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«THE CHARACTER OF THE STATE IN FINANCIAL DEVELOPMENT AND ECONOMIC GROWTH THESIS SUBMITTED FOR THE AWARD OF THE DEGREE OF DOCTOR OF PHILOSOPHY AT THE ...»

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THE CHARACTER OF THE STATE IN

FINANCIAL DEVELOPMENT AND ECONOMIC

GROWTH

THESIS SUBMITTED FOR THE AWARD OF THE DEGREE OF

DOCTOR OF PHILOSOPHY AT THE UNIVERSITY OF LEICESTER

BY

GODFREY C. UZONWANNE

M.Sc (Finance), MBA (Finance & Accounting), M.Sc, B.Sc (Civil

Engineering)

SCHOOL OF MANAGEMENT UNIVERSITY OF LEICESTER

SEPTEMBER 2010

THESIS TITLE: THE CHARACTER OF THE STATE IN FINANCIAL

DEVELOPMENT AND ECONOMIC GROWTH

AUTHOR: GODFREY CHIDOZIE UZONWANNE

ABSTRACT This study involved an analysis of how the character of a state inadvertently defines the trajectory of financial development of the state and its resultant impact/causality on economic growth. The guiding theme here is that the finance growth theory (Schumpeter 1911, Goldsmith 1969) has its fundamental root in the demographics of western economies with proven functional and stable political and social institutions. The direct applicability of this theory to the explanation of financial and macroeconomic phenomena in developing economies with a unique set of distinct characters may prove erroneous.

To analyse this assertion, a developing economy (Nigeria) which had experienced decades of autocratic military governance was studied using a mixed method research design to gather and analyse data. Under this approach, triangulation of three data sources was achieved to augment for the problem of reliability of data sources. A historical case review was conducted using secondary data. This was followed by an econometric analysis to determine the direction of causality of financial development on economic growth applying the vector co-integration analysis and the Granger Causality test using time series data relating to Real GDP Per Capita, Size, Activity and Efficiency of Financial Intermediaries and the Stock Market in Nigeria and dummy variables to represent socio-political characters identified from the historical analysis. Finally, primary data was generated by questionnaire and group interview as a means of validating the findings from the historical case review and the econometric analysis as well as completing the triangulation of data sources. The historical review revealed three major characters represented by ethnicity in which prebendalism was strongly inherent, social unrest culminating in a three year long civil war and persistence of autocratic military governance and civilian democracies tutored by military dictators while the econometric analysis revealed the presence of macroeconomic structures identifying at least one co-integrating vector but the causality test showed no indication of causality between financial development and economic growth irrespective of steadily rising annual figures for Real GDP Per Capita and indicators of positive financial development.

It was concluded that the character of a state in developing economies whose characters form a unique parabola of activities that are not prevalent in western democracies where this theory finds its origin is an endogenous variable in determining the impact of financial development on economic growth.

–  –  –

I wish first and foremost to acknowledge my research supervisors Dr.

Geoffrey Lightfoot and Professor Peter Jackson for the invaluable support and direction which they inexhaustibly rendered during the course of my research.

My deep felt gratitude goes to Professor Martin Parker, Director of Research at the School of Management, Professor Joanna Brewis, Director of the Doctoral Programme at the School of Management, Professor Alan Bryman and Professor Simon Lilley both of whom held the position of Director of the School of Management at different times during my Doctoral Programme and both of whom rendered me support and encouragement all the way. My sincere gratitude goes to Professor Thankom Arun and Professor Emmanuel Haven who were respectively my external and internal examiners in the examination of my thesis for the constructive criticism they deployed.

It is no gain-say to emphatically state that I am immensely indebted to my friends and family whose support and companionship never ceased even in the most difficult times in the course of this research, I therefore wish to acknowledge my Late Parents, Damian and Christiana Uzonwanne, my brothers Dr. Francis Uzonwanne and his family, Mr. Jude Uzonwanne and his Family, Mr. Emmanuel Uzonwanne and his wife Yomade, my sister Mrs Ifeoma Ogini and her husband, Mr Femi Ogini, my loving wife Onyeka and my lovely daughters Nicole and Naomi, my uncles and their wife’s, Professor and Mrs Victor Anosa, FRCPath and Dr. and Mrs Sunny Ndekwu and all my great friends.

–  –  –

TITLE PAGE………………………………………………………………....…..1 ABSTRACT…………………………………………………………………….....2 ACKNOWLEDGEMENT………………………………………………………..3 TABLE OF CONTENTS………………………………………………………..4 LIST OF T ABLES………………………………………………………………1 2

–  –  –





1.1 GENERAL………………………………………………………………….......14 1.1.1 Theoretical and Methodological Considerations….………………...14 1.1.2 Central Theme………………………………………………………......19 1.1.3 Limitations of Study………………………………………………….....20 1.1.4 Delimitations………………………………………………………….....22 1.1.5 Assumptions………………………………………………………….....22

1.2 RESEARCH QUESTIONS/HYPOTHESIS……………………………...….22 1.2.1 Research Questions…………………………………………………...22 1.2.2 Sub-Questions……………………………………………………….....23 1.2.3 Sensitizing Propositions....…………………………………………....23

1.3 BACKGROUND TO STUDY………………………………………………....24

1.4 SIGNIFICANCE AND SCOPE OF STUDY…………………………….......25 CHAPTER TWO: LITERATURE REVIEW……………………………….26

2.1 FINANCE AND GROWTH……………………………………………………26 2.1.1 Existing Views………………………………………………………....26 2.1.2 What Constitutes Financial Development………………………....29

2.2 THEORIES OF ECONOMIC GROWTH………………………………….....37 2.2.1 The Adam Smith Growth Model……………………………………..43 2.2.2 The Neoclassical Growth Model………………………………….....46 2.2.3 The Rostow Growth Model…………………………………………...47 2.2.4 The Schumpeterian Model…………………………………………..48

2.3 THEORIES OF FINANCIAL DEVELOPMENT……………………………..50 2.3.1 Bank Based Finance-Growth Models……………………………….50 2.3.2 Market Based Finance-Growth Models……………………………..53 2.3.3 Banking/Market Based Finance-Growth Models…………………..55

–  –  –

DEVELOPMENT AND ECONOMIC GROWTH………………………………...59 2.4.1 Some Theoretical and Empirical Considerations by Raymond Goldsmith……………………………………………………………....59 2.4.2 Empirical Evidence (King and Levine 1993)…………………….....61 2.4.3 Time Series Evidence from 26 Countries…………………………..62 2.4.4 Panel Evidence from 24 Countries……………………………….....62

2.5 THE FINANCIAL REPRESSION HYPOTHESIS………….…………….....63

2.6 LEGAL, REGULATORY, SOCIAL AND POLITICAL DETERMINANTS OF

FINANCIAL DEVELOPMENT…………………….……………………………....65

2.7 ETHNIC POLITICS, PREBENDALISM AND MILITARY GOVERNANCE

…………………………………………………………………………….........66 2.7.1 The Theory of Two Publics (Ekeh 1975) …………………...........66 2.7.2 Ethnicity and National Development…. …………….…………...67 2.7.3 Military Governance, Financial development and Economic Growth in Black Africa…. ………………………

2.8 POLITICAL INSTABILITY AND ECONOMIC GROWTH…. …….............73

2.9 SUMMARY OF LITERATURE REVIEW…....……

CHAPTER THREE: METHODOLOGY

3.1 THEORETICAL CONSIDERATIONS……………………………………….76

3.2 RESEARCH DESIGN AND EPISTEMOLOGICAL CONSIDERATIONS..77

3.2.1 Qualitative and Quantitative Research Methods…………………..77 3.2.2 Mixed Method Research Designs………………………..................80 3.2.3 Research Method……………………………………………………..83 3.2.4 Questionnaire Design………………

3.2.5 Interview Design………………………………

3.2.6 Method of Data Sampling………………………………

3.2.7 Exploratory Pilot Study

3.2.8 Ethical Considerations………………………………

3.3 ANALYSIS OF DATA…………………………………………………….….100 3.3.1 Analysis of Questionnaire Data…………………………………....100 3.3.2 Analysis of Interview Data………………………………….............102 3.3.3 Analysis of Time Series Data……….………………………….......103 3.3.3.1 The Size, Activity, Efficiency and Ownership Structure of Financial Intermediaries…………

Absolute Measures of Size of Financial Intermediaries………....105 Measurement of Activity of Financial Intermediaries…………….105 Measurement of Efficiency of Financial Intermediaries………….106 3.3.3.2 The Size, Activity and Efficiency of Financial Market…..107 Measurement of Size of Stock Market………………………….....107 Measurement of Activity of Stock Market………………………....108 Measurement of Efficiency of Stock Market……………………....108 3.3.4 Data Source……………………………………………………….....108

3.4 DESCRIPTION OF VARIABLES…………………………………………...109 3.4.1 Deposit Money Bank Assets………………………………………..109 3.4.2 Non-Bank Financial Institutions Assets……………………………110 3.4.3 Total Financial Assets……………………………………………….111 3.4.4 Liquid Liabilities……………………………………………………....111 3.4.5 Gross Domestic Product…………………………………………….111 3.4.6 Credit to the Private Sector by Deposit Money Banks………......112 3.4.7 Liquidity of the Stock Market…………………………………….....112 3.4.8 Outstanding Market/Monetary Value of Shares……………….....112 3.4.9 Number of Shares Traded……………………………………….....113

–  –  –

POLITICAL ECONOMY…………………………………………………….1 1 4

4.1 PRE-INDEPENDENCE……………………………………………………...114

4.2 THE FIRST ATTEMPT AT CIVILIAN RULE (1960-1966)…………….....121

4.3THE FIRST ERA OF MILITARY GOVERNANCE (1966-1975)………….133 4.3.1 The January 1966 Military Coup……………………………………..136 4.3.2 The Aguiyi Ironsi Led Military Government of National Unity January 16th 1966 – July 29th 1966) ……………………………….137 4.3.3 The Gowon Led Military Regime (Aug 1966 – July 1975)……....140 4.3.4 The Murtala/Obasanjo Military Regime (July 1975 – Oct 1979)..146

4.4 THE SECOND ATTEMPT AT CIVILIAN RULE (1979-1983)……………150 4.4.1 The Institutional Structures of the Second Republic …………….151 4.4.2 Crisis and the life of the Second Republic………………………...153 4.4.3 The Economy during the Second Republic……………………….154

4.5 THE RETURN TO MMILITARY RULE (1983-1993) …………………….155

4.6 THE BOTCHED THIRD REPUBLIC AND PERSISTENCE AT MILITARY

RULE (1993-1998)……………………………………………………................157

4.7 THE FOURTH REPUBLIC (1998 TO Date)……………………………….159

4.8 THE CHARACTER AND ROLE OF THE MILITARY IN NATION

BUILDING………………………………………………………………………....160 4.8.1 The Character of Military Intervention, Military Colonialism and the Theory of the Third Public…………………………………………………161 4.8.2 The Nigerian Economy under Military Governance (1966-1979)…………………………………………………….…...164 The Objectives of economic Policy………………………………..…..170 A Review of Fiscal Policy…………………………………………….....177 Monetary Policy under the Military………………………………….....180 Key Institutional/Sectorial Developments…………………………......182 4.8.3 Development of Financial Intermediaries and Markets under Military Governance……………………………………………..…183

4.9 SUMMARY OF HISTORICAL REVIEW……………………

–  –  –

RESULTS……………………………………………………………………….187

5.1 DESCRIPTION OF DATA…………………………………………………..187 5.1.1 The Structure of Economic Data…………………………………...187 5.1.2 Procedure of Data Analysis………………………………………...188 5.1.3 Analysing Time Series Data………………………………………...189



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