AN EVALUATION OF THE ROLE OF CAPITAL MARKET ON NIGERIAN ECONOMIC GROWTH
This study seeks to evaluate the contribution of capital market to the growth of Nigeria’s economy. To achieve this objective, an error correction model was estimated for economic growth in Nigeria, using Vector Error Correction techniques on an annual time series data spanning from 1981 to 2014. The data were subjected to Phillip Perron Unit Root Test at level and first difference. The result shows that, at one percent significance level, all the variables were stationary at first differencing.
The result of the normalized cointegrated series further reveals that market capitalization rate, total value of listed securities, labor force participation rate, accumulated savings and capital formation are significant macroeconomic determinants factors of economic growth in Nigeria. It was then recommended that, for the capital market to realizes its full potentials, its environment must be enabled to promote and encourage investment opportunities for both local and international investors, since the stock market operates in a macroeconomic environment. Consequently, an improvement in the Nigerian trading system with the aim of increasing the ease with which investors can purchase and sell shares, could guarantee the stock market liquidity.
KEYWORDS: Capital Market, Economic Growth, Market Capitalization, Capital Formation
1.0 Background to the Study
The capital market is a subset of the financial system that is involved in the provision of longterm funds for productive use. The capital market drives any economy’s economic growth and development because it is necessary for long term growth capital formation (Osaze, 2000) but evidences from past studies have revealed a growing concern and controversies on the role of the capital markets on economic growth and development. While some (Atje & Jovanovic, 1993; Demirgue-Kunt & Levine, 1996; Levine & Zervos, 1996) supported a positive link, some others (Harrris, 1997; Levine & Zervos, 1998; Ariyo & Adelegan, 2005; Ewah, Esang & Bassey, 2009; Donwa & Odia, 2010) do not find any empirical evidence to support such conclusion.
Nyong (1997) found a negative link but Sudharshan and Rakesh (2011) saw, instead, economic growth playing a role in stock market development.
The neoclassical growth model made three important predictions:
1. Increasing capital relative to labour creates economic growth, because people can be more productive given more capital.
2. Poor countries with less capital per person will grow faster because each investment in capital will produce a higher return than rich countries with ample capital.
3. As a result of diminishing return to capital, an economy will eventually reach a point at which any increase in capital will no longer=create economic growth. However, it can overcome this steady state and grow by investing on new technology. Solow (1956) explains that if there were no technological progress, then the effects of diminishing returns would finally cause economic growth to die down, however, economies that achieve large increases in output over extended periods of time, not only enable rapid increases in standards of living, but also have serious changes in their economic, political and social landscape. Therefore, for a country to attain a sustainable economic growth and development, it requires both local and foreign capitals made available by the opportunities provided by the capital market (Ekundayo, 2002). However, non-availability of long-term funds for investment financing has constituted a barrier to the development and growth of most African countries, particularly in many developing countries such as Nigeria, wherein capital has become a major constraint to economic development. Despite the significant financial reforms experienced in the financial sector over the years, there has been an underdevelopment of the real sector as a result of lack of funds from the financial sector (Oluwole, 2014). The Nigeria capital market has grown to being capable of providing facilities both to the private and public sectors to raise long term capital used in executing development programmes as well as finance the expansion and modernization of projects.
However, how these reforms have influenced economic growth over the years still remains unexplored by previous studies. Any economy that is financially underdeveloped is usually characterized by under-employment of resources. Zuvekas (1978) puts it that development is a progress towards the reduction of the incidence of poverty, unemployment and income inequalities (cited in Oluwole, 2014, p.232) but these incidences are still evident in the Nigerian economy.
