EFFECTS OF CAPITAL FORMULATION ON ECONOMIC GROWTH IN NIGERIA, (1980-2010).
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EFFECTS OF CAPITAL FORMULATION ON ECONOMIC GROWTH IN NIGERIA, (1980-2010).
Chapter One: Introduction 1.1 Background of the Study
Capital formation is the proportion of present revenue saved and invested to increase future output and income. It is frequently the consequence of the purchase of a new plant, along with machinery, equipment, and all productive capital goods. Capital creation is the rise in a country’s physical capital stock as a result of social and economic infrastructure investments.
Capital formation is a critical component of the economic development process. It has long been seen as a potential growth-enhancing player. Capital formation determines the nation’s capacity to produce, which influences economic growth.
Capital formation deficiency has emerged as a key concern in empirical macroeconomics. In the 1970s, a popular theory known as the “Big Push” proposed that countries needed to move from one stage of development to another via a virtuous cycle in which large investments in infrastructure and education, combined with private investment
would propel the economy to a more productive stage, breaking free from economic paradigms appropriate for a lower productive stage. Growth models, such as those proposed by Lucas (1988), imply that higher capital accumulation will result in a permanent rise in growth rates.
Economic theories have demonstrated that capital development is critical in models of economic growth (Beddies 1999, Ghura and Hadjji-Micheal 1996, Ghura 1997). Yoto Poulos and Nugent’s (1976) capital fundamentalism theory has been reflected in several countries’ macroeconomic performance.
It is obvious that even somewhat robust growth rates can only be sustained over time if countries can keep capital formation at a significant share of GDP. It has been established that any proportion less than 27% cannot support economic growth.
The ratio of gross capital formation to GDP in Sub-Saharan African nations that suffered low growth in the 1990s is projected to be less than 17%, compared to 28% in advanced countries (Hernandez – Cata 2000).
This pattern supports the significant relationship between capital accumulation and economic growth. To track the relationship between capital creation and economic growth, the gross capital formation for each year is typically scaled to the gross domestic product (GDP).
Thus, changes in capital formation are thought to have a significant impact on economic growth. However, the proportion of capital formation to GDP that can support robust economic growth must be at least 27%, and in some situations up to 37% (Gillis et al 1987).
Numerous empirical studies have established the relationship between national capital formation and economic growth. Several analyses have revealed that there is a causal relationship between capital accumulation and economic growth.
Nonetheless, understanding the drivers of capital formation is a critical prerequisite for developing a variety of policy interventions aimed at achieving economic growth. The process of capital generation is cumulative and self-sustaining. It consists of three interrelated conditions.
According to Jhingan (2006), real savings increase with the presence of credit and financial institutions. These savings can then be used to invest in capital goods.
As a result, we can conclude that saving is the most important factor influencing capital formation. It is often assumed that increasing the amount of national revenue dedicated to capital development is only one path for growth.
As a result, people are encouraged to save more than they consume, because a growing economy necessitates a steady flow of funds for investment in order to provide a supply of capital goods sufficient for consumer goods production and the replacement of outmoded equipment.
In 1986, the Nigerian government recognised the need for improved capital formation and implemented an economic reform that shifted the emphasis to the private sector.
The sector reforms were supposed to ensure that interest rates were positive in real terms and to encourage saving, making investment funds available to the real sector.
Furthermore, the reforms were supposed to result in increased worker efficiency and productivity, more efficient use of economic resources, increased aggregate supply, lower unemployment, and a low inflation rate.
Unfortunately, these reforms failed to provide the anticipated results due to macroeconomic imbalances such as a declining currency rate and corruption in the public sector. Economic infrastructure deficiencies, such as a weak power supply, a poor road network, and inadequate health facilities, were all equally responsible for the failure of these capital creation measures. Overall, Nigeria’s economic growth has been slow and weak.
1.2 Statement of Problem
Capital formation is a notion that appears in macroeconomics, national accounts, and financial economics. It can be described in three ways:
It is a statistical concept applied to national account statistics, econometrics, and macroeconomics (Wikipedia Encyclopaedias). In that sense, it refers to a measure of a country’s (or an economic sector’s) net additions to its (physical) capital stock in an accounting interval, or a measure of how much the entire physical capital stock rose during an accounting period.
It is also used in economic theory as a current general phrase for capital accumulation, referring to the complete “stock of capital” that has been generated or its growth (Wikipedia Encyclopaedia).
In a broader sense, the term capital formation has recently been used in financial economics to refer to savings drives, the establishment of financial institutions, fiscal policies, public borrowing, the development of capital markets, the privatisation of financial institutions, and the development of secondary financial markets.
In this case, it refers to any way of expanding the amount of capital held or controlled by oneself, as well as any method of utilising or mobilising capital resources for investment goals.
Thus, capital could be “forms” in the sense that it is brought together for investment objectives in a variety of ways. This expanded interpretation is unrelated to the statistical measurement of concept or the classical notion of concept in economic theory.
Economic growth, on the other hand, refers to a gain in per capita GDP or another measure of aggregated income. It is commonly expressed as the rate of change in real GDP.
Economists distinguish between short-term economic stabilisation and long-term growth. Economic growth is the quantity of commodities and services generated.
Economic growth is primarily concerned with long-term outcomes. The short-run volatility of economic growth is known as the business cycle. The long-term course of economic growth is one of the key questions of economies; despite certain measurement issues, an increase in a country’s GDP is widely interpreted as an increase in its residents’ standard of living (Snowdon and ZVane, 2005).
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