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THE EFFECTS OF CAPITAL FORMULATION ON ECONOMIC GROWTH IN NIGERIA, (1980-2010)

CHAPTER ONE

INTRODUCTION

1.1           Background to the Study 

The value of capital a nation can source/generate determines her capacity to effectively utilize production factors available to her which in turn affects her capacity to increase production. Thus, substantial capital investment is needed for a nation that is determined to meet her  development and growth objectives (Tareef & Shawaqfeh, 2019). The production capacity in this sense cut across virtually all sectors in the economy thus, an increase in a nation’s physical capital stock and social economic infrastructure is equivalent to capital formation (Meyer, & Sanusi, 2019; Ugwuegbu & Uruakpa, 2013), which is further classified into gross private and public investment (Bakare, 2011). Capital formation is the amount of money saved to augment future consumption (Nweke, Odo & Anoke, 2017).

The accumulation of capital goods, be it equipment, electricity, infrastructures, and tools by either an individual, the business sector or government officials (Oluwatobi, Festus & Grace, 2021). Capital and money markets represent a major source of capital formation for growth to take place in any nation. These markets are avenue for surplus investors to save their excesses and/or the deficit investors to borrow the excesses for investments, which in turn will lead to creation of employment opportunities and reduce poverty level. The pace of development between countries most especially developing countries is widened as a result of differences in the structure of capital formation.

Shuaib and Dania, (2017) asserted that capital formation helps in bridging and breaking the circle of poverty and reduce unemployment in developing countries, Jhingan, (2019) opined that capital formation is dependent on institutions that mobilizes savings in countries and how these institutions invest the mobilized funds. Thus, the failure of these institutions leads to low rate of capital formation in less developed countries (LDC). The classical economist describes capital formation as a gradual and continuous process which revolves around how a country save and invest.

According to Nurskey, (1953) capital formation is a situation whereby countries do not spend all their current productive activities that generates revenue on the desires and need of current consumption but channel part of it to the production of goods, machines and heavy-duty equipment that will enhance the production capacity of the country. Arguably, expenditure on physical capital will enhance economic growth and development.

On the other hand, Kuznet (1973) gave a more comprehensive view of capital formation as it involves public expenditure on both the physical and human capital. They opined that public expenditure on tangible goods such as high standard of education, recreational facility, scientific and traditional research will help boost the morale of citizenry. To this extent, investment in both human and physical capital can so greatly enhance growth in LDCs, Nigeria inclusive. In Nigeria, there has been capacity underutilisation as a result of low capital formation (Edewusi, & Ajayi, 2019; Osundina & Osundina, 2014) as both domestic and foreign investment is declining on a daily basis as a result of the global pandemic and fall in Nigeria oil revenue (Ogunbiyi & Abina, 2019). Kanu, and Ozurumba (2017) discovered that the inadequate social infrastructure such as good road and steady power supply in Nigeria arose as a result of fluctuation in the countries capital formation. In a bid to improve the countries capital formation, the Structural Adjustment Programme (SAP) was initiated in the year 1986 with the sole aim of encouraging private domestic investment in the country, but poor implementation and corruption limited the program from achieving its objectives. Capital formation has generated significant debate in the past and recent year as it is an important factor that needs to be addressed for economic growth to take place, thus this research work thereby investigates capital formation and economic growth in Nigeria.

1.2     Statement of the Problem       

The problem of capital formulation and its impact on economic growth in Nigeria between 1980 and 2010 is a multifaceted challenge that requires thorough examination. Several issues contribute to the complexity of this problem, highlighting the need for a comprehensive investigation. Firstly, Nigeria has experienced periods of economic instability and fluctuating growth rates during the specified timeframe. Understanding the correlation between capital formulation and these economic variations is crucial for policymakers and researchers. The challenge lies in identifying the specific factors within the capital formulation process that contribute to economic growth or hinder its progress.

Secondly, the effectiveness of capital allocation and utilization becomes a central concern. Capital formation involves the accumulation of financial resources for investment, and if this process is not executed efficiently, it can lead to suboptimal outcomes. Identifying bottlenecks or inefficiencies in the capital utilization process is paramount for devising strategies that enhance economic growth.

Thirdly, the macroeconomic policies implemented during this period need scrutiny. Government policies play a pivotal role in shaping the economic landscape, and any inconsistencies or inadequacies in policy formulation can impede the positive effects of capital on growth. An in-depth analysis of policy frameworks, their coherence, and alignment with the economic development agenda is essential.

Fourthly, external factors such as global economic trends and geopolitical events may have influenced Nigeria's economic performance. Understanding how these external forces interacted with the country's capital formulation efforts is vital for a comprehensive assessment.

Lastly, the impact on different sectors of the economy needs exploration. Capital formulation may have varying effects on agriculture, manufacturing, services, and other sectors. Recognizing the sector-specific dynamics can provide nuanced insights into the overall economic growth patterns.

In essence, the problem revolves around deciphering the intricacies of capital formulation and its consequences on Nigeria's economic growth. It requires a holistic approach that considers economic policies, capital utilization efficiency, external influences, and sector-specific nuances. Addressing this problem is crucial for formulating targeted strategies that harness the positive effects of capital formulation to foster sustainable and inclusive economic growth in Nigeria.

1.3    Objectives of the Study

The primary aim of this study is to examined the effects of capital formulation on economic growth in Nigeria, (1980-2010) The specifics objectives are to:

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