5

Understanding
Facts, Myths, Policies

Manufacturing






This week, we continue our series on the facts, myths, policies and theories
surrounding the manufacturing concept. Feel free to send your comments or
questions to me at k.osafehinti@limeassociates.com.ng. We will try to publish
and treat as many of these as possible in subsequent editions.

Do accept our apologies for the absence
of the article last week. This week article
continues from the previous week.
This author is convinced that the
use of manufacturings contribution
to GDP as a measure of its
performance is highly misleading if
not erroneous.
In the earlier editions of this column,
it was espoused, with concrete
historical evidence, that
manufacturing was the sole engine
of economic growth exacting a
pulling effect on the rest of the
economy.
It follows therefore that the active,
consistent promotion of the
manufacturing sector can greatly
increase the earnings from all other
sectors from the economy, thus
increasing the overall outlook of
GDP. The reality is that economies
that perform well see the level of
output from all sectors increasing
steadily, with each sector
maintaining about the same
percentage of (direct) contribution
to GDP. For instance, it is estimated
that the manufacturing sector of
Singapore accounts for about one-
fifth of GDP, a value that has been
held consistently in recent times.
However as the economy is
expanding continuously, it follows
that the real value that amounts to
one-fifth is increasing every year,
from year to year.
Hence the focus should not be to
increase the contribution of
manufacturing to GDP but rather
to increase the rate at which the
manufacturing sector is growing
and expanding, which will in turn
drive up the contribution of every
other sector (including itself) to the
economy.
Consider further the fact that
manufacturing exerts a pulling
Kola Osafehinti
Managing Partner, Lyme Associates Nigeria

effect on other sectors of the
economy, which gives the notion
of an indirect contribution to
GDP as a result of the effects of
manufacturing. Hence, taking the
direct contribution of the
manufacturing sector in isolation is
a poor way to truly measure its
impact and thus an inaccurate
way to proffer ways to improve it
and subsequently improve
economic performance.
A fictitious example
The following example of a fictional
region paints the picture of the
preceding arguments better:
Due to backward integration,
growth in manufacturing within a
region has increased the demand
for raw materials, which in this case
are farm/agricultural products. The
manufacturing sector within the
region in question provides a ready
market for farmers and growers, as
well as a stable price for their
products. Thus the general output
from agriculture within the region
increases substantially, with
increase in income for the farmers,
as well as increase in revenue for
the regions government via tax
receipts and VAT.
Hence the contribution of
agriculture to GDP (earnings from
goods and services by individuals
and governments) for the region
increases.
Further, consider the levels of trade
within this region and export
between this region and
neighboring regions.
The expansion in the
manufacturing sector results in a
steady increase in the sales of
finished goods. Human nature and
micro economics says that if a
good or product meets the need
of its target market it would
perform relatively well.
Hence, in the region in question,
increasing number of goods are
sold both locally within the region
and exported to neighboring
regions. The turn of events leads to
an increase in profits for the
manufacturing firm, its distributors,
and the scores of middle men
along the way before the good
gets the end consumer. Due to the
increase in trading activity, the
government within the region will
experience an increase in its
earnings from an increase in sales
taxes (VAT) being paid, as well as
an increase in company and
personal income taxes being
collected.
Hence, the contribution of trade
and exports to GDP increases.
A similar scenario could also be
painted for other sectors of this
economy and the increase in
contribution (causes and effects)
to GDP, readily demonstrated.
In all, the said fictitious region
experiences an overall boom in its
local economy transcending all
subsectors thereof.
The rate at which the
manufacturing sector grows would
be the sole determinant of the
pace at which the said economy
will flourish. If support for
manufacturing declines or falters,
the economy as a whole performs
poorly and vice versa.
It must be reiterated again that
historical evidence points not to
the size of manufacturing but its
rate of growth as the key factor in
determining its performance and
that of the whole economy. The
size and GDP contribution are
irrelevant factors as historical
evidence reveals that economies
with relatively minuscule
manufacturing sectors have
experienced outstanding growth
while those with larger
manufacturing sectors have
performed poorly, all due to the
rate of expansion of this sector.

Myth #5
The growth of the manufacturing
sector would naturally decrease as
the economy advanced stages of
maturity. At this point, the main
driver of economic growth would
be the service sector
This myth informs a whole lot of
faulty policies put in place to
stimulate economic growth.
Economic growth is viewed in terms
of a natural state or the flow of a
natural chain of events from
nascent economic development
to a matured economy.
In this concept, manufacturing is
seen as a means to move the
economy through the underlying
stages of development to a final
point whereby services are viewed
as the chief driver of growth.
These views originate from an early
theory of the stages of growth.
Stages of Economic Development-
a theory
In 1960, Walt W. Rostow published
his work the stages of economic
growth, where he identified and
offered evidence for five stages of
economic growth:
1. The Traditional Society
A traditional society has a large
proportion of the population
devoted to agriculture. The level of
technology is severely restricted.
2. The Preconditions for Take-Off
Preconditions for take-off exist
when there is a more stable
political nation. There is greater
exploitation of science, and rising
investment in communications and
transport. Modern manufacturing
appears.
3. The Take-Off
Agriculture is commercialized, new
industries appear. Unused natural
resources are exploited, savings
and investment rise and steady
growth is achieved.
4. The Drive to Maturity
After a long period of growth (say
40 years), 10 to 20% of national
income is invested and output
continually outstrips population
growth. Goods that were previously
imported are now produced at
home. There is a shift away from
heavy engineering towards more
complex processes. The economy
can choose to produce anything it
wants even if the natural resources
required are not actually present.
5. The Age of High Mass-
Consumption
A large number of the population
has moved beyond meeting their
basic needs. Leading sectors of the
economy are producing durable
goods. Increased resources are
allocated to social welfare and
security.
Modern variations of this theory
gives says further that as an
economy moves from having
agriculture predominating (that is
being the largest contributor to
GDP) in its nascent stage, then
followed in its more mature stages
by the manufacturing sector and
eventually the service sector takes
over when the economy has fully
matured.
When an economy has fully
matured it is expected that output
would decrease and that the
service sector would be the main
source of growth. In order to offset
the effects of this natural cycle at
this stage, strategies of increased
competitiveness, greater
investment in training and human
resource development, liberalized
trade policies are usually adopted.
The snags in this theory are:
1. It assumes that economic
growth is can be influenced
up to a certain limit at which
it will follow some natural
tendency of decline
2. It presupposes that the
service sector has the
capacity to stimulate
economic growth
3. Historical evidence readily
disproves these notions
So what are the facts?
The Facts
Fact #5
Historically economies the world
over have been through various
stages of economic growth and
have evolved fully matured
economies, that have consistently
outstripped the other periods of
growth in which this theory holds
that growth should be more rapid.
The US and British economies during
the 1930s had by every standard
become fully matured and thus
should, according to this theory,
not experience much expansion
afterwards. However the facts say
otherwise. These two economies
within the period of 1930-1990
experienced on the average
almost phenomenal growth
compared to the growth in the 60
years before 1930.
During this time, not only the
production and output increase
rapidly so did the service sector, in
tandem to the development and
expansion of the manufacturing
sector.
This coincides with stronger support
for manufacturing by the
governments of the two respective
countries in the years that follow
1930 than the years before then.
Hence economic growth models
like Rostows do not depict natural
situations but rather man-made
circumstances due to a decrease
in support for manufacturing which
was informed by the same model
in the first place!
The evidence suggests that high
levels of production and economic
growth can be maintained
indefinitely as long as the main
engine of growth is properly and
enthusiastically promoted.
To be continued next week.