Effect of Capital Formation on Economic Growth in Nigeria

Abstract

This study examined the effect of capital formation on economic growth in Nigeria. The specific objectives of the study are to: (i) determine if capital formation has any significant impact on economic growth in Nigeria. (ii) determine the direction of significant causal relationship between capital formation and economic growth in Nigeria. The study adopted co integration and vector error correction model in the analysis of the variables specified in the model in addition to VEC granger causality test. The result of the data analyzed showed that; Stable long run relationship exists between the dependent and independent variables as indicated by two (2) co integrating equations. In the VECM, it was found that gross capital formation (GCF) has a positive insignificant impact on real gross domestic product (RGDP) in the short run and the long run. Government capital expenditure (GCE) revealed negative significant correlation with RGDP (real gross domestic product) both in the short and long run; From the causality test, the p value of 0.0004 for RGDP and p-value 0.0016 for GCF is less than 0.05; showing that a bi directional causality runs amid RGDP (real gross domestic product) and gross capital formation (GCF). Another two way causality also among GCF (gross capital formation) and GCE (government capital expenditure) indicated with a p-value of 0.0007 and p-value of 0.0000 for GCF. The implication of this study is that gross capital formation has no significant impact on economic growth in Nigeria within the period of study. Based on the findings and policy implications, the study makes the following recommendations; there should be a deliberate collaboration between the government and the private sector towards building enabling environment that promotes capital investment in the economy. There should be conscious effort by both government and private sector to address the issue of corruption in the economy in addition to strengthening public statistical bodies to ensure that all private investments are captured and regulated.