Silent Factories, Empty Warehouses

 

 

 

 

 

 

 

 

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.