Nigeria, the hub of West Africa’s economy has remained stagnant, following the declaration of global economic and financial crisis which became major concerns for political leaders, economists and managers of financial institutions across the globe. It was later confirmed by the Central Bank of Nigeria (CBN) Governor, Godwin Emefiele and the Minister of Finance, Kemi Adeosun that Nigeria’s economy was officially declared to be in a technical recession based on the new trend figures released. This study aimed at suggesting various measures for Nigeria’s economic recovery. Way-out of economic recession can be through the additive reforms of the following: economic policies; transport infrastructural development; economic diversification with more emphasis on addressing the issue of local contents; education research and innovation; filtering externalities, culture, SMEs, domestic products; sound policy and anticorruption approaches; lessons were drawn from Japan economic policies with emphasis on monetary and other policies. Finally, various recommendations were suggested for policy actions.
1.1 Background of the Study
In economics a recession is a business cycle contraction, a generally slowdown in economic activity (Meriam-Webster, 2008). During recession, many macro-economic indicators vary in a similar way. Production G D P, employment, investment spending, capacity utilization, household income, business profit and inflation all fall, while bankruptcies and unemployment rate rise. The National
Bureau of Economic Research (2008) defines an economic recession as a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real G D P, real income, employment, industrial production and whole sale- retail sale. The global financial crises began in the United States of America and the United Kingdom when the global credit market came to a standstill in July 2007 (Avguoleas, 2008). The crisis, brewing for a while, really started to show its effect in the middle of 2008. Around the world stock markets have fallen, large financial institutions have collapsed or been bought out and governments in even the wealthiest nation have had to come up with rescue packages to bail out their financial systems (Abdul, 2009).
Nigeria industries were in shamble as a result of economic meltdown that bedeviled the economy of United States of America in 2008. Till date some of our industries, more especially in the Textile sector have not recovered from the effect of economic recession inspite of the bailout fund given to them by the government. The ripple effect of economic recession in our industries includes, low capacity utilization, horrendous nosedive in the stock market prices, high production costs as a result of general collapse of infrastructure especially power, labour turnover, factory closure, incredible shrinkage in investments and investors relocating their productive facilitates to neighbouring countries (Akin, 2010, Avguoleas, 2008).
The collapse of the existing infrastructure has tremendous effect on the manufacturing industries that uses diesel to power their plants during power outage.
This increased cost of production, led to low capacity utilization and also made our industries increasingly less competitive in the global economy (Lyman, 2004).
Economic recession created harsh economic climate in Nigeria, which is evidenced by high energy cost, high bank interest rate (22%) and high naira exchange to dollar (N154 to $US) etc. Some of the multinational companies like Dunlop plc and Michelin plc relocated to neighboring countries because of harsh economic climate. The horrendous nosedive in stock market prices reduced level of investment in stock in manufacturing industries. Many of the manufacturing industries were delisted in the stock exchange because of poor performance and closure and investors no longer acquire their shares. The issue of expansion was also made difficult in manufacturing industries by low stock prices and delisting of industries at the stock exchange. There were massive labour turnover (Layoffs) as a result of low capacity utilization and factory closure. Textile industry was the hardest hit with about 80% of its factory closed down. Most industries were producing blow 50% capacity utilization. The dwindling state of the economy made naira rate of exchange to US dollar very unstable and tremendously high. It posed difficulty on importation of spare parts, equipments and raw material for manufacturing industries.
The finance minister during chief Obasanjo Civilian administration, Mrs. Nenadi Usman confirmed in her review of progress made by economic reform to turn around the economy, that Nigeria was in recession at the advent of their administration in 1999 (Vanguard 22 December, 2007). According to her, after 46 years of independence, Nigeria was finally beginning to realize her potential. The GDP growth rate had averaged 3 percent per annum over the proceeding decade with a population growth rate of 2.8 percent per year. The GDP per capital growth rate was an insignificant 0.2 percent. The economy by her review was plagued by price volatility, a double agility inflation rate (20-25% and a highly unstable exchange rate.
Mrs. Nenadi Usman also stated in her review that an external reserve stood at about $3 billion which could barely finance 3 months of import and that Nigeria GDP per capital fell less that of US$700 and was one of the lowest globally. And that a huge overhang of US$38 billion restricted our ability to secure additional resources for priority projects and development areas. According to her a history of high corruption mean that the limited development resources we have were vulnerable to squandering.
Mrs. NenadiUsman further emphasized that the previous government had also neglected to invest in the development of our physical and human infrastructure.
“In 1999 Nigeria was a country reeling from almost two decades of significant economic deadline” she said. The issue of whether Nigeria was in recession or not was laid to rest by Mrs. NenadiUsman’s review, which confirmed that Nigeria was in recession. The review also showed that Nigeria was already in recession even before the advent of US economic meltdown of 2008.
The recent US economic meltdown of 2008 affected most economies that had business link with US including Nigeria. United States of America (US) is a key player in the global economy and that is why the financial crisis that bedeviled its economy in 2008 had ripple effect on the economies of other countries (Akin
2010; National Bureau for Economic research, 2008).
Nigeria has witnessed series of economic recession since 1975 to date and no solution seems to be on sight in spite of our resource endowment and numerous economic reform program of Federal government. The ailing economy status has been ascribed to decade of mismanagement, corruption, political instability and military intervention into Nigeria politics and government. The economy is burdened by the biggest external debt in Africa, while its heavy dependence on crude oil revenue, let it vulnerable to the plummeting prices of the past years (Obadina, 1999).
The lingering effect of the various years of recession on the economy of Nigeria to present date has negative impact on our manufacturing industries. The profligate consumption pattern in the spendthrift years of early eighties, while oil revenue was fast declining resulted in huge deferred payments on trade transactions; all these have cumulative effect on the economy and manufacturing sector (Agugua, 2002).
Previous administrations in Nigeria have tried to introduce and implement different social, economic and political reforms. Such reform programmers could neither be described as success nor failure because they were abandoned halfway, calling into question the real intentions of the government of the day that might have introduced them.
Political stability in governance is an important requirement for conducive business environment.
Frequent changes in policies and programmers as a result of intervention in governance renders business plans and projections useless. And no foreign investors will like to do business in a Chaotic and unstable environment. There must be stability and continuity in governance. Successive government must continue from where his or her predecessors stopped. But unfortunately, this is not the case with Nigeria. In Nigeria incoming administrations abandon projects inherited from previous administration. Most of the federal and state owned industries and enterprises were abandoned in this way. This has negative impact on the manufacturing industries because of the needed infrastructure which is abandoned through this process.
The problem of global economic recession in manufacturing industries cannot be solved unless the Nigerian factors responsible for continuing existence of this malady is unraveled and salvaged with proper economic reform programme. Corruption and embezzlement of public fund is blamed for the stunted economic growth which have stymied all efforts at national development and industrial expansion (Eze, 2009). The stunted economic growth has serious negative impact on the manufacturing industries. The manufacturing industries are affected when it bothers on reserve to service imports, from where they obtained foreign exchange to import their spare parts, machineries and raw materials. The stunted economy has resulted to high interest rate, to unstable naira to dollar exchange rate and these affects manufacturing industries that rely on bank loan to finance their business and exchange to dollar for procurement of their spare parts, machinery etc. Our leaders have deliberately made wrong economic and development decisions leading to colossal loss in financial resources, which most often were borrowed. Loans were accessed from foreign banks meant for projects at home but the funds so borrowed never made it into Nigeria shores (Eze, 2009). They most often end up in foreign personal bank accounts of our leaders. The problem of Nigeria, begin and end with corruption. Once corruption is eradicated the problem of Nigeria and its persistent economic recession will come to an end. High level fraud and mismanagement of economic resources deprive the manufacturing industries and the entire citizens of Nigeria the needed infrastructure for existence and development.
The recent high fraud and mismanagement of fund in the banking sector by the people at the helm of affairs of the banks in 2008 has negative impact on the manufacturing industries. The money which would have been used to cater for meaningful projects was used in providing funds to bail out the affected banks by government.
Inadequate infrastructure especially power has sent many Textile industries into oblivion since they cannot operate at high cost of production and remain in business. Organizations as a centre piece of economic activities responds to economic recession in two forms, organizational downsizing and organizational decline (Lee, 2001). Whereas organizational downsizing is intentional proactive management strategy, organizational decline is an involuntary negative consequence of non-adjustment to adverse environment circumstances such as recession.
We chose to research on the effect of economic recession in manufacturing industries, because it is the foundation and indeed cornerstone of any national economy. Growth in manufacturing fuels other sectors of the economy, creating jobs, improving lives and providing fresh investments, opportunities even in nonmanufacturing sectors and sustainable development.
1.2 Statement of the Study
Nigeria has been an economically slavish neocolonial state. The present economic recession in Nigeria is a manifestation of long-term ills in the structure of the economy that became full-blown under the present government. The recession seems to affect socio-political structures, Nigeria’s credit condition, general living standard, imports, production and employment as well as consumption demand in Nigeria. Fast developing economies like China, India, Brazil, including Vietnam and
Thailand depend on exports to drive their economies.
Nigeria cannot afford to do otherwise. 80 percent of Nigerians still lack access to electricity, decent housing, portable water and good healthcare. This figure is growing as a result of increasing unemployment caused by the recession. For many years, The importation of petroleum products covers 30 percent of Nigeria’s GDP, importation of toothpick, rice, fish, cassava starch, sugar and processed tomatoes take 20 percent; importation of garments and fabrics 15 percent, importation of cars and electronics 20 percent; resulting to sky-rockets inflation of 17.8 percent in 2016.The demand for foreign exchange and imports (including imports of petroleum products) remained high structure of the economy has not only been export dependent, but also on a resource that is non-renewable.
Nigeria is not the only country that has experienced economic recession. Several other countries have also gone through recession in different phases and have recovered in varying degrees. They include: Korea, Hong Kong and Southeast Asia 1997-1998, United State of America 1974-1975, double deep recession in 1949 and
1980-1982, Japan in 1993-1994, Thailand 1997-1998, Australia 1931-1932, United Kingdom in 2000 and Venezuela double deep 2015-2016, (Chossudorsky,2010; Richard, 1960). If any known market economy would have escaped a recession, it would have been the US economy, however, despite prudent economic management, the US economy experienced periodic recessions and the last global economic crisis was triggered by the collapse of the sub-mortgage sector, (Adelmann, 2011).
1.3 Objectives of the Study
The main objective of this study is to analyze economic recession and the way out in Nigeria. The specific objective are as followed:
• To research into the effect of Economic recession in manufacturing industries in Nigeria
• To find out the most serious effect of economic recession in manufacturing industries in Nigeria
1.4 Scope of the Study
The scope of this study is centered on economic recession and the way out using Alimosho local government, Lagos State, Nigeria as the case study.
1.5 Significance of study
• To know the effect of economic recession in manufacturing industries in Nigeria
• To know how to tackle the problem of economic recession
• To proffer advice
1.6 Research Methodology
Doctrinal method and also empirical shall be mainly adopted in this research which will entail the consideration of statutes, textbooks of both foreign and local authors, journals, case laws conferences, materials form, collection of facts and data through questionnaires, internet and other relevant materials will be consulted.
1.6 Literature Review
A recession has many attributes that can occur simultaneously and includes decline in component measures of economic activity (GDP) such as consumption, investments, government spending and net export activity. The summary of measures reflect underlying drivers such as employment levels and skills, house hold savings rates, corporate investment decisions, interest demographics and government policies.
Koo (2009) stated that under ideal conditions, a country’s economy should have the household sector as the net borrows, with the government budget nearly balanced and net export near zero. When these relationships become imbalanced, recession can develop within the country or create pressure for recession in another country. Policy responses are often design to drive the economy back towards this ideal state of balance.
Recession have psychological and confidence aspects. For instance, if the expectations develop that economic activity will slow, firms may decide to reduce employment levels, save money rather than invest.
Such expectations can create a self-reinforcing downward cycle bringing about or worsening a recession (Samuelson, 2010).
The bursting of a real estate or financial asset price bubble can cause recession. For example Koo (2009) stated that Japan’s “Great Recession” that began in 1990 was a balance sheet recession”. It was triggered by a collapse in land and stock prices, which caused Japanese firms to have negative equity, meaning their assets were worth less than liabilities. Despite Zero interest rate and expansion of the economic supply to encourage borrowing, Japanese corporations in aggregate opted to pay down their debts from their own business rather than borrow to invest as firms topically do (Gregory, 2010).
Most mainstream economists believe that recessions are caused by inadequate aggregate demand in the economy and favor the use of expansionary macroeconomic policy during recessions. Strategies favored for moving an economy out of a recession vary depending on which economic school the policy makers followed. Monetarists would favor the use of expansionary monetary policy, while the Keynesian economist may advocate increase government spending to spark economic growth. Supply side economist may suggest tax cuts to promote business capital investment.
Some recessions have been anticipated by stock market decline. Siegel (2002) mentioned that since 1948, ten recessions were preceded by a stock market decline. The real estate market also usually weakens before a recession. However, real estate decline can last much longer than recessions (Shiller, 2009).
During an economic decline, high yield stocks such as fast moving consumer goods, pharmaceuticals and tobacco tend to hold up better. However when the economy starts to recover and the bottom of the market has passed, growth stocks tend to recover faster (NASAAQ composite index, 2011). Diversifying ones portfolio into international stocks may provide some safety, however economies that are closely correlated with that of the US may also be affected by a recession in US.
Productivity tends to fall in the early stages of recession and then rise again as weak firms close. The variation in profitability between firms rise sharply Vaitilingan, 2009). This corroborates the finding of Oludayo and Okwara (2012) that although, the recent economic recession has ripple effect in many industrial organizations resulting in low productivity and negative consequence, however the impact have not been the same for every organizations. The point according to Oludayo and Okwara (2012) is that while some organization may have experienced the worst hit, like the Textile industry, others may have utilize the opportunities of the period as a brace up towards higher productivity, goodwill, motivation for employees.
Low skilled, low educated workers and young are most vulnerable to employment in downstream. After recessions in Britain in 1980s and 1990s, it took five years for unemployment to fall back to its original level. The problem of economic recession lies with indiscriminate laying off of staff with little or no premium placed on experience and requisite professional skill of staff (Elizur and Sagie, 1999). The danger of the consequences is often enormous as organizations affected by recession may lack visible team of management to sustain productivity as a result of layoff. The living standards of people dependent on wages and salaries are more affected by recessions than those who rely on fixed incomes and welfare benefit.
The loss of job is known to have negative impact on the stability of families and individuals health and well being Vaitilingan, 2009.
Organizations as a centerpiece of economic activities responds to economic recession into forms, organizational downsizing and organizational decline
(Lee, 2001) whereas organizational downsizing is intentional, proactive management strategy; organizational decline is an involuntary negative consequence of non-adjustment to adverse environment circumstances such as recession.
The immediate cause of economic meltdown of 2008 in US was rooted in housing market. It was the inability of numerous borrowers in the housing sector to pay, which is technically called, subprime default that caused the onset of financial crises. It has hurt investors and bankers in the housing market while raising the specter of a recession in the world economy (Femi, 2010; Avguoleas, 2008). The subprime sickness was able to spread to other sectors of the economy internationally because so many banks were exposed to housing mortgages, directly or indirectly in the processes of repacking and reselling mortgages as security for credits. The spread of risks involved means the spread of crisis when the bubble burst. The crisis brewing for a while started to show its effect in the middle of 2008, Around the world stock market have fallen, large financial institutions have collapsed or been brought out and governments in even the wealthiest nations have had to come out with rescue packages to bail out their financial system.
The initial response of the policy makers in Nigeria was meek. Either they did not understand the crisis or underestimated its magnitude and insisted that the fundamental of the financial system look impressively strong, even when the capital market was bleeding uncontrollably (Abdul, 2009). The minister of planning stated rather insensitively, that there is no problem in the nation’s capital market, this was at a time when market capitalization had dropped from N12 trillion to less than N9 trillion (Abdul, 2009). When finally they accepted there was crisis, they promised to rectify the abnormally.
About 58.4% of Nigeria oil export is US bound and up to 25% to Euro zone. 67% of our non oil export goes to Western Europe, 20% to Asia, while ECOWAS accounted for 11% in 2007. About 99% of foreign reserves and 85% of local revenues are directly derived from activities relate to oil which is at the centre of financial crisis. The stock of our foreign reserves is kept in European capital where financial market has stumbled and banks distressed. How can anyone think we are insulated from the financial crisis? International financial crisis which affect trade and investment flow are bound to impact on domestic (Abdul, 2009). The world economies are integrated financially. An economic recession that affect a key player in global economy like US, is bound to affect other economies of the world that has business link with US.
Despite the claimed immunity of our economy to vagaries of the economy of the Western countries, the impact of economic recession was outright disaster. Not only have we witnessed nosedive in stock prices, incredible shrinkage in capital investment, general collapse of public infrastructure, shutdown of factories and relocation of productive facilities elsewhere, the resultant rise in unemployment compounded by endemic corruption had all but grind the economy to a halt (Akin, 2010).
With its enormous financial and economic resource endowment, Nigeria is not supposed to be badly hit by economic recession. The ailing economy was as a result of decade of mismanagement, corruption and political instability (Agugua, 2002). Other nations with less resource endowment survived the impact of economic recession.
Some manufacturing industries are still comatose in spite of the bailout fund given to them by government. The manufacturing industries are faced with problem of infrastructure especially power, high naira exchange rate to US $, high bank interest rate and this makes our industries less competitive in a globalized economy (Lyman, 2004). The devaluation of naira by our previous administration in 1986, when they took IMF loan was the cause of high naira exchange rate (The Guardian May 14, 2010).
The credit squeeze in the bank introduced during banking reform were manifested in the reduction in the capacity utilization of manufacturing industries, as a result of lack of access to the working capital. Banks preferred giving short term loan to importers at high interest rate than to manufacturers who require long term loan at low interest rate. Manufacturers also find it difficult to borrow because of high interest rate of 22% and stringent security measures. No manufacturer will survive under this outrageous interest rate. The Capability of many firms to source raw materials were impaired by inaccessibility of loan from banks. Many consumer product distributors could not access loan to buy products from manufacturers. And this resulted to unsold inventories pilling in ware houses in the factory.
The galloping profitability of the banks by not bringing commercial lending rate below 10% to ginger industrial growth led to the collapse of industrial sector.
The inexplicable credit squeeze which puts the government in competition for available funds against genuine would be investors had led to collapse of industries. The inability of the authority to wean the sector from the current predominant occupation of buying and selling paper money, on place of genuine investments in national industrial growth is a factor in collapse of manufacturing industries.
Dollar value vis-a-vis the naira has actually risen tenfold increase in our dollar savings as a result of economic downturn. It will be recalled that in spite of our pariah status during the regime of Gen SaniAbacha our naira exchanged, steadily for about N80 = US $ with a paltry reserve of $4bn or four months import cover for our overseas payments for goods and services supplied. Our reserve base now approached $45bn, but surprisingly the naira now exchange for N154 when it should be much less than N80 = $1 US in our austere period.
Nigeria needs to learn from industrial economies like Korea and Malaysia where interest rate is 15% and particularly Japan that sets Zero percent interest on loans or purchase of industrial machines (Vanguard 21 August 2008). The central bank of Nigeria (CBN) in its intervention policy to revitalize ailing industries made available N500 billion fund to the Bank of industry to be accessed by industries at interest rate of 1%, payable between 10-15 years. It is hope that when the fund is fully accessed, industries will start running at full capacity and provide employment to the army of unemployed youths.
Our manufacturing industries cannot compete effectively in a liberalized market because of high cost of production. ECOWAS trade liberalization worsen the situation by allowing all kinds of products including textiles, tyre, beer, etc, to pass the border without payment of custom duties (Vanguard 27 October 2006).
Protection of our industries against foreign competition by regulating importation of goods produced in the country is very vital.
Investing in labour intensive textile industries, resuscitating the existing ailing ones will help to address mass unemployment, reduce crime rate and poverty in the country, compared to unhelpful so called poverty alleviation programme of distributing motorcycle, tricycle etc which are not even produced in the country.
A total of 35 textile companies were closed down in Nigeria at the onset of economic crunch and 23126 employees lost their jobs (Funmi, 2007). Also between 2001 and 2010, a total of 837 firms closed down as a result of economic recession (Lay, 2010). The reason for the closure was the negative policies of some state and federal government to tackle economic recession, coupled with the harsh economic reform of the government. Some of the negative polices of some start governments were multiple taxation and levies. Not less than 834,000 jobs were lost during the period (Punch October 31 2010).
Although the manufacturing sector (including micro, small and medium size enterprises) has the potential to create wealth and employment, the sector has stagnated in Nigeria and its contribution to GDP and employment remain small. The activity mix in the sector is also limited, dominated by import dependent process and factors. Although reliable data are unavailable, rough indicators show that the capacity utilization in the sector has not come to the expected level since 1999 and the factor faces a number of constraints.
1.7 Limitation of the Study
In carrying out this research many factors served as constraints:
1. The limitation of the research title as economic recession and the way out.
2. Financial Limitation.
3. Inadequate Time: time factor constitutes the major limitation of this research study. It relates to the fact that the time for research work was short because it was combined with lectures, studies and examination.
1.8 Definition of Term
Recession:- A period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters.
Horrendous:- Extremely unpleasant, horrifying, or terrible.
Stock market:- A stock market, equity market or share market is the aggregation of buyers and sellers (a loose network of economic transactions, not a physical facility or discrete entity) of stocks (also called shares), which represent ownership claims on businesses; these may include securities listed on a public stock exchange as well as those only traded privately.