You are on page 1of 4

4

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
The need for governments to
champion infrastructure
development is understandable
and may in fact be admirable. The
desire to elevate the standards of
their respective peoples, alleviate
the hardship of an otherwise
unproductive economy seems to
be the front burner in pursuing this
strategy.
However, the overwhelming
evidence suggests such approach
will yield little fruit. Further, such
governments may very well harm
their respective peoples more than
they realize. Take for instance the
total life cycle cost for the
development of any form of
infrastructure which includes not
only construction costs but also
maintenance costs. It can be
readily ascertained that these
figures can be quite staggering as
infrastructure projects (the kind
undertaken by state and federal
governments) run into billions.
Apart from the initial project cost,
which more often would be
financed by some form of debt
instrument (and would be borne by
the public purse for years to come),
maintenance would need to be
performed regularly to keep the
facilities in top condition.
From our experience here in
Nigeria, this can be quite a burden,
one which most governments seem
to do well to avoid. In the end, the
huge investment is wasted
because resources to sustainably
maintain and expand the
infrastructure facilities are lacking.
A booming economy will yield
substantial resources to any
government not only to sustainably
pursue and maintain high worth
infrastructure project but also to
elucidate the participation of the
private sector in doing so. The
existence of a vibrant
manufacturing sector is the only
Kola Osafehinti
Managing Partner, Lyme Associates Nigeria

way to through which such a boom
can be attained and thus is the
only way to attain high levels of
infrastructural development.
Given this overwhelming cost
factors, one may wonder why
governments still venture into this
form of infrastructure development.
The answer lies in the use of the
cost-benefit analysis.
The cost-benefit analysis is used to
assess the value of projects of this
nature. It is set up by estimating the
various economic and (mostly)
social benefits that will be derived
during the lifespan of the project.
A good project is one whereby the
benefit far outweighs the costs and
the rule is that such projects would
receive priority in government
budgetary expenditure.
However, there are problems with
this approach. Firstly, the benefits
so calculated are based upon
perception of potential benefits
which may or may not be realized.
The throngs of many infrastructure
projects, the world over, which
have been under-utilized,
abandoned or demolished (to
pave way for ironically more such
projects) is testimony to this.
Secondly, the estimated costs can
dramatically be escalated due to
unforeseen economic factors (a
higher inflation rate than
anticipated for instance), financial
constraints, and so on. The end
result therefore is lower levels of
derivable economic benefits with
higher levels of project costs which
lead to projects being more costly
than beneficial.
Thirdly, the computation of these
ratios is somewhat difficult, as the
premise upon which they are built
can be a bit shaky. Further,
instances of overstating these
benefit ratios are not unknown.
Comparative analysis of investment
in manufacturing against
infrastructure readily reveals that
the manufacturing approach is by
far the best means of achieving
sustainable economic growth.
The returns of investment in
manufacturing (in terms of job
created, level of trade created,
increases in government income
through taxes and so on) for
instance can easily be quantified
and verified.
This readily lends weight to
manufacturing being a preferred
investment choice in the first
instance to achieve sustainable
increasing direct returns in
investment which can then be
ploughed back to develop
infrastructure, education and
services in general.
Experiences from the present
The United States has by far one of
the most developed infrastructure
systems in the world. The vast
networks of roads rails, bridges,
navigable water ways has been
the envy of many a nation
including Nigeria.
However despite all of this, the
economy has been experiencing
relatively poor levels of
performance in the past 50 years
than in the previous 50 years before
then (when the infrastructure was
by far not so developed).
Further their level of infrastructure
has by no means helped to
alleviate the hardships of the
recession (interestingly one of the
components that lent weight to the
crash was the incredible
investment practices in the housing
sector).
Productivity levels have by and
large remained dismal. If we are to
believe that infrastructure
development is a true panacea for
economic growth, surely the United
States should be one of the fastest
growing economies in the world
today.
That title is however left for China.
The Chinese manufacturing sector
is reaching unprecedented heights
and with it exceptional levels of
infrastructural development are
being attained.



Myth #4
“The contribution of manufacturing
is best measured in terms of
contribution to GDP”
Gross domestic product is the
measure of the sum total, in value
of the goods as well as services
rendered within an economy within
a specified period of time. Various
segments of the economy are
ranked according to their
contribution to this figure, which
borders mostly on the size of the
sector.
The author is convinced that this
approach is based on a general
misconception on the theory of
economic growth. In order for any
segment of the economy to be of
upmost importance to the whole
economy, it must be a sector that
has the capacity to exert a pulling
effect on the whole economy. It
that is the case, then it is not a
matter of size but rather the rate of
growth of this segment! If this is
growing at a rapid rate then the
economy will experience rapid
expansion. If that segment
experiences stagnation, it follows
that the economy will shrink.
So what are the facts?

The Facts
Fact #4
“The evidence suggests that it is the
rate of growth of the
manufacturing sector that has
been the strong determinant in
economic growth and not its size or
share of GDP”.
The figures in the tables presented
earlier (see article 1) are given in
rate terms. The summary tables
(courtesy of Sabillon, 2006) are
reproduced here for convenience
The United States

Man GDP Agri Serv Inf Unem
16th Century 0.0 0.0 0.0

0.0

17th Century 0.1 0.1 0.1

0.0

18th Century 0.4 0.3 0.2

0.0

19th Century 5.4 4.5 2.4

0.0

20th Century 4.2 3.5 1.7 3.9 2.5 6.5

Singapore
Man GDP Agri Serv Pop Inf
18th Century 0.0 0.0 0.0
19th Century 1.8 1.4 0.7
20th Century 7.0 5.7 1.3 6.8

China

Man GDP Agri Serv Pop Inf Ex
16th Century 0.2 0.1 0.1

0.1

17th Century 0.2 0.1 0.1

0.1

18th Century 0.6 0.4 0.3

0.8

l9th Century 0.2 0.1 0.1 0.3
20th Century 7.4 2.7 2.2

1.0


Great Britain

Man GDP Agri Serv Pop Inf Unem
16th Century 0.4 0.3 0.2

0.2 1.7

17th Century 0.4 0.3 0.2

0.2 0.4

18th Century 1.1 0 8 0.5

0.6 0.9

19th Century 3.2 2.7 1.2

1.4 0.1

20th Century 3.5 3.0 0.8 3.4 0.5 4.0 7.5

As the tables reveal the rate of
growth of manufacturing has been
tandem to the rate of expansion of
the economy in the four above
cases.
History has revealed nations
achieve fast rates of development
by virtue of a small but rapidly
expanding manufacturing sector.
Conversely nations have
experienced stagnation despite
the size of their manufacturing
sector, when the general level of
productivity was diminishing.
To be continued next week.