Academic journal article The Journal of Developing Areas

Dynamic Interaction between Savings, Investment and Economic Growth in Nigeria: A Vector Autoregressive (Var) Approach

Academic journal article The Journal of Developing Areas

Dynamic Interaction between Savings, Investment and Economic Growth in Nigeria: A Vector Autoregressive (Var) Approach

Article excerpt

(ProQuest: ... denotes formulae omitted.)

INTRODUCTION

Several empirical studies abound in the literature that examines the causal link between savings, investment, and growth, but there seems to be no harmony as regards the existence and direction of the relationship between these variables. While some scholars supported the classical growth theory that is of the view that savings stimulates growth (Tang & Chua, 2009; Olajide, 2009; Abiodun, 2010; Tang, 2010; Hafizah et al. 2011) others lend credence to the Keynesian hypothesis, which posit that growth causes and drives savings(Carroll & Weil, 1994; Romm, 2005; Rasmidatta, 2011; Sekantsi, & Kalebe, 2015). From the time of the empirical work of Harrod (1939) and Domar (1946), the significance of savings and investment in advancing the growth of the economic has gained a considerable interest in growth theories as (Mishra, Das & Mishra, 2010) in their research findings also documented that the origin of savingsinvestment relationship is attributable to the seminal work of (Fledstein and Horioka ,1979).

Since savings and investment has been regarded as the two vital variables in achieving economic growth, the need to have an in-depth knowledge of the dynamic interaction between savings, investment and economic growth is crucial as it will aid policy makers in designing and employing appropriate macroeconomic policies. This entails identifying which of the economic variables required attention in order to attain macroeconomic goals and objectives (Sajid & Sarfraz, 2008) as well as the various implications of those policies. In a study conducted by (Cyril & Oscar, 2014), the researchers explored the link between aggregate savings and investment in Namibia between the periods 1995 to 2011 using Error Correction Model (ECM) and granger causality test. The empirical evidence from the study indicates the existence of longrun association between savings and investment in Namibia and that savings drives investment.

In a more recent study, (Mohammad & Anas, 2015) explored the link between savings and investment in Jordan between the periods1980 to 2013 using Augmented Dickey-Fuller (ADF) test and Johansen cointegration test. The result of their research showed that there exist a significant, positive and long-run association between savings and investment. Adelakun (2011) noted that while the positive link which exists between savings, investment and growth is well recognized in empirical literature, the growth rate observed in most less developed countries (Africa) relative to other continent of the world is a concern for developmental economist. This concern arose because of the disparity between the growth rate recorded and the level of investment, which could be due to corruption (i.e. over invoicing, inflated public sector contract etc that has led to the actual level of investment being lower than the reported).

In most of the years, domestic savings as a percentage of GDP exceeds that of investment in Nigeria except in 1981, 1982, 1998 and 2009 where gross domestic investment as a share of GDP exceeds that of gross domestic savings by 3.92%, 2.08% 6.79%, and 0.26% respectively. This implies that most of the savings do not translate or are not channelled into investment and this is inimical to the growth of the economy. More so, it contradicts both the Classical and the Keynesian theory which assumes that savings is equal to investment presuming that all savings are channelled to investment. The gross domestic savings as a proportion of GDP fell drastically from 30.10% to 1.83% in 1998 reflecting a decline in household and government savings. Between 2000 to 2013 domestic savings as a percentage of GDP shows a fluctuating trend. In 2014, the proportion of domestic savings as a share of GDP stood at 21.70% while the gross domestic investment to GDP stood at 34.02% in 1981 but fell to 8.62% in 1998. Between the periods of 1999 to 2013, gross domestic investment as a proportion of GDP also shows a fluctuating trend. …

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