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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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5.2 STATEMENT OF PROBLEM AND METHOD OF ANALYSIS………….189 5.2.1 Statement of Problem……………………………………………….189 5.2.2 Estimating the Long-Run Relationship between Variables……...190

5.3 ANALYSIS AND RESULTS………………………………………………...191 5.3.1 Tests for Unit Roots or Non-Stationarity Using The Augmented Dickey –Fuller Test……………………………………………….....192 5.3.1.1 Unit Root Test for Real GDP Per Capita………………….....194 5.3.1.2 Unit Root Test for Size of Stock Market……………………...197 5.3.1.3 Unit Root Test for Activity of Stock Market…………………..198 5.3.1.4 Unit Root Test for Efficiency of Stock Market………………..199 5.3.1.5 Unit Root Test for Size of Financial Intermediaries…………203 5.3.1.6 Unit Root Test for Activity of Financial Intermediaries……...204 5.3.1.7 Unit Root Test for Efficiency of Financial Intermediaries…...205 5.3.2 Test for Co-Integration (Long-Run Relationship)…………………206 5.3.3 The Error Correction Mechanism (Short-Run Relationship)….....208 5.3.4 Johansen Full Information Maximum Likelihood Test…………...211 5.3.5 The Granger Causality Test………………………………………...213

5.4 SUMMARY OF RESULTS……………………………………………….....216 5.4.1 Snapshot of Results……………………

5.4.2 Evaluation and Interpretation of Results……………………........220 5.4.3 Relevance of Results……………………

–  –  –

DATA, T RAI N GU LAT I ON OF FINDINGS, SELECTIVE ANALYSIS

AND DEVELOPMENT OF THEORY……………………………..........224

6.1 DISCUSSION OF QUESTIONNAIRE RESULTS………………………...224

6.2 INTEGRATION OF QUESTIONNAIRE FINDINGS AND HISTORIC CASE

REVIEW ANALYSIS…………………………………………………………….257

6.3 DISCUSSION OF INTERVIEW RESULTS……………………………….263

6.4 DISCUSSION OF THE OUTCOME OF THE CAUSALITY TEST……...285

6.5 TRIANGULATION AND SELECTIVE ANALYSIS OF FINDINGS……..287

6.6 DEVELOPMENT OF THEORY……………………………………….........289

CHAPTER SEVEN: CONCLUSION AND RECOMMENDATIONS291

7.1 OVERVIEW…………………………………………………………………...291

7.2 RECOMMENDATIONS……………………………………………………...294 7.2.1 Policy Recommendations…………………………………………...294

7.3 INFERENCES AND OBJECTIVE DEDUCTIONS………………………..299

7.4 CONCLUSION………………………………………………………………..300

APPENDIX A: QUESTIONNAIRE AND INTERVIEW QUESTIONS

APPENDIX B: QUESTIONNAIRE ANALYSIS……………………….316 APPENDIX C: MACROECONOMIC DATA SET…

APPENDIX D: MAP OF NIGERIAN GEOPOLITICAL ZONES…..320 BIBLIOGRAPHY……………………………………………………… ……...321

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TABLE 4.1: RELATIVE SIZE OF THE PUBLIC AND PRIVATE SECTOR.

.164

TABLE 4.2: PLANNED DISTRIBUTION OF EXPENDITURE-SECOND

NATIONAL DEVELOPMENT PLAN……………………………………...........173

TABLE 4.3: SECTORIAL DISTRIBUTION OF INVESTMENTS, INCREASE

IN OUTPUT, INCREMENTAL CAPITAL/OUTPUT RATIO IN MILLIONS OF

NAIRA…………………

TABLE 4.4: A CROSSECTION OF CHANGES IN PERSONAL INCOME

ALLOWANCE UNDER THE MILITARY………………

–  –  –

GOVERNMENT REVENUE (1966-1977)……………

TABLE 5.1: UNIT ROOT TESTS (ADF) REAL GDP PER CAPITA….

.........195 TABLE 5.2: UNIT ROOT TESTS (ADF) FOR SIZE OF STOCK MARKET..197 TABLE 5.3: UNIT ROOT TESTS (ADF) FOR ACTIVITY OF STOCK MARKET……………………………

TABLE 5.4: UNIT ROOT TESTS (ADF) FOR EFFICIENCY OF STOCK

MARKET……………………………………

TABLE 5.5: UNIT ROOT TESTS (ADF) FOR SIZE OF FINANCIAL INTERMEDIARIES……………

TABLE 5.6: UNIT ROOT TESTS (ADF) FOR ACTIVITY OF FINANCIAL

INTERMEDIARIES……………

TABLE 5.7: UNIT ROOT TESTS (ADF) FOR EFFICIENCY OF FINANCIAL

INTERMEDIARIES……………

–  –  –

INTEGRATION……………………………

TABLE 5.9: THE ERROR CORRECTION MECHANISM………………….

..210 TABLE 5.10: ORDER OF UNRESTRICTED VAR MODEL……………......211 TABLE 5.11: EIGENVALUE AND TRACE STATISTICS TEST FOR COINTEGRATION VECTOR………………………………………

TABLE 5.12: GRANGER CAUSALITY TEST……………………………….

.214

–  –  –

1.1 GENERAL 1.1.1 Theoretical and Methodological Considerations “One of the most important problems in the field of Finance, if not the single most important one, almost everyone would agree, is the effect that financial structure and development have on economic growth” Goldsmith (1969:390).





Following Goldsmith (1969), this research focused on studying how development of the financial structure affects growth in the Nigerian economy, what is the causal relationship between financial development and economic growth and what sector of the financial industry (market or intermediary) is the predominant driver of economic growth. The research design adopted to carry out this study is a mixed method research design with elements of grounded theory. The mixed method was considered very appropriate as no single research paradigm was viewed as suitable to provide sufficient evidence and credibility for the investigation this research focused on. Deductivism was therefore employed by starting off the research with a theoretical position while allowing inductivism by formulating perspectives as the research progressed. This procedure followed the argument of Silverman (1993) which stressed that research that stems from a theoretical background such as this research has is capable of redefining the limits of existing theory. This research therefore gathered both qualitative and quantitative data to argue that the finance-growth theory as we currently understand it is unable to explain the financial and economic structures of developing economies which undergo a very different set of residual socio-economic and socio-political identity characteristics from developed economies, the characters of whom the theory is based upon. These broad characters include properly functioning democracies, free markets and largely mono ethnic societies.

The study focused on the Nigerian economy for several reasons. One of the reasons is that the Nigerian economy provides a suitable test of how effectively the finance-growth theory is applicable to a developing economy as the Central Bank is currently concerned with developing the financial sector as a means of enhancing economic growth. Furthermore the Obasanjo led civilian government privatization of public parastatals has opened up a huge private equity market in Nigeria. A further reason is to contribute to policy decision making as the scope of this study interfaces with the Central Bank of Nigeria’s Financial Systems Strategy, FSS (2020) programme targeted at analysing how the development of the financial services industry can act as a stimulus to future economic growth in Nigeria and the West African SubSaharan sub-region. In investigating the applicability of this theory to the Nigerian economy, this study carried out a three fold analysis, the first part being a historical analysis of the Nigerian political economy using books and journal articles, the second part was a phenomenological study of the Nigerian social phenomena using a two fold approach of questionnaires and group interviews while the third part of the data gathering and analysis process was an econometric analysis of bank and market time series data to determine causality of economic growth using the vector co-integration technique and Granger Causality test. Data for the econometric analysis was gathered from a database called the Financial Structure Database which provides data to compute the size, efficiency and activity of financial intermediaries and markets for a large number of countries over a long period of time. The data used to create this database is sourced primarily from the International Monetary Fund’s International Financial Statistics, the Bank for International Settlement Quarterly review on International Banking and Financial Market Development and Goldman Sachs International Investment Research. The historical analysis of the political economy was intended to highlight country specific effects within the body polity of Nigeria with a view to isolating possible conditions that could inadvertently tilt the position of theory as a result of policy implications on growth and development of the financial sector on economic growth. Furthermore, it is worth bearing in mind that the theory has never been tested for a multi-ethnic developing country using observations other than macroeconomic, political and legal variables. It may be argued however that several studies have been carried out to demonstrate the existence of the impact of political instability on economic growth however all the studies such as Levine and Zervos (1996), Barro (1996) etc utilise cross-sectional data while Asteriou and Price (2001) utilise time series data but look at the effect of political uncertainty on investment growth and hence economic growth using Gross Domestic Product (GDP) as a proxy for economic growth in the United Kingdom. No known study has carried out an analysis of the impact of the character of the state leading to political instability and uncertainty on the causality of financial development on economic growth in Nigeria. Asteriou and Price (2001) further indicate that in a ‘polarised society’, a change in the government may create political uncertainty with its attendant effect on economic growth; in the Nigerian context, polarity can be clearly seen by the deep stratification in ethnic groups from the North to the South and the vicious contest to control the Federal Government. Asteriou and Price (in a study of the UK economy) touched on the reason why military takeovers of government in Nigeria was always welcome. They stress that if the current government (UK Government) was perceived to be untrustworthy, news of their ousting could lead to an increase in investment. However in the Nigerian case where there is a track record of the outcome of military governance, can this premise necessarily be true?

The result of this study proved otherwise. This study is further unique due to the fact that it studied a developing economy with a unique set of endogenous characters.

The Finance-Growth theory’s main drive is that developments in the financial system help ameliorate inadequacies in information exchange between investors and potential investors. Banks are thought to be in better control of information flow due to the personal contact they have with their clients while a different school of thought believes that markets are in place to counteract the rent seeking and monopoly prone attitude of banks thereby presenting a more investor friendly platform (Beck and Levine, 2004). This assumes that ceteris paribus the political economy of the country is in a state of tranquillity.

In Nigeria however and a large number of African countries, evidence from literature (Brown 1995, Collier 2008) suggests that this may not be the case as these countries in addition to experiencing a constant state of flux in their body polity are riddled with decadent infrastructure that could further foster information asymmetry such as poor road networks, poor communication systems and even huge threats to the movement of factors of production due largely to ethnic strife between competing politico-ethnic groups (Madiebo 1980, Osaghae 1998, Falola and Heaton 2008).

Goldsmiths work studied the finance-growth relationship in thirty-five countries showing a positive correlation between financial development and economic growth but due to research limitations at the time, he was unable to highlight a causal relationship. Advances in research skills and data such as are evidenced in Demirguc-Kunt and Levine (2001) has however created contrary schools of thought as to which financial system drives economic growth and to what extent. The general view of the finance-growth literature (DemirgucKunt and Levine, 2001) suggests that economic growth is primarily driven by financial development and not necessarily by financial structure (bank or market based). Evidence of this view was drawn from the case of Germany and Japan, bank based systems versus the United States of America and the United Kingdom, market based systems. All four countries have experienced similar magnitude of long run growth in GDP. They further indicate that the size of the banking sector as well as the size and liquidity of the stock market exert a causal drive on economic growth using Gross Domestic Product per Capita as a proxy for economic growth. Following the long run aftermath of the recent financial crisis however, the bank based German economy may be better positioned than the market based UK and US economies. This is further food for thought.

1.1.2 Central Theme The central theme of this thesis is to examine the impact of the character of the state on causality of financial development on economic growth. The character of the Nigerian state is one of prebendalistic ethnic politics suppressed by decades of dictatorship military governance during which a three year long civil war was experienced. Because the military played a key role in national planning and development as well as institutionalising the democratic process, this research focused on the examination of the impact of military governance on financial development as a key character of the state leading to a causal relationship on economic growth. The term prebendalism was introduced into literature by Joseph (1987) to describe the tendency of ethnocentric looting carried out on public treasury by elected officials.



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