The Impact Of Capital Formation On Economic Growth In Nigeria

Project and Seminar Material for Economics

The Impact Of Capital Formation On Economic Growth In Nigeria


Abstract


Capital formation is one of the major determinants of economic growth. Literature is replete with the extent to which capital formation can engineer the growth of nations. There is a conventional perception that the most pertinent obstacle to economic growth is shortage of capital. This work analyses capital formation and its impact on the Nigerian economy. The work studies the extent to which capital formation effects economic growth in Nigeria. Making use of the classical linear regression model (CLRM) through the ordinary least square (OLS) method, the impact of capital formation on the Nigeria’s economic growth was examined. The result showed that capital formation has a significant impact on economic growth.

The work goes further to analyse the determinants of capital formation in Nigeria as understanding these determinants is a crucial prerequisite in designing a number of policy interventions towards achieving economic growth. This is important because the level of impact of capital formation on economic growth depends on the intensity of its determinants. The result showed that the significant determinants of capital formation in Nigeria are the level of financial development (proxied by the market capitalization of the Nigerian Stock exchange) and gross domestic product (GDP).The work also makes some important policy recommendations.


Chapter One


Introduction

1.1 Background of the Study

Capital information refers to the proportion of present income saved and invested in order to augment future output and income. It usually results from acquisition of new factory along with machinery, equipment and all productive capital goods. Capital formation is equivalent to an increase in physical capital stock of a nation with investment in social and economic infrastructure.

Capital formation is one of the engines of economic growth. Deficiency of capital has been cited as the most serious constraint to sustainable economic growth. Ugwuegbu and Uruakpa (2013) posits that the rate of growth in the Nigeria economy cannot be fully analyzed without a closer look at the contribution of capital formation to Nigeria’s economic growth. On the definition of capital formation, Bakare (2011) stressed that it refers to the proportion of present income saved and invested in order to augment future output and income. According to Ugwuegbu and Uruakpa, (2013), capital formation is equivalent to an increase in physical capital stock of a nation with investment in social and economic infrastructure. Bakare classified capital formation into gross private domestic investment and gross public domestic investment. The gross public domestic investment includes investment by government and public enterprises while gross private domestic investment is investment by private enterprises. Gross domestic investment can be attributed to gross fixed capital formation plus net changes in the level of inventories.

Capital naturally plays an important role in the economic growth and development process. It (capital) has always been seen as potential growth enhancing player. Capital formation determines the national capacity to produce, which in turn, affects economic growth. Deficiency of capital has been cited as the most serious constraint to sustainable economic growth. It is therefore not surprising that the analysis of capital formation has become one of the central issues in empirical macroeconomics. One popular theory in the 1970s, for example, was, that of the “Big Push” which suggested that countries needed to jump from one stage of development to another through a virtuous cycle in which large investments in infrastructure and education coupled with private investment would move the economy to a more productive stage, breaking free from economic paradigms appropriate to a lower productivity stage. Growth models like the ones developed by Romer (1986) and Lucas (1988) predict that increased capital accumulation can result in a permanent increase in growth rates.

The relationship between capital formation of the nation and economic growth has been documented in a number of empirical investigations. The result which has been found in several analyses is that causality exists between capital accumulation and economic growth.

Nevertheless, understanding the determinants of the capital formation is a crucial prerequisite in designing a number of policy interventions towards achieving economic growth. The process of capital formation is cumulative and self-feeding. It involves three inter-related conditions; (a) The existence of real savings and rise in them;

  1. The existence of credit and financial institutions to mobilise savings and to direct them to desired channels; and
  2. To use these savings for investment in capital goods (Jhingan, 2006).

Therefore, we can understand that savings is the major determinant of capital formation. It is widely believed that an increase in the proportion of national income devoted to capital formation is only one avenue for growth. Therefore people are encouraged to save more than to consume more, because a growing economy requires a constant flow of fund for investment in other to assure a supply of capital goods adequate for production of consumer goods and replacement of obsolete equipment.However, government restrictions imposed on financial institutions such as interest rate ceiling, high reserve requirement, etc, restrain the process of financial intermediation and consequently, impede economic growth. Greenwood and Jovanovich (1990), stressed the role of financial intermediaries in pooling funds and acquiring information that enable them to allocate capital to its highest use-value, thereby, raising the average return to capital.

Capital formation is a concept used in macro-economics, national accounts and financial economics. It can be defined in three ways:

It is a specific statistical concept used in national accounts statistics, econometrics and macroeconomics (Wikipedia Encyclopaedia). In that sense, it refers to a measure of thenet additions to the (physical) capital stock of a country (or an economic sector) in an accounting interval, or, a measure of the amount by which the total physical capital stock increased during an accounting period.

It is used also in economic theory, as a modern general term for capital accumulation, referring to the total “stock of capital” that has been formed, or to the growth of this total capital stock (Wikipedia Encyclopaedia).In a much broader or vaguer sense, the term “capital formation” has in more recent times been used in financial economics to refer to savings drives, setting up financial institutions, fiscal measures, public borrowing, development of capital markets, privatization of financial institutions, development of secondary financial markets (Wikipedia Encyclopaedia). In this usage, it refers to any method for increasing the amount of capital owned or under one’s control or any method in utilising or mobilizing capital resources for investment purposes. Thus, capital could be “formed” in the sense of “being brought together for investment purposes” in many different ways. This broadened meaning is not related to the statistical measurement concept nor to the classical understanding of the concept in economic theory.

Economic growth, on the other hand, is the increase of per capita gross domestic product(GDP) or other measure of aggregate income. It is often measured as the rate of change in real GDP. Economic growth refers only to the quantity of goods and services produced. Economists draw a distinction between short-term economic stabilization and long-term economic growth. The topic of economic growth is primarily concerned with the long run. The short-run variation of economic growth is termed the business cycle.

The long-run path of economic growth is one of the central questions of economics; despite some problems of measurement, an increase in GDP of a country is generally taken as an increase in the standard of living of its inhabitants (Snowdon, B. And Vane, H., 2005). Over long periods of time, even small rates of annual growth can have large effects through compounding. A growth rate of 2.5% per annum will lead to a doubling of GDP within 29 years, whilst a growth rate of 8% per annum (experienced by some Four Asian Tigers) will lead to a doubling of GDP within 10 years. This exponential characteristic can exacerbate differences across nations (Miles D. and Scott A., 2005).Capital has always been seen as growth enhancing player. There has been a problem of vicious circle of poverty that tend to perpetuate the low level of development in LDCs and it stems from the fact that there is low level of productivity in LDCs due to deficiency of capital. The classical economists who were interested in the development problems of their time specified capital as one of the crucial variables in the development process.

They specified that high productivity could be achieved only if more tools and machinery were made available for production. Thus Nurske (1951), states that the vicious circle of poverty in underdeveloped countries can be broken through capital formation. Also Richard Lipsey (1979), on the other hand, recognised capital as one of the factors affecting development. He states that “as long as a society has unexploited investment opportunities, productive capacity can be increased by increasing the stock of capital”.

Over the years, the growth rate of capital formation in Nigeria has not been satisfactory. It has always been very low and often negative. Capital formation as a percentage of GDP has also been very low. This brings about capacity under-utilization as resources (human and material) will not be adequately mobilized to bring about substantial economic growth. In the drive towards rapid economic growth and the Nigerian vision of being one of the twenty biggest economies in the world come 2020, expert opinion is that the economy should be growing at the rate of at least 15 percent per annum (Soludo C. C., 2010). Such growth can only be possible if there is continuous increase in the capital stock of the nation to be brought about by massive public and private investment in the country.
The table below and the charts that follow is a summary of the performances of output (represented by the GDP at current prices) and capital formation (represented by Gross Fixed Capital Formation) in Nigeria for the periods under study.


1.2 Statement of Problem

In 1986, the Nigerian government pursued a structural adjustment programme (SAP) which shifted emphasis from public sectors to private sectors. The goal was to encourage private domestic savings and private domestic investment for capital formation in order to enhance economic growth. The supposed relationship between capital formation and economic growth is that through financial services such as savings and deposit mobilization, credit creation, it increases the accumulation of capital which in turn is expected to enhance economic growth of the country. However, capital formation in Nigeria has been characterized by fluctuations which may be responsible for lack or inadequate social infrastructure such as roads, power supply and health facilities. The speed and the strength of economic growth in Nigeria have not been satisfactory which contributes equally to the decline in capital formation over time. For instance, during 1980s, gross fixed capital formation average was 21.3 percent of GDP in Nigeria. This proportion increased to 23.3 percent of GDP in 1991 and declined drastically to 14.2 percent of GDP in 1996. It picked and increased to 17.4 percentage in 1997 and average 21.7 during 1997 to 2000. The gross fixed capital formation rose from 22.3 percent of GDP in 2000 to 26.2 percent in 2002 and declined to 21.3 percent in 2005.The capital formation rate in 2008 was 0.060 which represent 6% of the GDP.

By implication, the initial optimism expressed about public sector reforms has not been met as Nigeria continues to be confronted with low rate of economic growth. The rate of infrastructure development is very slow in the country which hinders foreign and domestic investment. The skills of labour are poor and technological backwardness hampering the process of new inventions and innovations. Hence low capital accumulation is the main obstacle faced in achieving the goal of sustained economic growth in Nigeria. Overall, the empirical evidence on the performance of capital formation is mixed. While some studies had positive effects other showed negative effects Judging fluctuation trends of GCF to GDP, This study intends to study the relationship existing between the two variables. The study also intends to complement the existing literature by investigating empirically the extent to which capital formation has impacted on economic growth in Nigeria.


1.3 Objectives of the Study

The major objective of the study is to examine the effect of capital formation on economic growth in Nigeria.

  1. Determine if capital formation has any significant impact on economic growth in Nigeria.
  2. Determine the direction of significant causal relationship between capital formation and economic growth in Nigeria.

1.4 Research Hypotheses

Hypotheses One
  • Hi: Capital formation has no significant impact on economic growth in Nigeria.
  • Ho: Capital formation has a significant impact on economic growth in Nigeria.
Hypotheses Two
  • Ho: There is no significant causal relationship existing between capital formation and economic growth in Nigeria
  • Hi: There is a significant causal relationship existing between capital formation and economic growth in Nigeria

1.5 Significance of the Study

It is hoped that the finding of this project work will not only add to the vast knowledge about the impact of social media on the students of Lagos state University, it’s also designed to highlight the function of the media and more importantly how social media has impacted the generality of students. It will also be useful to educators, parents and even the students in monitoring the use of social media by students and taking necessary measures to curtail wrong usage.


1.6 Scope and Limitation of the Study

This study is primary concerned with the impact of social media on students’ academic performance among senior secondary schools students. This study covers Lagos State University.The researcher encountered some constraints, which limited the scope of the study. These constraints include but are not limited to the following.

a) Availability of Research Material:

The research material available to the researcher is insufficient, thereby limiting the study

b) Time:

The time frame allocated to the study does not enhance wider coverage as the researcher has to combine other academic activities and examinations with the study.


1.7 Definition of Terms

Media:

This means the way through large number of people receive information and entertainment that is television, radio, newspaper, magazine and internet.

Social Media:

Means media for social interaction using highly accessible and able publishing technique. It’s also a form of electronic communication to share information, ideas, personal messages and other content.

Networking:

This is the exchange of information or services among individuals, groups or institutions. It’s also the establishment or use of computer.


1.8 Organization of the Study

This research work is organized in five chapters, for easy understanding, as follows

  1. Chapter one is concerned with the introduction, which consist of the (overview, of the study), historical background, statement of problem, objectives of the study, research hypotheses, significance of the study, scope and limitation of the study, definition of terms and historical background of the study.
  2. Chapter two highlights the theoretical framework on which the study is based, thus the review of related literature.
  3. Chapter three deals on the research design and methodology adopted in the study.
  4. Chapter four concentrate on the data collection and analysis and presentation of finding.
  5. Chapter five gives summary, conclusion, and recommendations made of the study

Chapter Five


Summary, Conclusion and Recommendation

5.1 Introduction

It is important to ascertain that the objective of this study was to ascertain a critical analysis of impact of social media on students’ academic performance among senior secondary students.

In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations are made, which in the opinion of the researcher will be of benefit in addressing the challenges of social media and students’ academic performance.


5.2 Summary

This study aimed at havinga critical analysis of impact of social media on students’ academic performance among senior secondary students. Four objectiveswere raised. These objectives include: To examine the impact of social media on academic performance among secondary school students in Lagos State, to find out the amount of time students invest into social networking, to ascertain how the use of social media is affecting the study habits of students, to identify the benefits obtained from using the social media.


5.3 Conclusion and Recommendations

This study investigated the effect of capital formation on the growth of Nigeria economy using the vector error correction model VECM. It was established from the result of the study that capital formation has no significant positive impact on the growth of Nigeria economy within the period investigated, just as the causality test indicates a two way causality between the dependent and the explanatory variables. The implication of this study is that gross capital formation has no significant impact on economic growth in Nigeria within the period of study. Based on the findings and policy implications, the study makes the following recommendations; there should be a deliberate collaboration between the government and the private sector towards building conducive enabling environment that promotes capital investment in the economy. There should be conscious effort by both government and private sector to address the issue of corruption in the economy in addition to strengthening public statistical bodies to ensure that all private investments are captured and regulated. This work investigated the impact of capital formation on economic growth. The analysis discovered that there is a significant positive relationship between capital formation and economic growth in Nigeria both in the short-run and long-run. It also discovered that rate of savings is not significant to enhance economic development. The public authorities should encourage savings by enhancing interest rate. The government should be creating an enabling atmosphere and provide more infrastructural facilities to pave way for investment which in turn will boost capital formation. Government should induce the money and capital market to function adequately in order to enhance investors’ confidence. This will go a long way in boosting the capital formation and thereby enhance economic growth.


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