Impact of Savings on Nigeria Economic Growth

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Impact of savings on Nigeria economic growth will be the focus of this research work. Download the full research work and enjoy.

CHAPTER ONE

INTRODUCTION

1.1.      Background to the study

The three major macroeconomic goals pursued by policy makers in the world is the achievement of sustainable economic growth, price stability and full employment of its resources (both physical and human capital) over time (Noko, 2016). Economic growth indicates the ability of an economy to increase production of goods and services with the stock of capital and other factors of accumulation with the right combination of other factors of production will bring about their higher output growth.

Most of today’s developed countries follow same part towards achieving such leaps. First, they saved part of their output and invest same in education of men, women and in physical capital. Second, they achieved high productivity from this investment by providing efficient capital markets, competitive trade-lending roles, and higher level of economic efficiency driven by technological capabilities, stable polity, appropriate economic policy and economic system (World Bank, 2002). However, as a result of market failure that may likely occur in the process of growth, it may not be ideal to leave the process of economic growth entirely to the market forces especially in the developing economies like Nigeria.

Various economic growth models have attributed the role of capital formation in a country to savings, thus lack of saving will leads to poor or no capital formation in such country (Ghura, 1997; Noko, 2016). Growth models like the ones developed by Romer (1986) and Lucas (1988) predict that increased capital accumulation through savings can result in a permanent increase in growth rates.

On the other hand, capital formation has been attributed as the engine that drive a nation economic growth and development. Deficiency of capital has been cited as the most serious constraint to sustainable economic growth. Ugwuegbu and Uruakpa (2013) posits that the rate of growth in the Nigeria economy cannot be fully analyzed without a closer look at the contribution of capital formation to Nigeria’s economic growth. On the definition of capital formation, Bakare (2011) stressed that it refers to the proportion of present income saved and invested in order to augment future output and income. According to Ugwuegbu and Uruakpa, (2013), capital formation is equivalent to an increase in physical capital stock of a nation with investment in social and economic infrastructure. Bakare classified capital formation into gross private domestic investment and gross public domestic investment. The gross public domestic investment includes investment by government and public enterprises while gross private domestic investment is investment by private enterprises. Gross domestic investment can be attributed to gross fixed capital formation plus net changes in the level of inventories.

Higher savings leads to higher investment, which in turn leads to higher economic growth (Lewis, 1955). The Harrod-Domcar model proposed by Harrod (1939) and Domar (1946) postulates that savings as the major determinant of economic growth depends on marginal propensity to save and capital output ratio.

Economic theories suggest that the national savings of a nation is the aggregate of public savings and private savings. Usually, it is equivalent to the income of a country after subtracting the government buys and expenditures. National savings function according to the economic model of national savings. According to the basics closed economy model, the GDP (Gross Domestic Product or the commodities and services manufactured within a year) can be utilized for three purposes.

It is believed that the people of less developed countries (LDCs) are incapable of high level of individual savings for reasons like; low level of per capital income, indulgence in luxurious and conspicuous consumption by the view who could afford to save. Looking at it by intuition, according to investment, the capital stock will grow faster and a higher growth of income will result but it is instructive to note that the connection among savings and growth is not as simple as it looks (Osundina & Osundina, 2014).

It is widely agreed on one side that countries that save more also tend to grow faster provided the financial system is deep while on the other hand, some analysts fear that a rising savings rate could hamper economic recovery if consumer expenditures from a large component of aggregate demand. Low savings rate has been cited by some study as one of the most serious constraints to sustainable economic growth, one of those studies is that of World Bank that concludes that on the average, third world countries with higher growth rates incidentally are those with higher saving rates (World Bank, 2009).

There is an implicit belief that the Nigerian economic environment has been unable to attract foreign direct investment to its fullest potentials, given the unstable operating environment, which is characterized by inefficient capital markets, high rate of inflation, unstable polity, stringent policies and fragile financial system, among others. Another major problem is the element of fiscal dominance. A size of fiscal deficit has an implication of national savings and investment and ultimately economic growth, (Uwakaeme, 2015).

In Nigeria, the main factor underlying these outcomes is the volatility of government expenditure arising from the boom and burst cycle of government revenue which is derived mainly from single export commodity (oil), whose price is also volatile. To worsen the problem, these expenditures are not channeled to productive sectors of the economy (Yesuf, 2006). Thus, this low level of savings in Nigeria is a result of high incidence in poverty and low level of disposable income, underdeveloped saving channels reflecting underdeveloped capital markets, conspicuous. Consumption and unfavorable economic environment characterized by high unemployment and inflation (Ahortor & Adenutsi, 2009).

1.2       Statement to the Problem

The problem with domestic savings in Nigeria has been long standing issues over time and has been debated and re-evaluated by policy makers (Noko, 2016). Three decades ago, Nigeria policy makers pursued a structural adjustment program which shifted emphasis from public sectors to private sectors. The goal was to encourage private domestic savings, private domestic investment and capital formation in order to enhance economic growth. In an attempt to achieve this goal, resources were diverted from current consumption and were invested in capital formation through privatization and commercialization of state enterprises. Diversion of resources from current consumption is called saving.

One worrisome aspect of the result of liberalization of the public sector in Nigeria is the extent of distress in the sector including high rate of unemployment. The literature is a replete account of the serious impacts of these crises on the economy, particularly as they affect the real sector. In spite of these, the distress syndrome remains inadequately detected and controlled (Ysuf, 1996; Uwakaeme, 2015). Amongst other things, savings serve as the main source of financing investment and related economic activities.

Igbatayo & Agbada (2012) noted that higher level of national savings leads to higher investment and consequently higher output. This is so because the level of savings determines the magnitude of capital accumulation. On the other hand, the magnitude of total earnings depends on the level of total output, thus output also determines the level of savings (capital accumulation) and investments by households and business.

Empirical works on saving and economic growth has confirmed the longrun relationship between savings and economic growth in the country. Anorou & Ahmad (2001) investigated the relationship between savings and economic growth in seven African countries, congo cote divoire, Ghana, Kenya, Nigeria, south Africa and Zambia and discovered an existing relationship between savings and economic growth. The inability to save for sustainable economic growth has become a serious challenging issues facing developing countries especially Nigeria.

This problem has become more complex in today’s world. In view of the stated research problem, the study broadly aimed at examining the impact of savings on Nigeria economic growth during and after structural adjustment program.

1.3       Research Questions

  • To what extent does savings impacted on Nigeria economic growth?
  • To what extent does long-run relationship exist between savings and Nigeria economic growth?
  • To determine if there is bidirectional relationship between economic growth and domestic savings in Nigeria.

1.4       Objectives of the study

The broad objective of the study is to empirically investigate the relationship between savings and Nigeria economic growth. Specifically the objectives of this study include to:

  • evaluate the impact of savings on Nigeria economic growth.
  • determine if there bidirectional relationship between savings and Nigeria economic growth.
  • examine the long-run relationship between savings and Nigeria economic growth.

1.5       Hypotheses of the study

  1. Ho: Domestic saving has no significant impact on Nigeria economic growth.
  2. Ho: Domestic saving has no bidirectional relationship with Nigeria economic growth.
  • Ho: Domestic saving has no long-run relationship with Nigeria economic growth.

1.6       Significance of the study

The role of saving (capital formation) in the growth part of a nation cannot be over emphasized. In analyzing the relationship existing between domestic savings and Nigeria economic growth, attempt will be made to evaluate the role of savings in investment that result into economic growth. The study is of great importance to policy makers, as findings base on the study will serve as a guide to making appropriate policy decisions draw conclusion on where to strengthen the effort of investors. It will form a measuring tool to access the efforts of the financial sector as well as government agencies in managing polices that affect savings positive in recent years.

It will also act as a source of information on various factors that can determine national savings. It is also of great importance to the government (CBN), business firms, investors, and households. The household stands to benefit from improved and robust financial system. Finally, the study will serve as an indispensable tool for students, the general public and should serve as a library resource for future researchers.

1.7       Scope and limitations of the Study

The study shall concern itself with the investigation of the relationship between savings and Nigeria economic growth and shall cover a sample period of 1981-2015.

In the course of carrying out this study, the researcher encountered some challenges.

  1. Finance: this is the major obstacle faced by researchers, access to good and qualitative materials are readily available to the researcher but at an exorbitant cost.
  2. Internet access: due to network fluctuation & failure, researcher finds it so difficult to get access to more materials.
  3. Availability of data: most of the information used is obtained basically from the Central Bank of Nigeria (CBN) and most time it is difficult to get adequate information from the financial institutions.

In spite of the above mentioned constraint, the researcher put in adequate effort to ensure that the result will be relevant and also serves the intended purpose.

 

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