Magoosh GRE

The contribution of infrastructure to Nigeria’s economic development and future prospects

| February 8, 2017

Introduction

There is general consensus that there is a positive relationship between development in the financial sector and economic growth providing the means to mobilize and to allocate funds in the economy (Masha et al., 2004; Shaw, 1973). However, financial development is also shown to be inadequate to cause economic development often being considered to be a passive handmaiden serving to enhance the output and contribution of the real sector (production) (Firzli and Bazi, 2011; Olaseni and Alade, 2012). There is therefore need for enhanced focus on the growth of the real sector, which in most cases is private sector driven and includes economic activities of a country’s citizenry. Herein lay the import of infrastructure development and the need for its aligned pursuit with financial sector development for enhanced national economic development. This research assesses the potential for utilizing infrastructure investment to enhance economic development in Nigeria, seeking to show need for enhanced focus on infrastructure investments to achieve the country’s desired economic growth and a positive future prospects.

Aim of research

This research proposes that there is significant potential for utilization of infrastructure investment to achieve enhance economic development of Nigeria. Through the assessment of this potential and analysis of government efforts towards managing infrastructure inadequacies, this research endeavours to answer the question: What is the potential for utilizing infrastructure investment to enhance economic development in Nigeria? It seeks to show that infrastructure investments are justifiable in the quest for economic growth and robust future economic development prospects for Nigeria.

Research Objectives

With regard to its overarching theme, this research aims to achieve the following objectives:
To assess the correlation between infrastructure development and economic growth
To assess infrastructure inadequacies in Nigeria impeding the country’s economic growth and what measures are being taken to address them.
To evaluate impact of infrastructure development past and present on Nigeria’s future prospects and economic outlook.

Structure of proposal

Following is a review of literature which lays the foundation for the subject under study. It is followed by the research Methodology outlining techniques and approaches employed in the conduct of study.

Literature review

There is general consensus that there is a positive relationship between development in the financial sector and economic growth. While acknowledging that financial institutions provide the means to mobilize and allocate funds in the economy hence enhancing development, Schumpeter, in his 1934 work, did not perceive financial sector development as being the cause of economic development. Later in 1954, Robinson supports this view arguing that the financial sector is a handmaiden of economic development, which is passive and responds to needs in the real sector (which encompasses economic production including manufacturing) and therefore growth in the real economy (Masha et al, 2004). However, McKinnon (1973) and Shaw (1973) argue that the financial sector can be more than a passive handmaiden and a major driver of economic growth if it is relieved of its restraints. With repression, they argue that the financial sector responds passively to the needs in the real-sector and can only drive economic development if liberalized.
It is settled for most research work that there is a definite link, between growth in the financial sector and in the real sector (economic production). In an article in 2005, Asagowa identified close to ten indices of growth and deepening of the financial sector. These include rate of growth of all-encompassing money relative to GDP (diversification of the economy), interest rates spread, and ratio of financial assets to GDP, among others (Babatunde, et al, 2012). Infrastructure is a significant contributor to growth in sectors of the economy such as manufacturing and other forms of production easing and facilitating essential constituent processes.

Financial sector reforms and economic development

Up until the fourth quarter of 1986, Nigeria pursued a government-led economic development paradigm guided by National Development Plans. The government dominated all sectors of the economy including agriculture, commerce, services (especially transportation), and industry, among others, with the private sector playing a passive role. Since its independence in 1960 and subsequent discovery and exploitation of oil through the 1970s, the government had sufficient resources to finance these development plans to a reasonable proportion (World Bank, 2010).
However, poor fiscal discipline consequent to the revenue windfalls deriving from oil saddled the nation with a significant external debt burden. The disregard of other sectors of the economy led to a fall in international trade, and as well resulted in high unemployment rates and slow growth of output. These led the government to rethink its underlying philosophy of development resulting in a shift in paradigm to a private sector-led paradigm. With this shift came relief of stringent regulations governing every sector which were put up to enhance government control but which impeded the enhancement of performance and growth (Akinyosoye, 2010).
In 1984, therefore, a programme was fashioned called the Structural Adjustment Programme (SAP) which attempted to move the country away from direct government control of economic activities to indirect control such as through market forces. This involved widespread deregulation of trade, exchange, finance, among others. However, in spite of the increase in the number of financial institutions and greater variety of financial instruments and freedoms, the real economy showed no marked improvement with all macroeconomic indicators declining three years into the new millennium (World Bank, 2013). The country suffered debilitating external debt, high inflation (highest at 72.8% in 1995) (FMW, 2012: NNBS, 2013), high level of fiscal debt, underemployment and low capacity utilization in industry and agriculture. There was general distress also in the financial sector with high levels of insolvency and non-performing loans (Firzli and Bazi, 2011). Financial reforms have not been entirely successful translating into economic growth to desired levels. In this regard, there is need for aligned pursuit of growth in the financial sector with that in the real sector, which is facilitated by infrastructure development. Herein lay the import of infrastructure development.

Infrastructure and economic development

Infrastructure is herein defined to include the sectors of transport, water and sanitation, telecommunications, power, among others. In all countries across the globe, this aspect represents a large portfolio of expenditure, ranging from a third to a half of public investment (Akinyosoye, 2010). Given the intense capital requirement and the length of time it takes for benefits to manifest, there has been concern and debate among economic policy makers, politicians and the general public regarding the performance of infrastructure and its impact on economic development (Patunola-Ajayi, 2013). However, AEO (2013) and WEF (2010) among others present a widespread agreement that the inadequacy of physical infrastructure in a country is among major constraints impeding sustained and broad-based economic development.
There are various correlations between infrastructure and economic activity. In the short term, the construction phase is associated with attendant decision in the public sector that could have an influence on macroeconomic variables such as GDP, employment, public deficit, inflation, among others. The public investment thus expands aggregate demand, yielding a boost to employment, production and income (Patunola-Ajayi, 2013). In the medium and long term (the utilization phase), there are macroeconomic effects such as increases in productivity over the territory and in the private sector, as well as its effect on the degree of competitiveness of an economy (ADB, 2012; Foster and Briceno-Garmendia, 2010).
Additionally, various benefits derive from infrastructure development. The availability of infrastructure influences the marginal productivity of private capital with investment of public capital in infrastructure in a particular location often attracting additional flow of resources (Akinyosoye, 2010; ADB, 2012). Infrastructure services such as transportation, electricity, and water are also intermediate inputs to production. Public capital invested in infrastructure therefore complements private capital and serves to enhance economic development (ADB, 2012; World Bank, 2010). Services thereby generated as a result of sufficiency of infrastructure translate into increased aggregate output.
At the microeconomic level, the effect of infrastructure is specifically seen through the reduction in the cost of production derived from its impact on profitability, output levels, employment and incomes (Myers, 2007). This is particularly the case for small and medium scale enterprises. Extensive and efficient infrastructure is critical in ensuring effective functioning of the economy and is an important factor in the determination of the location of economic activity and the kind of sectors and/or economic activities that can develop in a particular economy (Patunola-Ajayi, 2013).
There is also the intermediate input for economic development which encompasses higher productivity obtained from improved human capacity development. This can be attained through improvements in healthcare, nutrition, education, better roads and transportation, and access to electricity to households as well as telecommunication services which enable the creative engagement of citizens and access to core economic activities (Wilhelm, 2010; Akinyosoye, 2010). On a global scale, and regarding international trade (trade logistics), there is also an impact on the cost and quality of service which determine competitiveness in export and import markets. Infrastructure reduces the effect of distance between regions, enables the integration of national markets, and creates connections at lower cost to markets in other regions or countries (WEF, 2010; ADB, 2012; KPMG, 2012).
A remarkable positive effect of infrastructure development has been adduced by models such as the Cobb-Douglas which yield a median value of 0.30. This means that public investment equivalent to 100% of the public capital stock would lead to a 300% growth of private production (Babatunde, et al, 2012). Investment in infrastructure is therefore among the important mechanisms through which to increase income, employment, productivity, and consequently, the competitiveness of the economy.

Infrastructure development in Nigeria

Nigeria’s economic growth is largely driven by the capital-intensive oil sector which continues to drive the economy. The average growth of this sector was about 8% comparable to -0.35% for the non-oil sectors (NNBS, 2013). Given its limited job creation capacity, focus on this sector has not translated into sufficient jobs resulting in poverty and disenfranchisement of the greater population and, therefore, the country’s low rank in the Human Development Index (HDI) (NNBS, 2013; The Guardian, 2012). In this regard, King, 2003; FMW, 2012 and AEO, 2013; show that economic growth has not translated into sufficient job creation and/or poverty alleviation with unemployment increasing from 21% in 2010 to 24% in 2011 (King, 2003; NNBS, 2013).
The country’s outlook for growth remains positive, though, with an annual economic growth rate of about 8% (KPMG, 2011; NNBS, 2013), and an anticipated GDP growth rate of about 12% in the next five years (NNBS, 2013; AEO, 2013). This outlook pegs its vision 20:2020’s aspiration to achieve a GDP of $900 billion (FMW, 2012; NNBS, 2013) predicated on improved sectoral performance, the propulsion of a better business environment, and supportive government policies focused on stability in the macroeconomic environment and increased investment. This is however challenged by short and medium term downside risks which include security challenges due to religious conflict in some of its states, slowed global economic growth in major economies of the world and the crisis of the Eurozone (Olaseni and Alade, 2012).
There is therefore a great need to diversify the Nigerian economy making it broad-based (both socially and geographically) and to expand the sources of growth. The development of agriculture, manufacturing and services could enable the broadening of growth, creation of employment and reduction of poverty (AEO, 2013). The country is therefore addressing the infrastructure deficit in the country to create linkages and to enable such diversification which would enable inclusive growth (FMW, 2012). Infrastructure made a one percentage point net contribution to the country’s improved per capita growth performance in recent years (NNBS, 2013), notably held back by unreliable power supply (Olaseni and Alade, 2012).
In spite of the obvious importance of infrastructure to the nation, governments both at the national and local levels have continued to pay lip service to the provision of infrastructure (Financial News, 2014). As a consequence, the country’s growth prospect is undermined. The following section offers a glimpse at some of the country’s major infrastructure inadequacies.

Inadequacies in infrastructure development

Urban housing

Lack of proper planning and management of rapid urbanization has led to uncontrolled growth in major cities and towns to accommodate an informal economy which stands at 60-70%. This has had a negative impact on the landscapes of urban centres, leading to decay of inner cities, growth of shanty towns especially in peri-urban areas, consequently limiting their contribution to the national economy being inimical to security and good governance (UN Habitat, 2010).

Transport

Throughout the country, roads are neglected, particularly those connecting major cities, the sea port and commercial centres to the hinterland which are bad and deteriorating. Efforts at repair are often in vain due to the use of substandard materials. Though having the potential to provide a cheaper means of transport, the existing rail network is old and dilapidated, having served half a century after being built by the British colonial government (ADB, 2012). Attempts to procure new coaches or to create new routes have not succeeded. This has fostered the development of a disorganized and unregulated private sector freight and passenger road transport system, which has resulted in traffic congestion in cities, increase in motor accidents, and environmental pollution (UN Habitat, 2010).
Given Nigeria’s endowment of waterways and long stretches of coast with potential for transportation, this option, which could ease congestion on roads and aid easier movements, is neglected and the water ways are left undeveloped. There are only a few canoe and ferry routes which are ill-equipped having no good jetties, harbours, safer boats or ferries. The recently refurbished mini-port at Ikorodu, Lagos State provides relief to commuters going through the Ikorodu-Lagos-Lekki road where they now only cross by ferry to Ajah (Akinyosoye, 2010). This is evidence of potential and should be replicated across the country. Transportation of heavy cargo through waterways can save pressure on roads.
There have been recent attempts to improve/ renovate airports which have for a long time remained in deplorable condition, and to address the challenge of adequate capacity. Travelling by air is still expensive in Nigeria compared to international standards with charter options such as helicopter, cargo and passenger planes largely untapped. Air transport has the exceptional advantage in terms of speed, time of travel and distance considerations. It is also of high value in relation to weight and is preferred when accessibility is a challenge (Akinyosoye, 2010).

Electricity supply

Though it forms a significant avenue for economic empowerment of the people and country as a whole, the power crisis in Nigeria persists. Irregular supply impedes production and manufacturing and consequently some entities have had to relocate leading to loss of employment opportunities (UN Habitat, 2010). The country currently generates 4000MW which is inadequate compared to South Africa’s 34000MW (Olaseni and Alade, 2012). There are however efforts and resources being planned in the medium term towards enhancement of power supply but quite a lot needs to be done given the importance of power in economic development and well-being of citizens who make use of generators for their power requirements (Olaseni and Alade, 2012).

Water supply infrastructure

Population pressure has strained water supply capacity with damaged supply pipes, deteriorating water treatment infrastructure and erratic power supply challenging the supply of safe water to the population. To many, the main sources of water are boreholes, wells, springs, flowing rivers, and brooks whose safety for human consumption is not guaranteed. Poor sanitation and consequent diseases impacts overall health and well-being of citizens and their productivity (UN Habitat, 2010).

Communication

The emergence of cellular phones has revolutionized the public and private business environment, bridging communication gaps that hitherto existed. There has subsequently been a reduction in unproductive business trips and an enhancement of transactions. High prices of service and poor reception, inadequate capacity and coverage however need to be addressed for this aspect to facilitate expected economic growth (Financial News, 2014).
There is obviously greater need for the Nigerian government and constituent states to develop adequate and effective infrastructure. This requires a more strategic approach to tackle its dearth which has been deemed to constrain the required economic development. There needs to be robust strategic planning, strong political will, as well as the right procurement approach to achieve long term success (Akinyosoye, 2010; AEO, 2013).
According to World Bank (2013) estimates, Nigeria’s vision and aspiration to attain middle income status by 2020 requires sustained investment in infrastructure of about $14.2 billion over the next decade which is about 12% of its GDP. The current investment is $5.9 billion (5% of GDP) (NNBS, 2013) falls short. Expenditure on food imports is a significant at $90 billion a year (NNBS, 2013; World Bank, 2013) and is unnecessary given Nigeria’s potential in agriculture, taking up resources that could finance infrastructure development (World Bank, 2013). Reducing this bill requires investment in enabling infrastructure such as rural energy, transport systems, telecommunication and irrigation systems. However, much of Nigeria’s impetus for rural development will derive from investments at the level of the State though such infrastructure run by the State and government is prone to low maintenance and support, hindering efficiency and effectiveness (Olaseni and Alade, 2012).
Current development of public infrastructure is occurring in tandem with a huge expansion of private sector developments, particularly in the property market (ADB, 2012). Continued urbanization and an emerging middle class, as well as a shortfall in quality office space for investor companies are key drivers for this wave of real estate development (KPMG, 2011; FMW, 2012). The success of ambitious infrastructure developments is likely to increase investors’ appetite to expand their operations and capture the anticipated growth, portends significant potential for economic growth (AEO, 2013).

Methodology

Research Philosophy

This study employs a pragmatic philosophy which embraces both positivism in its opening up and confirming valid causal relationships which can therefore be used for prediction; and subjectivism which appreciates the difference between humans as social actors, with varied views of reality, values and knowledge (Creswell, 2002). Focus in this regard is on observable phenomena and their subjective meanings driving applied research integrating different perspectives to help in the interpretation of data.

Study Technique and Strategy

Given the contextual nature of the study and its focus being an attempt to gauge the impact of infrastructure development on Nigeria’s economy, a qualitative inductive approach is deemed to be a suitable approach enabling a detailed exploration of the subject (Quirke, B., 2008). The inductive approach is useful in condensing varied and extensive data into a brief and summarized format while establishing links between research objectives and findings obtained (Saunders et al., 2000). This technique involves the exploration of published literature on the subject including government reports, working papers, as well as journals and other relevant literature.
This research also employs a quantitative technique in the conduct of interviews in a social survey to targeted experts in Nigeria’s development ministry as well as government leaders in sample states. This would enable the acquisition of information on actual infrastructure investment and development, cross-checked to the particular region by local officials towards the realization of study objectives. This would also enable the acquisition of opinions and information on the actual contribution of infrastructure to increased economic activity in the various regions, and/or the enhancement of life which is a precursor to increased productivity.

Practical Implementation

The targeted experts chosen for the survey include random sample of 20 officials in the national Federal Government in charge of oversight of infrastructure development in the country’s 36 Federal States and the administrative areas of the Federal Capital territory and urban councils. This will enable the attainment of a comprehensive view of projects and prospects given that they comprise the control centre for the entire nation, and arebetter placed to notice and to identify increases in economic activity reflected in increase in revenues to Local government areas and urban councils, and tax revenues to the nation state.
This survey will take the form of a structured interview administered by the researcher, a method which ensures consistency of results obtained and answers that can reliably be aggregated. Its format is as appears in Appendix: A comprising both closed- and open-ended questions which afford the research the capability to compare and/or contrast interviewee responses in order to answer the research question (Creswell, 2002).

Analysis approach

Data obtained from interviews will be analysed using SPSS which enables the production of graphs which would enable the study to show correlations between infrastructure development and increase in economic activity (growth in the real sector) which enables evaluation of its actual or potential impact. A wide and extensive exploration of literature, as well as congruence on the ground as assessed by target experts enhances reliability and validity of data obtained (Creswell, 2002). The choice of a representative sample from across the entire country enhances the study’s generalizability and thereofore its capacity to make comprehensive deductions on the subject (Creswell, 2002; Saunders et al., 2000).
Findings showing an increase in economic activities in areas recently served by new or improved infrastructure; entry of medium and large scale investors to locations supported by actual or prospective infrastructure investments; as well as increases in local and federal government revenues signify the contribution of infrastructure investments in increased economic activity engaging the population in the regions and overall expansion in the real sector. These are expected to translate to economic growth and positive future prospects for economic development.

Limitations of study

Assessment of the impact and actual correlation of infrastructure development on economic growth might be a challenge given the length of time with which the utilization of infrastructure translates into tangible economic activity and causes observable effect on the country’s economy.
Economic growth of a country depends on the interplay of several factors including financial deepening, investor confidence, the encouragement of various economic activities, among other socio-cultural and policy factors. The isolation of the contribution of infrastructure development is therefore a challenge and might affect the outcome of this research.

Ethical Considerations

It is imperative in research to ensure that the survey approach and activities do not portend psychological or social harm to interviewees. An initial important and significant step is in ensuring that the researcher seeks informed consent from the particular interviewees and as well from their superiors in departments or other actors whose areas of duty and responsibility may be touched by the inquiry. This would ensure that there are no breaches in confidentiality, and also ensures that interviewees are not put in tight spots and forced to discuss sensitive areas and information which may be of psychological harm.
The researcher should also be keen to note potential language barriers and cultural practices such as cultural gender power disparities that may impede the smooth progress of the interview and which may also negatively impact the interviewees making them feel incompetent or hindered in their participation. In such cases, the researcher should seek support of interpreters and agreeable individuals to help out in the conduct of the interview enhancing comfort and therefore output.
Alongside the above considerations, it is also worthwhile to ensure that time set aside for interviews and other activities such as prior meetings is properly consented to both by management or superiors in the relevant departments in which the interviewers are, as well as by the interviewees themselves. This would ensure that the interviews and related activities do not infringe on official or personal schedules, as well as personal, cultural or religious preferences or obligations. The interviewee should also be informed of their right to answer a particular question or to terminate the interview altogether.
The researcher in this study therefore in the foregoing will endeavour to obtain proper consent for study survey; respect privacy and goodwill of participants by not asking hypersensitive or confidential information; respect cultural norms and individual preferences of interviewees; ensure the confidentiality of data collected protecting it from access by third parties, and, to honestly and accurately report information obtained from the survey, avoiding the identification of interviewees if they wish that their identity be waived.

Conclusion

Reform in Nigeria’s financial sector is inadequate for economic development if the economy is not diversified and if citizens are not engaged in worthwhile economic activity. For the government to achieve this shift there needs to be a focus on infrastructure development, which would encourage private investments, enhance well-being of citizens, reduce existing constraints, and overall increase in economic activity which contribute to economic growth.
Further research is required to clearly show correlations between investment in infrastructure and economic growth and future economic prospects. This would enable its effects to be isolated from among other factors such as financial deepening which are also essential for economic growth and development.

References

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Africa Economic Outlook, 2013. Nigeria Economic Outlook. AEO Report
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Category: Essay & Dissertation Samples, Social Science