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JOURNAL OF RESEARCH IN NATIONAL DEVELOPMENT VOLUME 8 NO 2, DECEMBER, 2010


 

GLOBALISATION AND CAPITAL FORMATION IN NIGERIA

 

Pat Donwa and James Odia

Department of Accounting,University of Benin, Benin City

E-mail:pdonwa@yahoo.com

 

Abstract

This paper considers the impact of globalization on the gross fixed capital formation in Nigeria from 1980 to 2006.Using the ordinary least square, it was found that globalization proxy by openness was negatively and insignificantly related to gross fixed capital formation. In other words, globalization has not helped in assisting fixed capital formation. Foreign Direct Investment and Gross Domestic Product were positive and significant while exchange rate had a negative impact on GFCF. Interest rate had positive and insignificant relationship with GFCF. Suggestions on how Nigerian can benefit from globalization and improve gross fixed capital formation are also professed.

 

Key words: Globalization, gross fixed capital formation, gross domestic product,


 


Introduction

In the quest for rapid development, many nations around the world are becoming integrated. This integration is because of reduced transport costs, low trade barriers, faster communication of ideas, rising capitals flows due to foreign investment and immigration. The theoretical underpinning of globalization is based on the irrelevance of national sovereignty and national boundaries in terms of world market, trade and decentralization of capital flows. Globalization fosters the advancement of a “global mentality” and conjures the picture of a borderless world through the use of information technology to create partnership to foster greater financial and economic globalization (Obadan, 2008).

 

Globalization is a phenomenon that reflects the increasing interactions among persons and institutions across the globe. These interactions permeate all facets of human endeavours. Thus, globalization is multi-faceted (Daouas, 2001) spanning economic, political, environmental, social, religious and cultural dimensions. The various dimensions affect people, institutions and countries in one way or another, either positively or negatively. For instance the World Bank (2002) argues that globalization produces winners and losers, both between and within countries. It remains a powerful force shaping world economies for good or for evil. Despite the numerous benefits, globalization has generated anxieties as it increases inequalities within and between nations, threatens employment and living standards, thwarts social progress, shifts power and destroys cultures (IMF Staff, 2002, Giddens,2000). Globalization has created opportunities and challenges for developing countries. Dreler (2003) argues that globalization promotes economic growth. Nevertheless, many poor countries and poor people in many countries have not been able to take full advantage of the opportunities brought by globalization or to participate in its benefits (World Bank,2007), Goyal (2005) posits developing countries have suffered from globalization. Gross fixed Capital Formation has been known to be a steady process by which the productive capacity of a country is increased over time and thereby resulting in rising levels of national income. Globalization is often associated with less restrictive trade regimes resulting in more openness of the economy with a sharp increase in the volume of trade. Increase in the volume of trade brings about high profit which encourages savings and consequent accumulation of capital for investment. Iyoha (2007) posits that investment through net capital formation is largely from business enterprise made possible by households’ savings.

 

Globalization and Nigeria’s economic well-being

Globalization generally intends to generate and yield substantial benefits to all nation of the world as long as all those that are involved show some level of commitment and strong will. It is a commonly held view that globalization holds the key to rapid economic growth. But Nigeria, with relatively open economy and rich natural, human and other resources, is yet to realize significant benefits from globalization (Agbu,2004, Owolabi, 1998).In fact openness has negative relationship with output growth  in Nigeria (Oladipo,1998, Olomola,1998, Alege et al,2004, Okoh,2004). Uwatt (2004) empirical evidence on 41 African countries produced mixed result. However, financial openness had negative effect on growth. In the last two decades she has put in tremendous efforts to be more integrated with the rest of the world through economic reforms including trade liberalization and capital control.

 

In the same light, Nigeria signed to become a global player and an entrepreneur of the World Trade Organization (WTO) in 1983 with the intention of becoming a major player in the world market. In 1986, it embarked on restructuring the economy through Structural Adjusted Programme (SAP) as a result of the economic crisis in which the country experienced negative external shocks from glut in international oil market. Some of the SAP policies adopted were: privatization and commercialization deregulation and trade liberalization.

 

It is necessary to note that Nigeria faced some dangers due to the relatively openness of the economy, that is vulnerability and undiversified export and import structure. Though Nigeria participates in world trade, her share in world export has reduced from 1% in 1970s to 0.24% in 2005 and 0.4% in 2006.Similarly, her share of world imports fell from 0.82% in the 1970s to 0.135% in 2005.From a low export value of N330million in 1960, it rose to N8.9billion in 1986 and N6,372.1biliion in 2005.However,exports value per  capita US dollar terms  have declined since 1980 being $319.3 in 2006.The degree of integration with the world of Nigeria is low considering the volume and proportion of her share in  total global trade which declined from 0.92% in 1970s to  about 0.26% in 2005. Given also the monoculture economy , and characteristic Dutch Disease of the oil sector, which has dominated Nigeria’s exports of over 90% from the 1970s, has resulted in structural imbalances, vulnerability to short-term booms and busts, total neglect of the non-oil exports that it was 2 .3% in 2006


.(CBN,2006).

 


 

 

 Table 1 Economic Growth, Manufacturing Growth and Capacity Utilisation in Nigeria

Period

RealGDP GrowthRate(%)

Avg. Mfg

 Growth (%)

Avg.Mfg  Capacity U(%)

Avg. Mfg 

Value Added (%)

1970-74

n.a

10.1

n.a

n.a

1975-79

n.a

23.1

74.5

n.a

1980-84

3.7

-1.5

59.6

9.3*

1985-89

5.7

13

40.1

8.3

1990-94

4.0

-0.2

37.1

7.9

1995-98

2.8

-1.9

33.9

6.4

1999-2000

3.3

3.7

53.3

7.1

2001-2006

6.1

8.9

52.9

4.1

Source: Central Bank of Nigeria (2006) and annual report of various years. * average for 1981-1984.

 

 


Impact of globalization on Nigeria’s trade and capital flows.

Major components of economic globalization are trade and capital flow. As pointed out by Ajayi (2000) trade remains the vehicle for Africa participation in integration of global economy. Africa is least integrated with the world economy with a share of world trade less than 2%, region’s share of world export fell from 4.6% in 1980 to 1.8% in 2000,declining share of world import from 3.6% to 1.6% over the same period. Africa’s share of FDI flows fell from 1.8% in the period 1986-90 to 0.8% over the period 1999-2000 ( Dupasquier and Osakwe,2003). Considering financial flows and investment, despite the dramatic increase in global FDI flows, African continent and Sub-Saharan Africa (SSA) have been marginal. SSA’s share of world’s trade fell from 3% in1960 to 1.2% in 1990. It rose slightly to 1.7% in 2005. There were slight increase in the ratios of net inflow of FDI (0.4 to 2.7%)  and gross capital flows ( 5.1 to 14.2% ) to the GDP for the same period (World Bank, 2007).Similarly the average annual growth rate has been 2.5 % from 1990-2000 but with a slight increase  to 4.3% from 2000-2005.

        


           

 Table    2         Nigeria’s  External Trade and Degree of Openness (%)

 

1975-79

1980-84

1985-89

1990-94

1995-98

2002-05

Exports/GDP (%)

23.28

18.78

21.04

34.58

41.93

33.13

Imports/GDP (%)

20.24

18.34

12.76

22.72

29.90

18.25

Total Trade/GDP (%)

43.50

37.14

33.78

57.28

71.83

51.93

Share of World Exports (%)

1.00

0.84

0.36

0.32

0.24

0.24

Share of World Imports (%)

0.82

0.78

0.24

0.20

0.16

0.135

Share of Total World Trade (%)

0.92

0.81

0.28

0.25

0.20

0.26

Source: World Bank ,World Economic Indicators,2000,2007;Central Bank of Nigeria Statistical Bulletin,2005,2006.

 


The table shows that Nigeria index of openness increased from an average of 43.5% in 1975-79 to 71.8% in 1995-98 .From 2002-2005,the index was 51.9 %.Despite the relatively high index of openness, she has low integration with the global economy in 2005 manifested through : (1) very low  and declining share of total world trade (about 0.26% in 2002-2005 period).(2) very low share in global output  (0.2%), (3) low GCF/GDP of 0.9% (4) FDI/GDP of 2.0% (5) low per capita income of $ 560 2005 (6) very poor export growth of -4.4% between 1980-1990 but 1.9% fro 1990-2005.(7) the current account balance between 1993-2002 shows massive deficit and outflows due mainly to the huge debts servicing.(8) high incidence of poverty of about 54.5%   (CBN,2006,World Bank,2007,IMF,2006).

 

In addition, Nigeria capital flow and outflow are relatively low, in 1998 the ratio of Nigeria private capital flow to GDP was 4.1% and it remained 4.1% by 1998. Thus, capital flow and outflow in relation to GDP which measures the financial depth of the economy was 29.2 % in 2000 and 2003. This compared favourably with sub-Saharan African average of 23.5%.Increased in FDI has been found to enhance domestic GFC (Hejazi and Pauly, 2003) .Similarly, Abass (n.d) found a strong relationship between GDP and FDI and GCFC and FDI. Increased capital flows can promote growth by providing resources for investment; complement domestic savings permit higher levels of investment and raising growth rates as a result of increased profit. Yauri (2006) found from empirically that Nigerian manufacturing firms that receive that receive FDI employ more technology than non-FDI firms, essentially due to influence of foreign capital.

 

Globalization and capital formation in Nigeria

Capital formation is the increase in the capital stock that results from investment spending. A high and increasing level of Capital formation in an economy is determined by the following:  new technological development and discoveries, increase changes in the rate of consumption, low prevailing interest rate. Others are favourable government policies aim at fostering investment-friendly environment through provision of basic infrastructural facilities, subsidies, tax concessions, investment allowances and low interest rate etc ; high disposable incomes  and business profits.

When capital formation and real GDP was co-integrated, a long run co-integration of capital formation causing positive real GDP was found for G7 and developing countries. In fact, 1% increase in capital formation increase real GDP by 0.1 to 0.28% (Narayan and Smith,2008, Lee,2007). 

In Nigeria, there have been tremendous growths in the rate of gross fixed capital formation. At current       price, the GFCF was N10.841 billion in 1980 and N12.215bn in 1981.From 1982 to 1987 it declined until 1988 when it assumed an increasing trend. The GCFC was N30.626.8bn in 1990, N114, 476bn in 1995, N268.895bn in 2000, N1, 780.04bn in 2005 and N2.272 trillion in 2006 (CBN,2006) .Gross capital formation is made up of GFCF and changes in stock. GFCF comprises residential, non-residential buildings and other construction except land, land improvement, transport equipment, machinery and breeding stock .The identified sources of financial capital formation in Nigeria are: savings, public corporation, foreign investment and aids, Taxation and marketing boards. The ability of these sources has greatly influenced positively the growth of the economy. Sola (2008) did not find link between public investment and economic growth in Nigeria. According to UNCTAD World investment report of 2008, the proportion of FDI to GFCF was 69.0% and based on inward FDI performance index ,Nigeria was ranked 30th in 2006 with an FDI inflows and outflows of $13956m and $228m respectively. The GCFC as a percentage of GDP was 38% in 1980, 15% in 1990, 20.3% in 2000 and 22% in 2006 It has been remarked that investment expands productive capacity , which is also a major explanation of and contributory factor to long run growth in the economy (Iyoha,2007).

 

Interest rate, exchange rate  and capital formation

According to the Keynes’ marginal efficiency of capital and investment (MEC/MEI) and the present value  (PV) criterion, investment is inversely related to the market rate of interest or investment demand function is negatively interest elastic (Iyoha,2007). Anyanwu (1993) remarks that others have put forward interest inelasticity of investment thesis arguing that high deposit rate will lead to rise in savings which will consequently lead to increase in investment. He faulted their argument as not tenable at high interest rate with respect to strategic sectors of the economy. Exchange rate instability, volatility and inappropriate management have had negative implications on overall macroeconomic management. This also affects the rate of investment

 

Methodology

The study used secondary data which were sourced from the Central Bank of Nigeria’s annual reports, statement of accounts and statistical bulletins, bureau of statistics and the Internet to get data for the variables for the period 1980 to 2006. The method of analysis is the ordinary least squares method of estimation.

 

Hypothesis

Based on the literature, we hypothesize that there is a significant relationship between Gross Fixed Capital Formation and the independent variables of Openness, Foreign Direct Investment, Interest Rate, Exchange Rate, and Gross Domestic Product

Model specification

We specify the model based on the hypothesis as :

GFCF = F (OPN, FDI, INT, EXCH, GDP).

Where GFCF = Gross Fixed Capital Formation, OPN = Openness, FDI = Foreign Direct Investment, GDP = Gross Domestic Product, INT = Interest Rate, EXCH = Exchange Rate. Openness is the total of the export and import divided by the gross domestic product.

The econometric form of the model is written as :

GFCF = a0 + a1 OPN + a2 FDI + a3 INT + a4 EXCH + a5 GDP + Ɛ                             ……….  (i)

                          (+)         (+)             (-)             (-)              (+)                       

LNGFCF = a0 + a1 LnOPN + a2 LnFDI + a3 LnINT + a4 LnEXCH + a5 LnGDP + Ɛ ------       (ii)

.   Analysis of regression  result

GFCF = 49321.2 – 3427.8 OPEN + 2.76 FDI + 6756.1INT – 3275.4 EXCH + 0.07 GDP

                 (0.46)         (-1.35)       (3.97)            (1.08)              (-2.58)              (4.24)

            R2 = 0.93; F (6, 20) = 47.3   DW – Stat = 2.18

The t values are in parenthesis below the coefficients.

The DW – Statistic of 2.18 shows that the serial correlation has been removed and the error term is well behaved. The value of the R2 of 0.93 shows about 93% of the total systematic variation in GFCF is explained by the five (5) independent variables. Furthermore, the F value of 47.3 is also high easily passing the significance test at the 5% level. This shows that there is a significant linear relationship between GFCF and the various repressors.

However, only OPEN and INT fail their apriori signs while the other variables pass their apriori signs. The values of 3.97, 4.24 and -2.58 show that FDI, GDP and EXCH pass the significance test at the 5% level respectively. This shows that FDI, GDP and EXCH are significant factors affecting GFCF. While FDI and EXCH are positively related to GFCF,EXCH is negatively related to GFCF. OPEN and INT do not pass 5% level of significance and hence have no significance influence on GFCF, However, while OPEN is negatively related while INT is posited related to GFCF.  

Policy implications

Our analysis shows that Nigeria has so far not benefited from Globalization despite the country’s great potentials and resources endowments. Our analysis shows that impact of openness was insignificant and negatively related to the gross fixed capital formation. Agbu (2004)  and Owolabi (1988) have also remarked that considering various macro-economic and social indicators, globalization has not conferred much benefits on Nigerian economy like other Asian and  Latin American countries.  Notwithstanding, the choice is not for Nigeria to retreat from the process of globalization, rather to meet the major challenges of enhancing the economy’s competitiveness, the country should design and implement sound economic policies. These policies should be aimed at transforming the economy from a resource base economy because Countries that are best placed to benefit from globalization are those that are rapidly transforming their policies and structures to support outward growth (Qureshi,1996). The government should devise strategies aimed at orderly implementation of external sector performance.

 

From our analysis, it implies that foreign direct investment has positive and significant effect on the gross fixed capital formation in Nigeria. Usually, capital flow has its cost or risk. And because Nigeria is still seen as a relatively high-risk country for foreign investment with the high level of corruption, high transaction cost, insecurity-militancy and kidnappings among others, government should promote investment-friendly environment which entails political stability, effective and efficient public administration, and good governance characterize by absence of corruption, insecurity of lives and property etc to sustain the foreign direct investment. Similarly, our analysis shows the exchange rate has negatively impacted on the capital formation, probably due to its volatility. Our result confirm Osaka, Masha and Adamgbe (2003) that inappropriate exchange rate management in Nigeria has impacted negatively on overall macroeconomic management in several ways. Also, the non-oil exports have not been stimulated in any meaningful ways because exchange rate volatility (Obadan, 2006).Therefore, the Central Bank of Nigeria should promote and ensure exchange rate stability and appreciation of the naira to because of the micro/macro-economic implications to capital formation and other sectors of the economy.

 

Conclusion

Specifically, it has been discovered that trade openness and external reserves have had a direct positive relationship with Nigeria’s economic growth, while Foreign Direct Investment (FDI) has a positive impact on Capital Formation going by the period of our analysis. The study has the following findings which are (i) OPENNESS has a negative impact on GFCF though not significant (2) FDI has a positive impact on GFCF and it is very significant (3) GDP has a positive relationship with GFCF and also very significant (4) EXCH has a negative impact on GFCF which is also very significant (5) INT has positive relationship with GFCF although not significant.

 

In conclusion, OPENNESS does not have any significant relationship with Gross Capital Formation in the Nigeria’s economy. This means Nigeria has not benefited much from globalization for the period 1980-2006. The globalization process is yet to result in significant improvement in the country’s economic and social conditions because of the problems of poor governance, bad leadership and gross mismanagement of the nation’s resources and endowments. Also, the monoculture natures of the Nigerian economy and the structural dependence on primary commodity, production and exports have been strong factors in the country’s limited benefits from globalization.

 

Nonetheless, Globalization offers Nigeria the chance of improving on her economic performance especially in the area of capital formation in other to raise the standard of living of its populace. This study is of the view that increased trade, capital flows and robust external reserve engendered by globalization can enhance the country’s growth performance. The following recommendations are put forward if Nigeria is to reap from the benefits of globalization:

 

Recommendations.

The following policies suggestions and policies responses are put forward if Nigeria is to benefit from globalization, boost capital formation and economic growth:

Orderly implementation of outward-oriented strategy

Outward-Orientation is an industrialization and trade strategy which encourages production for exports and thereby creates greater profitability. Export-oriented strategies are based on concepts of economic efficiency and competitiveness in world market. As such, the Nigerian government should embark on appropriate policies that can help sharpen the behaviour of the external sector. These policies are orderly implemented so that significant growth is achieved.

Complementary macro and micro economic policies

Globalization increases the cost of macroeconomic distortions but enhance the reward for good policies. Thus, it is necessary to have in place sound macro economic, sectorial and structural policies in order to improve macroeconomic stability, ensure external sector viability, make the economy more flexible, encourage diversification, reduce the vulnerability of external shocks, ensure stable and development-oriented exchange and interest rates, and increase the over all economic growth, such policies should include prudent fiscal policy to ensure macroeconomic stability and provide a basis for effective and efficient monetary policy.

Human capital development

Human capital development is critical for the survival of Nigeria in the context of globalization and increasingly knowledge based economies. Therefore, the country must invest heavily in human capital, especially education and health. The growth rate is a key factor in determining the extent to which they can capture growing share of trade by increasing manufacturing and service exports.

Attraction of foreign direct investment inflow

Capital flows which are a prominent feature in the globalization process can be quite beneficial to a country’s growth and development. But they also have their own risks/cost and as such can harm economic growth. The financial crises in Mexico and East Asia in the 1990s reminds us of the dangers in unguarded financial liberalization can bring to host countries. This danger can be minimized when there is a secured and enabling economic environment for foreign direct investment to thrive. Hence, Nigeria should create an environment where macroeconomic stability and consistent policies, political stability among others exist.

Raising the level of domestic investment

If Nigeria must realize growth rates that will enable it achieve the millennium development goals (MDGs) by 2015, the 20-20-20 vision, and participate fully in the globalization process, then domestic investment must be raised substantially. This requires raising domestic savings rate and mobilizing private capital. Domestic savings can be increased by pursing macroeconomic stability through prudent fiscal policies, monetary policies that encourage positive real interest rates and reforms of the domestic financial sectors particularly the capital market. On the other hand, domestic investment can be boosted by measures to improve confidence in the economy and its management, consistent policies among others. An investment-friendly environment can also be created through a combination of favourable tax policies on investment and policies that keep the relative prices of capital goods low.

Sustained amnesty and security of the niger-delta region

Amnesty for the Niger –Delta militants must be sustained to ensure continuous peace in the region. Besides, government must address the insecurity of lives and properties, and kidnappings in various part of the country.  

 

                                                          

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Appendix 1

 

Years

OPEN  (%)

FDI (Nm)

GFCF (Nm)

GDP (Nm)

EXCH

INT

1980

46.91

-404.1

10841.2

49632.3

0.55

9.5

1981

47.29

334.7

12215

50456.1

0.61

10

1982

33.7

290

10922

51653.4

0.67

11.75

1983

29.13

264.3

8135

56312.9

0.72

11.5

1984

26.04

360.4

5417

62474.2

0.76

13

1985

26.59

434.1

5573

70633.2

0.87

11.75

1986

20.74

735.8

7323

71859

2.02

12

1987

44.57

2452.8

10661.1

108183

4.02

19.2

1988

36.91

1718.2

12383.7

142618

4.54

17.6

1989

40.34

13877.4

18414.1

220200

7.39

24.6

1990

57.23

4686

30626.8

271908

8.94

27.7

1991

66.64

6916.1

35423.9

316670

9.91

20.8

1992

65.03

14463.1

58640.3

536305.1

17.3

31.2

1993

55.86

29675.2

80948.1

688136.6

22.05

18.32

1994

40.8

22229.3

85021.9

904004.7

21.89

21

1995

88.16

75940.6

114476

1934831

81.02

20.79

1996

69.24

111295

172106

2703809

81.3

20.86

1997

74.5

110452.7

205553

2801973

81.6

23.32

1998

58.4

80750.4

192984

2721178

83..8

21.34

1999

61.91

92792.5

175736

3313563

92.3

27.19

2000

61.91

115952.2

268895

4727523

100.8

21.55

2001

62.5

132481.0

371898

5374335

111.5

21.34

2002

55.57

225972

438115

623243.5

120.5

26.65

2003

79.94

259250.4

429230

6061700

127.6

21.61

2004

80

249157.7

456970

11411067

130.6

20.62

2005

60.5

303328.8

1780040

14610882

131.7

19.467

2006

45.4

573835.05

2272760

18222790

128.7

11.6

s