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Silent Factories, Empty Warehouses
By Nasir Ahmad El-Rufai
Newsdiaryonline Fri Sep 23,2011
Back in 1959, the
manufacturing sector contributed about 4.4 percent of Nigeria’s
GDP. It was also the second largest employer of labour after
agriculture. As we search for answers to the question - where
are the jobs? - we look today at the manufacturing sector's
evolution and challenges, as well as the opportunities it
presents for job creation and economic development.
The manufacturing sector
not only plays but also represents an important criterion to
assess a nation's development. Most successful countries have
strong manufacturing base. Growth in manufacturing value added
has significant positive effects on employment creation,
sustained increases in per capita income, technological
innovation and adoption, competitiveness and economic growth of
a country.
Most countries that are
major players in the global economy have transformed the
structures of their economies by developing a strong
manufacturing sector. Central to the transformation of countries
is therefore the growth and size of the manufacturing sector.
The level of a country’s development can therefore be measured
by its manufacturing sector. In the 19th century, Europe
developed on the back of building a strong manufacturing base.
Similarly, the development of some Asian countries as from the
second half of the 20th century was anchored on a
virile manufacturing sector. That China is currently the second
largest economy in the world and has significantly improved the
standards of living of its people in the last three decades are
primarily due to the growth of manufacturing output - it is now
the manufacturing factory of the whole world.
In the decades since
independence, the Nigerian manufacturing sector has witnessed
ups and downs as its contribution to GDP rose and fell. In 1970,
it had risen to 9.4 percent of GDP. During the oil boom in 1973,
it fell to 7 percent, but rose to 13 percent in 1980 at the
height of the second oil boom. However, according to the
National Bureau of Statistics, manufacturing only contributed
4.1 percent of Nigeria’s GDP in 2010. In other words, after tens
of billions of dollars in public and private investments since
independence, the manufacturing sector actually contributes less
to Nigeria’s economy than it did before independence 50 years
ago.
In terms of jobs, as recently as 2002, Nigerian manufacturers
employed more than 2.8 million people directly, nearly as many
as those employed by
all the local governments, 36 states and the federal
government combined, without significant direct allocations from
the national budget. This number collapsed to about 1.5 million
by 2009, at the height of the Yar'Adua era of policy reversals
and uncertainties. In that year alone, according to
Manufacturers' Association of Nigeria (MAN), 834 factories had
closed shop shedding off nearly 80,000 jobs and the trend has
sadly continued.
As implausible as it may seem today, the sectoral growth rate in
manufacturing was very high, averaging at an annual rate of
almost 13 percent in the period from 1966 to 1975. In fact, from
1976 to 1985, growth in the sector reached an average annual of
about 18.5% with the setting up of more import substitution
industries. In the 1970s, the Nigerian manufacturers produced a
range of goods such as milled grain, vegetable oil, meat
products, dairy products, sugar refined, soft drinks, beer,
cigarettes, textiles, footwear, wood, paper products, soap,
paint, pharmaceutical goods, ceramics, chemical products, tyres,
tubes, plastics, cement, glass, bricks, tiles, metal goods,
agricultural machinery, household electrical appliances, radios,
motor vehicles, and jewellery.
Though the boom years of Nigerian industries, especially in the
1970s saw increased manufacturing employment, tariff and trade
policy distortions in favour of certain sub-sectors led to the
expansion of assembly activities dependent on imported inputs
that contributed little or nothing to local value added and
created relatively modest employment opportunities, but
negatively impacted on true industrial growth overall.
But in the decades since then, our manufacturing has been in
decline because the industrialisation of Nigeria was built on
some faulty policies. The industrial policy was centred around
import substitution - an inward-looking orientation that led to
the proliferation of uncompetitive assembly operations rather
than entrenchment of real, value-addition manufacturing.
Our trade policies sought to protect, in a haphazard,
short-sighted and
uncoordinated manner, certain sub-sectors without thinking
through Nigeria's true competitive advantages in an increasingly
open and globalised world.
This resulted in the establishment of many consumer goods
industries, including soft drinks, cement, paints, soap and
detergents that imported intermediate, semi-processed goods for
finishing in Nigerian 'factories'. The successful nations of
East Asia with their relatively small populations and paucity of
natural resources adopted a different strategy - producing goods
for export, which compelled their manufacturers to be
competitive, true manufacturing operations. The differing
outcomes are clear for everyone to see today.
The oil boom which overvalued our exchange rate, also led the
Nigerian industrial sector to make unrealistic assumptions
because the era provided ample foreign exchange for the
importation of needed inputs – raw materials, spare parts and
machinery which in turn provided the impetus for the sector’s
apparent phenomenal growth. The nation's ability to finance the
import needs of industry came under considerable strain
following the collapse of oil prices in the early 1980s.
As oil revenues dried up, it became more and more
difficult to import raw materials and other industrial inputs.
As the economic conditions worsened, capacity utilisation - the
extent to which an enterprise actually uses its installed
productive capacity followed the same downward trend. From an
annual average of 53.6 per cent in the period 1981-85, it fell
to 31.8% from 1986 - 90. In addition, the sectors’ share to GDP
fell from 9.2% in 1981-85 to 8.3% from 1986-90, 7.5 per cent in
1991-95 and 6.3 per cent in 1996-98.
These negative trends in the manufacturing sector clearly show
declining productivity. The average growth of 2.6% during the
SAP period fell short of the expected rate of 8% needed to put
the sector on the path of slight recovery. Its stunted growth
constrained the capacity of the reform process to pull the
economy out of recession. Capacity utilisation rate at the
moment is too low to make for profitable operations estimated at
about 55 per cent; the last time capacity utilisation in Nigeria
was well over this level was in the early 1980s.Manufacturing
contribution of 4.1% GDP is also poor when compared with between
20% and 40% in many industrialised and rapidly industrialising
nations. In what appears to be a double whammy, the
manufacturing sectoral growth rate has in addition been
declining since 2007.
From 9.4% in 2006, to 9.6% in 2007, 8.9% in 2008, 7.9% in
2009 and down to 7.4% in 2010.
So do we still need to ask what more killed our industries?
One of the most
debilitating challenges is the infrastructure deficit,
especially the frequent disruption in electric power supply,
expensive water supply, telecommunications
and a weak transportation network, particularly the absence of a
railway system. The cost of alternative infrastructural
facilities results in high costs which reduces efficiency and
loss of competitiveness. A recent study showed that about 55 per
cent of firms regarded ineffective provision of physical
infrastructure as one of their biggest problems. When our trade
policies make it easy for Nigeria to become a dumping ground for
all kinds of imported products, it is no wonder that our
industries cannot compete.
Multiple taxation and imposition of levies on manufacturers are
both disincentives to investment and give the impression of
systemic unfairness. It is irritating and annoying when local
governments and states agents that provide no service show up at
a manufacturer's gate repeatedly with claims of taxes and
levies, payable immediately! Sadly, these happen all the time,
with no sanctions.
The low level of technology in our industries is another
drawback. Developments in technology and innovations are the
primary forces propelling industrialisation across the world
today. New processes and procedures of doing old things, and
automation have radically transformed manufacturing and
multiplied productivity.Unfortunately, industries in Nigeria
cannot acquire modern machinery that have improved processes.
Most of them, especially textiles, bakeries, leather, paper
manufacturing and many others still use machinery that were
procured in the 1960s and 1970s. This results in frequent
breakdowns and reduction in capacity utilisation rates.
Poor capacity utilisation remains a challenge. The major causes
of low capacity utilisation are frequent power outages, shortage
of affordable credit to procure inputs, falling demand for
products, the importation of cheaper alternatives and labour
disputes. The high cost of raw materials - both domestic and
imported also contributes to poor capacity utilisation.
Nigeria’s industrial capacity utilisation according to the CBN,
was about 55.5% in 2010. With the levels of fixed costs that
have to be distributed across low volumes of output, the
competitiveness of Nigerian manufacturers is further worsened.
Another major obstacle is that of inadequate access to credit. A
recent study showed that 47% of firms placed access to credit
among their top problems. Inadequate access to credits results
in low investment, making it difficult for manufacturers to
procure modern machines, information technology and human
capital which are vital in reducing production costs, raising
productivity and improving competitiveness. Our banks have
abandoned the real sector and are unwilling to make credit
available to manufacturers, because of they are afraid of
borrowing short and lending long - the tenor of funds needed by
industries.
In addition, banks perceive manufacturing as high risk ventures
and would rather engage in contract and trade financing which
often guarantee quicker and higher returns. Even when credit is
available, high lending rates, usually at about 24-35%
make it unattractive and even riskier since returns on
investments in manufacturing have consistently been below the
rates of borrowing.
Other factors militating against manufacturing include inflation
which constitutes a disincentive to saving and retards
investments and growth. It also encourages speculative
activities and diverts resources from productive ventures.
But Nigeria cannot afford to neglect the real sector. Industrial
development provides the brightest hope for sustained growth,
employment generation, improved savings and investments and
economic development. While most countries in the world are
facing crippling economic crises, China, on the other hand has
to control its economic growth to prevent the economy from
overheating. Today, about 50% of all new television sets and
computers in the world are made in China, as are about 70% of
garments. The country uses about 50% of all cement in the world
and consumes about half of the world’s steel. Indeed, China is
now the manufacturing capital of the world.
To revive our industries, we must begin with the right policies.
Manufacturing activity can only flourish in a good investment
climate. There must be consistency in government policy. The
importance of physical infrastructure, sound financial markets,
and affordable credit cannot be overemphasised. Nigeria’s trade
policy stifles our industries and hampers economic development.
Import bans are often imposed and lifted with little regard for
overall impact on the domestic economy. Nigeria’s import ban
list currently includes some 25 categories of goods, whose
restricted status impedes local development. Even worse is the
flip-flop in policy positions about import bans!
Reliable power supply is key to improving Nigerian industrial
productivity. Improving electricity supply is an essential step
in kick starting the large-scale extraction and development of
Nigeria’s agricultural output and solid minerals as raw material
for infrastructure development and
industrialisation.
Customs procedures in Nigeria present a logistical obstacle for
manufacturers who face long clearance procedures and high
unloading costs for imports and exports. Our cargo inspection
procedures are rife with corruption, which imposes additional
costs and delays: we must halt this. Nigerian banks must
increase the flow of affordable credit to the manufacturers. And
the Bank of Industry, NEXIM, as well as the Small and Medium
Scale Enterprises Development Agency (SMEDAN) must rise up to
the challenges of global competition.
In an era of increasing specialisation, Nigeria must exploit its
areas of competitive advantage and focus its industrial
development to propel growth in the agro-allied sector. We need
a twenty-first industrial policy that recognises our resource
endowments and match them what the world needs in the short,
medium and long term. For instance, by reducing the imports of
food and and other consumer goods, Nigeria can save billions of
dollars in foreign exchange and create 15-20 million jobs.
We spent nearly
N8.7 trillion ($57 billion) in 2010 to import many goods and
services we can produce from food (13% of total) to manufactured
goods (14%), and we can no longer afford this. And even beyond
affordability, we need the jobs preserved within our borders. So
the work is cut out for the leaders of our nation.
As matter of urgency, the authorities must implement policies
that would make our industries hum with activity – and make our
warehouses and retail outlets full of Made in Nigeria goods.
If we do not take immediate action today, Nigeria will
become the biggest dumping ground in the world within a few
years; our factories will remain forever silent, and our
warehouses empty of all but goods from Ghana,South Africa, and
China. And that will be very sad indeed.
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