Advertisement

Quality & Quantity

, Volume 49, Issue 1, pp 365–384 | Cite as

Do the dynamics of financial development spur economic growth in Nigeria’s contemporal growth struggle? A fact beyond the figures

  • Abdulkadir Abdulrashid Rafindadi
  • Zarinah Yusof
Article

Abstract

This paper investigates whether long-run economic growth can be fostered by the impact of financial development in Nigeria, and what could be the empirical explanations for the factors attributable to the continued backwardness of the Nigerian economy in the current millennium? Is the relationship between financial development and economic growth monotonic? To ensure this, we measure the short run and long run Impact of Financial Development on Economic Growth from 1980 to 2011. The “U” and the ARDL bounds testing approach to cointegration were applied. The findings of the study established that financial development and population are the only variables that have contributory impacts in fostering economic growth in both the long-run and short-run in Nigeria. While, M3, bank asset, fixed capital formation, trade and private sectors have insignificant contribution to GDP and are the impediments to Nigeria’s growth dilemma. In another dimension the research established that, the relationship between FD–GDP is monotonic suggesting that too much finance does not prevail in the Nigerian economy. By policy implication the country will be facing prolonged macroeconomic volatility due to the absence of strong exogenous risk cushioning effects, chaotic and unfavourable investment climate, unemployment and persistent exchange rate instability. Eventually these factors could lead to output failure, deterioration in reserve holding that could translate in to currency crisis and an eventual financial crisis. We recommend the pursuance of synergistic monetary policy model that will not only ensure a sustainable and improved value of the local currency but should also create its foreign demand among others.

Keywords

U test ARDL bound test Economic shock Economic growth 

References

  1. Ang, J.B., McKibbin, W.J.: Financial liberalization, financial sector development and growth: evidence from Malaysia. J. Dev. Econ. 84, 215–233 (2007)Google Scholar
  2. Arcand, J., Berkes, E., Panizza, U.: Too Much Finance? International Monetary Fund, Research Department, Washington, DC (2012)Google Scholar
  3. Arestis, P., Demetriades, H.T.: Financial development and economic growth: assessing the evidence. Econ. J. 107, 109–121 (1997)CrossRefGoogle Scholar
  4. Al-Yousif, Y.K.: Financial development and economic growth: another look at the evidence from developing countries. Rev. Financ. Econ. 11, 131–150 (2002)CrossRefGoogle Scholar
  5. Bagehot, W.: Lombard Street (1962 edn). Richard D. Irwin, Homewood (1873)Google Scholar
  6. Bell, C., Rousseau, P.L.: Post-independence India: a case of finance-led industrialization? J. Dev. Econ. 65, 153–175 (2001)CrossRefGoogle Scholar
  7. Chandavarkar, A.: Of finance and development: neglected and unsettled questions. World Dev. 22, 133–142 (1992)CrossRefGoogle Scholar
  8. Christopoulos, D.K., Efthymios, G.T.: Financial development and economic growth: evidence from panel unit root and cointegration tests. J. Dev. Econ. 73, 55–74 (2004)Google Scholar
  9. Demetriades, P.O., Hussein, A.K.: Does financial development cause economic growth? Time series evidence from 16 countries. J. Dev. Econ. 51, 387–411 (1996)CrossRefGoogle Scholar
  10. Fosu, O.A.E., Magnus, F.J.: Bounds testing approach to cointegration an examination of foreign direct investment, trade and growth relationships. Am. J. Appl. Sci. 3, 2079–2085 (2006)CrossRefGoogle Scholar
  11. Goldsmith, R.W.: Financial Structure and Development. Yale University Press, New Haven (1969)Google Scholar
  12. Gonzalo, J.: Five alternative methods of estimating long-run equilibrium relationships. J Econometr. 60, 203–233 (1994)Google Scholar
  13. Greenwood, J., Jovanovic, B.: Financial development, growth, and the distribution of income. J. Polit. Econ. 98, 1076–1107 (1990)CrossRefGoogle Scholar
  14. Hicks, J.: A Theory of Economic History. In: Financial Development and Economic Growth: Time Series Evidence from Pakistan and China, vol. 63. Claredon Press, Oxford (1969)Google Scholar
  15. Hye, Q.M.A., Wizarat, S.: Impact of financial liberalization on economic growth: a case study of Pakistan. Asian Econ. Financ. Rev. 3(2), 270–282 (2013)Google Scholar
  16. Inder, B.: Estimating longrun relationship in economics: a comparison of different approaches. J Econometr. 57, 53–68 (1993)Google Scholar
  17. Ireland, P.N.: Money and growth: an alternative approach. Am. Econ. Rev. 84, 47–65 (1994)Google Scholar
  18. Jalil, A., Ma, Y., Naveed, A.: The finance-fluctuation nexus: further evidence from Pakistan and China. Int. Res. J. Financ. Econ. 14, 212–231 (2008)Google Scholar
  19. Johansen, S.: Statistical analysis of cointegrating vectors. J. Econ. Dyn. Control 12, 231–254 (1988)CrossRefGoogle Scholar
  20. Johansen, S.: Cointegration in partial systems and the efficiency of single-equation analysis. J. Econometr. 52, 389–402 (1992)CrossRefGoogle Scholar
  21. Khan, S.M., Senhadji, A.S.: Financial development and economic growth: an overview. IMF Working Paper 00/209. International Monetary Fund, Washington, DC (2000)Google Scholar
  22. Khan, M.A., Qayyum, A., Saeed, A.S.: Financial development and economic growth: the case of Pakistan. Pakistan Dev. Rev. 44(2), 819–837 (2005)Google Scholar
  23. King, R.G., Levine, R.: Finance and growth: Schumpeter might be right. Q. J. Econ. 108, 717–737 (1993)CrossRefGoogle Scholar
  24. Levine, R.: Financial development and economic growth: views and agenda. J. Econ. Lit. 35(2), 688–726 (1997)Google Scholar
  25. Levine, R.: Finance and Growth: Theory and Evidence. NBER Working Paper, No. 10766 (2004)Google Scholar
  26. Lind, J.T., Mehlum, H.: With or without U? The appropriate test for a U-shaped relationship. Oxford Bull. Econ. Stat. 72(1), 109–118 (2010)CrossRefGoogle Scholar
  27. Lucas Jr, R.E.: On the mechanics of economic development. J. Monet. Econ. 22, 3–42 (1988)CrossRefGoogle Scholar
  28. Luintel, K.B., Khan, M.: A quantitative reassessment of the finance growth nexus: evidence from a multivariate VAR. J. Dev. Econ. 60(2), 381–405 (1999)CrossRefGoogle Scholar
  29. Maduka, A.C., Onwuka, K.O.: Financial market structure and economic growth: evidence from Nigeria data. Asian Econ. Financ. Rev. 3(1), 75–98 (2013)Google Scholar
  30. Majid, M.S.: Does financial development and inflation spur economic growth in Thailand? Chulalongkorn J. Econ. 19, 161–184 (2007)Google Scholar
  31. McKinnon, R.I.: Money and Capital in Economic Development. The Brookings Institution, Washington, DC (1973)Google Scholar
  32. Meier, G.M., Seers, D.: Pioneers in Development. Oxford University Press, New York (1984)Google Scholar
  33. Pagano, M., Volpin, P.: The political economy of finance. Oxford Rev. Econ. Policy 17, 502–519 (2001)CrossRefGoogle Scholar
  34. Patrick, H.T.: Financial development and economic growth in underdeveloped countries. Econ. Dev. Cult. Change 14(1), 174–189 (1966)CrossRefGoogle Scholar
  35. Pesaran, M.H., Pesaran, B.: Working with Microfit 4.0: Interactive Econometric Analysis. Oxford University Press, Oxford (1997)Google Scholar
  36. Pesaran, M.H., Shin, Y.: Long-run structural modelling. Econometr. Rev. 21, 49–87 (2002)CrossRefGoogle Scholar
  37. Pesaran, M.H., Shin, Y., Smith, R.J.: Bounds testing approaches to the analysis of level relationships. J. Appl. Econometr. 16, 289–326 (2001)CrossRefGoogle Scholar
  38. Rafindadi, A.A., Yusof, Z.: Is financial development a factor to the leading growth profile of the South African economy? Measuring and uncovering the hidden secret. Int. J. Econ. Empirical Res. 1(9), 99–112 (2013a)Google Scholar
  39. Rafindadi, A.A., Yusof, Z.: A startling new empirical finding on the nexus between financial development and economic growth in Kenya. World Appl. Sci. J. 28, 147–161 (2013b)Google Scholar
  40. Ram, R.: Financial development and economic growth: aditional evidence. J. Dev. Stud. 35, 164–174 (1999)CrossRefGoogle Scholar
  41. Robinson, J.: The Rate of Interests and Other Easys. Macmillan, London (1952)Google Scholar
  42. Romer, D: Advanced Macroeconomics. The Mcgraw-Hill Series in Economics, 3rd edn (2006)Google Scholar
  43. Rousseau, P. L., Wachtel, P.: Economic growth and financial depth: is the relationship extinct already. Discussion Paper, No. 2005/10. United Nations University (UNU-WIDER) (2005)Google Scholar
  44. Sasabuchi, S.: A test of a multivariate normal mean with composite hypotheses determined by linear inequalities. Biometrika 67(2), 429–439 (1980)CrossRefGoogle Scholar
  45. Schmpeter, J.: The Theory of Economic Development (translated by redevers). Dunker and Humblot, Leipzig (1912)Google Scholar
  46. Shahbaz, M.: A reassessment of finance-growth nexus for Pakistan: under the investigation of FMOLS and DOLS techniques. ICFAI J. Appl. Econ. 8(1), 65–80 (2009a)Google Scholar
  47. Shahbaz, M., Shamim, S.M.A., Aamir, N.: Macroeconomic environment and financial sector’s performance: econometric evidence from three traditional approaches. IUP J. Financ. Econ. 1&2, 103–123 (2010a)Google Scholar
  48. Shahbaz, M., Afza, T., Shabbir, M.S.: Financial development, domestic savings and poverty reduction in Pakistan: using cointegration and granger causality analysis. Int. J. Econ. Empirical Res. 1(5), 59–73 (2013)Google Scholar
  49. Shan, J.: Does financial development ‘lead’ economic growth? A vector auto-regression appraisal. Appl. Econ. 37, 1353–1367 (2005)CrossRefGoogle Scholar
  50. Shaw, E.S.: Financial Deepening in Economic Development. Havard University Press, Cambridge (1973)Google Scholar
  51. Shrestha, M.B., Chowdhury. K.: A sequential procedure for testing unit roots in the presence of structural break in time series data: an application to Nepalese quarterly data. Int. J. Appl. Econometr. Quant. Stud. 2–2, 1–16 (2005)Google Scholar
  52. Solow, R.M.: A contribution to the theory of economic growth. Q. J. Econ. 70(1), 65–94 (1956)Google Scholar
  53. Stern, N.: The economics of development: a survey. Econ. J. 99, 597–685 (1989)CrossRefGoogle Scholar
  54. Stiglitz, J.: More instruments and broader goals: moving towards the post-Washington consensus. WIDER Annual Lectures 2. http://time.dufe.edu.cn/wencong/washingtonconsensus/instrumentsbroadergoals.pdf. Accessed 17 March 2012 (1998)
  55. Wurgler, J.: Financial markets and Allocation of Capital. J. Financ. Econ. 58(1), 187–214 (2000)Google Scholar

Copyright information

© Springer Science+Business Media Dordrecht 2014

Authors and Affiliations

  • Abdulkadir Abdulrashid Rafindadi
    • 1
  • Zarinah Yusof
    • 1
  1. 1.Department of Economics, Faculty of Economics and AdministrationUniversity of MalayaKuala LumpurMalaysia

Personalised recommendations