TITLE PAGE
NATIONAL SAVINGS AND ECONOMIC GROWTH IN NIGERIA
(1970-2007)
A PROJECT SUBMITTED IN PARTIAL FULFILLMENT FOR THE
COURSE REQUIREMENT FOR THE AWARD OF BACHELOR OF
SCIENCE (B. Sc) DEGREE IN ECONOMICS
BY
NWAOWI DONALD ONYEMAECHI
EC/2006/248
DEPARTMENT OF ECONOMICS
FACULTY OF MANAGEMENT AND SOCIAL SCIENCES
CARITAS UNIVERSITY AMORJI-NIKE EMENE, ENUGU STATE.
AUGUST, 2010
APPROVAL PAGE
This is to certify that this project was undertaken by Nwaowi Donald
Onyemaechi and duly supervised and approved as having met the
requirement for the award of Bachelor of Science (B.sc) Degree in the
Department of Economics, Caritas University, Amorji- Nike, Enugu State.
………………………..
Date:………………………
Ojike R.O.
Project Supervisor
…………………………
Date: …………………..
P.C. Onwudinjo. Esq
Head of Department
…………………………
Date: ……………………..
Dr. C.C Umeh
Dean, Faculty of the Management
and Social Science
……………………………...
External Examiner
Date: ………………..
DEDICATION
This project is dedicated to Almighty God and then to my dearest parents
for their unflinching financial and moral support throughout my pursuit of
academic excellence.
ACKNOWLEDGMENT
One of the problems one faces in writing a support cast is to
remember all the people to include, in this regard I wish to place on record
my indebtedness to all those who contributed in various ways towards the
completion of this project.
First of all is my able supervisor, Mr. Ojike Richards who in spite of
all his engagements diligently put all his tireless effort to see that this project
was a success. May God bless you and your family through in all your
endeavours.
Again, my profound gratitude goes to my beloved Emeka,
furthermore, I express my profound gratitude to my aunty and my uncles for
their financial support throughout my stay in school. May the Almighty God
continue to bless all of you.
Again I wish to appreciate my cousin, Ngozi Juliet Adigwe and my
friends Chijioke Chibuzo, Oke Chioma Brenda Agusiy, Ogechi, Ada,
Adaliyom Ikpirijor, Okoh Jane, Nancy Udeh, Nancy Owurm, Okwoli
Chukwuma, Pojas, Ejike and many others who always make me happy
whenever I am sad.
I cannot end this vote of thanks, without mentioning my most
respected lecturers in economics department.
Therefore, I wish to use this opportunity to thank my following
lecturers; Mr. Ojike Richards Mr. Agu S.V and Mr. Ugwu J.O and other
lecturers in the department. My God will always be with you all.
Finally, the milestone and brain behind my academic pursuit can
never be left out in the person of Sir and Lady E.K. Nwaowi my beloved
parents for their effort in bringing me up to the point of sponsoring my
education to this stage.
Above all, I thank the Almighty God who has made every possible,
above all human effort.
Nwaowi Donald Onyemaechi
ABSTRACT
The research work studied the national savings and Nigerian economic
growth, spanning from 1970-2007. The study adopted Ordinary Least
Square (OLS) single equation model. Using time series data over the period,
the work shows that National Savings is not significant at SY level and it
granger causes real gross domestic product. The study also shows that
exchange rate is significant in its contribution to economic growth. The
investment as one the of explanatory variables is significant and supports
the idea that most of the investments in Nigeria are not from savings. The
study also reveals that money supply has no impact on Nigeria’s economic
should increase national savings through increased interest rate on deposits
and also maintain its managed floating exchange rate policy.
TABLE OF CONTENT
Title page i
Approval page
ii
Dedication
Acknowledgement
Abstract
Table of content
CHAPTER ONE
1.1
Background of the study
1.2
Statement of the problem
1.3
Research hypothesis
1.4
Justification of the study
CHAPTER TWO
2.1
Theoretical Literature
2.2
Empirical literature
2.3
limitations of the previous studies
CHAPTER THREE
Methodology
3.1
Model specification
3.2
Estimation procedure
3.3
Techniques for evaluation of the result
3.3.1 Evaluation based on economic criteria
3.3.2 Evaluation based on statistical criteria (first order test)
3.3.3 Evaluation based on economic criteria (second order test
3.4
Data source
CHAPTER FOUR
Empirical result
4.1
Presentation of regression results
4.2
Evaluation of results
4.2.1 Evaluation based on economic criteria
4.2.2 Evaluation based on statistical criteria (first order test)
4.2.3 Evaluation based on econometric criteria
CHAPTER FIVE
5.1
Summary, Policy Recommendation and Conclusion
5.2
Policy recommendation
5.3
Conclusion
CHAPTER ONE
1.1
BACKGROUND OF THE STUDY
Saving naturally play an important role in the economic growth and
development process. Savings determine the national capacity to invest and
thus to produce, which in turn, affect economic growth potential. Low
saving rates have been cited as one of the most series constraints to
sustainable economic growth. Growth models developed by Romer (1986)
and Lucas (1988) predict that higher savings and the related increase in
capital accumulation can result in a permanent increase in growth rates.
The close relationship between the savings rate of the economy and
the economic growth is stylized feature which has been well documented in
number empirical investigations. This is result which has been found in
several sensitivity analysis in the although it is emphasized that causality
should be inferred from this positive growth literature, example, Leveine and
Renelt (1992) and Sala-i-Martin (1997). Contemporaneous correlation. The
close connection between saving and growth has also been a key finding in
the empirical saving literature; the possibility that country differences in
saving rates could be explained by differences in growth rate recognized
early.
Modern saving theories indicate that the rate of growth in aggregate
real income is an essential determinant of the national saving rates. Rapid
growth raises the saving rate. Higher national saving then release resources
for the investment needed to sustain high growth. If investment is discourage
the growth rate fall as does the saving rate. In the case of Nigeria, prior to
the Structural Adjustment Programme (SAP) in 1978; there had been a
major disequilibrium in the external sector from large current account deficit
and capital inflows. The balance of payment problems result from the high
saving and investment gap in Nigeria as we saw during SAP.
1.2
STATEMENT OF THE PROBLEM
In Nigeria, prior to Structural Adjustment Programme (SAP) in 1987,
there had been a major disequilibrium in its external sector from large
current account deficit and capital inflows. The balance of payment
problems resulted from the high saving investment gap. National saving as a
percentage of Nigeria GDP which was 6.1% between 1973 and 1985 was
inadequate to finance domestic investment, which accelerated to 20.5%
during the same period. There was a sizeable saving-investment gap of
14.4%of GDP between 1973 and 1985 (Adebiyi, 2001).
After the SAP, the saving rate in Nigeria increase significantly from
6.1% of the GDP between 1973 to 1985 to 11.7% of GDP between 1994 and
1998. This was reflect in the growth rate of real GDP, which rose 1.5%
between 1973 and 1985 to 2.7% between 1994 and 1998 (Adebayo, 2001).
This shows a relationship between saving rates and economic growth. On
the other hand, the inability of bank and financial institution to make
provision for more soft loans to Nigerians, encourage small and medium
scale enterprises, provides funds for the teeming number of unemployed
youths to engage in meaningful economic activities, then saving may never
lead
economic
growth
in
Nigeria.
This problem of instability in saving rate would lead to low investment and
low output which will in turn lead to high demand of imported goods. This
will cause disequilibrium in Nigeria external sector as we saw during SAP
period. Based on the fore going analysis. Therefore the following research
question can be deduced.
1. Is there a long run relationship between saving and economic growth in
Nigeria?
2. Is there casualty between saving and economic growth?
This research we as much as possible answer the questions above.
1.3
RESEARCH HYPOTHESIS
1. H0 (Null Hypothesis): saving rates and GDP growth rates are not
co
integrated
2. i H0 (Null Hypothesis): The GDP annual saving rate does not ganger cause
GDP growth rate
3. ii H0
(Null hypothesis): The GDP growth rate does not ganger cause
national savings
1.4
JUSTIFICATION OF THE STUDY
Understanding the relationship between national savings and
economic growth would have significant implication on the state of the
Nigeria economy. Experiences of economic crisis have highlighted the fact
that low (and declining) saving rate have contributed to generating
unsustainable current account deficit in many countries. In the case of
Nigeria, prior to the Structural Adjustment Programme (SAPs) in 1987.
There was a major disequilibrium in its external sector from large current
account deficit and high capital inflows. The balance of payment problems
resulted from the high saving and investment gap. National savings, as a
parentage (% of GDP, which was 6.1% between 1973 and 1958 was
inadequate to finance domestic investment, which accelerated to 20.5%
among the same period. There was a sizeable saving-investment Gap, of
14.4% of GDP between 1973 and 1985 (Adebiyi, 2001).
After the SAP, the saving rate in Nigeria increased significantly from
6.1% of the GDP between 1973 and 1985 to 11.7% of GDP between 1994
and 1998. This was reflected in the growth rate of real GDP, which rose
from 1.5% between 1973 and 1987 to 2.5% 1994 and 1998 (Adebiyi, 2001).
This who shows a relationship between saving rate and economic growth.
The contribution of national saving rate and cannot be ignored. Therefore, it
is vital to study its contribution, and effect if any. This relationship justified
because it may inform policy formulation about which variables should be
selected and projected in achieving a higher economic growth. It may help to
determine policy instrument or variable that has much or high magnitude
while impacting on economic growth. It will also inform the rate at which a
particular instrument or variable can be manipulated policy wise to achieve a
desirable level of economic growth. This research will help our nation
national Nigeria to know which among the macroeconomic variables to
encourage most in other to attain a desirable economic growth and will
equally help to achieve the national vision in 2020 and beyond. It is also
necessary for further studies and references in Nigeria and the world at large.
SCOPE OF STUDY
The scope of this research is limited to national savings and economic
growth: a causality analysis from 1970-2007. The choice of the sample
period is due to availability of data.
CHAPTER TWO
2.1
THEORETICAL LITERATURE
There are numerous theoretical evidence concerning the functional
relationship between savings that savings and economic growth. Juster and
Taylor (1975) came up with the finding that saving is an increasing function
of income and Modigliani (1970), Madison (1992), Bosworth (1993)carol
and Weil
(1993), Schmidst-Hebbel, Sawen and Solimano (1994) and
Edwards (1995) all had a consensus that the level of saving is largely
determined by the income level.
It is general recognized that economic growth corresponds to a
process of continual rapid replacement and re-organization of human
activities facilitated by investment (through savings) to maximize returns.
Economic growth studies began with the critique of mercantilism and the
foundation of the disciple of modern political economy. Adam Smith
“Inquire into the nature and cause of the wealth of nations” (1776) was the
first theory of growth and it advocated accumulation of capital, division of
labour and specialization as recipe for growth. The theory was that
productive capacity itself allowed for growth, and the improvement of
capitals, couple with its increase, to allow for such a capacity was the
wealth of the of the nations. This is the classical growth model.
The neco-classical growth model was ushered in by Solow (196) and
Swan (1956) in their exogenous growth with models. They discovered that
countries can only overcome their steady- states and continue growing by
inventing in new technology, despite
diminishing nation, as such creation
of new technology allows for production with fewer resources. Thus, growth
depends on capital accumulation- increasing the stock of capital goods to
expand productivity capacity; on new investment (and the need for sufficient
saving to finance investment) and higher saving-postponing consumption to
finance increased allocation of resources towards investment.
According to Solow, a combination of capital deepening and
technological improvement explains major trends in economic growth.
As is evident in the exogenous growth model, national saving is
necessary for acquiring frontier technologies especially in economies like
Nigeria and other LDCs that lack requisite legal and institution, political
framework to attack foreign direct investment (FDI) and foreign port-folio
investments (FPI). Thus, national savings could lead to ways of
endogenising technology-innovation, research or importation- in order to
increase a nation’s steady –state level of capital, expand gross fixed capital
formation (investments) and spur economic growth.
Growth theory, therefore, advanced into a new-economic growth
theory with the theories of economist list Paul Roman, Paul Ormerod,
Robert Lucas and Robert Barro in the late 1980s and early 1990s. Seeking to
make technological progress endogenous, the endogenous growth theory (as
it came to be called) says that government policy to increase capital or foster
right kinds of investment, in physical capital can permanently raise
economic growth. Furthermore, if capital broadened to include human
capital, law of from education and efficiency. Extent of capacity usage
would depend on government encouragement of open markets
Thus, the rate of growth was explained as depending on the types of
capital a country invests in. Focus was shifted to human capital (acquired
through investment in functional education and learning by doing) and
technological progress instead of capital-deepening.
Targeted savings theories, like the Modigliani life- cycle hypothesis,
was ushered in by the endogenous growth model-a new perspective on the
persistently rising economic growth rates through total-factor productivity
expansion. According to Aghion, Comin Howitt (2006), growth results
from innovations that allows local sectors to catch up with the frontier
technology. Such a catch-up requires foreign investment and the effects of a
domestic bank tat monitor local projects to which the technology is to be
adapted. In such a country, they concluded, local savings matter for
innovation.
On the country, countries close to frontier technology (developed
countries) do not need to attract foreign investment because they are already
familiar with the frontier. For such a country, local savings does not matter
for economic growth.
From the foregoing review of growth literature, it is evident that
savings have a pivotal role to play in financing economic growth
consequently, many theories of saving and consumption as two sides of the
same coin have emanated over the years. Keynes (1936) in his book” the
general theory of employment, interest and money” argued that savings is
determined by income. To Keynes, savings is the excess of income over
expenditure on consumption implying that part of the disposable income that
has not through consumption (Umoh, 2003 in Uremadu, 2005)
Saving is the dual of consumption and is measured per unit of time –a
flow (frank and Bernanke 2001, P. 580). Savings is deferred consumption; it
is simply a means to an end (Kerr, 1997). Keynes postulated in his
fundamental psychological law that household increases their consumption
as their income increase but not as much as their income increase. This
implies that the savings income ratio will rise over time (ie savings rate will
use over time as income increases). Thus, the focus of the time was the
impact of the income on household savings and the theory has the notion
that the proportion if national income represented by saving increases during
periods of economic growth.
In 1942, Kuzents faulted the Keynesian theory of saving when he
showed that long-tern saving-income ratio has not changed (that is
increased) over time. This sparked off studies that employed several new
approached to the theory of saving Modigliani and Brumberg (1954) in their
“life-cycle hypothesis” explain that households strive” to maximize their
utility of the future consumption. Thus, planning is involved in saving for
the future. The planning period is finite; people save only themselves in
order to smoothen consumption over their expected life span. Friedman
(1957) in his “permanent income hypothesis” offered a rational explanation
of the Keynes -Kuzents contradiction within a general theory of consumer
demand framework. He posited that a person’s income consists of permanent
component that determine decision about consumption and saving such that
the savings income ratio is constant in the long-run
Furthermore argued that Keynes’ proposition incorrect since it was
derived from empirical observations of cross-section data referring to total,
not to permanent income. He equally disagreed with the Modigliani –
Brumberg planning period. For Friedman, this period of planned savings in
infinite implying that people not only save for themselves but also for their
descendants (bequest savings). Motivations for saving were saving thus
fleshed out-to long-team objective such as retirement (life-cycle savings),
for emergencies (precautionary savings) and to leave an inheritance (bequest
savings).
In addition, the amount that people save depends on the
macroeconomic environment such as inflation and the real reward for
saving, but it can also depress saving by making it easier for savers to reach
a specific saving target. On net, a higher real interest rate appears to lead to a
specific savings target (frank and Bernanke 2001, P. 86)
Prior to the theories of modillion and Friedman, Deusenberry (1949)
had argued that people are not just concerned about absolute levels of
possessions but about their possession in relation to others (keeping up with
Jones). Deusenberry argued that
spending
we have a greater tendency to resist
decreases relative to falls in income then do to increase
expenditure relative to increase of income (because we don’t want to alter
our standard of living downward but upward instead). Deusenberry is, thus,
rather of the opinion that savings-income ratio is not constant but falls as
income increases.
2.2
EMPIRICAL LITERATURE
The relationship between savings and economic growth is studied
using contemporaneous correlation and dynamic models. In this section,
some of the studies that attempted to correlate the saving ate and economic
growth are presented. Bacha
(1990), Otani and Villamieva (1990),
DeGregorio (1992), and Jappeli and Pagano (1994) concluded that a higher
after conducting ordinary least square
(OLS) on cross-section data.
Kriekhaus (2002) studies 32 countries in which he found that a higher level
of national savings led to higher investment and consequently caused higher
economic growth. So does Maddison (1992).
This finding was consistent with the conventional wisdom that
stipulates that national savings stimulate economic growth through
investment. The implication is that since most developing countries like
Nigeria are capital importers, national savings are therefore needed to
acquire more foreign capital for investment purposes .
Carol and Weil (1994), used five-tear average of the economic
growth rate and saving for OECD countries as well as a larger sample, found
that economic growth rate granger-cause savings in the large sample. On the
other hand, when time dummies were not included savings granger-caused
growth in the OECD countries.
However, attanasio et al. (2000) criticized the Robustness of Caroll
and Weil’s results, finding that using annual data rather than the five-year
average increased precision and statistical significance of the estimates as
well as changing pattern of causation.
Sinha (1996) presented evidence that economic growth grangercauses rate of savings in Pakistan. Further, Sinha and Sinha (1998) found
that causality was from the economic growth rate to growth rate of savings
in México. Sinha (1999) examined the relationship between growth rates of
gross national savings and economic growth in Sri Lanka. In this study, the
causality was from growth rates of gross national savings to economic
growth rate.
However, Sinha (2000) did similar studies in the Philippines and
found causality from economic growth rate to growth rate of national
savings. Furthermore, Sinha and Sinha (2007) conducted a most recent
study on the relationships among household saving, public saving, corporate
and economic growth in India using multi-variate granger-causality test and
showed that causality goes from economic growth to saving.
Bjor (1999) reported that the causal chain linking saving and output
differ across countries and that causality associated with adjustments to
long-run relation might go in different direction than causality associated
with adjustments to long-run relations might go in different directions than
causality associated with short-team disturbance after using VEC models for
Sweden UK and USA.
Saltz (1999) argued that the higher income per capata, the higher the
consumption and savings rate. This study investigated the direction of
causality in 17 third world countries, using the Vector Error correction
(VEC) model for eight countries and Vector Auto regressive (VAR) model
for the other nine countries. The study found that for nine countries the
causality was from the economic growth rate to growth of savings. For only
two countries was the direction identified. For the other two countries,
bidirectional causality was detected. The author concluded that higher
growth rates of real GDP contribute to a higher growth of savings. Annoru
and Ahmd (2001) investigated the causality of savings and economic growth
in seven African countries using VEC. The authors found that in four out of
save countries, economic growth granger cause the growth rate of national
savings. However, they obtained a bi-directional causality in Cote d’ Ivorie
and South Africa. Only in the congo did the apposite result prevail.
Mavrotas and Kelly (2001) used the Toda and Yammato method to
test for granger causality. Using data India and Lanka, and found no
causality between GDP growth and private savings in India. However, they
found that a bi-directional causality exists for Sir-Lanka. On the other hand,
Alguacil, Caudros and Oits (2204) used the granger non in determining the
saving procedure developed by Toda and Yamamato also in determining the
saving- growth nexus in Mexco and found that higher savings led to higher
economic growth.
Hussein and Thirllwall (1999) investigate the major determinants of
difference in the domestic savings ratio between countries, using panel data
for 62 countries over the period 1967-199, and reported the capacity to save
depends primary on the level of per capital income (but not in a linear
fashion) and the growth of income.
Uremadu (2005) investigates the core determinants of financial
savings in Nigeria using ordinary least squares (OLS) framework and the
empirical results showed a positive influenced of GDP growth and per
capital income (amongst other variables) on financial savings in Nigeria.
According to the work bank policy and research bulletin (January
March, 1999; Vol, 10, No 1):
Growth and savings are positively correlated.
Much of the causation appears to run from
growth to savings, however, rather than
from savings to growth…. with a one
percentage point increase in the rate of growth
raising the private rate by a percentage point.”
Aghion, Comin and Howith (2006) show that lagged savings is
significantly associated with productivity growth for poor but not for rich
countries. They report that this effect operates entirely through total factor
productivity (TEP) rather than through capital accumulation. Furthermore,
they reported that savings is significantly associated with higher levels of
foreign direct investment (FDI) inflows and equipment imports and that the
effect that these have on growth is significantly largely for poor countries
than rich countries.
Shahbaz (2008) used time- series data to show that there exist a
long-run robust relationship between economic growth and domestic saving
and that there in a one way causality running from economic growth to gross
national savings in Pakistan.
Nwachukwu
and
Egwaikhide
(2007)
examined
the
determinants of private savings in Nigeria comparing the estimation result of
the Error Correction Model (ECM) with those of Partial Adjustment, Growth
Rate and Static Models, and found that the saving rate rise with the level of
disposable income but falls with the rate of growth of disposable income.
They equally found that public saving seem not to crowed out private
saving.
Moreso, Odhoambo (2008) found that there is distinct uni—
directional casual flow from economic growth to financial development in
Kenya using a biavariate causality model (in which savings was included as
an intermitting variable) and error correction techniques. The result also
revealed that economic growth Granger-cause savings while savings drive
the development of the financial sector in Kenya.
Lean and song (2009), using cointegration and causality test for
the period 1995-2004, found that china’s economic growth has a long-run
relationship with household savings and enterprise savings, and that bilateral
causality exists between national savings growth to economic growth.
Agrawal and Sahoo (2009) studied the determinants of savings and
direction of causality between savings and growth using time-series
techniques. They fund that total savings rate is mainly determined by the
GDP growth while private savings rate is also affected by the public saving
rate. A bi-directional casualty was reported to exist between savings and
growth.
2.3
LIMITATION OF PREVIOUS STUDIES AND THE MOTIVATION FOR
FURTHER STUDY
Early empirical studies in Nigeria; Nwachukwu and Egwaikihe
(2007), Uremadu (2005) have focused on the role of savings in economic
growth more recently attention has been shifted to the direction of casualty
between savings and economic growth. However, these studies are still scare
and the casual relationship between national savings and economic growth
has not been empirical resolved in Nigeria. This research will improve upon
the novel variable such as exchange rate, savings and foreign dire
investment (FDI) also other studies have failed to recommend reforms of the
financial sector. But it is realized that the structure of the financial sector can
affect macroeconomic performance like availability and mobility of savings.
This study will bring to the form a reconnection between casualty issues of
national savings and economic growth and role of reforms in the sector as a
catalyst for growth. This study would find the direction between savings and
economic growth, using the data from Central Bank Statistical Bulletin from
1970-2007. The choice of the sample period is due to availability of the data.
CHAPTER THREE
METHODOLOGY
3.1
MODE SPECIFICATION
“The first and most important step a research has to take in
attempting the study of any relationship is to express it in mathematical form
that is to specify the model with which the economic phenomena will be
explained empirical”. Koutsoyiannis (1977:12).
MODEL 1:
Real Gross Domestic Product: F (Money Supply, Exchange Rate,
Investment, Savings).
The econometric form of the model is this:
RGDP = βo + β1MS + β2EXR + β3INV + β4SAV + Ut
The variables in the model are defined this:
MONEY SUPPLY (MS)
Economic theory postulates a positive relationship between RGDP and Money
Supply.
SAVINGS
Economic theory stipulates that the relationship the relationship
between saving and RGDP is positive. Thus. An increase in the availability
of will lead to increase in RGDP.
EXCHANGE RATE (EXR)
According to Jhingan (1997), there is a positive relationship
between exchange rate and real cross domestic product. In other words, a
high exchange rate will lead to an in RGDP.
INVESTMENT (INV)
Economic theory says that a high rate of investment has positive effects on a
country’s RGDP because it is one of the components of GDP.
STOCHASTIC ERROR TERM (Ut)
According to Gujarati (2003) it is a random variable that has
well defined probabilistic properties. The stochastic error term, also known
as the disturbance term may represent all those determinants of consumption
but are not into account explicitly.
MODEL 11
SAVt = Σα 1RGDPt-1 + Σβj SAVt + U1t
RGDPt = Σα1SAV t-1 + Σβj RGDPt + U2t
3.2
ESTIMATION PROCEDURE
The procedure for estimation adopted in this study is the
ordinary least square (OLS) single equation method. This was used to
estimate the model under study. This method attributed to Carl fired- rich
causes, a German mathematician is preferred because it is easy to
understand, sample in its computational procedure plus its parameter
estimates, which have some optional properties of linearity, unbiasedness
and minimum variance among a class of unbiased estimator. Thus, the OLS
estimator posses the BLUE properties of best, estimator posses the BULE
properties of best, linear and unbiased estimators, which are consistent and
sufficient.
The ordinary least square techniques is relatively simple to use
and there are also readily available software packages for use like the MS
Excel, PcGives, Eviews, SPSS that are user friendly. Data requirement are
also minimal and it is also easier to understand by non-experts in
econometric methodology. The Eviews econometric package was adopted
for this analysis.
However, the following are some of the assumptions underlying
OLS according to the Gaussian classical linear regression model (CLRM)
which is the cornerstone of most econometric theory, Gujarati (1995:59)
3.3
TECHNIQUES FOR EVALUATION OF THE RESULTS
The techniques for evaluation of the result will be based on
economic a priori expectation, statistical tests of significance and
econometric tests.
3.3.1
EVALUATION BASED ON ECONOMETRIC CRITERIA
Under these criteria, the a priori expectations (signs and sizes) of
the parameter estimates of the variable in the model will be evaluated to
check whether they confirm economic theory.
3.3.2
EVALUATION
BASED
ON
STATISTICAL
CRITERIA
(FIRST ORDER TESTS)
1. R2: this measures or explain the total variation in dependent variable (private
consumption expenditure) caused by variations in the explanation variables
include in the model.
2. The t- test: This test is used to test whether the variable are significance or
not in determining the level of private consumption expenditure.
3. The F-test: The test the overall significance of the regression model
3.3.3
EVALUATION BASED ON
ECONOMIETRIC
CRITERIA
(SECOND ORDER TESTS)
NORMALITY TEST
This test is carried out to test whether the error term following
the normal distribution. The normality test adopted is the Jarque-Bera (JB)
statistical which follows the chi-square distribution.
STATIONARITY TEST
This is to test whether the mean value and variance of the
stochastic term are constant overtime. The augmented dickey fuller (ADF)
test is appropriate.
CO-INTEGRATION TEST
This is to test whether the variables have long term relationship
or are stable overtime, as a result of their different order of integration. The
augmented dickey fuller (ADF) (using the residuals) test will used to
conform whether long run relationship exists.
ERROR CORRECTION MODEL:
If we establish a long-run relationship among the variable of our model, it
then follows that we use the Error Correction Mechanism to correct for
error. This is all about how the short-run discrepancies among the variables
adjust to equilibrium; how long is the long-run? Such that we are able to
discern how quickly or how slowly the dependent variable will adjust to
changes in the repressor to reverse back to equilibrium. Here the adjustment
can be negative or positive depending on the sign and significance of the
coefficient of the residual term from the cointegration regression.
ARCH TEST
This is test whether the error corresponding to different
observation are uncorrelated.
GRANGER- CAUSALITY TEST
This test is carried out to test whether SAV granger cause RGDP or that
RGDP Granger caused SAV. That is, to test if the have unidirectional
relationship, or feedback or that they are independent.
3.4
DATA SOURCE
The data used in this research work are secondary data sources
from the Central Bank of Nigeria Statistical Bulletin. The sample period
includes annual data on Nigeria RGDP and national saving 1970-2007.
CHAPTER FOUR
EMPIRICAL RESULT
The results of the ordinary least square regression are presented below. The
estimates of the regression result are subjected to various economic
statistical and econometric tests. Thus, the hypothesis will be evaluated
based on the empirical result
4.1 PRESENTATION OF REGRESSION RESULTS
The results of the estimated model are presented below.
MODE 1
DEPENDENT VARIABLE: LOG (RGDP)
Variable
Coefficient
Std. Error
T-statistic
Prob. Value
CONSTANT
9.822371
0.144660
67.89990.
0.0000
LOG (SAV)
0.039714
0.122097
1.144283
0.2607
LOG (M2)
-0.269098
0.142524
-1888087
0.0678
EXR
7.02E-05
1.26E-05
5.583096
0.0000
LOG (INV)
0.285174
0.044772
6.369521
0.0000
R2 = 0.93592
R2 = 0.927561
F(4,34) = 119.4440
DW= 1. 159340
Result is shown in appendix II
4.2
EVALUATION OF RESULTS
4.2.1 EVALUATION BASED ON EONOMIC CRITERIA
CONSTANT
The sign of the constant is positive which conform to a prior expectation as
specified in the model. It stipulates that holding all other variable constant,
RGDP will raise by 9.82271.
SAVING
The sig of saving conform to economic theory. Stipulating that a percentage
increase in the availability of saving will lead to 0.139714 percent in RGDP
MONEY SUPPLY
The coefficient of money supply is -0269098. This does not conform to
aprior expectation. Also, the negative sign indicates money supply is
university related to Real Cross Domestic Product.
EXCHANGE RATE
Exchange rate follows a prior sign. According to Jingan, exchange rate and
RGDP have positive relationship. The coefficient of EXR (7.02E-05)
measure the rate in which RGDP increases. It indicates that over the period
of study, holding other variables constant the partial elasticity of RGDP with
respect of EXR IS 7.02 implying that, there is a 7.02 percentage increase in
RGDP as a result of a unit absolute increase in exchange rate.
INVESTMENT
The coefficient of investment was formed to be positive in the estimation.
This agreed with theoretical postulation that in period of high investment,
there would be as increase in RGDP.
4.2.2 EVALUATION BASED ON STATISTICAL CRITERIA (FIRST ORDER
TEST)
We shall apply the standard t-test, R2 and the f-test to determine the
statistical reliability of the estimated parameter.
The R2 IS 0.93592 WHILE R2 (adjusted for loss in degree of
freedom) is 0.927561 means that they explains variable in Real Domestic
Product to the turn of 93%. It implies that 93% of the vibration in the
dependent variable is explained by the variation in the explanatory variable
in the mode.
The t-test
Hypotheses: test
H0: θ1 ≠ 0 (the parameters estimated are statistically insignificant).
Against
H0: θ1≠ = 0 (the parameters estimated are statistically significant).
At 5% level of significance with n-k degree of freedom.
Decision rule:
Reject H0 if (tcal > t 0.025 n-k or tcal <- t 0.025 n-k)
If otherwise accept H0
t300. 025 = 2.04
The result for the t-test is presented below based on the value of the
tabulated t-value above.
Variables
t- value
Conclusion
constant
67.89990
Significance
SAV
1.144283
Insignificance
M2
-1.888087
Insignificance
EXR
5.583096
Insignificance
INV
6.369521
Insignificance
From the table above, we can conclude that the constant, EXR and INV are
significant at 5% level while M2 and SAV are insignificant at the same level
of significance.
The F-test
The F-test, which follows an E- distribution, measures the overall
significant of the mode.
Hypothesis: test.
H0: θ1 = θ2 = θ3 = θ4 = 0 (The model is insignificance)
Against
Hi: θ1 ≠ θ2 ≠ θ3 ≠ θ4 = 0 (The model is insignificance) At 5%, with K-1 (VI)
AND n-k (V2) degree of freedom
Decision rule
Reject ho if F* (Fcal) > F0.05
Accept ho if F*(Fcal) < F0.05
From the regression results, f* = 119.4440 while from the F-table, F0.05= 2.69
Therefore, since F* = 119.4440 > F0.05= 2.69, we reject H0 and
conclude that the model has a good fit and is statistical significant. That is
there exists a significant relationship between the dependent variable and
explanatory variables.
Results shown in appendix III
4.2.3 EVALUATION BASED ON EONOMIC CRITERIA (SECOND ORDER
TEST)
Normality Test
This test is carried out check whether the error follows the normal
distribution. The normality test used is the jarque Bera (JB) statistical,
which follows a chi-square distribution.
Hypothesis: Test
H0: θ = θ (the error term follows a normal distribution)
Against
Hi θ≠ θ = θ (the error term follow a normal distribution)
At 5% level of significance with 2degree of freedom
Decision rule
Reject H0 if (JB*) > JB0.05 (2df) (JBtab), if otherwise accept H0
From the result normality test
JB* =0.71986 while from the chi-square table JABtab = 5.99147
Therefore, since JB*< JABtab, at 5% level of significance, we do not reject H0
and conclude that the error term follows a normal distribution.
Stationarity Test
Under this, test, the unit root test for stationarity is applied using the
Augmented Dickey fuller (ADF) test. Hypothesis: Test
H0: θ = 0 or P = 1 (the variables are non stationary)
Against
Hi: θ ≠ 0 or P < 1 (the variables are stationary)
We assumed 5% criteria value (5% level of significance to compare with the
ADF result).
Decision Rule:
Reject H0 if the absolute value for the calculated ADF for any of the variable
are greater than the abosulte value of the 5% criteria values.
ORDER OF INTEGRATION
Integrated of
Integrated of order
order zero 1 (0)
one 1 (0)
Variable
ADF
Mackinnon
ADF
Mackinnon
Variable
statistics
Critical value 5%
statistics
Critical value 5%
RGOD
-2.154876
-1.9507
SAV
3. 176450
-1.9507
INV
-3.526367
-1.9507
M2
2.833845
-1.9507
EXR
-2.141263
-1.9507
From the foregoing, we that all the variables are stationary after taking their
first difference. Thus we conclude that all the variables are stationary at
order one.
CO-INTEGRATION ANALYSIS
Since we do not want to lose any useful information, due to differencing we
carryout a co-integration test on the estimated residuals obtained from
regression. The following result was obtained.
Variable
t-ADF
Critical value
Ut-1
-3.942726
1% = -3.6228
5% = -2.9446
10% =-2.6105
From the table above, since the absolute of the t-ADF of the residual is
greater than each of the critical values, especially when compare with the
5% critical values. That is 1-3.947261> 1-2.94461 we conclude that the
estimated error term is stationary. Hence, the variable are co integrated.
As shown in appendix iv
ERROR CORRECTION MODEL (ECM)
Variable
Coefficient
Std. Error
t- statistic
Prob
C
10.00052
0.143606
69.6387
0.0000
LOG (SAV)
0.046730
0.123954
.0.376997
0.7087
LOG (M2)
-0.146529
0.144439
-0.01447
0.3182
EXR
7.77E-05
1.16E-5
6.695031
0.0000
LOG (INV)
0.231490
0.044973
5.147310
0.0000
RESDOI (-1)
0.444699
0.16217
2.523587
0.0170
We know a prior that if the coefficient of the residual from the co-integration
regression is statistical equal to zero; it means that is instantaneous
adjustment to equilibrium by the dependent variable. But if the coefficient is
statistically different from zero, it means that the adjustment of the
dependent variable is not instantaneous to move from the long-run
(equilibrium) to the coefficient of RESDIO1 (-1) is 0.44 and the t-static is
2.523. this shows that the error correction term is positive and statistically
significance. It then mean that the adjustment in RGDP to changes in the
independent variable takes longer time to occur
ARCH TEST
This is the test to know whether the residuals arte correlated or not.
Hypothesis: Test
H0 (no positive or negative auto-correlation)
H0: (no auto-correlation)
The test follows chi-square distribution with (n* R2) ~X2 þdf.
Where
n=
number of the observation
R2 = normal R2
Þ=
lag length of residuals
df=
Degree of freed
Decision Rule
Reject H0 if otherwise do not reject x2cal > x2tal, otherwise do not reject.
x2(II) df at 5% level of significance = 19.68
From the ARCH test results, the x2cal= 17.64 while = x2tal, = 19.68
Since x2cal > x2tal we do not reject H0 and therefore we conclude that there is
no auto-correlation whether positive or negative in the model.
GRANGER-CAUSALITY TEST
This test is carried out to test whether SAV granger cause RDSP or that
RGDP granger causes the sav. That is test if they have unidirectional
relationship, feedback or that they are indenpdent
Result is known in appendix v
Null hypothesis
Obs
f-statistics
Prob
SAV DOES NOT
37
6.18739
0.01793
7.2341
0.01056
GRANGER
CAUSE RGDP
RGDP
DOES
NOT
GRANGER
At = 5% with k, (n,k)
At =5% (5, 32) =2.69
Reject H0 F*cal >F*cal if otherwise accept H0
Since F*cal 6.18739 > Ftab = 2.69
F*cal 7.3241 > Ftab 2.69
When then conclude that SAV Granger cause RGDP and RGDP Granger
cause SAV. This imply a bidirectional movement or feedback effect
between the two variables.
CHAPTER FIVE
SUMMARY, POLICY RECOMMENDATION AND CONCLUSION
5.1
SUMMARY OF FINDINGS
The study has so far investigated the casual relationship between
National Savings and Economic Growth in Nigeria, from 1970 to 2007. The
empirical result shows that money supply (M2) is a very significance
variable influencing economic growth in Nigeria. But in this study. This is
shown was found to have no impact on Nigeria’s economic growth. This is
shown from the coefficient of – 0.269098. The result of this study also
shows that exchange rate was very significance in its contribution to
economic growth. In fact, it was the second most significant variable in this
study that influences economic growth in Nigeria according to study. This
study equally reveals that investment was significant. In fact, it was most
significant variables that influences economic growth in Nigeria.
However, the study further reveals that though national saving
conform to economic prior expectations, it was not significant in the study,
based on the low t-value of 1.144283. Further, the study on the on their
causal relationship shows a bidirectional movement from saving to Real
Gross Domestic Product (RGDP) and from RGDP back to saving that saving
granger-causes RGDP and RGDP granger- cause saving respectively within
the sample period.
5.2
POLICY RECOMMENDATION
The empirical results reveal that Nigeria macroeconomic variable is
not very health, and much needed to be done.
The following recommendation will be made:
That money supply does not comply with economic theory, though
significant in the study. It shows that the total money supply in the economic
was either not used for real investment purpose or was mismanaged. The
government should therefore ensure that money that goes to the economy are
used for real investment purpose.
*
The government should maintain it managed floating exchange rate policy.
Since this variable has provide to be reliable and significant in the Nigeria’s
growth.
*
The government should ensure the necessary conditions that attack
investment in Nigeria are made. This macro-economic variable in this study
shows itself most significant variable among other that encourage
infrastructural development, and should also ensure adequate security to
guild investor and their investment. Government of Nigeria should try and
stop the crises in Niger-Delta Areas as this will help in encouraging stable
and expansion of business activities in Nigeria.
*
National saving should be encouraged, government of Nigeria should make
policies through the Central Bank of Nigeria that will encourage more
savings. This could be done through the lowering of interest rate on
borrowing and increasing of interest rate on deposit in other to attract saving
encourage investment. The Granger causality test shows that saving Granger
cause RGDP and RGDP Granger cause saving, we had a bidirectional
causation. Therefore, saving in Nigeria should be encouraged first to boost
investment which will perhaps increase national output which will in long
run encouraged national savings.
5.3
CONCLUSION
Finally, we conclude that is worthwhile for government to pay
attention to all variable that affect macroeconomic performance in Nigeria,
but also attention must be paid to some core variables such as: investment,
saving, exchange rate which proved to be significant in the study. The policy
on money supply, exchange rate, saving and investment should be
encouraged and sustain if the objective of vision 2020 must be achieved and
beyond.
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