The Impact of Manufacturing Sector on Economic Growth in Nigeria

Manufacturing is the process of transforming raw materials into a whole new product Flath (2014). He notes that the transformation of raw materials involves a rigorous process called manufacturing process.

Various scholars often use production as another term for manufacturing. Sloman (2016) identifies three sectors of the economy. The first of the three is the primary sector and it involves the extraction of raw materials.

Secondly, the secondary stage which is referred to as the manufacturing sector is saddled with the responsibility of producing finished products and thirdly, the service sector which is concerned with providing intangible commodities. Pumpinyo and Nitivattananon (2014) define reverse logistics as the technique used for transferring a product from its storage space to another location with the motive of selling it or for appropriate disposal.

They however, conclude that although China and Brazil’s manufacturing sector lack good internal consistency and a good reverse logistic technique in the past, the sector for both countries are among the leading sectors in the world.

In support of this assertion, Mamic (2014) claims that Shenzhen, which is a district in China, will boost the manufacturing sector to be the leading sector by 2020.

However, Deloitte (2016) in its global manufacturing competitiveness index (GMCI table 1) report shows that China’s manufacturing sector is the leading sector in the world, followed by the USA and Germany.

However, the GMCI future forecast report indicates that the USA might overtake China as the leading manufacturing sector by the end of the decade. However, countries are still putting in strong policies to achieve competitive advantage in the manufacturing sector.

Analysing economic development through the manufacturing sector will not be complete unless one of the three schools of thought of economic theories is applied. Prabagar (2016) claims that the Harrod-Domar growth model emphasises on savings and investment in order for a country to grow and develop.

Furthermore, Prabagar (2016) concludes that the model is not a good strategy for countries to apply because too much saving for countries would affect infrastructure development of various sectors including the manufacturing sector. Chowdhury (2016) pointed-out that the Harrod-Domar growth model incorporates institutional and structural issues of the economy by providing solutions based on reality and practicality.

The Harrod-Domar growth model has been used by the Japanese government to boost the manufacturing sector which involves savings and investing some capital on the sector (Audretsch, 2007). However, there have been various key limitations of the Harrod-Domar model as concluded by Todaro (2015). The Savings ratio for low income countries often does not increase.

This lack of increase in saving ratio is what Secondi (2008) refers to as low marginal propensities to save. Rossi (2014) concludes that a significant limitation of the Harrod-Domar model is not considering the low marginal propensities of developing countries. Similarly, Gürak (2015) pointed-out that for developing countries, supplementary income is preferably spent on consumption instead of being saved. This savings problem for many developing countries is referred to as the domestic saving gap.

Another limitation of this model is that the ratio of capital output acquired through efficiency is strenuous for less developed countries, because of weaknesses of its labour investment and human capital which amount to inefficient use of capital (Piętak, 2014).

A major critique of the Harrod-Domar model was that research and development required to enhance the capital output is underfinanced. This is a major cause of market failure for the manufacturing sectors Finally, Piketty and Goldhammer (2014) argue that the accumulation of capital tends to increase if the manufacturing sector begins to sprout dynamically. Therefore an increase in capital is not automatically a condition for economic growth. In support of this argument, Knibbe (2014) concludes that the assumption that increase in capital will automatically lead to economic growth according to the Harrod-Domar model is not necessarily certain because the richer the manufacturing sector, labour income rise, so also does savings, and the impact of increase in income is that it enhances capital investment spending over an extended period.

However, the strongest criticism of the Harrod-Domar model was the exclusion of technology as a yardstick for growth in the manufacturing sector. Consequently, the various limitations highlighted by the various scholars show that the Harrod-Domar model of growth was limited to only developing countries and even if the developing countries do not focus on technology, they will be less competitive in their manufacturing.

This significant concern gave room for the rise of other schools of thoughts. The second school of thought which is the SolowSwan growth model of 1956 is popular because of its neo-classical approach to solving economic development problems (Dehejia, 2013). This model was formed based on the Harrod-Domar growth model (Liening, 2013). Perhaps, because of the growing influence of technology in the manufacturing sector, the Solow-Swan growth model was integrated with technology.

Dohtani (2010) observes three significant assumptions in this model. Firstly, emphasis on the impact of technology in the manufacturing sector was in depth, which shows that if the government or manufacturers invest in technology, the sector will grow in a brief period and the cost of outsourcing will be reduced.

Secondly, the model identifies a stage called the steady state which arises from investing savings that occurs from using technology. Such as savings on labour and outsourcing costs. Taylor (2016) claims that a steady state implies that the manufacturing sector will not remain stagnant if additional means of growth is established.

Finally, the role of saving was also identified. Tang and Tan (2016) maintains that the role of savings as identified by Solow-Swan model shows that a sector that dedicates a substantial portion of its income to savings will have a higher steady capital and a high volume of income.

In addition, Taylor (2016) pointed-out that the higher the income per person or per sector, the higher the investment on percentage output for the person or sector. Furthermore he argues that another assumption that the government and manufacturers do not pay significant attention to is the role of population in the economy.

He maintains that if the population is growing, the consumption rate of the economy will increase and this will give rise for the manufacturers to increase their productivity. In support of Taylor (2016) argument, Dellink (2017) maintains that population growth will lead to massive development through technology specifically in a manufacturing sector.

Summary of Results 

After the extrapolation of the data from interviewing the manufacturers and the government officials, a schematic representation was created to show weakness in Nigeria manufacturing sector.

The schematic representation is designed from the popular responses of the interviewees to show the Nigerian manufacturing sector. Therefore, if the manufacturing sector’s impact on the Nigerian economy is to grow according to the manufacturers and government, the schematic representation should be studied.

The data were separated into three themes which are government support, technology impact and investment approach and the popular responses were highlighted. From the data collected, the interviewees emphasised on the significance of taxation, policies, savings, and raw-materials and made in Nigeria goods. Perhaps, the economic growth theory emerging from this data combines the Harrod-Domar, Solow-Swan, and Rostow growth models as a new growth theory in Nigeria.

Conclusion

The first major finding was that the Nigerian government does not provide adequate support for the manufacturers to have a conducive environment for production.

The second finding was that technology does not play a significant role in the Nigerian manufacturing sector because of the high capital involved in the procurement of technological tools.

The final finding of this research is that there is less investment in the manufacturing sector. Therefore, government support, technology impact and investment approach emerged as reliable proposals for the impact of the manufacturing sector on economic growth in Nigeria.

Recommendations for policy 

The first thing the Nigerian manufacturing sector needs is for the government to review taxation policy and foreign exchange policy. The manufacturers complained about the taxation system which makes the federal government, state government and the local government tax the same thing.

The Nigerian Joint Tax Board (JTB) should list the taxes the Federal Inland Revenue Service (FIRS) and the State Inland Revenue Service (SIRS) are to collect from the manufacturers. Assigning each government tax body its responsibilities would solve the problem of multiple taxation in the manufacturing sector.

This would make the taxation system to be transparent and manufacturers would know what they are being taxed for. Bruhn and Loeprick (2016) claim that the Georgian government assigned tax responsibilities to various government agencies to solve the problem of multiple taxation.

The second policy to review is the currency control policy. The current currency control policy does not favour the manufacturers which causes disruption in their activities. The Nigerian government through the Central Bank of Nigeria (CBN) should run a transparent system where the manufacturers would be granted FOREX at a normal rate.

The exchange rate should be the international exchange rate rather than the black-market rate. This would allow the manufacturers to access raw-materials from abroad pending the time the government invested heavily in local materials.

The second recommendation of this research is for the Nigerian government to reduce the interest rate charged by banks to manufacturers. Currently the interest rate stands at 14%. Interest rate in the UK stands at 0.25%, while USA stands at 1.25%, Canada stands at 0.75% while Australia stands at 1.5% (Global rate, 2017). Comparing these countries’ rates to the Nigerian interest rate, it shows that the Nigerian government needs to reduce interest rates in order for the manufacturing sector to grow.

According to the Deloitte (2016) global manufacturing competitive index forecast for the year 2020 show that USA, China, South Korea and UK as the leading countries in manufacturing, while Nigeria stands at number 38. Perhaps this is due to the interest rate charged by the banks in those countries. Therefore, it is important for the Nigerian government to reduce interest rates so that the manufacturing sector can flourish.

The final recommendation would be for the government to invest heavily in technology for the manufacturing sector by inviting foreign and local investors to invest in the sector. Richards (2016) highlights three main investors’ challenges in Nigeria; security, corruption and government red tape.

The Nigerian government should provide security assurances to foreign investors so that one of their fears can be conquered.

BY Sulayman, Sayfullah Olatunde & Oyelekan, Abolade Fatai, Statistics Department Central Bank of Nigeria