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Ijagun Journal of Social and management Science Vol. 4 No. 1 April 2014

87

SERVICE SECTOR ROLE IN THE CONTEXT OF INTER-

SECTORAL LINKAGES: THE CASE FOR ECONOMIC

GROWTH IN NIGERIA

By

ONAKOYA, Adegbemi Babatunde

Department of Economics,

Babcock University of Education, Ilishan, Nigeria

[email protected]

Abstract

This paper investigates the service sector contribution to the economy of Nigeria

was conducted by this study. A structural economic model which encompass four

sectors was developed. The model reflects the inter-linkages between agriculture

manufacturing, oil and gas and services in the real sector of Nigeria's economy.

The paper utilised the combination of Two Stage Least Squares (2SLS) and SURE

(Seemingly Unrelated Regression) which is encompassed in the Three Stage Least

Squares (3SLS). The 3SLS generalizes the 2SLS method to take account of the

correlations between the simultaneous equation. Time series data spanning forty

years from 1970 to 2010 was utilized. The findings suggest the existence of uni-

directional causality from services to the agricultural, industrial and oil sectors. It

shows that sectoral linkages are not always beneficial. This is manifested by the

negative relationship between the industrial and service sectors. The study

however confirms that the sectors are inter-wined and beyond the manufacturing

sector, the service sector plays increasing positive role in the cumulative causation

growth of the economy. In order to achieve balanced economic growth and the

transformation of a predominantly agrarian into a tertiary economy, the private

sector should invest more in innovative technology, high-tech inputs, better

transportation, more reliable communications and engaging financial services

amongst others. The government on its part should continue the liberalization of

energy infrastructure for sustainable economic growth.

Keywords: Economic growth, Macroeconometric model, Inter-sectoral linkage,

Service sector,

1.0 Introduction

mailto:[email protected]


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The contributions of the different sectors to the growth of the economy have

attracted a lot of mention in the literature. However, the literature is far from being

conclusive on the relative influence of the sectors especially in the context of their

inter relatedness. The literature contributions of the service sector methods, in the

opinion of Hoekman, 2006), is considered scanty.

The service sector, also known variously as the tertiary sector and affective

labour consists of the activities where knowledge and know-how of people are

offered for improved productivity and performance. Services provide intangible

goods which include attention, advice, access, experience, and discussion. It

includes the quaternary sector which describes the knowledge-based part of the

economy such as information generation and sharing, information technology,

consultation, education, research and development, financial planning and other

knowledge-based services (Selstad,1990).

The service economy involves the rise in the proportion of service inputs in

agriculture, production, employment, consumption and trade. According to OECD

(2000), it is the growth to a higher proportion of services components in

intermediate inputs. The organization reports that on the average, in year 2000 for

example, the proportion of employment in services in the United States of

America, United Kingdom, France, Germany, Netherlands and Spain was 71%.

Echevarria (1997) reports positive relationships between the price of

services and income resulting in positive association between national product and

services as a proportion of GNP. The (OECD, 2011) position is that the service

sector must add about 10 to 30 percent value in order to satisfy the symbiotic the

industrial sector. This is because the income elasticity for manufacturing output is

less than that of services when the economy develops (UNCTAD, 2004). This

because of the greater proportion of human intervention required in most of the

service sector jobs. Given that the human peculiarities in the manufacturing and

agricultural sectors cannot be replicated at the same level in the service sector, the

productivity as measured by the value marginal product of labour could be

enhanced at the same rate. This accounts for the continuous service labour

(employment) growth compared to the diminishing growth in the industrial sector

as a result of technological progress. It can be inferred from the leading sector /

political revolution thesis propounded by Rostow (1960) that the tertiary sector is

now the leading sector.

Consequently, as the economy grows, the labour gravitates more to the service

sector. The alternative contention is that the growth in the service sectors (banking,

transport, telecommunication, etc.) provide beneficial spill-overs to the other

sectors. The contributions of three of the major sectors to Nigeria's economy are

presented in Figure 1. The continued ascendancy of the agricultural sector is

manifest. The services sector has overtaken the manufacturing and the Oil sectors.

http://en.wikipedia.org/wiki/Affective_labor

http://en.wikipedia.org/wiki/Affective_labor

http://en.wikipedia.org/wiki/Information

http://en.wikipedia.org/wiki/Information_technology

http://en.wikipedia.org/wiki/Education

http://en.wikipedia.org/wiki/Research_and_development

http://en.wikipedia.org/wiki/Financial_planning


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This study however seeks to establish the linkage dynamics between and betwixt

the sectors and identify the sector with greatest linkage effect on Nigeria's

economy.

Figure 1: Major Sectoral Contributions GDP (1970 - 2011), Amounts in Naira Millions

Source: Central Bank of Nigeria Bulleting (2012).

The use of the input-output framework is common in the literature (Leontief,

1936; Szeskin & Davar, 1985; Kaur, Bordoloi & Rajesh, 2009; Jones, 2010;

Saikia, 2011). Hidalgo, Klinger, Barabasi & Hausmann, (2007) applied the export-

based sectoral relatedness whilst the Vector Error Correction Model (VECM) by

Balassa (1978), Social Accounting Matrix by Vogel (1994) and Macroeconomic

Simulation by Subramaniam (2010) have also been employed. The modelling of

the behaviour of service activities has been less prominent (Dowrick & Gemmell,

1991; Bhagwati, 1984).

These methods have not fully captured the economy-wide spill-over and

externalities effects. Failure to factor in these connectivity and linkages may lead

to inefficient and biased answers arising from omitted variable bias (Onakoya,

2012, 2013). The main contribution of this paper is the development of a structural

equation model (SEM) to remove such biases. This research contributes to

development economics literature by investigating the role and nature of the

service sector in explaining the growth the Nigerian economy.

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AGRICULTURE

MANUFACTURING

SERVICES

OIL & GAS

http://www.tandfonline.com/action/doSearch?action=runSearch&type=advanced&result=true&prevSearch=%2Bauthorsfield%3A(Szeskin%2C+Arieh+L.)

http://www.tandfonline.com/action/doSearch?action=runSearch&type=advanced&result=true&prevSearch=%2Bauthorsfield%3A(Davar%2C+Ezra)


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The remaining part of this paper is structured as follows. Section 2.0 focuses

on the theoretical underpinning of service industry. The relevant literature is

reviewed in section 3.0. The fourth section covers sub-sections 4.1 on

methodology and 4.2.on model specification. The findings and discussions are

presented in section 5.0 while the concluding remarks and some recommendations

are proffered in the final section. In the next section, the conjectural framework is

discussed.

Theoretical Framework

The Circular cumulative causation theory posited by Myrdal (1957) is that

growth by itself, can transform an economy. The investment and location of a new

manufacturing factory may ignite more employment in the factory and indeed

generate more ancillary jobs and service industries in the area. This may in turn,

given better infrastructure, attract more industries. The consequential cascading

implication of such unfolding events may cause a change in the structure of the

economy. These changes wrought, apply to a whole set of new variables due to the

multiplier effect. Indeed, the momentum of change becomes self-perpetuating, and

more investment is encouraged into to the area. As with the multiplier, the

cumulative causation also works backwards when major factory shuts down and

the effects transcends throughout the local economy.

Ocampo (2005) and Cornwall and Cornwall (2002) considered the concept

of cumulative causation as being critical principles of post-Keynesian growth

theory. They in fact play a key role in providing explanations to the

contemporaneous process of economic development. The model of cumulative

causation was systematically developed by (1966, 1975). Figure 2 exemplifies the

circular cumulative causation as envisaged by G. Myrdal (1957).


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Figure 2. Circular Cumulative Causation Transmission

Source: Oxford Dictionary of Geography (2004).

The complexities of service sector demand and supply factors influencers

have gained attraction in the literature especially in the developed nations. The

three-sector hypothesis which divides the economy into three sectors of activity:

primary (extraction of raw materials), secondary (manufacturing) and tertiary

(services) was developed by Clark (1940) and Fourastie (1949). The disputation of

Clark and Fourastié is the gravitation of demand from the the industrial to the

tertiary sector. The earliest categorization service industry was into smaller sub-

groups for the purpose of analyzing the changes in employment structure. The

works of Clark (1940) and Fisher (1935) initiated the rationalization of the shift to

services from manufacturing by focusing on the demand-side. They contend that

the rise of employment in services is driven by the changes in the structure of final

demand. Fuchs (1968) and Gershuny & Miles (1983) however contradict this

position. Instead, they ascribed the increase to the developments in the household

demand for services.

The spill-over effects arising from productivity-enhancing innovations in

industrial technologies are expected to rub off on the structural transformation

from agrarian to industrial economy. The sectoral productivity levels tend towards

equality because of a relatively faster growth in the agricultural sector. (Dowrick &

Gemmell, 1991). Sundrum, (1990) however provides empirical evidence that in the

long run, productivity tends to increase across all major sectors as income per

capita goes up.

The greater prominence the service sector attains in an economy, the greater

the level of its development. This is due in part to the relatively higher income

elasticity for service as the economy enters into a higher level of development. The

More Service Industries

http://en.wikipedia.org/wiki/Colin_Clark_%28economist%29


92

growth of labour in the service sector is continuous due to increases in the

marginal value product of labour (MVPL) as a result of technological progress

while the employment in other sectors tends to lessen.

Similar to the manufacturing sector, the service sector could be deleterious

to growth in the agricultural sector as a result of changes in productivity and

differences in income elasticities. Economies in industrialized countries show that

there are positive relationships between the price of services and income. Unlike

the agricultural and manufacturing jobs, most of the service jobs cannot be

substituted by machines, and therefore, the need for quality service personnel will

continually increase. Consequently, as the economy grows, the ever increasing

demand for service jobs will attract more and more resources from the

manufacturing and agricultural sectors. This could create a negative linkage to the

other sectors. The alternative argument is that the growth in the service sectors

(banking, telecommunication, transport etc.) could allow other sectors to take

advantage of the benefits of economies of scale, and make positive linkages to rest

of the economy.

Baumol (1967, 2001), a supply side economist propounded the ‘cost-

disease’ hypothesis that supply-side factors, i.e. productivity explicates why the

share of employment in services is growing when compared to the manufacturing

sector. As with osmosis, there is a tendency for demand to shift in favour of goods

produced in the progressive sector. He explains that where one sector is stagnant

and another is progressive with positive productivity growth, the cost per unit of

the stagnant sector will increase without limitation. Indeed, more labour will move

to the less productive sector if the goods from the non- productive sector are not

good substitutes in which case the economic growth rate will converge to the level

of the motionless sector.

Baumol's hypothesis is corroborated by Fuchs (1968) who attributes the

service sector growth to intermediate demand. Esping-Andersen (1993) on his part

attributes the preeminent rise of the service sector to the increased government

expenditure and transfer payments through the welfare state institutions. The

implication of cost disease hypothesis propounded by Baumol’s is that in service

sector, the rate of price increases is stronger than that of the industrial sector.

However, this have been confirmed for some, but not for all services. The

mechanism by which the impact of the sectors is transmitted throughout the

economy is conveyed through the different supply and demand - private

(household and firms), government and external blocks. In order to reconcile this

with the growth theory of Kaldor, Blecker (1992) contends that the Verdoorn’s

Law can be applied using the cumulative causation impact on the Thirlwall’s

(1979) Law in understanding the balance-of-payments-constrained growth.


93

Having established the theoretical underpinning of the service industry, the

next presentation is the analysis of some prior works.

Review of Literature

Different classifications of the service sector have been adopted in prior

studies. Singelmann (1978) identified the personal, producer, social services and

distributive types. Some others applied the knowledge content and information

criterion (Castells, 1996; and Albin & Appelbaum, 1990). The use of input-output

tables was deployed by Gregory & Greenhalgh (2001) and Russo & Schettkat

(2001). Their research report could not sufficiently explain the service trend using

the increase in outsourcing from manufacturing to services between the US and

Europe.

The literature abounds with reports of externalities and self-reinforcing

spillover outcomes amongst economic sectors which are inter-connected and

complicated. Two main schools of economic thought advance explanations for the

nature of relationship between the composition of the sectors and growth. For the

neoclassical school, sectoral composition is a trivial by-product of growth. On the

other hand, the authors affiliated with contemporary Breton Woods’s model of

development of development posit that economic growth is engendered by the

composition of the sectors (Kuznet, 1971; Chenery & Syrquin, 1975; and Baumol,

Blackman & Wolf, 1989). The study on services, as noted by Hoekman (2006)

constitutes only a small proportion of the economics literature which reflects in

part, the paucity of data on policies and flows. However, there is a growing interest

in empirical research on inter-sectoral linkages particularly on the service reform

and the emergence of the knowledge economy. The general finding is that service-

sector reform is positively and significantly associated with productivity in the

industrial sector (Arnold, Mattoo & Narciso, 2008; Arnold, Javorcik, Lipscomb &

Mattoo, 2010; Arnold, Javorcik, &Mattoo, 2011; and Fernandes, & Paunov, 2012).

Arnold, Javorcik and Mattoo (2011) on Czech Republic, (1998-2003)

examine the association between the productivity of domestic firms and services

sector reforms in downstream manufacturing by applying the micro data. The

research finds evidence that the liberalization of the services sectors to foreign

providers improves the performance of downstream manufacturing sectors.

Duggan, Rahardja and Varela (2013) using OECD's foreign direct

investment regulatory restrictiveness index and the input-output tables find that

relaxation in service sector foreign direct investment policies accounted for 8

percent of the observed increase in manufacturers' total factor productivity over a

12 year period ended 2009. The Indonesian service sector is also reported to be

strongly interlinked with the real sectors, accounting about 22% of manufacturing

inputs and for over a third of all intermediate inputs.


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The productivity impact of some African manufacturing companies on

services performance was investigated by Arnold, Mattoo and Narciso (2008).

Significant and positive impact was recorded.

Aviral (2011) in examining the incomes form the sectors (service,

agriculture, manufacturing) and the impact on the Indian GDP (1950 to 2009). The

study which applied the Variance Decomposition framework, Impulse Response

and the Engle-Granger reported that the static service sector Granger-causes

industrial sector and GDP. The dynamic causality results show that the explanation

power of one standard deviation innovation in the industry and agriculture sectors

to the forecast error variance is quite high (30.6% and 40%, respectively).

Dasgupta, S. &Singh, A. (2005) also reviewed the role of manufacturing and

services in economic development given the fact that the rate of growth of

services was more than that of manufacturing in India. Their study reports

a close association between service, manufacturing and economic growth

having applied the OLS estimation technique. However, the matter is not

that simple. Although the growth of services was found to depend largely

on the growth of manufacturing in the case of retailing and transportation,

Information Communications Technology (ICT), in the reverse was causing

the expansion of manufacturing.

Increased direct and backward linkages between services and manufacturing

in the USA over the last few decades were discovered by Falk and Jarocinska

(2010). This is corroborated by Francois (2007) who provides empirical evidence

that the rise of business services imports engender the promotion of manufacturing

exports. Similarly, the added value in the technology and skill intensive industries

increases while a negative effect in labour intensive industries was observed.

The relationship between the different aspects of service trade and non-oil

export in Nigeria between1980 to 2010 was examined by Mkpado (2013).

Adopting the triangulation technique as advocated by Saunders, Lewis, and

Thornhill (2009), Mkpado utilized different data collection technique within the

study in order to achieve a more accurate result. The study by means of descriptive

statistics, correlation analysis and regression analysis on secondary data finds

subsisting positive and significant correlations between the variables. Specifically,

agricultural credit, road network, domestic government capital expenditure on

services and domestic service positively determine exportable services and GDP.

In assessing the importance of oil in the development of the Nigerian economy,


95

Akinlo (2012) applied a multivariate vector autoregression (VAR) model over the

period 1960-2009. He reported Granger bidirectional causality between oil and

services. The analysis of Fuchs (1968) found that the elasticity of household goods

demand was less that the elasticity demand for services.

From the presented theoretical underpinning and the findings of the previous

research works, the established a priori expectation is that the sectors are inter-

wined and the service sector beyond the manufacturing sector plays increasing

positive role in the cumulative causation growth of the economy. Indeed,

Hirschman (1958) recommends, as part of the balanced growth strategy, that

government should promote greater linkages between the sectors through forward

and backward integration. Through this strategy, the leading sector, through

linkages with follower-sectors, may foster the development of the latter industry. It

is important therefore to investigate the involvement of the private demand, the

government and the external sectors in achieving the growth of the economy

through service delivery. This forms the basis of the conceptual framework

presented in the next section together with the methodology and model

specification.

Method

The literature is awash with empirical studies on structural changes in

national economies. The methodological approaches have been bedevilled with

drawing inferences from time-series stylised facts from cross-section results. Other

limitations include the endogeneity of the variables involved and the difficulty in

separating short-run effects from long-run impacts (Gemmell, Lloyd and Mathew,

1998). There is the need therefore to consider the inter-sectoral linkages in the real

sector of the economy in order to obviate these methodological constraints. The

interactions of these sectors no doubt generate externalities throughout the

economy. The multiplier effects should not be ignored in order to avoid the error of

omitted variables. (Onakoya, 2012).

The paper therefore utilised the combination of Two Stage Least Squares

(2SLS) and SURE (Seemingly Unrelated Regression) which is encompassed in the

Three Stage Least Squares (3SLS). The 3SLS generalizes the 2SLS method to

take account of the correlations between the simultaneous equations. Murty and

Soumya (2006) recommend the 3SLS as a more robust technique for estimating a

hybrid simultaneous equation system. The method takes care of the non-

stationarity of the series and also addresses the contemporaneous correlation of

error terms. This is because 3SLS integrates lag terms of both the independent and

dependent. The need to test for stationarity is therefore obviated. The critical


96

requirement is that the equations are all over-identified. In the estimated model of

this study, 3SLS is considered appropriate. The model design is the object of our

next presentation.

Model Specification

The simultaneous equation regression is applied in the model specification

of the paper. This approach has been applied in the past by Herrera (2001), Belaid

(2004) and Roller and Waverman (2001). The possible recursive and distortion in

the regression result that may arise where a variable serve as a dependent variable

in one of the simultaneous equation and as an independent variable in another is

taken care of.

This study also benefits from the concept of simultaneous model of Pasinetti

(1981, 1991) in his Structural Economic Dynamic approach, which focuses on the

growth of the economy from both demand and supply sides, which engendered the

analysis of structural change including exogenous and endogenous variables.

The structure of the macroeconometric model which is fashioned after the

national accounting identity focuses on the IS portion of the IS-LMBOP model.

The model reflects the inter-linkages between agriculture manufacturing, oil and

gas and services in the real sector of Nigeria's economy.

The model as designed provides for two main possible channels through

which the service sector can affect economic growth. First, investment in service

can affect output directly. Secondly, service as an intermediate input can indirectly

impact growth through the outputs of other economic sectors (manufacturing,

agriculture, and oil). The model consists of 16 behavioural equations and 4

identities and is made up of four major blocks: supply (Output), private demand

(Household and firm expenditure), government expenditure and the external

sectors. The model is, presented as follows:


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Supply Block: YMFG = a1+ a2GCRMFG + a3FDIMFG +a4KMFG+ a5 PMFG + a6YAGRIC +a7YOIL +a8YSERV + a9YMFG-1 +e1 (1)

YAGRIC=a10 + a11GCRAGRIC +a12FDIAGRIC + a13KAGRIC + a14RAIN + a15 PAGRIC + a16YMFG +a17YOIL +

a18YSERV + a19YAGRIC -1 + e2 (2)

YOIL = a20 + a21GCROIL + a22FDIOIL + a23KOIL + a24POIL + a25OPEC+a26YAGRIC+ a27YMFG

+ a28YSERV+ a29YOIL-1 + e3 (3)

YSERV = a30 + a31FDISERV + a32KSERV + a33PSERV +a34YMFG +a35YAGRIC+ a36 YOIL +a37YSERV-1 + e4 (4)

Private Demand Block

CF = a38+ a39PF +a40YDc + a41IR + a42CF-1 + e5 (5)

CNF = a43 + a44PNF +a45YDc + a46W +a47 CNF-1 + e6 (6)

INVMFG = a48+ a49YMFG +a50IR + a51 FDIMFG +a52GCRMFG + a53PMFG + a54YAGRIC+ a55YOIL

+ a56YSERV + a57 INVMFG-1 + e7 (7)

INVAGRIC = a58+ a59YAGRIC +a60IR+ a61YD + a62GCRAGRIC + a63PAGRIC + a64YMFG + a65YOIL

+ a66YSERV +a67INVAGRIC-1 + e8 (8)

INV OIL = a68 + a69YOIL +a70 FDIOIL +a71GCROIL + a72 POIL + a73YAGRIC+ a74YMFG + a75YSERV

+a76INV OIL-1 + e9 (9)

INVSERV = a77 + a78YSERV + a79FDISERV+ a80 GCRSERV + a81 PSERV + a82YMFG + a83YAGRIC

+ a84YSERV-1 +e10 (10)

Government Block: The government demand is given by equations (11) to (13):

GE = a85 +a86GRV +a87CG+ a88EDS+a89DDS+a90 FD+ a91GE + e11 (11)

GRV = a92+ a93 FDI +a94NX + a95GRV-1 + e117 (12)

FDF =a96+ a97FD + a98NFA +a99EXR + a100 FDF-1+e13 (13)

External Block: The external block is depicted by equations (14) to (16):

X =a101 + a102Y +a103TOT + a104 EXR + a105 X-1 + e14 (14)

M = a106 + a107TAR +a108Y+ a109TOT+a110EXR + a111 M +e15 (15)

RES =a112 +a113Y + a114 NFA + a115 EXR + a116 RES-1 + e16 (16)


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The system is closed by a set of identity equations listed as equations (17) to (20).

PDD = C +INV (17)

GE = FDF + GRV (18)

NX = X - M (19)

AGD = PDD + GE + NX (20)

The Schematic diagram (Fig. 3) simplifies the complex algebraic relationships

hitherto represented in the system of simultaneous equations 1 through 20.

Private

Demand

Block Capital

Stock

Price

Government

Block

Government Capital

Exponential Ratio

Foreign Direct Investment

External

Block Rain

OPEC

Agriculture

Service

Oil

Consumption

Manufacturing

Interest

Disposable income

Figure 3: Conceptual Framework of the Macroeconometric Model

Source: Author's design (2014)

Investment

Agricultural

Output

Service Output Oil Output

Industrial

Output

Dependent Supply Block Variables Dependent Demand Block Variables

Independent Variables

Economic Growth

Externalities and Spill-

over linkages across

real sectors of Nigeria's

economy


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In the demand block, private demand consists of investment (firms) and

consumption (households). Both the external and government blocks also have

impact on the supply and the private demand block. The variables indicated in

equations 1 through 20 and also explained in Table 3.1 are considered important in

estimating the relationship between service sector and economic growth directly,

and as transmitted through other sectors. The relationships of the variables are

derived from earlier studies. The choice of the equations is also guided by the

expected sign as well as statistical significance of their coefficients and high

goodness-of-fit. Specific attention is given to the oil sector to reflect its importance

to the Nigerian economy. The Nigerian economy, in terms of national output and

employment generation, is based on agriculture. The GDP by sector as of 2010 was

agriculture: 42 percent; services: 20 percent manufacturing: 15 percent and

wholesale / Retail trade 17: others 6 percent (US Embassy in Nigeria, 2011).

Agriculture therefore qualifies for inclusion in the model.

Furthermore, inclusion of the external sector is not critical in the models

constructed for countries with restrictive international trade. This is not the case

with Nigeria. The country is not in autarky but has largely run open economic

system since attaining independence. An external block has therefore been

incorporated to reflect the interaction of the country with the rest of the world as a

member of the World Trade Organisation (WTO) and an integral part of the

Economic Community of West African States (ECOWAS) amongst others.

In the model, the Output of the service sector (YSERV) is assumed to be

explained by (a) the foreign direct investment in the sector (b) capital stock (c) the

price (d) Output of other sectors and (e) Output of that specific sector in the

immediate past year. The inclusion of the foreign direct investment (FDI) variables

in the model is advised by the massive increase in foreign private investment in the

Nigerian economy. The impact of fiscal deficit on balance of payments in Nigeria

has come to the fore in economic discussions since 2005, when Nigeria achieved a

milestone agreement with the Paris Club of lending nations. The household

consumption, the external reserves and moderation of the exchange rate are

variables also considered important for inclusion in the econometric model.

The study utilized the time series dataset from 1970 to 2010, a period of 40

years which, about three quarters of the life of independent Nigeria. The E-

ViewsTM (version 6.1) statistical package was used for the analysis. The results are

discussed in the next section.


100

5. Findings and Discussions

The supply block and the private demand block are of interest to this study.

Therefore, this section examines the estimation results of the inter-sectoral

relationships of the economic sectors with special emphasis on the service sector

which is represented in equations 4 and 10. The independent variables in equations

4 and 10 account for 98 percent and 95 percent (2R = 0.98 and 0.95) respectively of

the variation in the output of, and the investment in services. These attest to the

high degree of the model specifications. The high values of 2R which may be

indicative of specious results, is considered valid in view of the fact that the

Durbin-Watson Statistics (DW) for each of the regressions (1.8 and 1.62) is higher

than the respective 2R (Granger, & Newbold, 1974, Gujarati, 2003). The output of

the service sector (YSERV) is positively related to each of the outputs of agriculture

(YAGRIC), and oil (YOIL) sectors but negatively associated with the manufacturing

sector (YMFG). All the sectors are not statistically significant in determining the

output of the service sector (Table 1).

Table 1: System Estimation Report: Inter-Sectoral Linkages in the Supply Block

YSERV YAGRIC YMFG YOIL

YSERV 0.13

(0.32)

-0.79

(-1.47)

0.17

(0.77)

YAGRIC 0.05

(0.62)a

0.44

(3.85)a

-0.41

-(5.42)a

YMFG 0.33

(4.58)a

0.04

(0.38)

0.28

(5.00)a

YOIL 0.04

(0.18)

6.70

(0.31)

4.16

(0.25)

Note: a, imply 1 percent significance level. T-statistic in parenthesis:

The industrial sector in Nigeria is insignificant and negatively related to the

output of the services sector. This is contrary to the findings of Francois (2007) and

OECD (2011) which in demonstrating the symbiotic nature of the industrial and

service sectors in the developed countries, estimates reveal that the contribution of

services value added needed to satisfy demand for manufactured products varies

between 10 and 30%. Indeed, the report shows that between 1995 and 2005,

significant increases in total services embodied in manufacturing were evident in

the United States Turkey and Poland. This manifests that over time, a shift in

industrial structures towards manufacturing products that are more service

intensive is being achieved.

The negative Nigerian experience can be explained by the Baumol’s (2001)

Cost-Disease hypothesis. The treatise states that shifts in demand (in this case for


101

manufacturing output) play only a minor role in the share of service employment.

This is due in part to lags in skill set and labour know-how. The lack of impetus

from the service sector reduces the productivity of labour which cannot take

advantage of the technological progress inherent in the industrial sector. The

industrial marginal value product of labour (MVPL) could therefore not be

enhanced at the same level as in the service sector. The implication of this for a

developing country like Nigeria is the loss of the opportunity for continuous

growth of the service sector labour as obtainable in the developed countries.

The findings that the oil sector is inconsequential in the determination of the

output of the service sector of Nigerian economy are consistent with the views of

Oyejide and Adewuyi (2011). They ascribed the lack of linkages between the oil

sector and the service sector of the Nigerian economy to the capital intensive

nature of oil sector activities and scarcity of capital as well as dearth of local

expertise. This malaise appears to have been, in part, addressed by the enactment

of The Nigerian Oil and Gas Industry Content Development Act, 2010. (Momah,

2013).

In the reverse, the estimated regressions report of the output of the service

sector, serving as explanatory variable in equations 1, 2 and 3, reveals positive

relatedness to the output of the other sectors (see Table 1). In addition, the output

of the service sector significantly determines the outputs of both the agriculture

and industrial sectors at 1 percent level. This means that one percent increase in the

service sector will respectively lead to about 0.05 percent and 0.33 percent increase

in the output of the agricultural and manufacturing sectors respectively. This

research is in conformity with the findings of Akinlo (2012) who reports uni-

directional causality from manufacturing to trade & services. The result also

validates the growing importance of the service industry in promoting the growth

of the industrial and agricultural sectors as highlighted by Stringer (2001).

The reasons advanced by Stringer include the provision of the impetus for

specializations in distribution, transporting and financing practices which in turn

lead to entrepreneurship development in the form of suppliers, processors,

distribution middlemen importers, exporters, merchandisers, advertisers and

finance experts. The liberalization of the services industry as part of the

privatisation programme of the Nigerian government and removal of import

restrictions has led to increase in the number of services providers. The engendered

competition has also resulted in improved product quality and process innovation

with concomitant enhanced efficiency and expanded consumer choice. The net

effects of these in the opinion of Oyejide and Bankole (2001), is direct and indirect

enlargement of supply, lower prices, and gains in consumer surplus.

The oil sector which however remains largely unaffected by the service

industry may be due to dominance of foreign multinational companies in the


102

provision of value - added services to the sector. The enactment of the Nigerian Oil

and Gas Industry Content Development Act (NOGICDA) in 2010 is expected to

correct this anomaly by significantly improving the amount of contracts awarded to

Nigerian companies. Unlike the previous guidelines by the Nigerian Petroleum and

Petrochemical Company (NNPC) which were considered advisory, the NOGICDA

is a valid legislation, enforceable by the relevant regulatory agencies and the court

of law, where applicable (Arogie, 2013).

The gross output in the real sector of the economy and the sectoral

contributions are trended in the same direction as an indication of the positive

contribution of the sectors to overall growth of the economy. This supports the

findings by Blunch, and Verner (2006) in a similar study on Tunisia which point

out that in the long run, all the sectors (agriculture, industrial and services sector),

tend to move together in their contribution to growth. The import of these findings

is that the inter-sectoral relationships are complicated and multi-directional. The

spill-over effects and externalities generated by the interactions and linkages

between the different sectors attest to the dynamic nature of the economy. As the

results show, the economic role of the service sector as a one-way flow towards the

agricultural, industrial, and oil and gas sectors has implications for urbanization,

employment and foreign trade stability.

The results confirm the a priori expectation / hypothesis that investment on

services has had some significant impact on economic growth in Nigeria. Arising

from these findings, the concluding remarks and recommendations are, presented

in the final section.

Conclusion

This study employed the macroeconometric model in testing the

contributions of the service sector in the context of inter sectoral linkages. The

technique provided an avenue to account for the spill-over effects and externalities

generated by reinforcing sectoral linkages which have largely been omitted in

literature. The findings suggest the existence of uni-directional causality from

services to the agricultural, industrial and oil sectors. It shows that sectoral

linkages are not always beneficial. This is manifested by the negative relationship

between the industrial and service sectors. The study however confirms that the

sectors are inter-wined and beyond the manufacturing sector, the service sector

plays increasing positive role in the cumulative causation growth of the economy.

In order to achieve balanced economic growth and the transformation of a

predominantly agrarian into a tertiary economy, the private sector should invest

more in innovative technology, high-tech inputs, better transportation, more


103

reliable communications and engaging financial services amongst others. The

government on its part should continue the liberalization of energy infrastructure

for sustainable economic growth.

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Appendix 1

Description of Variables and their Sources

S/N

Notation

Definition Type Unit Source(s)

1 AGD Aggregate

Demand

Endogenous N/million Central Bank of Nigeria Statistical

Bulletin December, 2007 Pg. 132-134;

2008 Pg. 91-93; 2010, Table B. 1.1

2 C Total

Consumpti

on


Bulletin December, 2010, Table

C.1.6

3 CF Food

Consumpti

on

Endogenous N/million National Bureau of Statistics, Sector

Statistics of Price & Price index.

Available at:

http://www.nigerianstat.gov.ng/index.p

hp//sectorStatistics/ facts and figures

about Nigeria 2010/ Pg. 33-35

4 CNF Non –food

Consumpti

on

Endogenous N/million National Bureau of Statistics, Sector

Statistics of food consumption

Available at:


hp//sectorStatistics / facts and figures


5 CG Credit to

the

government

Exogenous N/million Central Bank of Nigeria Statistical

Bulletin December, 2010

http://www.cenbank.org/OUT/2011/P

UBLICATIONS/STATISTICS/2010/P

artB/PartB.html

6 EXR Exchange

rate

Endogenous Index Central Bank of Nigeria Statistical


2008 Pg. 248; December, 2010, Table

D.3.4.3

7 DS Debt

Service


Bulletin December, 2010, Table B.1.6

8 FD Fiscal

Deficit


Bulletin December, 2010, Table

B.1.6

9 FDF Fiscal

Deficit

financed by

CBN



2008 Pg. 91-93; 2010, Table B.1.1

GE-GRV (Total Government

Expenditure –Government Revenue)


111

10 FDI Foreign

Direct

Investment

Exogenous N/million

Central Bank of Nigeria Statistical

Bulletin Golden Jubilee Edition

December, 2008 Pg. 263


Bulletin December, 2010 Table D.5.4


UBLICATIONS/STATISTICS

BULLENTINS/INDEX.html

11 FDIAGRI

C

Foreign

Direct

Investment

in

agriculture

Exogenous N/million

12 FDIMFG Foreign

Direct

Investment

in

manufactur

ing

Exogenous N/million

13 FDIOIL Foreign

Direct

Investment

in oil

Exogenous N/million

14 FDISERV Foreign

Direct

Investment

in service

Exogenous N/million

15 GCR Governmen

t capital

expenditure

ratio

Exogenous Ratio


Bulletin, December, 2007 Pg. 113-114



December, 2008 Pg. 91-93





artB/PartB.html

Table B.1.2 (Investment divided by

Total government exp)

16 GCRAGR

IC

Governmen

t capital

expenditure

ratio in

agriculture

Exogenous Ratio

17 GCRMFG Governmen

t capital

expenditure

in

manufactur

ing

Exogenous Ratio


112

18 GCROIL Governmen

t capital

expenditure

ratio in oil

Exogenous Ratio Central Bank of Nigeria Statistical




December, 2008 Pg. 91-93





artB/PartB.html

Table B.1.2 (Investment divided by

Total government exp)

19 GCRSERV Governmen

t capital

expenditure

ratio in

agriculture

Exogenous Ratio

20 GE Total

Governmen

t

Expenditur

e

Exogenous Ratio Central Bank of Nigeria Statistical


December, 2008 Pg. 91-93; December,

2010, Table B.1.1

21 GRV Governmen

t Revenue



2008 Pg. 91-93; 2010, Table B.1.1

22 INV Total

Investment

Endogenous N/million








artC/PartC.html Table C.1.3

23 INVAGRIC Investment

in

Agriculture


24 INVMFG Investment

in

manufactur

ing


25 INVOIL Investment

in Oil


26 INVSERV Investment

in Service


27 IR Interest rate Exogenous Rate Central Bank of Nigeria Statistical


December, 2008 Pg. 43; 2010, Table

A.2.4.1

28 KAGRIC Capital

Stock in

Agriculture

Exogenous N/million








artA/PartA.html Table A.2.4.1


Bulletin, December, 2007 Pg. 113-

114; 2008 Pg. 263; 2010, Table C.1.3

Identity: K = INV + FDI


113

29 KMFG Capital

Stock in

manufactur

ing








artA/PartA.html Table A.2.4.1



114; 2008 Pg. 263; 2010, Table C.1.3

Identity: K = INV + FDI

30 KOIL Capital

Stock in oil

Exogenous N/million

31 KSERV Capital

stock in

service

Exogenous N/million

32 M Import Endogenous N/million Central Bank of Nigeria Statistical


December, 2008 Pg. 205-207; 2010,

Table D.1.1

33

NFA Net foreign

Assets



December, 2008 Pg. 233-234; 2010,

Table D.2.3

34 NX Net Export Endogenous N/million Central Bank of Nigeria Statistical

Bulletin December, 2007 Pg. 101-104



December, 2008 Pg. 205-207; 2010,

Table D.1.1

35 OPEC OPEC Exogenous M/Barrels 1.Central Bank of Nigeria Statistical

Bulletin, December, 2007 Pg. 173

2. United States Energy Information

Administration Independent Statistics

and Analysis. International Petroleum

Monthly (IPM), February 2010

edition. Available at

http://www.eia.doe.gov/emeu/ipsr/sour

ce4.html

3. Energy Information Administration,

February 2010 International Petroleum

Monthly Available at

http://www.eia.doe.gov/emeu/ipsr/app

c.html

4.http://www.eia.gov/cfapps/ipdbproje

ct/IEDIndex3.cfm?tid=5&pid=53&aid

Output given in days for each year.

This was multiplied by 365 to get total

output for the year

http://www.eia.doe.gov/emeu/ipsr/appc.html

http://www.eia.doe.gov/emeu/ipsr/appc.html

http://www.eia.gov/cfapps/ipdbproject/IEDIndex3.cfm?tid=5&pid=53&aid=1

http://www.eia.gov/cfapps/ipdbproject/IEDIndex3.cfm?tid=5&pid=53&aid=1


114

36 PDD Private

Deduction

Endogenous N/million C+ INV ( Total Consumption + Total

Investment)



114; 2010, For 2008-2010 Data, See

Update value for C AND INV (2008-

2010)

37 PMFG Price of

manufactur

ing



December, 2008 Pg. 121-124; 2010,

Table C.1.4

38 PF Food price Exogenous N/million National Bureau of Statistics, Sector

Statistics of Price and Price index

Available at:


hp//sectorStatistics/ facts and figures



Bulletin December, 2010 , Table

C.1.4

Note: Value not available from 2009-

2010. The value for four years before

2009 was summed together and

divided by four. Thereafter, the

remaining years were extrapolated

39 PNF Price of

Non food

Exogenous N/million National Bureau of Statistics, Sector

Statistics of Price and Price index

Available at:


hp//sectorStatistics/ sectorStatistics /

facts and figures about Nigeria 2008/

Pg. 36-41


Bulletin December, 2010,Table C.1.4

40 PSERV Price of

Service



December, 2008 Pg. 121-124; 2010,

Table C.1.4

41 PAGRIC Price of

Agriculture

Exogenous N/million



December, 2008 Pg. 121-124, 2010,

Table C.1.4

42 PMFG Price of

manufactur

ing

Exogenous N/million

43 POIL Price of oil Exogenous N/million

44 PSERV Price of

service

Exogenous N/million

45 RAIN Annual

Rainfall

Exogenous Millimetr

e



Note: The value for four years before


115

service sector role in the context of inter- sectoral ... · clark and fourastié is the...

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