conclude that ail the variables in the mode! pass ail the diagnostic.
The Jarcque-Bera test is conducted to determine the normality of the distribution of the residual terms in the model. If the distribution is not normal, the basic assumption of the OLS estimation is therefore violated. The Breusch-Godfrey test is performed to dictate the existence of auto-correlation in the model.
The ARCH and WHITE tests assists in detecting homoscedasticity in the disturbance term. The null hypothesis underlying these tests is that the disturbance terms are homoscedastic. The presence of heteroscedasticity violates the OLS assumption. The WHITE test is more robustas it tests for heteroscedasticity as well as mis-specifications.
The RAMSEY test is used to detect specification of the regression model. These mis-specifications usually occur as a result of omission of relevant explanatory variables or incorrect functional mis-specification. RAMSEY tests regresses the dependent variable on explanatory variables and fitted values of t~e dependent variables with increasing forecasting powers.
4.6 INTERPRETATION OF THE RESULTS
4.6.1 Interpretation of the results of the Error Correction Model: Table 6
The ECM mode! is valid; the error correction coefficient is negative and significant. The ECM model is satisfactory; the explanatory variables are significant and the model is globally significant. The regression results indicate that the coefficient of determination also known as "goodness of fit" is relatively very high. It shows that 62.0 per-cent of the fluctuation in the real growth rate can be explained for by the explanatory variables used in the model. This is foilowed by a high F-statistics of 7.5 and a low probability ofF-statistics which means that the model is globally significant. The high F-ofF-statistics with its
associated probability rejects the null hypothesis that ali ·the coefficients of the explanatory variables except that of constant and intercept term are zero and accept the alternative that there is a relationship. As a follow up, the residuals from the regression on the growth equation were tested for stationarity. This test validates the model and rules out any element of spurious correlation in the model.
The coefficient of adjustment of the dependent variable (PCGRt_1) meaning the velocity at which any disequilibrium between the desired and actual levels of growth rate is absorbed in a year following any shock should be less than one and negative.
PCGRt-1 = - 0.578, this means that the speed of adjustment of the imbalance between the desired and actuallevel of growth rates is high. Also the coefficient of lagged dependable variable must be less than zero otherwise error correction model cannot be valid. In our case, the coefficient of the lagged dependent variable is necessarily negative ( -0.578) and statistically significant. The relationship between the short and the long run satisfies the basic theory of error correction model. In the mode1, we try to incorporate the lagged difference of the INV and HCAP as an independent variable in order to examine if they have a long run impact on economie growth. The variable CUAB was dropped from the model because of its statistically insignificance.
The results of the model indicate that investment has a positive impact on economie growth. In the short run if investment increasesd by 1 percent, growth will rise bLQ]___
percentage point. In the long run, the coefficient of INV is statistically significant which means that if investment increases by 1 percent, growth will increase by 0.2 percentage point. The low performance of the private investment in Nigeria could be attributable to the poor infrastructural facilities, high lending rates, social insecurity and high leve1 of capital flight.
The coefficient of FINDEP representing financial deepening is weak in the model, signifying low financial intermediation and poor banking habit. FINDEP as a measure of financial deepening, which involves the growth of financial assets in relationship with
non financial assets, involves the monetization of an economy by increasing use of financial intermediation by savers and investors, and the rise of specialized financial institutions. The result indicates a shallow financial system where money balance is mostly held in non financial assets. It was observed that currency formed a lager proportion ofbroad money (M2) in Nigeria with a ratio of 43.2 percent in 1990 rising to 57.4 percent in 1995 compared with 41.6 in Kenya, 12.8 in South Africa and 16.2 percent in Zimbabwe. Thus, by comparison, the Nigerian financial system is relatively shallow due to paucity of financial instruments and preference for non financial assets.
Private sector credit is expected to increase in response to improved priee signaling, represented primarily by the establishment of positive real interest rates. Capital flows are not the only reason why money and credit-based measures of financial deepening diverge. However, in general, government borrowing from the banking system will, for a given level ofbroad money, reduce the amount of credit available to the domestic private sector. If private sector activity is more productive than government expenditure, then this crowding out of private borrowing may have strong negative effects for economie performance. The coefficient of private sector credit is significant though negative, implying that if lending rate increases by one ,percent, growth will decrease by 0.04 percentage point. The poor priee signal in the form of high lending rates and macroeconomie instability has hindeted the growth of private sector investment in Nigeria.
The empirical results support the prediction that REALDEP have a positive impact on economie growth. The main po licy consideration of the Mckinnon and Shaw hypothesis is to increase deposit rate to a positive level to encourage financial saving. A real positive or market clearing real deposit rate encourages borrowers to undertake only those projects which have retums above market clearing interest rates. Market clearing interest rates also reduce inefficiency associated with directed loan towards preferential sectors.
However the coefficient of real deposit rate is very low which is consistent with other findings on developing countries (Ghatak, 1995). This low coefficient could be
attributable to the low level of incarne in Nigeria. Since most eamings of people are spent on basic needs, people are left with very little to save. This implies that interest rate liberalization alone is unlikely to expedite economie growth in Nigeria. The empirical result indicates that if REALDEP increases by one percent, growth will increase by 0.1 percentage point.
Endogenous growth theory (NGT) predicts that human capital (HC) is one of the main engines of economie growth, a common feature in LDCs. The extended model predicts that there is an additional efficiency gained caused by the accumulation of human capital resulting from financial liberalization. Our model predicts that human capital significantly impact on economie growth. Thé coefficient ofhuman capital is statistically significant; this implies that if human capital increases by one percent, growth will increase by 0.1 percentage point. The low impact of human capital in Nigeria is associated with brain drain, acute unemployment and the increasingly high cost of education which has further undermine secondary school enrolment ratio. As a corollary, the school curriculum should be revised to place more emphasis on science, technical and vocational education for schoolleavers' self employment.
4.6.2 Interpretation of the Results of the Gran ger Causality Tests (Annex 9)
LFINDEPGDP Causes LPSCR LFINDEPGDP does not cause PCGR
It is preferable to predict LFINDEPGDP by knowing LPCGR than without knowing it.
To say that Y1 causes X1 means simply that it is preferable to predict Xt by knowing Yt than without knowing it.
The result of the Granger causality test does not indicate any evidence of causality between financial liberalization and economie growth. However, there is evidence of causality between financialliberalization and private sector credit (Annex 9).
To sum up, our results show that INV and REALDEP have positive impact on economie growth. The weak: coefficient of FINDEP is attributable to inadequate financial institutions' branch network and poor banking habit prior to the introduction of the financial liberalization programme. This explains the Mckinnon and Shaw hypothesis that macroeconomie instability and negative real interest rate reduces capital accumulation, investment and growth. When the two periods are compared Pre-reform period (1970-1985) and Liberalization (1986-2002), growth increased by 1.2 percentage points, which could partly be attributable to the impact of financialliberalization.
Though inconclusive, but based on the data used in the study, evidence of causality between economie growth and financial liberalization could not be established. This implies that for financial liberalization to succeed, appropriate macroeconomie po_licy, institutional development and structural reform must accompany financialliberalization.
CHAPTER FIVE
POLICY IMPLICATIONS, RECOMMENDATIONS AND CONCLUSION.
This chapter discusses policy implications emerging from the empirical model and proffers sorne policy recomrnendations and conclusion.