IMPACT OF FOREIGN DIRECT INVESTMENT ON UNEMPLOYMENT IN NIGERIA (1980-2007)

BY

OBU EWERE MICHAEL SSC0503221

DEPARTMENT OF ECONOMICS AND STATISTICS FACULTY OF SOCIAL SCIENCES UNIVERSITY OF BENIN EDO STATE

MARCH, 2010.

IMPACT OF FOREIGN DIRECT INVESTMENT ON UNEMPLOYMENT IN NIGERIA (1980-2007)

BY

OBU EWERE MICHAEL SSC0503221

A RESEARCH WORK PRESENTED TO THE DEPARTMENT OF ECONOMICS AND STATISTICS, FACULTY OF SOCIAL SCIENCES, UNIVERSITY OF BENIN, EDO STATE; IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE AWARD OF A BACHELOR OF SCIENCE DEGREE IN ECONOMICS AND STATISTICS UNIVERSITY OF BENIN,

MARCH, 2010.
ii

CERTIFICATION We the was carried undersigned certify that this research work out by OBU EWERE MICHAEL of the

Department of Economics and Statistics, University of Benin, Edo State. And it is adjudged adequate in scope and quality for the purpose of a partial fulfillment for the award of a Bachelor of Science (B.Sc) Degree in Economics and Statistics.

_______________________ Dr. Anthony Monye-Emina Project Supervisor ________________________ Dr. Mrs. E. I. Okojie Project Coordinator

Date:__________________

Date: ____________________

_______________________ Dr. O. T. Ekanem Head of Department

Date:___________________

iii

DEDICATION This research work is dedicated to my late mother,

Mrs. Christiana Onyero Obu, in memory of her motherly love, care and guidance while she was alive.

iv

ACKNOWLEDGEMENT I wish to seize this opportunity to thank my

Supervisor Dr. Anthony Monye-Emina for his guidance and tutelage in the course of writing this project. Also, I express my warmest gratitude to my father Sir Michael Arinze Obu, for his prayers, moral and financial support. Further, my warmest appreciation goes to my brothers and sisters viz, Mrs. Vivian Egbudu, Collins, Onyeka and Mrs. Glory Airiavbere for their love, prayers and financial support. To be continually remembered are my friends

Celestine Asumuga, Cornelius Chinedu, Kanabe Imhoesi, Kenneth, Frank, Shola, Kingsley, Fred, Tina, Abdu and all others too numerous to mention.

My profound appreciation

also goes to my lecturers

Prof. Obadan, Okoh and Okojie (Mrs.) as well as Drs. Edo, Hassan, tutelage. For their prayers, I am indebted to Rev. Father MarioDebie, Rev. Dr. Oke Akokotu and others. Not left out are my Uncles Rev. Mr. Fidelis Nwadiani, Rev. Prof. Mon. Nwadiani, Egnr. Rapheal Obu and Mr. Ogbemudia as well as Engrs. Airiavbere, and Mr. & Mrs. and encouragement. Above all else, I thank God Almighty for his awesome goodness in granting me the strength, courage and Peter Egbudu and Atole Oriakhi, Mrs. Mogbolu and others for their

Chris Idoye for their support

determination not only in the course of writing this project but also, for leading me through out the period of my study.

vi

TABLE OF CONTENT
Title Certification Dedication Acknowledgement Abstract Chapters i ii iii iv viii

CHAPTER ONE: INTRODUCTION

1.1 1.2 1.3 1.4 1.5 1.6 1.7 Background to the Study Statement of the Problem Significance of the Study Objectives of the Study Hypotheses of the Study Scope and Methodology Limitation of the Study CHAPTER TWO: LITERATURE REVIEW 2.1 Foreign Direct Investments: Conceptual Issues 2.2 Determinants of Foreign Direct Investments Flows 2.3 Trend in Foreign Direct Investment Flows in Nigeria 2.4 Unemployments Conceptual Issues 2.5 Determinants of Unemployment 2.6 Trend in Unemployment in Nigeria 2.7 Foreign Direct Investment and Unemployment:
vii

1 4 5 7 7 8 9

10 13 19 22 26 32

Theory and

Evidence.

34

CHAPTER THREE: THEORETICAL FRAMEWORK 3.1 Sources of Data and Method of Analyses 3.2 Model Specification CHAPTER FOUR: EMPIRICAL ANALYSES 4.1 Presentation of Empirical Results 4.2 Discussion of Empirical Results 41 42 37 37

CHAPTER FIVE: SUMMARY, RECOMMEDATION AND CONCLUSION 5.1 Summary of Findings 5.2 Recommendations 5.3 Conclusions Bibliography Appendix 46 47 49 51

viii

ABSTRACT This study investigated the Impact of foreign direct

investment on unemployment in Nigeria from the period 1980 to 2007. The study was carried out empirically using the Ordinary Least Squares method of regression analysis; alongside other statistical tests. Empirical results obtained revealed that government expenditure is a poor determinant of

unemployment, while foreign direct investment inflow is the most germane determinant of unemployment in Nigeria. Hence to reduce the spat of unemployment in Nigeria, policy emphases should be centered on attracting greater inflows of foreign direct investment.

ix

CHAPTER ONE INTRODUCTION

1.1 BACKGROUND TO THE STUDY The world economy is growing on the strength of globalization. One of the most salient features of

globalization drive is the conscious encouragement of crossborder investments, and especially Thus by many trans-national countries and

corporations

firms.

continents (especially developing) now see the attraction of foreign direct investment as an important element in their strategy for economic development, essentially because it is seen as an amalgamation of capital, technology, marketing and management (Sjoholm, 1999). Foreign direct investment is an investment made to acquire a lasting management interest in a business enterprise operating in a country other than that of the investor, defined according to residency (World Bank, 1996).
1

Such investments may take the form of either Greenfield investment (also called mortar and brick investments) or

merger and acquisition which entails the acquisition of existing interest rather than new investment. In corporate governance, ownership of at least 10% of the ordinary shares or voting stock is the criterion for the existence of a direct investment relationship, while

ownership of less than 10% is recorded as portfolio investment. Furthermore, foreign direct investment

comprises not only

mergers and acquisitions and new and

investments, but also reinvested earnings and loans

similar capital flows or transfers between parent companies and their affiliates. It has been posited that a countrys inward foreign direct investment position is made up of the hosted foreign direct investment projects, foreign direct investment comprises while outward investment

those

projects owned abroad.

2

One of the strongest strengths of foreign direct investment arises from the positive externalities if generates from the positive externalities it generates from forward and backward linkages or through industrial acceleration as being currently experienced in the South and East Asia. This is evident because it is less volatile and resilient to perturbations in the economy. Africa is in dire need of foreign direct inflows owing to its acknowledged advantages. Hence one of the pillars on which the New partnership for Africas Development

(NEPAD) was launched, was to increase the available capital inflows through a combination of reforms, resource

mobilization and a conducive environment for foreign direct investment (funke and Nsouli, 2003). Finally, in Nigeria the level of foreign direct investment attracted overtime is mediocre (Asiedu, 2003),as compared with her resource base, potential need; especially in limiting
3

unemployment growth rate, , and in relation to the policy framework initiated in the past. 1.2 STATEMENT OF THE PROBLEM Essentially, since the aftermath of the oil glut in 1982, there has been an enormous need for foreign

direct investment in mitigating the constraints posed by shortages of foreign exchange earnings, dire need of necessary capital and intermediate goods with which to fast-track production, growth in employment and the attainment of the targeted growth rate. It has been a constant cause for worry that despite the myriad of investment incentives offered overtime in Nigeria, there has been a continual low inflow of foreign direct investment employment. One of the fundamental problems observed overtime is the high cost of running businesses owning to poor
4

as

well

as

poor

outcomes

in

generating

infrastructure.

Other

identified

factors

include:

the

continual growth in labour force, the variability in policy frameworks thus; leading to low confidence in investment incentives, the inequitable spread or skewness of foreign direct investment largely towards the extractive and capital intensive industries, hence facilitating the use of foreign technology in place of human labour. All this have cumulatively contributed to poor outcomes of foreign direct investment in enhancing employment generation in Nigeria. Finally, in view of the current global economic crisis and dwindling flow of foreign direct investment, the expectant impact of foreign direct investment in generating jobs in Nigeria seems elusive and unattainable. 1.3 SIGNIFICANCE OF THE STUDY In any developing economy, there is usually an enormous quest for foreign direct investment because of its

forward and backward linkages in enhancing economic growth as well as reducing unemployment. The need to curtail the growing pace of unemployment in Nigeria via foreign direct investment has been paramount, as articulated in the Structural Adjustment Programme in 1986. In examining, the trend and outcomes of foreign direct investment via -a- vis unemployment in Nigeria, this

research work assesses the performance of past policy frameworks and the impact of foreign direct investment inflows on unemployment in Nigeria overtime. Finally, it emphasizes the spread of foreign direct investment into non-oil sectors, especially the agricultural sector. Thus it stresses the need to limit infrastructural barriers and variabilility in policy frameworks, as a means of revamping the declining inflows of foreign direct investment, hence generating employment in all sectors of the economy.
6

1.4 OBJECTIVES OF THE STUDY The general objective of this study is to determine the impact of foreign Nigeria. The specific objectives include to: i. examine the trend in foreign direct investment flows to Nigeria. ii. iii. determine trend in unemployment in Nigeria. estimate the relationship between foreign direct direct investment on unemployment in

investment and unemployment in Nigeria and iv. 1.5 make recommendations on appropriate policy .

HYPOTHESES OF THE STUDY The hypotheses that guided this study are: i. Null hypothesis: HO: Foreign direct

investment is not negatively associated with unemployment in Nigeria.

ii.

Alternative

hypothesis:H1:

Foreign

direct

investment is negatively associated with unemployment in Nigeria. 1.6 SCOPE AND METHODOLOGY This study covers the period 1980 to 2007. Essentially the earlier part of the period was marked by a resurgence in the need for foreign direct investment particularly for two reasons, viz: The oil glut of the 1980s which had precipitated a drop in revenue and massive loss of jobs in Nigeria and, The lifting of restrictive laws inhibiting foreign

participation especially through the institution of Structural Adjustment Programme in 1986. In the latter period on the other hand, there had been an enormous need to spread foreign direct investment inflow

into non-extractive sectors as a means of limiting the growth in unemployment. The sources of data for this study would be secondary sources, such as the Central Bank of Nigerias publications like the statistical bulletin. Finally the Ordinary Least Squares regression

technique was used or adopted in the empirical analysis of this research work. This criterion was adopted because it has the best, linear, unbiased estimator property among the class of linear estimators. 1.7 LIMITATION OF THE STUDY This study was greatly constrained by the short period of time required to carry out this research work. This is in addition to the requirements of other course work required by the programme.

CHAPTER TWO LITERATURE REVIEW

2.1

FOREIGN DIRECT INVESTMENT: CONCEPTUAL ISSUES:

According to the International Monetary Fund (1977), foreign direct investment refers to investment that is made to acquire a lasting interest in an enterprise operating in an economy other than that of the investor. Further, the Organisation for Economic Corporation and Development (1983), posits that a direct investment enterprise refers to a situation in which a single foreign investor controls less than 10 percent or more of the ordinary shares or voting power of an incorporated or unincorporated enterprise with a view of having an effective voice in the management of the organization. International capital flows in the form of foreign direct investment is a major in indicator of financial globalization. Thus, Obadan (2004), posits that against the background of
10

financial and capital account liberalization, the larger the share of a countrys capital flows in global capital flows, the more financially globalized it is taken to be. In this light according to Weitz and Lijane (1998), opening up a country requires investment for connecting the necessary

infrastructure such as roads, telecommunication, power plants, financial system. The need to open up became very prominent in Nigeria at the aftermath of the economic

crisis of the 1980s owing to the substantial drop in oil revenue. As observed by Akpokodje (1998), Nigerias

domestic investment as a ratio of gross domestic product declined from an average of 24.4% during the 1973 to 1981 period to 13.57% during 1982 to 1986 period, implying that its dwindling capital was barely replaced in the country. In the same vein, foreign direct investment rate depreciated from 8.6% in 1973 to 1981 period to 4.2 percent in the 1982 to 1996 era. macroeconomic The economic crisis, further manifested in imbalances,
11

widening

saving-investment

gap, high rates of domestic inflation, chronic balance of payment problems, massive unemployment and huge

budget deficit (Akpokodje, 1998). Owing to the above, Obadan [2004], argues that in

view of its clear benefits and advantages in relation to the other forms of capital inflows, foreign direct investment

should be preferred and accorded priority in consideration of external finance. For not only does it bring money and machines but also technical know how; it helps in industrialization, in building up economic overhead capital and in creating larger employment opportunities. It is further heightened or esteemed for its less volatility and resilience to perturbations (Odusola, 2003). Overall, it is for these reasons that prominence is being attached to increasing the magnitude of foreign direct

investment in Nigeria especially since 1982, as a means of augmenting revenue inflow, counteract the sluggish trend in
12

official and private portfolio capital flows and further enhancement of employment (Uremadu, 2006).
2.2 DETERMINANTS OF FOREIGN DIRECT INVESTMENT FLOWS

Several range of factors could account for the disproportionality and skewness of foreign direct

investment inflow into a few countries. A highlight of the determinants are as follows: i. Macroeconomic Environment:

A good macroeconomic environment may be defined as one which guarantees an efficient allocation of resources (including foreign exchange) , provides appropriate signals to producers in the real sectors of the economy, and eliminates distortions in production, investment and consumption (Iyoha, 1997). In analyzing the importance of an appropriate macroeconomic environment, (Serven and Solimano, 1992); asserted that monetary, fiscal and exchange rate policies

13

directed at correcting macroeconomic inbalances would have a salutary effect on foreign direct capital flows. Below are the analyses of various components or variants of

macroeconomic policies. Firstly, foreign exchange rate management is a

veritable tool for attracting foreign direct investment. Below are the analyses of various components or variants of macroeconomic policies. Exchange rate is identified as the most important determinant of foreign direct investment in Nigeria and should , therefore, be given due attention in order to maximize all the benefits that accrue from foreign direct investment in Nigeria (Uremadu, 2006). Further, Obadan (1994), traces the need for exchange rate in

emphasizing that a sustained exchange rate misalignment in terms of over valuation or under-valuation, is a major source of macroeconomic disequilibrium in developing countries. In reporting on the relationship between real exchange rate and
14

foreign direct investment in Nigeria, (Chete and Akpokedje, 1997), posits that an over-valued exchange rate or highly distorted foreign exchange rate deters foreign inflows as well as discourages exports. Finally, Monye-Emina (2001),

postulates that the attendant fluctuation in the rate of exchange creates the problem of uncertainty which leaves a negative impact on manufacturing output; hence, in the light of the demand and supply conditions for foreign exchange; an appropriate mechanism for determining not only a realistic but also a stable rate is desirous. Secondly, inflation in the economy signals the inability of government to manage the economy (Fisher, 1993). An accelerating inflation rates impinge adversely on foreign direct investment flow by raising the risk of longer-term investment projects, lowering the average maturity of commercial bank loans and distorting price signals in the economy (Uremadu, 2005).
15

Finally, an appropriate fiscal, monetary and credit policy to ensure stable prices and interest rate, sound financial system; as well as a stable commercial and trade policy will contribute in no small measure to increase the confidence of foreign investors and raise foreign direct investment (Iyoha, 2001). In summary, there is an emerging consensus that a conducive macroeconomic policy environment is, therefore, desirable for attracting substantial amounts of foreign the inflow of

direct investment inflow. ii Infrastructure Development: Good infrastructure facilitates production, reduces operating costs and thereby promotes foreign direct

investment (Wheeler and Mody, 1992). In the literature, the number of telephone per 1,000 population and the index of energy consumption this could be used to measure and

infrastructure. In

connection,
16

(Pfeffermann

Madarassy, 1992) identify, among other macroeconomic factors, that, capacity utilization which relies much on efficiency of industrial or energy production, is a major

determinant of foreign direct investment. They further discovered that the size of the domestic market and improved capacity utilization are positively related to foreign direct investment, while inflation and volatile exchange rates have negative effects on foreign investment. Finally, an efficient infrastructural development proxied by the index of energy consumption will create conducive environment for high foreign direct investment inflows and increased

domestic investment (Uremadu, 2006). iii Openness of the host economy to trade: A good indicator of openness is the relative size of the export sector, and a range at surveys suggest a widespread perception that open economies encourage more foreign

direct investment. Iyoha[1999], posits that one of the

17

concrete gains from increased openness and integration into the global economy is increased investment. Moreso ,Singh and Jun[1995],indicates that exports ,particularly

manufacturing exports, are a significant determinant of foreign inflows, and further, that there is a strong evidence that exports precede foreign direct investment flows. In conclusion, according to World Bank[1996], trade and investment will accelerate in countries that have opened up to the global economy. iv. Size of the market The size of the market could be proxied by the size of gross-domestic product. Other tools for measurement are income levels average, and growth rates. There is a consensus that the size of Chinas market explains, in large part, the massive foreign direct investment flows it has and provincial gross

attracted since the early 1980s

national product, reflecting economic development and

18

potential demand, has also been indicated as a major determinant of this concentration (Broadman and sun, 1977). For sub-Saharan Africa as a whole, Bhattacharya et al (1996), identify gross domestic product growth as a major factor; and for majority of low-income countries which fail to attract large foreign direct investment flows, their small domestic markets are often cited as the main deterrent. However, Asiedu (2003), observed that the level of foreign direct investment attracted by Nigeria is medio cre despite her market size, resource base and potential need.
2.3 TREND IN FOREIGN DIRECT INVESTMENT FLOWS IN NIGERIA:

Despite government

the myriad of overtime, the

incentives created by the inflow of foreign direct

investments has been mediocre. Statistics investment shows that the nominal foreign direct rose from #3,620 in 1980 to

inflows

#5,382.8million and #6, 804million in 1982 and 1985

19

respectively.

Between

1986

and

1990,

in

which

the

Structural Adjustment Programme was initiated, there were several oscillations in the inflow of foreign direct investment. In 1986, there was an inflow of #4,313million which rose to a high of #10,339 million in 1990 and to a low of #5,610.2 million in 1991. Starting from 1992 onwards, net foreign direct investment shows some degree of resilience, thereby raising subsequently from #14,463.1 million in 1992 to #110, 456.2 million in 1997; hence indicating a growth rate of 556.9% (Odusola, 2003). There was also a drop or

oscillation between 1998 and 1999 which amounted to #92,795 million in that year and an upward sustained increase or trend in net foreign direct investment inflows between 2000 and 2007, in which #115,952.2 million was recorded in 2000; #249,157.7 million and #573,835.1 million in 2004 and 2006 respectively. The current

sustained upward trend in foreign direct investment inflow

20

could be adduced to the privatization, commercialization and deregulation exercises of the government (Aremu, 2004). Further, an analysis of the net inflows shows that since 1970 net foreign direct investment flows have been positive except in 1989 and 1990, in which there were negative outcomes. Also, sectoral analysis shows cumulative foreign direct investment been concentrated in the mining and quarrying, manufacturing and processing, and trading and business services sectors. In the period 1992-2006, Obadan (2007), observed that mining and quarrying sector accounted for an average of 36.5 percent of foreign direct investment flows while manufacturing and processing sector accounted for 28.6 percent inflows. Also the finance and business services sector recorded 6 percent, and 10 and 1 per cent for

transport and communication, and agricultural sectors respectively.

21

Overall, inspite of a large market and government incentives, agriculture has continued to maintain the least shares in foreign direct investment, inflow. 2.4 UNEMPLOYMENT: CONCEPTUAL ISSUES: There seems to be a consensus on the definition of unemployment. The International Labour Organization, defines the unemployed as numbers of the economically active population who are without work but available for

and seeking work, including people who have lost their jobs and those who have voluntarily left work (World Bank, 1998). Also, unemployment implies that actual output is less than potential output (Okun, 1962).The issue of

underemployment is also important. It is a situation where peoples skills are not used or exploited to their fullest potentials and thus, represents waste of human resources

22

who in some cases happened to have been expensively trained (Umo, 2007). Unemployment has been a major socio-economic problem in Nigeria. Thus unemployment has been

categorized as one of the major impediments to social progress; hence, apart from representing a colossal waste of a countrys resources, it generates welfare loss in terms of lower output thereby leading to lower income and well-being (Akinboyo, 1987). Also,[Okojie ,2003]; posits that with a stagnant economy and low economic growth rate, demand for labour has been declining, thus resulting in high level of youth unemployment. The experience of Nigeria since independence in 1960, has been that of increasing rates of unemployment both in terms of quality and quantity. In this connection,

Okedara(1984) and Awopegba(1995), attributed the upsurge in the quantity and quality of educated unemployment to
23

discrepancies in the production of high-level manpower and level of employment. Among the factors attributed to the above include; inadequate job opportunities for graduates of tertiary institutions and inadequate practical skills, as well as high student-teacher ratio. In corroboration, Ojo (1998), observed that Nigerian unemployment problem emerged in the 1960s as it was virtually non-existent in the 1950s. he further posits that the low unemployment rate of 4.3 per cent in 1976 could be attributed to the oil boom of the

decade; while unemployment rate blossomed in the 1980s with relatively high aggregates for urban and rural

unemployment, following the impact of the oil glut of 1982. In view of the Structural Adjustment Programme initiated, Iyoha (2003), posits that the Nigerian government failed to solve the unemployment problem at least in the short and medium term, since it triggered retrenchments both in the public and private sectors. In this connection, although a modest growth rate of 5 percent was achieved in real gross
24

domestic product during the adjustment years of 19861992, it was accompanied by a phenomenon referred to as jobless growth (Iwayemi and Jerome, 1996). The seriousness of the unemployment problem has attracted government attention over time, hence

employment generation strategies and targets featured prominently (Obadan in the past National Development has led Plans to the

and

Odusola,

2001).

This

establishment of several institutions and schemes in tackling the problems, and these include: The National Directorate of Employment, Industrial Training Fund, The Directorate of Food, Roads and Rural

Infrastructure, Small medium Scale Enterprises Scheme, Micro Finance Banks and
25

The

National

Poverty

Alleviation

Programme

(NAPEP),etc. Finally, despite the efforts aimed at abating unemployment overtime, it remains a major problem in Nigeria and with the current global economic crisis, the problem may become dismal. 2.5 DETERMINANTS OF UNEMPLOYMENT Several factors account for the causes of

unemployment and such factors result from various events that impede the full utilization of human economic skills or potential (Umo, 2006). The unemployment crisis has been attributed, inter alia, to four major causes , viz; the labour force explosion arising from the population explosion, the massive rural-urban migration in less developed countries; the failure of industrialization to live to the expectations of many as an effective means of generating employment in the manufacturing sectors of less developed countries and over
26

production of school leavers and graduates who are illequipped for the labour market (Diefomaoh and Orimalade, 1971) and Iyoha, (1982). More recently, ILO (1995), posits that the causes of unemployment growth or crises can be grouped under six headings; the phenomenon of jobless growth, macroeconomic instability, poorly functioning

labour markets, and lack of international competition In view of the above, a highlight of the determinants

of unemployment are as follows; i Population Growth Rate Growth in population especially in developing

economies impacts negatively on employment. (Diejomaoh and Oriemalade, 1971), argues that population growth is

the major factor of unemployment since population growth exceeds labour demand at prevailing wage rates. Also, Iyoha (2004), states that the rapid population growth rate of the 1980s translates into the rapid labour force growth of the
27

late 1990s and early 21st century, hence the weak or declining employment growth juxtaposed against rapid labour force growth would spur rising unemployment and underemployment rates. ii Gross Domestic product growth rate This relates to the value of the goods and services produced in the economy. According to Sancho (1996), economic growth is the driving force which makes job creation possible. Further, low output is inevitably

associated with low employment, thus Okun(1961), posits that for every three percentage points growth in real gross national product, unemployment rates decline by one

percentage point every year. Hence Iyoha (2004), argues that employment prospects in Africa in the years ahead depend on many factors including especially the growth of gross domestic product, macro and sectoral capacities to create

new jobs and output composition. Therefore, increasing

28

output through expansion of national production would expand or broaden opportunities for employment creation in the economy. iii Defective Macroeconomic Policies The macroeconomic policies of a Nation through its allocative roles could impact on unemployment either positively or negatively. Iyoha (2004), reckons that the best results of fiscal and monetary policies should be targeted to activities with the greatest employment creating potential, but however,

observed that acute economic crisis in the 1980s which was caused by a lost of factors including poor macrocosmic policy management, led to inflation, rising fiscal deficits,

capital flight, scarcity of foreign exchange and massive unemployment subsequently.

29

Below

is

highlight and

of

the their

components effects

of

macroeconomic unemployment: Firstly,

policies

towards

inflation

has

deleterious

impact

on

unemployment. There is indeed a tradeoff between inflation and unemployment and for this reason it has been observed that the goals of full employment and stable prices are largely incompatible. Hence Philips (1958), posits that an

increase in the rate of change of nominal wages or prices (inflation) leads to decreases in unemployment rate. This is evident in the inflation-unemployment trade off that is implied by the Phillips curve. Secondly, the result of scarcities or volatilities in the foreign exchange rate and high interest rates impacts negatively on imported limiting inputs and investment, in and the

consequently

employment

generation

economy. Evidently, Monye-Emina (2001), argues that

30

Fluctuation in exchange rate will cause instability in purchasing power and hence negatively impact on

investment in import of manufacturing inputs in this connection, Iyoha (2004) posit that in the aftermath of the Structural Adjustment Programme of 1986, the result of scarcity of foreign exchange for imported inputs and high interest rates led to worker lay-offs in manufacturing firms, particularly. Overall, poor macroeconomic policies are constant drags inhibiting employment creation or opportunities through their deleterious effects on the economy. i. Ineffective Demand

Effective demand refers to the total expenditure on the total output that is produced, at an equilibrium level of employment in the employment. Keynes (1936), stated that the level of effective demand determines the level of employment in the economy. Further, the extent of demand
31

determines the amount of resources utilized (Bannock et al, 1998). Therefore, deficiency in effective demand generates unemployment because it is tantamount to low production or output in the light of low amount of resources utilized. 2.6 TREND IN UNEMPLOYMENT IN NIGERIA In recent times, the incidence of unemployment in Nigeria has been deep and widespread cutting across all age groups, educational strata and geographical entities, and a peculiar feature of the unemployment problem in Nigeria is that it was more endemic in the early 1980s than any other period (Obadan and Odusola, 2001). Notably, unemployment rates between 1981 and 1986 were relatively higher than what obtained in the 1960s and 1970s (Ojo, 1998).

32

Unemployment rate rose from 4.3 percent in 1976 to 6.4 percent in 1980. It oscillated between 6.4 and percent during the 1980-1985 period. 6.1

Further,

unemployment rate fell significantly from a high of 7.0 percent to a low of 3.1 percent in 1991. And although it rose marginally to 3.4 percent in 1992, the unemployment rate, however, consistently declined to 2.7,2.0, and 1.8 percent

points for 1993, 1994 and 1995 respectively; which then rose to 3.4 percent in 1996 and 45 percent in 1997.The rate of unemployment has always been highest within the 15-24 age groups. Labour force survey between 1966 and1967 indicated that the group accounted for as high as 72.6 percent of total unemployment even though it represent only 25% of potential labour force while in 1984 it accounted for almost three quarter of the unemployed, and recent data show the same pattern as the group represent 71.2 percent of all unemployed in 1994 (FOS, 1996: P. 220).

33

In 1999, there was an increase in unemployment rate to 4.7 percent, which oscillated subsequently between 3.4 and 3.1 percent points in 2001 and 2004 respectively. The unemployment rates for the years 2005-06 where stable with 2.9 percent for both years with an upsurge of 5.8 percent for 2007 and 4.9% for 2008. Finally, the increase in the duration of unemployment represents the most serious labour market development; hence long term unemployment has become a chronic problem in Nigeria (Okigbo, 1986; Oladeji, 1994) 2.7 FOREIGN DIRECT INVESTMENT UNEMPLOYMENT: THEORY AND EVIDENCE: AND

The expectant outcome in the relationship between foreign direct investment and unemployment is negative. This means that increase in foreign direct investments reduce unemployment rate.

34

The Literature is replete with the employment impact of foreign investments in terms of empirical investigations. Aremu (1997), posits an inverse relationship between increase in foreign direct investment on unemployment in Nigeria for 1988 to 1990 period after the introduction of the Structural Adjustment Programme. Further, in an empirical study of Fiji Pacific Island, Jayaraman and Singh (2007), posits that the gains from foreign direct investment include not only creation of employment in those sectors which attracted overseas investors, but also of additional

employment opportunities in ancillary sectors, which are supportive to all production oriented activities in the economy. Finally, in Nigeria, however, the result seems

inconclusive as the expected inverse relationship between unemployment and inflow of foreign direct investment could only be established for the period 1986 to 1990 and 1995 to
35

1997; but between 1991 and 1995, positive association seemed to be established (Odusola, 2003).

36

CHAPTER THERE THEORETICAL FRAMEWORK 3.1 SOURCES OF DATA AND METHOD OF ANALYSES Data for the study were sourced from secondary sources such as Annual Abstract of Statistics; of National Bureau of Statistics and the Central Bank of Nigerias Statistical Bulletins, for the period 1980 to 2007. The Ordinary Least Squares method as well as other statistical tests were used in the analyses of the data. 3.2 MODEL SPECIFICATION The take-off point for the model used in this study is provided in Massoud (2008). The model in its functional form is given below as; UNR = F(POP, GDP, FDI, GOV)- - -(3.1)

37

Transforming the functional model above into an empirical form yields; UNR = B0 + B1POP + B2GDP + B3FDI + B4GOV + Ui [3.2] where; UNR = Unemployment rate POP = Population growth rate GDP = Gross domestic product as proxy for economic growth FDI = Foreign direct investment inflow GOV = Government expenditure and Ui = Random error term The Bs: B0, B1, B2, B3, and B4 are the parameters to be estimated. The a priori expectations are given as; B1 > 0 : B2, B3, B4 < 0

38

The parameter measuring population growth rate is positively signed because an increase in population leads to increase in labour force and consequently expanding the unemployment rate. The gross domestic product is expected to be negative since a rise in gross domestic product reduces

unemployment; hence an increase in gross domestic product rate should reduce unemployment rate. Foreign direct investment is signed negatively being that foreign direct investment inflow eases or bridges domestic saving-investment gap and foreign exchange

constraints for enhancing industrial acceleration and thus creating employment through forward and backward

leakages of foreign inflows. Government expenditure that is directed forwards enhancing domestic production and consumption activities

39

has a multiplier effect in enhancing employment generation, thus government expenditure is expected to be negative.

40

CHAPTER FOUR EMPIRICAL ANALYSES 4.1 PRESENTATION OF EMPIRICAL RESULTS The results of the empirical work are presented below: UNE = -5.27+.13POP6.92GDP2.70FDI1.25GOV ..[4.1] (-1.46) (2.78) (-1.37) R2 = 0.40 R2 = 0.30 F = 3.72 D.W =1.97 (-1.86) (-2.08)

UNE = -3.67 +1.97InPOP -.14InGDP 23InFDI+0.001InGOV (4.2)

(-1.43) (2.96) R2 = 0.53 R2 = 0.44 F = 6.13

(-.80)

(-2.60)

(.01)

D.W =2.01

41

4.1 DISCUSSION OF EMPIRICAL RESULTS. An observation of the Ordinary Least Squares results above, show that unemployment is associated positively with population but negatively with government expenditure, foreign direct investment and gross domestic product. The estimate of the intercept terms was -5.27,

indicating that the expected level of unemployment when all the other parameters are zero is -5.27 units. The estimate of the population parameter was 0.13, meaning that a unit increase in population leads to an increase in

unemployment by 0.13 units. Government expenditure and the foreign direct investment estimates were-1.25 and -2.70 respectively, which means that a unit increase in

government expenditure and foreign direct investment will reduce unemployment by -1.25 and -2.70 units accordingly. Finally, the coefficient for gross domestic product was -6.92, units. Further, the R2 and R2 were 0.40 and 0.30 percents
42

respectively. Hence, the explanatory variables explained about 30 percent of the variations in the dependent variable using the Adjusted Sum of Squares (R2). The F- statistic though weak at 3.7,however, passed the test of significance, being above the critical value of 0.03.Lastly, the DurbinWaston value of 1.97, clearly shows the absence of autocorrelation. The initial result appeared spurious and suggested the presence of heteroskedasticity. A satisfactory result was obtained with the Log-Linear method, which showed that unemployment is associated positively with population and government expenditure, but negatively on foreign direct investment and gross domestic product. The estimate of the intercept term was -3.67 percent, indicating that the expected level of unemployment when other explanatory variables are zero is -3.67 percent. The estimate of the population and government expenditure
43

parameter were 1.97 and .001 percents respectively, thus a one percent increase in population and government

expenditure will lead to 1.97 and .001 percent increases in unemployment accordingly. Further, the estimates of the foreign direct investment and the gross domestic product parameters were -0.23 and -0.14 respectively, meaning that a one percent increase in foreign direct investment and the gross domestic product parameters were -0.23 and -0.14 respectively, meaning that a one percent increase in foreign direct investment and gross domestic product will bring

about a decrease in unemployment by -0.23 and -0.14 percents respectively. The values for the R2 and R2 improved to 52 and 44 percents respectively, thus indicating that the explanatory variables explained about 44 percent variations in the dependent variable using the Adjusted Coefficient of

Determination (R2)
44

The

F-statistic

increased

to

6.13percent

and

statistically significant as well, being above the critical value of 0.002. Therefore, there exist a linear relationship between unemployment and the explanatory variables. Finally, the Durbin-Watson value of 2.001 is indicative of the absence of autocorrelation.

45

CHAPTER FIVE SUMMARY, RECOMMENDATIONS AND CONCLUSION. 5.1 SUMMARY OF FINDINGS. The results of the empirical findings showed that all the explanatory variables initially conformed to the a priori expectations and were statistically significant, with the population parameter positively signed, and the foreign direct investment, gross domestic parameter for expenditure, negatively the and

government However,

expenditure the

signed. of

with

correction

presence

heteroskedasticity, the government expenditure parameter became positively signed and statistically insignificant in contrast to the a priori expectation. The study on the whole showed that foreign direct investment and government expenditure overtime have yet to meet the expectation of creating broadened employment

46

opportunities across all sectors of the economy. Essentially, this could be adduced to the deleterious effects of continual population economy. 5.2 RECOMMENDATIONS Based on the research findings, the following growth and financial management in the

recommendations are proffered; (i) Efforts should be geared by government towards encouraging the adoption of family planning strategies as a means of stemming the current growth in population. (ii) In a bid to attract greater foreign inflows, adequate efforts should be made to mobilize the desired gross national savings towards raising capital formation to a level needed for industrial growth.

47

(iii)

Greater

government

expenditure

should

be

ploughed into productive economic, consumption and capital infrastructure in promoting real sector investments and industrial acceleration in the economy. (iv) In order to enhance and maximize the impact of gross domestic product growth, greater proportion of our annual national income should be invested in productive capital goods. (v) The monetary authorities and government should initiate and sustain policies that are necessary or needed to fast track growth in foreign inflows, increase domestic savings and in the overall macroeconomic management of the economy.

48

5.3

CONCLUSION

In order to combat the growing spat or trend of unemployment in Nigeria, the following remarks are made from the overall observations above: (i) That government expenditure is a poor

determinant of unemployment in Nigeria, owing to corrupt financial practices and mismanagement (ii) Foreign direct investment inflow is the most germane or important determinant of

unemployment in Nigeria. Overall, therefore greater and consistent foreign inflows should be sourced on the bases of the right policy framework and directed or piloted into industries and sectors that would bring about optimost growth in the economy and with high labour absorption capacity ,while also

optimizing on the rightful use of governments

49

revenue

or

expenditure

in

the

provision

of

economic infrastructures in enhancing capital formation and growth in gross domestic product towards generating employment in Nigeria.

50

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,performance and promotion

Central Bank of Nigeria, Research Department, Seminar Paper,No.4, July.

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analysis of scope, trends and policy issues. The Nigerian Journal of Economic and Social Studies, Vol. 13, No.2, July. Ekpo, A.H.(1971) foreign direct investment in Nigeria: Evidence from time series data. Central Bank of Nigeria Economic and Financial Review, Vol. 35, No.1. Englama, A. (2001); Unemployment: Concepts and

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