Professor Oyelaran-oyeyinka in a lecture he  delivered at the 93rd birthday celebration of Engr. Anthony Sobo organised by the Nigerian Society of Chemical Engineers Lagos-Ogun branch, monitored by our correspondent via zoom, said Nigeria’s adoption of Neo-liberal strategies in the form of structural adjustment programme (SAP) combined with her dependence on raw materials export was responsible for the disruption of manufacturing strategy it earlier embarked upon.

Speaking  on the topic: “Why Nigeria’s Development Lags: Causes and Consequences of Premature Deindustrialization”, he said Nigeria’s manufacturing production and export performance has stagnated and troublingly, has been declining significantly due to historical heavy reliance on oil and raw commodity export, making the economy vulnerable to global shocks.

Below is the full text of the lecture

I wish to congratulate the organizers for this important public lecture in honour of a very special person. I thank you for inviting me to deliver this lecture. I especially thank Engr. Sobo whom I met 45 years ago as a young graduate in my brief stint at the Lever Brothers. Engr. Sobo did not know me from anywhere except that I made first class honours and was awarded the Lever Brothers Prize as the overall best student in Chemical Engineering from the University of Ife. The head of HR did not want to give me the job, presuming I might leave for postgraduate degree the same way others before me did. Engr. Sobo insisted on my recruitment, and I was hired but then left not long after as Mrs. Green predicted. Today I am here to thank him. Lagos was a tough act for a young man who for many years was sheltered in the relative calm of Ibadan and Ile-Ife.

Introduction

Given that this lecture is being hosted by engineers with penchant for models, and equations, I will indulge a little bit of that to address the issues we face currently as a nation. I speak to the topic: “Why Nigeria’s Development Lags: Causes and Consequences of Premature Deindustrialization”.

I open with two contrasting examples of two countries that were both disadvantaged by their colonial pasts, Thailand and Nigeria. In place of the latter, I could have chosen Vietnam, South Korea or India. I will also illustrate with Malaysia in concluding.

For several decades, Thailand was a mono-product economy, with traditional subsistence agricultural economy engaging about 70% of the population in rice cultivation. During the period 1855‒1950, rice accounted for about 70% of all exports. Because of its mono-product dependence, economic growth prior to 1950s was stagnant without structural changes However, during the period 1950‒1961, the agricultural sector became diversified to include cultivation of other crops like cassava, corn, cotton, peanuts, soybeans, and tobacco, amongst others.

By 2020 Thailand had become a major exporter into the most sophisticated markets, its most prominent destination for exports is the United States ($32.2B), China ($29.1B), Japan ($23.8B), Vietnam ($11.8B), and Hong Kong ($11.1B). Significantly, the top ten export items were not raw agricultural and petroleum products but industrial machinery including computers: $40.2 billion (16.4% of total exports), electrical machinery, equipment: $33.9 billion (13.8%), vehicles: $28.9 billion (11.8%), gems, precious metals: $15.7 billion (6.4%), rubber, rubber articles: $15.3 billion (6.3%), plastics, plastic articles: $13.3 billion.

The rapid growth experienced by Thailand in the 1980s was accompanied by structural diversification as the share of agriculture’s contribution to GDP declined from 50.1% in 1950 to  to an estimated 18% in 1988. The share of manufacturing in GDP rose from 10.3% in 1951 to 23% in 1988.; however, rice remained the dominant crop, but the total cultivated area for rice had fallen to around 62% by 1988. A once mono-product economy, it is now a leading producer of high-tech products, automobiles, and electronics, and ranked as the 12th largest automobile producer in the world. As a major exporter of high-value goods, its exports account for two-thirds of its GDP. Thailand Gross Domestic Product (GDP) per Capita reached USD 7,800 in December 2023.

Same with Vietnam. Its GDP at current prices in 2023 is estimated at (USD 430 billion). GDP per capita is estimated to reached USD 4,284.

What did Thailand do, and Nigeria did not do?

In the last few years Nigeria’s economic situation which has been challenging, got compounded by measures that are necessary for longer term sustainability. The fuel subsidy removal and the liberalization of the foreign exchange (FX) markets led to Naira inflation especially for food and transportation.

I cite two such manifesting challenges that have roots in longer term historical causes.

First, measured by nominal Gross Domestic Product (GDP), the Nigerian economy has fallen into the fourth place in 2024 behind South Africa, Algeria and Egypt. Not so long-ago, Nigeria was the number one economy in Africa. Nigeria’s nominal GDP was US$ 509 billion in 2013 compared with $252 billion in 2024. More troubling the country’s nominal GDP/capita which measures citizen’s living standard, halved from USD$ 2202 in 2022 to USD$ 1,110 in 2024.

Second, countries with the requisite industrial and engineering capability will progress increasingly into export-oriented manufacturing sector. It is the acknowledged capability to earn huge foreign exchange to offset dollar-based imports. Sadly, Nigeria’s manufacturing production and export performance stagnated and troublingly, has been declining significantly due to historical heavy reliance on oil and raw commodity export, making the economy vulnerable to global shocks.

I had cited in previous writings how Nigeria’s manufacturing share of total merchandise exports peaked at 6.7% in 2010, dropped progressively to 3.56% in 2018, though it increased noticeably to about 10% in 2019. Oil exports makes up an average share of 90.00% between 2010 and 2019.

Second, Nigeria’s share of manufacturing export in GDP fell from 1.5% in 2010 to 0.43% in 2019. Notice that Thailand’s exports account for two-thirds (66%) of its GDP. Clearly, hereinis the root of our foreign exchange crisis. A nation addicted to consuming luxury products that it has no capability to manufacture! Nigeria’s poor performance in manufacturing and as well, its weak manufacturing exports capacity is the root cause of its status as a laggard in development. It has been eroded over time by weak structural support, poor credit delivery to manufacturers, well known poor state of infrastructure, market volatility and unstable macroeconomic environment, among others.

Nigeria has been experiencing relative premature deindustrialization meaning a declining share of the manufacturing sector in GDP that is manifested in  the above cited country’s trade balance in manufactures.

In sum, development is signaled by a structural transformation of countries from agrarian, low-technology and low-productivity agriculture that export primary commodities to an industrial country that in turn processes agriculture commodities into high-value products and manufactured goods. The mastery of the manufacturing sector provides the greatest opportunities for countries to engage in learning, innovation and manufacturing exports. The outcome is sustained economic growth, employment creation, poverty reduction, greater productivity and reserve accumulation through which a country could maintain a favorable balance of payment (BOP).

Dear Colleagues

II. Manufacturing as the Engine of Economic Growth

Let me explain the theoretical basis for the emphasis on manufacturing drawing on Nicholas Kaldor’s framework.  It provides a theoretical basis that emphasizes structural change as the basis of economic growth for two reasons.

First, industrial manufacturing performance correlates highly with the overall economic performance of an economy. This makes manufacturing central to explaining the overall productivity and employment growth. Clearly, slow industrial growth leads to low-equilibrium development, low employment growth and declining standard of living.

Engineers are familiar with the notion of equilibrium; it is the same in physics as it is in economics. Putting it crudely if an economy peaks at GDP per capita say $10,000, it is a high-performing High-Income equilibrium status. If an economy peaks at a miserable $200-500 per capita like almost all Sahelian and Least Developed Countries (LDCs), one can describe such a condition as being at a “Destitution Equilibrium”.

The UN classifies most Sahelian and Least Developed Countries (LDCs) as “fragile”. The factors that characterize a country so defined include weak state governance, weak capability in social services delivery, a debile economy characterized by rising debts and a monocultural economy, rising insecurity, and failure to overcome a protracted insurgency. This is what we are experiencing.

The second mechanism is a condition where employment growth in industry leads to increasing  rate of productivity growth in other sectors like agriculture and services. This means manufacturing expansion generates production linkages, knowledge linkages and income linkages that would simutlaneously propel more economic activities and greater productive diversification.

For example going from cotton to a Ready Made Garment (RMG) induces a transition from cotton on the field to a factory and finally sales of cloths at a mall. The classic structural transformation in the economy therefore involves a shift from the farm (agriculture) to non-agriculture (industrial manufacturing) and subsequently from industry to serrvices (shops, banking and others). This is how an economy is Horizontally connected. The opposite is Vertical Coneection where local firms are tied to foreign firms with attendant leakage in FX.

Countries that engage in manufacturing activities with higher technology component generate more opportunitiesfor technological progress, human capital development and productivity increase, which ultimately contribute positively to a faster economic growth. South Korea, Switzerland and others with significant high-tech sectors such as pharmaceuticals, aerospace for example tend to rank high on “the most innovative” while pathological raw materials exporters like DRC, Mali, Burkina Faso and Nigeria rank very low.

Consider the Global Innovation Index (GII). Its score ranges between 0 and 100. Depending on this score, countries are grouped into four categories, namely: highly advanced, advanced, catching up, and lagging. These categories are based on four equal intervals of the score in 2020 which are from 13.56 for Yemen to 66.08 for Switzerland.

I next summarize Kaldor’s Three Growth Laws to explain why growth rates differ between countries, why some countries are advanced, and others are laggards.

First Law, there is a strong positive relationship between the rate of manufacturing output and GDP growth. This has been found to be not just an ‘association’ but a causal relationship.

Second Law: There is a strong positive relationship between the rate of growth of manufacturing output and the growth of manufacturing labour productivity. High Productivity economies create greater wealth. A farmer using advanced agricultural techniques in Europe produces in one hour what 50 farmers produce using hoe and cutlass in the same period. It is the reason why Netherlands with a landmass of 41,543 square kilometres, which is 4.45 percent of Nigeria, which has a landmass of 923,768 square kilometres dwarfs Nigeria in agricultural productivity. The Netherlands exported agricultural goods with a total value of 124 billion euros in 2023. This is four times Nigeria’s average total crude oil exports. Nigeria has 22 times the landmass of the Netherlands.

The opportunity cost to Nigeria not having its own foundational industrial pillars such as iron and steel, petrochemicals, pharmaceuticals and so on, go beyond the aggregate loss of dollars we spend yearly to import manufactures and what will have accrued to the country from exports. The most fundamental damaging is the loss of Technological Learning and engineering mastery that accrues to home grown engineers through “Learning-by-Production”, “Learning-by-maintenance and innovation by trial-and-error. It is why Nigeria relies today on foreign human capital for the most basic technical and engineering chores.

Time and opportunities lost is hard and often impossible to recover as comparator countries have left us far behind. Nigeria’s GDP/capita was six times that of China in 1980. Today China’s export of goods and services total 3.38 trillion U.S. dollars more than 13 times Nigeria’s GDP! Its export is more than GDP of all of Africa estimated at roughly 3.1 trillion U.S. dollars in 2023.

Third Law: There is a strong positive relationship between the growth of manufacturing productivity and productivity of the non-manufacturing sector. As resources are moved out, the average productivity of those that remain will rise. For example, as labour draws out of agriculture, it leaves behind a smaller agriculture labour force without shrinking overall agricultural output. These result from technological diffusion through agriculture sector including the use of mechanization, agro-chemicals, irrigation and so on.

Clearly, manufacturing is also at the heart of Services sector including industrial Value and Supply chains. In product manufacturing, the supply chain facilitates the transfer of raw materials from farmers to factories where raw materials are transformed into finished products. Again, it is manufacturing logistics and transportation (rail, airport, cold stores etc.) that facilitate distribution of the products to a retailer or directly to a consumer.

Dear friends and colleagues,

The next important point to make is that economic structures explain economic growth, because a country’s production structure is the basic source and locus of its economic activities and performance. This sectoral structure embeds the key actors and factor endowments including natural resources, human capital as well as the physical capital which reflect the level of the country’s development. Therefore, the level of industrial dynamism will always reflect a country’s level of technological capability and efficiency of its capital stock. If a country is locked into a backward agricultural economy, it remains a poor low-level equilibrium society.

The actors will be poor farmers with hoe and cutlass eking out subsistence and struggling to avoid a life that is harsh, brutish and short. To progress an economy is not a sprint. It is a marathon. An economy that will raise living standards consistently must intentionally plan for it. The foundation of all strong, knowledge-driven economy is industrial capability. It requires a sound bureaucracy, highly trained human capital, a secure and stable environment and above all, knowledgeable political leaders with strong empathy for the poor.

Let me give a simplistic model of this journey depicted by the Growth Tree that I formulated here.

The root denotes the foundation which is the production capability and all ancillary services necessary for firms to produce efficiently including power and other infrastructural systems.

The trunk represents the Competitive/Innovative capability. My metaphor of a tree trunk as the competitive structure is that the higher the trunk the more easily you tower over rivals and overcome competitive pressures.

The fruits and trees are the products and services. The more productive, the more luscious the trees and fruits.

Ladies and gentlemen, I now address the issue of Deindustrialization.

As discussed earlier, secular sectoral shifts resulting in new structural configurations (from agriculture to industry and ultimately Services) is a pointer to long-term development. An important phenomenon of this shift is that many countries have been experiencing Deindustrialization which has been widely studied for decades especially for advanced industrial countries.  This pattern of sectoral shift has differentiated implications depending on the country.

The deindustrialization process began as a natural process in the advanced industrial OECD countries in the late-1960s, while high-income East Asian countries experienced this phenomenon in the late 1980s.  This was followed by some Latin American countries and South Africa, which was the most industrialized in the African region. This process occurred mostly after radical economic reforms. This latter process has been labelled premature de-industrialization.

Conceptually, de-industrialization is broadly defined by two metrics.

1. A falling employment in manufacturing as a share of total employment. This is a ‘normal’ manifestation in advanced economies and in the higher-income economies of some Asian countries.

2. The process of deindustrialization, is associated with decline in the share of manufacturing value added in GDP. With this change has been a rising share of services in GDP.

For advanced industrial nations, declining employment in manufacturing is followed by technologically-drives growth in services that subsequently influences the economy-wide growth rate.

On the other hand, what is now described as premature deindustrialization has been happening in several middle and Low-income economies like Nigeria at income levels far below what applied in high-income countries. One of the manifestations is the less desirable early transition to the Services sector. Where this happens, the massive advantages of manufacturing productivity enjoyed by earlier industrializers through dynamic growth in manufacturing is lost to these countries. The impact of manufacturing on employment, improving living standards among others in the advanced economies earlier is equally lost.

In sum, we regard deindustrialization as a natural order of industrialization for high-income countries and not at all an undesirable trajectory of long-run development as nations attain the status of advanced economies. This is different for poorer countries.

In what follows I summarize three reasons among others for pre-mature industrialization in poor countries.

1. Faster Growth of Productivity in the Services Sector

The first reason for premature deindustrialization is the faster growth of productivity in services than in manufacturing. In other words, deindustrialization is basically the evolution of declining productivity in manufacturing than in services.

2. The Turning Point of Changing Income per capita levels

There has been a significant decline in the turning point for de-industrialization which was around $21,000 in the 1980s slightly over $10,000 in the 1990s (in 1985 US$). By the 1990s there were over 30 countries at that critical point from zero in 1980 mostly affecting middle-income rather than high-income countries.

3. The Dutch Disease

Nigeria experienced the phenomenon called the Dutch disease since it discovered crude oil. It is partly the reason for poor industrial growth. The reason is that whenever there is a resource boom, the extra revenue accruing from the sale of natural resources (oil and minerals) trigger appreciation of the real exchange rate and subsequent contraction of the traded sector. Countries that are locked-in into resource extraction and trade tend to record decline in the traded sector once they begin to enjoy resource trade boom. Given that economic development is driven largely by industrial manufacturing and through time technological learning, the Dutch Disease becomes the lever that steers nations from the pathway of economic diversification and structural transformation.

This is because higher resource revenue led to movement of labour from the traded (manufacturing at core) to the non-traded sector (like banking etc). Resource boom permanently lowers the rate of growth. It is the reason Nigeria’s pathological resource-dependence has contributed to its laggard development.

Nigeria’s premature deindustrialization resulted from the perennial prioritization of commodities exports that now manifest in the low growth rates of its economy. The adoption of Neo-liberal strategies (SAP) combined with the Dutch Disease led to the disruption of manufacturing strategy earlier embarked upon.

Let me summarize several implications of the deindustrialization, namely:

1. the ability to generate and propagate technological progress is lost.

2. Shift away from manufacturing, the greatest potential for productivity growth relative to other sectors.

3. the generation of positive externalities and synergies; and contribution to the sustainability of the balance of payments and trade gains.

While Nigeria’s imports is growing faster, this has become non-sustainable as the country is not able to finance the ever-growing BOP deficit on the current account by capital flows. To mitigate the BOP equilibrium would require radical adjustments to reduce imports growth and increase manufacturing exports growth and more efficient public finance management.

Dear colleagues, let me end with another case of successful economic diversification built over a long time.

Malaysia has been successful in diversifying from the production of rubber to being a major player in the industrial rubber sector. Long term preparation ensured that the strong industrial rubber sector became a major beneficiary of the pandemic as the sector witnessed total exports revenue of US$11 billion in 2020.

The latex goods sector comprises mainly medical devices such as gloves and catheters. The sector made up 90% of the total rubber products exports in 2020, increased from 81% recorded in 2019. The increase resulted from high demand from the medical and health sectors worldwide, in the effort to curb the spread of the COVID-19 pandemic. Rubber gloves alone made up 86% of the country’s rubber products exports. Globally, Malaysia has been supplying more than 60% of the world demand for rubber gloves and the Malaysian Rubber Council (MRC) estimates the share to expand to 68% in 2020. The lesson is that sector capability building is not done overnight. Nigeria is blessed with rubber but it remains an undeveloped sector. Without value addition to natural resources as Malaysia did with rubber and oil palm, we remain a Rich Country brimming with the poorest people.

Finally, colleagues, let me put forth some self-evident recommendations

1. Prioritize Investment in Capabilities at the Factory level: The Locus of Production is the firm. Efficient production and innovation in the context of latecomer countries like Nigeria means satisfying domestic demand thus reducing imports, developing the capabilities for changes to processes and products that are incremental that may not necessarily be frontier type activities. The locus of these change activities is the factory floor of the private sector industrial enterprises rather than the formal R&D laboratory. The food and agribusiness sector in Africa, is expected to reach US$1 trillion by 2030. The sector is particularly important for Africa possessing 65% of all uncultivable arable land in the world. The continent has the potential to feed itself and export value-added food products to the world; it needs to intensify investment in food processing and logistics.  Therefore, government need to support local companies and create an environment that makes them efficient and competitive.

2. Promote Manufacturing Export Capabilities as a Source of Growth

Friedrich List advanced a general principle: “A nation is rich and powerful in the proportion in which it exports manufactures, imports raw materials, and consumes tropical products”. One of the most effective strategies for rapid economic growth is the accumulation of export capability to drive sustained exports of manufactures leading to foreign exchange earnings. African countries have long shortchanged themselves by exporting raw materials that others use as basis for wealth generation.

Countries grow fast if they have an export structure geared to the production and income levels of rich countries where the demand for high value-added goods is strong. Countries producing manufactured goods with a high-income elasticity of demand in world markets will have a higher growth of exports and a higher growth of GDP.

3. Nigeria should move away from Resource-dependence

Resource-dependence constraints Industrial Progress in low-income countries. Unlike the experiences of the advanced industrial countries, today’s mineral-rich African countries have failed to industrialize. Natural Resource abundance is not by itself a curse or a blessing. It is the nature of policies and the institutional context within which a country operates that determine the development trajectory and development outcome of NR assets.

Why has a country like the Democratic Republic of Congo (DRC) remained poor amid mineral abundance? For years, foreign not local companies in industrialized countries have purchased Coltan its major mineral, despite war and lawlessness in the DRC. They became profitable sources of foreign currency for a multitude of state and non-state actors, including rebel forces. The wealth of DRC is appropriated by others with the industrial manufacturing capabilities leaving poor communities with no employment opportunities.

4. Build Capabilities for Economic and Industrial Diversification

Africa fell behind because it relied on the low-growth pathway of commodity extraction and export while Asia made spectacular progress as it took the high road of learning and Master of Technologies that underpin industrialization. Of the fifteen least diversified countries in the world, eight are in Africa.

5. Clustering and Agglomeration as Industrial Policy Instrument

Clustering and Agglomeration is an Industrial Policy Instrument that should be deployed explicitly as a key part of Industrial Policy. From a development perspective, as well as an investment policy perspective, special economic zones should be seen as models of industrial strategies and an integral instrument of industrial Policy that stimulate clustering.

Asia has 75% of all 4046 Special Economic Zones (SEZs) in the world as of 2018 out of which China alone has over 2,500. China alone hosts over half of all SEZs in the world.

Vietnam has 376 industrial parks: the most prevalent instrument for manufacturing and industrial growth in Asia. The country derives more than 60 percent of its Gross Domestic Product from industrial zones.

The South Korean government built more than 900 industrial clusters which account for 62 per cent of the country’s manufacturing production and 80 per cent of total exports. The path of industrial development in South Korea revolved around building industrial complexes and clusters scattered across the country, and it initiated the measures and policies that enabled such industrialization.

         As I end this lecture, I recall a statement by

Michael Best commenting on America’s war time endeavor: “Both fiscal and monetary policies were involved, but they were subservient to the transformation of the nation’s productive structures (factories and laboratories) …the massive increase in federal R&D funding during World War II laid the institutional foundation of the S&T infrastructure that enabled the emergence and postwar ..of America’s regional innovation system” Best, 2018, pg 7,8).

My emphasis today is on the need to strategically promote the rebuilding of industrial technological capabilities for manufacturing both for domestic market to reduce imports and for manufactured exports, invest more in infrastructure and institutions that foster Ease of Doing Business.

The ‘factory of national firms’ is the furnace where long-term fortunes are formed. The wealthiest nations are the ones with the strongest industrial capacities.

Nigeria will rise again!!!