DETERMINANTS OF INVESTMENT IN NIGERIA
(1977 - 2007)
BY
NNAJI JOAN ANWULIKA
EC/2006/241
A PROJECT SUBMITTED IN PARTIAL FULFILMENT OF THE
REQUIREMENT FOR THE AWARD OF BACHELOR OF SCIENCE
(B.SC) DEGREE IN ECONOMICS
FACULTY OF SOCIAL SCIENCES
CARITAS UNIVERSITY
AMORJI NIKE ENUGU
AUGUST 2010
APPROVAL PAGE
I certify that this project work was carried out by Nnaji Joan A. It has
been read and recommended for acceptance in partial fulfillment of the
requirements for the award of Bachelor of Science (B.Sc) Degree in
Economics.
__________________
Ojike R. O.
________________
Date
Supervisor
_______________________
______________
Bar, Onwudinjo P. C
Date
Head of Department
________________________
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Dr C.C. Umeh
Date
Dean Faculty of Social Science
___________________________
External Examiner
_________________
Date
DEDICATION
I hereby dedicate this project work to God Almighty for his mercy,
having made the journey successful and my family for their love and support
towards my education and most of all for believing in my capabilities.
ACKNOWLEDGEMENTS
My profound gratitude goes to God Almighty who has counted me
worthy of his protection, grace and guidance. Glory and honour to the holy
spirit who inspired my thought and gave me understanding of what life is all
about.
I thank my parents Elder and Mrs. C. L. Nnaji who labour to bring me
up and gave me the training and discipline that has helped my life.
Also to my brothers Samuel and Dodoo for their financial support. I
also thank my other brothers and sisters for their advice that made me
strong.
My special thanks go to my friends, Chidimna, Ogechi, Cece,
Chinenye, Glory and all my friend from first year to the final year.
My appreciation goes to my supervisor Mr. R. O. Ojike whose help
has enabled me to produce this work.
My profound gratitude also goes to my lecturer Mr. Ugwu whose
valuable advice helped me in this work.
My thanks also goes to my lecturers Prof. Udabah, Dr. C. C. Umeadi,
Dr. Asogwa, Mr. Agu and Bar. Onwudinjo.
ABSTRACT
In recent times there has been growing concern about the rising but volatile
rate of investment in Nigeria. This concern stems from the fact that
investment play a dominant role in stimulating growth. The study buttress on
the overview and empirical analysis into the determinants of investment in
Nigeria.
In order to achieve the objectives hypothesis was stated with the purpose of
achieving current and future stable upswing of investment by re-addressing
problem of investment as highlighted in the statement of the problem.
The study used investment as the dependent variable and government
expenditure, tariff , real interest rate and capital stock as the independent
variable. In analyzing the data, economic model of multiple regression using
ordinary least square (OLS) technique was employed. That t-test conducted
indicates that government expenditure, tariff and real interest rate. Not
statistically
significant
at
5
percent
level.
Normality
heteroscedaticity test were employed as the second order test.
test
and
TABLE OF CONTENTS
Title Page
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i
Approval Page
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Dedication -
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iii
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Acknowledgement
Abstract
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CHAPTER ONE -
INTRODUCTION
1.1
Background of the Study
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1.2
Statement of the Problems
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1.3
Research Questions
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1.4
Objective of the Study
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1.5
Statement of the Hypothesis
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1.6
Significance of the Study
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1.7
Scope/Limitation of the Study -
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CHAPTER TWO -
LITERATURE REVIEW
2.1
Literature Review
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2.2
Empirical Literature
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2.3
Limitation of Previous Studies -
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CHAPTER THREE
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METHODOLOGY
3.1
Model Specification
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3.2
Analytical Techniques
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39
3.3
Sources of Data and Software Packages
CHAPTER FOUR -
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PRESENTATION AND ANALYSIS OF
RESULT
4.1
Presentation of Regression Result
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43
4.2
Result Interpretation
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4.4
Evaluation Based on Economic Criteria
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CHAPTER FIVE -
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SUMMARY, CONCLUSION AND
RECOMMENDATIONS
5.1
Summary of Findings
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5.2
Conclusion
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5.3
Policy Recommendation -
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BIBLIOGRAPHY
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Appendix
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CHAPTER ONE
INTRODUCTION
1.1
Background of the Study
The Nigerian economy has witnessed a slow pace of growth of less than 5
percent in the last two decades. Various reasons have been advanced to this
development but the most apparent has been the poor investment climate in
the economy and this has been attributed to the low available investable
funds.
The stimulation of sustained economic growth requires a balance investment
in physical and financial assets human and social capital as well as natural
and environmental capital.
Nigeria has been classified as low savings and even lower investment
economy (Ajakaiye 2002) one of the principal objective of the Nigerian
government under the 1999 democratic dispensation is fostering of sustained
economic growth. Over the years the government has been in the driver’s
seat in growth the economy. But lessons of experience have show that
government cannot regulate the economy effectively. A typical example has
been the shift under the National Economic Empowerment and Development
Strategy (NEEDS) which has recommended the need to restructure and
deepen the financial system. Some economists like Mckinnon and Shaw
(1973) said that rising investment alone is not sufficient enough to bring
about growth and the role of financial institutions is very vital. In particular,
the view expresses that the role of capital fund is very critical to the success
of any endeavor (World Bank 1998). In this regard, it is therefore important
to investigate the determinants of investment in economy in the past three
decades.
Growth of economies is derived from investment is such economy. A
key role is assigned to investment as a propellant of economic growth.
Investment in various sectors of the economy stimulate aggregate
employment, output, demand income which also increase the government
revenue for further provision of basic industrial and agricultural further
provision of basic industrial and agricultural inputs for the growth and
development of an economy. This entails that the investment multiplier
increase national income which increases savings for investment,
consumption and aggregate demand level. The effect will be the rising
standard of living of the masses which is the major determent of growth and
development in an economy.
Banking sub sector in Nigeria has remained foreign in rural areas. But
recently the establishment of community banks (now micro finance banks)
has been to deepen their operation in rural areas. These banks with
government assistance give loans and mobilize savings from rural areas for
further investment in Nigeria. In addition government have tried to provide
necessary infrastructures in rural areas to help reduce the rate of rural –
urban migration for the purpose of compelling the rural population to take
agriculture to greater height as it was in past 38 years. However the
diversification of the various sectors of the economy has been the main
objective of the government. This is to increase employment which will
increase income and savings for investment. But the process so far have not
been adequate because of political instability and policy inconsistency which
range from corruption of political administrators and negative effect of
transitional government.
Diversification of different key sectors of the economy like agriculture and
industry increases employment, incomes, consumption, savings, demand and
generally, aggregate investment level that will broaden and deepen the
society’s standard of living. But the dismissal growth record in most African
countries relative to other regions of the world has been of concern of
economists (World Bank, 1998).
This is because the growth rate registered in most African countries
including Nigeria is often not commensurate with the level of investment.
In Nigeria for instance, the economy witnessed tremendous growth in the
early and late 1970s, as a result of the oil boom.
This increased investment especially in the public sector. But with the
collapse of the oil market prices in the early and mid 1980s, investment fill,
thereby causing a fall in economic growth. For example during the
investment boom, gross investment as a parentage of GDP was 16.8% and
31.4% in 1974 and 1976 respectively, where as it declined to 9.5 and 8.7
percent in 1984 and 1985 due to the depression.
Although the rise in oil prices during the 1990 – 1991 period was supposed
to spark off an investment but that was not the case in Nigeria. The Nigerian
Military government for instance was inexperienced in formulating
economic policy and thus left that task to bureaucracy (Babalola and Idoko
1996). The unit was that investment decision which were undertaken with
great decline, the government in 1986 adopted the IMF World Bank
Structural Adjustment Programme (SAP) with a view to providing stable
macroeconomic and investment environment.
To this end interest rate that were previously fixed and negative in real terms
were replaced by an interest rate regime which is driven by the market
forces.
The policy shift de-emphasized direct investment stimulation through low
interest rate and encouraged savings mobilization by decontrolling interest
rate (World Bank 1996). Consequently, the objective of enhanced
investment and output growth was not realized as the country’s investment
failed to rise to anything near the level it had reached in the 1970s.
Although successive government has implemented policies and strategies
raising the level of savings and investment but these policies so far have
been erratic as a result of recent changes in government induced by political
instability.
In addition the experience of the east Asian countries suggests that an
investment rate of between 20 and 25 percent could engender growth rate of
between 7 and 8 percent. Statistical evidence reveal that output represented
by the real GDP in Nigeria showed a positive growth soon after the civil
war, following the oil boom of the 1970s such that growth rate stood at 21.3
percent in 1971 (Bage 2003. P. 17)
Therefore, for Nigeria to register increase in growth and development there
is need to increase the tempo of private investment that would lead to higher
growth as was the case in Asian countries.
Finally, an analysis of domestic investment require a simultaneous link to
GDP as aggregating factor interest rate and other unique variables that react
to fluctuations in investment, like debt ratio, business environment real
exchange rate government expenditure and provision of infrastructures etc.
1.2
Statement of the Problems
Domestic Investment in Nigeria has been constrained by numerous factors.
These factors range from the followings
Low capital stock: investment can never be successful if the capital stock is
low.
The poor level of capital stock has been as a result of poverty which
decreases domestic savings resulting from decline in real per capital
inadequate
infrastructures,
investment
entrepreneurial
activities
is
discouraged more by the absence of basic infrastructure like electricity, good
road and communication (Green J. and D. Villanura (1991)).
Economic and Social Infrastructures are poorly developed in Nigeria. Thus
domestic and foreign investors are wary of investing in countries where
basic requirement are inadequate. Political instability and policy
inconsistency. Due to the transitional nature of the Nigerian government
investment have been derailed.
Interest rate move inversely with investment, that is, as interest rate increase,
investment fall conversely, when interest rate is falling investment raises.
But Nigeria interest rate of about 17.6% year ended 2006 did not account
for upswing in private investment because of inappropriate administration
and poverty.
The growth of domestic and external debt over the years has negatively
affected the level of investment in Nigeria. Nigeria debt burden between
1977 – 2007 has effect for the economy and the welfare of the people. For
example Nigeria was owing the international community as at end of 2007
was up to billion while its total external debt stock stood at 25.77 billion
dollars (US), which could have been used for more allocation of basic
requirement that would aggravate investment (Babalola and Idoko 1996).
Exchange rate fluctuation have also contributed to low propensity to invest
in Nigeria by the foreigners. This is because of low manufacturing of export
good capital which would have ordinarily increased domestic exchange rate
(Jhingan M. L. 2005).
Therefore instead of investing domestically, the greater percentage of
Nigerian’s prefer investing abroad where their money would be managed
effectively.
High cost of raw materials and inadequate developed nature of domestic raw
materials for investment. Therefore government should give incentives to
encourage the investors given tax holding and reduction in duties charged
during import of raw materials.
1.3
Research Questions
The study revolves around answering the following questions:
The relationship between national savings and investment.
Relationship between household consumption and investment.
The relationship between inflation rate and investment
1.4
Objectives of the Study
The objectives of the study will be to :
To determine the trend, character and profile of investment.
To determine the causal relationship between investment and real gross
domestic production in Nigeria.
Recommend policy measures that will stimulate investment in Nigeria.
1.5
Statement of the Hypothesis
The research study will be conducted under the hypothesis frame work
below :
Ho:
the macro economics variables do not influence investment in
Nigeria.
Hi:
the macro economics variables do influence investment in
Nigeria.
1.6
Significance of the Study
The importance of the study lies in the fact it will provide an insight into the
relationship between investment and other core policy variables.
It will also further identify the reason why Nigeria’s investment efforts have
not provided the desired results.
It is anticipated that this research work should be a source of reference to
economic and social planners interested in the study of investment in
Nigeria.
1.7
Scope /Limitation of the Study
The major limitation is the quality of date while public sector investment are
easily obtained from budget estimates, there is no reliable control in case of
private investment as the date series are questionable as it is derived
residually the analysis are questionable as it is derived residually.
The analysis relied on data series from 1977 to 2007 the choice of time was
informed by the availability of data and the desire to capture the periods of
structural break control regime.
CHAPTER TWO
2.1
LITERATURE REVIEW
Investment is one of the components of aggregate demand and therefore it
plays a crucial role in the determination of equilibrium national income. It
means the accumulation of real capital goods, that is those stocks and means
of production like plants, machinery, new building will lead to future flow of
services. In other words, investment consists only of new physical goods to
be used to increase productive capacity and hence future output.
Although investment is a smaller component of aggregate demand than
consumption. It is more volatile as a source of short run changes in
aggregate demand. In other words, it is a more important determinant such
that variation in it can produce magnified changes in aggregate demand and
level of output on employment. In many modern economies, investment
account on the average of 15 to 20% of GNP. However, because of its
volatility and variability, the importance is out of proportion to its size.
Investment expands productive capacity. It is a major explanatory and
contributory factor to long run growth in the economy. It is largely
unpredictable. Investment is financial from both domestic and foreign
savings. In advanced countries of the world, domestic saving are mainly
used and is always enough to finance investment. In developing economies,
foreign savings is used to supplement domestic savings to finance
investment.
The first component is new construction?
The new construction includes residential and commercial construction
while the residential may be new house built rents, commercial construction
are those by firms to enhance their business.
Producer durable equipment like machines etc consists of the second
component of investment, while the third component is net change in
business inventories. However commercial construction and producer
durable equipment are called plant and equipment (Ihesiulo S. O. 2005 P.
31).
Investment can be of two kinds. These two classification are based on the
source of investment. We also have private investment which can be foreign
or domestic. Public investment are those investment by government or state.
It can be foreign if it is invested abroad by the state, while it can be domestic
if it is invested domestically that is, within an economy, it is always
dependent of the level of income. Private investment are those investment by
the profit oriented individuals or firms. It can be foreign when they invest
abroad and domestic when they invest within the economy. But for the sake
of this research, private domestic investment are investment that is,
individual in an economy that is, individual in a country (both citizens and
foreigners) for example, Dangote group is a private domestic investment in
Nigeria.
Furthermore, public investment which is carried on by a state or government
is always autonomous. This entails that most often, the government of an
economy invest in other for the growth and development of such economy
which may not necessarily be profit minded, while the aim of private
investment is always to make profit and it is dependent of income level.
The level of investment is determined by various factors. The major
determinants of investment are :
i.
Interest Rate: This moves inversely with investment rate that is to say
that the higher the interest rate, the less investment is induced. On the other
hand, if interest rate is low, the inducement to invest is always high. This is
because if the cost of obtaining capital is high, potential investors will back
investment because it will reduce the return on investment (Anyanwu:
1997).
ii.
Cost of capital Asset: The cost of procuring capital asset needed in an
industry is compared by the investor. These costs may be costs of buildings
and machineries etc. If these cost are low, private domestic investment will
rise consistently and vise versa.
iii.
The expected rate of return during the life time of a project. In other
words, it may be regarded as the case inflow. That is the ability of the
project to give an efficient and sufficient return on investment. If the
expected rate of return is high investors will always increase their level of
investment.
iv.
However, keyness sum up these factors in his concept of marginal
efficiency of capital (MEC) and marginal efficiency of investment (MEI).
v.
The MEC is the highest rate of return expected from an additional unit
of capital asset over its cost. It is the ratio between the prospective yield of
addition capital goods and their supply price. The prospective yield is it
aggregate net return from an asset during its life time while the supply price
of a capital assets is the cost of producing this asset. (Jhingan M.L : 2005)
vi.
The MEI is the rate of return expected from a given investment on a
capital asset after covering all its cost except the rate of interest like the
MEI, it is the rate which equates the supply price of a capital asset to its
prospective yield. The investment on an asset will be made depending, upon
the interest rate involved in getting funds from the banks. The MEI relates
the investment to the rate of interest its schedule shows the amount of
investment demanded at various rates of interest. That is why it is called the
investment demand schedule curve the MEI (stock) is based on a given
supply price for capital and MEI (flow) on induced charge in this price. The
MEI shows the rate of return on all successive unit of capital without regard
to the existing stock of capital. On the other hand the MEI shows the rate of
return on only units of capital over and above the existing stock of capital.
(Jhingan M: 2006).
vii.
The Rate of Government Expenditure: There is a strong and positive
relationship between government expenditure at rate of investment.
Government autonomous expenditure on different sectors of the economy
stimulates employment as well as income of the public. The increase in
income will also increase in disposable income of the masses will increase
consumption as well as private investment.
viii. Consumption Demand:
Both the present and future demand for
products greatly influence the level of investment in the economy. If the
current demand for consumer goods is increasing rapidly more investment
will be made to meet up the increased demand. Therefore the household
consumption have a close relationship with investment depending on
whether it is increasing or decreasing.
ix.
Inflation Rate:
Is the persistent rise in the prices of goods and
services. When there is mild inflation, it increases FDI and it was said by
Keynes in his works.
x.
National Income: An increase in income level in an economy through
the rise in money wage rate and other factor incomes increases aggregate
demand as well as investment both private and public. Contra wise, the
inducement to invest will fall with the lowering of income level.
xi.
Stock of capital: Private investment can never be successful if the
capital stock is very low. This has been one of the problems shrinking
private investment (domestic) in Nigeria. This is a result of poverty which
also decreases domestic savings. Therefore for investment to grow there is
need to upgrade the level of capital stock in Nigeria (Kharkate : 1988).
xii.
Inventions and Innovation:
The two tend to raise the level of
investment through its increase in technological advancement as well as its
increases in productivity and a redaction in production cost (Anyanwo O. :
1995)
xiii. A rapidly growing population means a growing market for all types of
goods in the economy. To meet the demand of an increasing population in
all brackets, investment increases both in consumer goods and producer
goods. (Jhingan : 2006)
xiv.
State policy of the government have an important influence on the
inducement to invest in economy potential investors monitor the government
policies before an investment is done. It is necessary to note that all the
factors (determinants) that affect investment in general also determines the
faith of investment which is the base of this research project.
a.
The government policy on shipping the dumping of interior products
in the Nigeria market.
b.
The government on stopping the importation of poultry product,
textiles in the Nigeria market.
However investment in Nigeria has experienced problem due to the fact that
factor that stimulate investment are inadequate. Some investment in Nigeria
is very low compared to other countries like south Africa, United Kingdom
and china due to problem enlisted below: (white L.N & G. AK,70koje:
1996).
a.
Low Capital stock:
In an economy where the capital stock is
relatively low private domestic investment is always in shamble. This is
why private domestic investment is myopic in Nigeria. Therefore capital
stock needs to be increased through viable project by the government
theories and several empirical test.
Accelerator theory: Iat
= k (Yt - Yt-1) + Dt
K=
kt
Yt
IGt = Gross Investment at current period .
Dt
b.
= Disposable Investment
Inadequate Infrastructures:
Infrastructures likes electricity, good,
roads and efficient communication encourage investment. The ever growing
inconsistency in power supply in Nigeria has negatively affected the
investment. Although the present government have already puts in place
policies? To ship this enemy, it is now left for those whose are appointed to
ameliorate this problem to do effectively.
c.
Political Instability and policy inconsistency:
policies (viable) in
Nigeria are abandoned when a transitional government takes over
administration. This point that the corrupt political elites make policies that
will favour their personal political aggrandizement.
(i)
The Obasanjo proposed the building of the second Niger bridge but
was not enforced by the Yar’Adua Government.
(ii)
The dredging off the River Niger was proposed by the Yar Adua
Administration and was continued by the Good Luck Jonathan
Administration. Private investment in this situation shrinks. Therefore all
hands must be on deck to pursue this misappropriation through a strong
contribution in public opinion and the general elections.
d.
The growth of Domestic and External Debt: Nigeria’s debt burden
over the years between 1980s till present has grave effect for the economy
and welfare of the people. Internal debt reduces domestic savings, external
debt reduces public investment and this cuts domestic private investment by
reducing the loanable funds internally. The servicing of debt in Nigeria has
adversely encroached on the resources available for socio economic growth
and development. The huge debt has been since the military interference in
government. The military government were borrowing money from the IMF
and World Bank without proper plans to service them. It is necessary to note
that Nigeria debt burden as at years ended 2005 was 40 billion (dollars)
which is above our national income for five years. Therefore government
should minimize the rate of borrowing so as to improve our domestic
investment for progressiveness in the rate of growth and development.
e.
High cost of raw materials and inadequate developed nature of
domestic raw material for investment. Therefore policies should be made to
give incentives to encourage private domestic investors by giving a tax
holiday and a reduction duties charged during import of raw materials.
Conclusively if these problem enlisted above are minimized,
investment in Nigeria will be greater, investment percentage through out
Africa before 2020.
Theories of Investment
1.
The principle of Acceleration:
This theory has two forms – the simple or the Afflation clerk
acceleration and the flexible acceleration or lag in investment.
This theory has some fundamental assumptions:
The theory assumed a constant capital output ratio.
It assumed that resources are easily available
It assumed that there is no excess or idle capacity in plants.
It assumed that the increased demands is permanent
There is elastic supply of credit and capital
Its increase in output immediately lead to a rise in net investment
2.
The Afflation Clerk Accelerator:
The Accelerator principle finds its roots in the work of Thomas Nixon Caver
(1903) Albert Afflation (1909) Bicker Dike CF (1944) and John Mainna
Dark (1917). Unlike other theories of investment, the acceleration theory
relied heavily upon its empirical strength for its derivation and justification.
The accelerator or the relation as Roy Harold (1936) called it is condition.
If demand increase there will be an excess demand for goods facing such a
situation, firms are faced with two options, either to raise prices in the hope
of trending away that excess demand or to meet that demand by raising
supply under certain situation, it might be understandable that the former
option might be exercised. In more keynessian vision of the world, quantity
adjustment takes precedence. In other to meet higher production, firms will
increase their output capacity by investing in plants and equipment stock.
The simple (Afflation) accelerator principle entails that an increase in the
rate of output of a firm will require proportionate increase in its capital
stock. Assuming that capital output ratio is constant the optimum capital
stock is a constant proportion of the output so that in any period
t, kt = Vyt.
Where kt is the optional capital stock in period t, v (accelerator) is a positive
constant and yt is output in period t.
Any change in output will lead to a change in the capital stock. Thus kt – kt
– 1 = v (yt – yt – 1) it = u (yt – yt – 1). Therefore it = kt – kt -1 = (yt – yt -1).
In the above equation, the level of net investment is proportionate to change
in output. If the level of output remains constant, net investment would be
zero. For net investment to increase, output must increase.
However demand shocks are many and not all are permanent. If for instance,
a firm responds to an aggregate positive demand shock at time t by
increasing capacity immediately, it might be faced with a dilemma. We can
say that a firm, instead of increasing capacity immediately and fully in
response to a single demand shock, it will respond gradually until it converse
to the desired level of capacity. It finally states that actual investment at time
t (it) will be a fraction (u) of the desired investment which in turn is a
fraction (v) of the past changes in output and aggregate demand.
3.
Flexible Acceleration Theory of Investment:
The flexible acceleration theory of investment other wise known as lag
investment is associated with Chenery (1951) and Goodwin (1952).
In their book “The Non Linear Acceleration and Persistence of Business
Cycle” These lag include:
The decision making lag
The financial lag
The delivery lag
According to this types, if there is an increase in demand for output to meet
it, firm uses its inventories and then utilize its capital stock more intensively.
If however, the increase in demand for capital is large and persist for some
time then the firm should increase its demand for capital stock. The gap
between the occurrence of the increase in demand and the time the firm
demand for capital stock is what Chenery and Goodwin referred to as
decision making lag. Finally, a delivery lag exists between the ordering of
capital stock and its delivery.
4.
Strength of the Acceleration Theories
The acceleration makes the process of income propagation clearer and more
realistic than the multiplier theory. The multiplier shows the effect of
a change in investment on income via the consumption while the
acceleration shows the effect of consumption or output on investment and
incomes.
In addition Professor Shapire opines that the acceleration principle however
inadequate by itself clearly emerges as one of the major factors that are
needed in combination with the multiplier to explain the fluctuations
observed in the world of spending.
e.
Weakness of the Acceleration Theories
The acceleration principle did not give consideration to interest rate
influencing investment such as absence would only be possible if there is an
assumption of constant relative price for factors. The idea of constant output
ratio has been criticized due to inventions, innovation and improvement in
techniques which have resulted in increase output unit per capital.
Thirdly it has been criticized on the basis that investment decision are not
influenced by demand alone but are also affected by future anticipation like
market changes, political climate, economic climate, provision of stable
infrastructural facilities among others.
Neoclassical Theory of Investment
The neoclassical theory of business fixed investment sees the rate of
investment being determined by the speed with which firms adjust their
capital stock toward the desired level, if the desired capital stock is bigger,
the larger the expected output the firm plans to produce and the smaller the
rental or user cost of capital.
1.
Marginal Adjustment Cost Theory:
Wicksell (1898 – 1901) established that there is a stock flow difficulty with
the theory of capital and investment. Specifically as identified by Fredrick
Itayek (1941), Abba Learner (1944 – 1953) and Truggle Haavelmo (1960). It
is virtually impossible to allow the marginal productivity theory to
determine the optimal level of capital and then have marginal efficiency of
investment theory to determine the optical level of investment without
eliminating the flow of investment term entirely.
As Leaner (1944 – 1953) proposed, as investment increases, the cost of new
capital goods rise and it’s the marginal efficiency of investment fall so the
MEI = r before the optimal capital stock is reached. Where r is the interest
rate. These rising cost would therefore slow down adjustment all allow for
both optimal capital and optimal investment to be defined.
It can be summarized as MEI = FK – MAC where FK is the marginal
product of capital and MAC are convex marginal adjustment cost which can
be thought as supply price of capital goods (r).
2.
Evaluation of the Marginal Adjustment Costs:
In the marginal adjustment cost analysis the firm faces a short run supply
constraint which raises the price of its goods. Thus in any single period, the
optimal level of investment will be found where marginal efficiency of
investment is equal to interest rate (MEI = r).
JAMES FOBIN’S Q THEORY OF INVESTMENT:
He presented this in Brainerd in 1968. The “q” theory of investment entails a
connection between investment and stock market. The price of a share in a
company. The
managers of the company can then be thought of as
responding to the price of the stock by producing more new capital, that is
investing when the price of shares is high and producing less new capital or
not investing at all when the price of shares is low. “Q” is an estimate of the
value the stock market places on a firm’s asset relative to the cost of
producing those assets. In its simplest form “q” is the ratio of the market
value of a firms stock to the replacement cost of capital. When the ratio is
high, firms will produce assets, so investment will be rapid. In fact the
higher the “q” is greater than one (q > 1) a firm should add physical capital
because for each naira worth of new machinery, the firm can sell stock for q
naira and pocket a profit q – 1, this implies a flood of investment behaviour.
So investment rises moderately with q.
Evaluation of the James Tobin’s Theory:
hayeshi (1982) showed that when the production function and the
adjustment cot function are linearly homogenous inputs (capital and labour)
that average “q” is observable to the econometricians.
Keyness Internal Rate of Return Theory of Investment
In his general theory, he proposed an investment function where the
relationship between investment and interest rate was of a rather naïve form.
Firms were presumed to “rank” various investment project depending on
their internal rate of return” (or marginal efficiency of investment) and
thereafter faced with a given interest rate and choose those project whose
internal rate of return exceeds the rate of interest the firms would invest until
their marginal efficiency of investment equals the rate of interest (mei = r)
keyness also said that MEC is equal to the rate of discount which would
make present value of the series of annuities given by the returns expected
from the capital asset during its life just equal its supply price.
It therefore follows from keyness that the inducement to invest depends
partly on the MEC and partly on the rate of interest. On the contrary, he also
observed that the inducement to invest is inversely related to the rate of
interest so that when interest rate is high, investment tends to be discouraged
and vise versa.
Argument Against the Keynessan’s Theory
For the purpose of this work, we shall take only one; the idea by several post
Keynessians such as Athanasians Asimapules (1971 – 1991) and Piero
Gareganie (1978). They argued that in the presence of employment the
possibility of a downward sloping MEC as observed by Keyness becomes
inconsistent.
Profit Theory of Investment
This theory regards profit (undistributed) as a source of internal fund for
financing investment. Investment depends on the profit which in turn
depends on income.
In this theory, profits relate the level of current profit and of the recent past.
If the total income and total profit are high the retained earnings of firms is
also high and so investment and vise versa. In this situation the firm re-
invest which imply that the interest rate or cost of capital is low while the
optimal stock is high or large. That is why firms prefer to re-invest their
extra profit for making investment instead of keeping them in banks in order
to buy securities or to give dividends to shareholders. Contrariwise when
their profit falls, they cut their investment project. Thus the liquidity version
of the theory. Another version is that the optimal capital stock is a function
of the expected profit. It aggregate profits in the economy and business
profits are rising they may lend to the expectation of their contined increase
in the future. Thus expected profits are some function of actual profit in the
past. Kt = f (vt -1) where kt is the optimal capital stock and f (ut-I) is some
function of past actual profit.
Criticism of the Profit Theory:
The theory is based on the assumption that profits are related to the level of
current profits and of the recent past. But there is no possibility that firms
current profit of this year or of the next few years can measure the profits of
the next year or of the next few years.
A rise in current profit may be the result of unexpected changes of a
temporary nature such temporary profits do not induce investment as it may
not be certain.
2.2
Empirical Literature:
As we have seen the theoretical review; there are many transmission
channels through which investment is affected. Many studies have been
carried out empirically to test the relationship between investment and
factors that affect it. Therefore we will look at them one after another.
Greene
and
villanuera
(1991)
estimated
the
effect
of
different
macroeconomic variables and policies in developing countries including
Nigeria.
Their result showed that private investment G.D.P ratio is
positively related to real GDP growth level of per capital GDP and the rate
of public sector investment while real interest rate, domestic inflation, the
debt service ratio negatively affected investment ratio.
Rama (1990)
investigated the theoretical and empirical determinants of gross investment
in developing countries such as financial depression, lack of infrastructure,
economic instability, level of aggregate demand, foreign exchange shortage
relative factor and credit availability as important variable that explained
investment.
Kharkharte (1988) used a non parametric methodology in his study of the
relationship between invest rate and other macroeconomic variable,
including savings and investment. He grouped by developing countries
including Nigeria into three, based on the level of their real interest rate.
Group A, B, C comprised countries with non-negative, moderatively
negative and severely negative interest rate respectively. He then continued
by computing economic ratio among which were gross savings income
investment and investment income for the countries. Applying the Mana
Whitney test, he found that the impact of real interest were not significant
for the three group.
His methodology was criticized by Balasa (1989)
arguing that a relationship has to be established by the use of regression
analysis. Chenary and Strout (1996).
He established the positive relationship between investment and economic
growth using the investment income ratio as the explanatory variable Iyoha
(1998) using the same parameter was able to analyse the impact of
investment on growth in Nigeria. Using data for the 1970 – 1994 Parod,
Iyoha found a 10% rise in investment. Income ratio will trigger off a 3
percent increase in per capital gross national product (per capital GNP) in
the short run. He also found that in the long run, a 10% increase in
investment income ratio will induce a 26% increase in per capital GNP.
Therefore, for government to achieve its desired objective of high economic
growth and rapid development, it must pursue policies that will increase
both the public and private investment. In Nigeria a study was carried out by
Chete and Akpokuge (1997). They found that public investment stimulates
private investment and suggested that public investment crowd in private
investment. Similarly, but weaker relationship was reported by Malambo
and Oshikoya (1999) in their study on macroeconomic factors and
investment in Africa.
The need for both private and public sector of the Nigerian economy to serve
in other to be able to increase investment was clearly demonstrated by
Ibadan and Odusula (2001) using the Granger Causality Test on Nigerian
data. They tested the causal relationship between savings and income
growth, savings and investment and growth and investment they came out
with three findings among which a unidirectional relationship between
investment and economic growth was found. These observation confirm the
findings of Iyoli’s study on the same matter and therefore gave credence to
the important rule of investment in the growth process. Having recognized
the important role of investment in the economic growth in Nigeria, it is
essential to adopt policies and strategies that will ensure a state
macroeconomic environment conducive and suitable for a sustainable
investment planning and rapid capital accumulation.
Furthermore, the sharp the debt crises of the early 1980s and led to the
inclusion of debt burden as a deterrent to domestic investment in Nigeria.
Many empirical studies have found a negative association between
investment and debt overhead as proxies by debt to GDP ratio.
Burensztaiz (1990) however argued that it is credit unworthiness associated
with debt overhang that really matters for investment than disincentive effort
of mounting debt to GDP ratio.
In additional interest rate reported to have a negative relationship with
investment as a ratio GDP in Uganda (Okuru 1999).
Agu (1988) reviewed the determinants and structure of interest rate in
Nigeria and noted the existence of low nominal and negative real interest
rate during most of the reviewed period (1970 – 1985). He demonstrated the
negative effort of low interest rate on savings and investment using
Makinnon Financial Repression Diagram.
Agu’s conclusion based on theoretical analysis prompted Reechel (1991) to
investigate the empirical relationship between real interest rate, the savings
and investment in Nigeria. It is regression result above that:
i.
Real interest rate was positively related gross domestic financil
savings (comprising of personal and government savings)
ii.
Output was significant and positively related to financial savings.
Exchange rate was reported Attse and Achep (1995) in Cote d’voire to have
an ambiguous effect, a positive significant co-efficient in the private
investment equation, while Okurut (1998) found a positive relationship
between real exchange rate and investment GDP ratio.
Even the World Bank (1995) confirm that there is a strong correlation
between improvement and the depreciation of real effective exchange rate.
Chete and Akpokuje (1997) also found a positive relationship between credit
to private sector plus foreign private inflow and private investment in
Nigeria. Similarly in Tanzania Moshi and Kilindu (2001) found a credit
from investment banks significant a 5% on investment.
In the same vein, inflation and deviation of income from its trend level was
used as surrogate for economic instability by Chete and Akpokuje (1997) in
Nigeria and they found a negative impact on investment. They reported that
the impact of deviation income was higher than that of inflation.
Limitation of Previous Studies
Generally, from the review of studies, one can conclude that the estimates of
the domestic function are largely conflicting, following the findings of
Kharkhate (1988) that interest rate was not significant relative to investment
applying the Mana Whitney Test. The result might be different if other test
like the ordinary least square test is adopted amid the short fall of the data
series derived residually.
Previous studies have focused largely on the empirical relationship between
investment and debt stock total debt, external and internal debt. But have
rarely considered the effect of debt payment.
Nnanna (2004) also reported that exchanged rate negatively related to
investment with a coefficient of 0.414. This research work will also ascertain
whether the relationship is negative or otherwise with good reasons.
CHAPTER THREE
METHODOLOGY
We can test the validity of economic theories by expressing the
theoretical model in terms of statistical relationship which can then be tested
Haavelmo (1944).
An Econometric Research is concerned with measurement of the
parameters of economic relationship and within the predication of the value
of economic variables which will originate from these parameters.
Econometric modeling requires three major steps viz:
3.1
Model Specification
The research work be conducted employing on econometric method of
research.
Econometric tools shall be used in analyzing and presenting date, the
framework for the analysis will be graphical and analytical.
The ordinary Least Square (OLS) techniques of estimation will be used in
estimating the model.
This is because of its interesting BLUE (Best Linear Unbiased Estimation)
properties and its intrinsic assumption. The OLS estimators have both
numerical and statistical properties.
Gujarati (1995:56) quoting Davidson and Mekinnor (1993) put the
numerical properties as “those properties that hold as a consequence of the
use of ordinary least squares, regardless of how the data were generated”
similarly, the statistical properties are those that hold under the certain
assumptions about the way data were generated.
Model Specification
The essence of the economic modeling is to represent the phenomenon under
investigation in such a way as to enable the researcher to attribute numerical
values to the concept.
Log DIVT =
F (GEXP,TARF REIR, CSTK)
The model can be mathematically specified thus:
Log DIVT =
Bo + B1 GEXP + B2 TARF + B3 REIR + B4
CSTK + Ut
Where :
Log DIVT =
Logged investment
GEXP
=
Government Expenditure
TARF
=
Tariff
REIR
=
Real Interest Rate
CSTK
=
Bo
=
Capital Stock
Parameter constant
B1, B2, B3, B4 and B5
=
parameter estimates
However investment is the dependent variable.
3.2
Analytical Techniques
Economic Test
The economic test of significance will utilized for the regression analysis.
The sign and magnitude of the parameter estimates will be examined
whether they are in conformity with their appropriate expectation.
Theoretically, the relationship between INVT and GEXP is expected to be
positive (>0), REIR, and TARF are expected to be negative (< 0), the signs
of CSTK are expected to be positive.
Econometric Test
In the econometric test, these are tests set by the theory of econometric of
the econometric employed are satisfied, or, nor. Among the text are
Autogression, Hetrerosedescty, Manolity, etc.
Statistical Criteria (Test)
There are test defined by statistical theory and used at evaluating the
reliability of the parameter estimates.
According to Gujarati (1993: 124) “a test of significance is a procedure by
which sample result are used to verify the truth or falsify of a null
hypothesis.
T-Statistic Test: The t-test will be carried out in order to determine the
significant of the parameter estimates of the models.
Standard Error Test: The estimates obtained from a given set of a sample
observation are not free from sampling errors. It is therefore necessary to
measure the size of the errors and subsequently determine the degree of
confidence in the validity of the obtained estimates. Kousoyiannis (1977:80).
The test help us to know, if our estimates are statistically significant or
whether the sample from which we made estimations might have come from
a population whose true parameter values are zero. Koutsuyiannis (1977:80).
F-Ratio Test: This test involves the overall significance of the regression
result, as against individual significance of the repressors. This tells whether
there is a strong relationship between regress and the repressors. The test can
be said to be a joint hypothesis test employing the analysis of variance
(ANOVA). Gujarati:246)
The reason for the preference of the technique is that the OLS is
relatively simple to use and there are readily available software packages
that are readily available software packages that are user – friendly for its
use like Pc Give, Ms Excel, E-view and so many others. And it is easier to
understand.
Econometric test will be carried out to ensure that the model doe not
violate the assumption of OLS. The Durbin Watson II statistic will be used
for autocorrelation.
3.2.2. Transformation Made on Data
Date: Transformation:
Government Expenditure: Nominal Government Expenditure = a
proxy.
Real Interest Rate: Nominal Interest Rate = a proxy - for commercial bank
lending rate. Nominal interest rate – inflation rate.
TARIFF : Proxy for Tarf.
CSTK : Proxy for Cstk at 1984 faster cost.
3.3
Sources of Data and Software Packages
The date used for this study are secondary data. They are sourced from
recognized sources.
a.
The Central Bank of Nigeria (CBN) annual statistical bulletin /volume
in 16/2005. edition.
b.
The National Bureau of Statistics
Data on GEXP was obtained from CBN. REIR was also from CBN bulletin.
INVT, a proxy for private fixed capital flow (PFCF), TARIFF and CSTK
were obtained from observation of the Nigerian Bureau of Statistics.
Finally, data on economic climate were from the observation of the political
development in Nigeria for the years of study. The data presented have been
deflated and proxies in one way or the other to bring them into real term.
The charges made are presented below.
CHAPTER FOUR
PRESENTATION AND ANALYSIS OF RESULT
4.1
Presentation of Regression Result
Table 4.1a
Variable Co-efficient Std-Error T-value T-Prob Part R2 Constant -1512.7
7027.9 -0.215 0.8313 0.0018
0.0609
GEXP 0.078235 0.060256 1.298 0.2056
TARF -0.38125 0.33518 -1.137 0.2657 0.0474
REIR -69.447
300.00 -0.231 0.8187 0.0021 CSTK 0.0029736 0.00022189 13.401 0.0000
0.8735
Dw
R2
=
0.983676, f = (4,26)
=
1.24, RSS =
=
391.68 (0.0000)
1.709157021e + 010
RESULT INTERPRETATION
Evaluation Based on Economic Criteria
As already pointed out in chapter three, our parameter estimates are
expected to conform to apriori expectation consequently the table below
summarizes the outcome of our model parameters on a priori ground.
Variable
Expected Signs Obtained Signs Conclusion
GEXP Positive
Positive Conforms TARF Negative Negative Conforms REIR Negative
Negative Conforms CSTK Positive Positive Conforms
The apriori expectations for the explanatory variable were satisfied
confirming the economic acceptability of the estimates as they are
theoretically justifiable.
The co-efficient of GEXP (0.078235) implies that a unit change in
government expenditure will bring about a 7.8% increase in investment.
The co-efficient of Tarft (1 + 1013811511) (-0.38125) implies that a unit
change in Tarff will bring about a negative 38% decrease in investment.
The co-efficient (REIR) implies that a unit change in Real Interest rate will
bring about 6944.7% decrease in investment.
The co-efficient (CSTK) implies that a unit change in capital stock will
bring about 0.29% increase in investment.
Statistical Test (First Order Test)
1.
Standard Error Test
The null hypothesis for the test is
Ho:
bo
=
0
H1:
b1
=
0
against the alternative
If the standard error is smaller than half of the numerical value of the
parameter estimate (that is if s(bi) < bi /2) we conclude that this estimate is
statistically. We therefore reject the null hypothesis that bi = 0 and accept
the alternative, that bi ( 0 and vise versa. This conclusion of significance or
non significance of b is based on a two-tier test at 5% level of significance.
The standard error test can be summarized thus:
Table 4.2.2a
Variable Std Error ½ coefficient Decision Conclusion Constant 7027.9 756.1 s(bi) > bi/2 Not significant GEXP 0.060256 0.0391175 s(bi) > bi/2
Not significant
TARF 0.33518 -1.190625 s(bi) > bi/2 Not significant
REIR 300.00 -34.7235 s(bi) > bi/2 Not significant
CSTK 0.00022189
0.0014868 s(bi) > bi/2 Significant
ii.
The Student t Test
The student t Test involves comparing the t* (calculated) to its tabulated
value which define the critical region in a two-Tailed test, with n-k degrees
of freedom (n = sample size and k = total number of estimated parameters).
The null hypothesis
Ho
:
bi = 0 is tested against the alternative
H1,
:
bi ( 0
If t* > t 0.025, reject Ho, otherwise accept Ho.
The summary of the student t Test is presented thus:
Table 4.2.2b
Variable Std Error ½ coefficient Decision Conclusion Constant -0.215 ±
2.056 t* 2.056 Not significant
GEXP -1.298 ± 2.056 t* 2.056 Not
significant TARF -1.137 ± 2.056 t* 2.056 Not significant REIR -0.231 ±
2.056 t* 2.056 Not significant CSTK 13.401 ± 2.056 t* 2.056 Significant
Note: df = n – k = 31 - 5 = 26
*
The above result shows that only capital stock is significant while
government expenditure, tariff and real interest rate are not significant.
This is a proof that capital stock to investment in Nigeria inspite of
poor funding.
iv.
F - Test
F- ratio is used to test for joint influence of the explanatory variables
on the dependent variable. It test for the statistical significance of the entire
regression plane. It is given as:
F
=
R2 /k - 1
(1 – R2)/ N – K
The computed F – ratio, F*, is compared with the theoretical F 0.05
with N1 = K- 1 and N2 = N - K degrees of freedom
Where;
N1
=
degrees of freedom for numerator
N2
=
degrees of freedom for denominator
K
=
Number of bs (including bo)
N
=
Sample size
If f* > f 0.05, reject the otherwise accept Ho from our regression
result f* (N, 26) = 391.68 while F 0.05 (4, 26) = 2.69
Since F* = 391.68 > F 0.05 = 2.69
We reject Ho and conclude that 5% level of significance, the overall
regression is statistically significant. The significant nature re-affirms the
validity of the R2.
iii.
R2
The structural variables explain the variation on the behaviour of the
dependent variable adequately. This is evidenced in the high value of R2
which is 0.983676, showing that government expenditure, tariff, Real
interest rate, and capital stock jointly accounted for at least 98.4% of the
variations in investment in Nigeria with 1977 – 2007.
Econometric Test (Second Order Test)
i.
Test for Auto correlation
One of the assumptions of OLS regression model is that errors are
independent. In the context of time series analysis, this means that an error
Ut is not correlated with one or more of previous errors Ut – i.
The Durbin-Watson, d test compares the empirical d* value, calculated from
the regression residuals, with di and du in D-W tables with their transforms (
4 – dL) and (4 – du).
Decision Rule
If d* < dL we reject the null hypothesis of no auto-correlation and accept
that there is positive autocorrelation of first order.
If d* > (4 – dL) we reject the null hypothesis and accept that there is
negative autocorrelation of first order.
If du < d* < ( 4 – du) we accept the null hypothesis of no autocorrelation.
If dl < d* < du or if (4 – du) < d* < (4 – dL) the test is inconclusive
From our regression result the
d*
=
1.24
dL
=
1.090
du
=
1.825
4 – dL =
2.91
4 – du =
2.175
Hence 1.24 < 1.825 < 2.175
Accept the null hypothesis and conclude that there is no autocorrelation in
the model.
i.
Normality test for Residual
The YB test of normality is an asymptotic or large sample test and it is based
on the OLS residuals. This test computes the skewness and kurtosis
measures of the OLS residuals and uses the chi-square distribution (Gujarati,
2004).
The null hypothesis for the test is
Ho: bi = 0 (the error term follows a normal distribution against the
alternative)
Hi: bi (0 ( the error term does not follow a normal distribution).
At 5% with 2 degree of freedom
__
JB
=n
S2
+
(K – 3)
6
24
= 18.631
while critical JB = ( X2 (2) df) = 5.99147 at 5% level of significance, we
reject Ho and conclude that the error term does not follow a normal
distribution.
ii.
Test for Heteroscendasticity
Heteroscedesticity has never been a reason to throw out an otherwise good
model. But it should not be ignored either (Mankiwng 1990). This test was
carried out using White’s General Heteroscedasticity Test (with cross
terms). This test asymptotically follows a chi-square distribution with degree
of freedom equal to the number of regressor. (excluding the constant term).
The auxillary model can be stated thus:
Ut
=
Bo + B1 GEXP + B2 TARF + B3 REIR + B4 CSTK +
B5 GEXP2 + B6 TARF2 + B7 REIR + B8 CSTK2 + Vi
Where vi = pure white noise error.
This model is run and auxillary R2 from it is obtained. The hypothesis to be
tested is
Ho:
B1 = B2 = B3 …. =
B6 = 0
(Homoscedasticity)
H1:
B1 ( B2 = B3 …. (
B6 = 0
(Homoscedasticity)
Note: The sample size (n) multiply by the R2 obtained from the auxillary
regression asymptotically follow the chi-square distribution with degree of
freedom equal to the number of regressors (excluding constant term) in the
auxillary regression.
Using p. c. give soft ware package saves us the above rigors by calculating
the
Chi-square value
Decision Rule
Reject Ho if X2 cal > X2 tab at 5% level of significance, if otherwise accept
Ho
From the obtained result;
Calculated X2 = 15.581
While the tabulated X2 = 15.5073
Since calculated X2 = 15.581 tabulated X2 0.05(6) = 15.5073, we reject the
null hypothesis of homoscedasticity and conclude that the error term have a
constant variance.
iv.
Test for Multicullinearity
The tests were carried out using correlation matrix.
According to Barry and Feldman (1985) criteria, “multicullinerity is not a
problem if no correlation exceeds 0.80”
Table 4.2.2c
DIVT GEXP TARF REIR CSTK DIVT 1.000
M TARF 0.9121 0.9893 1.000
- GEXP 0.9306 1.000
M,M REIR 0.3588 0.4187 0.4058 1.000
- CSTK 0.9912 0.9450 0.9228 0.3734 1.000 M,M,M,NM
Where m shows the pressure of multicullinearity between the two variables
and NM show that there is no multicullinearity between the two variables.
From the above table, we can conclude that multicullinearity exist only
between GEXP and TARF and CSTK.
CHAPTER FIVE
SUMMARY, CONCLUSION, AND RECOMMENDATIONS
5.1
SUMMARY OF FINDINGS
Following the findings in this study with the coefficient of various variables
that was conducted employing econometric approach. The objective of the
research was to determine the trending profile, the macroeconomic
determinant of private investment, the causal relationship between
investment, and
GEXP, TARF, DISP, REIR, CSTK, was established as
well which will help in making policies that will improve the investment
environment and would be of immense help to policy analysts, business
executives and policy makers to analyze current information and to forecast
future trends. The 025 model was used which help to ascertain the result.
5.2
CONCLUSION
This study so far, econometrically analyzed the determinants of
investment behaviour in Nigeria over the period of 1577-2007.
The
empirical findings have some serious policy implications relevant to the
growth and development of the investment level in the nation for the Nigeria
economy to break away from its current level of under development, policy
makers must recognize the importance of these variables.
Government Expenditure Tarrif, Real Interest Rate are not significant except
capital stock to the investment in Nigeria.
This is because of the crucial role adequate mobilization can play in
generating or bringing about productive investment needed for the nations
current economic development goals as enunciated in the National
Economic Empowerment and Development Strategy (NEEDS).
Thus, the effective manipulation of these variables through consistent
and effective target policies in important for facilitating adequate
mobilization necessary for productive investment.
POLICY RECOMMENDATION
Due to the existing gap in domestic resources for investment activities
would elevate investment profile for sustainable growth the appropriate
policy mix must be adopted (Nnanna 2004:119). Therefore, the behaviour
of the macroeconomic determinants of the investment should be used to
analyze current and expected economic condition in Nigeria in the following
ways.
i.
From the result, it is observed that most of the variables are exhibiting
improvement indicating that with approprsiate policy mix, the economy
would be experiencing an increase in the level of investment.
52
ii.
A fall interest rate accounted for a (0.006236) rise investment, this
presupposes that the economy might not experience short-run fluctuation,
and low investment activities.
iii.
The “trending” profile of private investment has shown the tendency
to move upwards but in an unstable manner. This is as a result of social
forces, most predominantly unplanned change in government regime
policies schemes and sudden shocks.
Generally,
the
government
should
pay
greater
attention
to
the
macroeconomic variables as to make up for the loss brought about by the
economic depression of the early 1980s and the SAP of 1986.
Policy options should be targeted towards achieving steady growth in
those variables, taking into consideration the speed of adjustment, length of
transmission and the magnitude of response. The debt management policy
can be used to reduce the effect of interest on debt on government spending
and investment, promote the regime of managed flexible exchange rate by
ensuring that government does not influence rate of exchange exogenously.
The (0.0121818) increase in private domestic investment due to
currency appreciation can be improved upon. Small and medium scale
enterprises (SMES) and having scheme can also be used to increase the level
of investment.
Finally, recent investment and pro-poor growth policies and
programmes like the National Economic Empowerment and Development
Strategy (NEEDS) and the bank recapitalization policy of 2006 and 2007
should be consistently reviewed and re-adjusted to account for future
unexpected price fluctuations.
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