6

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.

Continued from last week
Levels of Investment and Economic
Growth
The issue is not whether or not
support for manufacturing exists
per se, but rather the extent to
which the support is being
provided. Ample evidence exist to
show that governments the world
over support manufacturing one
way or the other. The Nigerian
government (through the CBN) for
instance announced earlier in the
year a NGN 500 billion intervention
fund for the manufacturing sector.
While those gestures are laudable,
the question is: are they sufficient?
Historical evidence reveals that
governments through the ages
have supported manufacturing in
one form or the other, but the
periods of high productivity came
only when the support was
intensive and sustained for long
periods of time.
The two great wars attest to this
scenario.
Germany before the Second World
War, under Hitler, experienced a
period of rapid transformation from
a depressed economy to an
economic power house.
Hitler was preparing for war during
this period and thus led a massive
armament program which almost
immediately eliminated
unemployment. He also needed to
make Germany self-sufficient to
withstand the effects of trade
blockades, hence civilian
manufacturing was promoted.
The Nazis during this time
committed so many policy errors
Kola Osafehinti
Managing Partner, Lyme Associates Nigeria

that alarmed the economists of the
time and yet managed to achieve
an impressive 12% growth average
growth between 1932 and 1939. By
the end of the period they had
transformed 30% unemployment
rate to virtual overemployment with
large numbers of the elderly, young
children as well as women swelling
the ranks of the work force.
As at this time it was estimated that
government spending on
armaments manufacturing was at
an unprecedented 28% of GDP
which was to rise to 33% when all
other manufacturing investment
was considered.
Agriculture expanded rapidly as
intense mechanization could be
achieved through the production
of tractors. It was estimated that
the number of tractors grew from
26,000 in 1931 to 125,000 in 1941,
majority of them manufactured in
Germany.
The same situation happened in
the United States during the war. As
more investment was poured into
the manufacture of weapons and
other essential civilian goods the
economy which was experiencing
a recession began to transforms
with high levels of productivity.
The two instances cited above
(Germany and the US during the
war) illustrate that in order for there
to be any form of growth there
must be intensive sustained capital
investment into the manufacturing
sector. The point being made here
is not for the production of arms
and weapons rather the promotion
of factories to produce goods
(which in peace time would be
civilian goods).
The evidence suggests that this
active and energetic promotion of
factories is the cause of the
transformation experienced by the
two states in question.
Further, the evidence reveals that
the majority of the investment has
come from government.
Myth #6
Private sector investors would lead
the way in investment into the
manufacturing sector
The Facts
Fact #6
Policymakers typically fail to
understand the dynamics of
investment into manufacturing as
against other sectors and thus have
built economic blue prints around
seemly impossible circumstances.
Manufacturing is a capital intensive
venture that requires longer periods
to turnover substantial profit as
opposed to services as well as
primary sector activities.
Hence the average investor
(financial institutions in this case)
would not put money into
manufacturing unless there is
adequate governmental incentives
and policy to attract, and at times
coerce the investor to invest in
manufacturing.
The historical evidence
corroborates this notion, as the
data suggests that even in period
of policy incentive manufacturing
performed poorly in the absence of
strong governmental investment
and strong government pressure on
investors to back manufacturing.
In the absence of these, private
investor typically prefers quick
investment projects that yield high
returns in the shortest possible time
as opposed to investing in
manufacturing. However with the
right incentives, controls and
policies in place, strong
government investment in
manufacturing has been matched
by equally impressive private sector
investment.
Hence any government desirous to
grow its economic base must
realize that it (the government) will
lead the way by being the majority
contributor, either through
financial, non-financial and fiscal
measures (Sabillon, 2006).
An absence of which will lead to
dismal private sector investment,
poor factory output and poor
economic performance.
To be continued next week.