An Econometric Study Of The Relative Impact Of Monetary And Fiscal Policies On Industrial Output In Nigeria

Project and Seminar Material for Economics

Project and Seminar Material for Economics


This work/study investigated the relative impact of monetary and fiscal policies on industrial output in Nigeria for the period 1979 – 2008. An exposition of monetary and fiscal policies in Nigeria for the period under study (1979 – 2008) showed that monetary policies as against fiscal policies have been more pronounced in the economy due to the fact that these class of policies.

The simple linear multiple regression analysis was adopted to estimate the level of significance of various monetary and fiscal policies instrument employed in Nigeria. Using manufacturing output is a proxy for industrial development; the estimated model reveals that these policies have not been responsible for the average changes in the industrial development. Instead, some other variables such as legged petroleum output proved to be a significant dependent variable in determining industrial output.

Chapter One

1.0 Introduction

1.1 Background Of The Study

In it’s broad sense according to Colman and Nixon (1978;78) the term “industrialization” denote the organization of production in business enterprise characterized by specialization and the division of labour and involving the application of technology and mechanical and electrical power to supplement and replace human labour.

An industry constitutes groups of firms that sells a well defined product or closely related sets of products. This means that an industry is regarded as that part of the economy that produces goods and services.

“The level of decades of attempts to accelerate industrialization at the expense of agriculture has led many analysts to rethink the role of farming. Industrialization is capital intensive, attracts workers into crowded cities and often produces high level of employment for surplus labour. Indeed, if Bangladesh could increase the productivity of its farming by 20%, that advance would do more to release resource for the production of comforts than would try to construct a domestic steel industry to displace imports”.

-Paul .A. Samuelson.

In any society, the quest for better living conditions have continued to play significant role; as such man endeavors at one time or the other to achieve acceptable goals by evolving programmes of action. These actions relate to the efficient allocation of existing resources, since these resources are scarce relative to the demand of them.

In Nigeria, planners have made series of conscious efforts at achieving high level of economic development through the implementation of national developments plans. In these plans, objective of economic policy were usually spelt out, though they vary from plan to plan and reflect changes in economic environment and circumstances. In spite of these variations, the attainment of a high level of economic growth with equitable distribution of resources has always been at the centre of economic policy making in Nigeria.

Today the attainment of a high level of economic development has been generally accepted as major goal of national policy. Monetary and fiscal policies are recognized as effective instrument for the attainment of these objectives. These concerted efforts at industrialization were premised on the hope that industrialization will help to:

  1. Secure full employment
  2. Increase national income and;
  3. Improve the stability of foreign earnings.

In history, no national economy has ever treaded the part of development without paying due attention to the development of the industrial and agricultural sector. A look at the chart that compares the income produced by manufacturing and within each product category, for the world’s ten leading manufacturing countries, prepared by the United Nation Industrial Development Organization, show that the world’s leading manufacturing countries coincide with world’s leading economies. It is also true that agriculture development is so advanced in these leading economies that they become net exporters of agricultural product with only a small fraction of their labour force employed in agriculture. For instance in the mid 1990’s, 48% of the world’s labour force was employed in agriculture. The distribution range from 61% of the economically active population in Asia to less than 3% of the united state and Canada. In Africa the figure was 60%; South America, 20% and in Europe 9%. (Microsoft Encarta enclopedia; 2003). Thus, the industrial and agricultural sectors have proved to be the most significant sectors contributing to sustainable development in any economy.

From independence in 1960, Nigeria showed great potential of being a prosperous nation on account of the abundant human and natural resources. The outlook was further brightened by the emergence of huge oil reserves in early 1970’s.The advent of the oil boom spelt fundamental changes for Nigeria’s economy, which because so heavily dependent on revenue from crude oil sector. Therefore monetary and fiscal policies were based largely on the oil economy. Since the mid 80’s, there has been a drastic reduction, not only of production, but also of prices of crude petroleum which led to sharp fall in government revenue, a situation which had very serious implication for the supply of raw materials and spare parts to the import dependent industrial sector. Towards the end of 1985, the price of crude oil on the international market collapsed, reaching an unprecedented level. The consequences of the depressed oil market for our effort to restructure the economy were very unpleasant and called for an urgent reversal of our economy policies. It became necessary to find alternative source of foreign exchange as well as to nationalize the expenditure of the little foreign exchange earned by restricting import to very essential items.

However the agricultural sector which used to be the backbone of the economy in the 1960; s, was neglected and consequently, its share in total domestic output dropped from nearly 60% in the 1960’s to about 35% in 1975. With the huge earnings from crude oil exports, which non oil export became virtually extinct, government became the prime mover of the economy through direct participation in basic production of goods and services as well as in the provision of infrastructure, while effort are intensified in using other public policy instruments basically monetary and fiscal policies, to activate the speedy growth of the industrial and agricultural sectors.

Monetary and fiscal policies are measures that government adopt using instrument to control, stimulate, structure or restructure their economy, so as to attain the desired macro economic objectives in both industrial and agricultural sectors.

1.2 Statement Of The Problem

Prior to the oil boom in the 1970’s, Nigeria depended largely on primary commodity exports such as cocoa, palm oil, rubber, groundnut and cotton for its national income. The country at that time was self sufficient in food production and even a net exporter of agricultural produce. Also available statistics show that approximately 60% of the labour force earned their livelihood from farming. However, since early 1970 have as oil become a major foreign exchange earner and contributor to GDP (Gross Domestic Product) other sectors of the economy, especially agriculture were neglected to the background.

Buoyant oil revenue in the 1970’s provided the basis for large increase in government expenditures designed to expand infrastructure and non oil productive capacity.

In the period 1970-1985, there was significant expansion in the social and economic infrastructures of the country even though they were and continued to be far from adequate in both quantitative and qualitative terms. However despite the expansion of various infrastructures and institutional development, the economy witnessed poor performance especially in 1978. While real GDP grew by an average of 7.3% per year in the period 1970 to 1977, the performance from 1978 to 1985 showed a decline, averaging 2.2%. Thus the declining trend observed in domestic output. Since 1980, continued in 1984, following the adverse development in international oil market in the early 1970’s which resulted in sharp fall in oil prices. Consequently, Nigeria’s export revenue and budgetary receipts dropped significantly.

However, public spending did not slow down proportionately during this period. This resulted in the build up of large fiscal and external deficits. In the bid to finance the domestic deficits, government resorted to borrowing heavily from the banking system, especially the central bank, while the financing of foreign deficits led to foreign massive foreign borrowing and the drawing down of external reserves. In the 1980’s, the Nigeriaeconomy began to show signs of distress. The emerging problems culminated in the introduction of various rounds of budget tightening austerity measures and structural reform programmes, giving rise to several complicated and complex mix of monetary and fiscal policies and their reforms.

An inherent question in the trend to control the economic performance of key sectors, not by direct participation in economic activities but by the use of vary degrees of a complex mix of planned (or unplanned) monetary and fiscal policies affect the economic performance of the key sector in terms of development? These quests have to the need to investigate the role of monetary and fiscal policies in industrial and agricultural redevelopment in Nigeria.

1.3 Objectives Of The Study.

Stemming from the problem stated above, the main objective of this study is to investigate the role of monetary and fiscal policies in industrial development in Nigeria.

The main objectives which is:

  • To investigate the relationship between industrial development and various monetary and fiscal policy instrument.

1.4 Statement Of Hypothesis

The following hypothesis will be tested and will guide this study. To investigate the relationship between the industrial development and various monetary and fiscal policy instruments, the following hypothesis will be tested;

  • Ho: monetary and fiscal policies have no significant relationship with industrial development in Nigeria.
  • H1: monetary and fiscal policies have some significant relationship with industrial development in Nigeria.

1.5 Significance Of The Study

It is true that quite on impressively good number of works have been produced that investigate the role that public policies play in economic development in Nigeria. However, most of these works have been dealing on the role these policies play in general development of the economy without being specific on individual sectors involved. Yet another proportion of those that try to be specific have been centered on the influence of individual policy instruments, for example, the VAT (value added tax) on certain productive sectors of the economy. Thus, this work is added to the existing works that deal on the role of monetary and fiscal policies in specific productive sectors of the Nigerian economy.

Amongst those that are expected to benefit from this study are the policy makers for the Nigerian government at the federal level as well as policy makers in the state level, who are keen to know the role public policies play in industrial and agricultural development in Nigeria. Although the work may be more significant in the above group, the various public ministries especially the federal (or state) ministry of industry and federal (or state) ministry of agriculture should find the findings of the study relevant since they are responsible for creating impressions upon which the policy makers (whom they are also part of) base their policies. This work is also expected to benefit fellow researchers who may be interested in knowing what literature already has on the role monetary on fiscal policies play in industrial and agricultural development in Nigeria.

1.6 Scope And Limitation Of The Study

This study has been confined to investigating the role monetary and fiscal policies play in industrial development in Nigeria. It may not be interested in the role these policies play in other sectors of the economy. Thus, it is not a general study on economic development in Nigeria per say, accept as it concerns the industrial and agricultural sectors. In a much similar way, the study is interested in finding out the role monetary and fiscal policies only play. Such that public policies such as direct participation in economic activity may not be represented. Also important to note, is the fact that work covers the role monetary and fiscal policies play in the development of the stated sectors in Nigeria only and as a whole.

Thus , apart from the limitations of the study that may be termed “economic and social (environmental constraint)” on the researchers such as limited funds and available time frame, other limited to this study are more or less institutional. A typical example is the use of data comprising of country statistics (not state wise) and the use of secondary data only.

Therefore, the research is conducted on a “macro” platform viewing all the state in the country as if the various roles of these public policy instruments are uniformly spread over the various states in Nigeria.

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