Economic Openness and Industrial Development in Nigeria

Abstract

Over the years, governments have been confronted with the implementation of a growth-oriented economic policy. The policy challenge has often been a decision between protectionist and liberalized policies. Nigeria adopted the former up to 1986. Inability of the protectionist policy to drive sustainable growth led to a policy change, in July 1986, to economic openness or liberalization. Following the adoption of policy in 1986 under the structural adjustment programme, there have been conflicting opinions on whether or not it has supported the growth of the Nigerian economy. Against this background, this study seeks to examine the effect of the economic liberalization policy on the performance of the industrial sector in Nigeria. Specifically, the study examines the extent to which changes in some key economic indicators like exchange rate, financial deepening, trade openness and lending rate account for the trend in output performance of Nigeria’s industrial sector in the post reform period. Choice of the exogenous variables was based on developments in commercial and financial sectors following the adoption of the policy. Dataover the period 1986-2014 were analyzed using econometric technique based on the Vector Error Correction Model. The study shows that rate of change in exchange rate, trade openness and lending rate exert significant negative impact on industrial output. There is also evidence of significant positive impact of financial deepening on industrial output. The Granger causality estimate shows weak causal impact of financial deepening on industrial output as well as bi-directional causation between trade openness and industrial output. There is also evidence of causal impact of industrial output on lending rate, an indication that industrial development generates demand for financial resources. The study recommends that government seeks to achieve an investment-friendly climate as well as monitor real sector operators to ensure that foreign exchange allocations are not diverted.