Determinants of Economic Growth in Nigeria: An Autoregressive Distributed Lag (ARDL) Modeling Approach

Determinants of Economic Growth in Nigeria: An Autoregressive Distributed Lag (ARDL) Modeling Approach

ABSTRACT

The research also examines the relationship between the ARDL procedure and the fully modified OLS approach of Phillips and Hansen to estimate the cointegrating relationship between all the variables, and economic growth, these results provide strong evidence in favour of rehabilitation of the traditional ARDL approach to time Series econometric modelling. The ARDL approach has the additional advantage of yielding consistent estimates of the long-run co-efficient that is asymptotically normal irrespective of whether the underlying regressors are I(1) or I(0)., This research provides an empirical analysis of the relationship between economic growth and its determinants factors with a special focus on gross domestic product, foreign direct investment and other important factors in Nigeria, using data from the period of 1976 to 2010, we also employed ARDL bounds testing for the long-run relationship and ECM for the short-run dynamics. The findings suggest a positive relationship between efficient real GDP and foreign direct investment and economic growth both in the short run and long run.

Money supply and inflation have negative effects on economic growth while fiscal deficit and foreign direct investment have positive effects on growth. Foreign direct investment is found to have a significant positive effect on growth. The results are consistent with the theoretical and empirical predictions.

TABLE OF CONTENTS

TITLE PAGE …………………………………………………………………………………………………………… i
DEDICATION ………………………………………………………………………………………………………… ii
CERTIFICATION …………………………………………………………………………………………………. iii
ACKNOWLEDGEMENTS ……………………………………………………………………………………… iv
TABLE OF CONTENTS ………………………………………………………………………………………….. v
LIST OF FIGURES ……………………………………………………………………………………………….. vii
LIST OF TABLES ……………………………………………………………………………………………….. viii
ABBREVIATIONS ………………………………………………………………………………………………… ix
ABSTRACT ……………………………………………………………………………………………………………. x
CHAPTER ONE
1.1 Introduction ………………………………………………………………………………………………….. 1
1.2 Background of the Study ……………………………………………………………………………….. 1
1.3 Statement of the Problems ……………………………………………………………………………… 3
1.4 Research Questions ……………………………………………………………………………………….. 3
1.5 Aims and Objectives of the Study …………………………………………………………………… 4
1.6 Research Hypothesis ……………………………………………………………………………………… 4
1.7 Significance of the Study ……………………………………………………………………………….. 4
CHAPTER TWO: LITERATURE REVIEW
2.1 Introduction ………………………………………………………………………………………………….. 6
2.2 Nature and Structure of the Nigerian Economy ……………………………………………….. 10
2.3 Some Factors Used to Determine Nigerian Economy ………………………………………. 14
2.4 Advantages of the ARDL Models Over Other Techniques. ………………………………. 18
CHAPTER THREE: THEORETICAL FRAMEWORK AND METHODOLOGY
3.1 Introduction ………………………………………………………………………………………………… 19
3.2 Data Sources and Description of Variables …………………………………………………….. 19
3.3 Autoregressive Distributed Lag (ARDL) Model …………………………………………….. 20
3.3.1 General Model for the ARDL ……………………………………………………………………….. 21
3.3.2 Main Features of the ARDL Approach …………………………………………………………… 21
3.4 Co-integration Test ……………………………………………………………………………………… 22
3.5 Unit Root Tests …………………………………………………………………………………………… 23
3.5.1 Augmented Dickey-Fuller (ADF) Test …………………………………………………………… 24
3.5.2 Hypothesis Testing ……………………………………………………………………………………… 24
3.5.3 Kwiatkowski, Philip, Schmidt, and Shin (KPSS) Test ……………………………………… 25
3.6 ARDL Bounds Test Approach ………………………………………………………………………. 26
3.6.1 The General Bound Test For ARDL Model ……………………………………………………. 27
3.7 Long Run Model …………………………………………………………………………………………. 27
3.8 Short-Run Model …………………………………………………………………………………………. 28
3.9 Error Correction Model ……………………………………………………………………………….. 28
3.10 Diagnostics Test ………………………………………………………………………………………….. 30
3.11 Testing for Serial Correlation ……………………………………………………………………….. 30
3.11.1 Durbin-Watson d-Test …………………………………………………………………………………. 30
3.11.2 Breusch-Godfrey or Lagrange Multiplier Test ………………………………………………… 31
3.11.3 Stability Test ………………………………………………………………………………………………. 31
3.14 Hypothesis …………………………………………………………………………………………………. 32
3.15 Maximum Likelihood Estimation ………………………………………………………………….. 33
3.16 Software’s For The Analysis …………………………………………………………………………. 37
3.17 Model Selection Method ………………………………………………………………………………. 38
3.18 Models Specification …………………………………………………………………………………… 39
3.19 Using ARDL Model for Estimated Variables ………………………………………………….. 39
3.20 Using Unit Root Test for the Variables ………………………………………………………….. 40
3.21 Bound Test Approach ………………………………………………………………………………….. 41
3.22 Long Run Specification Model ……………………………………………………………………… 44
3.23 Short Run Specification Model ……………………………………………………………………….. 45
CHAPTER FOUR: RESULTS AND DISCUSSION
4.1 Tests for Non-Stationery ………………………………………………………………………………. 47
4.2 Results for Unit Root Test ……………………………………………………………………………. 47
4.3 Graphical Solutions of the Unit Root Tests …………………………………………………….. 49
4.4 Plot of CUSUM and CUSUMSQ (Stability Test) For LGDP as Depended
Variable ………………………………………………………………………………………………………………… 56
4.5 Analysis Using ARDL for LFDI as Depended Variable …………………………………… 58
4.5.1 Plot of CUSUM and CUSUMSQ (Stability Test) for FDI ………………………………… 61
CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATION
5.1 Summary ……………………………………………………………………………………………………. 63
5.2 Conclusion …………………………………………………………………………………………………. 64
5.3 Recommendation ………………………………………………………………………………………… 64
REFERENCES …………………………………………………………………………………………… 66

CHAPTER ONE

1.1 Introduction

Economically developed countries have been able to reduce their poverty level, strengthen their social and political institutions, improve their quality of life, preserve natural environments and achieve political stability [Barro (1996); Easterly (1999); Dollar and Kraay (2002a); Fajnzylber, (2002)]. After World War II, most of the countries adopted aggressive economic policies to improve the growth rate of real gross domestic product (GDP). The neoclassical growth models imply that during the evolution between steady states; technology, exogenous rate of savings, population growth and technical progress generate higher growth levels (Solow 1956). The endogenous growth model developed by Romer (1986) and Lucas (1988) argues that a permanent increase in growth rate depends on the assumption of constant and increasing return to capital.

Similarly, Barro and Lee (1992) investigate the empirical association between human capital and economic growth. They seem to support the endogenous growth model by Romer (1990) that high light the role of foreign direct investment in the growth process.

Fischer (1993) argue that long-term growth is negatively linked with inflation and positively correlated with better fiscal performance and factual foreign exchange markets. In the context of developing countries, investment both in foreign direct investment, money supply, and ability to adapt to technological changes, open trade policies and low inflation are necessary for economic growth.

1.2 Background of the Study

Nigeria is a West African economy with a long coastline along the Atlantic Ocean. The country shares international borders with Benin, Chad, Cameroon and Niger. Nigeria ranks 32 in the world in terms of total area. The terrain of the country consists of southern lowlands and plateaus in the central region have a mountainous surface, while the North’s consist of the plain. According to the 2009 estimates, the country has a total population of over 154 million, of which almost 70% live below the international poverty line; the Nigerian economy is overly dependent on the petroleum sector.

The Nigerian economy is one of the most developed economies in Africa. According to the UN classification, Nigeria is a middle-income nation with developed financial, communication and transport sectors. It has the second-largest stock exchange on the continent.

The petroleum industry is central to the Nigerian economic profile. It is the 12th largest producer of petroleum products in the world. The industry accounts for almost 80% of the G.D.P share and above 90% of the total exports. Outside the petroleum sector, the Nigerian economy is highly amorphous and lacks basic infrastructure. Several failed efforts have been made after 1990 to develop another industrial sector. Owing to the surge in international oil prices during 2007-08, Nigerian managed an annual G.D.P of US$352.3 billion. The nation rank 33 in the world in term of G.D.P per capita of US$2,400.The economic conditions of Nigerians have advanced over the last few years as a result of the rapid phase of industrialization. The economy of Nigeria also improved tremendously with foreign investment aided by high-quality research and development. Nigeria was under British colonial rule for a considerable period. During this phase, major raw materials and minerals were exported to foreign countries along with food grain which in due course of time spearheaded the rise of slavery and exploitation of labour class by the Europeans.

After the achievement of independence in Nigeria, efforts were made to revive the economic growth of the country through a set of economic reforms. It’s important to note that before the discovery of oil in Nigeria the country survived mainly on its agricultural production. The present G.D.P growth rate has been 7% in the past few years.

1.3 Statement of the Problems

Although various factors have been adduced to Nigerian economic growth performance, the major problems have been adducing to the economy’s continued excessive reliance on the fortunes of the oil market and the failed attempts to achieve any meaningful economic diversification (Osuntogun. 1997), reflecting the effect of the so-called “Dutch disease” the need to correct the existing structural distortion and put the economy on the path of sustainable growth is therefore compelling, this raises the questions of what else needs to be done to diversify the economy and develop the various factors to realize the potential of the factors that determine economic growth. This calls for new thoughts and initiatives, which is the essence of this research.

1.4 Research Questions

According to the objectives stated below, the research questions that would be examined in the course of the study are as follows

i. What has been the structure of the economic growth in Nigeria?

ii. What are the factors that are responsible for determining the economic growth in Nigeria?

iii. What has been the performance of each factor on economic growth in Nigeria?

1.5 Aims and Objectives of the Study

The specific objectives of the study are as follows

i. To determine the factors that are responsible for the performance of Nigerian economic growth.

ii. To analyze and measure the contributions of each factor on economic growth in Nigeria.

iii. Evaluate the effort of each factor on economic growth in Nigeria.

1.6 Research Hypothesis

Base on the models stated above, the hypothesis to be tested in this research is stated below.
Hi: The factor has contributed significantly to the economic growth of Nigeria.

Ho: The factor has not contributed significantly to the economic growth of Nigeria.

1.7 Significance of the Study

The major significance of this study is as follows

i. It would provide an econometric assessment of the contribution of these factors to the economic growth of Nigeria.

ii. It would provide a detailed composition of these factors of Nigerian in recent time apart from petroleum oil

1.8 Scope of the Study

This project focused on the factors that determine the economic growth in Nigeria as necessitated by the devastating effect on the recent global economic crisis. Although several attempts have been made to diversify the Nigerian economy since the introduction of structural adjustment programs (S.A.P) in 1986, no meaningful.

Success has been achieved. Therefore, this project would examine the trend, pattern and composition of the factors responsible for Nigerian economic growth during the post and pre-SAP era as well as its export profile, subsequently, the causes and consequences of the neglect of the factors shall be identified. The study would also investigate the contribution of all these factors to the economic growth of Nigeria with data ranging from 1976to 2010.

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