Finance, oil rent and premature deindustrialisation in Nigeria

The literature on deindustrialisation often neglects the role of finance in the decline in manufacturing, despite the increasing shift towards financial speculation relative to real investments. This paper tries to bridge this gap in the literature by examining the role of finance in Nigeria's premature deindustrialisation, particularly banks' drive for short-term profits and their choice to lend to the oil and gas sector over manufacturing. We show that deindustrialisation in Nigeria can be traced back to the effect of the neoliberal policies of the 1980s and the take-off of financial liberalisation, corresponding to the decline in manufacturing value added. In the same period, employment share in manufacturing declined, however, at a distinctly lower rate than manufacturing value added. Therefore, higher productivity of labour is considered a less prominent factor for premature deindustrialisation in Nigeria, not least due to the low level of technological upgrading. We argue that the disproportionate flow of bank credit to the oil and gas and services sectors relative to manufacturing is further incentivised by the government's failed subsidy to the oil industry, which guarantees rent extraction for private interests. Using the Autoregressive Distributed lag (ARDL) estimation for the period 1981-2018, we find evidence that suggests a significant negative impact of domestic credit by banks on manufacturing value added in Nigeria. The disproportionate flow of domestic bank credit to the oil and gas and services sectors in Nigeria also indicates a significant negative impact on the country's manufacturing. On the other hand, net domestic credit by financial institutions, which includes financial flows by domestic development banks, has a significant positive impact on manufacturing. (c) 2021 Elsevier B.V. All rights reserved.