CHAPTER ONE

1.0 INTRODUCTION Nigeria is facing the twin problem of underdevelopment and stagnant growth rate despite its natural position as a green area with huge resource endowment. It manifests most of the attributes of sub-Saharan Africa which has about the largest absolute increase of 72 million people in the last decade. About 70 percent of Nigerians live on less than N100 / day (US$ 0.7/day), while youth unemployment is close to 90 percent (EZE,2003 ). The country has a large informal sector in which a substantial number of the unemployed take up employment (CBN, 2000a). The poverty syndrome is a bit difficult to understand with Nigeria being the sixth world highest producer of crude oil and earning upwards of US$ 15 billion annually (CBN, 2000b). Regrettably in 2002 alone, 80 percent of the national earning accruing from oil exportation was spent on maintaining the government, leaving only 20 percent for economic development. This partly explains the nature of budgetary

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problems facing the nation. The question then is, what intervention option besides the oil sector, does the nation have for sustainable growth? Nigeria’s overall economic performance since Independence in 1960 has been decidedly unimpressive. According to World Bank data, the average annual growth rate of Gross Domestic Product (GDP) between 1960 and 2000 was less than 4 percent. Thus, despite the availability and expenditure of colossal amounts of foreign exchange obtained mainly from its oil and gas resources, Nigeria’s economic growth has been weak and the incidence of poverty has increased. It is estimated that Nigeria received over US$228 billion from oil export receipts between 1981 and 1999 (Udeh, 2000). Yet the number of Nigerians living in abject poverty- that is, on less than US$1 a day – more than doubled between 1970 and 2000, and the proportion of the population living in poverty rose from 36% in 1970 to 70% in 2000. Nigeria’s per capita income of US$260 in 2000 is much less than, indeed it is only one-third of its level, US$780, in 1980, World Bank (2003). Nigeria faces the challenge of meeting the macroeconomic targets of growth rate and development. Nigeria is among the world’s 27 poorest countries, according to the United Nations Development Programme (UNDP 2001). The country has had lost decades of development due to negative and slow growth and has been one of the weakest growing economy in the world on a per capita basis especially for the period between 1981- 2000. In analysing the major macroeconomic targets of growth rate we will be looking at the aggregate GDP, the manufacturing sector, agricultural sector, the service sector which are basically the non-oil sector for this particular study. The level of economic development and growth rate over the decades has been disappointing. The real sector is dominated by the primary sectors of the economy which has always been the crude oil sector. The agricultural sector is a predominating sector with a low and declining productivity. This sector has stagnated and failed to keep pace with the needs of the rapidly growing population in Nigeria. The crude oil sector is categorised to fall under the primary sector for which the resources from this particular sector has not been diversified to other sectors of the economy to enhance growth and development in other sectors. Using a poverty frontier of US$2 per day, Collier and Dollar (1999:33) reports that 60% of Nigeria’s population was below the poverty line in 1996. A recent report issued by the

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Federal Government of Nigeria confirms that the problem of poverty is acute. According to the report titled “Poverty alleviation policy”. With a per capita income of about US$300 and a human development index of 0.4, Nigeria is a poor country despite the abundance of human, material and natural resources. Recent studies show that at least 50% of the population is poor while another 30% may be regarded as moderately poor. The majority of the poor, over 70%, are located in the rural areas where most of the people and national resources are located. The paradox of this is that she is ranked the 6th largest producer of petroleum in the world. Nigeria nevertheless has one of the lowest GDP per capita incomes: $970 in purchasing power parity-adjusted U.S. dollars.

The secondary sector deals with the manufacturing sector, and the service sector. The manufacturing sector is one sector of the economy that has classified Nigeria as the least industrialized countries in Africa. This sector of the economy has been stale and entails about 5 - 7% of GDP, according to NEEDS report (2004, p.20). In the industrial sector, it is the role of the manufacturing sector that appears to be the strategic factor in modern economic growth. ‘Solow stated that development cannot occur without growth (Hall, 1983:19). Thus, the objective of this paper is to analyse the impact of the major various sectors contributions to economic growth and development, laying more emphasis on the manufacturing sector, agricultural sector, and the service sector. The Global Research Project, ‘Explaining Growth’ is an attempt to compile the most comprehensive assessment of growth in developing and transition countries. Yuba and Suman (2002 p.1). This research work on growth consists of three phases. Phase one of the study comprises the progression of growth. The current dilemma in understanding economic development and growth is not just about understanding the process by which an economy raises its savings rate and boosting the rate of physical capital accumulation, but 'something else’, which captures the differences in economic growth and economic development, TFP is usually ascribed to as the 'something else', which contributes to the differential growth rates.

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JUSTIFICATION OF STUDY 3

the development of this sector tends to be neglected.By the time Nigeria became politically independent in October 1960. The importance of the study therefore lies 4 . The country’s decade of development plans has not led to increase growth rate in the non-oil sectors which consist of the manufacturing industry. service sector and the agriculture industry in country. the truth still remains that there are lack of distribution of resources for the development of these non-oil sectors. too much attention has been allocated to indicators that do not have significant impact on GDP in Nigeria. In the industrial sector. contributing almost 70% of the Gross Domestic Product (GDP). In as much as the government has been trying to provide stable growth rate in the core sectors. government expenditure. agricultural and the service sectors are essential for rapid economic growth and development in Nigeria. Datta-Chandhuri (1990) notes "the success of Keynesian activism in fighting the great depressions in the western countries. service and industry has been recognized as the core sectors for the process of growth. it is the role of manufacturing sector that seem to be the significant factor in modern economic growth. Over the years. for the purpose of this study will be the economic indicators which are basically the Consumption expenditure. Barro (1990) concludes that the role of public service (infrastructure) creates positive linkage between government and growth. the success of the Marshall Plan in engineering the quick reconstruction of the war-damaged economies of western Europe. Barro's work established that there is a negative correlation between growth in government expenditure and economic growth. The role of government in development is a controversial one.The major sector contributions to economic growth in Nigeria. Transformation in the relative significance of agriculture. as well as savings rates for governments whose expenditures provide consumption services only. High productivity in the non-oil sectors like the industrial. the agricultural sector was known to be the dominant sector of the economy. There is no doubt that the state has a role to play in the economic development of a country. net exports and lagged variables of GDP. gross fixed capital formation (GFCF) this will serve as the gross investments. But today. and the achievements of the Soviet industrialization drive in the 1930s had created a virtual intellectual consensus in the world on the power of the "visible hand.

First. The review takes into consideration both theoretical and empirical literature on growth which are considered as important determinants of growth. the agricultural sector and the service sector from 1970 to 2005. GDP (the dependent 5 . The GDP of Nigeria is used as a proxy for economic growth. The Nigerian economy should be concerned about policy implementation that tends to hamper its efforts in development. This study is carried out econometrically using both univariate and multivariate regression techniques. gross fixed capital formation (GFCF) this will serve as the gross investments. Due to data availability GFCF is used in place of gross investment. The statistical aggregate of GFCF is a measure of the net investment by enterprises in the domestic economy. gross fixed capital formation. Thirdly it also aims at identifying which components of growth is the most important determinant of economic growth in Nigeria by regressing the GDP of Nigeria against the following independent variables: Consumption expenditure. This usually comes in as fixed capital assets during an accounting. it conducts a straightforward examination of past economic growth trends by looking at the contributions of the major economic sectors in Nigeria to the GDP which includes the manufacturing sector. These variables are considered because they are readily available and form the core components in econometric studies of this kind. it is of paramount significance that the nature of the existing measures maybe taken. Secondly it presents an in-depth literature on economic growth which explains the determinants of growth. This research therefore reveals how important the traditional determinants of growth (consumption expenditure.with the fact that government should pay attention and devote economic resources to the growth of non-oil sectors.2 AIMS AND OBJECTIVES OF THE STUDY This dissertation examines Nigeria’s economic growth in three steps. If the implementation problem is to be alleviated. net exports and lagged variables of GDP. government expenditure and net exports) as used in the study and variables on how investments on the GDP dependent variable will greatly influence or impact economic growth rate in Nigeria. 1. government expenditure. this is due to the fact that GFCF time series is often used to analyse the trends in investment activity over time.

Secondly the study on the sectoral contribution to economic growth in Nigeria will give an insight of which sectors of the Nigeria economy will dominate in attracting economic growth and development. 1. This chapter outlines the economic performance of the Nigeria economy.variable) is regressed on all the independent variables indicated above for the period 1970 to 2005. firstly the study provides an insight into the determinants of economic growth and development which enriches the existing literature on the topic by exploring some of the most recent literatures on economic growth and applying it to the Nigerian economy. Chapter four gives an overview of the overall assessment of the Nigeria economy. In chapter five the actual test is conducted and the results discussed. 1. outlines and explains the factors that attract growth to a country. The results obtained from this agenda can assist the Nigeria government in the country’s economic policy to attracting growth and development and as well help in addressing what measures can be taken in boosting economic growth and development. Chapter three comprises the research methodology as well as the econometric model to be used in the empirical analysis. 6 . Chapter six concludes the study and tenders some policy implication for boosting growth in Nigeria. This chapter looks at the determinants of growth.3 SIGNIFICANCE OF THE STUDY This study is significant for various reasons.4 ORGANISATION OF THE STUDY Chapter two reviews the relevant literature on the subject under study.

Many theories have been developed by economist over the years to explain economic growth and development. if the elasticity of substitution between exhaustible resources and reproducible capital is 7 . The importance of the economic growth and development can hardly be over-emphasized.CHAPTER TWO LITERATURE REVIEW 2. Nevertheless this literature remains one of the most researched with respect to development and growth. These usually try to identify what the determining factors that contribute to growth and development are. The likes of Hamilton (1995) were of the opinion that economic growth is unsustainable. Many economists and other social scientists would say that drives to develop are present but are masked by current political structures and organisation barriers.0 INTRODUCTION The literature on the analysis and contributions of economic growth and development is vast and inconclusive.

its productivity. sources of economic growth by explaining the use of GDP in Nigeria as a proxy for economic growth which accounts for national income in an open economy such as that of Nigeria. which examines the relationship between the level of development and economic growth.less than unity. employment growth and institutional change are attributed to be driving forces of economic growth. This dissertation empirically assesses conflicting views that retards various factors to economic growth. the quality of investment. 2. Technological progress. existence of appropriate policy. political. It is challenging for any researcher to point at a particular set of theory or determinants which contributes to economic growth and development.1 DETERMINANTS OF ECONOMIC GROWTH Understanding the growth process is central in the context of development economics. High investment ratios do not necessarily lead to rapid economic growth. This paper highlights some policy approach that will boost the Nigerian economic performance. Growth can be regarded as one of the mainstays of a modern economy. and social 8 . sectoral contributions and their impacts to GDP is reviewed. capital accumulation. This study adds to a large policy-oriented literature on the relationship between economic development and growth. while theory is useful to streamline guidance for identifying. analysing and interpreting the determinants of growth. there are studies which focused on the explanation of Output growth of an economy can be attributed to many reasons. Most of the empirical literature is actually based on crosscountry growth regressions. In this chapter an extensive review of the literature relating to the application of economic growth and development. The existing studies of determinants of growth can be grouped into several categories. Levine and Renelt (1992) and Sala-i-Martin (1997) identify investment as a key determinant. which are seen as being useful in identifying those factors that most consistently appear to be important determinants. The approach complements the growth literature.

new investments representing net additions to the capital stock are considered important. Investment in general is often seen as the engine that drives a country’s economy. domestic savings are not sufficient to meet the requirements of the general investment as a whole. The growth mechanism by which more investment leads to more economic growth can be described in terms of the HarrodDomar growth model. In theory. through productivity. law and order.infrastructure are all determinants of the effectiveness of investment (Hall and Jones. 2003). and the degree of openness with the emphasis on FDI were major factors. Mankiw et al. Public investment provides the necessary infrastructure that is need for the economy while private investment is the driving force that spins the economy. One of the principal determinants of growth necessary for any takeoff is the mobilization of domestic and foreign saving in order to generate sufficient investment to accelerate economic growth. Another factor that is related to investment is foreign aid. foreign aid could relax any or all of three constraints on investment (Bacha. research and development. Investment can be classified into public and private investment. 1999. (1992) and Barro and Sala-i-Martin (1992). Thus. Public investment in human capital. 2003. and social and economic infrastructure leads to creation of positive externalities which in turn improve the productivity of private investment. The constraint on savings give rises to low-income countries. 1990). Every economy should be able to save certain proportion of its national income in order to be able to replace worn out or impaired capital goods. Every good economy’s growth rate should greatly depend on the level of savings. one would expect a positive relationship between public investment and economic growth (Barro. 2003). However in order to grow. the savings ratio and as well the productivity of investment. Artadi and Sala-i-Martin. 1991. Conventional macroeconomic policies such as government investment can greatly affect the level of per-capita income but they have no effect on the long run growth rate of the economy Barro (1991). Kaipornsak (1995) studied the source of economic growth and found that spending on R&D. Fafchamps. Public investment can affect growth either directly. 1996. especially government expenditure. 2000. There are constraint which 9 . or indirectly through the effect on private investment. Artadi and Sala-i-Martin.

has provided examples necessitating a reexamination of the role of international trade in the development of poor countries. Frankel and Romer.captures the possibility that government reactions can affect private savings and public investment and this can affect investment. 2. 1995. 1999). embodied technological transfer through imported inputs. he concluded that countries which neglect their export sectors through discriminatory economic policies are likely to have to settle for lower rates of economic growth as a result. Foreign trade is one major variable that influences private investment and ultimately economic growth. Tyler (1981) argues that the dramatic economic success of some countries pursuing export oriented policies. Elbadawi (1999) argues that the African foreign aid causes exchange rate appreciation thereby dampening growth of exports and thus economic growth. The literature on trade and growth tends to mainly pay attention on exports. Thus. Zhang and Zou. 1996. Dornbusch and Reynoso (1988) concluded that there was no evidence to attribute rapid development of a country to financial liberalization alone." Balassa (1985) concluded that "trade orientation has been an important factor contributing to inter-country differences in the growth of output. scale economies arising from expanded markets. and intermediate goods and to some extent they can be used directly for investment. If foreign aid is used to relax these constraints it is expected to be positively correlated with investment and growth (Hjertholm et al. along with the equally dramatic failures of those countries pursuing autarkist policies. Michaely (1977) tested the hypothesis "that a rapid growth of exports accelerates the economy's growth of a country. capital. 1995. 2000). openness to trade has many advantages such as efficiency gains that come with specialisation and competition from international trade. Chenery and Strout (1966) also posit a knowledge gap in developing countries and foreign aid in the form of technical assistance can relax this constraint (and increase productivity). Harrison. According to neoclassical thinking.2 A BRIEF HISTORY OF GROWTH THEORIES AND EMPIRICS 10 . there are two justifications for concentrating on imports – they represent imported technology. and diffusion of ideas through global interaction (Piazolo.

Falling profit rates along with the growth path of an economy gives way to changes in the relative factor scarcity and decreases in profitable investment opportunities all play a role in constraining economic growth. Grossman and Helpman 1991. and Aghion and Howitt 1992 have devoted their 11 . Exogenous growth models that have focused primarily on the role of factor accumulation in the growth process. The standard neoclassical growth model implies that the steady state growth rate. in an ongoing economic growth process. stated was due to cultural and institutional backwardness of these countries. and therefore. In his own view. Thus. 1997). every developing economy had to slow down and stop at an upper limit of development. Developed nations in his time were England and North America but they were only at the second stage of development. According to his view. In this case our focus is to find the statistically significant relationship between GDP and some economic indicators in Nigeria. as well as endogenous growth models given examples from Romer 1990. government policies can affect the long-run growth rate of real output in an economy. some nations were at “a low level equilibrium trap” because of “bad-governance” and an insufficiency in maintaining common human rights and freedoms or “property rights” in modern parlance. This. They were still in a “natural freedom” environment.Studies conducted on growth theories draws back to Adam Smith’s (1776) An Inquiry into the Nature and Causes of the Wealth of Nations may be seen as a suitable starting point for economic growth theories. is zero. As a corollary of the model. Smith distinguished between three different stages of economic growth. In Smith (1776). not only capital accumulation but also technological progress and institutional and social factors play a crucial role in the economic development process of a country (Kibritcioglu. The notion of an upper limit to growth is perhaps related to the agrarian based economy of Smith’s age. the natural environment limits economic growth beyond a certain level. aside from exogenous technological progress. Smith believed that no country in the 18th century was rated at the third stage of economic growth. Theories of growth are highly aggregated usually featuring only one or two types of output and a limited number of inputs.

models and hypotheses on the role of accumulation. These models are however not consistent with the pattern of development that had characterized economies over most of human existence. However. To disentangle the sources of economic growth one needs an analytical framework to assess the contribution of various factors to growth. In the last decades this has been the concern of economists and economic historians. King and Levine (1993) pointed out that early literature tried to explain that growth is positively related to the level of financial development. The prevailing view in economics is that financial development contributes greatly to growth in various ways. Most endogenous and exogenous growth models are not consistent with the changes in the demographic regime along the process of development. Greater investment and its more efficient allocation are the two principal channels through which financial integration will lead to growth. This involves the formulation of theories. Financial integration is not an end in itself but rather a means to achieve higher economic growth. The significance of economic growth involves as follows. positive 12 . technological progress and financial development. Increase in investment is expected because of financial integrated markets. Economists have found empirical evidence that countries with developed financial systems tend to grow faster and rapidly. they show that the relative size of the financial sector in 1960 is positively correlated with economic growth over the period. Given evidence from 80 countries from 1960 to 1989.attention to the role of endogenous technological progress in the process of development.3 FACTORS THAT ATTRACTS GROWTH TO A COUNTRY The kind of factors which attracts any form of growth and development to a country differs. productivity and technology. 2. the role of investment as a form of foreign investment. One of the factor economists anticipate is that financial integration will lead to more investment with a progress on more efficient allocation of capital. however there is no consensus on what emphasis that should be given to the key factors behind growth. were designed to capture the main characteristics of the Modern Growth Regime.

Inter country studies gives an insight on the pattern of growth varies across nations in terms of their different characteristics. 1993. Benhabib and Spiegel 2000). In addition. In this section we review briefly some of the findings conducted on growth rate simply because this study is interested in estimating the determinants of growth of which sectoral investment is likely to have a positive effect on GDP growth. The benefit of these studies is that it helps developing countries to formulate good policies which help to attract growth and development.correlation may simply reflect the fact that faster and rapidly growing countries have larger financial sectors because of the increase in the number of financial transactions conducted. However. Subsequent work using statistical techniques to control for the endogenous effect of economic growth on financial development as well as for country-specific factors that are not explicitly considered. 2. Other studies that supported the human capital accumulation as a source of economic growth include (Barro and Lee. they can better monitor its managers to the effect of financial development is robust (Levine. Rebelo (1991) using the time investment as a proxy for growth rate human capital yielded the same result but later extended the model by introducing physical capital as an additional input in the human capital accumulation function. The pioneer work in this regard is the work of Lucas (1988) which explained that the growth rate of human capital is also dependent on the amount of time. which manifests in the form of knowledge. allocated by individuals to acquire skills found out that time investment positively the growth rate of human capital. Romer. Loayza. These studies have been conducted at inter country level. 13 . has analyzed this information more efficiently. and using both time series and cross-sectional data to extract more information from the data. the model of endogenous growth by Romer (1990) assumes that the creation of new ideas is a direct function of human capital. and Beck 2000. As a result investment in human capital led to growth in physical capital which in turn leads to economic growth. once a project has started.4 EVIDENCE FROM SOME SELECTED EMPIRICAL STUDIES Studies on the contribution to economic growth have been studied differently in past research.

human development and overall social 14 . Benhabib and Spiegel. it has a rich natural resource endowment and relatively high levels of human and social capital. CHAPTER THREE NIGERIAN ECONOMY: AN OVERALL ASSESSMENT 3. It was that need to reduce the fragility of the economy and hasten structural change that informed early post-independence development strategy (World Bank 1993). Nigeria is a relatively large nation of considerable wealth. however recent studies on growth factors such as human growth accumulation influence the determinants of growth have been diverse from one research to the other. Gupta and Chakraborty (2004) developed an endogenous growth model of a dual economy where human capital accumulation is the source of economic growth.0 INTRODUCTION This chapter is aimed at presenting an overview of the economic performance of the Nigeria economy from 1970 to 2005.1991. it is not surprising that a major part of colonial economic policies was devoted to tackling some of these. Some studies have examined different ways through human capital can affect economic growth. Notwithstanding its wealth and considerable economic potential. At best these studies give a general idea of what determines economic growth and development. Nigeria has not as yet succeeded in effectively translating its potential into economic growth. This chapter provides a brief overview of Nigeria’s key development challenges in order to provide a basis for assessing contributions to the nation’s development priorities during this period (1970-2005). 1994). even if in obviously inadequate terms. Bratti et al (2004) estimated a model of economic growth and human capital accumulation based on a sample of countries at a different stage of development. Based on this identification of structural constraints to growth and development. one cannot concretely point at what particular factors that determines economic growth and development in a country. Although the techniques employed in past studies seem to be accurate.

8 Infrastructure 8.0 10.6 to about 40.3 26 159. The agricultural sector accounted for more than half of its national output between 1950 and 1960.4 29.8 4 219.7 100 1990 40.4 9.9 4. while infrastructure and services appear to stabilize at lower levels of about 9 per cent and 28 per cent. During the period of independence in 1960.0 15 .7 7. over the incessant increase from 26.2 1965 55.5 100 1987* 40.5 8. while the services sector appears to have had persistent growth interrupted only by the economic recession of the 1980s.7 100 1980 21. Over the same period.3 12.4 3 146.0 79 270. the backbone of the national economy relied primarily on agricultural sector. between 1987 and 1990.6 28. The agricultural sector has experienced a general improvement in a portion of GDP since 1985.1 1.3 100 Manufacturing 4. Table 3. The attraction drawn to the agricultural sector was later diverted to the oil sector. The oil boom transformed the economy drastically. the manufacturing sector has experienced rather sluggish growth since around 1970. which became a major source of revenue.8 100 1975 26.0 89 100.9 17.1 26.0 28.6 28.6 19.1 24. This chapter reviews the Nigerian economy by focusing on the contributions of the major sectors to GDP. oil and mining fell to about 14 per cent of GDP.8 13.5 100 1970 44.7 8.4 4. 3.9 7.5 15.1 below.1 Distribution of gross domestic product in Nigeria for selected years (%) (1960-1990) Sector Agriculture Mining 1960 64.0 26 283.1 THE STRUCTURE OF THE ECONOMY An analysis of the structure of the Nigerian economy is fundamental for comprehending the predominance of poor economic growth and development in the country.7 11.9 Services Total Value (Nm) 21.1 8.0 100 2 493.5 9. The economy became absolutely dependent on the oil sector. which accounted for more than 98 per cent of export earnings.4 22.8 9.5 23.transformation.3 100 1985 26.2 13.8 in 1990.3 30 808. From table 3. respectively.8 31.8 8.

8–9) 3.Source: Central Bank of Nigeria. 16 .9 per cent respectively.2 per cent and 2. pp. and market-oriented and open. diversified. the agricultural sector declined in low commodity prices while the oil boom contributed to the negative growth of agricultural sector in the 1970s. This ratio drastically dropped from 64. government services. this signified a remarkable growth.1% in 1960 to 28. After independence. but its contribution has reduced gradually over the years since the accomplishment of political independence in 1960. during this time frame of the two periods.0. the GDP responded positively at a rate of 4. with supporting data as evidence. the creation of a national economy that is highly competitive. The services sector includes wholesale and retail trade. but based on internal momentum for its growth is the aim. the Gross Domestic Product (GDP) recorded was 3. Agriculture dominates the Gross Domestic Product (GDP). Between the period of 1960 and 1970. (Nigeria. the industry and manufacturing sector had a slowly positive growth rate given exception for the period of 1980 to 1988. this is detailed in the table above.1 per cent growth annually. An economy that experiences rapid and sustained growth that is not less than 6– 10% per annum at the end of the present Administration’s tenure. During the oil boom era. Ministry of Finance 2000c. the industry and manufacturing sector grew negatively by 3. this period was a period there was economic adjustment policy which is known as the structural adjustment and economic liberalization. the growth rate of GDP dropped negatively. 2000) highlights most of the structural issues in perspective.35% in 2002. In the period of 1980s. private sector–led. real estate. The growth rate for the agricultural sector for the periods 1960 to 1970 and 1970 to 1978 was unsatisfactory. which was in the period of 1970 to 1978. financial. Annual Report and Statement of Accounts. In the early 1960s. broad-based.2 GENERAL PERFORMANCE OF THE ECONOMY The Nigerian economy has had a truncated history. transportation.2 per cent annually. responsive to incentives. GDP grew positively by 6. Between the periods of 1988 to 1997. Various Issues Analysing one the recent work of the Central Bank of Nigeria (CBN.

44%) and Service (12. generating more than 30 percent of gross domestic product (GDP) and so far has provided the largest source of rural employment. 1969).45%). The empirical work will attempt to improve on the recent results on the sources of economic growth in Nigeria reported by Iyoha (2000b). hotels and restaurant services.62%). has fallen short of expectations. exporting agricultural products and importing manufactured ones. The rapid expansion of the oil sector has also played so much eroding the competitiveness of agriculture. It was an open economy (Kilby. but this potential is not been actualized. or for a reason that their impacts have been swamped by macro policies affecting inflation. food production supply have not kept pace with population growth. this is as a result in increase of food imports and a decline rate of national food self-sufficiency. 1966) albeit with a small and active export enclave. from analysis states in past years. Nigeria once a big net exporter of food has now become an importer of food. Before the outbreak of the Second World War. Blessed with abundant land. 17 . Nigeria’s agricultural sector has a high potential for growth. Productivity is very low and basically stagnant. Most of the agricultural policies that have established have been ineffective. Growth in Nigeria’s agricultural sector. 3. exchange rates. The largely subsistence agricultural sector has not kept up with the rapid population growth in recent times. either because they have been misguided. oil (33.3 AN OVERVIEW OF THE AGRICULTURAL SECTOR Agriculture is the backbone of the rural economy. due to the fact that successive governments have chosen the easy path of depending heavily on earnings from oil exports rather than making the investments needed to diversify the economy by maintaining productivity growth in agriculture and other non-oil sectors. and the cost of capital. seen as attaining better than the growth achieved in many other African countries. the Nigerian economy was still largely dominated by peasant agriculture (Helleiner. Value added per capita in agriculture has accelerated by less than 1 percent per year for the past 20 years. According to Nigeria Bureau of Public Enterprise (BPE 2000) the three highest contributors to Nigeria’s GDP are agriculture (34.communication. natural resources and water resources.

Problem identification will be beneficial to agricultural policy makers. the major constraints on agricultural production in Nigeria include: 18 . • Poor post-harvest technology. if given direct attention and improved on will remain the major contributor to GDP.2 below.3. This was known to be the economy’s booming sector and people’s main source of livelihood along with its contribution to GDP. Nevertheless. • Premature liberalisation and deregulation. • Environmental degradation. 3. due to over-dependence on oil. • Poor distribution of fertilizer. Agriculture. There are several major reasons which are defined for the declines in production of agricultural products in the agricultural sector are noted as follows: • Deterioration in rural infrastructure. • Lack of proactive pro-farmer food pricing. Ogunfiditime (1996).1 per cent in 1960 from table 4. Basic understanding of these problems and the ability to plan in advance will help immensely to accelerate agricultural production and pave the way for effective management of both agricultural inputs and outputs in Nigeria.35 per cent in 2002 from table 4. its contribution to national revenue declined from 64. • High population growth. • High cost of farm inputs.Agriculture was the backbone of the economy at the time of independence in 1960s. • Low rate of adoption of high technology.1 to 28. the extension agents.1 CONSTRAINTS TO INADEQUATE AGRICULTURAL PRODUCTION IN NIGERIA There is inadequate empirical analysis of the real problems situations facing agricultural production in Nigeria. • Lack of working capital for agricultural boost. the researchers and the peasant farmers. According to Nwosu (1980:143).

H. Inadequate or lack of effective supporting services such as farm credit to genuine farmers. Neglect of irrigated agriculture M. K. Shortage of capital which includes shortage of credit facilities. Nature oriented problems like drought. expansion. Inappropriate policies by government. Iyoha and Oriakhi (2002) 19 . energy management problem. marketing facilities. inadequate farming systems. The problem of diseases and pest control I. and high cost of production etc. as lack of dependable water resources constitutes an obstacle to agricultural productivity. (ii) failure to ensure a workable agricultural credit system. At the micro-economic level. etc. Inadequate supplies of agricultural inputs D. Our land tenure system inhibits investment. Management oriented problems such as the problem of land ownership. transport services. The instability in the price of agricultural products discourages farmers. L.A. Nigerian agricultural policy in the 1970s can be criticized for its deficiencies in three key areas: (i) failure to encourage private price-setting and marketing channels. The problem posed by increasing labour shortage in the rural areas in consequence of rural urban migration. There is need to develop and encourage appropriate technology for rapid development of the agricultural sector. G. and (iii) failure to provide necessary infrastructure and thus an enabling economic environment to support provision of key services like machinery maintenance. etc E. crop management. There is need for sustainable policy towards favourable conditions for farmers. There is need to allow small farmers to have more access to land in order to boast their output. land and water management. effective utilization and increased food production. Problem of Technology. The poor condition of feeder roads and other transport facilities F. J. desert encroachment. repair and spare parts to farmers. B. farm infrastructure. Shortage of qualified manpower in key areas C.

it operates at around 100. Its four refineries. and the 12th largest world-wide. upstream.3. namely. Production level is about 2. have lasted for the past 30 years old.S. Although it is the fifth-largest supplier of crude oil to the U. which demonstrates the distribution arm and association with final consumers of refined petroleum products in the domestic economy. The most uncertain over the years has been the downstream sector. it has to import gasoline which it sells at subsidized prices. Nigeria is raking in the cash from the high prices of its crude-oil exports.2 NIGERIA GAS SECTOR AND GDP OPPORTUNITIES AND BARRIERS THE POTENTIAL 5 BARRIERS ● World’s 7th largest gas reserves= 184 TCF ● Pricing ● Fiscal Terms ● Significant gas reserves upside 20 . But the country is in a bind: Because of inadequate refining capacity. Oil accounts for 40% of GDP.750 barrels a day. This embraces less than half of Nigeria's gasoline requirement of around 250. Because of their age and poor maintenance. 70% of Government revenue and 95% of foreign exchange earnings. it faces rising bills to cover the costs. Nigeria is saddled with a dilapidated infrastructure and little economic development outside the oil sector.2million bpd and 2 billion cubic feet per day TABLE 3.000 barrels a day. downstream and gas. with a total capacity of 438. Now.4 OIL SECTOR The Nigerian oil sector can be categorized into three main sub-sectors. According to Vincent Nwanma and Norval Scott Dow Jones Newswires (2004).000 barrels a day meaning it has to rely on imports. According to a journal by Bureau of Public Enterprises Oil and Gas Investments in Nigeria Conference (2002 p 4-7).

real estate. In analysing the Nigerian various sectors. hairdressers. financial intermediaries. service and industry has been recognized as the core of the process of growth. The industrial sector has performed dismally in the last century. storage. restaurants. (NNPC) 2006 3. entertainers. it is the role of manufacturing sector that seem to be the significant factor in modern economic growth. services account for 24 percent of the GDP. but the fall in the global price of oil in the mid-1980s created a shortage of the foreign exchange needed to acquire raw materials. The informal service sector consists of small-scale enterprises that rely on family labour. rich in liquids ● Legal and Regulatory Framework ● Financing ● Institutional/Infrastructural Arrangements Source: Nigeria National Petroleum Corporation.● No dedicated gas exploration to date ● High grade gas quality – 0% Sulphur. retail trade and wholesales. The manufacturing sector 21 . Transformation in the relative significance of agriculture. High productivity in industrial. banks. government and other services. renting and business activities. porters. communication. law offices. transport. tailors. including traders.6 INDUSTRIAL SECTOR The increased revenue from oil aided to speed up the rate of industrial development. Other services are provided by formal-sector entrepreneurs that include. and travel agencies. In the industrial sector. oil and the service sectors are essential for rapid economic growth and development in Nigeria. hotels. 3.5 SERVICE SECTOR The Service sector is a wide sector and can be classified as part of the Nigerian economy which embrace most informal and many formal enterprises. auto mechanics. agricultural.

compose a range of goods that included milled grain, vegetable oil, meat products, dairy products, sugar refined, soft drinks, beer, cigarettes, textiles, footwear, wood, paper products, soap, paint, pharmaceutical goods, ceramics, chemical products, tires, tubes, plastics, cement, glass, bricks, tiles, metal goods, agricultural machinery, household electrical appliances, radios, motor vehicles, and jewelleries. Between 1982 and 1986, Nigeria's value added in manufacturing fell 25 percent, this is due to the effect of inefficient resource allocation caused by distorted prices most importantly for exports and import substitutes and prohibitive import restrictions. Often, the manufacturing sector is characterized by increasing returns to scale and positive externalities. A decrease of the manufacturing sector further decreases the productivity and profitability of investments, accelerating the decrease in investments (Sachs and Warner 1995, 1999a, Gillis et.al 1996, Gylfason 2000, 2001a). Other reasons for the poor performance of manufacturing enterprises include poor investment phase preparation, (inadequate feasibility), lack of adequate techno managerial skills for investments production and maintenance, misuses of monopoly powers, poor capitalization resulting in inadequate working capital, defective capital structures resulting in heavy dependence on government for the operation, bureaucracy in their relations with supervising ministries, performance of the manufacturing sector: • Low capacity utilisation. • A collapse in the world market price of oil, creating shortages of the foreign currency required for importing raw materials and capital goods. • Obsolete equipment and machinery. • Inadequate infrastructure. • Implementation of inappropriate economic policies, such as high interestrate regimes and inflationary financing. • Liberalisation and deregulation of the economy. 3.6.1 PERFORMANCE OF THE MANUFACTURING SECTOR mismanagement, corruption and nepotism. (Oyelaran-Oyeyinka et al, 1997). The following reasons account for the fall in the

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The performance of the manufacturing sector was unprepossessing, even appalling, within the sub-period, exclusively between 1995 and 2000. This weak performance was perhaps has not expectedly given the unclear macroeconomic and policy environment in Nigeria. During the 1996-2000 periods, overall growth of real gross domestic product (GDP) was unimpressive, ranging between 2.4% and 3.8%. See Table 3.2 below for selected macroeconomic indicators. The early period of independence till the mid-1970s brought about a rapid growth of industrial capacity along side with output, as this denotes the contribution of the manufacturing sector to GDP which rose from 4.8% to 8.2%. This structure was altered when crude oil suddenly became imperative and important to the world economy through its supply-price nexus, as shown in the table below

Table 3.3 SECTOR Agriculture

NIGERIA: SECTORAL CONTRIBUTION TO GROSS DOMESTIC 1960 64.1% 4.8% 0.3% 1970 47.6% 8.2% 7.1% 1980 30.8% 8.1% 22.0% 39.1% 1990 8.2% 2000 3.4% 2002 5.5% 40.6%

PRODUCT (GDP) 39.0% 35.7% 28.35% 12.8% 47.5%

Manufacturing Crude Oil Others

30.8% 37.1%

40.0% 13.4% 25.55%

Source: Central Bank of Nigeria, Changing Structure of the Nigerian Economy (2000) and Annual Report & Statement of Accounts (2002). As manufacturers are required to invest huge capital funds to provide alternative infrastructural facilities for their operations, domestic industries carry high cost/price structure which results in loss of competitiveness for their products in both the domestic and foreign markets. Hence, manufacturing capacity utilization rate has fallen from an

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average of over 70.0 percent for the period 1975-80 to about 30.0 percent during 19961998, owing to infrastructural failures and other endemic problems of the economy, CBN (2000, p. 46). Table 3.4 Selected indicators of economic growth in Nigeria, 1960–1989 (average annual growth rate in percent) Period GDP Agriculture Industry Manufacturing Services 1960–1970 3.1 -0.4 12.0 9.1 4.9 1970–1980 6.5 0.8 8.1 12.0 9.7 1980–1989 -0.5 1.3 -2.1 0.8 -0.4

Source: World Bank: World Development Report, 1982 and 1991.

The generally low factor productivities for most sectors are due, in part, to the low average capacity utilization in most sector especially post 1981 and the use of obsolete technology. The low labour productivity is sometimes used to justify the low real wages in the manufacturing sector (World Bank, 1990). The initial growth was not sustained and came from a low base. The growth of manufacturing lagged behind that of GDP leading to a declining share of manufacturing in GDP and therefore a lack of intersectoral structural change of the type usually associated with development (Nixson, 1990). In the Nigerian manufacturing industry, high productivity is essential for the sectors’ recovery, achieving competitiveness and boosting the GDP of the economy. There are five ways to increasing the growth rate in the manufacturing industry. One way is Upgrading of Technological Capacity this is achieved by improve in productivity through upgrading of its technologies and enhancing research and development in the sense of applied industrial research. Another way is by Reducing Cost of Production. By adopting

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while more than half. cement. Increase in investments will yield a high growth rate and high productivity in the manufacturing sector. on the average. Reducing dependence on imports for industrial goods will contribute a lot in reducing cost in the long-run and boosting productivity in the manufacturing sector. soap and detergents. 57 per cent. 3.strategic planning is one way of minimising costs and boosting productivity in the manufacturing sector.1 per cent during the period 1980-89. paints. the manufacturing output growth cut down drastically to an annual average of about -2. About 11 per cent recorded no growth. including soft drinks. Growth rate in the Industrial was relatively high in the period 1960-70 at an annual average of 12. there is little or no data on productivity levels in the Nigerian economy in general and the manufacturing sector in particular. The Government should give priority facilities that will contribute or facilitate industrial operations. only 30 per cent of respondents indicated they had rising productivity. Good working framework increases productivity in the manufacturing sector and reduces production costs. such as telecommunication. Power supply and water supply. This negative trend in the performance of manufacturing production indicates falling productivity in the sub-sector. The fourth method is by Reducing Dependence on Imports. Finally there should be Rehabilitation and Development of Infrastructural Facilities.2 PRODUCTIVITY IN THE NIGERIAN MANUFACTURING INDUSTRY Perhaps owing to the complexities involved in constructing productivity index. The third way is by Increasing Investments. recorded declining productivity levels. 25 . Since then it’s been indicated that the situation has been worsened ever since then.6. However. The Manufacturers Association of Nigeria (MAN) acknowledged the general trend in productivity in the industrial sector was proved negative in 1989. This demonstrated the significance at which the government attributed to manufacturing activities and the adoption of import substitution industralisation strategy from independence which was as a result in the establishment of many consumer goods industries. Oshoba (1989) study on food and basic metal industries.0 per cent. transportation services. Ad hoc studies conducted during 1989 indicated that. 1996). there was little rise in productivity (Enisan and Akinlo.

such as commerce. Low technology is accountable for the inadequacy for local industry to be able to produce capital goods such as raw materials.3. raising productivity and improving competitiveness. information technology and human resources development which are vital for reducing production costs. giving rise to frequent breakdown and reduction in capacity utilization rates. restructure and diversify the productive base of the economy so as to reduce dependency on the oil sector and imports. cement. banks acknowledge manufacturing as a high risk venture in the Nigerian environment. bakery. 26 . high interest and exchange rates and diseconomies of scale. (c) High Cost of Production: Since the introduction of Structural Adjustment Programme SAP (of which its major objectives were. Industries in Nigeria cannot secure the use of modern machines in order to reduce processes. Nevertheless. the bulk of which are imported.6.3 INCESSANT PROBLEMS IN THE MANUFACTURING SECTOR High productivity in the Nigerian manufacturing sector has been accountable to many factors which include the following: (a) Low Level of Technology: This is considered to be the greatest impediment constraining productivity in the sub-sector as advancement in technology and innovations are the fundamental forces propelling industrialization in recent times. high and increasing cost of production has been recorded by most firms as a main constraint on their operations. achieve fiscal and balance of payments viability over the medium term. The level of low investments has been traced immensely to the financial sector mainly the indisposition to make credits available to manufacturers. hence banks prefer to lend to low-risk ventures. High cost are traced largely to poor performing infrastructural facilities. which has developed into increased unit price of manufactures. Most machineries used especially for textiles. spare parts and machinery. (b) Low Level of Investments: The level of inadequacy of funds makes it difficult for firms to invest in modern machines. and to promote non-inflationary economic growth). to. leather. paper production and many others are all being produced with machineries procured in the 1960s and 1970s. Technology has brought about easy processes and procedures of carrying out jobs and automation have revolutionalised the manufacturing industry. that have high returns.

low effective demand for goods. There was a neglect of the agricultural sector by mid 1980s and this contributed to the origin of our economic problem. liquidity squeeze and fallen capacity utilization rates. 3. Nigeria's vast oil wealth. is now unable to payoff foreign debts and rebuilds the country. Bauer(1991. are characterized by frequent interruption in power supply. lack of clear development vision and commitment to the Nigerian project. Bauer (1991.122) analysed that industrialization in the sense of state support for manufacturing activity has been a major plank of development policy and planning in many less developed countries’ Manufacturing is a subset within the industrialization matrix and the manufacturing sector in Nigeria has been facing many problems over the years. All these contributed to the major causes of Nigeria’s failed past. The price of oil escalated in the 1970's where the economy boomed and afterwards the price of oil fell. (e) Poor Performing Infrastructure: Poor performance of infrastructural facilities. According to Gordon (1992). The Nigerian debt came when the price of oil crashed in the 1980's. p. inefficiencies and waste. The government used the old development models of import substitution industrialization and this postulated the government as the dictator. producer and controller in the economy which had affected abnormal incentives.7 WHY THE PAST FAILURES? According to Professor Kilby. who suggested great majority of underdeveloped countries will have to place major emphasis upon import replacement if they wish to increase the extent of their industrialization. (d) Inflation: This can be described as persistent increase in the general price level. p. compared with a Gross Domestic Product of $21 billion. poor and frequently changing policies and programmes. It also encourages speculative activities thereby diverting resources from productive ventures. Nigeria is depended on oil exports for 95% of its foreign exchange. water supplies and inconsistency in telecommunication systems and transportation systems. was bankrupt by corrupt rulers in the past. These poor performances have a negative effect on productivity. Nigeria has a national debt of $32 billion. In Nigeria the history of 27 .133). There was an inappropriate development framework. It creates a disincentive to for future saving use and also retards investments and growth.

the overriding aim of development effort in Nigeria was to bring about an improvement in the living conditions of the people. In addition to the three policy objectives inherited from the Third National Development Plan namely. The last two centuries.industrial and manufacturing development is a classic illustration of how a country could neglect a vital sector through policy inconsistencies. experienced growth of comparatively low or mediocre magnitude. unpredictable government policies. unfair tariff regime. ineffective regulatory agencies.8 SOUND ECONOMIC POLICIES Economic growth is an integrated concept which includes increasing income and productivity. It is now accepted in the development conformity that good policies matters and can bring about development. economic growth and development and development. The type of policies that drive economic growth include those on service. 3. According to the Fourth National Development Plan. Inward-looking development strategy stresses the need for LDCs to evolve their own styles of development and control their own destiny. Nigeria and Venezuela. and industrial sector. Russia. agricultural. Nigeria has practised poor policies and there have been policy inconsistencies. According to Todaro (2000). nonimplementation of existing policies. inadequate infrastructure. Growth generates resources which are potentially available for development. Low patronage. price stability and social equity. the fiscal 28 . A convenient way to approach the complex is issues of appropriate trade policies for development is to set specific policies in the context of a broader LDC strategy of looking inward. high interest rates. in many poor countries agriculture is especially important. This means policies to encourage indigenous “learning by doing” in manufacturing and the development of indigenous technologies appropriate to a country’s resource endowments. There are certain constraints that drawn in this sector which include.g. The neglect of the agricultural sector has further denied manufacturers and industries their basic source of raw material and this has to a shortage in locally sourced inputs which attributes to low industrialization. e. and economic diversification. Sachs and Warner (1995) claim that this is a historically common pattern. countries rich in natural resources. generation of employment. dumping of cheap products.

• Systematic reduction of the role of government in direct production of goods and strengthening its facilitation and regulatory roles • Pursuit of private sector/export led growth • Empowering the people through gainful employment and creating safety nets for vulnerable groups. Nevertheless. 31-32) adds that these remote causes are manifested in many immediate causes such as: (i) the high cost of doing business arising mainly from inadequate infrastructure.99 period). • Sustenance of high but broad –based non-oil GDP growth rate consistent with poverty reduction and employment generation. According to him. In order to rekindle economic growth. the authorities need to formulate and implement sound macroeconomic policies that promote growth through.1 EXPLAINING NIGERIA’S SLOW GROWTH In the development orthodoxy it is accepted that good policies matters and can bring about development. Herrick and Kindleberger (1988) stated that countries that aspire to economic development must face international issues squarely if they are to be successful. In providing solution to the question of why Nigeria has failed to develop. (iii) a falling investment-GDP ratio (which had reached 6% during the 1995. (ii) the noncompetitiveness of the domestic producers. there are remote (long-term) and immediate causes for this economic stagnation. • Diversification of the production structure away from oil/mineral resources.policy in the Fourth National Development Plan was specifically directed at raising additional revenue (Mbanefoh 1992). Taiwo(2001. adopting a recently approach used by Taiwo (2001. Nigeria has been on the track of poor policies and this brings about policy inconsistencies. policy reversals and often a lack of policy coherence.8. 3. 30-32) in attempting to explain Nigeria’s economic stagnation. and incomprehensible delays in capital releases for 29 . leading to continued de-industrialization. The remote causes are based on weak production base arising largely from a poor technological base. (iv) a poor planning and data base. • Ensuring international competitiveness.

and improved political stability. This chapter begins by explaining how these variables are measured.3 expatiates on how the estimations are conducted this includes how to test for the existence of a unit root. 3. the generation of residuals and 30 . CHAPTER FOUR METHODOLOGY 4. and (v) political instability. government expenditure.75%. This is low compared with the standards of both developing and industrialized countries. net exports which is the difference between exports and imports and lagged variables of GDP. achieving a deregulated financial environment. strategies. policies and measures to deal with uncertainty. Following the presentation drawn on the discussion from Iyoha (1999b). insecurity of life and property. the debt overhang problem. Subsequently. in section 4. and social and ethnic disharmony.8. promotion of foreign private investment. section 4. the annual ratio of investment to income averaged 16.public sector projects coupled with inadequate capacity for executing large-scale projects.0 Introduction This section discusses the methodology used in conducting our empirical studies. the following were identified as the major macroeconomic issues in the attempt to rekindle investment and sustain it in Nigeria: “the macroeconomic policy environment. As discussed briefly we employed most of the traditional variables that are considered as the determinants for economic growth. These economic policies should refer to the actions in which government controls the economic field.1. gross fixed capital formation as a proxy for gross investment. increasing economic and financial openness. we explain the variables used. GDP which is set as the dependent variable in our empirical study is also used as a proxy for economic growth.2 POLICIES TO REKINDLE ECONOMIC GROWTH IN NIGERIA Between 1960 and 2000. Hence in section 4. appropriate macroeconomic policies. These variables include private consumption.” Macroeconomic policy instruments fall within the realm of major macroeconomics policy.2 we specify our model.

2000). This will be based on the Keynesian model. As a result we use the GDP in Nigeria as a proxy for economic growth. 4. Van Ark and Barrington.1. in a politically stable economy and in a country in which the rule of law is enforced. As an economy grows it is expected that the growth rate in GDP increases. It is also the sum of value which is added up at every stage of production of all final goods and services produced within a country in a specific period of time (McGuckin. Thus changes in the economic growth are captured by changes in GDP. This is represented below by the following equation. 4.1 VARIABLES USED AND THEIR MEASUREMENT The literature on the determinants of growth is replete in economic literature. Although there exist a large volume of text on the subject of economic growth most of the literature relies on the use of a cobb-douglas function which involves two variables such as labour and capital which owning to data problems are not employed in this study. However for the purposes of this study we only limit our study to the use of the variables discussed in the introduction of this chapter. Macroeconomic equilibrium in the short-run Keynesian model occurs when aggregate output equals aggregate demand.1 GROSS DOMESTIC PRODUCT This is one of the major ways of measuring the size of the economy. Going by the expenditure approach in accounting for national income in an open economy such as that of Nigeria. aggregate demand (AD) equals C + I + G + NX. GDP = C + G + I + NX Where GDP = is a measure of economic growth from year to year 31 . This is the actual monetary value of all finished goods and services produced in a country within a specific period of time.the application of an Error correction model in conducting our regression for the determinants of economic growth. Economic growth can be achieved at least theoretically through a high inflow of both domestic and foreign capital.

Data was collected on those variables originating from the appendix review as being relevant to the indicators of economic growth.C – Equal to all private consumption. government expenditure and net exports) and GDP. To allow for sustained growth GDP equation is employed. the more the economy can afford to invest. variables such as gross fixed capital formation net export. Methods require form to be developed in order to find statistically significant relationship between the traditional determinants of growth (consumption expenditure.2 MODEL SPECIFICATION Given time and resource constraints this study relied mostly on secondary data. the larger the fraction of GDP devoted to investment at the expense of consumption. Genuine saving is intended to indicate the difference between sustainable net national product and consumption. G – is the sum of government spending I – the sum of all the country’s businesses spending on capital NX – the nation’s total net exports. the higher the rate of capital 32 . Due to the difficulty associated in obtaining annual data for gross investment in the economy we use gross fixed capital formation as a proxy for gross investment in the economy. 2001). Gross investment is assumed to be a fraction of GDP. or consumer spending in a nation’s economy. calculated as total exports minus total imports. gross fixed capital formation. government expenditure and lagged variables of GDP are used.(NX = Exports – Imports) We therefore modify the above equation to ascertain the effectiveness of each of the variables serve as the most important determinants of economic growth in Nigeria. The main idea behind this assumption is that the higher the output or national income. where sustainable net national product means the maximum amount that could be consumed without reducing the present value of national welfare along the optimum path (Hamilton. 4. In this growth model.

GDPt = αt + Σ β1Ct + Σ β2 It + Σ β3Gt + Σ β4NXt + Σ β5GDPt-1 + εt . (2) WHERE. 1991).………………. net exports. private consumption..formation and hence the higher the rate of GDP growth. and on net exports NX (exports minus imports) and this is represented by Y = C + I + G + NX……………………………………………………………... The model of national income determination in the short run is based on the forces of aggregate demand. and government expenditure to have an impact on national economic performance.e.M) GDPt-1=lagged variables of GDP 33 . We use ordinary least squares (OLS) regression to model economic growth. Economic growth studied for about 35 years is employed for this research work. 1970-2005) C = Consumption G = Government Expenditures I= Gross fixed capital formation NX = Net Exports = (X. national output can be decomposed into expenditure by the consumers C. This lag allows sufficient time for independent variables such as investment. We specify the econometric model used in the study as. by government G. on investment I. OUR DEPENDENT VARIABLE GDP=Gross domestic product EXPLANATORY VARIABLES ARE α = Constant factor Σ = Summation of a variable from t=year 1 to 35 (i.(1) The modelling approach controls and measures variables we employ which are chosen to be consistent with the prior high quality of national economic growth by economists (Barro. By way of the national income identity..

.3 ECONOMETRIC METHODOLOGIES: BASIC REGRESSION SPECIFICATIONS Recent developments in econometric studies suggests that caution is necessary in applying the ordinary least square (OLS) method in time series analysis of this nature. 34 . we reject the null hypothesis of a unit root and conclude that the variables are stationary (Koop.Where X = Exports M = Imports ε = the random error term to compensate for errors in data 4. The reason is because most times series data are usually non. A time series data is stationary when it is integrated to order zero I (0) and non-stationary when it is integrated to a higher order I (n) where n is a higher order. 2000:49). whilst the value of the covariance between two specified periods depends only on the gap between the periods and not the actual time at which the covariance is considered and any violation in the conditions above results in the non-stationarity of the process (Tsikata et al.stationary. In order to test for the existence of stationarity or non stationarity among the variables. Non-stationarity in the level of a time series can always be tested in an applied econometric research.1 software package to test for the stationarity of the time series data. Stationarity results as the mean and variance of a time series data remains constant overtime. In order to then avoid having a spurious result we employ the Dickey – Fuller (DF) and Augmented Dickey – Fuller (ADF) test using Microfit4. 2005:154). When a time series is non-stationary it is most likely for one to obtain regression results with promising diagnostic test statistics given the when the reason of estimation is spurious Charemza & Deadman (1992). we set the following hypothesis: Ho: ρ =1 variables are non stationary and has a unit root Hı: / ρ / <1 variables are stationary and has a deterministic trend. When the ADF test statistic (t-ratio) is greater than the DF critical value in absolute terms as reported by Microfit.

it can be made stationary by running the regression in their first differences as long as their first differences are stationary.(5).e. we obtain equation (4) below. hence if ρ=1. such estimations will only cover in the short run which response to the variables by the given result.run value will be added. Nevertheless.… (3). Thus when ρ=1 the times series data is non-stationary. when ρ=1. The coefficient of the lagged residual measures the extent of adjustment in a given period to deviations from the long-run equilibrium (Koop. Let λ = (ρ – 1) this simply implies that ∆ Yt = β0 + λYt-1+ et………………………………………………(7). the equation two is then co-integrated and there will then be the performance of our final analysis by adding lagged variables of the residual term to the first difference of equation two. then λ=0 and this gives the general condition for non-stationarity or unit root for a time series data (i. an error correction term that ties in the short – run behaviour of the dependent variables with its long. In order to do this we estimate equation two by OLS to determine the variables are well co-integrated.Yt = β0 + ρYt-1+ et (3) by subtract Yt-1 from both sides of…. And a random walk is an example of a non-stationarity time series. This is achieved by generating the residuals in equation two and performing a unit root test on the residuals to ascertain if it is stationary [integrated to order zero I (0)]. but ∆ Yt = Yt -Yt-1 hence ∆ Yt = β0 + (ρ – 1)Yt-1+ et…………………………………………………………………. then the time series data is stationary and has a unit root. Yt -Yt-1 = β0 + ρYt-1 .Yt-1 + et………………………………… (4). Re-arranging (4) we express the equation above as Yt -Yt-1 = β0 + (ρ – 1)Yt-1+ et …………………………………. 2005:160-175). In (time series) econometrics. -1< ρ <1 which is equivalent to -2< λ < 0). a time series that has a unit root is known as a random walk (time series). (6). 35 . When the residuals is stationary I (0). When the time series data is non stationary.

We use an Error Correction Model or Approach to carry out our estimation. we reject the null hypothesis of a unit root and come to a conclusion that the variables are cointegrated.∆ GDPt = αt + Σ β1∆ Ct + Σ β2∆ It + Σ β3∆ Gt + Σ β4∆ NXt + Σ β5∆ LAGGDPt + λ LAGRES εt (8) Where ∆ Yt = Yt -Yt-1 and ∆ Yt = the first difference of a time series data and Yt-1 = lagged variable of Y by one period. (2) To conduct a unit root test on the residuals using the Dickey – Fuller (DF) and Augmented Dickey – Fuller (ADF). 4. 2005:168). This occurs if the errors or residuals trends with the variables the errors produced in the estimation will be growing steadily and this will violate the principles of cointegration (Koop. When the ADF test statistic (t-ratio) is greater than the DF critical value in absolute terms as reported by Microfit. There are two basic steps to follow in order to perform a unit root test on the residuals (1) To regress the dependent variable in equation two this is GDP.. if we accept the null hypothesis then cointegration does not exist and we will end up with spurious regression which renders the obtained results from the regression meaningless.4 UNIT ROOT TEST FOR RESIDUAL ……………………………………………………………………………………………………………………………………. However. on the set of independent variables and then generates the residuals. The results stated from these tests are based on regression estimates with intercept but without a trend. 4.5 Error Correction Model 36 .

(9) Recalling from equation (8) ∆ GDPt = αt + Σ β1∆ Ct +Σ β2∆ It + Σ β3∆ Gt + Σ β4∆ NXt + Σ β5∆ GDPt-1 + λ LAGRES + εt The first difference of this equation is tested for stationarity... Hence we test their second difference for a unit root. We also generate the residuals from equation (9) and test for cointegration.. Nevertheless. we then will add the residuals to equation (10) to form our ECM and we estimate our determinants using equation (11) below. ∆ GDPt = αt + Σ β1∆ Ct + Σ β2∆ It + Σ β3∆ Gt + Σ β4∆ NXt + Σ β5∆ GDPt-1 + εt . ∆ 2GDPt = αt + Σ β1∆ 2Ct + Σ β2∆ 2It + Σ β3∆ 2Gt + Σ β4∆ 2NXt + Σ β5∆ 2GDPt-1 + εt (10) After testing for cointegration and stationarity in the residuals from (9).……………………………………………….. ∆ 2GDPt = αt + Σ β1∆ 2Ct + Σ β2∆ 2It + Σ β3∆ 2Gt + Σ β4∆ 2NXt + Σ β5∆ 2GDPt-1 + δLAGRES1 + εt .………….Drawing from our analysis above the Error Correction Model (ECM) is applied only when the variables are cointegrated. Most data become stationary at their second difference. this is usually the case in some time series variables. If the variables are not stationary. it is possible that the first differences are not stationary. The second difference of the time series is stated below. and established the existence of cointegration. then the first difference of equation two will be.………. The second difference is given in equation (10) below..(11) 37 . …….

∆ 2 2Xt = ∆ 2Xt . The CUSUM test plots the recursive residuals against the break points and the CUSUMQ test plots the squared recursive residuals against the break 38 . Hence we report the DurbinWaston (DW) Statistic. A CUSUM (cumulative sum) and CUSUMSQ (cumulative sum of squares) test is conducted on the final model to finally determine if the determinants of GDP growth rate are stable in the long run. 2005).0) then serial correlation or autocorrelation is eliminated and the resulting estimates forms the core components of the model (Halicioglu. 2006). (i. functional form statistic and heteroskedastic statistic in our table of results.22< dw stat < 2. LagRES1= the lagged values of the residual generated by OLS in equation 9.e. However. we cannot work with logs. Bounds cointegration technique crashes (Frimpong & Oteng-Abayie. the Bounds cointegration method relies extensively on using logs of variables included in the model and when one has negative values whose logs can not be calculated as in this research.∆ 2Xt-1) Coefficient of lagged values of the residual δ measures the extent of adjustment in a given period to derivations in the long run equilibrium (Tsikata et al. Bound cointegration techniques also involves the use of the logs in the data transformation and because the data has got some variables. 2000). then we can then say serial correlation exists and when its closer to two (i. Whereby the DW statistic is numerically further away from two or above two. It is very likely that heteroskedastic problems may not exist but autocorrelations may pertain and this is eliminated using Cochrane-Orcutt procedure with Microfit.δ = the coefficient of the lagged residual term or error correction term which has both short-run and long-run properties.e 1. Equation (11) is tested for autocorrelation and heteroskedasticity. ∆ 2= Second difference.

and collection of adequate data for this study.6 SOURCES OF DATA The principle data source of Nigeria in this paper is drawn from the CBN. Due mainly to data constraints. The estimated regression coefficients are stable and correctly specified when both plots stay within the five percent significance level (Brown et al. The data set starts from 1970 to 2005 by time series data on the focus variables for the study were obtained from the IMF statistical yearbooks and the official website of the Central Bank of Nigeria. but restricted access to primary literature. Gujarati (1995:23) describes a time series as ‘a set of observations on the values that a variable takes at different times’. b) Further.7 SCOPE AND LIMITATIONS OF THE STUDY The literature search will aim to be comprehensive and broad in scope. the present study suffers from the following limitations: 1 2 a) One major limitation is lack of reliable data on the major macro-economic variables under consideration for economic growth rate over a period of 35 years. an agency under the National Planning Commission (NPC) is responsible for the production of macroeconomic data while the Central Bank of Nigeria (CBN) needs these statistics for analyses of economic and financial developments and the formulation implementation and monitoring of economic and financial policy measures. and The United Nations Development Program. various issues. The International Monetary Fund. it has been widely believed that one major reason for the poor growth performance of Nigeria’s economy is lack of good governance. no 39 . 4. 4. The data was taken for all variables on a yearly basis from 1970 to 2005 obtained from the official website of the Central Bank of Nigeria (CBN). statistical bulletin. However. The period for making this research is limited due to the restrictions of time to complete the project and resources to support it. Other complementary data were obtained from the Internet based databanks of the World Bank. The time frame usually is at regular intervals. in this instance the data relate to yearly intervals.points. 1975). In Nigeria. for example due to the remote location of material sought. while the Federal Office of Statistics (FOS).

RESULTS AND INTERPRETATION 5.2 tests our hypotheses and model stability.satisfactory indicator is readily available at the moment to account for the governance variable over the years. This is mainly done to avoid spurious regression results which are the basic characteristic of time series variables and they are non stationary. The results on the unit root test for all variables and regression results are reported and explained in Section 5. c) Similarly.1 and Section 5.0 Introduction The empirical estimates of our econometric models are presented in this chapter. 40 . another data constraint relates to lack of adequate and reliable information on economic growth rate for various sectors over the years. Most time series econometric analysis are normally done by performing a correlation test among the stationary variables and explore the time series properties of our data to ascertain the optimal lag structure of our models as stated in the methodology. CHAPTER FIVE ESTIMATION.

4372 5 -3.Xt-1 .5671 G -1. TABLE 5(a): ADF Unit root Tests results with trends VARIABLES ADF (TEST LAG DF CRITICAL STATISTICS) LENGTH VALUE GDP -1.5671 C -2. The first difference of equation two is given below.1 UNIT ROOT TESTS We test for the existence of a unit root in equation two and therefore we present the table below which gives a summary of the results. The order of the lag length is selected using the Akaike Information Criterion (AIC).5671 LAGGDP -1.4904 3 -3.5671 I -2.2034 1 -3. Ho: ρ =1 variables are non stationary and has a unit root Hı: / ρ / <1 variables are stationary and has a deterministic trend.1770 2 -3.445 5 -3. Therefore we cannot reject the null hypothesis Ho hence concluding that all the variables have a unit root.7469 5 -3.5.5671 Notes: Critical values for the augmented Dickey-Fuller statistics are at 5% level.5671 NX -2. ∆ GDPt = αt + Σ β1∆ Ct + Σ β2∆ It + Σ β3∆ Gt + Σ β4∆ NXt + Σ β5∆ LAGGDPt + εt Where ∆ Xt = Xt . We test the usual hypotheses for a unit root. we evaluated the first difference of equation two and tested if they were stationary. Table 5(a) indicates that all the variables have a unit root since all the ADF test statistics is less than the DF critical value. TABLE 5(b): ADF Unit root Tests results with trends VARIABLES ADF (TEST LAG DF CRITICAL 41 . To ensure all non stationary variables stationary.

5731 DNX -2.0199 3 -3.4240 5 -3. As a result we cannot run a regression of non-stationary variables hence we estimate the second difference for stationarity.8143 4 -3.5731 DI -3.2520 3 -3.5796 DDLAGGDP -5. DD represents ∆ 2 in microfit It is clearly noted that the second difference of all estimated variables are stationary.2516 5 -3.8985 1 -3. In order to use the error correction model we first and foremost generate the residuals from 42 .STATISTICS) LENGTH VALUE DGDP -2. below shows a summary of the unit root test (See appendix). TABLE 5(c): ADF Unit root Tests results with trends VARIABLES ADF (TEST LAG DF CRITICAL STATISTICS) LENGTH VALUE DDGDP -7.4531 5 -3.5796 DDG -7.5731 Notes: Critical values for the augmented Dickey-Fuller statistics are at 5% level.8925 5 -3.1271 1 -3. D represents ∆ in microfit Table 5(b) above shows that none of the variables are stationary.2919 1 -3.5796 Notes: Critical values for the augmented Dickey-Fuller statistics are at 5% level.5731 DLAGGDP -2.5796 DD I -4. The order of the lag length is selected using the Akaike Information Criterion (AIC).8097 5 -3.5731 DG -2.5796 DDC -7. The second difference shows that all the variables are stationary hence we estimate the determinants by using the second difference with an error correction approach.5091 3 -3.5731 DC -2. The order of the lag length is selected using the Akaike Information Criterion (AIC).5796 DDNX -3. Table 5(c).

the first difference of equation (9) and then conduct a unit root test on the residuals (lagged by one period) to ascertain if the dependent variable is cointegrated with the independent variables. A full report of the regression results is stated in the appendix ∆ 2GDPt = αt + Σ β1∆ 2Ct + Σ β2∆ 2It + Σ β3∆ 2Gt + Σ β4∆ 2NXt + Σ β5∆ 2GDPt-1 + δLAGRES1 + εt Initial results from our regression indicate that we have a low DW-statistic. Table 5(d) below reports the results obtained from the unit root test of the residuals. Table 5(e) presents a summary of the regression estimates as carried out in their second difference. TABLE 5(d): ADF Unit root Tests results with residuals in equation eight without trends VARIABLES ADF (TEST LAG DF CRITICAL STATISTICS) LENGTH VALUE LAGRES1 -4. This signifies that the result is affirmative and that cointegration exists.2398 1 -2.9665 Notes: Critical values for the augmented Dickey-Fuller statistics are at 5% level. we adopt Cochrane Orcutt’s measures with the aid of microfit to eliminate it. this is reported in column one. Hence. A low dw value normally suggests that autocorrelation is present in our estimation. The order of the lag length is selected using the Akaike Information Criterion (AIC). The DW statistic improves drastically and therefore the most appropriate estimates are reported in column 2. The results indicate that approximately 98% of the 43 . Hence the determinants of GDP are carried out in their second difference. DD represents ∆ 2 in microfit Given that the ADF test statistic is greater than the DF critical value we reject the null hypothesis of a unit root and arrive at a conclusion that the variables of the second difference are cointegrated and stationary.

2287 2 787.83920 5.1161 -.3820 .093859 .1360 1.3962 .14592 -.29129 -. [T-RATIOS ARE IN BRACKTS] *** DD 44 .9997 1.98890 .1443 -5.3898 3 397.8505 .7824 -.63292 2.547 .87955 1.3107 -.31010 .73014 6.93681 16.067 Notes: Significant at 5% **Significant .7942 -.198 at 5% after the elimination of serial autocorrelation with COCHRANE-ORCUTT.20906 -1.171 .162337 .9880 .0018 -1.61882 1.90822 6.1406 1.081365 -1.081260 .5297 . Table 5(e) Ordinary Least Squares Estimation Dependent Variables in DDGDP 33 Observations used for estimation from 1973 to 2005 1 458.78341 -1.019 2 Heteroskedasticity[X (1)] .6592 4.010145 -.3888 1.90214 .3980 1.3705 .98391 2.077210 -.dependent variable (GDP) is explained variations in the explanatory variables.0058 10.1047 .0908 LAGRES1 Diagnostic Tests R2 R BAR SQUARE DW STATISTIC -5.89836 .78659 7.507 Functional Form [X2(1)] . The intercept (INPT) is statistically significant at 5% significance level therefore we find it statistically appropriate to employ it in subsequent analysis and subsequent results are reported in column 2 and 3.1377 .87954 1.2135 INPT DDC DDG DDI DDNX DDLAGGDP Autocorrelation[X2(1)] .

Similarly. The former may be attributed to the high level of oil export by Nigeria considering that is the sixth leading exporter of oil in the world.represents ∆ 2 in microfit Upon the elimination of serial correlation from the results obtained in column 1. From column three we can see that apart from the gross fixed capital formation which has a negative sign all of the other variables have the correct signs. The result of not obtaining a significant relationship between government investment expenditure and economic growth is not really surprising considering the high level of corruption in the government and government also having to spend a huge chunk of 45 . the constant is represented by INPT is also statistically insignificant. it is obvious that at a 5% significance level past values of gdp (ddlaggdp) is not statistically significant. Comparing the coefficients of the respective variables we can deduce that among the statitistically significant variables. In addition changes in consumption and changes in net export appear to be the most statistically significant since they have t-ratios which are greater than two in absolute terms. In order to ascertain the most significant contributors or determinants of economic growth we drop the lagged values of gdp from our model and carry out a third regression which is reported in column 3 of the table above. Again our results indicate that approximately 89. private consumption in Nigeria happen to be the most important determinant of growth according to our study. Thus were as a 1% change in private consumption will cause economic growth or GDP to change by approximately one naira whereas the same proportionate change in net export will causes GDP or economic growth to change by approximately 80 kobo. Thus it indicates that there is a statitistically significant positive relationship between economic growth and net exports as well as private consumption.e gdp or economic growth ) are accounted for by changes in the explanatory variables.9% of the variations in the dependent variable (i. The diagnostic tests also indicate that the functional form of our estimated model is correct and there is no problem with autocorrelation nor heteroskedasticity.

this result is consistent with many other researches on GDP to developing and middle income countries.revenues accruing from the exportation of oil to service its self because of its size. See fig 1 and 2 below. An example is the works of Taylor (2000). However. Other measures used in measuring the openness variable in this work such as the ratio of imports plus exports to GDP did not change our result hence it wasn’t reported. Government expenditure is statistically insignificant and this could be due to misplacement of priorities or this could be an increase in corruption rate. 46 . In conclusion private net exports and private consumption are significant determinants of GDP inflow to Nigeria. In addition to the above a plausible explanation as to why net export and Private consumption happen to be the only statistically significant variables are that: population growth in Nigeria is extremely high and in actual fact high population growth leads to increase in private consumption which boosts economic growth as it practically promotes production due to constant demand and constant supply. The model is found to be stable and therefore has predictive ability since both plots lie between the 5% critical boundaries. For a meaningful and sustained economic growth it will be appropriate government channels more of state revenue to put up infrastructure which is a sine qua non for economic growth since the availability of much need infrastructure tends to attract foreign investment ceteris paribus.

Fig. 1 GRAPH WITHOUT GDP P lot of Cum ulative S um of Residuals 15 10 5 0 -5 -10 -15 1973 1978 1983 1988 1993 1998 2003 The s traight lines repres ent critical bounds at 5% s ig 47 .

5 1973 1978 1983 1988 1993 199 T h e s tra ig h t lin e s re p re s e n t c ritic a l 48 .0 -0 .0 0 .P lo t o f C u m u la tive R e c u rs ive R e 1 .5 0 .5 1 .

Fig. 2 GRAPH WITH GDP P lo t o f C u m u la tiv e S u m R e s id u a ls 15 10 5 0 -5 -1 0 -1 5 1973 1978 1983 1988 1993 1998 2003 T h e s tra ig h t lin e s re p re s e n t c ritic a l b o u n d s 49 .

0 0 .0 .5 1 .P lo t o f C u m u la tiv e S R e c u rs iv e R e s id 1 .5 1973 1978 1983 1988 1993 1998 2003 20 T h e s tr a i g h t l i n e s r e p r e s e n t c r i ti c a l b o u 50 .0 .5 0 .

government expenditure and net exports) as used in the study and variables on how investments on the GDP explanatory variables will greatly influence or impact economic growth rate in Nigeria. existence of appropriate policy. We therefore employed some of the controversial results arising from the determinants economic growth in developing countries and as well developed countries which are yet to be tested on the Nigerian economy to ascertain their significance as determinants of economic growth in Nigeria . 1999. gross fixed capital formation.CHAPTER SIX SUMMARY.section or panel analysis of most researchers on developing countries. Previous study on GDP growth rate indicated that the variable for government expenditure was insignificant which were not cognisance in some empirical studies. the quality of investment. political. net exports was the most significant factor. However. and social infrastructure are all determinants of the effectiveness of investment (Hall and Jones. CONCLUSION AND RECOMMENDATION 6. They were positively related. 2003). This is because most developing countries have contrasting the characteristics of underdevelopment hence encountering instability of economic growth which are not taken into cognisance in such studies. We adapted univariate and multivariate regression. Fafchamps.0 SUMMARY AND CONCLUSION This chapter covers the entire research and draws a conclusion based on the empirical test conducted on the determinants of GDP and economic growth in Nigeria The study begun by identifying what the determinants of Economic growth are by relying on cross.The study presented a literature review on how important the traditional determinants of growth (consumption expenditure. its productivity. The GDP of Nigeria is used as a proxy for economic growth in this study which suggest that hhigh investment ratios do not necessarily lead to rapid economic growth. 2000. The results indicated that private consumption and net exports in Nigeria were significant determinants of GDP growth rate over the period of study. Kaipornsak (1995) 51 . Artadi and Sala-i-Martin.

This study tends to highlight some recommendations for future research which will be important if studies are conducted on what granger causes growth in Nigeria whether it is private consumption or net exports. 6. which according to United Nations Survey Report (2003). The resources and time should be channelled towards economic growth by increasing investment to the country and increasing government expenditures.1 RECOMMENDATIONS To boost economic growth in Nigeria. and for local investors in acquiring loans and ways in encouraging new businesses to grow. 52 . has been a subject of concern to potential investors to the country. especially government expenditure. It also will be important if one can ascertain the impart of investments into various sectors of the Nigerian economy to economic growth. and the degree of openness with the emphasis on FDI were major factors. this research recommends among others that Government bodies in charge of promoting economic growth should assist foreign investors some basic fundamentals like acquiring land.studied the source of economic growth and found that spending on R&D.

3607 -344.0448 -341.6952 ADF(2) -5.5157 -348.5108 ADF(3) -4.0942 -347.RESULTS 18 Unit root tests for variable DDC The Dickey-Fuller regressions include an intercept but not a trend ******************************************************************************* 28 observations used in the estimation of all ADF regressions.9230 ADF(1) -8.9706 LL = Maximized log-likelihood AIC = Akaike Information Criterion SBC = Schwarz Bayesian Criterion HQC = Hannan-Quinn Criterion Unit root tests for variable DDC The Dickey-Fuller regressions include an intercept and a linear trend ******************************************************************************* 28 observations used in the estimation of all ADF regressions.5030 -349.6717 -339.6963 -346.5047 -350.0942 -344.7045 -339.1124 ******************************************************************************* 95% critical value for the augmented Dickey-Fuller statistic = -2.5157 -347.8479 -347.6963 -343.5047 -348. Sample period from 1978 to 2005 ******************************************************************************* Test Statistic LL AIC SBC HQC DF -10. Sample period from 1978 to 2005 ******************************************************************************* Test Statistic LL AIC SBC HQC DF -10.7289 -345.0826 -344.0843 -346.5253 -345.1156 53 .0843 -344.4247 -345.

7064 -345.6525 ADF(3) -4.8925 -346.9649 -345.6219 -338.8959 -348.6054 -339.6344 -344.6344 -347.8985 -341.1177 ******************************************************************************* 95% critical value for the augmented Dickey-Fuller statistic = -3.8959 -344.5796 LL = Maximized log-likelihood AIC = Akaike Information Criterion SBC = Schwarz Bayesian Criterion HQC = Hannan-Quinn Criterion 54 .ADF(1) -7.0420 -345.0420 -347.8566 ADF(2) -5.

E.8551[.07E+10 Equation Log-likelihood -392.76281 .000] DLAGGDP -.632]* * * * * * B:Functional Form *CHSQ( 1)= 2.20289 3.7103 DW-statistic 2.316] ******************************************************************************* R-Squared .3996 1.227] DNX . 27)= 2.4 .23485[.051695 .72357 R-Bar-Squared .29319[.127]* * * * * * C:Normality *CHSQ( 2)= 151.0200[.55910 .1 Residual Sum of Squares 2.1331 1.025940[.000]*F( 1.979] DC .2352[. 27)= .1379 ******************************************************************************* Diagnostic Tests ******************************************************************************* * Test Statistics * LM Version * F Version * ******************************************************************************* * * * * * A:Serial Correlation*CHSQ( 1)= .10946 -1.11166 .001] DI .000]* ******************************************************************************* A:Lagrange multiplier test of residual serial correlation B:Ramsey's RESET test using the square of the fitted values C:Based on a test of skewness and kurtosis of residuals D:Based on the regression of squared residuals on squared fitted values 55 .7597[.1962[.091]*F( 1.77779 .1312 Schwarz Bayesian Criterion -402.1760[. F( 5.14969 5.000] Mean of Dependent Variable 11070. Criterion -398.3423 5410.9313[. of Dependent Variable 47675.000]* Not applicable * * * * * * D:Heteroscedasticity*CHSQ( 1)= 15.D.7985[.9 F-stat.1312 Akaike Info. 32)= 25.588]*F( 1.927] DG 1.RESULT 19 REGRESSION IN FIRST DIFFERENCE TO OBTAIN RESIDUALS FOR ERROR CORRECTION MODEL Ordinary Least Squares Estimation ******************************************************************************* Dependent variable is DGDP 34 observations used for estimation from 1972 to 2005 ******************************************************************************* Regressor Coefficient Standard Error T-Ratio[Prob] INPT 140.1 S.67421 S. 28) 14.4751[. of Regression 27211.092461[.6586[.

7 -3194.0 5325.6 -108062.5 -8859.2 1979 -3911.3 694.0 120045.6 1974 25406.0 -3567.8 7024.0 4948.3 -9650.7 1988 19413.0 1281.0 -5654.0 28526.8650 2003 43221.9 1977 18991.0 17912.6 8732.0 32472.0 -1774.3 12311.0 -16649.7 1999 4639.6 2005 32853.4 2002 20003.0 1880.0 -1278.4 1998 10637.RESULTS 20 RESIDUALS FOR REGRESSION Residuals and Fitted Values of Regression ******************************************************************************* Based on OLS regression of DGDP on: INPT DC DI DG DNX DLAGGDP 34 observations used for estimation from 1972 to 2005 ******************************************************************************* Observation Actual Fitted Residual 1972 11033.3 1983 -16346.2 5764.5 10425.0 22902.5 1987 -1787.3 4869.1 404.0 4495.0 6035.4 13529.6 1997 10613.8 1985 25758.0 18718.5 1980 8673.7 1995 7418.5 68942.6 4235.5 10283.2 1992 8644.8 1981 -5953.0 2908.6 -7234.7 1984 -3126.0 -13273.7419 1989 19681.0 6324.0 5882.0 12776.0 18733.0 133317.3 4601.0 25139.0 19109.5 2004 32569.3 -14571.0 2000 19225.0 7008.8 -27430.0 -141275.4 1993 5251.9 9950.1 ******************************************************************************* 56 .0 6151.0 23709.0 2001 19451.3 1973 11983.2 1975 -6366.1 19190.2 1986 4771.4 1994 2688.5 14694.6 13126.0 14121.8 -10134.6 1990 202260.0 1996 14572.5 1991 -168706.4 -16495.7 1780.0 -4422.8 1696.0 19598.6 1982 -4325.0 -5358.6 -17900.4 13459.5 1976 23686.8 -12112.7 1978 -16535.0 10425.0 1015.0 8800.

5530 -327.9665 LL = Maximized log-likelihood AIC = Akaike Information Criterion SBC = Schwarz Bayesian Criterion HQC = Hannan-Quinn Criterion Unit root tests for variable LAGRES The Dickey-Fuller regressions include an intercept and a linear trend ******************************************************************************* 29 observations used in the estimation of all ADF regressions.8167 -327.4588 -326.5731 LL = Maximized log-likelihood AIC = Akaike Information Criterion SBC = Schwarz Bayesian Criterion HQC = Hannan-Quinn Criterion SINCE THE TEST STATISTIC IS GREATER THAN THE CRITICAL VALUE THE RESIDUALS ARE FIRST STATIONARY AND THIS SUGGESTS THAT THERE IS A COINTEGRATION BETWEEN OUR DEPENDENT VARIABLE AND THE INDEPENDENT VARIABLES USED IN THIS STUDY 57 .5796 -325.3062 ADF(2) -4. Sample period from 1977 to 2005 ******************************************************************************* Test Statistic LL AIC SBC HQC DF -5.5294 ADF(3) -3.3762 -328.1836 -328.2744 -327.0480 -322.3963 -322.2349 -328.5590 ******************************************************************************* 95% critical value for the augmented Dickey-Fuller statistic = -3.8184 -326.7346 -321.6748 ADF(3) -3.2398 -323.4304 -321.2744 -331.4588 -329.6284 ADF(1) -4.0371 -326.8259 ADF(2) -4. Sample period from 1977 to 2005 ******************************************************************************* Test Statistic LL AIC SBC HQC DF -5.3630 -322.8771 -327.2345 -326.1836 -326.4498 -329.5796 -326.8873 ******************************************************************************* 95% critical value for the augmented Dickey-Fuller statistic = -2.8184 -329.2692 -322.Result 21 Unit root tests for variable LAGRES The Dickey-Fuller regressions include an intercept but not a trend ******************************************************************************* 29 observations used in the estimation of all ADF regressions.8167 -331.9861 -325.0078 ADF(1) -4.1843 -327.9469 -326.4498 -326.9861 -328.2615 -323.

2121 S.081218 -1.3486[. 26) 39.RESULT 22 ERROR CORRECTION MODEL Ordinary Least Squares Estimation ******************************************************************************* Dependent variable is DDGDP 33 observations used for estimation from 1973 to 2005 ******************************************************************************* Regressor Coefficient Standard Error T-Ratio[Prob] INPT 458.000] Mean of Dependent Variable 661.000] ******************************************************************************* R-Squared .1352 DW-statistic 1.926] DDC .0908 .44035[.067]*F( 1. 25)= 4.E.872] DDNX .086] DDI -.83920 .21369 -5.8974 Akaike Info.3888 .1406[. 25)= 2.326] LAGRES -1.9458[.2 .41925[.D.1047[.6786[.093859[.90214 R-Bar-Squared .8233[.3107[. of Dependent Variable 80892. of Regression 28074.000]* Not applicable * * * * * * D:Heteroscedasticity*CHSQ( 1)= .73014 .0018[. Criterion -387.2287 ******************************************************************************* Diagnostic Tests ******************************************************************************* * Test Statistics * LM Version * F Version * ******************************************************************************* * * * * * A:Serial Correlation*CHSQ( 1)= 5.9 Residual Sum of Squares 2.16325 5.000] DDLAGGDP -.16237[.11570 6.522]* ******************************************************************************* A:Lagrange multiplier test of residual serial correlation B:Ramsey's RESET test using the square of the fitted values C:Based on a test of skewness and kurtosis of residuals D:Based on the regression of squared residuals on squared fitted values 58 .077210 .05E+10 Equation Log-likelihood -380.9842[.081365 .4 F-stat.77917 1.019]*F( 1. 31)= .105]* * * * * * C:Normality *CHSQ( 2)= 159.7824[.507]*F( 1.000] DDG 1.8974 Schwarz Bayesian Criterion -393.9880 4890.87955 S. F( 6.4855[.47550 -.035]* * * * * * B:Functional Form *CHSQ( 1)= 3.

E.3962[.9608 Akaike Info.0 .541] DDC 1.4434 DW-statistic 2.63292 .000] Mean of Dependent Variable 661.98391 S.034829 -.047504*U(-3)+E ( -2. 20) 197.012] ( -.6592 .010145 .29129[.9979[. Criterion -324.22204 2.1161[.773] LAGRES -.040191*U(-2)+ -.15128 -1.1 F-stat.34163)[.62598)[.091435 10.31E+09 Equation Log-likelihood -314.9608 Schwarz Bayesian Criterion -332.736] ( -. F( 9.000] DDG 1.7444)[.2121 S.20906 .37742 4.008] DDNX .D.058129 16.59852*U(-1)+ -.000] DDLAGGDP -.179] ******************************************************************************* R-Squared .93681 .61882[.RESULT 23 Cochrane-Orcutt Method AR(3) converged after 6 iterations ******************************************************************************* Dependent variable is DDGDP 33 observations used for estimation from 1973 to 2005 ******************************************************************************* Regressor Coefficient Standard Error T-Ratio[Prob] INPT 787.9997[.1377 1272.537] T-ratio(s) based on asymptotic standard errors in brackets ******************************************************************************* 59 .0058 .3898 ******************************************************************************* Parameters of the Autoregressive Error Specification ******************************************************************************* U= -. of Regression 10748.98890 R-Bar-Squared .8505[.000] DDI . of Dependent Variable 80892.3820[.9 Residual Sum of Squares 2.

562]* ******************************************************************************* A:Lagrange multiplier test of residual serial correlation B:Ramsey's RESET test using the square of the fitted values C:Based on a test of skewness and kurtosis of residuals D:Based on the regression of squared residuals on squared fitted values 60 .36241[.14801 6.78659 . F( 5.000] Mean of Dependent Variable 661.3721[.13E+10 Equation Log-likelihood -381.5223 Akaike Info.34422[. 27) 47.547]*F( 1.2121 S.90822 . of Dependent Variable 80892.5654[.RESULT 24 Ordinary Least Squares Estimation ******************************************************************************* Dependent variable is DDGDP 33 observations used for estimation from 1973 to 2005 ******************************************************************************* Regressor Coefficient Standard Error T-Ratio[Prob] INPT 397.14592 .8741[.936] DDC .0652[.9 Residual Sum of Squares 2.77917 1.1360[.7834[.2135 ******************************************************************************* Diagnostic Tests ******************************************************************************* * Test Statistics * LM Version * F Version * ******************************************************************************* * * * * * A:Serial Correlation*CHSQ( 1)= 1.0119 DW-statistic 1.3 F-stat. of Regression 28076. 26)= 1.1443 .7278[.6542[.000] ******************************************************************************* R-Squared .10106 7.222]* * * * * * B:Functional Form *CHSQ( 1)= 1.000] DDG 1.E.000] LAGRES -1. 26)= 1.252]* * * * * * C:Normality *CHSQ( 2)= 188.47056 -.89836 R-Bar-Squared .000]* Not applicable * * * * * * D:Heteroscedasticity*CHSQ( 1)= .87954 S.5223 Schwarz Bayesian Criterion -392.5297[. Criterion -387.31010[.3980 .081260[.D.171]*F( 1.084] DDI -.1 .7942[.198]*F( 1.759] DDNX . 31)= .20694 -5.3705 4890.

5 1973 1978 1983 1988 1993 1998 2003 2005 The straight lines represent critical bounds at 5% significance level 61 .0 -0.5 0.0 0.GRAPH WITHOUT GDP Plot of Cumulative Sum of Recursive Residuals 15 10 5 0 -5 -10 -15 1973 1978 1983 1988 1993 1998 2003 2005 The straight lines represent critical bounds at 5% significance level Plot of Cumulative Sum of Squares of Recursive Residuals 1.5 1.

5 1.0 0.GRAPH WITH GDP Plot of Cumulative Sum of Recursive Residuals 15 10 5 0 -5 -10 -15 1973 1978 1983 1988 1993 1998 2003 2005 The straight lines represent critical bounds at 5% significance level Plot of Cumulative Sum of Squares of Recursive Residuals 1.0 -0.5 1973 1978 1983 1988 1993 1998 2003 2005 The straight lines represent critical bounds at 5% significance level 62 .5 0.