Why Policies Fail: The Independent Effects of Industrial Policy and Trade Openness on Structural Transformation in Nigeria, 1986–2023

Purpose: This study aims to examine the independent effects of industrial policy and trade openness on structural transformation in Nigeria for the period 1986-2023, and to offer empirical evidence on how each policy variable drives or constrains structural transformation in an emerging African economy.  Methodology: The annual time series data for the period 1986-2023 were used. The ratio of manufacturing to agricultural value added was used for measuring ST. Government spending on manufacturing subsidies (GSM) was used to proxy industrial policy (IPol), and trade openness (TO) was measured as the ratio of trade to GDP. Some control variables included were agricultural productivity and inflation. The autoregressive distributed lag (ARDL) bounds testing approach of Pesaran, Shin and Smith (2001) was employed and two distinct model specifications were used to allow the independent contribution of each policy variable. Phillips-Perron (PP) and Augmented Dickey-Fuller (ADF) unit root tests were performed to ensure stationarity properties and diagnostic tests such as Breusch-Godfrey LM test, heteroskedasticity tests and CUSUM stability tests were used to verify the estimated model properties.  Findings: There is a strong negative long-run association between industrial policy and structural transformation (β = -38.49; p < 0.01), indicating that economic policy implementation is not only about coordination but also about basic implementation failure. The long-run effect of trade openness on structural transformation is negligible (β = -0.30, p value 0.05), meaning that in 39 years of trade liberalisation, there has been no effect. In both model specifications, agricultural productivity has a significant long-run negative effect on structural transformation, suggesting strong and persistent labour mobility restrictions. These lagged effects are positive for industrial policy and modest positive effects are seen with trade openness, with a time lag of two to three years, but neither are able to overcome the structural inertia in the long-run. Both models of error correction mechanisms show quick convergence to equilibrium, the industrial policy model convergence rate is 97.1% per annum, and the trade openness model is 144.4% per annum.  Originality: This study provides the first dual-model ARDL analysis isolating the independent effects of industrial policy and trade openness on structural transformation in Nigeria over the full SAP-to-AfCFTA policy cycle (1986–2023). It contributes to the literature by demonstrating that policy ineffectiveness in Nigeria is systemic rather than sector-specific, and that agricultural productivity rigidity, not trade exposure, is the dominant structural constraint on manufacturing-led transformation.