Structural Transformation and Capital Formation in Nigeria: An ARDL Analysis

Abstract

The study tests the proposition that structural transformation drives capital formation which in turn underlies development through the expansion of gross domestic product (GDP). Relevant data consistent with extant literature were obtained from the World Development Indicators between 1980 to 2017 and checked for integration and mean reversion properties. Having obtained satisfactory results from the pre-regression tests, the autoregressive distributed lag (ARDL) regression was chosen to fit the series. Post-regression evaluations check about the assumptions of normality, serial correlation, and homoskedasticity were all satisfactory to enable us to draw valid inference. Our results find no long-run evidence of structural transformation as a process of fixed capital formation in Nigeria. The correlation between the two is strongly negative. The GDP provides the most powerful and significant drive for fixed capital formation as well as the volume of domestic credit to the private sector, gross domestic saving, and the real rate of interest. The pattern of structural transformation observed showed an industrial structure comprising weak and low-capital intensive industries. The study recommends an industrial road map focused on both the industrialisation of agriculture and the creation of capital-intensive industries to drive sustained fixed capital accumulation.

Keywords: structural transformation, capital formation, agriculture, modern sectors, Nigeria

DOI: 10.7176/JESD/10-8-13

Publication date: April 30^th 2019