The study examined tee effect of capital formation on economic growth in Nigeria for the period under study. In doing this an empirical research was concluded using secondary time series data spanning from 1981 to 2015 a linear model was estimated using the OSL estimation techniques and the key finding of this study suggest that capital accumulation has played a fundamental role in economic growth in Nigeria thus give credence to the Harrod-Domar Model which considers investment as a determinate of economic growth. Therefore it is recommended that there is need for a rekindled interest in the mobilization of domestic recourses to finance savings and economic growth. Furthermore, to improve savings and investment in Nigeria, particular attention should be paid to economic and social-cultural shocks specifically, the investment climate in Nigeria so as to ensure macroeconomic stability and economic development.
- Background of the Study
The essence of economic development is the creation of economic and social overhead capitals which leads to increase in national output and/or income through creation of employment opportunities and/or reduction of vicious circle of poverty both from the demand side and supply side (Shuaib and Ndidi, 2015).
Every economy seeks to grow its industrial sector to move the economy from a traditional and low level of production to a more automated and efficient system of mass processing and the manufacturing of goods and services. For this level of development to be attained, the need of capital accumulation in both physical and human basis cannot be overemphasized. As they serve as the catalyst for attainment and speeding up the process of development.
Capital accumulation or formation, as a component of economic growth and development in any society, is the process of acquiring additional capital stock (both physical and human capital) which is used in productive process. The foundation of capital accumulation is savings and it results when some portion of present income is saved and invested in order to augment future output and incomes(Todaro and Smith, 2003). The extent to which the level of savings can affect capital accumulation and growth largely depends on the capacity of the economy to channel the savings into productive use. Higher savings then implies higher capital accumulation and hence, economic growth. According to Osundina and Osundina (2014) people of LDCs are incapable of high level of individual savings for reasons like; low level of per capital income, indulgence in luxurious and conspicuous consumption by the few who could afford to save.In addition to this, Shauib and Ndidi (2015) stressed that the emerging countries of the World have no opportunity costs or the attitude of sacrificing present consumption for future consumption in order to augment future national output and income. This possibly amounts to the low rate of capital formation in most emerging countries like Nigeria.
The importance of capital formation can be seen in the underlining principles of the Lucas model of growth where capital accumulation, human capital development, national savings rate, technological progress, and other policies that encourages openness are being advanced as the main factors of long-term economic growth Ewubare and Ogbuagu (2015). Capital accumulation is the catalyst for countries to escape low level equilibrium trap involving a vicious cycle of poverty Ewubare and Ogbuagu (2015). Furthermore, Rostow’s economic development model emphasizes that for the process of economic development to actually take-off, there is the need for sustained growth in terms of critical growth in the ratio of investment to national income. Similarly, Lewis (1955) notes that the process of economic development involves transforming an economy from being a 5% saver and investor to that which is saving and investing at least 12% of its net income. So it becomes pertinent that for any country to achieve and sustain growth, she must dedicate substantial part of the national income to savings, which is reinvestment to accumulate capital.
Capital formation is analogous (or prerequisite) to an increase in physical capital stock of a nation with investment in social and economic infrastructures little wonder why several attempts has been made by successive government to pursue policies that tends to increase capital formation in Nigeria. The first development plans in Nigeria emphasized greatly on the need for capitalization of the Nigerian private sector to promote sustainable growth and development in Nigeria (Baghebo and Edoumiekumo, 2012) and also the deregulation of interest rate and exchange rate during the SAP period was equally geared towards improving capital formation and growth in the private sector (Shuaib and Ndidi, 2015). The Privatisation and Commercialisation Decree of 1988, which later became the Privatisation and Commercialisation Act No. 28 of 1999 was also an attempt to foster capital accumulation in the private sector so as to improve productivity and output. However, whether thesepolicies of the government has been successful in improving capital accumulating/formulation process is what this intends to investigate.
Thus, based on this background, this study investigates the effect of capital formation on economic growth of Nigeria.
1.2 Statement of the Problem
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 (Sunny and Osuagwu, 2016). 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.
Nigeria policy makers pursued a structural adjustment program which shifted emphasis from public sectors to private sectors. The goal was to encourage private domestic savings, private domestic investment and capital formation in order to enhance economic growth (Sunny and Osuagwu, 2016). In an attempt to achieve this goal, resources were diverted from current consumption and were invested in capital formation through privatization and commercialization of state enterprises.
But unfortunately, the initial optimism expressed about public sector reforms has not been met. The reforms program led to privatization and commercialization of many state enterprises and improvement in some macroeconomic variables like the nominal interest rate and money supply with intensions to improve capital formation in Nigeria, however there have been some disappointing performances as Nigeria continues to be confronted with low rate of economic growth. Besides, the aggregate supply continued to diminish leading to demand pull inflation.
One worrisome aspect of the result of liberalization of the public sector in Nigeria is the extent of distress in the sector including high rate of unemployment. The need for a better understanding of the extent and implications of the problem becomes quite important. This will be the focus of this study the focus of this study
1.3 Research Questions
The following questions are therefore raised to guide the study;
- What is the impact of capital formation on the economic growth in Nigeria?
- What is the impact of interest rate on Nigerian economy?
1.4 Objective of the Study
The broad objective of the study will be of this study is to investigate the impact of capital formation on economic growth in Nigeria, while the specific objectives are:
- To examine the effect of capital formation on economic growth in Nigeria.
- To examine the impact of interest rate on economic growth in Nigeria.
1.5 Research Hypothesis of the Study
- H0: There is no significant impact of capital formation on the economic growth.
- H0: There is no significant interest rate on economic growth in Nigeria.
1.6 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.
Also, it will be of significance to students and researchers alike as a point of reference and bedrock for further study. Finally, to the academic world it will be an addition to already existing knowledge.
1.7 Scope and Limitation of the Study
The focus of the study is limited to activities of the Nigerian capital formation and will cover the period of 31 years (1985 to 2016). One major limitation of this study is the issue of time as the researcher is also a student’s who has other courses to attend to with her limited time.
Also, the issue of finance is another important limiting factor in this study, the research, due to lack of adequate finance, could not travel to obtain necessary data and relevant materials for the study.