advertisement

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. BIBLIOGRAPHY Arestis, A., & Panicos, C.L. (1997). Financial Development and Economic Growth. Florida: Endence Publishers. Bagehol,W.,&Lombard,V.(1962). Economy & Research, Development. Toronto: Homewood Press. Barro, R.J. (1997). Developments of Economic Growth. London: MIT Press. Cameroon, R. (1967). Banking in Early State of Industrializatin. New York: Oxford University Press. Dornbush, R. (1993). Stabilization, Debt and Reform. New York: Harvester Weasheaf Press. Gelb, A. (1989). Financial Policies, Structure and Efficiency. London: Philip concord publishers. Goldsmith, R. (1969). Financial Structure and Development. New Haron: Yak University Publishers. Haslag, J.H.,& Hasbeeb, Y.A. (1994). Achieving Sustainable Output Growth. London: Oxford University Press. JOURNALS Aschaver, D.A. (1989). Is Public Expenditure Productive. Journal of Monetary Economics. Vol. 7,pp.177-200. Cashin, P.E. (1995). Government Spending Taxies on Economic Growth. IMF Staffer Paper. Vol. 42. No. 2. pp. 237-292. Fischer, S. (1993). The Role of Macroeconomic Factors in Growth. Journal of Monetary Economics. Vol. 4, pp. 485-512.