Financial Liberalization and Economic Growth – The Nigerian Experience

Abstract

The financial liberalization literature assumed that the removal of government control and restrictions on the workings of the financial market would stimulate higher savings as interest rate would be more market driven.  The higher savings would enhance greater investment in the classical Keynesian fashion of savings being equal to investment.  The increase in investment would lead to economic development and growth all other things being equal.  Therefore, according to the main tenets of the financial liberalization literature, we should expect to see higher saving rates (as well as higher levels of investment and economic growth) following financial liberalization. Is this the case in Nigeria?  To establish this, the study employs an empirical examination using the Johansen Co-integration test and the Error Correction Mechanism (ECM).  Annual time series data were obtained from the Central Bank of Nigeria Statistical Bulletin for the period 1987 to 2012 on the variables used for the study.  The results obtained from the econometric modeling shows the existence of a long-run equilibrium relationship among the variables and co-integration equation at 5% significance level. The Error Correction Mechanism shows a very high coefficient of multiple determinations in both the Over-parameterized and the Parsimonious Models.  However, the descriptive statistics shows that financial liberalization has impacted minimally on economic growth in Nigeria for the period under review.  The particular sequencing of the liberalization process and the hostile macroeconomic environment in Nigeria over the years has combined to minimize the expected benefits of financial liberalization.  The authors recommend that government should promote monetary stability, ensure sound macroeconomic environment and provide critical infrastructures to enable the economy grow in a sustainable manner.

Keywords:  Financial Liberalization, Investment, Economic Development, Economic Growth