THE IMPACT OF CAPITAL FORMATION ON ECONOMIC PERFORMANCE IN NIGERIA

THE IMPACT OF CAPITAL FORMATION ON ECONOMIC PERFORMANCE IN NIGERIA

The broad objective of this study is to determine the impact of Capital formation on economic performance in Nigeria. The specific objectives are;

1. To ascertain the effect of Gross Fixed Capital Formation on Gross Domestic Product in Nigeria.
2. To determine the impact of Savings on Gross Domestic Product in Nigeria.
3. To examine the impact of Government Debt on Gross Domestic Product in Nigeria.
4. To determine the impact of Investments in the Stock market on Gross Domestic Product in Nigeria.

CHAPTER ONE

1.1   Background of the Study

The importance of capital formation for the purpose of economic performance cannot be overemphasized. When there is the availability of financial resources from the surplus economic unit to the deficit economic unit, macro-economic objectives will be achieved.  Nations all over the world have always desired good economic performance because a growing economy guarantees price stability, full employment, the balance of payment, and gross domestic product (GDP) which are basic macroeconomic objectives. The economic growth of a nation can be seen as an increase in the number of goods and services produced per head of the population over a given period of time (Shuaib and Ogedengbe, 2015). It is the increase in the market value of the goods and services produced by an economy over time. It is conventionally measured as the percentage rate of increase in gross domestic or real GDP translated into an increase per capita income. Economic growth leads to an increase in productive capacity, private/public sector investment, increases taxes, increase per capita income, and standard of living.

Consequently, on the importance of economic growth to public/private objective and other macro-economic objectives lots of scholarly efforts have been done from the classical era to improve the economic performances of nations. To this end, several nation economic theorists formulated and postulated means and ways of enhancing this growth. Jhinghan (2016) had argued from the perspective of trade and balance of payment positing that favorable balance can guarantee economic growth. Philip (2015) from his perspective rated economic growth from the perspective of price stability that is if the price level is stable within a defined period of time it can enhance the commercial products. It is an increasing stock on real capital in a country as it involves making of more capital goods such as machinery, materials, tools, factories, transport, equipment, etc. which are used for future production of goods. This eventually calls for more savings and consumption. Capital formation captures all the real-value-added to the economy on real- assets –terms which will lead to further enhancement of savings, investment, and generation of more wealth in the future. The propensity to curb consumption rate and increase savings, the greater the development of the society towards capital accumulation. This perception or the presumed relationship between savings and capital accumulation has led some scholars to mistake capital accumulation for savings. Suffix it however to be mentioned here that savings are a means of capital accumulation. Considering the positive impact capital formation has on economic performance, this study intends to examine if there exists a relationship between capital formation and economic performance in Nigeria.

1.2 Statement of the Problem

In Nigeria, capital-output is low resulting from the fact that capital income is low. More so, the marginal or average propensity to save is low, while the marginal or average propensity to consume is so high, this leads to the attainment of economic development. For economic development to be achieved in  Nigeria,  then there should be increase of domestic saving from 4% to thereabout 12% in national income, expansion of the market, investment in capital equipment,  decrease in population rate,  correcting of imbalance of payments,  declining of foreign debts, control of inflationary pressure,  etc.  These stated points are possible only and only if there is a rapid rate of capital formation in the country, that is if a smaller proportion of the community’s current income or output is partly devoted to consumption and/or the other part is saved and/or invested in capital or industrial equipment. Consequently, on the considered importance of economic growth to the economic performance of nations, lots of scholars have explored techniques, advanced theories, models and postulated as evident in the economic literature on how to improve it. Philip one of the classists observed the improvement of it from the perspective of price stability, inflation control, and unemployment? We can incline to observe however here that the experiential and economic indices available about Nigeria economic performance reveal that as unemployment is increasing so do price fluctuates on the hyper increase in inflation is against the posit of the classical economy who believes that the increase in employment will guarantee economic growth, the sub-African experience has shown that even when there is an increase in employment, there is severe cut in indexes and determinant of economic growth like GDP. The goal was to encourage private domestic savings, private domestic investment and capital formation in order to enhance economic growth. In an attempt to achieve this goal, resources were diverted from current consumption and were invested in capital formation through privatization and commercialization of state enterprises. Diversion of resources from current consumption is called saving. But unfortunately, the initial optimism expressed about public sector reforms has not been met. Although the reform program led to the privatization and commercialization of many state enterprises and improvement in some macroeconomic variables like the nominal interest rate and money supply, there have been some disappointing performances. For example, Nigeria continues to be confronted with a low rate of economic growth. Besides, the aggregate supply continued to diminish leading to demand-pull inflation. One worrisome aspect of the result of the liberalization of the public sector in Nigeria is the extent of distress in the sector including a high rate of unemployment.

1.3    Purpose of the Study.

The broad objective of this study is to determine the impact of Capital formation on economic performance in Nigeria. The specific objectives are;

1. To ascertain the effect of Gross Fixed Capital Formation on Gross Domestic Product in Nigeria.
2. To determine the impact of Savings on Gross Domestic Product in Nigeria.
3. To examine the impact of Government Debt on Gross Domestic Product in Nigeria.
4. To determine the impact of Investments in the Stock market on Gross Domestic Product in Nigeria.

1.4 Research Questions

The following posers of questions will be asked for the purpose of the study;

1. How does Gross Capital Formation Affect Gross Domestic Product in Nigeria?
2. To what extent do Savings Affect Gross Domestic Product in Nigeria?
3. In what way does Government Debt affect the Gross Domestic Product in Nigeria?
4. To what extent do Investments in the Stock Market affect Gross Domestic Product in Nigeria?

1.5 Research Hypotheses

The following null hypotheses were formulated and were tested in the course of the study:

Ho₁:  There is a significant relationship between Gross Fixed Capital Formation and Gross Domestic Product in Nigeria.

Ho₂: No significant exist between Savings and Gross Domestic Product in Nigeria.

Ho₃:  There is no significant relationship between Government Debt and Gross Domestic Product in Nigeria.

Ho₄:  There is no significant relationship between Investments in the Stock Market and Gross Domestic Product in Nigeria.

1.6 Significance of the Study

The growth rate in Nigeria’s economy cannot be fully analyzed without a closer look at the contribution of capital formation to Nigerians economic growth. This is in the understanding that capital formation has been reorganized as an important capital naturally plays an important role in the economic growth and development process. It has always been seen as a potential growth-enhancing player as it helps policymakers take good decisions to enhance their productivity and achieve their aims and objectives also, in the government, students and various agencies tend to benefit if there is stable economic growth.

1.7 Scope of the Study

The study is aimed at examining the capital formation and economic performance in Nigeria from 1990-2018. The scope of the study can be divided into the following subsections;

Geographical scope: This covers the geographical territory of Nigeria and the scope of the Nigerian economy.

Content scope: The content scope covers all the theories of scholars pertaining to Capital formation and economic performance.

Study unit: The study unit consists of the economy and variables that relate to the study.

1.8 Limitation of the Study

The study is limited to examining the influence of capital formation on economic performance in Nigeria from 1990-2018. We find out there is autocorrelation, The time range is also small and lastly, there is no autonomous data. The period selected is based on the availability of data for the research.

1.9 Organization of the Study

This study comprises 5 chapters and is structured as follows:

Chapter one consists of the background of the study statement of the problem Aim and objective of the study, the scope of the study, limitation of the study, definition of terms, and organization of the study. Chapter two consists of the literature review which entails conceptual and theoretical framework, empirical review, and the gap in the literature. Chapter three will discuss the methodology, which covers the research design, sample size, sample and sampling techniques, data collection and analysis method, operational measures of variables, and model specification. Chapter four centers’ on data presentation, data analysis, and test of hypotheses, Chapter five is devoted to discussion of findings, conclusion, and recommendations.

1.10 Definition of Terms

Economy: The system production and distribution and consumption

Savings: This is said to be the diversion of resources from current consumption.

Growth: This can be said to be an increase in size, number, value, or strength of a business.

Infrastructural Development: This is the construction and improvement of foundational services with the goal of sparking economic growth.

Investment: This is the purchase of goods that are not consumed today but are used in the future to create wealth.

Economic Development: This is a process in which a nation is been improved in the sector of the economic, political, and social well-being of its people.

Capital Formation: This is a concept or a term used to describe the net capital accumulation during an accounting period of a particular country.