Between 2007 and 2016, Nigeria’s investment share of GDP declined from 18.7% to 12.6%, reaching the lowest level in the past two decades, Naija247news understands.
According to a recent economic paper, Boosting Investments: Nigeria’s path to growth, estimates the size of investment needed to drive growth.
Growth in Nigeria has been relatively strong at an average of 5.6% per annum over the past decade. However, this has been fuelled by the oil boom and population expansion, rather than investments.
To reach its conclusions, the paper conducted an extensive review of economic literature, and analysed a panel data of 13 emerging economies between 1991 and 2016. The analysis revealed that investment is the most fundamental driver of growth.
Furthermore, the paper concludes that Nigeria requires at least an investment of 20% of GDP per annum, which is far above the investment level of 12.6% of GDP in 2017.
Estimating the size of investment needed to drive growth
In the decade preceding the recession, Nigeria recorded growth at an average of 6.3% per annum. To estimate the size of investments required to drive growth back to the
historical growth trend, we adopt the following approach:
Economic Literature Review
An extensive review of 26 economic papers was conducted to identify the key determinants of economic growth, particularly in the emerging and developing economies. We find that investment is the most fundamental driver of growth, with positive and statistically significant coefficients.
Using a panel data of 13 emerging economies between 1991 and 2016, we analyze the impact of investment on output growth. To achieve this, we utilize a panel regression of output growth on labour productivity growth and investment (% of GDP). Specifically, we
incorporate one year investment lag to avoid a model specification error, since investment is unlikely to propel growth within the same year. After a series of analyses and robustness checks, we arrive at our estimates using:
Real GDP growth = a+b (Labour productivity growth)
+ c (Investment share of GDP)
where a, the intercept of the regression, captures the effect of other variables that independently affect GDP growth but are not included in the model. The other
parameters of the equation, b and c, represent the coefficients of the explanatory variables ( labour productivity growth and investment share of GDP).
From the panel regression, the mathematical relationship between economic growth and the selected explanatory variables can be expressed as:
Real GDP growth = 0.03+0.69 ( ) + 0.11 (Investment share of GDP) Labour productivity grow
Subsequently, we estimate the required investment to achieve an annual growth of 6.3%. To arrive at this estimate, we assume that labour productivity growth would not significantly deviate from its historical average of 1.6%per annum. Consequently, the relationship between investment and GDP is reduced to the equation:
Real GDP growth = 0.04+0.11 (Investment share of GDP)