1.1 Background Of The Study
Saving naturally play an important role in the economic growth and development process. Savings determine the national capacity to invest and thus to produce, which in turn, affect economic growth potential. Low saving rates have been cited as one of the most series constraints to sustainable economic growth. Growth models developed by Romer (1986) and Lucas (1988) predict that higher savings and the related increase in capital accumulation can result in a permanent increase in growth rates.
The close relationship between the savings rate of the economy and the economic growth is stylized feature which has been well documented in number empirical investigations. This is result which has been found in several sensitivity analysis in the although it is emphasized that causality should be inferred from this positive growth literature, example, Leveine and Renelt (1992) and Sala-i-Martin (1997). Contemporaneous correlation. The close connection between saving and growth has also been a key finding in the empirical saving literature; the possibility that country differences in saving rates could be explained by differences in growth rate recognized early.
Modern saving theories indicate that the rate of growth in aggregate real income is an essential determinant of the national saving rates. Rapid growth raises the saving rate. Higher national saving then release resources for the investment needed to sustain high growth. If investment is discourage the growth rate fall as does the saving rate. In the case of Nigeria, prior to the Structural Adjustment Programme (SAP) in 1978; there had been a major disequilibrium in the external sector from large current account deficit and capital inflows. The balance of payment problems result from the high saving and investment gap in Nigeria as we saw during SAP.
1.2 Statement Of The Problem
In Nigeria, prior to Structural Adjustment Programme (SAP) in 1987, there had been a major disequilibrium in its external sector from large current account deficit and capital inflows. The balance of payment problems resulted from the high saving investment gap. National saving as a percentage of Nigeria GDP which was 6.1% between 1973 and 1985 was inadequate to finance domestic investment, which accelerated to 20.5% during the same period. There was a sizeable saving-investment gap of 14.4%of GDP between 1973 and 1985 (Adebiyi, 2001).
After the SAP, the saving rate in Nigeria increase significantly from 6.1% of the GDP between 1973 to 1985 to 11.7% of GDP between 1994 and 1998. This was reflect in the growth rate of real GDP, which rose 1.5% between 1973 and 1985 to 2.7% between 1994 and 1998 (Adebayo, 2001). This shows a relationship between saving rates and economic growth. On the other hand, the inability of bank and financial institution to make provision for more soft loans to Nigerians, encourage small and medium scale enterprises, provides funds for the teeming number of unemployed youths to engage in meaningful economic activities, then saving may never lead economic growth in Nigeria. This problem of instability in saving rate would lead to low investment and low output which will in turn lead to high demand of imported goods. This will cause disequilibrium in Nigeria external sector as we saw during SAP period. Based on the fore going analysis. Therefore the following research question can be deduced.
- Is there a long run relationship between saving and economic growth in Nigeria?
- Is there casualty between saving and economic growth?
This research we as much as possible answer the questions above.
1.3 Research Hypothesis
- H0 (Null Hypothesis): saving rates and GDP growth rates are not co integrated
- H0 (Null Hypothesis): The GDP annual saving rate does not ganger cause GDP growth rate
- H0 (Null hypothesis): The GDP growth rate does not ganger cause national savings
1.4 Justification Of The Study
Understanding the relationship between national savings and economic growth would have significant implication on the state of the Nigeria economy. Experiences of economic crisis have highlighted the fact that low (and declining) saving rate have contributed to generating unsustainable current account deficit in many countries. In the case of Nigeria, prior to the Structural Adjustment Programme (SAPs) in 1987. There was a major disequilibrium in its external sector from large current account deficit and high capital inflows. The balance of payment problems resulted from the high saving and investment gap. National savings, as a parentage (% of GDP, which was 6.1% between 1973 and 1958 was inadequate to finance domestic investment, which accelerated to 20.5% among the same period. There was a sizeable saving-investment Gap, of 14.4% of GDP between 1973 and 1985 (Adebiyi, 2001).
After the SAP, the saving rate in Nigeria increased significantly from 6.1% of the GDP between 1973 and 1985 to 11.7% of GDP between 1994 and 1998. This was reflected in the growth rate of real GDP, which rose from 1.5% between 1973 and 1987 to 2.5% 1994 and 1998 (Adebiyi, 2001). This who shows a relationship between saving rate and economic growth. The contribution of national saving rate and cannot be ignored. Therefore, it is vital to study its contribution, and effect if any. This relationship justified because it may inform policy formulation about which variables should be selected and projected in achieving a higher economic growth.
It may help to determine policy instrument or variable that has much or high magnitude while impacting on economic growth. It will also inform the rate at which a particular instrument or variable can be manipulated policy wise to achieve a desirable level of economic growth. This research will help our nation national Nigeria to know which among the macroeconomic variables to encourage most in other to attain a desirable economic growth and will equally help to achieve the national vision in 2020 and beyond. It is also necessary for further studies and references in Nigeria and the world at large.
Scope Of Study
The scope of this research is limited to national savings and economic growth: a causality analysis from 1970-2007. The choice of the sample period is due to availability of data.
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