes with a discussion of emerging industrial policy issues.

6.2 Evolution of Industry: Historical Perspective

At independence in 1960, and for much of that decade, agriculture was the mainstay of the Nigerian economy. The sector provided food and employment for the populace, raw materials for the nascent industrial sector, and generated the bulk of government revenue and foreign exchange earnings. Following the discovery of oil and its exploration and exportation in commercial quantities, the fortunes of agriculture gradually diminished.

Table 6.1 Percentage distribution of real GDP by sectoral group, 1961–2009

Sectoral group

1961

1970

1981

1990

2003

2007

2009

Primary sector

70.54

66.99

58.40

55.68

68.36

61.92

58.44

Agriculture

68.88

49.45

28.37

22.99

34.62

42.02

41.69

Mining and& quarrying

1.66

17.54

30.03

32.69

33.74

19.90

16.75

Secondary sector

9.67

16.15

12.14

9.04

10.51

9.24

9.05

Manufacturing

4.73

7.66

5.60

5.12

4.32

4.03

3.72

Building and& construction

3.30

7.77

2.83

1.78

2.70

1.72

2.01

Utilities

1.63

0.60

3.71

2.14

3.49

3.49

3.32

Tertiary sector

19.79

16.86

29.46

35.28

21.13

28.84

32.51

Wholesale and& retail

19.36

13.56

14.17

8.68

12.92

16.16

18.14

Other services activities

0.43

3.29

15.29

26.60

8.21

12.68

14.37

Total (GDP)

100.00

100.00

100.00

100.00

100.00

100.00

100.00

Source: National Bureau of Statistics (NBS various years); authors’ calculations.

Table 6.1 highlights the extreme dominance of the primary sector in GDP in Nigeria and the small contribution from the manufacturing sector. At independence, the contribution from the primary sector to GDP was about 70 per cent. The transition from primary production to secondary and tertiary activities was sluggish; in 2009 more than half of Nigeria’s output was still generated by the primary sector. The secondary sector contributes the least to GDP in Nigeria.

The macroeconomic performance of the economy is divided into five distinct periods, characterized by significant shifts in economic policy management (Adeoti et al., 2010). These periods are:

  1. 1. immediate post-independence period starting from independence in 1960 to the advent of the first military regime in 1966;

  2. (p.117) 2. post-civil war oil economy starting from the end of the 30-month civil war in 1970 to the handover of government by the military to civilians in 1979;

  3. 3. transition to an austere economy that emerged in the second republic and the subsequent adoption of the WB–IMF-led economic structural adjustment programme (SAP) in 1986;

  4. 4. era of SAP and guided economic liberalization starting from 1986 to the advent of the new democratic dispensation in 1999;

  5. 5. regime of further economic liberalization starting from 1999 and resulting in emergent macroeconomic stability in recent years.

6.2.1 Post-independence

Nigeria’s first attempt at comprehensive and integrated planning took the form of the First National Development Plan (1962–8). The plan included an aggregate growth rate target of 4 per cent per annum, an increase in the rate of investment from 11 per cent to 15 per cent of GDP and an increase in the ‘directly productive component’ of government investment (Bevan et al. 1999: 30). To encourage industrial development and lessen dependence on foreign trade, import substitution industrialization (ISI) was introduced conserving foreign exchange by producing local products that were previously imported. Import duty relief, accelerated depreciation allowances, and easy remission of profits aimed to attract foreign investors. The period of this plan witnessed the commissioning of energy projects such as the Kanji Dam and the Ughelli Thermal Plants, which provided a vital infrastructural backbone for the emerging industrial sector. Other important industrial infrastructure included an oil refinery, a development bank, and a mint and security (p.118) company. Clearly, the main objective of the ISI strategy was to stimulate the start-up and growth of industries, as well as enhance indigenous participation. However, it led to high technological dependence on foreign know-how, to the extent that the domestic factor endowments of the country were grossly neglected.

6.2.2 Post-civil War Oil Economy

Military intervention in Nigeria’s governance in 1966 resulted in a 30-month civil war from July 1967 to January 1970. The post-war economy was dominated by the oil sector, arising from the unprecedented increase in the price of crude oil in the international market. Oil exports as a percentage of total exports rose from 58 per cent in 1970 to 83 per cent in 1973. The oil boom enabled public sector expansion in infrastructure and manufacturing, most of which was aimed at achieving IS of foreign consumer goods and consumer durables. These measures were encompassed in the Second National Development Plan (1970–4). The government embraced ambitious and costly industrial projects in sectors such as iron and steel, cement, salt, and paper (Oyelaran-Oyeyinka, 1997).

The period of the 1970–4 plan also witnessed a dramatic shift in policy from private to public sector-led industrialization. It was clear that there was a dearth of human capital and skills required for initiating, implementing, and managing industrial projects among Nigerian entrepreneurs. Foreign technical skills and services were heavily relied upon. The oil economy was characterized by ‘Dutch Disease’, signified by the diversion of productive resources away from agriculture into commercial activities that thrived on trade in imported manufacturing goods (Forrest 1993). The windfall in oil revenue affected the fiscal policy of government. Political pressures meant that the tax base remained narrow under the belief that oil revenue would always lead to surplus. Non-oil taxes were thus neglected and some taxes abolished.

The Third National Development Plan (1975–80) was launched at the height of the oil boom—emphasis remained on public sector investment in industry. Indigenization policy was implemented in 1973 and 1978, with the objectives of increasing the level of local managerial control, building local technological capability, and extending state ownership. Heavy subsidies were provided for public companies and corporations. The Nigerian Enterprises Promotion Act of 1977 aimed to further support Nigerian businesses.

It became apparent that the country had entered into industrial project agreements with very little concern for capabilities for technology acquisition. While each of these projects required the acquisition of key sector-specific skills, the agreements made by Nigerian planners were for the turnkey transplantation of technology. During the same period, the nation’s oil sector had (p.119) become vibrant and prosperous, and the gates of the economy had been opened up to all sorts of imports. This had a debilitating effect on real industrial growth. The period of the Third National Development Plan failed to advance the course of industrial development in Nigeria in a positive way.

6.2.3 Austerity

The Fourth National Development Plan (1981–5) coincided with a global economic recession which sparked declining foreign exchange earnings, balance of payment disequilibrium, unemployment, and accelerating inflation in the Nigerian economy. This prompted emergency stabilization measures in 1982. These measures included advance deposits for imports; increases in import duties; review of import licences; a 40 per cent across the board cut in public expenditure without any prioritization; and an upward review of excise duties, interest rates, and prices of petroleum products. In the agricultural sector, exports became highly constrained by the overvalued naira and production declined. This included the production of labour-intensive export crops (e.g. cocoa, palm oil, cotton). The decline in output was most apparent in the manufacturing sector, resulting in gross losses in employment. This demonstrated the vulnerability of the high cost, import-dependent industrialization that had been encouraged by the pattern of incentives in the 1970s. A decline in the aggregate index of manufacturing was observed from 1982, falling by 26 per cent in 1983 (Forrest 1993). Plant closures were common in consumer goods sectors, especially in textiles. Average capacity utilization in industry declined from 73.3 per cent in 1981 to 38.2 per cent in 1986 (Fashoyin et al. 1994). The stabilization measures achieved some reduction in the volume of imports, however, the inability to effectively control the allocation of import licences and foreign exchange aggravated the pace of decline. The experience in the first half of the 1980s exposed profound weaknesses in Nigeria’s industrial structure and planning.

6.2.4 Structural Adjustment

The introduction of the WB–IMF-packaged economic SAP in July 1986 was aimed at addressing the inherent weaknesses of the economy. The SAP generated an intense debate between proponents of a liberalized economy and advocates of state-led development. The SAP was a medium-term programme, with the twin objectives of revamping an economy under persistent recession and setting it on the path of sustainable growth. It consisted of the stabilization policies of the IMF (to reduce budget and balance of payment deficits and reduce inflation) and the structural adjustment policies of the WB. The salient features included:

  • (p.120) currency devaluations;

  • real cuts and reorientation towards agriculture in the government budget;

  • reorientation of public expenditures in the productive sectors towards rehabilitation and maintenance;

  • increased taxes on consumer goods;

  • holding nominal wages fixed and/or raising them by significantly less than required to make up the effects of inflation;

  • liberalization of the import regime;

  • substantially raising nominal producer prices for agricultural cash crops to limit real declines;

  • reduced price controls;

  • increased competition and flexibility in agricultural marketing;

  • privatization of government-owned assets and concentrated efforts to raise efficiency in remaining government institutions.

All of these policy instruments were applied between 1986 and 1993. The implementation had controversial economic and social consequences. While the conditions imposed by the IMF caused a sharp deterioration in living standards, the developmental impacts of the SAP were slow. With the introduction of the Second-tier Foreign Exchange Market in September 1986, devaluation of the naira was put on course, and demand management became an important feature of monetary and fiscal policy. In order to avoid a mutually reinforcing currency depreciation and inflation, the SAP reduced liquidity in the economy and compressed consumer incomes, through a wage freeze and significant cuts in public expenditure.

The impact of SAP on the productive sectors of the economy was mixed. Industry had to cope with the new regime as well as a slump in effective demand. Tariffs were cut on finished goods more than on intermediate inputs and raw materials, thereby reducing rates of protection and increasing competition with foreign producers. Industries with less dependence on imports (e.g. textiles) were less adversely affected. There were new investments in industries that relied on local raw materials such as the tanning of hides and skins and soya milk processing. Ogun (1995) reported that an increase in the cost of imports and pressure by government had resulted in the rise of local raw material sourcing by industry from 38 per cent in 1985 to 50 per cent in 1988. The impact of the SAP on the export of agricultural produce was also remarkable. Cocoa exports rose significantly as producer prices soared. The tanning industry in Kano received new export-oriented investment, and the export of rubber also increased.

A national science and technology (S&T) policy was formulated and launched in 1986 with the aim of placing S&T at the centre of national development. Measures included the establishment in 1986 of the Raw (p.121) Materials Research and Development Council (RMRDC) and the Standards Organisation of Nigeria (SON). The S&T policy emphasized the transfer of foreign technology to local firms. There is little evidence, however, that this was successful. Bamiro (1994) and Oyelaran-Oyeyinka (1997) suggested that the main reason was that S&T institutions operated independently of each other, with little or no interaction; they also criticized the isolation of the manufacturing sector from R&D activities and the resultant non-commercialization of ideas. In essence, innovation was absent in this era of industrial development.

In 1989, the trade and financial liberalization policy was enacted to stimulate competition among domestic firms and between domestic import-competing firms and foreign firms. The policy involved a reduction in both tariff and non-tariff barriers, scrapping the commodity marketing boards and market determination of the exchange rate, as well as the deregulation of interest rates. The National Economic Reconstruction Fund (NERFUND) was set up in the same year, with the objectives of reversing some of the provisions of the Nigerian Indigenization Policy and opening up the economy for foreign investors. NERFUND sought to address the financial constraints experienced by small and medium-scale entrepreneurs, provide the required resources to merchant and commercial banks to lend to small and medium-scale firms, and provide naira or foreign-denominated loans to firms.

The decade of the 1990s was mostly a period of economic and political crisis in Nigeria, largely on account of authoritarian military rule. The pains of the SAP deepened, and with no evidence of a reversal of the economic recession, in the mid-1990s the government adopted a policy of guided deregulation. Under this programme, attempts were made to curtail the extent of liberalization under the SAP. A dual exchange rate emerged (one for government essential transactions, the other serving as the inter-market exchange rate). The privatization and commercialization of public sector companies which was intensely debated under the SAP proceeded with measured pace.

6.2.5 Economic Liberalization

The return to democratic governance in 1999 introduced a new opportunity for political and economic freedom. The Bank of Industry (BoI), established in 2000, was introduced to accelerate industrial development through the provision of long-term loans, equity finances, and technical assistance to industrial enterprises. As a complement to this, a Small and Medium Industries Equity Investment Scheme was also set up. The role of S&T featured prominently in the economic reform agenda between 1999 and 2007, specifically within the rubric of the National Economic Empowerment and Development Strategy (NEEDS) (NPC 2004; 2007). Similarly, the current economic policy (p.122) blueprint—Nigeria Vision 2020 (NV20:2020) (NPC 2009)—embraces elements of science, technology, and innovation (STI).

The macroeconomic policy regime that had emerged by the late 2000s showed a keenness for economic liberalization and an ardent commitment to private enterprise-led development. Despite these efforts, the manufacturing sector in Nigeria remains small, accounting for only 3.7 per cent of GDP in 2009 (Table 6.1). In what follows, we describe in detail the characteristics of the sector.

6.3 The Structure of Industry

The analysis presented in this section utilizes data from the WB Investment Climate Survey (WB 2006) and Nigeria’s National Bureau of Statistics (NBS various years). The WB survey covered manufacturing firms, micro-enterprises, retail, and residual businesses. The manufacturing survey addressed a wide range of issues pertinent to the industrial sector. Among the 2,387 firms surveyed, only 42 per cent fell within the industrial sector.

6.3.1 Structural Composition and Firm Characteristics

The distribution of firms across, age, ownership, and export status is presented in Table 6.2. The Nigerian manufacturing sector is dominated by firms in the food (30.17 per cent) and garment (22.28 per cent) sub-sectors—firms in the dominant sub-sectors over twenty years old have a relatively smaller percentage. Most of the firms are owned by domestic investors, but all sectors participate in some exporting activities. The highest proportion of exporting firms is in the textiles industry, representing 14.29 per cent of firms. (p.123) The proportion of sales accounted for by exporting firms is also high—10.81 per cent for the garments sector and 27.84 per cent for other manufacturing.

Table 6.2 Structure of industry by age of firms

Sector

% of firms

Of which: 0–5 yrs

6–10 yrs

11–20 yrs

20+ yrs

Foreign owned

Exporting

Textiles

1.40

28.57

28.57

21.43

21.43

0.00

14.29

Garments

22.28

24.22

43.95

26.01

5.83

0.00

4.93

Food

30.17

27.15

43.71

20.20

8.94

0.99

0.66

Wood and furniture

13.59

22.79

32.35

33.82

11.03

0.00

1.47

Other man.

27.27

20.51

42.12

28.21

9.16

1.47

5.13

Construction

5.29

24.53

26.42

28.30

20.75

0.00

1.89

All sectors*

100.00

23.98

40.66

25.97

9.39

0.70

3.20

(*) n = 1,001

Source: World Bank Investment Climate Survey (WB 2006).

Table 6.3 Average firm size

Sector

All firms

0–5 yrs

6–10 yrs

11–20 yrs

20+ yrs

Foreign owned

Exporting

Textiles

70

30

18

10

254

35

Garments

15

14

13

20

12

24

Food

31

23

29

30

64

54

69

Wood and furniture

22

17

21

22

33

47

Other man.

34

23

27

28

114

84

74

Construction

29

19

39

28

29

13

All sectors*

27

20

24

25

67

70

50

(*) n = 1,001

Source: World Bank Investment Climate Survey (WB 2006).

The average size of firms is reported in Table 6.3 (measured as the total number of employees engaged by the firm). Firms in the textile industry engage the highest number of employees on average at 79. The smallest firms are in the garment sector, with only 15 employees on average. Table 6.3 also reveals a positive relationship between firm size and survival, as is consistent with manufacturing in other countries.

Table 6.4 Wages per employee

Sector

All firms

0–5 yrs

6–10 yrs

11–20 yrs

20+ yrs

Foreign owned

Exporting

Textiles

1,691.97

1,881.54

1,319.69

2,278.50

1,349.04

1,693.92

Garments

934.76

972.16

885.97

960.50

1,032.41

1,105.17

Food

1,199.82

1,137.31

1,182.59

1,197.41

1,479.28

2,415.93

1,039.20

Wood and furniture

1,002.90

863.56

1,091.45

1,008.76

1,013.16

1,335.44

Other man.

1,354.82

1,098.84

1,360.93

1,307.25

2,046.63

2,606.72

2,354.94

Construction

2,420.01

1,059.84

2,217.87

3,158.54

3,277.67

1,609.61

All sectors*

1,227.78

1,064

1,188.66

1,269.33

1,700.28

2,524.96

1,714.78

(*) n = 1,001; Wages are total annual salary costs of the firm divided by the total number of employees (full-time + part-time).

Source: World Bank Investment Climate Survey (WB 2006).

Wages per employee (Table 6.4) are highest in the construction sector, followed by textiles. Average wages per employee show a rising trend with years of operation for firms in the construction and food sectors, but this pattern is not as clear-cut for other sectors. Significantly, foreign owned firms pay high wages per employee compared to exporting firms.

6.3.2 Technology and Skills

Table 6.5 Technology

Sector

Capacity utilization

Email

Website

Textiles

67.29

21.43

14.29

Garments

66.75

14.00

1.79

Food

68.99

24.50

8.29

Wood and furn.

66.14

15.44

5.15

Other man.

67.18

29.67

12.09

Construction

26.42

9.43

All sectors

67.50

22.38

7.59

N

947

1,001

1,001

Source: World Bank Investment Climate Survey (WB 2006).

Table 6.6 Skills

Sector

Ratio of temporary to full-time staff

Number of years of experience of top manager

Textiles

0.08

12.43

Garments

0.25

11.05

Food

0.14

10.06

Wood and furniture

0.28

12.53

Other man.

0.20

11.59

Construction

0.25

12.26

All sectors

0.20

11.18

N

1,001

1,001

Source: World Bank Investment Climate Survey (WB 2006).

In relation to the technology underlying firms’ production processes, capacity utilization averages 67.5 per cent while only 22.38 per cent of firms have email facilities and only 7.58 per cent have websites (Table 6.5). The ratio of (p.124) temporary to full-time staff averages 0.20 per cent while the number of years of experience of managers averages 11.18 per cent (Table 6.6).

6.3.3 Constraints

Table 6.7 Constraints to firm growth

Sector

Telecomm.

Transport

Electricity

Crime

Corruption

Textiles

0.57

1.43

3.36

1.57

1.64

Garments

0.60

1.60

3.45

1.40

1.49

Food

0.63

1.97

3.17

1.47

1.42

Wood and furniture

0.62

2.10

3.15

1.29

1.46

Other man.

0.58

2.02

3

1.45

1.35

Construction

0.94

1.94

1.72

2.53

2.13

All sectors

0.62

1.91

3.11

1.50

1.46

N

1,001

1,001

1,001

1,001

1,001

Source: World Bank Investment Climate Survey (WB 2006).

Table 6.7 describes the constraints to growth as reported by the firms in the sample. Electricity outages, transport bottlenecks, crime, and corruption are all key factors. Nigerian manufacturers suffer acute shortages of infrastructure such as good roads, piped water, and, in particular, power supply. Electricity outages and voltage fluctuations are commonplace, causing damage to machinery and equipment. Consequently, most firms rely on self-supply of electricity by using generators, escalating costs of production and eroding competitiveness relative to foreign firms.

Only 3.7 per cent of firms surveyed have access to formal credit and a phenomenal 38.9 per cent pay bribes.1 Corruption, rent-seeking, and patron–client (p.125) relationships impinge on the cost of doing business and contribute to a poor investment climate in Nigeria. Many firms are forced to offer gratifications to public officials for sundry purposes such as accessing public utilities, clearing goods at the ports, and obtaining licences and permits. Credit delivery from the financial system circumscribes smaller and medium-sized firms. To bridge the gap, the government provides subsidized credit to favoured sectors and firms. Implementation of these initiatives is typically faulty, with funds failing to get to the intended beneficiaries.

6.3.4 Productivity

Table 6.8 Labour productivity

Sector

All firms

0–5 yrs

6–10 yrs

11–20 yrs

20+ yrs

Foreign owned

Exporting

Textiles

6,875.42

5,300.88

5,804.72

12,133.06

5,144.80

7,750.00

Garments

4,057.15

4,332.93

3,770.24

4,203.23

4,422.74

7,776.41

Food

8,195.12

9,064.70

7,790.77

7,369.25

9,443.14

9,319.74

4,148.01

Wood and furniture

5,509.95

3,516.15

4,687.69

7,121.76

7,213.07

14,358.5

Other man.

8,547.93

6,544.65

8,251.15

9,664.62

11,290.19

22,063.1

17,745.99

Construction

15,058.42

9,969.51

19,219.17

10,636.61

21,806.84

30,046.15

All sectors*

7,347.00

6,681.63

6,996.89

7,542.45

10,198.81

17,815.31

12,701.72

(*) n = 996

Source: World Bank Investment Climate Survey (WB 2006).

Several recent policy measures in Nigeria have placed emphasis on productivity enhancement. Using the World Bank Investment Climate Data (WB 2006), a labour productivity measure can be constructed by dividing the total annual sales of firms by the total number of employees (both full- and part-time). Labour productivity is presented in Table 6.8. The average across all sectors is ₦7,347 per worker (approximately US$45). The highest labour productivity of ₦15,058 per worker was recorded in the construction industry. The lowest (p.126) labour productivity, with an average of ₦4,057 per worker, was recorded in the garment industry.

An average productivity of ₦10,198 per worker is recorded among firms above twenty years of age and increases with the firm’s age. The average among foreign owned firms is ₦17,815 per worker—among exporting firms, it stands at ₦12,701 per worker.

Capital productivity is measured using total assets divided by the number of employees, reported by Chete et al. (2014: Table 11) alongside value added by sector. The highest capital productivity was recorded in the food, beverages, and tobacco (FBT) sectors. The highest value added was recorded in the electrical and electronics sectors (over ₦400m), followed by machinery and equipment; the lowest was recorded in the garment sector.

6.3.4.1 Spacial Distribution

A prominent feature of the industrial sector in Nigeria is the existence of a number of special economic zones. There are approximately twenty-five free trade zones (FTZ) licensed by the federal government. However, fewer than thirteen of these are currently operational. Some are under construction and in the early phases of development. Two types of free trade arrangement operate in Nigeria—specialized and general-purpose. These are managed by two bodies—the Oil & Gas Free Zone Authority for the oil and gas zone and the Nigerian Export Processing Zone Authority (NEPZA) for the general-purpose zones.

Economic activity is clustered in this way to create a controlled environment for industrialization to flourish, especially in the presence of poor infrastructure. The localization of firms allows for infrastructural provisions to be prioritized, and it gives firms a competitive edge while offering access to raw materials, skilled labour, technology, and materials. Nigeria has a number of large industrial estates and complexes, but has also witnessed the spontaneous development of small clusters across the country. The latter include the computer village in Otigba, Lagos; the auto and industrial spare parts fabricators in Nnewi; and the footwear, leatherworks, and garment cluster in Aba.

6.3.5 Sunrise and Sunset Industries

Information and communications technology (ICT) is an emerging sector in Nigeria. A key example is the Otigba Computer Village which started in 1995, involving over 392 small and medium enterprises (SMEs) and employing more than 3,000 workers (Oyelaran-Oyeyinka 1997).2 The formation of this (p.127) cluster has given Nigeria a foothold in skills-intensive computer repair and ‘clone’ production. The village is located in Lagos and covers an area of some 325 km2.

On the other side of the spectrum, the textile industry is an example of a sunset industry and illustrates the deindustrialization process that Nigeria has experienced in the last decade. Over 820 companies shut down or suspended production between 2000 and 2008 (MAN 2009). At its peak, the textile industry employed close to 700,000 people (making it the second largest employer after the government) and generated a turnover of over US$8.95 billion. The industry witnessed a catastrophic collapse, from 175 firms in the mid-1980s to ten factories in stable condition in 2004, while employment in the industry plunged from 350,000 to 40,000.

6.4 Industrial Policy Framework

6.4.1 Policy Management and Coordination

At the apex of Nigeria’s economic policy-making architecture is the National Economic Council (NEC). The NEC has the vice-president of the country as chairman and the National Planning Commission as its secretariat. Membership of this body includes the Governors of Nigeria’s thirty-six states, the Governor of the Central Bank of Nigeria (CBN), the Minister of National Planning and the Minister of Finance, Attorney General of the Federation, and Minister of Justice and Chief Economic Adviser to the President. The three tiers of government—federal, state, local—implement, monitor, and evaluate policies approved by the body through their respective executive councils which meet on a monthly basis.

There is also a twenty-four-member National Economic Management Team headed by the president, and a fifteen-member Economic Implementation Team headed by the finance minister. The mandate of these teams includes achieving macroeconomic stability and developing critical sectors such as infrastructure, agriculture, manufacturing, education, health, and housing. The Federal Ministry of Industry, Trade and Investment has the operational mandate of promoting increased production and export of non-oil and gas products, fostering industrialization, attracting investment, and developing enterprise.

There are other agencies which play important roles in the trade and industrial sectors in Nigeria. For instance, the BoI, Small & Medium Enterprises Development Agency of Nigeria (SMEDAN), NEPZA, Nigeria Export Promotion Council, and Nigerian Investment Promotion Commission (NIPC) are parastatals of the Federal Ministry of Industry, Trade and Investment. The RMRDC is an agency of the Federal Ministry of Science and Technology and the (p.128) Nigerian Customs Service is a parastatal of the Federal Ministry of Finance. The setting-up of these teams and the designation of the finance minister as coordinator of economic policy have improved the implementation of economic policy in the country. It is typical for private sector groups such as the National Association of Small-Scale Industrialists to be invited to talks on draft policy.

6.4.2 Macroeconomic Policies

In the 2000s the main policies for economic development in Nigeria were encompassed in the NEEDS (NPC 2004). The key objectives were to:

  • sustain a rapid, broad-based GDP growth rate;

  • diversify the production structure away from oil and mineral resources;

  • make the productive sector internationally competitive;

  • reduce the role of government in the direct production of goods and strengthen its regulatory functions;

  • adopt policies that are consistent with raising domestic savings and increasing private investments;

  • promote exports and diversify exports away from oil;

  • liberalize imports, harmonize tariffs with Economic Community of West African States (ECOWAS)’ common external tariffs, and use import levies and prohibitions to protect local industries;

  • maintain a competitive but stable exchange rate regime by establishing a market-determined nominal exchange rate and avoiding overvaluation of the real exchange rate;

  • maintain low real lending interest rates.

These policy measures have led to a relatively stable exchange rate, a fairly predictable macroeconomic environment, and good prospects for growth. A review of the performance of NEEDS showed that the GDP growth rate, which was 3.3 per cent in 1999, was an average of 6.0 per cent during 2004–7, with oil and non-oil sectors having GDP growth rates of 0 per cent and 8.3 per cent respectively. The external reserve rose from US$4 billion in 1999 to US$43 billion in 2007. There was an average inflation rate of 9.5 per cent. Furthermore, noticeable achievements were recorded in the liberalization of the telecommunication industry, which became one of the fastest growing in the world. The privatization of publicly owned enterprises also progressed, with about 110 privatization transactions effected between 2000 and 2006 (NPC 2007).

Efforts under NEEDS have been complemented by the Seven Point Agenda (SPA) introduced in 2007. The SPA involves seven sectoral-specific targets to which the principles of NEEDS are applied. The aim is to make Nigeria one of the (p.129) twenty largest economies by the year 2020 (NV20:2020). The SPA encompasses seven key areas of development (FGN 2008):

  • critical infrastructure

  • Niger delta region

  • food security

  • human capital

  • land tenure changes and home ownership

  • national security

  • wealth creation.

The current and future vision for economic development in Nigeria is set out in NV20:2020. The macroeconomic policy thrusts of the NV20:2020 are as follows (NPC 2009: 22–3):

  • achieving double-digit growth rates and maintaining strong economic fundamentals, including inflation, exchange rate, interest rates, and other monetary aggregates;

  • achieving significant progress in economic diversification, such as to achieve an economic structure that is robust and consistent with the goals of the NV20:2020;

  • stimulating the manufacturing sector and strengthening its linkage to the agricultural and oil and gas sectors, in order to realize its growth potential and serve effectively as a strong driver of growth;

  • raising the relative competitiveness of the real sector, to increase the demand for Nigeria’s non-oil products and services;

  • deepening the financial sector and sustaining its stability to enable it to finance the real sector;

  • encouraging massive investment in infrastructure and human capital and creating an enabling environment for domestic and private investment;

  • adopting pragmatic fiscal management and implementing appropriate monetary, trade, and debt management policies to support domestic economic activities.

6.4.3 Industrial Policy

The NV20:2020 industrialization strategy aims at achieving greater global competitiveness in the production of manufactured goods by linking industrial activity with primary sector activity, domestic and foreign trade, and service activity. A key component is the promotion of a comprehensive policy of cluster development in the manufacturing and processing industries. This (p.130) includes the development of industrial parks, industrial clusters and enterprise zones, and incubator facilities.

Industrial parks, aimed at large manufacturers, are expected to cover areas of more than 3,050 km2. The parks will be based on the comparative and competitive advantage of each geographical zone. The following business activities have been identified for each of the zones (Nigeria Vision 20:2020).

  • North East: agriculture and solid minerals e.g. gypsum, biomass, ethanol, biodiesel, tropical fruits, etc.;

  • North West: gum arabic, livestock and meat processing, tanneries, biofuel, etc.;

  • North Central: fruit processing, cotton, quarries, furniture and minerals, boards, plastic processing, leather goods, garments, etc.;

  • South East: palm oil-refining and palm tree-processing into biomass particle boards, plastic processing, leather goods, and garments;

  • South West: manufacturing (especially garments, methanol, etc.), distributive trade, general goods, plastic, etc.;

  • South Central: petrochemicals, manufacturing (plastic, fertilizer, and fabrications, etc.), oil services, and distributive trade (TINAPA).

The industrial clusters, which will be established with the participation and assistance of states and local governments, will cover areas of between 100 and 1,000 ha. They will be exclusively devoted to the organized private sector. The location of the clusters will take into account access to roads, railways, sea ports, cargo airports, and proximity to a city, and management will be through a private cluster company. Industrial incentives similar to those in industrial parks will also be provided, while each cluster will have a skill acquisition/training centre.

Enterprise zones are platforms of 5–30 ha, targeted at incorporating the informal sector into the organized private sector. Located in state capitals and local government areas, they will enable farmers and SMEs to feed their products into the value chain of large-scale industries. These centres will accommodate mechanics, block makers, small-scale furniture manufacturers, timber merchants, and other vocational workers who constitute over 70 per cent of Nigeria’s private sector. Skills acquisition/training centres will also be located in each enterprise zone, while management will be handled by the private sector.

The incubators will be start-up centres for new and inexperienced entrepreneurs, graduates of tertiary institutions, investors, and vocational workers wishing to set up their own businesses. In these centres, prospective start-up companies will be equipped with entrepreneurial skills and resources aimed at nurturing them from formation to maturity.

(p.131) 6.4.4 Trade Policies

Recent economic policy reforms (from NEEDS to date) have sought to reduce the unpredictability of the trade policy regime, establish a schedule to adopt the ECOWAS common external tariff (CET), and respect obligations under multilateral trading systems (Adenikinju 2005).

Nigeria has several incentives for export promotion, but still uses import prohibition to protect its manufacturing and agricultural sectors. The rationale is that the production base is relatively weak, import-dependent, and limited in technological capability. The import prohibition list includes a wide range of manufactured consumer goods that were often dumped in Nigeria’s relatively large market. A few agricultural products (e.g. fresh fruits, pork, and frozen poultry) that are produced locally in large quantities are also included in the list to protect the local industry and encourage job creation. On the export prohibition list are staple foods/crops that are important for food security, commodities that could serve as raw materials to local industries, and living organisms that are becoming rare. Such commodities include maize, hides and skin, scrap metals, and wildlife animals classified as endangered species.

There are also elaborate export incentives including: the Manufacture-in-Bond Scheme, which allows exporting manufacturers to import intermediate products duty-free; the Duty Drawback Scheme, which provides refunds for duties/surcharges on raw materials; the Export Development Fund Scheme, which provides financial assistance to exporting companies to cover part of their initial expenses; and the Trade Liberalization Scheme of ECOWAS, which involves the removal of barriers to trade in goods originating from ECOWAS countries. In addition, the government has established the Oil and Gas Export Free Zone (1996) and Export Processing Zones (EPZs), which offer preferential tax treatment and other incentives for firms. Moreover, foreign investors are free to repatriate their profits and dividends net of taxes. The government, through the NIPC Act, has guaranteed that no enterprise shall be nationalized or expropriated.

6.4.5 The Institutional and Regulatory Framework

In recent years, the institutional framework for the implementation of macroeconomic and industrial policies has been strengthened or established where necessary. Some improvements include the following:

  • The CBN has been reformed and is now relatively more autonomous and powerful. A major achievement of the CBN is the consolidation of the Nigerian banking institutions, which reduced the number of (p.132) banks from eighty-nine to twenty-five by the end of 2005; the banks are arguably considerably stronger and able to provide better financial services.

  • The Customs and Excise Department has improved infrastructure, especially in the area of ICT.

  • The Bureau of Public Enterprises (BPE) has increased the pace of privatization of publicly owned enterprises.

  • The National Communication Commission has successfully liberalized the telecommunications sector.

  • The National Agency for Food, Drug Administration and Control has improved Nigeria’s food and drug products.

  • The SON has improved standardization of industrial products.

  • The Nigerian Export Promotion Council has improved the implementation of export incentives.

Some of the new institutions which have contributed to policy implementation include:

  • the BoI, formed through the merger of the former Nigerian Industrial Development Bank and the Nigerian Bank for Commerce and Industry;

  • the Nigerian Agricultural, Cooperatives and Rural Development Bank formed through the merger of the former Nigerian Agricultural and Cooperative Bank and the Peoples Bank;

  • SMEDAN;

  • The National Information Technology Development Agency (NITDA);

  • The Economic and Financial Crimes Commission (EFCC);

  • The Independent Corrupt Practices and other related offences Commission.

6.4.6 Sector Specific Policies

With the exception of the oil and gas industry, sectoral policies are not prevalent in Nigerian industrial policy. However, the NIPC shows sectoral policies aimed at stimulating investment in areas considered to have potential.

For the manufacturing sector, companies with turnover of under ₦1 million are taxed at a low rate of 20 per cent for the first five years of operation—dividends are also tax-free for this period. Dividends derived from manufacturing companies in petrol, chemical, and liquefied natural gas sub-sectors are exempt from tax.

In the agro-industry, incentives include a 100 per cent tax-free period for five years in processing, favourable duties, and capital allowances, and an (p.133) Agricultural Credit Guarantee Scheme Fund (ACGSF), where the CBN provides a partial guarantee for all loans granted by commercial banks.

An arguably disproportionate range of incentives also applies to the solid minerals sector (where firms enjoy a 3–5-year tax holiday) and the oil and gas industry. Firms are also subject to a low income tax rate of between 20 and 30 per cent, royalty payments are deferred, and holders of a mining lease are entitled to a range of capital allowances and tax reliefs. In the oil and gas industry significant incentives are granted to joint ventures with the Nigerian National Petroleum Corporation.

6.5 Conclusion

Despite the size and fast pace of economic growth in the Nigerian economy over the last decade, the manufacturing sector remains weak. Past policy efforts aimed at improving the performance of the sector have failed, and the focus has shifted towards more targeted policies aimed at specific sectors, as set out in NV20:2020. A key aim is economic diversification, with a focus on stimulating the manufacturing sector and strengthening its link with the agricultural and services sectors.

A number of challenges exist that will be critical to the success or failure of this strategy. Key among these are infrastructure, corruption, and national security. The current infrastructure base in Nigeria is grossly inadequate in terms of capacity and quality. Power generation capacity is less than 2,000 MW—about 20 per cent of estimated national demand. A key challenge for government and the private sector is to build a modern, efficient, and effective infrastructure network within the next five to ten years.

Nigeria ranks highly in the Corruption Perception Index. This has implications for investment and foreign direct investment (FDI) flows into the country. Previous anti-corruption policies implemented in Nigeria have been targeted at enforcement measures rather than addressing the root causes, which include social insecurity and over-centralization of resources.

The internal security of Nigeria has become a major challenge. Internal conflicts, including religious, ethnic, and economic, have had debilitating effects on the economy. The insecurity of lives and properties became noticeable following the civil war and the subsequent military regimes, and the recent upsurge of violence and insurgency in the country heightens the need to address the persistent causes of social tension.

Addressing these concerns will require private sector collaboration. Business coordination efforts in Nigeria have been largely successful, but future cooperation will require the development of efficient, accountable, transparent, and participatory governance. Strong public service institutions can engender (p.134) government effectiveness, and success will depend on the establishment of a competitive business environment characterized by sustained microeconomic stability and the enhancement of national security and justice.

References

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Notes:

(1) See Chete et al. 2014: Table 9.

(2) Data presented in this section are from Oyelaran-Oyeyinka (2004).