Abidemi Abiola and M.O Egbuwalo

 Department of Economics, Bowen University, Iwo

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This study examined the relationship between savings and investment, and between investment and economic growth. A corollary of the work is the determination of which of the inputs of production contributes more to economic growth in Nigeria. The study makes use of time series data spanning thirty-three years using Ordinary Least Square methods. The result shows a positive relationship between savings and investment. It also confirms the existence of a positive relationship between Investment and economic growth. Of the determinants of savings considered in the study, inflation rate contributes negatively to saving, while interest rate positively affect saving. All these confirm economic theory. The striking feature of the study however is the confirmation of the impact of labour on economic growth, which according to the study far outweighs the contribution of capital.


Key words: Savings, investment, productivity, growth





 Interests in the study of economic growth and development have been on the increase especially since the middle of the present century. Economic growth results in the expansion of a country’s production possibility curve such that the potential output of the country is increased beyond the previous levels. Thus growth is often defined in terms of a sustained increase in the real per capita income of a country. Simon Kuznets in (Todaro, 1885), defined a country’s economic growth as “a long term rise in the capacity to supply increasingly diverse economic goods to its population, this growing capacity based on advanced technology and the institutional and ideological adjustments that it demands”. Growth is therefore measurable and objective. It describes expansion in capital, in the labour force, in output, income, consumption e.t.c.


It should be noted that economic growth is sometimes used interchangeably with economic development. A distinction of the two was however made by (Jhingan, 1976) where he defined economic development as the ‘non-quantifiable measure of the growing economy” i.e. the economic, social and other changes that lead to growth such as changes in techniques of production, social attitudes and institutions e.t.c. No matter the distinction what is important in the words of (Iyoha, 1996) is that there is no development without growth. One point that must be mentioned however is that in practice, economic growth is used to describe the process of growth in advanced industrialized countries while economic development is used to describe the dynamics of growth in low income non-industrialized countries. This position is buttressed by (Romer, 2001), where he posited that over the past few centuries, standard of living in industrialized countries has reached levels almost unimaginable to their ancestors. He affirmed that although comparisons are difficult, the best available evidence suggests that average real income today in the United States and Western Europe are between 10 and 30 times larger than a century ago, and between 50 and 300 times larger than two centuries ago. 

Following from the above, Kuznets identified six characteristics of modern economic growth.

These are:

♣ High rate of growth of per capita output and population.

♣ High rate of increase in total factor productivity, especially labour.

♣ High rate of structural transformation of the economy.

♣ High rate of social and ideological transformation.

♣ Outward expansion of the developed economies i.e. the ability to reach out to the rest of the world for raw materials and markets.

♣ The international flow of men, goods and capita.

It then follows that for all these to be achieved especially for a developing economy like Nigeria some economic variables within the context of the features of the Nigerian economy must be marked upon to achieve these status mentioned above.


Statement of research problem

So many blurred visions about the projection of Nigerian economy have been seen by the operators of the Nigerian economy. In the days of Abacha administration between 1993 and 1997, it was vision 2010 as led by former Head of State, Ernest Shonekan. 2010 is around the corner and nothing seems to have changed the last 15years. Another journey is being embarked upon by Yaradua and his economic team. The mission of making Nigeria one of the biggest 20 economies in the world by 2020, vision 2020-20. Whether this is  achievable or not is best left for debate for scholars of economics. But if one must follow the position of Robert Solow (1956), the Ramsey-Cass-Koopman model (1928, 1965, 1965) and the Diamond model (1965), achieving the above is a function of thorough understanding of production function of a given economy. Nigeria like most countries is blessed with abundant human and natural resources, yet the economy is still groping with problems. Evidence is palpable that apart from income from sales of crude oil, the nation is close to zero in terms of technological advancement. The reason for this is no other than that the much needed investment to motivate technological advancement and industrialization is not forthcoming. The position of the government immediately after independence to embark upon import substitution as an industrialization strategy did not equally help matter.  


If investment is a catalyst for industrialization and hence economic growth, investment is made possible by another catalyst in savings. Over the years, there has not been any synergy between savings and investment in Nigeria. This problem is because of little emphasis partakers in the running of the economy are giving financial intermediation. It is in a country like Nigeria where the borrowers reign supreme at the expense of the lender. The deposit rates to the supplier of funds from the surplus units are not only meager but pittance, while the lending rates collected from the users of fund in the deficit unit is astronomical. So it is the issue of cutting the depositors with knife’s edge while cutting the borrower with razor’s edge. Savings is not encouraged while investment is discouraged. Economic activities slowed down, productivity neglected while economic growth in the real sense of it is stagnant.


Savings, investment and economic growth in Nigeria

Economic growth from the theoretical issue above describes the quantitative growth in a nation’s gross domestic product. From the simple open macroeconomic model, the gross domestic product is the addition of the country’s consumption, investment, government expenditure and net export. This underscores the importance of investment in a national economy. Available data from the Central Bank of Nigeria shows the trend of savings, investment and economic growth in Nigeria as shown in the table below:

































Source: CBN Annual Statistical Bulletin, various editions


The figures in the table show the averages of those variables under consideration. From the table, savings in the country averaged 4014.42million between 1981 and 1985. This figure rose steadily to #628090.28million between 1996 and 2000.  However between the period 2001 and 2004, savings fell from #628090.28million to #539431.3million. Investment on the other hand witnessed a progressive rise from 1981 to 1985 as a group period to 2001 to 2004 as another group period. From #5662.5million between 1991-1995, it rose 10397.42 in the period 1986-1990. This eventually rose to about #188943.1 between 2001-2004. On economic growth represented by gross domestic product, the variable has equally witnessed a steady from 1981-1985 period to 2001-2004 period. At an average figure of #120322.7million, it rose to an all high figure of #9212421million between the period of 2001 and 2004. This steady rise and fluctuation in the case of savings are captured in the graph shown below.





The graph above is the geometric representation of the table above. From the graph, whereas GDP and investment show an upward trend in their movement, the downward trend in the line of savings around year 2000 and 2002 corroborates the figures in the table above.


So many reasons could be adduced for the fall in savings. Prominent among these reasons is the fact that savings as a function of income is equally seriously linked to inflation rate in any economy. In an economy where income is rising simultaneously with rise in inflation rate as the case in Nigeria, it boils down to the fact that purchasing power will be eroded and savings may be affected. Another reason that may have affected the fluctuation in the savings pattern is deposit rate being given by the commercial banks in Nigeria. The deposit rate which should serve as motivator to would be savers are pittance, so meager that willing public rather than put their money in the banks would approach the capital market as the latest trend in investment practices in Nigeria indicate.


Methodology of Research

This simply means the statistical requirements needed to conduct the study. The data gathered for this study are totally secondary in nature i.e.  They were gotten from the already published materials, books and from published government institution of statistics, such as the Central Bank of Nigeria and the National Bureau of Statistics. The research technique is econometric analysis. The ordinary least square estimation technique was adopted to empirically examine the impact of savings on investment and of investment on the economic growth.


Model specification

Recall the purpose of the study as an attempt at investigating the impact of savings, investment and productivity on economic growth in Nigeria. With this in mind, the structural equation examined the impact of productivity on economic growth. Therefore, the structural equation that will be examined is specified as follows:

                        Y = f (Y/L, Y/K)    ……………………………………………………………(1)

Where Y represents the income of the country which is used to proxy economic growth.

Y/L = output per unit of labour

Y/K = output per unit of capital.

In clear term, the above function attempts to examine the productivity of labour and capital on the country’s economic growth.

The second equation that will be considered is the impact of labour and capital on investment, this is specified as follows:

                        I = φ (L, K)……………………………………………………………(2)

Also the study will examine the impact of savings on investment, and as such the third equation that will be examined is


While the last equation that will be examined is the determinants of Savings in Nigeria. This is specified as follows:

                        S = θ (INTR, INFR, Y)………………………………………………(4)


Where S= Savings

            INTR = Interest rate

            INFR = Inflation rate

            Y = Income


Empirical analysis of findings

The regression result of equation 1 can be summarized as shown in the table below:




Standard Error















R2 = 0.87  Adjusted R2 = 0.87 F=104.28 DW=1.78


The above result can be represented in an equation as shown below

                        Y = 789492.5 + 941.2963Y/L + 10.97048Y/K ……………………….(5)

                                (1.816)         (13.21)        (3.43)


The above is a product of time series data concerning the values of Gross Domestic Product (Y), Output per unit of labour (Y/L) and Output per unit of Capital (Y/K). With a priori expectation that there will be a positive relationship between the dependent variables Y and independent variables Y/L and Y/K, the result turns out as expected as the signs attached to the coefficients of the two explanatory variables are both positive. From the result it can be deduced that a million naira spent on a unit of labour will bring about 941.3million naira positive change in economic growth. While a million naira spent on capital will bring about 11million naira positive change in economic growth.


From the analysis above, it is obvious that as far as the Nigerian economy is concerned, labour contributes more to economic growth than capital. The reason for this may not be farfetched because whereas the economy is heavily populated (about 140million based on 2006 census figure), the country does not really fare well in terms of technological development.


Also noticed from the result is the R2, which is a measure of the overall goodness of fit in the equation. With an R2 of 0.87, it means that the proportion explained by the independent variables is 87%, while the remaining 13% was explained by the error term. Reported in parenthesis in the equation is the t-ratio. An application of the rule of thumb shows that the t-values for the two explanatory variables are greater than 2, which confirms significance to the variables at both 1% and 5% levels. This means that an examination of the independent variables; variable by variable shows that each of the independent variables belongs to the model. The F-statistics which can be considered as the “elder brother” of t-statistics has a value of 104.28. This shows that the two independent variables taken together belong the model. The most important aspect of the result is the Durbin Watson of 1.78 which suggests the absence of serial correlation that can make the result biased in the model.



            The result of equation 2 is presented as shown below:



Standard Error














R2= 0.76  Adjusted R2=0.75  F=48.195  DW=0.47


The above result expressed in linear form is as written below:

                        Inv = 24926.06 +17.27L + 0.07K………………………………….(6)

                                    (1.92)        (8.2)        (0.73)

The above result equally conforms with a priori expectation of a positive relationship between investment on one hand and labour and capital on the other hand. The result suggests that for every 1 million naira spent on labour, investment will increase by 17.27million naira. Likewise for every 1million naira spent on capital, investment will increase by .07million naira. The test statistics shows that t is significant for labour and insignificant for K. However, an F value of 48.195 is enough evidence to confer significance on both L and K. One major problem noticed in this second result is the lower DW, which suggests the presence of serial correlation. But with the R2 of 76%, it indicates that the variables at least 76% represent the dependent variable.

            For the third equation, the result is as shown below:



Standard Error










R2 = 0.92  Adjusted R2 = 0.92  F=359.39  DW =1.37


The above result expressed in linear form is as written below:

                        Inv = 6601.317 + 0.046Sav …………………………………………(7)

                                    (0.92)        (18.96)

From the result, saving positively affect investment. The variable is significant considering both the t and F statistics. With a Durbin Watson of 1.37, there is inconclusive evidence to suggest the presence of serial correlation in the model.

            Equation 4 above has the following result



Standard Error


















R2 = 0.94  Adjusted R2 = 0.94 F=154.99  DW =1.46


This is linearly expressed as

                        Sav = 159974.3 + 9395.611INTR -935.47INFL + 0.431Y ……….(8)

                                    (0.59)         (0.47)                 (0.14)             (20.7)

From the result, whereas both interest rate and income positively affect saving, inflation rate negatively affect it.  The t ratio for the model shows a significant result for only income while that of interest rate and inflation rate are not. However, with an F value of 154.99, it shows that the bulk of the explanatory variables ably represent the explained variable. The result equally has a high R2, which indicates that the model has 94% predictive power.


Conclusion and policy recommendation

That there is a strong link between saving and investment is incontrovertible. Also there is no controversy surrounding the existence of a relationship between investment and economic growth. The issue is what sort of relationship exists between these variables. Safe for economic theory that has clearly stated the type of relationship that exist between investment and economic growth, and between saving and investment, there is no clear cut quantitative relationship among these variables. This is what this research work has undergone.


The study confirms a positive relationship between saving and investment. It also established a positive relationship between investment and economic growth. An offshoot of the research work is determination of a positive relationship between interest rate and saving, and a negative relationship between inflation rate and saving. In terms of productivity the study shows that both labour and capital positively contribute to investment and by extension economic growth, however the contribution of labour far outweighs that of capital in the Nigerian context.


Policy statements deductible from this study include the fact that the country should move away from the labour intensive technique of production to capital intensive to keep pace with the trend of globalization. This will improve productivity of labour, increase investment and ultimately economic growth. From the study also, since it has been established that interest rate positively affect saving, the bank operator should encourage saving by increase the deposit rate to depositors. This will enhance the banking habit of the people and by extension saving accumulation that will culminate into investment. The monetary authority should intensify their efforts towards the realization of the policy objective of inflation targeting as currently being pursued. This is because the study confirms the negative effect  inflation has on investment, which in turn impact negatively on economic growth.



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