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PROJECT TOPIC AND MATERIAL ON IMPACT OF CAPITAL FORMATION AND INVESTMENT ON NIGERIA ECONOMIC GROWTH (1990 – 2016)
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This research work was embarked upon with a view to empirically analyse the impact of capital formation and investment on Nigerian economic growth. The objectives were set to access the impact of capital formation and investment on economic growth in Nigeria. Ordinary Least Square (OLS) multiple regression analysis was used in carrying out the statistical analysis. The result shows that there is a positive relationship between domestic investment, public investment, capital formation and economic growth in Nigeria within the years under study. The hypotheses further showed that there is a significant relationship between public investment, savings and economic growth in Nigeria. It was concluded from the findings of the study that capital formation and investment have positive relationship with economic growth. It was recommended that government should encourage domestic savings by increasing interest rate in Nigeria, in order to garner investible from the citizens. This thus will translate to capital formation which, however, is the engine of growth of any economy.
1.1 Background to the Study
A nation that needs to meet her objective of economic development needs a capital formation(physical capital stock) or capital accumulation. However, economic development may bemeasured through building of capital equipment on a sufficient scale to increase productivityin agriculture, mining, plantations and/or industry on the one hand. While on the other,capital is required to construct schools, hospitals, roads, railways, standards of living, Research and Development (R & D), etc. (Jhingan, 2006; Ainabor, Shuaib&Kadiri, 2014).The essence of economic development is the creation of economic and social overheadcapitals (or costs), which leads to increase in national output and/or income through creationof employment opportunities and/or reduction of vicious circle of poverty both from thedemand side and supply side. Economic development is sine qua non and/or is not normallyachieved in the short run rather in the long run, where the citizenries of per se country couldmatch up with the 21st century trends relatively to economies of the world. The discoveredproblem (s) that is/are responsible for the emerging economies is/are resulting from lowcapital formation (or base) (Jhingan, 2006; Ainabor, et. al., 2014). The emerging countries ofthe World have no opportunity costs or the attitude of sacrificing present consumption (.i.e. save) for future consumption (.i.e. investment) in order to augment future national output and income. Gross capital formation leads to technical progress which helps realize theeconomies of large scale of production (or economies of scale or operation) and/or increasesspecialization, in terms of providing machines, tools and equipments for growing labourforce. Thus, the accumulated capital enables the acquisition of new factories alongside withmachinery, equipment and all productive capital goods. In addition, to the construction ofcapital or mega projects and/or utilize (diverting) the gross capital formation into educational sectors, health sectors, etc.
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. Economic theories reveal that capitalformation plays crucial roles in economic growth (Beddies 1999). Growth models like the ones developed by Romer (1986) and Lucas(1988) predict that increased capital accumulation can result in a permanent increase ingrowth rates. Youopoulos and Nugent (1976) as cited in Bakkare (2011), supported the viewof capital fundamentalism.
The process of capital formation is cumulative and self-feeding. It involves three interrelatedconditions; (a) the existence of real savings and rise in them; (b) the existence of creditand financial institutions to mobilize savings and to direct them to desired channels; and (c) touse these savings for investment in capital goods (Jhingan, 2006). In 1986, the Nigeriangovernment imbibed the culture of capital formation by pursuing an economic reform thatlaid emphasis on private sector. In this program, it was expected to ensure that interest rateswere positive in real terms and to encourage savings, thereby ensuring that investment fundswould be readily available to the real sector.Capital formation is analogous (or prerequisite) to an increase in physical capital stock of anation with investment in social and economic infrastructures. Gross fixed capital formationcan be classified into gross private domestic investment and gross public domesticinvestment. The gross public investment includes investment by government and/or publicenterprises. Gross domestic investment is equivalent to gross fixed capital formation plus netchanges in the level of inventories (loc.cit). Capital formation perhaps leads to production oftangible goods (i.e., plants, tools & machinery, etc) and/or intangible goods (i.e., qualitative& high standard of education, health, scientific tradition and research) in a country.
In Nigeria for example, capita output is low resulting from the fact that capita income is low. In Nigeria the marginal or average propensity to save is low, while the marginal or average propensity to consume is so high, this leads to un attainment of economic development. For economic development to be achieved in Nigeria, then there should be increase of domestic saving from 4% to thereabout 12% in national income, expansion of market, investment in capital equipment, decrease in population rate, correcting of imbalance of payments, declining of foreign debts, control of inflationary pressure, etc. These stated points are possible only and only if there is a rapid rate of capital formation in the country, that is, if smaller proportion of the community’s current income or output is partly devoted to consumption and/or the other part is saved and/or invested in capital or industrial equipment.
Recently, the percentage of domestic investment and/or public investment has reduced drastically, which resulting from macroeconomic variables disequilibria such as, inflation rate; exchange rate fluctuations; balance of payment problems; High external debt ratio; increase in population, corruption, etc. it was worsened when most recently there was a significant drop of crude oil prices in OPEC. This has had inverse relationship with countries that depended on crude oil or agriculture (mono-economy) such as Nigeria. In other words, in Nigeria growth rate has dropped from 7% to 4.2%. This has led to devaluation of currencies and/or other stringent fiscal and monetary policies—such as reduction in taxes and deliberate attempt to make a mismatching of the unit of domestic currency and another currency (most especially American dollar as the commonest currency for exchange for goods and services) (Ainabor, et.al, 2014).
The devaluation of currencies which was opted for by the CBN has negative impact on the Nigerian economy as an emerging country; rather it has caused harshness in the economy such as various degrees of unemployment, high cost of production, etc. The purpose of economic development is to build capital equipment on a sufficient scale to increase productivity in agriculture, mining, plantations and industry. He went further to opine that capital is also needed to construct schools, hospitals, roads, railways, etc. In addition, economic development leads to the creation of economic and social overhead capital. Besides the internal (domestic) sources, the external sources are complementing the capitalformation of the emerging countries such as Nigeria, are:
- foreign aids;
- restriction ofimports; &
- favourable terms of trade (Jhingan, 2006).
Capital and money markets are other sources of capital formation for the economicdevelopment of any nation. These markets are avenue for surplus investors to save theirexcesses and/or the deficit investors to borrow the excesses for investments, which in turn,will lead to creation of employment opportunities, reduce poverty level, etc. (Shuaib& Peter,2010).
During Structural Adjustment Programme (SAP) of 1986, the government of Nigeriaconsidered the need for improvement in capital formation and pursued an economic reformthat shifted emphasis on private sector. The public sector reforms were expected to ensurethat interest rates were reduced (or positive) in real terms and/or to encourage savings,thereby ensuring that investible funds would be readily available to the real sectors. Besides,the reforms were expected to lead to efficiency and productivity of labour; efficientutilization of economic resources, increase aggregate supply, reduces unemployment andgenerate single digit inflation rate. For example, during 1980s till date, the percentage ofgross fixed capital formation had dwindling or fluctuating in Nigeria, in-spite of SAPprogramme. The fluctuations in capital formation from 1980 to 2013 resulted frommacroeconomic imbalances (or problems) such as deteriorating foreign exchange rate,increase in general price level, high real interest rate, double digit inflation, and/or high rateof corruption in public sector. In addition, inadequacy in economic infrastructures such asepileptic power generation, deplorable road networks as well as poor health and educationalfacilities were equally responsible for the decline in capital formation (Bakare, 2011,Ainabor, et. al., 2014).
Capital formation and investment is thus sine qua non as an important determinant of economicdevelopment. This would be however, an oversimplification to regard economic developmentas a matter of capital formation alone ignoring political, social, cultural, technological, andentrepreneurial factors (Jhingan, 2006).In the final submission, the speed and/or the strength of economic growth in Nigeria have notbeen satisfactory, in that, it has not generated employment opportunities, and contributed tothe Gross Domestic Product or Gross National Product or Income or Investment as the casemay be.
Real investment in the economy is an acceptable way of increasing capital formation in the economy has been known to increase productivity and output generally. Investment of this type can be undertaken by the public or private sectors with the government being involved mainly with autonomous investments which act as the main drivers of other investment in the economy. Autonomous investment had dwindled drastically while the expenditure being made by the public sector are not delivering value where rightly conceived. A simple analysis of the of the of capital formation statistics from the Central Bank of Nigerian shows that the nominal investment in capital formation is going down and has fallen in real terms. Investment could be social or soft in outlook (housing, health and education), while others are infrastructural or hard (transport, power and water), and yet others are purely economic, which the private sector undertakes for private capital accumulation. While financial investment is an avenue to increase wealth, real investment should be more emphasised to increase productivity and growth in the economy.
The decline in capital formation can be as a result of macroeconomic imbalances such asdeteriorating foreign exchange rate and corruption in public sector. The inadequacy ineconomic infrastructure such as poor power supply, bad road network as well as poor healthfacilities were equally responsible for the decline in capital formation over time. Overall, thespeed and the strength of economic growth in Nigeria have not been satisfactory.
1.2 Statement of the Problem
Three decades ago, Nigeria policy makers pursued a structural adjustment program whichshifted emphasis from public sectors to private sectors. The goal was to encourage privatedomestic savings, private domestic investment and capital formation in order to enhanceeconomic growth. In an attempt to achieve this goal, resources were diverted from currentconsumption and were invested in capital formation through privatization andcommercialization of state enterprises. Diversion of resources from current consumption iscalled saving. But unfortunately, the initial optimism expressed about public sector reformshas not been met. Although the reform program led to privatization and commercialization ofmany state enterprises and improvement in some macroeconomic variable like the nominalinterest rate and money supply, there have been some disappointing performances. Forexample, Nigeria continues to be confronted with low rate of economic growth. Besides, theaggregate supply continued to diminish leading to demand-pull inflation. One worrisomeaspect of the result of liberalization of the public sector in Nigeria is the extent of distress inthe sector including high rate of unemployment. The literature is a replete account of theserious impacts of these crises on the economy, particularly as they affect the real sector. Inspite of these, the distress syndrome remains inadequately detected and controlled. The needfor a better understanding of the extent and implications of the problem becomes quiteimportant. This is the focus of this study.
1.3 Objectives of the Study
The main objective of the study is to find out the impact of capital formation and investment on Nigeria economic development. The specific objectives include:
- To examine the relationship between the domestic investment and Nigerian economic growth
- To ascertain the relationship between public investment and Nigerian economic growth
- To ascertain the relationship between capital formation and Nigerian economic growth.
- To determine the impact of savings on economic growth.
1.4 Research Question
- What is the relationship between domestic investment and Nigerian economic growth?
- What is the relationship between public investment and Nigerian economic growth?
- What is the relationship between capital formation and Nigerian economic growth?
- What is the impact of savings on economic growth?
H01: There is no significantrelationship between domestic investment and Nigerian economic growth
H02: There is no significantrelationship between public investment and Nigerian economic growth
H03: There is no significant relationship between capital formation and Nigerian economic growth
H04: Savings has no significant impact on economic growth
1.6 Significance of the Study
Understanding the relationship between capital formation, investment and economic growth would have significant implication to the state of the Nigerian economy. This study is set up to cover the lapses of previous studies on this subject matter. It is worthy to note that previous studies of theimpact ofcapital formation and investment on economic growth have basically been the study of the situation in advanced economies. The findings of the study will be beneficial to economic policy makers.
1.7 Scope and Limitations of the Study
This study will cover the period 1990-2016; a sample size of 26 years is necessary in order to have enough observation for computation. This study will examine the relationship between the domestic investment and Nigerian economic growth, public investment and Nigerian economic growth, capital formation and Nigerian economic growth and the impact of savings on economic growth.The data over these years of study will be regressed and the research findings obtained will be explored statistically and econometrically.
However, this work will be limited to the use of secondary data which will be sourced from secondary source. Moreover, the study will use annual time series data.
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