Chapter one

Introduction

The impact of rnacroeconomic policies on private capital formation, a topic of obvious concern to policy makers, has attracted considerable interest in the analytical and empirical literature. Economic theory has paid considerable attention 10 this debate. Taken as a whole, however, the theoretical predictions arc ambiguous. Depending on their underlying assumptions, some approaches predict a negative relationship, while others predict a positive one.

Empirical literature on growth has consistently showed that the rate of accumulation of physical capital or investment is an important determinant of economic growth. Results provide evidence that public capital investments arc a key input in the private sector producion process fbr they affect both the steady state level of income per capita and the rate of economic growth on the transition paths towards the equilibrium (Nair, 2005). Furthermore, there are other important empirical evidences why private investment should be at the centre of the debate on how to promote growth and raise employment. Ndikyman (2005), while accepting that investment is a robust determinant of growth, especially equipmcnt investment, believe that private investment is a key determinant of cross-country diffcrcnce in long run economic growth. This has led observers to identify low investment as one of the leading causes of the slow growth i n developing countries i n general and in African countries in particular. The UN Millennium Project (2005) has re-emphasized the need for a big push strategy in irlvestnlent to help poor countries break out of their povcrty trap and achieve the Millennium Development Goals (MDGs). The report argues further that, to enable all countries achieve the MDGs, there should be identification of priority private investments to empower poor people, and these should be built into hlOG-based strategies that anchor the scaling-up of private investment..

In more than 40 years since independence, Nigeria has nevcr grown at 7 percent or more fbr more than three consecutive years (NEEDS, 2004). Between 1975 and 2000, Nigeria's broad based macroeconon~icaggregate-growth, the tenns of trade, the exchange

rates, government revenue and spending - were among the most volatile in the developing world. The economy has been caught in a low growth trap, chwactzrized by a low savings - investment equilibrium (at less than20 percent). With an average annual investment rate of barely 16 perccut or GDP, Nigeria is far below t! : niinimunl investrrier~t.rate of about 30 percent of GDP required to unleash a poverty reduction g~owthrate of at least 7 - 8 percent per year (NEEDS, 2004). A fairly large and growing literature has developed around attempts to explain this poor growth pe~formancc. I n providing what is perhaps one of the best reviews of literature, Collier and Gunning (1999) zero in on several important factors whose impact on Ali-ican growth performance is mediated through their rlcgative implications for investment, particularly private investment. In their view, "cumulatively" the variables have contributed to a capital hostile environment. This i n turn has reduced the rate of rcturn on private investment. These factors include: high risk, capital hostile environment, poor tinance and low savi~lgs

In Nigeria, unsurprisingly, the policy orientation has been akin to that of other developing countries in manifesting an increasing reorganization of the potential rolc the private scctor could play in mobilizing the country's formidable and copious natural and human resources. 'These concern, however, do not seem to have been matched by an appropriate and consistent blend of policies to bolster private scctor investment. Thc reported

performance of private investment in Nigeria has been less than satisfactory, and slightly less than the average for Sub-Sahara Afri:a (SSA) The Nigerian private sector spent only aroi~nd2 1 percent of the countries national income over the period 1970-1980. 'The pel iod 1% 1 - 199 1 marked a notable low performance with private investment/GDP ratio of only 1 I percent (The corresponding average for SSA was around 14 percent). Ry 1992-2003, it fell further to 7 percent (CBN, 2004). Not only has private investment been diluted over the 1980s and has remained so over the period 1990 - 2000, it has also been volatile. To use the 1980s as an example, private investment as a percentage of GDP

dropped from 2 1 percent to I 9 percent from what it    ss in 1970- 1980 representing a drop

of 47 percent