Growth economics pdf

Log in with Facebook Log in with Google. Remember me on this computer. Enter the email address you signed up with and we'll email you a reset link. Need an account? Click here to sign up. Download Free PDF. Tomola Obamuyi. A short summary of this paper. Financial reforms, interest rate behaviour and economic growth in Nigeria. Obamuyi1 and Sola Olorunfemi2 Abstract The paper examines the implications of financial reform and interest rate behaviour on economic growth in Nigeria.

The cointegration and error correction model were used on time series data from The results demonstrate that financial reform and interest rates have significant impact on economic growth in Nigeria.

The results imply that the behaviour of interest rate is important for economic growth in view of the empirical nexus between interest rates and investment, and investment and growth. The study recommends that government must embark on growth enhancing financial reform and be sensitive to the behaviour of interest rates for overall economic growth in the country. The dimensions of financial liberalisation include interest rate reform, reduction of credit control, free entry into the banking sector, autonomy to the banking sector, private participation in banking and liberalisation of capital flows [12].

The Interest rate reform, a policy under financial sector liberalisation, was to achieve efficiency in the financial sector and engendering financial deepening. In Nigeria, financial sector reforms began with the deregulation of interest rates in August , [9]. Prior to this period, the financial system operated under financial regulation, and interest rates were said to be repressed.

According to McKinnon [11] and Shaw [16], financial repression arises mostly when a country imposes ceiling on deposit and lending nominal interest rates at a low level relative to inflation. The resulting low or negative interest rates discourage saving mobilisation and channelling of the mobilised savings through the financial system. This has a negative impact on the quantity and quality of investment and hence economic growth. Therefore, the expectation of interest rate reform was that it would encourage domestic savings and make loanable funds available in the banking institutions.

The critical question, therefore, is whether real interest rates have any positive effect on economic growth in Nigeria. The paper examines the implications of financial reform and interest rate behaviour on economic growth in Nigeria. This is because the behaviour of interest rates, to a large extent, determines the investment activities, and hence economic growth of a country.

The paper is motivated by the shortage of empirical works on the effects of financial reforms and interest rates on the growth rate in Nigeria. Obamuyi and S. Olorunfemi 41 accommodating financial policies that will generate sizeable improvement in the activities of the private sector, which are considered critical for economic growth. As part of the efforts to sanitise the banking sector, the Central Bank of Nigeria CBN mandated all licensed banks to increase the minimum paid up capital from N2 billion to N25 billion with effect from January 1, The consolidation exercise that resulted from the pronouncement brought the number of banks to 24 groups of banks in Although, the consolidation exercise made the banks to be highly capitalised, people were surprised to hear the pronouncement of the newly appointed Governor of the Central Bank of Nigeria on 21 June, , that all were not well with the Nigerian banks.

The audit test by the Central bank of Nigeria of the 24 banks in August, , revealed that only 14 banks were found to have adequate capital and liquidity to support the level of their current operations and future growth, while 2 banks were asked to re-capitalise before 30 June, , and 8 banks were adjudged to be in grave situations. The criteria employed for the special examination in all the banks were: Liquidity, capital adequacy, and corporate governance.

This has created space for the banks to prefer paying penalty rather than complying with economic policy. It is an indication that the policies of government have not been properly evaluated to create value for the banking system and the economy. For instance, the banking failures of late s and early s banking boom and banking doom , and that of , led to the erosion of confidence in the banking system.

Between and , a total of 33 terminally distressed banks were liquidated CBN, Also, with the consolidation exercise, the number of banks was reduced from 89 banks in to 24 groups of banks in in With 8 banks now adjudged to be in grave situations, the number of banks will likely reduce to 16 banks.

The consequences of the scenario above are that: First, many people will be hostile to the banking business, and large amount of money kept outside the banking industry. This implies that monetary policy may not be effective in the economy. Second, the banker-customer relationship will be threatened as people would have lost confidence in the industry.

Third, the distress in the financial sector will have a contagious effect on all other sectors of the economy, with the tendency of reducing the rate of economic growth. The simple questions are: What has happened to the various financial reforms of the government over the years? Does it imply that financial reforms failed in accomplishing the intended objectives? Or, is the problem with non-compliance on the part of financial institutions?

Have the monetary authorities failed in their implementation duty and efforts? Olorunfemi 43 As Schwartz and others in the monetary school argued, financial crises are caused by the failure of the authorities to respond correctly to financial distress and are aggravated by private sectors uncertainties about the correct policy responses.

The monetary authorities in Nigeria seem to be confused about the implementation of economic policies. This is because there are warning signals before a bank becomes distressed. Meanwhile, some of the criteria usually employed to measure the performance of the banks have been compromised by the Central Bank of Nigeria. There were violations of the laws. That was not the basis for removing them. This implies that non-compliance with policy may not be too important to the government.

Additionally, these banks were unable to meet their maturing obligations without resorting to the CBN or the inter-bank market, yet the apex bank kept a silence while the situation was on. On the issue of corporate governance, Chow explained that the objectives of corporate governance are to ensure transparency, accountability, adequate disclosure and effectiveness of reporting systems. The basic issue in contemporary management practices pertains to how much authority should be retained by managers and whether the managers will sincerely act in the best interest of the shareholders.

In order to compare the structure of interest rates between the sub-periods, the paper combined deposit rate, lending rate and minimum rediscount rate to see how the correlations among these three variables change as the interest rates reform process sets in Figure 1.

The pre-reform period is considered as a period of financial repression, and was characterised by a highly regulated monetary policy environment in which policies of directed credits, interest rate ceiling and restrictive monetary expansion were the rule rather than the exception [17].

Although, the interest rate policy instruments remained fixed, there were marginal increases. For instance, the nominal deposit and lending rates rose from 9. By , the deposit and lending rates have risen to This will in turn affect the amount of funds available for investment with retarded influence on economic growth. On the other hand, the high lending rate is detrimental to productive investment and hence economic growth.

As Soyibo and Olayiwola [17] observe, borrowers with worthwhile investments may be discouraged from seeking loans and the quality of the mix of applicants could change adversely. Again, high lending interest rates could create moral hazard where loan seekers borrow to escape bankruptcy rather than invest or finance working capital.

Generally, the behaviour of the interest rate structure is such that there is a wide spread margin between deposit and lending rates which may encourage speculative financial transactions. With real GDP growth rate of 4.

Although, the GDP growth rate has been very low thereafter, it has maintained a positive stand since the introduction of interest rate reform. Family planning self-regulation — and immigration flows — supposedly raise population growth during expansionary economic cycles, while during recessions it produces the opposite effect Abernethy Historical evidence on fertility allow us to suppose that it is the result of a rational behavior Caldwell This position has strong Malthusian basis in its structure — population overgrowth is supposed to have negative effects on output per capita — however conclusions and policy advice are completely different.

In fact, population is not supposed to follow an uncontrolled pattern of growth, but instead to consciously adjust for production carrying capability. Therefore, population control is not to be enforced by planners.

This view is coherent with the general laissez faire policy advocated by Smith, the theoretical founder of this school of thought. Positive Effects The first social scientist known to challenge Malthusian theories from an economic point of view was Kuznets. Kuznets was not successful in providing a coherent framework to explain the positive dynamics deriving from population growth — probably because he did not proposed any 6 Other critics were made by ethical points of view.

For example, the absolute value of life was always defended by the Catholic Church, that opposed most contraceptive methods; the feminist movement too defended the women right to maternity Hodgson and Cotts Watkins In a later paper, Kuznets provided more empirical evidence on the beneficial effects related to population growth, calling for a deeper analysis and critique of Malthusian theories.

Kremer stated and empirically confirmed that larger population was associated with higher population growth rates and faster technological development. Technological development, a consequence of population growth, leaded to an increase in labor productivity, per capita income and improvements in living conditions. Julian Simon believed that technological development depended on population size for both: a innovation technology pushed, made more likely by the larger number of people; and b innovation demand pulled, because larger population creates new needs —and increases those already existing — granting higher rewards for the innovator Ahlburg The higher — and probably more stable — demand for consumption and investment goods is another positive effect of population growth, that can lead to expansionary economic cycles.

Therefore, production was theorized to be free from the diminishing returns to scale that characterized the previous economic analysis. Policy advice derived from this school of thought include support of fertility and immigration in countries with declining or stationary population Espenshade Transitional Effects Galor and Weil proposed an unified model to explain the relation between population and economic growth, combining elements from both points of view presented above.

They assume 7 Keynes considered the impact of growing population on aggregate demand. However, his contributes on population economics did not influence his contemporary research agenda Simon The faster pace of technological progress during the Industrial Revolution brought mankind to a new phase, called Post-Malthusian, in which population growth absorbed only a share of the rapid output growth.

Therefore, there was a dramatic — compared with centuries of stagnation — increase in output per capita. Finally, the Modern Growth regime is characterized by faster technological progress and a large accumulation of human capital; this will cause a demographic transition and the population growth rate will slow down, allowing output per capita to capture a larger share of the future productivity gains.

There are two kinds of transition in Galor and Weil. The first one refers to population growth and its effect on economic growth. In fact, in the Malthusian regime population growth is low and hinders economic growth almost completely, while in the Post-Malthusian and Modern Growth regimes there is higher population growth8, but combined with growth in per capita output.

The second refers to the impact of technology and culture o then population: an initial improvement in productivity allows output to grow faster and the population to escape from the Malthusian trap, while further accumulation of human capital changes the propensity for procreation and slows down population growth Ehrlich and Lui To a certain extent, we can classify also Marxist theory on population as trasitionary.

Marx did not consider overpopulation as a natural phenomena, but as a product of capitalism Toney, Stinner, and Kim Technological improvements and capital accumulation are presumed to increase exploitation and the overpopulation problem, driving capitalism to collapse Landreth and Colander With the transition from capitalism to 8 Even if the rate of population growth is supposed to decline in the Modern Growth regime, it remains higher than in the Malthusian regime.

The last kind of transitional effect regards population age. In fact, the impact produced by population on economic growth may depend on the age structure. According to Crenshaw, Ameen, and Christenson population increase has an immediate negative effect, because raising children absorb resources — capital and labor — that could have more productive uses.

On the other hand, when children grow up they become workers and consumers; the lagged effect on economic growth is positive. Sarel added further complexity by considering age-related productivity.

The policy advice we can draw from transitional theories is not univocal as that presented above. It depends on technological progress, the institutional environment, accumulation of human capital, and the age structure of the current population. From to , population in member countries of the European Monetary Union grew by Similar patterns have been observed and forecasted for most developing countries Ray By analyzing real GDP we can notice other divergences.

European Monetary Union aggregate real output grew by The difference is tremendous, the developing countries grew four times faster than the Eurozone countries for a long period of time. Theories predicting growth of aggregate output parallel with demographic increase find confirmation in the data. GDP growth has largely overwhelmed population growth during the last 40 years in the developed and developing countries we consider in this research.

Consequently, we can state that there was an improvement in living standards together with population increase. A better measure of the improvement in living standards is the growth of per capita real GDP. In the European Monetary Union it grew by In Brazil, Russia, India, and China the growth of per capita output in the same period was of The current recession did not cause real output to shrink in those countries United States Department of Agriculture - Economic Research Service a; b.

Theories predicting catastrophic results from rapid demographic growth are disproven by those facts. As we showed, countries with higher population growth — Brazil, Russia, India, and China — experienced faster economic growth compared to countries — the European Monetary Union —in which demographic growth was moderate.

In addition, the current recession seems to have had less impact on the former countries, maybe because of the growing internal demand produced by increased needs of a rising population. Faster increase in population may be a cause of faster economic growth, but it is not possible to affirm it beyond any doubt.

There are numerous other influential variables we are not taking into consideration, such as population density and age structure, technological change, income inequality, and so on. Therefore we prefer to avoid simplistic claims beyond the analytical capabilities of the data.

We can conclude that in the last 40 years there were signs of positive correlations between population and economic growth. The demographic prospects of member countries of the European Monetary Union, with population growth close to zero and an aging population, would suggest planning incentives for fertility and immigration flows capable of sustaining demographic growth. Econometric Research Given the variety of theoretical frameworks explained above, it is necessary to select a reference theory before starting with empirical research.

In this paper we chose to test a population age transitional model. Population growth is supposed to initially decrease real per capita output, while there would be beneficial effect when the labor force will increase Crenshaw, Ameen, and Christenson We performed our analysis on the European Monetary Union countries 10 — as representative of developed countries — on the one side and Brazil, Russia, India, and China on the other — as representative of developing countries.

Data The data needed for the model are population and real GDP. Census Bureau, International Data Base. Data are available from to for the 20 countries we selected for our analysis.

Then we calculated yearly population and per capita real GDP rates of growth; we lost one year in this operation. Therefore, the historical series for these figures starts with year In order to capture the effect of an increased labor force, we lagged population growth by 20 years; we lost 20 years in this operation. Therefore the historical series for the lagged population's yearly rate of growth starts with year The dataset we used for our regression is composed of yearly observations, 20 for each country we selected.

Procedure The procedure we followed is composed of two steps. This procedure generates a dummy variable for each unit in the cross section, suppressing the intercept to avoid the trap of perfect collinearity Gujarati and Porter , Model We selected a simple linear model, in which per capita GDP growth depends on current and lagged population growth.

We imposed a lag equal to 20 years to capture the transition from unproductive young population to labor force. We specified a fixed effects model with no intercept, in which each country has a dummy variable that represents all the other factors that determine the long term growth in GDP pro capita. We chose a fixed effect specification, therefore we should check for the joint hypothesis that all the dummy variable coefficients are equal to zero.

The third series — the lagged growth rate of population — showed a little shortfall, but in our opinion it does not affect the validity of the research; we decided to consider it stationary as the first two series. It means that non stationarity null hypothesis can be rejected at Given the limited shortcoming, we decided to consider the time series as stationary for our research. The F test for no fixed effects confirmed the validity of our model.

F 20,,0. Having confirmed the stationarity of the time series and the correct specification of the model, we can present the regression function we estimated. Both estimates are significative and their signs meet our expectations. Population growth has an immediate negative effect on per capita GDP growth, while in the long term its effects are positive. The adjusted R 2 is satisfactory, considered the relevance of all omitted variables. Brazil, China, and India show high growth rates, while most of the European Monetary Union countries lag behind.

The short term effect of population growth confirms the transitional theory Crenshaw, Ameen, and Christenson , showing that the increased population reduces per capita GDP. Conclusions The population debate is still far from being solved. However, we have made a contribution in favor of transitional population theory supported by empirical evidence. The importance of population dynamics and their impact on economic cycles cannot be underestimated.

European countries, characterized by a stagnant and aging population, should prepare policies capable of steering demographic dynamics. We cannot afford to risk a future in which our population age structure would menace productivity and stability. Maternity support and immigration policies are the two instruments available to plan a demographically sound future.

The economic effects of maternity and immigration are often misunderstood by the public. In order to avoid social tensions on such delicate issues, a campaign to promote a fuller understanding of these phenomena would be desirable.

Developing countries face the opposite problem. Their growing population supports future economic perspectives, but it tends to hinder current improvements in living conditions. Future Research Econometric research has room for enhancements. First of all, longer historical series would be preferable. Different demographic phenomena — fertility, mortality, immigration, and emigration — are unlikely to have the same impact on per capita GDP growth Espenshade A deeper understanding would be important in order to plan demographic policies.

Moreover, age-related productivity theory Crenshaw, Ameen, and Christenson ; Sarel offers other possibilities for research. Differences in population age structure may influence economic growth. Furthermore, they can even influence the impact of population growth on economic growth. Finally, population growth localization may offer new insight into the research.

Urbanization and population density open new levels of analysis about people and their impact on economic growth. Population and Environment 24, no. Ahlburg, Dennis A. Julian Simon and the Population Growth Debate. Population and Development Review 24, no. Blanchet, Didier.

Population and Development Review 17, no. Bucci, Alberto. Journal of Macroeconomics Caldwell, John. Towards a Restatement of Demographic Transition Theory.

Oxford: Oxford University Press. Coale, Ansley J.