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Service-sector led structural change and the Nigerian economy

The movement of labour from low productivity to high productivity sectors has been referred to as structural transformation and consistent with the growth trajectories of countries such as Netherlands to the United Kingdom, United States, Japan, South Korea, etc. Economic development patterns in these countries showcase the transfer of productive resources from agriculture – through manufacturing – to business services.

Share of employment in agriculture declines following productivity enhancements in the sector. Displaced labour finds employment in the manufacturing sector. The reason is that as incomes rise, demand patterns shift towards manufactured goods, stimulating manufacturing production. Fast productivity growth in the manufacturing sector further displaces workers who then find employment in business services as demand patterns also shift towards services as incomes rise.

This structural shift has been referred to as positive industrialisation, which occurs in developed economies as a result of sustained economic growth. In the instances of productivity enhancements in both agricultural and manufacturing sectors, output rises and demand is met with fewer labour resulting in increases in overall productivity and incomes.

Recent data show that many developing economies are undergoing structural change, albeit in a unique and heretical fashion, divergent from the experience of previous industrialisers. Take the Nigerian economy for instance, the contribution of industry to GDP declined between 1970 and 2020 from 33.7 to 28 percent. On the other hand, agricultural sector contribution fell from 49.5 to 24 percent, while services increased from 16.9 to 46 percent.

In the same vein, as of 2020, the shares of employment in industry, agriculture and services were 12.24 percent, 34.66 percent and 53.1 percent. As of 1970, these shares were 13 percent, 68 percent and 18 percent across the industrial, agricultural and service sectors. These figures suggest that the percentage of those employed in the agricultural sector has reduced significantly, while the service-sector has been employing more people within the 5 decades.

However, the share of employment in industry reduced (although by a tiny fraction), and never grew even for once in these years. From this, it could be observed that Nigeria’s structural change is service-sector led, which cannot deliver the needed growth, prosperity and quality employment, like how manufacturing led transformation delivered growth in most developed economies. This is unpacked below.

First, the poor industrial performance from 1970 to 2020, while employment shifted from agriculture directly to services in those same years, is synonymous to premature deindustrialisation, which occurs in low- and middle-income countries as a result of economic failure. The deindustrialisation is a denouement of economic failure in this case because the services sub-sector employing more people is the low-productivity, non-business services which include petty trade, hotels and restaurants, and other community, social and personal services often rendered by artisans.

To instantiate this, in May 2021, World Bank reported that 80.4 percent of Nigerian employment is in the informal sector where the majority work in non-business services. Non-business services, although good at absorbing labour, are of low labour productivity reflective in low wages and limited opportunities for skills’ accumulation and learning. Furthermore, they are characterised by high job vulnerability and informality rates and are naturally constrained by the size of the domestic market.

Second, business services on the flip side, such as banking and finance, insurance, information technology, haulage, communications, branding, advertising, marketing, etc., are not constrained by the size of the domestic market. They use modern technologies, provide learning opportunities, enjoy higher productivity levels and are skill-intensive. However, they are not good at absorbing labour.

For example, the Nigerian banking sector employs an estimated 95,000 personnel, while telecoms employ less than a tenth of that number. Both employ around 0.1 percent of the country’s labour force. And while business services can generate high-quality employment, Nigeria lacks the high-skilled labour needed for that sector. Workers leaving the agricultural sector are difficult to train and re-allocate to business services.

More so, considering only a small fraction of the workforce can be employed in business services, structural transformation towards this sort of services might not generate enough employment opportunities for the vast majority of the population. This exemplifies why the ICT service industry in India has not become a catalyst for job creation for the vast Indian population. For their part, non-manufacturing industries (such as mining and oil and gas) could enjoy rapid productivity growth but tend to generate unsustainable economic growth patterns due to international commodity prices volatility and the economic and social inequalities they tend to produce. In addition, they absorb less labour and have fewer linkages and spillovers to the economy.

Against this backdrop, a manufacturing-led structural change is most optimal for developing countries such as Nigeria. Several studies have shown that increasing shares of manufacturing value-added in GDP are associated with faster rates of GDP per capita growth. Manufacturing is the special engine of growth because it has productivity potentials. It can absorb more labour, pay higher wages and is the locus of technological development.

Furthermore, It drives the business service-sector through support services. Manufacturing provides a more readily available employment solution for agricultural workers displaced from farms in the situation that Nigeria attains enhancements in agricultural productivity. This is considering that training a farmer to use a machine to produce textiles is easier than training them to work in a bank (business services). This also obviates disenthralled excess labour from productivity growth in agriculture being mostly employed in low-wage, non-business services. Manufacturing also generates both static and dynamic returns; and has both price and income elasticity.

There are also dangers that a service-sector led structural change poses to Nigeria’s economy which further justifies why the compass is manufacturing. First, it limits the capacity of the manufacturing sector’s labour productivity to converge to the frontier of developed countries.

Second is poor technological development, given that most innovation and technological change emanates from the manufacturing sector before being diffused to other economic sectors such as the services sector.

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The third is the loss of backward and forward linkages from diverse industrial manufacturing through industries such as steel, machine tools, petrochemical processing and high technology manufacturing. Furthermore, there would be structural underemployment and unemployment because graduates of science and technology programmes are left with limited opportunities to engage skills acquired in industry, thereby resulting in increased brain drain. In addition, low domestic manufacturing capacity can lead to unfavourable terms of trade.

Unpacking this, instead of being manufacturing-independent, Nigeria would have to continuously rely on massive importation of both manufactured consumer goods and intermediate industrial inputs, with most of its depleting foreign exchange earnings.

The current structural transformation trend of employment shift from low-productivity (agriculture) to low-productivity (non-business services) has to be reversed. Therefore, Nigeria must deploy means to re-allocate labour from non-business services back to manufacturing to stimulate the virtuous and traditional processes of structural change.

And doing this is not preposterous. Nigeria needs a long-term industrial policy that is insulated from political interference, which should provide the blueprint for stimulating labour-intensive and export-oriented manufacturing growth.

As part of this policy, the government should pick winners from the lenses of its comparative advantage and industrial upgrading targets; coordinate investments for industrial restructuring and address market failures; set up deliberation councils for industrial policymaking; establish sectoral development institutes that provide support to industries; and stimulate cost discovery of entrepreneurs in non-traditional economic activities.

Ultimately, the country must leverage a gradualist, cluster approach, industrialization strategy that targets growth poles to address the challenge of the poor business environment while rigorously seeking foreign investments from East Asia where the rise in factor costs – particularly labour, is rendering firms less competitive.

Umezulike is a development economist and international development professional

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