Journal of Economics and Sustainable Development www.iiste.org ISSN 2222-1700 (Paper) ISSN 2222-2855 (Online) Vol.6, No.17, 2015 67 Effect of Fiscal and Monetary Policies on Industrial Sector Performance- Evidence from Nigeria Bakare-Aremu, T. A. Osobase, A. O Department Of Economics, University Of Lagos, Nigeria Abstract We unearth the impact of monetary and fiscal policies (i.e. stabilization policies) on the performance of the manufacturing sector as a real sector in Nigeria, using an error correction mechanisms model, and discover that those policies has expected impact on output of the manufacturing sector in Nigeria both in the short-run and long-run. Relationship among the stabilization policies on one hand and industrial or manufacturing sector out put on the other hand.The model makes use of time series data while ordinary least squared was the techniques of analysis, the data were filtered with use of augmented dickey fuller unit root test while Johansen co- integration test was used to justify the long-run relationship among all included variables. While the error correction model serves the basis for adjustment from short-run drift (disequilibrium) to long-run equilibrium through its speed of adjustment.The research work established that stabilization policy has a great impact on manufacturing sector performance and that if certain adjustment are made it would better the lots of the people by developing the sector, through Government fiscal policy and its monetary policy measures. Keywords: fiscal and monetary policies, industrial sector, error correction model, Nigeria. 1.0 BACKGROUND TO THE STUDY In Industrialization plays a significant role in economic development. It acts as a catalyst that accelerates the pace of structural transformation and diversification of economic, enable a country to fully utilize its factor endowment and to depend less on foreign supply of finished goods or raw materials for its economic growth, development and sustainability. Industrialization which is a deliberate and sustained application and combination of an appropriate technology, infrastructure managerial expertise and other important resources has attracted considerable interest in development economies in recent times (Okafor, 2005). Manufacturing sector is assumed to be more dynamic than other sectors. A transfer of productive resources to more dynamic sectors contributes to growth. Here the evidence turned out to be somewhat mixed (Szirmai, 2008). The current dwindling in manufacturing sector (proxy for industry) and seemingly collapse in the entire socio-economic infrastructures of the Nigerian economy has made several scholars to tag the country a sick nation. The Nigerian manufacturing sector is sick. The productive sector is in a crisis as its average contribution to the nation’s Gross Domestic Product over the past few years has not gone beyond 5%. Many years of neglect and maladministration on the part of successive military and civilian governments, coupled with corruption and indiscriminate policy reversals have all conspired to render the manufacturing sector comatose. Governments after governments have failed to pursue policies that could create a vibrant real sector with the result that the impact of the manufacturing sector has steadily declined over the years and its contribution to national growth and development has been disappointingly low (Banmijoko, 2011). The genesis of this sickness can be traced to its departure from a diversified economy to a mono-product economy with oil becoming almost the sole provider of foreign exchange earnings which account for about 90 per cent. Nigerian economy, before independence, was purely agrarian whose policy was anchored on the colonial interest of making the colonies producers of primary raw materials for foreign industries and consumers of imported goods. The economy of Nigeria was largely foreign dependent as the colonial government never had in its policy to industrialize the nation. Hence, Nigerian economy was dominated by foreign firms such as UAC, CFAO, Royal Niger Company and John Holt, etc. This effort added very little to our Gross Domestic Product as their main aim was to suck Nigerian economy dry by importing manufactured goods from their home countries and repatriating the excess profit made to develop their home countries. As a result, real indigenous manufacturing activities and adequate encouragement of local entrepreneurship were conspicuously absence in the scheme of things in the country (Adejugbe 2006). Consequent upon this, Nigerian leaders since independence, have continually emphasized the need to sprout the economy of the country to prosperity through industrialization. The genuineness of this is encapsulated in the various development programmes since 1960. The Nigerian Enterprises Promotion decrees of 1972, 1977, and 1981, by limiting foreign ownership shares in various industries, shifted the manufacturing sector from foreign majority ownership in the 1960s to indigenous majority ownership in the mid-1970s and late 1970s. As a result, indigenization policy was implemented owing to the unprecedented participation of the local people in the productive sector of the economy. The growth rate in the manufacturing sector was relatively high in the period 1966-75 at an average of 12.9 per cent owing to the importance which the government attached to manufacturing activities and the brought to you by CORE View metadata, citation and similar papers at core.ac.uk provided by International Institute for Science, Technology and Education (IISTE): E-Journals