THE EFFECT OF GROSS CAPITAL FORMATION AND POVERTY IN NIGERIA
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1.1 BACKGROUND OF THE STUDY
Nigeria had one of the world’s highest economic growth rates, averaging 7.4% according to the Nigeria economic report that was released in July 2019 by the World Bank. Following the oil price collapse in 2014–2016, combined with negative production shocks, the gross domestic product (GDP) growth rate dropped to 2.7% in 2015. In 2016 during its first recession in 25 years, the economy contracted by 1.6%. Nationally, 43 percent of Nigerians (89 million people) live below the poverty line, while another 25 percent (53 million) are vulnerable. For a country with massive wealth and a huge population to support commerce, a well-developed economy, and plenty of natural resources such as oil, the level of poverty remains unacceptable. However, poverty may have been overestimated due to the lack of information on the extremely huge informal sector of the economy, estimated at around 60% more, of the current GDP figures. As of 2018, the population growth rate is outpacing economic growth, resulting in a gradual increase in poverty. According to a 2018 World Bank estimate, nearly half of the population lives below the international poverty line ($2 per day), and unemployment has reached 23.1 percent. According to the World Bank’s Nigeria economic report released in July 2019, Nigeria has one of the world’s greatest economic growth rates, averaging 7.4%. The gross domestic product (GDP) growth rate fell to 2.7 percent in 2015 as a result of the oil price fall in 2014–2016, compounded with negative production shocks. The GDP shrank by 1.6 percent in 2016, its first recession in 25 years. The amount of poverty in a country with enormous riches and a large population to sustain commerce, a well-developed economy, and abundant natural resources such as oil remains intolerable. Poverty in the face of affluence is currently the world’s greatest challenge, and achieving equity in income distribution and poverty reduction is a fundamental developmental goal.
Nigeria failed all poverty tests, with the exception of the relative poverty index. Gross fixed capital formation, has in terms of theory recognized as an essential component to facilitate economic growth and reduction of poverty rate.
Without a closer look at the role of capital formation to Nigeria’s economic growth, the pace of growth in the Nigerian economy cannot be completely studied. This is based on the fact that capital formation has been identified as a critical factor in determining the growth of the Nigerian economy. Without significant investment in capital formation, no country has been able to achieve long-term economic growth. Increased capital formation has been emphasized as a means of achieving global economic growth.
Nigeria is a growing country that has to steadily increase its capital stock in order to meet its development goals. Over time, the Nigerian government has acknowledged the importance of capital production and has implemented structural, institutional, and policy reforms to improve the smooth functioning of the economy. The liberalization of the economy, for example, is one way to improve capital formation. Around the final quarter of 1986, banking sector reforms such as the Nigeria’s capital market is being internationalized, and financial institutions are being recapitalized. Other macroeconomic adjustments in the business environments, such as overheads. Scholars are divided on the extent to which these factors have influenced capital formation growth. According to CBN reports, Nigerian Gross Fixed Capital Formation was 11.63 percent in 2012. Between 2010 and 2015, the Gross Domestic Product increased by 10.23 percent, 8.15 percent, 10.48 percent, and 11.02 percent, respectively. In 2014, Mauritania had 43 percent, India had 32 percent, and Bhutan had 58 percent. This suggests that a lack of capital is a problem. One of the reasons for Nigeria’s failure to achieve its varied development goals is its formation plans.
Capital formation, according to Bakare (2011), is the percentage of current revenue saved and invested in order to increase future output and income. It frequently occurs as a result of the purchase of a new factory, as well as all machinery, equipment, and other productive capital goods. Capital formation is defined as an increase in a country’s physical capital stock as a result of social and economic infrastructure investment.
Capital formation is a natural part of the process of economic growth and development. It has always been regarded as a player with the ability to help the company expand. Capital development influences national production capacity, which in turn influences economic growth that affect the rate of poverty in Nigeria. The most important limitation to long-term economic growth has been identified as a lack of capital formation. As a result, it’s no surprise that capital formation analysis has become one of the most important topics in empirical macroeconomics. The “Big Push,” for example, was a popular theory in the 1970s that suggested countries needed to jump from one stage of development to another via a virtuous cycle in which large investments in infrastructure and education, combined with private investment, would move the economy to a more productive stage, breaking free from economic paradigms appropriate to a lower productivity stage. Models of growth such as the ones developed by, higher capital accumulation can lead to a long-term boost in growth rates.
The relationship between capital production and poverty rate has been established through a number of theoretical questions and empirical studies. The neo-classical synthesis established that saving plus borrowing must equal asset acquisition for an economic agent. As a result, national saving and domestic investment will always be equal in a closed economy. As a result, a high rate of capital formation leads to a high rate of productivity, resulting in reduction in poverty and economic growth.
1.2 STATEMENT OF THE PROBLEM
The ostensible relationship between capital formation and economic growth and poverty rate is that financial services such as savings and deposit mobilization, credit creation, and job creation improve capital accumulation, which is intended to boost the country’s economic growth.
Theoretically, investment is used to promote growth and automatically reducing poverty rate in an economy. However, in Nigeria content there has been consistent increase in the gross capital formation over the year but yet the rate of poverty in Nigeria has been rising.
However, capital formation in Nigeria has been characterized by fluctuations which may be responsible for lack of employment opportunities, low rate of job creation or inadequate social infrastructure such as roads, power supply and health facilities. The speed and the strength of poverty rate in Nigeria have not been satisfactory which contributes equally to the decline in capital formation over time. Overall, the empirical evidence on the performance of capital formation is mixed. While some studies had positive effects other showed negative effect. The goal of this research is to look at the relationship between gross capital formation and poverty in Nigeria. The study also aims to add to the current knowledge by analyzing empirically how capital formation has influenced Nigeria’s poverty rate.
1.3 RESEARCH QUESTIONS
Given the above objectives one could then ask some crucial questions given the renewed interest of the current democratic structure in Nigeria in poverty rate and given that gross capital formation is the arrowhead of the policy package of the current policy framework in Nigeria.
- What is the significant impact of gross capital formation on poverty rate in Nigeria?
- What is the nature of significant indifferent relationship between gross capital formation and poverty rate in Nigeria?
1.4 OBJECTIVE OF THE STUDY
The main objective of this study is to investigate the relationship between gross capital formation and poverty in Nigeria. The specific objectives which this research work aims to achieve are to:
- To examine the trend of capital formation and poverty rate in Nigeria
- To evaluate the relationship between gross capital formation and poverty rate in Nigeria
1.5 STUDY HYPOTHESIS
The following hypothesis are formulated from the research questions above
- There is no significant impact of gross capital formation on poverty rate in Nigeria
- There is no indifferent relationship between gross capital formation and poverty rate in Nigeria
1.6 SIGNIFICANCE OF THE STUDY
This study is significant because it would help to enlighten various sector of the economy on the relationship and effect of gross capital formation on the poverty rate in Nigeria as a whole. The research will provide of capital formation framework to tackle poverty in Nigeria.
1.7 SCOPE OF THE STUDY
In pursuance of the objective of this study, attention shall be focused on Capital formation and its effect on the poverty rate in Nigeria. In order to conduct an empirical investigation on the Gross capital formation and poverty, this study will examine the problems facing capital formation in Nigeria and factors causing poverty in Nigeria.
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