• 24th July, 2023

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      From Data-Backed Opinions

      What is Driving the Decline of Industry in Nigeria?

      The rise of Nigeria's services sector is coinciding with a sharp contraction of its industrial sector.

      What is Driving the Decline of Industry in Nigeria?

      The north of Britain houses the great shipbuilding centres of Tyneside and the Clydebank, the collieries of Wearside and Lanarkshire, and the steelwork factories of Lancashire and Wales. A walk along the Tyne and Clyde rivers nowadays shows no signs of ships being built. The East Lothian collieries are more likely to be giving tours to interested patrons; production has long seized. The large steelworking centres of Newport and Scunthorpe are now heritage sites: “This is what we used to be...”. 

      The Nigerian economy has changed drastically since the 1990s. In the 90s, the industrial sector contributed the most to the Nigerian economy, with 51.94% of the  NGN21.46 billion real GDP. The city of Port Harcourt had its famous Trans-Amadi Industrial Layout or District. Companies like Michelin had factories in the area processing rubber. Metalworks, distilleries, construction, and glasswork companies shared the district with the oil servicing companies.  

      The district was the goal of thousands of students who filled the engineering departments of nearby universities. Mechanical engineering, chemical, or civil…, get an engineering or technological degree and a job awaits you at Trans-Amadi. Or so we thought… 

      A walk around the district is descriptive of the direction the Nigerian economy has taken. Michelin is long gone. The glass companies have ceased operations, as have the metalworks. Few construction companies remain although the oil servicing companies are dominant. The district is now home to warehouses, dozens of them. Buildings lay unfinished; facilities have shuttered gates with rusting chains and padlocks. 

      What has driven Nigeria’s de-industrialization? The answer to this question is extremely complex and multi-faceted. It involves generational changes: exchanging the hard hat and steel toes for the suit and tie means working more with the brains instead of the hands; economic and financial deregulation: the reduction of the role of government in economic direction; globalisation-driven economic openness, and privatisation, buoyed by the idea that efficiency is generally higher in the private sector.  

      The economic modernisation that was promised in Nigeria’s deregulation/privatisation wave of the early 2000s has led to industrial decay. One might argue that the economy has grown as the service sector has. However, the industrial sector was the country’s largest source of secure employment after agriculture, and the loss of those jobs has seen unemployment rise.  

      It is impossible to understand this phenomenon without discussing financial deregulation or liberalisation. Financial liberalisation is based on the belief that deregulation allows for greater efficiency of market forces. However, this deregulation does not affect all sectors in the same way. Industry-based markets are based on the creation of goods, and the production of materials which are saleable assets. These demand infrastructure like land and equipment, which often means significant capital costs.  

      The capital part is crucial because the industrial sector often depends on the financial sector, banks in particular, for capital through long-term credit. The deregulation of the financial sector allows banks and financial organisations to decide how they use and allocate their capital without government direction or interference.  

      With this freedom, banks and credit bodies directed their capital away from industry funding and towards trading, which saw an explosion in the financial sector. The creation of increasingly sophisticated financial instruments (remember collateralized debt obligations?) has led to more trading avenues. However, these do not in any way show any benefit to the industrial sector or improved investment in actual production. Some will say it’s just money being moved around on a computer screen.  

      Economic liberalisation also means deregulated capital importation, but this has also experienced the same issues as the domestic banks’ capital use: the money flows predominantly towards the financial sector. Banking, Finance, and Shares combined to receive 63% of all capital importation in 2022; Production received 17.80%.  

      The argument for economic openness should lead to increased technological and knowledge acquisition from beyond the nation’s borders. These might in turn spur enhanced productivity of industry and higher efficiency. In reality, Nigeria imported Silicon Valley ideas based around data and computing, creating an entirely new sector: the tech industry.  

      The tech industry tends to be a hotspot for capital investment; tech companies and products can raise capital quicker than I can count to a hundred. The attraction of big data and quicker return-on-investment timeframes will likely lead an investor, private or corporate, to favour tech companies over traditional production companies. There is also a much lower initial capital investment: you need an office and computers to start a data company; you will need land and equipment to start a textile mill.  

      Would it be better for a fabric seller to set up a textile mill or import? With the way the system is set up, they will be more likely to get a loan from the bank if they present a request based on import. It’s better to import building materials like steel sheets than to set up a steelworking factory. Economic openness has thus had the effect of outsourcing production: it is cheaper to import than to manufacture. 

      The growth of capital inflow and revenue in the services sector has led to higher salaries. A young graduate is likely to earn considerably more as a tech product developer or trader at a bank than she will earn as a metallurgy technologist or a graduate engineer. She will also likely earn more in insurance or real estate. In a non-benefit, inflationary environment, financial compensation becomes the leading motivation for career choice. Young people desire to earn as much as possible and as such, gravitate towards services. After all, the industry's slow death means there are fewer jobs there anyway. Programmer roles are plentiful and well-paid.  

      The big-picture solution is that the government should find ways to direct capital towards industry. Various paths can lead to that: tax incentives; Bank of Industry funding; credit schemes; a re-regulation of the banking and financial sectors, or a combination of any of those. There are better places than this to explore those solutions. 

      What is inarguable is that it is a problem that needs to be settled. The industrial sector reduces imports, boosts exports, and tends to create employment for everyone from the highly skilled to the semi-skilled. That last part is crucial: tech and finance-based roles have a high barrier of entry with a lot of education required. This locks out a sizeable chunk of the population as the cost of education continues to rise. 

      In the United Kingdom, the readjustment of the economy from manufacturing-based to services-based saw the boom of the City of London, and its rise as one of the world’s largest financial hubs. However, this came at the cost of cities like Sunderland and Scunthorpe. In these forgotten cities, unemployment is rife, as citizens struggle economically. Nigeria is headed that way, with the growth of Lagos as a financial hub coming at the cost of industrial cities like Port Harcourt and Warri. It’s a defective economy, one which does not build anything. 

      • Published: 24th July, 2023


      Emmanuel is an economic researcher and writer who likes to investigate systems, connect the dots, and find solutions.


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