THE IMPACT OF CAPITAL FORMATION ON THE GROWTH OF NIGERIAN ECONOMY (1981-2019)

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

The rate of growth in Nigeria economy cannot be fully analyzed without a better check out the contribution of capital formation to Nigeria’s economic process. This is within the understanding that capital formation has been recognized as a crucial factor that determines the expansion of Nigerian economy. According to Bakare (2011), Capital formation refers to the proportion of present income saved and invested so as to reinforce future output and income. It usually results from acquisition of latest factory alongside machinery, equipment and every one productive capital goods. Capital formation is analogous to a rise within the physical capital stock of a nation with investment in social and economic infrastructures. Gross fixed capital formation is often classified as gross private domestic investment and gross public domestic investment. The gross public investment includes investment by government and/or public enterprises. Gross domestic investment is like gross fixed capital formation plus net changes within the level of inventories (Jhingan, 2006). Capital formation perhaps results in the assembly of tangible goods (i.e., plants, tools & machine) and intangible goods (i.e., qualitative & high standard of education, health, scientific tradition and research) in a country. Capital formation is like a rise in physical capital stock of a nation with investment in social and economic infrastructure. Continuing on the matter he noted that Gross fixed capital formation is often classified into gross private domestic investment and gross public domestic investment. The gross public investment includes investment by government and public enterprises while gross private domestic investment is investment by private enterprises. Gross domestic investment is like gross fixed capital formation plus net changes within the level of inventories. Economic theories have shown that capital formation plays an important role within the models of economic process (Beddies 1999; Gbura and THadjimichael 1996, Gbura, 1997). This view called capital fundamentalism however was supported by the work of Youopoulos and Nugent (1976) as sited in Bakare (2011). Growth models just like the ones developed by Romer (1986) and Lucas (1988) predict that increased capital accumulation may result during a permanent increase in growth rates. Capital naturally plays a crucial role within the economic process and development process. It has always been seen as potential growth enhancing player. Capital formation determines the national capacity to supply, which successively, affects economic process. Deficiency of capital has been cited because the most serious constraint to sustainable economic process. Meanwhile, an understanding of the impact of capital formation may be a crucial prerequisite in designing a policy intervention towards achieving economic process. The process of capital formation consistent with Jhingan, (2006) involves three inter-related conditions; (a) the existence of real savings and rise in them; (b) the existence of credit and financial institutions to mobilize savings and to direct them to desired channels; and (c) to use these savings for investment in capital goods. The government of Nigeria in 1986 considered the necessity for improvement in capital information and pursued an economic reform that shifted emphasis to non-public sector. The public sector reforms were expected to make sure that interest rates were positive in real terms and to encourage savings, thereby ensuring that investment would be readily available to the real sector. Besides this, the reforms were expected to steer to efficiency and productivity of labour; efficient utilization of economic resources, increase aggregate supply, reduces unemployment and generate low rate of inflation. For example, during 1980s, gross fixed capital information average 21.3 percent of GDP in Nigeria. This proportion increased to 23.3 percent of GDP in 1991 and declined 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 capital formation rose from 22.3 percent of GDP in 2000 to 26.2 percent in 2002 and declined drastically to 21.3 percent in 2005 (Bakare 2011). This study is intended to investigate the impact of capital formation on the growth of Nigerian economy.

1.2 STATEMENT OF PROBLEM

After the Nigerian civil war; massive reconstruction and public sector investments assumed the most viable option of rebuilding the economy and to guarantee an improved rate of economic growth and development. However, records of the past four decades have generated some concern over the slow pace of industrial and infrastructural development. Questions have been raised as to what should constitute the optimal size of government’s capital outlays that are capable of turning around the economy. Overtime, the Nigerian nation has witnessed a tremendous increase in her revenue profile through oil exports. She has equally enjoyed cycles of oil boom with successive governments harnessing the resources of the nation to execute its budget. Ironically, there has been an increase too in her expenditure pattern overtime. Paradoxically, it does not appear as if the increase in capital expenditures has translated into increased capital formation and consequent economic growth and development. The above scenario is quite disturbing. It is far from being satisfactory and obviously point towards an ailing economy. In Nigeria, capital output is low resulting from the fact that capital income is low. More so, the marginal or average propensity to save is low, while the marginal or average propensity to consume is so high, this leads to 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. Thus this study is set to ascertain, the impact of capital formation on the growth of Nigerian economy.

1.3 OBJECTIVES OF THE STUDY

The major purpose of this study is to examine the impact of capital formation on growth of Nigerian economy. Other general objectives are as follows:

1. To examine the role of capital formation on the growth of Nigerian economy.
2. To determine the impact of capital formation on growth of Nigerian economy for the period 1981-2019.
3. To determine the role of inflation in the economic growth of Nigeria.
4. To examine the direction and significance of interest rate on economic growth of Nigeria.
5. To examine the relationship between capital formation and economic growth of Nigeria within 1981 and 2019.
6. To draw policy implications for capital formation from the empirical findings.

1.4 RESEARCH QUESTIONS

1. What is the role of capital formation on the growth of Nigerian economy?
2. What is the impact of capital formation on growth of Nigerian economy for the period 1981-2019?
3. What is the role of inflation in the economic growth of Nigeria?
4. What is the direction and significance of interest rate on economic growth of Nigeria?
5. What is the relationship between capital formation and economic growth of Nigeria within 1981 and 2019?
6. What are the policy implications for capital formation from the empirical findings?

1.5 RESEARCH HYPOTHESIS

1. There is no significant relationship between capital formation and economic growth of Nigeria within 1981 and 2019.
2. There is a significant relationship between capital formation and economic growth of Nigeria within 1981 and 2019.
   1. SIGNIFICANCE OF THE STUDY

This study will be of significance to the government as a score sheet to evaluate the public sector reforms and to know how effective the policy has been over the years and provide further tools for policy making by government policy makers and others alike. It will also be of significance to the business owners on how government’s policy affects their businesses.

Furthermore, there is need to provide a reference document for further researchers and impact of capital formation on the growth of economy conducted by other Nigerians. This research work will go a long way to increase the availability of literature in the field of economics. Finally, the study is of immense benefit to policy makers, investors, financial manager’s lecturers and the general public.

1.7    SCOPE OF THE STUDY 

The study is based on the study on the impact of capital formation on the growth of Nigerian economy, (1981-2019).

1.8 LIMITATION OF STUDY

Financial constraint- Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

Time constraint- The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

1.9 DEFINITION OF TERMS

Capital Formation: Capital formation is a concept used in macro-economics, national accounts and financial economics. 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 the net 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.

Economic Growth: Economic growth is the increase in the inflation-adjusted market value of the goods and services produced by an economy over time. It is conventionally measured as the percent rate of increase in real gross domestic product, or real GDP.