Institutional Reforms and Economic Growth Performance in Nigeria.

Abstract. 

This study makes an empirical case that the level of sensitivity of economic growth to political and economic institutional reforms in Nigeria matters for sustained and sustainable economic performance both in the short, medium and long term. We first document the empirical evidence that successive regimes in Nigeria were indifferent to the impact of institutional reforms on economic growth. Several regimes both military and civilian pursued time bound and ambitious economic goals without regard to the effect of political institutional reforms. Secondly, the sequencing of policies were not considered necessary and therefore political and economic policies could be started and dropped regardless of their causal relationships with economic growth projections. Our basic framework was to use Extreme Bound Analysis (EBA) to ascertain the sensitivity of economic growth to political and economic institutional reform variables. In the results we found that economic growth was more sensitive to political than economic institutional reforms or lack of it. Our result exposes the inadequacy of the mindset of most regimes in Nigeria that economic growth will be achieved without regard to political or economic institutional reforms. In policy sequencing we used the Granger Causality Tests to ascertain that while economic institutional reforms is unidirectional to economic performance, political institutional reforms are bi-directional, ie there is a feedback causation from political reforms to economic growth. This explains why poor and inconsistent economic policies yield volatile growth performance in Nigeria, which resulted in a vicious circle between economic performance and political developments. The study also found out that economic reforms lead economic growth performance since there is a unidirectional causality between them. While poor economic growth performance stunts the growth of political reforms, poor political reforms destroy economic performance as a consequence. The most notable consequences of these poor policy sequencing are expressed in infrastructure deficits, corruption, declining FDI investments and growing unemployment and volatile growth. Our policy recommendations are therefore that both sectoral growth and targeted economic growth projections in the achievement of Millennium Development Goals(12%), Vision 20- 2020(15%) and Financial System Strategy 2020(20%) will not be met until appropriate political institutional reforms is undertaken urgently to address inconsistencies in the role of political institutions in driving economic policies. Secondly, economic policy summersaults and inconsistency in policies will continue to undermine economic performance until there is continuity and proper policy sequencing between economic reform policies, political reforms and economic performance in Nigeria.

Table of Content

Title Page………………………………………………………………….……..……….ii

Approval Page……………………………………………………………………………iii

Dedication……………………………………………………………….…………...…..iv

Acknowledgements…………………………………………………………………..…. .v

Table of Contents …………………………………………………….… …….…..…….vi

List of Tables………………………………………………………….…………...…….vii

List of Figures………………………………………………………………………..….viii

Abstract………………………………………………………..………..….……….…...x

CHAPTER ONE …………………………………………..…………………...……......1

INTRODUCTION…………………………………………….…………………..….…...1

1.0Background…………………………………………………….………….……...........1

1.1 Statement Of Problem……………………………………….…………….......…....…4

1.2 Study Hypothesis…………………………………………….………….……..…...…9

1.3 Objectives Of The Study……………………………………..…………...…..………9

1.4 Scope of the Study ……………………………………………..……………….….…9

CHAPTER TWO…………………………………………………..……..……….….… 10

 REVIEW OF LITERATURE…..……………………………..………..…….……….…10

THEORETICAL FRAMEWORK…………………………………………………….……..…..10

 2.1 Theories Of Institutions And Growth……………………..…..….……………....…10

 2.1.1 Transaction Cost Economics…………………………….………..…….……. ..…10

 2.1.2 New Classical Convergence Theory…………………….…….……….…...…...…11

 2.1.3 The Conceptual Framework…………………………….….…….……...….......… 12

THEORETICAL LITERATURE………………………………...…………………………….....…...……...…16

 2.2 The Basic Theoretical Model ………………………………………… . . ......…...…16

 2.2.1 Modeling the impact of institutions……………………………….….………..…. 16

 2.2.2 Relevance of Institutional theory on Growth……………..…..….….......……....…23

 2.2.3 Political Institutions and Growth …….…………………………..…….…..…..… 24

 2.2.4 Political Regimes and Growth …………………………..…...…………..........…..25

2.2.5 Economic Instituions and Growth….……………………..…..………………...…25

 2.2.6 Neo-Classical Growth Convergence hypotheses…..………..….......................….. 28

 2.2.7 Institutions And Growth Convergence……………………..…………..…........….29

 2.2.8 The Causal Relationships……………….……………….………………...….……31

 2.3 EMPIRICAL LITERATURE……………………………….……..…….……..….. 32

CHAPTER THREE………………………………………………………………..….....37

 3.1 Institutional Reform Experience in Nigeria…………………………………………...37

3.2 Institutional Reforms in Nigeria: Some stylized facts……………………....………... 37

Institutions and Growth Performance in Nigeria 7

CHAPTER FOUR………………………………………………..…..………..……..…..45

METHODOLOGY AND MODEL SPECIFICATION ………………………....………..45

 4.1Overview..………………………………………….…………..……………..…..….45

 4.2 Growth Regressions And Robust Specifications...………….………..….…......…....45

 4.3 The Sensitivity Analysis ( EBA)……………………..…….….………......……..….46

 4.4 The Causality Tests………………………………………….…………….…...….…48

 4.5 Data Sources……………………………………………….……….……….…..…...49

 4.6 Model Justification………………………………………….……………… …..….49

CHAPTER FIVE……………………………………………………………….…….… 52

DATA GENRERATING PROCESS, DESCRIPTIVE STATISTICS AND DIOGNOSTIC TESTS……………………………………………………………………………….….….52

5.1 Data graphing and Assessment of time series characteristics……………….….……...52

5.2 Descriptive Statistics…………………………………………………..……….………55

5.3 Diagnostic Tests…………………………………………………………….………….57

5.4 Johansens Cointergration Tests…………………………………………….…………..61

CHAPTER SIX……………………………………………….……………...…….…......61

EVALUATION AND INTERPRETATION OF RESEARCH RESULTS……….……....61

 6.1 Growth Regressions And Robust Specification………………….………………………..………………….….……........63

 6.1.1 Sensitivity Tests: Extreme Bound Analysis ( EBA)………..…….…………………………………………………………..…....….....65

 6. 2 Causality Test Results…………………………………………………….….………..66

CHAPTER SEVEN……………………………………………………….……….……..73

SUMMARY AND

CONCLUSION…………………………………………………..……………..…..….….79

7.1 Summary……………………………………………/...…………………………….….….79

7.2 Policy Implications………………………………………………………………….…..…79

7.3 Conclusion……………………………………. …………………………….…. …..81

References…………………………………………………………………….……...…..83

Appendixes…………………………….……….. 99