CAPITAL ACCUMULATION AND ECONOMIC TRANSFORMATION: A DEVELOPMENT STRATEGY FOR NIGERIA ECONOMY.

CHAPTER ONE

1.1    INTRODUCTION

The good economic performers of the 1960s, 70s and early 80s in Africa turned out to be disappointments in nearly all cases, in large part due to increasing inefficiencies bringing growth and investment to a halt. On the contrary, the recent improvement in economic performance in several African countries have been fuelled by the removal of market distortions and to a lesser extent by structural change, while significant progress in terms of higher investment rates has been absent (see, for example, Fischer, Hernandez-Cats and Khan,1998).

Nigeria has been a country of paradoxes. It is a country abundantly blessed with natural and human resources but in the first four decades of its independence, the potentials remained largely untapped and even mismanaged. With a population estimated at about 140 million, Nigeria is the largest country in Africa and one-sixth of the black population in the world. Nigeria is the 8th largest oil producer and has the 6th largest deposit of natural gas in the world. Currently, barely 40 percent of the arable land is under- cultivation. With over 100 tertiary institutions producing more than 200,000 graduates per annum, the basic human capital for progress is there. There are abundant solid mineral deposits that remain largely untapped. It is estimated that over 5 million Nigerians live outside of Nigeria, with tens of thousands as world class medical doctors and other professionals. In the midst of these resources, Nigeria (on the average) stagnated over the period up to 1999. The poverty situation worsened consistently such that by 1999, the incidence of poverty was estimated at 70 percent.

A classic example to underscore the scope of our misfortune is to compare Nigeria with Indonesia and even Malaysia. By 1972 before Nigeria and Indonesia had the first oil boom, both countries were comparable in almost all counts: agrarian societies; multi-ethnic and religious societies; with comparable size of GDP; etc. Both experienced oil boom in 1973 and thereafter, but took different policy choices. The outcomes of the differences in policy regimes are such that today, while manufactures exports as percentage of total exports is about 40 percent in Indonesia, it is less than one percent in Nigeria­ where we were in the 1970s. We hear of how Malaysia got their first palm seedlings from Nigeria in the early 1960s when oil palm produce was already a major export of Nigeria. In the 1990s, it was estimated that Malaysia's export of palm oil produce earned it more than Nigeria earned from oil exports, and Nigeria had become a net importer of palm produce.

In economic terms, the decade of the 1990s witnessed an average GDP growth rate of 2.8 percent- just about the rate of growth of the population (2.83). This means that on a per capita basis, growth was zero during the decade of the 1990s and no wonder poverty incidence worsened to 70%. All basic infrastructure was in a state of crisis, with barely 1700MW of electricity being generated for a country that needed at least 40,000. Needless to recount the dilapidated transportation infrastructure and the nascent, albeit fragile financial system that was ill suited to the demands of socio-economic transformation. Unemployment and poverty were the twin faces of the economy. Real wages were declining precipitously since the 1970s until the wage increases in 2000 that began to reverse the trend but not yet recovered to the mid 1970s levels in real terms.

Nigeria has had lost decades of stagnant growth and has been one of the slowest growing economies in the world on a per capita basis in the last 30 years despite receiving about $300 billion from oil exports. For several years, the development challenge for Nigeria became the diversification of the productive base away from oil. Successive governments took up this challenge in the design and implementation of several plans and policies. However, the attempts at achieving a more rapid growth of the industrial sector led to investment in several projects that turned out to be "white elephants".

During 2003-7 Nigeria is attempting to implement an economic reform program called the National Economic Empowerment Development Strategy (NEEDS). The purpose of NEEDS is to raise the country's standard of living through a variety of reforms, including macroeconomic stability, deregulation, liberalization, privatization, transparency, and accountability. A related initiative on the state level is the State Economic Empowerment Development Strategy (SEEDS).

A longer-term economic development program is the United Nations (UN)-sponsored National Millennium Goals for Nigeria. Under the program, which covers the years from 2000 to 2015, Nigeria is committed to achieve a wide range of ambitious objectives involving poverty reduction, education, gender, equality, health, the environment, and international development cooperation. In an update released in 2004, the UN found that Nigeria was making progress toward achieving several goals but was falling short on others.

Overall, the economy is characterized by low savings-­investment equilibrium and low growth trap, and lack of high growth persistence is a defining feature of the economy such that in over 40 years, it has never had a growth rate of 7% or more for more than three consecutive years.

An even more worrisome issue is the miniscule investment rate. A society that does not invest is a society that cannot grow. The bulk of investment is undertaken by the public sector, and the low private sector investment is essentially on account of the risky and uncertain investment climate, and the atypically high cost of doing business; Nigeria has a potentially large market (although the purchasing power in a $300 per capita economy is low).  But investors are less enthusiastic to exploit this opportunity because of the risks and costs involved. The growth of output of any economy depends on capital accumulation, and capital accumulation requires investment and an equivalent amount of saving to match it. Two of the most important issues in development economics, and for developing countries, are how to stimulate investment, and how to bring about an increase in the level of saving to fund increased investment.

For growth to occur, a country must invest to build up productive capacity. It is this capacity that determines the level of output of goods and services in the economy. If investment, which represents the net increase in an economy's capital stock leads to growth, then there is relationship between capital accumulation and economic growth. When sustained growth has occurred, it is expected that, over time, with the appropriate policies that allows for more equitable distribution of the fruits of economic growth among a progressively larger percentage of the population, economic development would follow. Thus, the fact that capital is needed for economic growth is not disputable. Faith in this relationship has long been established.

1.2    STATEMENT OF THE PROBLEM

The weakness of the Nigerian economy in the past three decades is not unrelated to its dependence on oil. Indeed, the country is a textbook example of an economy under the influence of the Dutch Disease with its deleterious impact on the, development of other aspects of the real sector. Oil generates about 90% of foreign exchange earnings and 75% of government revenues. It contributes about 30% of GDP but employs only about 3% of the labour force.

For several years therefore, the development challenge for Nigeria became the diversification of the productive base away from oil. Successive governments took up this challenge in the design and implementation of several plans and policies. However, the attempts at achieving a more rapid growth of the industrial sector led to investment in several projects that turned out to be "white elephants". Two factors probably contributed to this development. First, the capacity to design/execute such projects was lacking. Secondly, the soft funds heeded to sustain the projects after they were started dried up following the collapse of oil prices in the early eighties. But there is an even more significant development resulting from the attempt to put the economy right. Government inadvertently became the dominant force in the economy employing about one million people. The huge resources accruing to government turned it into a centre for rent seeking and corruption. Though Nigeria's rating in world corruption table is often contested, the government has acknowledged that the situation is sufficiently bad to warrant a frontal attack.

The economy is characterized by low savings-investment equilibrium and low growth trap, "and lack of high growth persistence is a defining feature of the economy such that in over 40 years, it has never had a growth rate of 7% or more for more than three consecutive years. The bulk of investment is undertaken by the public sector, and the low private sector investment is essentially on account of the risky and uncertain investment climate, and the atypically high cost of doing business. Nigeria has a potentially large market (although the purchasing power in a $300 per capita economy is low). But investors are less enthusiastic to exploit this opportunity because of the risks and costs involved. Nigeria needs help to meet the challenge of initiating an inclusive rapid growth with socio-structural transformation to strategize, prioritize and to manage its own resources better. Hence, the purpose of this paper which looks at transforming the Nigerian economy into a state of development through huge capital accumulation.

1.3    OBJECTIVES OF THE STUDY

Since independence, Nigeria has formulated five development plans, four rolling plans and the Vision 2020. However, the fruits of planning could not be said to have been realized. There is urgent need for the economy to be transformed.

The national crusade for a new economy is embodied in Obasanjo's socioeconomic transformation agenda entitled "National Economic Empowerment and Development Strategy" (NEEDS) with a focus on four key objectives- poverty reduction, employment generation, wealth creation and value re-orientation. The Federal Government has also assisted the States to develop the State Economic Empowerment and Development Strategy, SEEDS and every state in Nigeria has its own reform programme. The difference in outcomes so far between the Federal programmes and some of the states lies in effective implementation. The experience under NEEDS demonstrates that where you have a. robust programme and implementation is effective, you have the desired outcomes.

To achieve the NEEDS objectives, government is embarking on massive capital accumulation. The foreign reserve presently above $43billion.

The purpose of the study includes among others:

To determine why development plans have failed in the past.

·        To determine the present level of development in Nigeria.

·        To determine the need for capital accumulation in Nigeria.

·        To determine the challenges of capital accumulation in Nigeria.

·        To establish a relationship between capital accumulation and economy transformation in developing the Nigerian economy.

1.4    SIGNIFICANCE OF THE STUDY

It is a known fact that, Nigeria has been a country of paradoxes. It is a country abundantly blessed with natural and human resources but in the first four decades of its independence, the potentials remained largely untapped and even mismanaged.

With a population estimated at about 140 million, Nigeria is the largest country in Africa and one-sixth of the black population in the world. Nigeria is the 8th largest oil producer and has the 6th largest deposit of natural gas in the world. Currently, barely 40 percent of the arable land is under cultivation. With over 100 tertiary institutions producing more than 200,000 graduates per annum, the basic human capital for progress is there. There are abundant .solid mineral deposits that remain largely untapped. It is estimated that over 5 million Nigerians live outside of Nigeria, with tens of thousands as world class medical doctors and other professionals. In the midst of these resources, Nigeria (on the average) stagnated over the period up to 1999. The poverty situation worsened consistently such that by 1999, the incidence of poverty was estimated at 70 percent.

This study is expected to bring fore the phenomenon of under­development or socio-economic decadence in Nigeria, looking at why it is poor amidst plenty and how capital accumulation, human and physical, can be instrumental to socio-economic transformation in the country.

1.5    SCOPE AND LIMITATION OF THE STUDY

Because of the limitation of resources, both time and financial the use of secondary data is preferred to primary data and therefore to be used in this research work. The various data are to be collected from CBN statistical bulletin, CBN annual reports, FOS publications, and other relevant sources.

1.6    RESEARCH QUESTIONS

·        Does gross fixed capital formation have significant impact on the GDP?

·        Does foreign direct investment have significant impact on real GDP?

·        Does gross national saving have significant impact on real GDP?

·        Does exchange rate have significant impact on real GDP?

1.7    RESEARCH HYPOTHESIS

Hypothesis 1

H_o       =  Gross fixed capital formation has no significant impact on real GDP.

H₁       =  Gross fixed capital formation has Significant impact on real GDP.

Hypothesis 2

H_o       = . Foreign direct investment has no significant impact on real GDP.

H₁       =  Foreign direct investment has significant impact on real GDP.

Hypothesis 3

H_o       =  Gross nationals saving has no significant impact on real GDP.

H₁       =  Gross nationals saving has significant impact on real GDP.

Hypothesis 4

H_o       = Exchange rate has no significant impact on real GDP

H₁      = Exchange rate has significant impact on real GDP

1.8    METHODOLOGY

The research technique, to be used in this research work is regression analysis, which is an econometric method that is used to derive the relationship and estimates of economic parameters from data observations.

1.9    DATA COLLECTION

This study will explore secondary sources of data. The various data are to be collected from CBN statistical bulletin, CBN annual reports, FOS publications, and other relevant sources.

1.10 ORGANISATION OF STUDY

In an effort to achieve the research proposal, the project will be divided into five chapters. Chapter one contains the introduction, while chapter two is a detailed exposition of the literature review and theoretical framework. Chapter three deals extensively with the methodological issues of data collection and the nature of data used in the study. Chapter four focuses on data presentation, analysis and interpretation. Here also the test hypothesis is carried out to justify the purpose of the study. Chapter five contains the summary, conclusion and recommendations.

1.11 DEFINITION OF RELEVANT VARIABLES

1.       Gross fixed capital formation: this is expenditure on fixed assets (such as building, machinery, etc) either for replacing or adding to the stock of existing fixed assets.

2.       Foreign direct investment: this is expenditure by foreign investors on real assets for the purpose of production rather than portfolio investments.

3.       National savings: this is the total value of national savings whose major part lies in commercial bank.

4.       Employment rate: this is the percentage of people who are gainfully engaged in one economic activities or another as defined by the CBN

5.       Consumer price index: This is the index of increment in domestic prices and it was used to deflate nominal values such as gross fixed capital formation, foreign direct investment and national savings.

6.       Real gross domestic product at 1990 constant prices: This is an already deflated GDP using 1990 as the base year hence called real GDP.