Determinants of Economic Growth in Nigeria: an Autoregressive Distributed Lag (ARDL) Modeling Approach
Chapter One
Aims and Objectives of the Study
The specific objectives of the study are as follows
- To determine the factors those are responsible for the performance of Nigerian economic growth.
- To analyze and measure the contributions of each factor on economic growth in Nigeria.
- Evaluate the effort of each factor on economic growth in Nigeria.
CHAPTER TWO
LITERATURE REVIEW
Introduction
For some years, there has been significant progress in growth empirics. Most of the developments are concerned with the estimation of cross country and time series growth equations and the methodology used is based on standard growth models. A more recent approach is concerned with estimating growth equations using panel data. Traditional economic growth determinants include variables such as gross domestic product, fiscal deficit, money supply, inflation, interest rate, exchange rate and foreign direct investment etc. The relationship between growth and these variables are well- established empirical facts. Most of the recent explanations of economic growth focus on achieving growth through increases in factor productivity and/or factor utilization. Since the main focus of this study is to examine the relationship between all these variables and economic growth in Nigeria, this section is dedicated to the review of available literature on this relationship.
Levine and Zervos (1998) showed a positive and significant correlation between stock market development and long run economic growth in their study of 47 countries. However, their study relies on a cross-sectional approach with well-known empirical.
Romer (1986) and Lucas (1988) argue that permanent increase in growth rate depends on the assumption of constant and increasing return to capital Fischer (1993) argue that long-term growth is negatively linked with inflation and positively correlated with better fiscal performance and factual foreign exchange markets. In the context of developing countries, investment both in foreign direct investment, money supply, and ability to adapt technological changes, open trade policies and low inflation are necessary for economic growth.
Barro (1996) seems to document that high inflation in a country reduces the rate of economic growth. Many studies find no strong positive association between openness and growth of the economy. Grilli and Milesi-Ferretli (1995) do not support the hypothesis that inflow of foreign capital promotes growth. Rodrik (1998) shows no significant correlation between financial liberalization and growth in small open economies. Similarly, Edison (2002) does not find strong Evidence of a relationship between foreign direct investment and growth. He also concludes that interest rate does not promote the growth per se, without controlling for some economic, Financial, institutional and policy characteristics. Edwin and Shajehan (2001) support that apart from growth in the labor force, investment in skill and technology, as well as low inflation rate and exchange rate, is important for economic growth. Moreover, the ability to adopt beneficial technological shocks in order to increase efficiency is also necessary. Since many developing countries have a large agricultural sector, adverse supply shocks in this sector are likely to originate an adverse impact on growth. Growth in agriculture has a positive impact on industrial and service sector’s growth, social infrastructure is an important determinant of the investment decisions (Krishna, 2004).Hasan and Butt (2008) explored the association between external debt and economic growth in Pakistan for the period of 1975-2005 using Auto Regressive Distributed Lag (ARDL) approach to integration. Results indicated that labor force and trade both in the long run and the short run mainly determined economic growth in Pakistan. Total debt was not to be an important determinant of economic growth either in the short-run or the long run mainly due to inefficient use of external debt. Boopen. (2007), investigated the relationship between external public debt and the economic performance for state of Mauritius over the period 1960-2004. The results suggested that external debt have been negatively associated with the output level of the economy in both short and long run. Causality between public debt and economic development was also reported.
Moreover, there were also evidences that public debt have negative impact on both private and public capital stock of the country thus confirming the debt overhang and crowding out hypotheses. Patenio and Tan-Curz (2007), studied the relationship between external debt servicing payments and economic growth in Philippine for period 1981 to 2005. Results showed that economic growth was not very much affected by external debt servicing. This was probably because external debt servicing in Philippines was not yet a threat in economic growth and thus, Philippines should not fear of experiencing debt overhang in the near future. Clements (2003), examined the channels through which external debt affect economic growth over the time 1970-1999. The study suggested that beyond a certain threshold the author however stresses that there is a need for exploring other approaches to explain economic growth from all perspectives. Recent empirical studies confirm those natural resources, climate, topography and ‘land lockedness’ have a direct Impact on economic growth affecting agricultural productivity, economic structure, transportation costs and competitiveness in goods markets [Sachs and Warner; (1997), Bloom. And Sachs, (1998); Masters and McMillan, (2001); Armstrong and Read, (2004)]. However, others (e.g. Rodrik, 2002); Easterly and Levine, 2003) find no effect of geography on growth after controlling for institutions. Edwin and Shajehan (2001) empirically suggest that apart from growth in the labor force, investment in both physical and human capital, as well as low inflation and exchange rate are essential for economic growth. They also suggest the ability to adopt technological changes in order to increase efficiency.
CHAPTER THREE
THEORETICAL FRAME WORK AND METHODOLOGY
Introduction
In this chapter detailed overview of procedure and methodology to be implemented in this research work are presented. The theoretical model which also serves as basic frame work of our statistical analysis is the autoregressive lag model of order p ARDL model were build base on the economic variables that assume to be stationary, However many time series variables especially economic that occur in practice are non-stationary,
As suggested by Box and Jenkins (1976) differencing such variables may make them stationery, Most of economic variables are stationery when difference once however differencing removes some long run information Johansen (1990), Engle and Granger(1987) introduce the concept of cointegration, Two or more non-stationery series are cointegrated if there linear combination is stationery, the procedure for determining order of integration as well as cointegreted rank were presented, there after causality analysis was carried out using Granger causality approach.
Data Sources and Description of Variables
Annual time series data on economic growth variables were collected and use in this study, GDP for gross domestic product, FDI for foreign direct investment, M for money supply, ir for interest rate, ER for Exchange rate, INF for Inflation, and FD for fiscal deficit, which cover the 1975-2010 period, has been used in this Study. The data has been obtained from different sources, including Nigeria Central Bank annual Reports, quarterly Bulletins of C B N. In addition, different volumes of the International Financial Statistics (IFS) Yearbook, published by the International Monetary Fund, and World Development Indicators 2010 edition published online by the World Bank Have been used to supplement the local data. The economic growth variable, which is measured by real GDP per Capita, is denoted by Y. FDI is the value of real gross foreign direct investment inflows to GDP Ratio.
CHAPTER FOUR
RESULTS AND DISCUSSION
Tests for Non-Stationery
Results for Unit Root Test
Non stationary time series data have often been considered as a problem in empirical analysis. Working with non-stationary variables leads to spurious regression results, from which further inference is meaningless. Therefore, it is important to test the stationary of all series entering in the model. The required test was used to test the stationarity of the series. The null hypothesis was that the variable under investigation has a unit root, against the alternative that it does not. The results of the test for the variables are presented in Table In addition to the ADF, PP and KPSS tests.
CHAPTER FIVE
SUMMARY, CONLUSION AND RECOMMENDATION
Summary
This study uses annual time series data from 1976-2010 to determine the major determinants of economic grow in Nigerian economy, taking into consideration the following variables; rate of real income GDP, foreign direct investment, interest rate, rate of money supply, fiscal deficits, exchange rate and inflation. A model was constructed and estimated using the ARDL approach. The empirical results confirm the existence of a co-integrating relationship among the variables under study. Based on the results in both the long and short run, interest rate has the most significant impact on the present period inflation, in which 1% increase in the interest rate leads to about 58% increase in foreign direct investment. The impact is positive as increases in interest rate will result to increase in the cost of production which might lead to decrease in the supply of goods in the market as the limited goods had to compete with the available money in circulation, thereby resulting in general increase in price commodity. Finally applying the ECM version of the ARDL model shows that the error correction coefficient, which determines the speed of adjustment, has an expected and highly significant negative sign. The results indicate that deviation from the long-term growth rate in foreign direct investment is corrected by approximately 58 percent in the following year. The estimated model passes a battery of diagnostic tests and the graphical evidence of CUSUM and CUSUMQ, indicates that the model is stable during the sample period of real economic growth and foreign direct investment.
Conclusion
Based on the analysis in this study, economic growth in Nigeria can be promoted, if those factors that increase it are dealt with. These factors have being analyzed, which include the lagged fiscal deficit, lagged rate of money supply, lagged foreign direct investment, lagged exchange rate, lagged inflation and lagged interest rate which positively affect economic growth. The factors that promote economic growth such as lagged growth rate of real income gdp, and lagged exchange rate should be encouraged as this might lead to price stability or price reduction in Nigeria.
Recommendation
The government should display a high sense of transparency in the contributing factors stated above to bring about realistic solution to the problems. Fiscal deficits, where recorded should be channeled to productive investments like road constructions, electricity provision, and other overheads that will serve as incentives to increased productivity and high Gross Domestic Product (GDP). Therefore, deficit financing should only be applied in a situation of true economic recession to promote economic growth. Interest rate and inflation can also be reduced by the government reducing her participation in the economic activities as evidenced in her ongoing privatization and commercialization policies. However, government must continue to exercise caution and be systematic in the implementation to check the monopolistic tendencies of private investors.
-Policies that will set the Interest rate to a level at which it will encourage investment and increase in production level could be institutionalized, such that the excesses produced could be exported if well monitored and which may thus lead to economic growth .
-Foreign direct investment activities generate employment opportunities and in resulting contribute to improve economic growth. Finally, increased inflation and economic growth correlated inversely in the country.
REFERENCES
- Armstrong,S.A and Read,B.J (2004). Foreign direct investment and growth in Nigeria: An empirical investment. Journal of Policy Modeling, 26. Pages 627-639
- Bahmani-Oskooee and Nasir N.A (2004). Foreign direct investment in Nigeria: Evidence from time series data CBN Economic and Finantial Review
- Banerjee, A..J., Dolado, J., Mestre, R., (1998). Error-Correction Mechanism Tests for Cointegration in Single-Equation Framework. Journal of Time Series Analysis, 19, 267–283
- Barro,P.S (1996) Determinant of economic Growth. a cross –country empirical studies Massachusetts institute of technology, U.S.A.
- Barro, C.V and Lee,K.S.(1992). Statistics Inference in Regressive with integrated process.Part 1. Econometric Theory, 4 pages 468-497
- Bewley, R. (1979). The Direct Estimation of the Equilibrium Response in a Linear Dynamic Model,. Economics Letters, 3: 357-361
- Bloom,N.S. and Sachs,K.S. (1998), Macro-economic Policies and Private Investment in Nigeria ‘’, In Rekindling Investment for Economic development in Nigeria by Ben.EAigbokham (ed) Selected Papers for the 1998 Annual Conference, The Nigerian Economic Society.
- Boopen, J.J (2007), FDI and Economic Growth: Evidence from Nigeria. African Economic Research Consortiu, Nairobi AERC Research 165: pp. 3-8
- Box,G.E.P and Jenkins, G.M. (1976) . Time series analysis: Forecasting and Control Holden Day, San Francisco.
- Brown, Durbin,E.S. and Evan,W.N. (1975), Techniques for Testing the Constancy of Regression Relation over Time’.Journal of the Royal Statistical Society Series B. 39. Pp,107-113
- Carlos, R. 2001 “Long Memory Properties of Stock Central Bank of Nigeria Report and Statement of Accounts, CBN
