Effectiveness of Foreign Aid on the Growth of the Agricultural Sector in Nigeria

Transcription

1 Effeciveness of Foreign Aid on he Growh of he Agriculural Secor in Nigeria Clemen Aewe IGHODARO 1 and Isaac Chii NWAOGWUGWU 2 Absrac This paper examined he effeciveness of foreign aid o he growh of he agriculural secor in Nigeria using he ARDL and he ECM approach and quarerly daa covering he period 1981 o While all he variables used were found o be I(I), four coinegraion relaionships exis beween he dependen and he independen variables. Conrary o expecaion, he parameer esimae of foreign aid has a negaive and insignifican relaionship wih agriculural oupu in he shor and long run. On he conrary, savings and echnological rend are significan and have posiive relaionship wih agriculural oupu boh in he shor run and long run. A major policy implicaion of he resul is ha improved echnology is imperaive o he increase in agriculural oupu in boh he shor run and he long run raher han encourage foreign aid for agriculural growh in Nigeria. Key words: Aid, Auoregressive Disribued Lag, Error Correcion Model 1 Ph.D; Deparmen of Economics & Saisics, Faculy of Social Sciences, Universiy of Benin Benin Ciy clemigho2006@yahoo.com GSM: Ph.D; Deparmen of Economics, Faculy of Social Sciences, Universiy of Lagos Akoka, Yaba, Lagos 131

2 Clemen IGHODARO and Isaac NWAOGWUGWU: Effeciveness of Foreign Aid on he Growh of 1. Inroducion Nigeria is very rich in agriculural resource base hough hese resources have o be adequaely harnessed in order o diversify he economy and reduce over he dependence on crude oil. In spie of his rich resource endowmen, here has been a gradual decline in agriculure s conribuions o he naion's economy. The rend in he share of agriculure in he gross domesic produc shows a subsanial variaion and long-erm decline from 60 percen in he early 1960s hrough 48.8 percen in he 1970s and abou 22.2 percen in he 1980s. The agriculural secor is he mos imporan non-oil economic aciviy; i is also he single larges employer of labor forces (70 percen according o NBS, 2009) and conribued 40.07% of Gross Domesic Producs (GDP) in Low agriculural oupu has a negaive impac on he economy of Nigeria which may resul o low capaciy uilizaion in he indusry. Imporan resources needed o improve on agriculural oupu are capial relaed and hese are largely inadequae domesically, which consequenly warrans he need for exernal capial (Kargbo, 2012). Theoreically, aid is mean o bridge he savings - invesmen gap ha poor and emerging economies face. The effeciveness of foreign aid has been he subjec of much debae in economics. Previous sudies of he aid-growh nexus have produced ambiguous resuls and have been criicized on he ground ha mos of he sudies are based on cross-counry regression. They lump ogeher counries of heerogeneous characerisics and size; hence, canno be used for counry specific policy. Gomanee, Girma & Morrissey (2001) argue ha aid may no influence all policies and herefore, i is difficul o assess he impac of aid on policy a leas in a cross counry framework. Sudies on aid growh nexus for Nigeria are eiher cross counry sudies e.g. (Adamu & Ighodaro, 2011; Uneze, 2011) or if i is counry specific sudy, i is usually on he impac of aid on he overall economy, for example, (Fasanya & Onakoya, 2012; Bakare, 2011; Abidemi, Abidemi & Olawale, 132

3 Ehiopian Journal of Economics Vol. XXII No 2, Ocober ). These sudies did no consider he effeciveness of aid on secoral growh. One of he sudies on aid - agriculural growh relaionship for Nigeria is Akpokodje & Omojimie (2008). They use a simulaneous equaion model in heir esimaion. A major criicism of such model is ha exising heory may no be sufficienly precise o sugges compelling causal models; in he process of model specificaion and idenificaion, compromises may be made ha viiae he assumpions of he original heory (Fergusson, 1995). This sudy fills his gap by empirically considering he effeciveness of aid on he agriculural oupu in Nigeria using quarerly daa from 1981 o 2009 as well as he ARDL and he ECM esimaion echniques. Following secion 1, secion 2 reviews some relaed lieraure, heoreical framework and model specificaion are considered in secion hree while secion 4 dwells on presenaion, inerpreaion and discussion of resuls. Secion 6 provides policy implicaions of resuls and conclusion. 2. Review of Relaed Lieraure The effeciveness of aid can be raced back o he wo-gap model (Chenery & Srou, 1966), which remains he mos influenial heoreical underpinning of he effeciveness of aid lieraure. In his model, developing counries face consrains on savings and expor earnings ha hamper invesmen and economic growh. Aid flows are mean o fill he gap beween invesmen needs and domesic savings. Bacha (1990); Taylor (1994) also recognize ha governmen(s) of some developing counries simply do no have he revenue raising capaciy o cover a desired level of invesmen. Foreign aid provided direcly o he governmen(s) can poenially relax his fiscal gap as long as i is used for public invesmen purposes. Akpokodje & Omojimie (2008) use a simulaneous equaion model o invesigae he effec of foreign aid on agriculural growh during for Nigeria. Using agriculural growh, savings, aid and agriculural impors as endogenous variables, hey find ha foreign aid has a significan posiive effec on agriculural growh in Nigeria. However, he resuls do no suppor he view ha foreign aid flows more o counries wih low savings. 133

4 Clemen IGHODARO and Isaac NWAOGWUGWU: Effeciveness of Foreign Aid on he Growh of Using cross counry daa, Adamu & Ighodaro (2011) aemped o ascerain he impac of foreign aid on economic growh in ECOWAS counries using panel daa for 14 counries covering he period 1999 hrough The model allowed for boh language and counry effecs which were found o be significan. Foreign aid was found o have a significan and posiive effec on growh among he ECOWAS counries. The effec of foreign aid on economic growh was found o be sronger in he French- speaking counries. The non-linear effec of foreign aid on economic growh was esed bu was found no o be significan. Uneze (2011) on his par esed he impac of foreign aid and aid uncerainy on privae invesmen in Wes Africa using an unbalanced panel daa from 1975 o The resuls show ha mulilaeral aid affecs privae invesmen posiively, bu no bilaeral aid, and uncerainy, measured as he coefficien of variaion has a negaive impac on privae invesmen. Malik (2008) examined he effeciveness of foreign aid on economic growh using a coinegraion and he ECM for he period in he six poores highly aid dependen African counries (Cenral African Republic, Malawi, Mali, Niger, Sierra Leone and Togo). The empirical resul esimaed for each counry shows ha in he five ou of he six counries, foreign aid has a significan negaive long run effec on economic growh, he only excepion was Togo. Foreign aid has a long run posiive impac on growh in Togo. In he shor run aid has no significan effec on economic growh per capia for mos of he counries excep for Niger. In a recen sudy, Alabi (2014) aemped o esablish he impac of agriculural foreign aid on agriculural growh in Sub-Saharan Africa using a dynamic specificaion, Generalized Mehod of Momens (GMM) framework. The economeric analysis suggess ha foreign agriculural aid has a posiive and significan impac on agriculural GDP and agriculural produciviy. 3. Theoreical Framework and Model Specificaion Given a generalized neoclassical aggregae producion funcion ha follows Inada condiion (assumpions abou he shape of a producion funcion) augmened wih expors as below: 134

5 Ehiopian Journal of Economics Vol. XXII No 2, Ocober 2013 Y A F( K, P, X ) (1) WhereY is he aggregae oupu, K is capial inpus, P is populaion, and X is oal expors. The producion funcion, equaion (1) is he expor growh model originally proposed by Ballasa (1978). To inroduce foreign aid, we follow Burke & Ahmadi-Esfahani (2006) wih he assumpion ha capial can be decomposed ino domesic savings and foreign aid. The savings gap is he idea behind disaggregaing capial ino savings and foreign aid. According o Chenery & Srou (1966), foreign aid can be used o solve he problem of domesic savings which could be direced o invesmen and for he purpose of his sudy, invesmen ino he agriculural secor. Foreign aid and savings in equaion (1) can be rewrien as: Y A ( S, F, P, X ) (2) Where S is aggregae domesic savings; F is foreign aid and oher variables are as earlier defined apar from he dependen variables which is aken o be oupu of he agriculural secor. To know he conribuion of each of he variable o he growh of he agriculural secor, equaion (2) can be re wrien as: Y A ( S, F, P, X ) (3) Where A is echnological rend. To inerpre he coefficiens as elasiciy, we ake he logarihms of boh sides of equaion (3), resuling in he equaion below: LNY LNS LNF LNP LNX A (4) A priori, i is expeced ha,,,, 0. The major ineres here is o know he sign of he parameer. Noing ha LNY AGRGDP ; 135

6 Clemen IGHODARO and Isaac NWAOGWUGWU: Effeciveness of Foreign Aid on he Growh of LNS LNSAVG ; LNX TEXPTand A LNF LNFAID ; LNP LNPOPL ; T. Therefore, equaion (4) becomes: LNAGRGDP LNSAVG LNFAID LNPOPL LNTEXPT T (5) 3.1 Mehodology and Daa Sources The sample period for his sudy covers quarerly daa from 1981 o This period is chosen as i corresponds o he period where uniform and consisen daa on he relevan variables are available. All he relevan daa were obained from he Cenral Bank of Nigeria Saisical Bullein (various issues) and he Naional Bureau of Saisics (various issues). The auoregressive disribued lag (ARDL) mehod and he Error Correcion Models are applied in he sudy using he Microfi 4.0 for Windows sofware. 3.2 Economeric Procedure (a) The Saionariy Tes: The Augmened Dickey Fuller (ADF) es is employed o ascerain he saionariy of he variables. The specificaion is expressed as: Z Z Z (6) i 1 i 1 Z Z Z (7) i 1 i 1 Equaions (6) and (7) are specified wih only rend and rend plus inercep, where: is he residual erm and Z ( LNAGRGDP ; LNSAVG ; LNFAID ; LNPOPL ; LNTEXPT ). 136

7 Ehiopian Journal of Economics Vol. XXII No 2, Ocober 2013 (b) Johansen Co-inegraion Tes Coinegraion es was done using he Johansen & Juselius (1990) mehod. This involves coinegraion es based on Maximal Eigenvalue of he Sochasic Marix and he Trace of he Sochasic Marix as specified as he equaions below: n ( r, r 1) T ln(1 ) (8) max r 1 i r 1 race n ( r) T ln(1 ) (9) i r 1 i where is he esimaed values of he characerisics roos (called eigenvalues). The firs is called he maximum eigenvalue es. I ascerains he hypohesis ha here are r co-inegraing vecors versus he hypohesis ha here are r 1co-inegraing vecors. The second is known as he race es. I ess he hypohesis ha here are a mos r co-inegraing vecors. In his es, race equal o zero when all he i are zeros. (c) The Error Correcion Model (ECM) The accepance of coinegraion beween wo series implies ha here exiss a long run relaionship beween hem and his means ha an error-correcion model (ECM) exiss. Equaion (5) can be rewrien o have he error correcion componen is lag operaor ecm( 1) is one period lag of he specified below as: j k l m LNAGRGDP LNSAVG LNFAID LNPOPL LNTE m i i i i 1 i 1 i 1 i 1 NPOPL LNTEXPT T ecm ( 1) (10) i i i i 1 i 1 where: is lag operaor ecm( 1) is one period lag of he residual n 137

8 Clemen IGHODARO and Isaac NWAOGWUGWU: Effeciveness of Foreign Aid on he Growh of is he consan erm,,,,, are respecive parameers is he error erm 4. Presenaion, Inerpreaion and Discussion of Resuls 4.1 Uni Roo Resul The empirical resuls obained from he uni roo es show ha he variables are all I(1) as presened in Table 1 below. Table 1: ADF Saionariy Resuls Variable ADF Tes (Inercep bu no Trend) Conclusion LNAGRGDP ( ) Non-Saionary ( ) Saionary I(1) LNSAVG ( ) Non-Saionary ( ) Saionary I(1) LNFAID ( ) Non-Saionary ( ) Saionary I(1) LNPOPL ( ) Non-Saionary ( ) Saionary I(1) LNTEXPT ( ) Non-Saionary ( ) Saionary I(1) Figure in parenhesis are he criical value (5%) ADF Tes (Trend & Inercep) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) (-34504) ( ) Conclusion Non- Saionary Saionary I(1) Non- Saionary Saionary I(1) Non- Saionary Saionary I(1) Non- Saionary Saionary I(1) Non- Saionary Saionary I(1) 138

9 Ehiopian Journal of Economics Vol. XXII No 2, Ocober Coinegraion Resuls The Johansen coinegraion resul reveals he exisence of four long run relaionship (deermined a he poins where he es saisic is greaer han he 95% Criical Value) beween he dependen and he explanaory variables based on Maximal Eigenvalue of he Sochasic Marix (Table 2a) and he Trace of he Sochasic Marix (Table 2b). Table 2a: Coinegraion Based on Maximal Eigenvalue of he Sochasic Coinegraion wih no inerceps or rends in he VAR Coinegraion LR Tes Based on Maximal Eigenvalue of he Sochasic Marix 115 observaions from 1981Q2 o 2009Q4. Order of VAR = 1. Lis of variables included in he coinegraing vecor: LNAGRGDP LNSAVG LNFAID LNPOPL LNTEXPT Lis of eigenvalues in descending order: Null Alernaive Saisic 95% Criical Value 90% Criical Value r = 0 r = r<= 1 r = r<= 2 r = r<= 3 r = r<= 4 r = Use he above able o deermine r (he number of coinegraing vecors). 139

10 Clemen IGHODARO and Isaac NWAOGWUGWU: Effeciveness of Foreign Aid on he Growh of Table 2b: Coinegraion Based on Trace of he Sochasic Marix Coinegraion wih no inerceps or rends in he VAR Coinegraion LR Tes Based on Trace of he Sochasic Marix 115 observaions from 1981Q2 o 2009Q4. Order of VAR = 1. Lis of variables included in he coinegraing vecor: LNAGRGDP LNSAVG LNFAID LNPOPL LNTEXPT Lis of eigenvalues in descending order: Null Alernaive Saisic 95% Criical Value 90% Criical Value r = 0 r = r<= 1 r = r<= 2 r = r<= 3 r = r<= 4 r = Use he above able o deermine r (he number of coinegraing vecors). An examinaion of he resul in Table 3 below shows ha he one period lag value of agriculural oupu posiively and significanly deermines is presen value. This implies ha previous quarer s producion of agriculural producs provides incenives o produce more his in he curren quarers probably as a resul of he increase in he income of farmers. Domesic savings impac posiively and significan in he deerminaion of agriculural oupu in he counry. However, is one period lag value impaced negaively on agriculural oupu. The implicaion of his is ha in he previous quarers, raher han invesing in agriculure, farmers preferred o save heir income resuling o low agriculural oupu in he curren period. The exposure of he counry o foreign aid surprisingly impacs negaively and insignificanly on he growh of he agriculural secor of he counry conrary o he resul obained by Akpokodje & Omojimie (2008); Alabi (2014). This implies ha higher foreign aid have been associaed wih lower agriculural oupu conrary o expecaion. The Populaion variable has a posiively signed coefficien esimae in line wih economic heory. I suggess ha higher level of populaion is associaed wih higher growh of agriculural oupu. 140

11 Ehiopian Journal of Economics Vol. XXII No 2, Ocober 2013 This finding shows ha he consequence of populaion on Nigeria s economic growh will manifes direcly hrough increases agriculural oupu. Conrary o expecaion, he coefficien of oal expors is negaively signed and insignifican in he deerminaion of agriculural oupu. As expeced, he curren value of echnological rend is significan and has a posiive relaionship wih agriculural oupu. However, is lag value is significan and has a negaive relaionship wih agriculural oupu. The model has a good fi. I explains more han 96 percen of he sysemaic variaion in he dependen variable. Moreover, he absence of any serious problem of auocorrelaion is shown by he value of Durbin s h-saisic, The F saisic value of shows he exisence of a significan relaionship beween he dependen variable and he regressors. Table 3: ARDL (1,2,0,0,0) seleced based on Akaike Informaion Crierion Auoregressive Disribued Lag Esimaes ARDL(1,1,0,1,0,1) seleced based on Akaike Informaion Crierion Dependen variable is LNAGRGDP 115 observaions used for esimaion from 1981Q2 o 2009Q4 Regressor Coefficien Sandard Error T-Raio[Prob] LNAGRGDP(-1) [.000] LNSAVG [.072] LNSAVG(-1) [.165] LNFAID [.421] LNPOPL [.000] LNPOPL(-1) [.000] LNTEXPT [.883] T [.000] T(-1) [.000] R-Squared R-Bar-Squared S.E. of Regression F-sa. F( 8, 106) [.000] Mean of Dependen Variable S.D. of Dependen Variable Residual Sum of Squares Equaion Log-likelihood Akaike Info. Crierion Schwarz Bayesian Crierion DW-saisic Durbin's h-saisic [.070] 141

12 Clemen IGHODARO and Isaac NWAOGWUGWU: Effeciveness of Foreign Aid on he Growh of Table 4: Esimaed Long run Coefficiens using he ARDL Approach Esimaed Long Run Coefficiens using he ARDL Approach ARDL(1,1,0,1,0,1) seleced based on Akaike Informaion Crierion Dependen variable is LNAGRGDP 115 observaions used for esimaion from 1981Q2 o 2009Q4 Regressor Coefficien Sandard Error T-Raio[Prob] LNSAVG [.017] LNFAID [.423] LNPOPL [.000] LNTEXPT [.883] T [.000] Table 4 reveals ha only savings and echnological rend are significan and have posiive relaionship wih agriculural oupu boh in he shor run and long run. This is in line wih economic heory as increase in boh saving and echnological rend would have increasing effec on agriculural oupu. For example, when savings of farmers increase significanly, hey are likely o have enough money o buy farm inpus like ferilizers and oher farm implemens during farming season. Apar from ha, hey are also likely o have enough money from savings o hire more farm labourers and agriculural equipmen which mos likely leads o increased agriculural oupu when efficienly used. Wih respec o echnological rend, a new farming echnology like new farm equipmen, new improved seeds/seedlings, insecicides, fungicides, ec will increase agriculural oupu in he long run. Conrary o expecaion, he parameer esimae of foreign aid has a negaive relaionship wih agriculural oupu in he long run. This implies ha foreign aid are eiher no adequaely channeled o he agriculural secor or if he reverse is he case, he level of corrupion in he secor paricularly in he disribuion of cerain farm inpus has made i no o posiively impac on he agriculural secor. Unforunaely and conrary o expecaion, populaion has a conrary negaive sign, hough; significan in he deerminaion of agriculural oupu. The negaive sign may be inerpreed o mean ha as he populaion increases, raher han people go 142

13 Ehiopian Journal of Economics Vol. XXII No 2, Ocober 2013 ino agriculure, mos of hem would prefer whie collar jobs. Furhermore, oal expors impaced negaively on agriculural oupu conrary o expecaion and i is no significan. The sronges impac on agriculural oupu in he long run is echnological rend. 4.3 Error correcion represenaion The resuls of he error correcion represenaion of he models are presened in Table 5 below. Table 5: Error Correcion Represenaion for he seleced ARDL Model Error Correcion Represenaion for he Seleced ARDL Model ARDL(1,1,0,1,0,1) seleced based on Akaike Informaion Crierion Dependen variable is dlnagrgdp 115 observaions used for esimaion from 1981Q2 o 2009Q4 Regressor Coefficien Sandard Error T-Raio[Prob] dlnsavg [.071] dlnfaid [.421] dlnpopl [.000] dlntexpt [.883] dt [.000] ecm(-1) [.000] Lis of addiional emporary variables creaed: dlnagrgdp = LNAGRGDP-LNAGRGDP(-1) dlnsavg = LNSAVG-LNSAVG(-1) dlnfaid = LNFAID-LNFAID(-1) dlnpopl = LNPOPL-LNPOPL(-1) dlntexpt = LNTEXPT-LNTEXPT(-1) dt = T-T(-1) ecm = LNAGRGDP *LNSAVG *LNFAID *LNPOPL *LNTEXPT *T R-Squared R-Bar-Squared S.E. of Regression F-sa. F( 5, 109) [.000] Mean of Dependen Variable S.D. of Dependen Variable Residual Sum of Squares Equaion Log-likelihood Akaike Info. Crierion Schwarz Bayesian Crierion DW-saisic

14 Clemen IGHODARO and Isaac NWAOGWUGWU: Effeciveness of Foreign Aid on he Growh of R-Squared and R-Bar-Squared measures refer o he dependen variable dlnagrgdp and in cases where he error correcion model is highly resriced, hese measures could become negaive. As expeced, he error correcion variable ecm(-1) has negaive sign and saisically significan (Table 5). The coefficien of ecm(-1), as in Table 5 suggess ha adjusmen process is good and more han 70% of he previous quarer s disequilibrium in agriculural oupu from is equilibrium pah will be correced in he curren quarer. The resul furher shows ha populaion increases has been a major conribuion o agriculural producion in Nigeria in he shor run. This may be due o he fac ha majoriy of he populace may be engaged in agriculure in he shor run, meaning more hands on he farm as populaion increases. On he long run, mos of hose who enered ino agriculure in he shor run may have los ineres in agriculure due o poor incenives. 5. Conclusions and Policy Implicaions of Resuls The paper aemped o invesigae he effeciveness of foreign aid on he growh of he agriculural secor in Nigeria. The resul reveals ha any increase in domesic savings, in boh shor run and long run will impac posiively on he agriculural secor in Nigeria. On he oher hand, foreign aid is no beneficial o he agriculural secor in Nigeria in boh he shor run and he long run. Populaion impacs posiively on he agriculural secor in he shor run while i was significanly negaive in he long run. The size of he absolue value of he error- correcion coefficien indicaes ha he speed of resoraion o equilibrium in he even of any emporary displacemen of he variables of ineres is very high. A major policy implicaion of he resuls is ha policy makers in Nigeria should encourage savings. This can be done by increasing deposi ineres rae as such savings could be used by farmers o acquire imporan farming inpus like ferilizers and new crop varieies during planing season. I may also enable hem o acquire loans from he bank and such loan could be channeled ino viable agriculural pracices. The use of ferilizer and new crop variey will in he shor and long run increase agriculural oupu. Furhermore, improved echnology is imperaive o he increase in agriculural oupu in boh he shor run and he long run. 144

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16 Clemen IGHODARO and Isaac NWAOGWUGWU: Effeciveness of Foreign Aid on he Growh of Johansen, S. & Juselius, K. (1990). Maximum Likelihood Esimaion and Inference on Co-inegraion wih Applicaions o he Demand for Money. Oxford Bullein of Economics and Saisic (52), Kargbo, P. M. (2012). Impac of Foreign Aid on Economic Growh in Sierra Leone Unied Naions Universiy World Insiue for Developmen Economic Research (UNU-WIDER) Working Paper, No. 2012/0, January. Malik G. (2008). Foreign Aid and Economic Growh: A coinegraion Analysis of he six Poores African Counries. Universiy of Wesern Sydney, Economic Analysis and Policy, 33(2). Uneze, E. (2011). Tesing he Impac of Foreign Aid and Aid Uncerainy on Privae Invesmen in Wes Africa, Cenre for Sudy of Economies of Africa, CSEA Working Paper WP/11/01, February 146