Nigeria’s economic diversification and industrialisation: two peas in a pod

For someone very conversant with the Nigerian economy, the issue of industrialisation and economic diversification is not a new thing. Economists and policy makers alike have both called for the government to shift its focus from crude oil and diversify the Nigerian economy.

In 2016, the Nigerian Economic Society (NES) tagged its conference along the line of economic diversification and industrialisation in a bid to alter the government’s focus. However, evidence from BusinessDay Research & Intelligence Unit (BRIU) analysis shows that not much has changed in the last 10 years in terms of economic diversification.

In terms of the efforts to boost industrialisation, the solid mineral sector continues to lag behind others as it barely contributes one percent to industrial output, while the manufacturing sector in the last two years has contributed more to industrial output than crude petroleum.

However, it can be argued that the stronger performance of the manufacturing sector in Nigeria over the last two years can be linked to fall in oil prices in 2015 that culminated into declining crude petroleum output and the 2016/2017 economic recession.

In the first part of this analysis, BRIU investigates the performance of the industrial sector from 2007 to 2017 and in the second part, we create an index to measure economic diversification in Nigeria based on the data compiled from the Central Bank of Nigeria (CBN).

Industrialisation in Nigeria

The industrial sector in Nigeria is made up of three major sub-sectors namely: crude petroleum & natural gas; manufacturing, and solid minerals. The performance analysis of these sub-sectors from 2007 to 2017 shows that crude petroleum & natural gas’ output has averaged N7.44 trillion and manufacturing output averaged N4.86 trillion. During the same period, solid minerals’ output averaged just N69.37 billion.

Examining the growth rates of the sub-sectors, the solid mineral sector has performed the best among the rest averaging about 9.5 percent from 2007 to 2017. Manufacturing and crude petroleum & natural gas’ growth rates averaged 8.6 percent and -3.3 percent, respectively during the same period. What this tells us is that there are so many opportunities for harnessing the growth in the solid mineral sector that have not been leveraged upon by the Nigerian government.

Lastly, taking a look at the contribution to industrial output from 2007 to 2017 to get a better perspective on the development of the industrial sector in Nigeria, the analysis indicates that unsurprisingly, solid minerals contributes barely one percent to industrial output.

The manufacturing sector’s contribution to industrial output has been growing steadily since 2017 averaging 8.09 percent. Most of its growth has been due to improvement in Textile & Footwear; and Food, Beverage& Tobacco. Crude petroleum & natural gas’ contribution to industrial output has been diminishing from a high of 19.74 percent in 2007 to as low as 8.67 percent in 2017.

From these analyses, it can be concluded that Nigeria is still far behind in terms of industrialisation. Although, the efforts geared towards the manufacturing sector in recent years is commendable such as the implementation of the Economic Growth & Recovery Plan (ERGP). For the process to be complete there has to be an increased attention to the solid mineral sector.

Economic diversification in Nigeria

Economic diversification is usually regarded as the process of shifting an economy away from a single income source toward multiple sources from a growing range of sectors and markets.The objective of economic diversification is to improve economic performance for achieving sustainable growth.

The Nigerian economy is categorised into five major sectors based on the CBN. These sectors include: Agriculture, Industry, Construction, Trade and Services. In order to measure the level of economic diversification from 2007 to 2017 in Nigeria, BRIU makes use of the Herfindahl-Hirschmann (HH) index.

The HH index is an index for measuring a country’s absolute specialisation. It is used to determine whether a small number of sectors exhibit high portions of the overall income of the country. The index scores range from zero (good diversification) to ten thousand (high specialisation). Otherwise, it can be expressed between zero and one. The lower the value, the more diversified the economy.

Computing the HH index for Nigeria from 2007 to 2017, the index score has averaged 0.270 during the period indicating the presence of a highly specialised or concentrated economy. Furthermore, the index score has grown by about 11 percent from 2007 to 2017 showing that there has not been much real effect on the economic policies geared towards diversifying the Nigerian economy.

The question then is, how can Nigeria drive economic diversification? There are a number of ways this can be done. In what follows, we outline three strategies:

First, access to finance. Increasing the access to finance helps to boost economic diversification. Small and medium-sized enterprises’ access to finance has been identified as a strong constraint, and many policies and initiatives are being implemented to improve access.

Second, structural factors, including a country’s population, human capital and quality of institutions, have a positive impact on economic diversification. Diversification increases with increasing population as local firms have access to a larger market and thus benefit from economies of scale.

Third, trade liberalisation by the removal or reduction of barriers to trade between countries) facilitates competition and investment and contributes to creating jobs and increase in income. This can be achieved through the African Continental Free Trade Area (AfCFTA).