A RESEARCH WORK SUBMITTED TO DEPARTMENT OF. ECONOMICS ... The relationship between globalization and Nigerian industrial growth was ..... using instead customs tariffs (Feridun, Balouga and Ayadi, 2006). Successively, there.
THE IMPACT OF GLOBALIZATION ON INDUSTRIAL GROWTH IN NIGERIA BY ERUMEBOR RUME WILSON
A RESEARCH WORK SUBMITTED TO DEPARTMENT OF ECONOMICS, FACULTY OF SOCIAL SCIENCES, DELTA STATE UNIVERSITY, ABRAKA, NIGERIA
NOVEMBER, 2010
ABSTRACT The increasing breakdown of trade barriers, interdependence of nations and integration of the world economy has significantly aided the growth of economies, output and world standard of living. Contrary to these benefits, globalization has also had negative effects on various economies especially that of the less developed or developing countries. The study therefore examines the impact of globalization on industrial growth in Nigeria using the scope 1986 to 2008. The econometric method of data analysis and estimation adopted was the Ordinary Least Square (OLS) technique. Variables adopted in this study include: industrial output as a dependent variable, trade openness and exchange rate as explanatory variables. The relationship between globalization and Nigerian industrial growth was empirically tested and evidence from the study revealed that globalization has a significant effect on industrial growth in Nigeria. The results showed that the more the Nigerian Economy is open to trade with the outside world, the more the industrial sector suffers. Trade openness showed a negative relationship with industrial sector growth. It was further revealed that exchange rate was positively related to industrial growth in Nigeria. Both variables were shown to be statistically significance in explaining the impact of globalization on industrial growth. Owing to these findings, some recommendations were suggested so as to maximize Nigeria’s benefit in the globalization process and reduce the risk and cost of globalization.
1.0
INTRODUCTION
Over the past few decades, there have been gains and benefits from increased border transaction and massive flow of investment, technology and information between and among countries. Many other countries have however been faced with enormous challenges of partaking in the benefits of globalization. Such challenges include structural deficiencies, inefficient and inappropriate economic policies and high existence of corruption in the country amongst others. All these internal problems reduce their strength and capacity to successfully compete in the global trend rather they tend to reap the negative effects of globalization. According to the World Development Indicators (2007), “globalization has created opportunities and challenges for developing countries. While the experience of China, India, Indonesia, Thailand and some other countries have demonstrated that integration into the global
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economy is necessary for long term growth and poverty reduction, concerns have been expressed over equality of opportunity and unequal distribution of benefits”. By integrating the world into a global economy through trade liberalization, commercialization and privatization, globalization can undermine industrial growth in Nigeria as it exposes local businesses and industries to competition from global corporation who often have better financing, technology, advertising and market reach. Globalization has largely been driven by the interests and needs of the developed world who have access to the markets of developing countries. However, developing countries have a major problem accessing the markets of developed countries, many tariffs and non tariffs barriers in developed countries have continued to hinder exports from developing countries (Obadan, 2008). This problem however lies beyond the control of developing countries. Also with increased dependence of nations, most developing countries have been exposed to external shocks and crises and these economic crises tend to exist much longer in the developing countries due to the unwary and unstable nature of their economy. In an attempt to reduce these negative effects and reap the benefits of globalization in Nigeria, various policies have been put in place by the government to strengthen performance of the industrial sector; to ensure growth and increase output in the sector; to encourage increased investment in the industrial sector by granting incentives to new and existing firms in various sub sectors of the industrial sector. Little improvement have been recorded so far in achieving the above objectives. Flow of cheaper foreign goods as a result of trade liberalization, increased trade barrier in developed countries, heavy dependence on crude oil for foreign exchange earnings and government revenue thereby giving low priority to the industrial sector, poor infrastructural facilities and unhealthy business environment undermine the potentials of the industrial sector in Nigeria. 1.1
Statement of the problem
The Nigerian economy is characterized by high dependence on crude oil and this feature has seriously served as a constraint in maximizing the benefits of globalization rather it has partly led to slow growth in non–oil export and poor development of other sectors mainly the agricultural and industrial sector of the economy. With increasing breakdown of trade barriers in developing countries including Nigeria as a
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result of globalization, industrialized nations have therefore taken advantages of trade liberalization thereby seeking markets to dump their cheap manufactured goods rendering the local industries inefficient leading to slow growth rate, low capacity utilization and low output of the sector as the demand for goods produced within the country decline due to cheap imported goods and high cost of production faced by firms in the sector. These problems have therefore caused firms to leave their industries rendering many Nigerians unemployed. This research therefore intends to address these problems and determine how Nigeria’s interest can be protected in the globalization process. 1.2
Objectives of the study
The aim of this study is to portray vividly the impact of globalization of industrial growth in Nigeria. The following are the specific objectives: i. To analyze the challenges, opportunities and risks of globalization and their application for sustainable industrial growth in Nigeria. ii. To examine and analyze the reasons behind industrial growth or industrial backwardness in Nigeria iii. To recommend ways on how Nigeria can maximize her benefits and minimize the risks and cost of globalization 1.3
Hypothesis of the study
Ho: There is no significant relationship between globalization and industrial growth in Nigeria. HR: There is significant relationship between globalization and industrial growth in Nigeria.
1.4
Significance of the study
The importance of the study is to analyze and show the effects of Nigeria’s participation in the globalization trend and render suggestions on how Nigeria can maximize her benefits and reduce the negative effects of globalization on the industrial sector and on the economy at large. The study is also significant as it provides a framework to enable the government and planning authorities develop
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policies and strategies on improving the performance of the industrial sector and overcome the overbearing effects of globalization in her effort towards industrialization, economic growth and development. The study is also important as it offers reasonable suggested solutions to the problems facing the industrial sector and recommend ways for ensuring growth and productivity in the industrial sector with a critical look at various sub sectors of the industrial sector. A number of policy implications emerge from the study for Nigeria as well as for other developing countries. 1.5
Scope of the study
This research is geared towards examining the impact of globalization on industrial growth in Nigeria. It is however portrayed on the course of this study that globalization became paramount in Nigeria after the introduction of the Structural Adjustment Programme (SAP) in 1986 with increased breakdown of trade barriers and massive flow of Foreign Direct Investment (FDI) in the country. The data therefore collected for the purpose of this study is from the period 1986 – 2008. The data include industrial output as proxy for the industrial sector growth, exchange rate and trade openness as proxies of globalization. The trade openness will be measured by the ratio of total trade which is import plus export to Gross Domestic Product (GDP). All data are limited to Nigeria. 1.6
Methodology of study
The approach in the study will be to move from the theoretical dedications that have been accepted to empirical testing. Econometric tools, such as multiple regression would be employed in analysing data collected to determine the effects of globalization on Nigeria’s industrial growth. Various test such as standard error test; f – test, R – Square to Durbin Watson statistics will be used. In order to have the background knowledge of the study, journal and textbooks will be consulted; secondary data will also be collected from the following sources: CBN annual report, CBN statistical bulletin, CBN Economic and Financial Review, National Bureau of Statistics publication.
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2.0
LITERATURE REVIEW
This chapter contains the review of relevant literature of various authors in relation to the subject of study. The literature review would be divided into various sections as listed below: i. Globalization as a concept ii. Forces of globalization iii. Aims and benefits of globalization iv. Globalization and Nigeria: Its Origin v. An overview of the Nigerian industrial sector vi. The Nigerian Industrial Sector and the Global Economy vii. Globalization and its implication on the industrial sector in Nigeria viii. Maximizing the benefits of globalization in Nigeria
2.1
Globalization as a concept
The concept “globalization” has attracted the attention of many scholars from diverse fields and has been explained differently by these scholars. The phenomenon of globalization is a multi-dimensional and multi-faceted process that encompasses political, economic, social and cultural dimensions that have been variously explained in different terms and context (Akinboye, 2008). Although the political, cultural, social and environmental aspects of globalization are no doubt important, the economic aspect is perceived to be the heart of globalization process (Obadan, 2008). Globalization summarize a number of inter related features of the world economy; rapid advances in communication and transportation technology, expanding geographical scope for business activities of private corporation and financial institutions, the integration of market across national border and higher degree of uniformity in policy and institutional environment that set the rules of the game for economic actions and interventions on the part of private agent based in various countries (Court and Yanagihara, 1988). Globalization according to Islam (2002) is the intensification of cross border trade and increased financial and Foreign Direct Investment (FDI) flows among nations, promoted by rapid advances in trade and liberalization of communication and information technology. Kwanashie (1998), see globalization as the process of integrating economic decision making all across the
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world and creating a global market place in which increasingly all nations are forced to participate. Thus, globalization entails a borderless world and ensures increased international trade and capital flows among countries of the world. Globalization is therefore the integration and unification of the world economy and it involves the interdependence of nations around the world through increased border transactions and increased financial flows. Globalization has over the years been a contentious issue that has been criticized by some and yet widely accepted by many because of its features and consequences which varies from economy to economy arising from frequent changes in its indicators and forces in the economy.
2.2
Forces of globalization
Globalization has been directly associated with the movement and changes of certain macroeconomic variables which reveal the extent and depth to which the country actively partakes in the global economy. The extent and depth to which a country partakes in the global economy can be measured through the performance of the forces and indicators in the economy. Experts stressed that the main mode and indicators of globalization are rapid growth in international trade, foreign direct investment and international flow of capital and information (Iyoha and Unugbro, 2005). Obadan (2008) affirms that trade, investment and capital flows are the driving force of globalization and the extent of global economic integration can be gauged by the development in trade and financial flows. The major forces of globalization to be considered in this context would be International trade and capital flows mainly Foreign Direct Investment because of its direct impact and relation to the Nigerian industrial sector. Growth in International trade Growth in International trade has been a major feature of globalization as it facilitates exchange of goods between countries. OECD (2005) opined that in a globalizing economy, distances and national boundaries have substantially diminished with the removal of obstacles to market access. The markets and the production of different
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countries have become increasingly interdependent through the changes induced by the dynamics of trade and capital flows and transfer of technology –changes of which the primary vehicles are Multinational Enterprises (MNEs). Growth in international trade accompanied by increased border transaction between countries has increasingly united the world into a global village, enhancing trade relations between countries, increasing dependency ratio of countries and enabling the flow of capital which has tremendous effect on the balance of payment situation and foreign exchange of a country. The flow of goods between countries has been heightened through the breakdown of trade barriers as a result of trade liberalization enabling countries, firms and individuals to access markets and products of other countries. Liberalization of trade has in some cases led to development and improvement in entrepreneurial activities resulting from competition and openness to ideas and innovations amongst countries.
International Capital Flows International Capital Flow is a major indicator of financial globalization. International Capital Flow consists of two major types: Foreign Portfolio Investment (FPI) and Foreign Direct Investment (FDI). Foreign Portfolio Investment involves financial inflows used to purchase equities, stocks, bonds, etc in another country. This type of capital investment are very risky and can be reversed in a very short time because foreign portfolio investors may suddenly decide to leave the country in which they are investing owing to factors that are not connected with problems in economic fundamentals but due to herd behaviour (Obadan, 1999 and 2004). This form of ICF is however accompanied with high volatility especially in the developing countries with weak institutions. FDI on the other hand is a major component of international capital flows and it involves not only a transfer of funds but also a whole package of physical and capital techniques of production, managerial and marketing expertise, products, advertising and business practices for maximizing global profits. One of the most salient features of today’s globalization drive is conscious encouragement of crossborder investments, especially by transnational corporations and firms (TNCs). Many countries and continents (especially developing) now see attracting FDI as an important element in their strategy for economic development (Ayanwale, 2007). IMF (2003) summarized that FDI is one form of capital inflow that tend to be found
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positively associated with domestic investment and domestic growth in a relatively consistent manner. Other forms of capital inflow could also have a positive relationship but their effects tend to be less robust or less strong. FDI has been the most advantageous form of capital flows because of its benefits to build sustainable growth, enhance the optimum distribution of global resources, expedite industrial restructuring and promote innovations in technology in the receiving country. Dinda (2009) noted that FDI serves as an important engine for growth in developing countries through two modes of action: (i) expanding capital stocks in host countries and (ii) bringing employment, managerial skills, and technology. Thus, within this perspective, FDI therefore remains a significant force of globalization with its huge implications on industrial growth in countries around the world. 2.3
Aims and benefits of globalization
Nemedia (1998), noted that globalization of the world economy can bring immense benefit to countries that are able to harness the resulting opportunities to the proper development of their material and human resource endowment. Globalization is a dual sided phenomenon which has been beneficial to many countries and has not helped matters in the same or many other countries especially the developing countries. This is so because most developing countries have very weak capacities to take advantages of global markets as they are still grappling with the provision of basic necessities and amenities such as roads, railways, food, and water among others. In the absence and inadequacy of these basic necessities, it becomes difficult to fully utilize the opportunities and benefits of globalization. The benefits and opportunities of globalization include: i. Globalization brings about greater specialisation between nations in their production processes thereby increasing national output and world output in both quantity and quality which is expected to translate into higher living standards of the world population. ii. Expansion of global markets and corporations. The expansion of global markets and corporations as a result of globalization promotes efficiency through competition and division of labour that allows people and economies to focus on their best. Global markets offer greater opportunity for people to tap into more and larger markets around the world. It makes people to have access to capital flows, technology, cheaper imports and larger export markets.
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iii. Globalization provides opportunity for the transfer of technology through research and development and exposure to new ideas and products through the operations of Multi-National Corporations (MNCs). In most cases, it entails better quality products are produced and give wide options to consumers iv. With differences in natural endowment among countries, globalization brings about gains in efficiency in the utilization of world productive resources. It increases the tendency to establish more competitive production structures which tend to be more efficient and result in productivity gains. v. Globalization has led to increase in international capital flows which enhance foreign exchange earnings to supplement domestic savings and increase investment levels-for the host countries, transfer of technology and increase sources of revenue for government of the host countries through taxes and royalties. vi. Globalization enables a global financial integration which enables countries especially developing countries to access a diversified investor base for bonds and equity issues and also access capital market of the developed countries. vii. Globalization gives the domestic market, enhanced opportunity for generating revenue from foreign investor through the inflow of portfolio investments. viii. Globalization provides opportunities for export led growth of an economy fuelled by increased exportation on manufactured goods. ix. Globalization provides opportunities for increased foreign direct investment which helps in industrialization, building up of economic overhead capital and upgrading domestic human capital through managerial capacity building. 2.4
Globalization and Nigeria: Its Origin
Globalization through its indicators, growth in international trade and financial flows, has had massive effects on the industrial sector in Nigerian over the years. These effects can be categorized as positive and negative and have either contributed to or hampered the growth of the industrial sector in the Nigerian economy. It is therefore important to examine the traces of globalization in Nigeria so as to effectively study its impacts on industrial growth in Nigeria. Globalization has long been in existence in the world and even in Nigeria during the colonial era with the export of primary products and also crude oil following its discovery in 1956. Nigeria however became actively involved in the globalization
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process in 1986 through the Structural Adjustment Programme (SAP) following the economic crisis that hit major countries in the early 1980s. Obadan (2008) argued that the developing countries have since the mid-1980s undertaken widespread and rapid trade liberalization, essentially in response to the conditionalities attached to the stabilization and Structural Adjustment Programmes that they were cajoled to implement by the Bretton Woods institutions. While economic stabilization policies were put in place from the late 1970s, the formal adoption of the economic globalization in the Nigeria began with the introduction of the Structural Adjustment Programme (SAP) in July, 1986 by the regime of General Ibrahim Babaginda (Onyeonoru, 2003). The elements of the Structural Adjustment Programme (SAP) were introduced by the International Monetary Fund (IMF) and the World Bank to resolve economic hardship in many developing countries including Nigerian in the mid-1980s. These institutions according to Egware (1998) were referred to as the institutional agents of globalization. With the introduction of SAP in Nigeria, external trade was liberalized and the allocation of external resources such as foreign exchange was left to the exchange rate of the naira. The execution plans of SAP relied heavily on foreign resources and thus, trade policies were aimed at generating export surplus so as to earn enough foreign exchange to finance imports that were urgently needed for development (Analogbei, 2000). Trade liberalization and deregulation were the main driving force of the Structural Adjustment Programme (SAP). The Structural Adjustment Programme (SAP) was intended to restructure the economy from overdependence on the oil sector for government revenue and foreign exchange earnings, diversify the non-oil export base and ensure the attainment of internal and external balance of the economy. All these were followed by trade and foreign exchange liberalization, removal of import and export licensing, encouragement of export with the introduction of Nigerian Export-Import Bank (NEXIM), a reduction in the number of items initially prohibited to be imported thereby increasing the activities of the external sector and throwing open the economy to foreign participation. The post-SAP policies liberalized trade by removing the import-licensing requirement and using instead customs tariffs (Feridun, Balouga and Ayadi, 2006). Successively, there was an increase in total trade- Import plus export- by 224% in 1987, 9% in 1988 69% and 77% in 1989 and 1990 respectively. Obadan (1996) argued that the value of total exports has shown remarkable upward growth particularly since the period of SAP when the
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large depreciation of the naira exchange rate led to substantial increase in the value of merchandise exports. Specifically the value of export which was put at N8.920 billion rose to N109.886 billion in 1990. UNEP (2003) acknowledge that the Structural Adjustment Programme period 1986–1993, especially trade liberalization, enhanced export prices partly due to the devaluation of the Nigerian currency. Also, the value of imports rose from N5.983 billion to N45.717 billion in 1990. The Nigerian economy relatively became more open as a result of the Structural Adjustment Programme and tremendous growth in output was recorded during the early years of SAP. Capital flows on the other hand also constitute a major indicator of globalization and has become increasingly significant to the Nigerian economy after the Structural Adjustment Programme (SAP) especially in the aspect of Foreign Direct Investment (FDI). Odozi (1995) accounts on the factors affecting FDI flow into Nigeria in both the pre and post structural adjustment programme (SAP) eras and found that the macroeconomic policies in place before the SAP were discouraging foreign investors. He also revealed that the policy environment led to the proliferation and growth of parallel markets and sustained capital flight. In support of this view, Ayanwale (2007) argued that the adoption of the structural adjustment programme in 1986 initiated the process of termination of the hostile policies towards FDI. A new industrial policy was introduced in 1989 with the debt to equity conversion scheme as a component of portfolio investment. The Industrial Development Coordinating Committee (IDCC) was established in 1988 as a one-step agency for facilitating and attracting foreign investment flow. He further stressed that the low level of FDI inflow into all the sectors, however, took an upward turn in 1986 following the adoption of the SAP. FDI friendly policies increasingly soared after the SAP in 1986. Net FDI, which is the difference between FDI inflows and outflows, in Nigeria grew by 233.4% in 1987 and has significantly increased each year up till 2006. FDI in Nigeria is a major tool for the inflow of technology, expansion and integration of global marketers through the MultiNational Corporations (MNCs). 2.5
An overview of the Nigerian industrial sector
The industrial sector consists of the secondary sector of the economy and includes sectors which are responsible for the production of goods which are either consumed in the country or exported to other countries. The industrial sector according to CBN
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Statistical Bulletin (2007) will be divided into three major sub-sectors which include Manufacturing, Mining and Quarrying and Petroleum and Natural Gas sectors. The role of the industrial sector in the growth of developing countries is very significant because sustained economic growth and development of developing countries including Nigeria lies so much on the growth of the industrial sector. The Nigerian industrial sector would be discussed in two phases: The Pre-SAP era and the Post-SAP era (globalization era).
The Pre – SAP era (1970 – 1985) 1970 marked the end of the Nigerian Civil war and the second National Development Plan (1970-1974) was established. Analogbei (2000) stressed that the major strategy of the plan was to secure economic growth through the replacement of destroyed assets and restoration of the productive capacity of the country as well as ensure equitable distribution of the fruits of development. The plan was aimed at increasing agricultural and industrial output and therefore import licensing and increasing trade barrier which was dominant in the 1960s was maintained. As regards the industrial sector, the development of the petroleum, iron and steel industries and the establishment of the Nigerian Bank for Commerce and Industries (NCBI) to support industrial financing were executed. The industrial sector’s share to Gross Domestic Product (GDP) which stood at 22.4% in 1970 increased to a peak of 40.8% in 1980. The relative high growth in the index of industrial output in the 1970s was traceable to the promotion of industries through high trade barriers and incentives which offered protection and concession to the infant industries (Anyanwu, 2000). Policies during this period such as indigenization policy which aimed at increasing and protecting domestic participation in productive activities in the economy and import substitution industrialization policy were embarked upon. The Nigerian economy during the end of the second National plan was characterized by high dependence on crude oil due to increase in crude oil price in the international market which led to increased exploration and production of the product. NCEMA (2005) in a study revealed that in 1969 the oil sector accounted for less than 3 per cent of GDP and a modest US$370 million in exports (42 per cent of total exports); per capita income was only US$130; and more than half of GDP was generated in the
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agricultural sector. By 1980, the oil sector had come to account for nearly 30 per cent of GDP, oil exports totaled US$25 billion (96 per cent of total exports), and per capita income exceeded US$1,100. The production and sales of crude oil left the country with so much revenue and excess funds during the later part of the 1970s. Part of this fund was expended on the industrial sector and this consequently led to the growth in output of the sector. With the increase in oil prices in the 1970s, Nigeria relied heavily on imported goods in the late 1970s. The situation was compounded by a fall in oil revenue as a result of the oil shock of the early 1980s and balance of payment deficit was recorded. Funding imports became difficult and the shortage of essential items became a reality all over the country. The relaxation of import controls and the massive importation of essential commodities exposed local industries to stiff competition (Analogbei, 2000).The economic policy orientation during the 1970s left the country ill prepared for the eventual collapse of oil prices in the first half of the 1980s. Public investment was concentrated in costly, and often inappropriate, infrastructure projects with questionable rates of return and sizable recurrent cost implications, while the agricultural sector was largely neglected. Nigeria’s industrial policy was inward-looking, with a heavy emphasis on protection and government controls, which bread an uncompetitive manufacturing sector. Nonetheless, Nigeria’s economy has remained dominant in Africa (NCEMA, 2005). Despite the drastic measures taken by the government to resolve the economic problem such as the establishment of the Economic Stabilization Act of 1982, the problems still persist in the economy. This therefore led to the introduction of SAP in 1986. The Post – SAP era (Globalization era) Following the globalization trend, Nigeria has been liberalizing its economy but the real sector have had to function under conditions of unstable macroeconomic management, inadequate technology and credit facilities (Onwuka and Eguavoen, 2007). Trade openness was however at its peak after the introduction of SAP in 1986 as a result of the policy measures of the programme. Commercialization and privatization of countries which is a major aspect of globalization was paramount after 1986. In 1988, the policy thrust of legalizing commercialization and privatization of public enterprises was promulgated. Other industrial policy instruments include the New industrial policy of 1989 widely accredited as a replacement of the amended indigenization policy of 1977 to specifically encourage foreign investments, the
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Nigerian investment promotion decree No 16 and the Foreign Exchange decree No. 17 of 1995 (Ajayi, 2007). As noted by Okoh (2004), trade policies since 1986 have aimed at liberalization of the economy as well as achievement of greater openness and greater integration with the world economy. The policies thus ranged from abolition of marketing boards, to introduction of the second tier foreign exchange market (SFEM), various export expansion incentive schemes, establishment of the Nigeria Export- Import Bank etc. Analogbei (2000) observed that specific to international trade, the primary focus was on liberalization of trade and pricing system, with emphasis on the use of appropriate price mechanism for the allocation of foreign exchange. The Second – tier Foreign Exchange Market (SFEM), a major policy measure contained in the Structural Adjustment Programme (SAP) was then introduced under which the exchange rate of the naira was to be determined by the market forces of demand and supply. The naira was considered to be overvalued particularly between 1975 and 1985. The overvaluation of the naira was believed to be the core source of the structural problems in the country. The principal objective of SFEM therefore was to achieve a more realistic value for exchange rate for the naira. This value of the naira through official manipulation and interference with the market by the Central Bank of Nigeria, the naira became undervalued exchanging for about N4.01 to $1 USD in 1987, N7.39 in 1989 and N22.05 in 1993. Iyoha and Unugbro (2005) noted that the continuous depreciation of the naira has not resulted in raising significantly the proportion of total exports. Thus, this incentive effect of production to naira depreciation seems to have been quite limited. Besides, the depreciating naira has a devastating effect on the development of the industrial sector in addition to exacerbating the problem of inflation. The National Technical Working Group (2009) observed that the impact of SAP on the productive sectors of the economy was mixed. Industry had to devise strategies to cope with the various aspects of the new regime as well as a slump in effective demand. There were evidences of deliberate shift to local raw material sourcing by industry as one of the ways to cope with some of the challenges of this era. The increase in the cost of imports and pressure by government resulted in the rise of local raw material sourcing by industry from 38 percent in 1985 to 50 percent in 1988. The industrial sector witnessed an increase in output after the structural adjustment
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programme. The output was largely fuelled by the increase in the production of crude petroleum and natural gas. The industrial sector output immediately after SAP grew by 110.3% in 1987, 19.5% in 1988 and 462.67% from 1988 to 1993. The manufacturing sector output as a percentage of the industrial sector output stood at 21.5% in 1987, 26.6% in 1988 declined to 13.7% in 1989 and averaged 15.9% from 1990 to 1994. The Nigerian economy during this period was characterized by high importation of non – oil products in relation to its export which led to a slow growth rate of the manufacturing sector. Non oil imports grew by 203.8% from 1990 – 1994 while non oil exports grew by 64.1% in the same period. The overdependence on imports with no significant increase in non – oil export and the concentration on crude oil for government revenue adversely affected the growth and performance of the industrial sector especially the manufacturing and mining and quarrying sub – sectors. Anyanwu (1998) averred that the Nigerian industrial sector after the Structural Adjustment Programme was faced with series of problems which include: high cost of production, obsolete machinery and equipment, loss of competitiveness, low rate of capacity utilization due to foreign exchange scarcity, failure to utilize the advantages of labour intensive, among others. Presumably, some of the current problems of the industrial sector are as a result of the globalization process, making the economy externally dependent on policies and practices of other countries putting Nigeria in a situation where she lacks direct control over the crisis on her economy. With globalization, Nigeria kept importing everything at the expense of her own domestic industries (Aluko, Akinola and Fatokun, 2004). The domestic industries faced unfavorable competition with the influx of cheap finished products and the dumping of sub – standard goods from industrialized and other developing nations. These problems are still in existence in the country with the manufacturing sector contributing 9.58% in the period 1981 – 1985, 7.08% from 1986 – 1990, 5.8% from 1991 – 1995 and 4.95%, 3.9% and 2.6% during the periods 1996 – 1999, 2000 – 2003 and 2004 – 2007 respectively to the Gross Domestic Product (GDP). Capacity utilization rate followed the same downward trend from an annual average of 53.6% in the period 1981 – 1985 to 41.1%, 35.4% and 31.8% during the periods 1986 – 1990. 1991 – 1995 and 1996 – 1998 (Anyanwu, 2000). The manufacturing sector in spite of its huge potentials to create wealth, reduce poverty and generate employment has remained stagnant contributing a single digits percentage on the average to GDP
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annually. The stagnation and unimpressive performance of this sub – sector is injurious to the industrial sector growth and also a major obstacle facing the attainment of the vision 20 – 2020. 2.6
The Nigerian Industrial Sector and the Global Economy
This section examines how actively Nigeria partakes in the global economy and also Nigeria’s contribution to the global economy which would be measured by Nigeria’s share of total world trade; and the contribution of the industrial sub – sectors to national output and to external trade of the Nigerian economy. Ojo and Obaseki (1998) revealed that the place of Nigeria in the global economy has become an important issue of policy relevance as a result of the rapid integration of the world’s goods, services and financial markets. According to Obadan (2008), “Nigeria’s share of world trade is very low and has been declining over the years. The country’s share of total world trade declined from an average of 0.92% in 1975 – 1979 to 0.28% in 1985 – 1989 to 0.26% in 2002 to 2005. The shares of exports and imports in world exports and imports respectively have exhibited similar downward trends. The very poor performance of non – oil exports contributed to the rather poor performance of Nigeria’s share in global exports”. The exportation of crude oil and primary products and also the importation of goods are largely responsible for Nigeria’s share of world trade. Sub-sectors of the industrial sector such as manufacturing and mining and quarrying sectors contribute minimal to the external sector of Nigerian economy. Erumebor (2010) argued that the industrial sector has been faced with enormous challenges that have resulted in low capacity utilization, under utilization of resources, firms leaving their industries rendering many Nigerians unemployed, low output and poor contribution of the industrial sub- sectors except crude oil to the GDP. The manufacturing sector for instance has contributed about 3.31% annually on the average to GDP in the period 1998-2008. This figure is insignificant to national output and Nigeria’s external sector. National Technical Working Group (2009) argued that the manufacturing is the driver, mover and core of industrialization of the fully industrialized, leading economies of the world. The role of manufacturing in the modern knowledge-based technologically driven global world is vital. The bulk of global trade (77 percent) is in the form of manufactured goods; food and agriculture account for a mere 9 percent of global merchandise trade followed by fuels with 8 percent and ores and minerals accounting
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for 3 percent of world trade. Manufacturing is therefore not only the major foreign exchange earner but a stable and reliable source of foreign exchange earnings for major economies worldwide. For Abah (2009), no meaningful economic growth, wealth creation, employment generation and poverty reduction can be achieved in any country without a robust manufacturing sector. This therefore depicts the importance of the manufacturing sector in the growth of the real and external sectors of an economy as it facilitates the use of human resources in the procurement of raw materials and in the production and distribution of goods. Besides, most manufactured goods are easily transferable across national and international boundaries. While manufacturing sector’s share to GDP in other developing countries such as Malaysia stood at 30.9% in 2003, 25% on the average from 2000 to 2006 in Singapore, the Nigerian manufacturing sector is fast crumbling. As reported in Vanguard Newspaper (July 10, 2008), “Textile industry has further lost additional 15,000 direct jobs in the last one year with the danger of more closures and more job losses following the closure of UNT PLC, Atlantic Textile mill and United Textile limited amongst others. The manufacturing firms in Nigeria are faced with high cost of production, uneasy access to markets and low profit level which reduces their competitive strength with Multinational Corporations (MNC) in the country. Nigeria’s aspiration to be among the 20 largest economies of the world by the year 2020 will remain hollow and trivial in the absence of a vibrant manufacturing sector that is able to cope with the dynamic challenges of an increasingly globalized world. Lawal (2006) examines the contribution of the mining sector to output and finds that despite the mineral potential Nigeria possesses (proven reserves in 33 types of minerals in over 400 locations), solid mineral exportation constitutes a mere 1% to its GDP. This extremely low share is mainly due to Nigeria’s dependence on oil but also largely due to the underdeveloped mining sector, primarily resulting from inadequate and inefficient policies for mineral exploration development. The mining and quarrying sub – sector still remains under developed and unproductive in the country. Its contribution to GDP remains insignificant contributing 0.24% annually on the average to GDP between 1998 and 2008. ALISON-MADUEKE (2009) observed that some of the problems facing the mining sector include: Inefficient State Operations and participation in mining activities, Depleted Surface Alluvial Deposits (Especially Tin), Inadequate Geological Information & Data, Cumbersome mining license application processes, Prevalence of Illegal Mining Activities, Jurisdictional Conflicts between
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Federal and State government. As a result, existing material resources are underutilized and its usefulness is not well known. These mineral resources however form a major source of revenue for most countries and accounts for larger share of exports and outputs. A large number of these solid materials are newly discovered and some are still in prospects. This however shows the neglect of the mining and quarrying sector of the Nigerian economy. Okoh (2004) opined that a prominent feature of Nigeria’s external sector has remained basically the same since 1960. The export sector is characterized by the dominance of a single export commodity, crude oil. The petroleum sector has remained the most active sub-sector of the industrial sector in Nigeria and accounts for about 80 to 85% of industrial output from 1998 to 2007. The sector however is a major source of government revenue thereby given much attention when compared to others sectors of the economy. The discovery of crude oil in 1956 followed by the increased crude oil price in the international market in the 1970s led to the structural shift from agricultural sector to heavy dependence on crude oil in the Nigerian economy. Sekumade (2009) reveal that Oil export has contributed greatly to the foreign exchange earnings of the country and has led to the neglect of the agricultural sector. The shift from agriculture to crude oil in the 1970s has also contributed to low performance of other sub-sectors in the sector knowing fully well the relationship between the agricultural and industrial sector since most of the agricultural sector’s output could serve as input for the industrial sector. Odularu (2008) noted that petroleum production and export play a dominant role in Nigeria's economy and account for about 90 % of her gross earnings. This dominant role has pushed agriculture, the traditional mainstay of the economy, from the early fifties and sixties, to the background. Nigerian’s continued dependence on crude oil to the neglect of her agricultural and industrial sectors is dangerous. There is need to emphasize that our oil is very much exhaustible while other sub-sectors of the industrial sectors remains an unending means of creating employment, expanding wealth and generally improving the standard of living. When the oil market collapsed in 1982/1983 and in 2008, Nigeria experienced serious economic turmoil. However, this sector account for larger share of Nigeria’s export and larger portion of Nigeria’s share to the global economy.
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2.7
Globalization and its implication on the industrial sector in Nigeria
Empirical research has examined the effects of globalization on growth, productivity and efficiency at cross-country, industry and firm-level across countries. Existing empirical evidence shows mixed results about the relationship between globalization through its forces and industrial growth. Several reasons may be advanced to explain such disparity of empirical results. To mention a few, first, tests are traditionally conducted using data sets usually belong to heterogeneous groups of countries. Second, previous studies have used a variety of theoretical models. Third, empirical studies have usually implemented a number of different econometric techniques in testing and estimation. However, this disparity in results does not preclude the need for further investigation of the subject as long as it is clearly indicated that the analysis and the obtained results are not necessarily generalized to other cases. The literature discusses past empirical results on the impact of globalization on the economy of developing countries with special reference to the Nigerian economy. Axel Dreher (2002) concludes that globalization is good for growth. His empirical findings further showed that on average, countries that are more globalized experienced higher growth rates. This is especially true for actual economic integration and – in developed countries – the absence of restrictions on trade and capital. However, Dreher (2004) went further to state that countries with the lowest growth rates are those who did not globalize. Countries like Rwanda or Zimbabwe, e.g., insulated themselves from the world economy. They have poor institutions which repress growth and promote poverty. Nevertheless, all else equal it will not be enough for poor countries simply to globalize their economies to spur growth rates and reduce poverty. His study revealed that countries with greater economic integration experienced higher growth than countries with low economic integration. Similarly, Pleskovic and Stern (2003) points out that openness is highly correlated with changes in growth, with a point estimate suggesting that an increase in the trade share of GDP from 20 to 40 percent over the decade would raise real GDP per capital by 10 percent. They showed that openness is a fairly robust cause of growth. In the aspect of FDI, similar results were obtained. Their results revealed that FDI as a share of GDP predicts growth. Sachs and Warner (1995) examined the experience of countries that opened since 1975 and found higher growth in two years after liberalization and further relative to the years prior to liberalization. As demonstrated by Dollar and Kraay (2001) there
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exists a positive relationship between growth and openness. They classified countries into globalizers and non-globalizers based on three criteria: One, countries whose trade as a share of GDP rose faster between 1975-79 and 1995-97; Two, countries who had the largest reductions in average tariff over the period 1985-89 to 1995-97 and Three, those nine countries that were in both groups. They showed that the globalizers enjoyed a substantial increase in growth rates in the 1990s relative to the 1980s from 2.4 percent to 3.8 percent, whereas the non-globalizers experienced slow growth rates from -0.1 percent to 0.8 percent. Goyal (2006) showed that globalization has not only increased the GDP of India but also the direction of growth in the sectors has also been changed. Earlier the maximum part of the GDP in the Indian economy was generated from the primary sector but now the service industry is devoting the maximum part of the GDP. The services and industrial sector remains the growth driver of the Indian economy with a contribution of larger percentage share of GDP. Balasubramanyan et al. (1996) report positive interaction between human capital and FDI. They had earlier found significant results supporting the assumption that FDI is more important for economic growth in export-promoting than import-substituting countries. This implies that the impact of FDI varies across countries and that trade policy can affect the role of FDI in economic growth. Shiro (1999) found that there is a positive relationship between foreign direct investment and industrial production. The elasticity of the index of industrial production with respect to foreign direct investments of 0.14 indicates that one percent increase in foreign direct investment will lead to fourteen percent increase in the level of industrial output. Salimono (1999) state that since globalization entails trade liberalization, it is therefore imperative that there is free and unrestricted movement of trade, finance and investment across the international border. The advantage here is that globalization allows Nigeria to export and import goods, capital and investment without restriction. In contrast with the above empirical studies, several studies have shown that globalization through its indicators have had adverse effects on industrial output and economic growth of countries most especially developing countries. Robert Johnson (2002) in his regression analysis of growth per GNP in 72 countries between 1960 to 1978, found stocks of foreign direct investment to be positively associated with economic growth at statistically significant level for relatively advanced economies. He therefore concluded that once the size of a developing country is taken into account, the level of direct investment has no consistent effect on growth. According to Obadan
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(2008), although globalization has had some positive effects on the Nigerian economy, especially through the oil sector, there seems to be a consensus that the positive impacts have been negligible considering macroeconomic indications such as growth, poverty and other social indicators. Nemedia (1998) in his findings revealed that that trade liberalization pose a great challenge to the growth of the industrial sector in developing countries. He further stated that as a result of poor technological development and weak managerial know-how, the developing countries run the risk of marginalization from globalization. He argued that growth in manufacture and industrial sector poses a major challenge for developing countries given their greater dependence on export of primary commodities and mineral products. Ayanwale (2007) while contributing to the impact of globalization on the industrial sector notes that though FDI contributes positively to Nigeria’s economic growth with FDI in the communication sector which currently has the highest potential to grow the economy, the FDI in the manufacturing sector has a negative relationship with economic growth, suggesting that the business climate is not healthy enough for the manufacturing sector to thrive and contribute to positive economic growth. 2.8
Maximizing the benefits of Globalization in Nigeria
As earlier discussed, the Nigerian economy is not spared from the phenomenon of globalization. However, Nigeria as a country is faced with the challenges of maximizing the benefits and reducing the cost of globalization. Diversification of the economy from heavy dependence on the petroleum sector to the development of other secondary sectors of the economy such as manufacturing, mining and quarrying sector to ensure that output in such sectors are optimum with lowest possible cost should be embarked upon. Also the promotion of manufactured exports rather than dependence on crude oil and primary products exports should be embarked upon. Obadan (2008) stressed that dependence on primary commodity exports has not significantly aided Nigeria’s integration into the global economy nor minimized its marginalization, even though the economy is open. In order to ensure the industrial sector growth, development and promotion of manufactured exports in the areas of comparatives advantages have to be carried out thoroughly. This however can be achieved by the government and its agencies initiating grass root production through the promotion of Small and Medium scale Enterprise (SMEs) to produce what is imported and to meet the basic domestic needs and tailor Nigeria’s participation in the globalization process.
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This will, if properly instituted and managed, generate production externalities that could lead to productivity, industrialization, economic growth and development and strengthen Nigeria’s status and prospects in the globalization trend. The rapid economic growth and prosperity in the Asian developing countries is derived from their ability to enhance manufactured exports and industrialization and produce goods in which they have comparative advantages which turns out to be cheaply produced and affordable by their trade partners. But in the case of Nigerian industries, the ability is produce these goods is constrained by many domestic factors which includes infrastructural inadequacies such as bad roads, inadequate water supply, erratic power supply, macro economic instability leading to low level of output, high cost of production, low capacity utilization and unfavorable business environments. The adverse business conditions coupled with insecurity of life and property, political instability makes it difficult for Nigerian industries to take advantages of the opportunities offered by globalization for Nigeria to become a manufactured export – driven nation, it becomes pertinent that these problems be addressed so as to encourage growth and development of the industrial sector and the economy as a whole. Knowing fully well the positive effects and impacts of Foreign Direct Investment in a country, friendly, stable and sound economic and financial policies should be adopted to heighten the inflow of Foreign Direct Investment (FDI) into particular sectors of the Nigerian economy. However, before these policies are made, the local industries should be well – equipped and prepared to face the competitive strength of the MNCs ensuring that their products are quality inclined to enable international competitiveness with foreign forms on the country. Also, the use of modern technology in the production processes of local firms should however be encouraged. Owolabi (1998) opined that computer and telecommunication technology are the means of investment, production and marketing in the globalization process. A system of global links must be established to other international databases and information networks, for collecting processing, repackaging and disseminating information on market industry, investment and technology so as to catch the opportunities in developing global markets for exports and imports, gain advantages of patents and technological progress to support
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innovation and develop new products and increase the competitive edge and business connection as well as strengthen their business structure networks and increase productivity levels in the industrial sector in Nigeria. Ayadi and Balonga (2006) argued that trade liberalization have had negative effects on the environment in Nigeria. In specific terms, increased trade openness have led to increased environmental pollution which have a significant and negative impact on agriculture particularly the soil and water and also on the industrial sector. They therefore recommended that trade liberalization be accompanied by government investment in education, skills, research and development so as to equip people to take advantage of new employment opportunities and to create adequate safety nets to protect the environment in this era of trade liberalization.
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3.0 3.1
Theoretical Framework and Research Methodology Theoretical Framework
The Dependency theory and the Classical theory of international trade would be examined to further explain the impact of globalization on industrial growth. 3.1.1
The Dependency Theory
The dependency theory asserts that underdeveloped and developing countries need to reduce their connectedness with the world so that they can pursue a path more in keeping with their own needs, less dictated by external pressures. The dependency theory portrayed that developing and poor nations are at a disadvantage in their market interaction with wealthy nations. The theory asserts that poor or developing nations provide natural resources, cheap labour, destination for obsolete technology and markets to wealthy nations without which the latter could not have the standard of living they enjoy. Wealthy nations actively perpetuate a state of dependence by various means. This influence may be multifaceted, involving economics, media control, banking and finance, education, politics, culture, sports and all aspects of human resource development. In this theory, it is believed that a high proportion of the developing nations’ economic activities consist of exports and imports from other developing nations – in many cases with only one or few developed nation. By contrast, only a small proportion of the economic activity of the developed nations consists of trade with the developing nations; a developed nations’ trade consists mostly of internal trade and trade with other developed nations. This therefore puts a poor nation in a weak bargaining position in the globalized world as against the developed nations. Furthermore, the dependency theorist argued that there is harmful long-term impact of FDI on economic growth. They argued that FDI may promote growth in the short run but it is usually accompanied by numerous adverse effects on economic growth in the long run most especially in developing countries. Proponents of the dependency theory therefore proposed or suggest for developing countries to embark in the promotion of their domestic industries by imposing subsidies to protect domestic industries; rather than simply exporting raw materials, they should however promote manufactured export; adopt import limitations strategies by limiting the importation of luxury goods and manufactured goods that
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can be produced within the country; prevent foreign investment and enforce nationalization whereby the government takes control of foreign owned companies on behalf of the state, in order to keep profits within the country. In summary, the theory affirms that globalization is beneficial only to developed countries and the developing or poor nations tend to reap the negative effects of globalization. 3.1.2
The Classical Theory of International Trade
The orthodox theory of trade as propounded by classical economists such as Adam Smith and David Ricardo stressed that trade can promote growth and development in the form of higher output. The Ricardian model however revealed that trade between countries is attached with enormous benefits and consequently leads to growth of the economy. In the Ricardian Model, trade leads to international specialization with each country shifting its labour force from industries in which that labour is relatively inefficient to industries in which that labour is relatively more efficient thereby enhancing output of the industry. The Ricardian model asserts that not only that all countries gain from trade but that every individual is better of as a result of international trade. The Ricardian model assumes two countries, two commodities and one factor of production, labour. Labour is the only primary input to production and labour is internationally immobile. It focuses on comparative advantages and is perhaps the most important concept in international trade theory. In the Ricardian model, countries specialize in producing what they produce best. Unlike other models, the Ricardian model predicts that countries will produce goods in which it has comparative advantage. Differences in climate and environment tend to result in differences in comparative advantage: differences in comparative advantage lead to trade. Comparative advantage explains that trade can create value for both parties even when one can produce all goods with fewer resources than the other. The net benefits of such an outcome are called gains of trade. Conclusively, the theory reveals that trade between countries would be beneficial to both countries, thus supporting the process of globalization. 3.2
Research Methodology
Almost every scientific research can really be conducted by employing any four of the alternative methods such as: the econometric method, the comparative method, the
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experimental method and the documentary or case history method (Teign, 1976). The nature and peculiar characteristics of the problem under investigation and the objectives of the research will inform the choice of the research method to be adopted (Umoru, 2007). The econometric method however would be adopted for the purpose of this research. The econometric method facilitates the specifying of statistical or econometric model, estimation of parameters of chosen econometric model, checking for model accuracy and testing the hypothesis derived from the model. 3.3
MODEL SPECIFICATION
In relation to the economic theories, the variables to be adopted in the model in explaining the impact of globalization on industrial growth in Nigeria are: industrial output which is the dependent variable; trade openness defined by the share of total trade (import plus export) to Gross Domestic Product (GDP), the explanatory variable and exchange rate which is also an explanatory variable. The model specification implies expressing the relationship among variables in functional, mathematical and econometric form. The relationship is given as thus: i) Function form of the model IOt = f (TOt, ERt) ii) Mathematical equation of the model IOt = βo+ β1TOt+β2 ERt iii) Econometric equation form of the model IOt= βo+ β1TOt+ β2ERt + Ui Where IO = Industrial Output TO = Trade Openness ER = Exchange rate Ui = Stochastic error term The stochastic term captures all other factors that could influence industrial output other than the two variables listed above.
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Based on the economic a priori condition, trade openness and exchange rate is expected to have either a positive or negative impact on industrial output in Nigeria thereby a positive or negative sign in the model. Specifically in terms of trade openness, the Ricardian model for instance asserts that there are enormous benefits from trade between countries. The dependency theory on the other hand posits a negative relationship between trade and output in developing countries. Therefore trade openness could be beneficial or not in relation to the above theories. Trade openness would be beneficial ceteris peribus if goods imported are capital goods which could be used to enhance production and increase output which in-turn could lead to export driven growth of a nations’ economy. The industrial sector however in Nigeria relies heavily on imported inputs such as raw materials, machines, equipment and capital goods which would promote efficiency, growth and development of the sector as this input would be employed in ensuring increased output in the sector. Given such cases trade openness is however expected to have a positive relationship with industrial growth or output in an economy. Conversely, trade openness if accompanied by the inflow of consumer goods could enable the importation of inflation and encourage the inflow of goods that happen to be cheaper and better in terms of quality when compared to locally produced goods. With local industries grappling with internal problems like poor infrastructural facilities, poor power supply amongst others, trade openness seems to be injurious on industrial growth in the country. Exchange rate on the other hand is a major determinant of foreign direct investment (FDI) and it is expected to have either a positive or negative effect on industrial growth in Nigeria. A weak exchange rate in relation to other currency tend to encourage FDI which is the most advantageous form of capital flows as it promotes innovation in technology, enhance optimum distribution in technology and build sustainable growth with the movement of multi-national corporations across countries. This could however promote export driven growth in various sectors of the economy. Notwithstanding the above benefits, a weaker exchange rate could also discourage the importation of capital goods and inputs thereby negatively affecting productivity in the industrial sector; attract FDI through Multinational Corporations allowing firms in the industrial sector to face unfavorable competition. Exchange rate is thus expected to have a positive or negative impact on industrial growth in Nigeria.
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3.4
Description of Variables
The variables to be adopted in this research work include trade openness, exchange rate and industrial output. i) Trade Openness: This measures the extent to which and economy is open to trade and it is measured by the share of total trade to GDP. Plaskovic and stern (2003) asserts that measuring openness as import and export as a share of GDP combines the effect of natural openness and trade policy and that this level of openness reflect the level of economic development, such as geographic factors as distance from trading partners and resources endowment (in that countries with unusual resources endowment are likely to trade more). Trade openness would however serve as a proxy for globalization in this research work. ii) Exchange rate: Exchange rate is defined as the rate at which a country’s national currency exchanges for another country’s currency. It is expressed as the amount of a currency needed to purchase a unit of another currency. The exchange rate in this research work is the naira as against the US dollar. iii) Industrial Output: The industrial output would be used as proxy for industrial growth as there exist a positive relationship between growth and output. The output in this case is the monetary value (in naira) of goods produced by the industrial sector during the specified period. 3.5 Nature and Sources of Data The data used for this research work covers the period 1986-2008. The data are annual time series data collected from secondary sources such as the CBN statistical bulletin 2008 and the National Bureau of Statistics (NBS) publication 2008. 3.6 Method of Data Analysis and Estimation The method of estimation adopted in this research work is the Ordinary Least Square (OLS) technique. The OLS technique would be adopted so as to empirically examine the impact of globalization on industrial sector growth in Nigeria from the period 19862008.
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The OLS technique was adopted for this research because it establishes a linear relationship between the dependent and independent variable and it is easy to understand, simple in computational procedure and it possesses a unique property, Best Linear Unbiased Estimator (BLUE) in which the estimators acquire minimum variance among a class of unbiased estimators. Test such as the t-test, f-test and R2 which is the coefficient of determination would be used to measure the statistical significance of the coefficients and also measure the goodness of fit of the model.
4.0 Presentation of Result The model used in this analysis is a single equation model consisting of three variables, one dependent variable and two explanatory variables. The result of the equation is presented below: LIO = SB(i) t probability
5.074987 – 0.074987LTO + 0.85214LER (0.106223) (0.005727) (0.039559) (47.11670) (13.0945) (2.154078) (0.0000) (0.0000) (0.04336)
R2 = 0.80705
R2
= 0.787755
F statistics = 28.61114 Prob (f statistic) = 0.000 DW = 1.995725 N = 23 Where: L = Natural Logarithm
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4.1 Analysis of the Result SIGNS/MAGNITUDE The result suggests a positive linear relationship between ER and IO and a negative linear relationship between TO and IO. Thus, an increase in the value of ER by a unit will increase the IO by 0.085214 units, while an increase in TO by a unit will reduce the IO by 0.074987 units.
2 R /R
2
2
The
R
which is the co-efficient of determination and the goodness of fit test
suggests that 81 percent in the total variation in Industrial output has been explained by the Exchange rate and trade openness taken together. This is a good fit since the unexplained variation is just 19 percent (1-0.81). The R2 which is the adjusted R2 for degrees of freedom suggests that 79 percent of the total changes in the IO has been explained by the TO and ER taken together. F Test The f-test is used to test the overall significance of the model. The f test with a value of 28.61114 and probability of 0.000 suggests that the IO and ER are significant factors to be taken into consideration when explaining the changes in the IO. This suggests a rejection of the null hypothesis and an acceptance of the alternative hypothesis. T test The t-test is used to test the statistical significance of each independent variable in explaining the changes in the dependent variable. The t-test with values of 2.154078 and -13.09450 and probabilities of 0.0000 and 0.0436 is an indication that both the TO and ER are statistically significant in explaining the changes in IO. This further suggest that the TO and ER are good predictors of the IO. This suggest that the TO and ER are good predictors of the IO.
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DW test The Durbin Watson test is used to test for the presence or absence of first order serial correlation in the series. The DW value of 1.995725 did not show significant support for the existence of first order serial correlation in the model.
4.3 Policy Implication The result shows that trade openness and exchange rate are important determinants of the level of industrial output. This suggests that the trade openness and exchange rate are important factors that to a large extent influence growth of the Nigerian industrial sector. However, the positive relationship between exchange rate and industrial output implies that an increase or appreciation of the value of the naira by one unit would increase industrial output by 0.085214 unit. This can be attributed to the reason that as the naira appreciates as against the US dollar, imports becomes cheaper thereby increasing the importation of capital goods, machineries and equipments that are needed to simulate the industrialization process and in turn increase industrial output. Thus, a depreciation of the value of the Naira is likely to have a negative impact on industrial sector growth in Nigeria. The result also showed that trade openness has a negative sign. This suggests that the openness of the Nigerian economy to the outside world has not been too beneficial to the industrial sector. This is visible from the collapse of local industries that could not compete with their foreign counterparts as a result of globalization. Thus, an increase in the level of openness by a unit would reduce the level of industrial output by 0.074987 units.
5.0 Summary of Findings The purpose of this research is to examine the impact of globalization on industrial growth in Nigeria. Trade openness and exchange rate were used as proxies for globalization to determine the relationship between globalization and industrial output in Nigeria. Trade openness was found to be negatively related with industrial output. This result is however in support of the dependency theory earlier discussed. This is due to the reason that openness weakens the competitive strength of local industries with the
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presence of multinational companies who usually have better and cheaper products and use advanced technology of the developed countries. Also, the openness of the Nigerian economy perpetuates the inflow of both essential and non-essential goods enabling easy access of the Nigerian market by the developed countries thereby rendering our local infant industries unprotected. Conversely, the developing countries protect their economy from exports of the developing countries. Therefore, trade openness retards industrial output in the economy and thereby reduces industrial growth in Nigeria. Exchange rate on the other hand is positively related to industrial output n Nigeria. As the value of the Naira appreciates with respect to the US Dollar, industrial output would increase on the average. This implies that as the value of the Nigerian naira appreciates, imports would seem cheaper and imported capital goods and machineries needed for the promotion of industrialization process would appear cheaper in the country. The importation of such capital goods would help in the promotion of import substitution process which would help increase industrial output in the long run.
5.1 Conclusion Based on the findings of this research work we would reject the null hypothesis that there is no significant relationship between globalization and industrial output. Thus, globalization is an important factor that should be considered in determining the performance of the industrial sector. Globalization is a complicated phenomenon which is accompanied with enormous benefits and costs among countries around the world. Nigeria is not exempted from the benefits and cost of globalization. The study reveals the benefit accruing to the Nigerian economy as a result of globalization and examines how Nigeria can maximize these benefits. The study also shows that the adverse performance of the non-oil subsector of the industrial sector was not modified or resolved by the globalization programmes introduced by the Structural Adjustment Programme (SAP) in 1986 rather these problems was heightened as a result of the globalization process. Owing to the empirical evidence of the study, globalization can be said to have a long term impact on the growth of the Nigerian industrial sector and the growth of the
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industrial sector relies heavily on the performance of the indictors and agents of globalization as earlier discussed.
5.2 Recommendations In order to reduce the cost of globalization and maximize its benefits on the industrial sector in Nigeria, the following recommendations should be considered. i)
Development of the manufacturing and mining and quarrying sub-sectors of the industrial sector – the extreme dependence on the crude oil revenue has partly led to the neglect of other sectors like the manufacturing and mining and quarrying sector. This has hereby led to poor performance of these sectors which can be seen in their output, capacity utilization and contribution to Gross Domestic Product (GDP). Enacting business friendly policies and granting incentives like tax holidays to producers and firms in these sectors so as to stimulate production should be done by the Nigerian government.
ii)
Protection of local infant industries – Adopting protective policies and strategies such as restricting the participation of foreign firms in certain sectors, avoiding multiple taxes on infant and local firms by the federal, state and local government, e.t.c so as to reduce unfavorable competition between them and other large Multinational firms should be adopted.
iii)
Promotion of manufactured export – Dependence on crude oil and primary products for exports has served as a major constraint in integrating Nigeria into the global economy. The prices of the above named products are externally determined outside the economy and this leads to fluctuations on their prices thereby dwindling revenue becomes the order of the day. The development of the industrial sector would require the promotion of manufactured exports in areas of comparative advantage. These if properly done would not only increase manufacturing sector output but also stimulate industrial growth ceteris peribus.
iv)
Development of technology – The Nigerian government should encourage the development and transfer of technology from advanced countries so as to bring
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about advanced production techniques, better machine, better products design that can help increase their competitive edge and also better marketing techniques in the industrial sector in Nigeria. v)
Infrastructural development – One major factor inhibiting industrial sector growth is infrastructural failures. Inadequate infrastructure make locally produced goods less competitive locally and abroad. A notable reason for this is high cost of production occasioned by infrastructural failures. Inadequate power supply, water supply, transportation sector and minimize Nigeria’s benefits in the globalization process. The development of infrastructural facilities would however reduce the problems of the industrial sector in Nigeria.
vi)
Attraction of foreign direct investment to particular sectors – Having analyzed the benefits of FDI in a country, there is therefore the need for the government to enact and develop policies that would encourage and attract long-term capital inflows particularly FDI into selected sectors of the economy. There is also the need to develop policies and design benefits of FDI in relation to the costs.
vii)
Regulation of imported goods should also be done by the government of the country. Imposing higher tariffs on non-essential goods and the control of imported essential goods so as to prevent Nigerian market from being a dumping ground should be carried on.
viii)
Formulating and implementing efficient fiscal and monetary policies should also be considered by the Nigerian government. Adequate structural and sectoral policies in order to improve macroeconomic stability, ensure external sector development, reduce vulnerability to external shocks and crisis and ensure stable exchange rate and interest rate should be carried out.
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APPENDIX Table 1 Year
Total trade GDP (N’million) (N’million)
Trade Openness (TT/GDP)
Industrial Output (N’million)
Exchange Rate Naira/ US Dollar
1986
69,147.00
14,904.20
0.2155
16,392.90
2.0206
1987
105,222.90
48,222.30
0.4583
34,477.30
4.0179
1988
139,085.30
52,638.50
0.3785
41,200.30
4.5367
1989
216,797.50
88,831.40
0.4097
89,596.70
7.3916
1990
267,550.00 155,604.00
0.5816
115,591.40
8.0378
1991
312,139.80
208,555.60
0.6681
136,627.70
9.9095
1992
532,613.80
353,177.40
0.6631
274,755.30
17.2984
1993 683,869.80
384,870.50
0.5628
282,305.90
22.0511
1994 899,863.20
368,848.00
0.4099
283,563.10
21.8861
1995
1,933,211.60
1,705,789.10
0.8824
873,884.70
21.8861
1996
2,702,719.10
1,872,170.00
0.6927
1,293,225.60
21.8861
1997
2,801,972.60
2,087,379.30
0.7450
1,215,912.20
21.8861
1998
2,708,430.90
1,589,275.40
0.5868
1999 2000
3,194,023.60 4,537,637.20
2,051,485.50
0.6423 0.6459
882,034.00 1,179,551.20 2,359,313.30
21.8861 92.6934 102.1052
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2,930,745.70 2001
4,685,912.20
3,226,134.20
0.6885
1,874,082.90
111.9433
2002
5,403,006.80 3,256,873.00
0.6028
2,042,716.50
120.9702
2003
6,947,819.90
5,168,121.70
0.7438
3,037,706.30
129.3565
2004
11,411,066.90
6,589,826.80
0.5775
4,610,083.70
133.5004
2005
14,610,881.50
8,400,905.20
0.5750
6,090,547.40
132.147
2006
18,564,594.70
10,477,389.80
0.5644
7,488,743.50
128.6516
2007
20,657,317.67
11,009,191.20
0.5329
8,085,380.04
125.8331
2008
24,296,329.29
12,868,045.80
0.5296
9,719,513.86
118.5669
Source: CBN Statistical Bulletin 2008
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Table 2 Manufacturing Year Output (N’million) 1986 6,580.20 1987 7,422.40 1988 10,960.50 1989 12,304.70 1990 14,527.50 1991 19,118.00 1992 26,522.00 1993 38,520.00 1994 62,470.20 1995 103,736.30 1996 130,456.80 1997 141,922.30 1998 140,035.50 1999 148,649.20 2000 163,667.00 2001 185,279.70 2002 223,017.50 2003 270,373.20 2004 326,859.40 2005 379,330.05 2006 441,066.18 2007 479,527.27
Industrial sector Manufacturing growth rate sector growth rate -10.1% 2.9% 110.3% 12.8% 19.5% 47.7% 117.5% 12.3% 29.0% 18.1% 18.2% 31.6% 101.1% 38.7% 2.7% 45.2% 0.4% 62.2% 208.2% 66.1% 48.0% 25.8% -6.0% 8.8% -27.5% -1.3% 33.7% 6.2% 100.0% 10.1% -20.6% 13.2% 9.0% 20.4% 48.7% 21.2% 51.8% 20.9% 32.1% 16.1% 23.0% 16.3% 8.0% 8.7%
2008 537,990.95 20.2% Computed from CBN Statistical Bulletin data 2008
12.2%
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Table 3 Year
Manufacturing Share of GDP
Industrial Share of GDP
1985
9.42%
26.84%
1986
9.52%
23.71%
1987
7.05%
32.77%
1988 1989
7.88% 5.68%
29.62% 41.33%
1990
5.43%
43.20%
1991
6.12%
43.77%
1992
4.98%
51.59%
1993
5.63%
41.28%
1994
6.94%
31.51%
1995
5.37%
45.20%
1996
4.83%
47.85%
1997
5.07%
43.39%
1998
5.17%
32.57%
1999
4.65%
36.93%
2000
3.61%
51.99%
2001 2002
3.95% 4.13%
39.99% 37.81%
2003 2004 2005
3.89% 2.86% 2.60%
43.72% 40.40% 41.69%
2006 2007 2008
2.38% 2.32% 2.21%
40.34% 39.14% 40.00%
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Computed from CBN Statistical Bulletin data 2008 Table 4 Growth rate of Import, Export and Total Trade Year Import Export 1986 -15% 1987 199% 1988 20% 1989 44% 1990 48% 1991 90% 1992 68% 1993 14% 1994 -2% 1995 364% 1996 -25% 1997 50% 1998 -1% 1999 3% 2000 14% 2001 38% 2002 11% 2003 38% 2004 -4% 2005 -10% 2006 64% 2007 41% 2008 -20%
Total Trade -24% 240% 3% 86% 90% 11% 71% 6% -6% 361% 38% -5% -39% 58% 64% -4% -7% 77% 49% 44% 14% -9% 39%
-21% 224% 9% 69% 75% 34% 69% 9% -4% 362% 10% 11% -24% 29% 43% 10% 1% 59% 28% 27% 25% 5% 17%
Computed from CBN Statistical Bulletin Data 2008
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Computed from CBN Statistical Bulletin Data 2008
44
