EXCHANGE RATE DEREGULATION AND HUMAN CAPITAL DEVELOPMENT IN NIGERIA, 1986-2015.

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TABLE OF CONTENTS

CONTENT                                                                                                                  PAGE

Title                                                                                                                                     Page    1

Declaration……………………………………………………………………………………………………………….. 2

Certification……………………………………………………………………………………………………………… 3

Dedication……………………………………………………………………………………………………………….. 4

Acknowledgements……………………………………………………………………………………………………. 5

Table of contents………………………………………………………………………………………………………. 6

Abstract…………………………………………………………………………………………………………………… 7

CHAPTER ONE: INTRODUCTION

CHAPTER TWO: LITERATURE REVIEW

CHAPTER THREE: RESEARCH METHODOLOGY

CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS

CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATION

REFERNCES………………………………………………………………………………………………………… 94

APPENDIX

  1. DATA OF VARIABLES USED………………………………………………………………… 113
  2. AUGMENTED DICKEY-FULLER (ADF) TEST RESULT………………………. 114
  3. PHILIP-PERRON (PP) UNIT ROOTS TEST RESULTS………………………….. 119
  4. COINTEGRATION TEST RESULT………………………………………………………… 124
  5. ERROR CORRECTION MECHANISM (ECM) RESULTS………………………. 127

ABSTRACT

This research investigates exchange rate deregulation and human capital development in Nigeria from 1986-2015. Data were collected from the Central Bank of Nigeria Statistical Bulletin. The study examines the stochastic characteristics of each time series by testing their stationarity using Augmented Dickey-Fuller (ADF) and Philip Peron (PP) tests. The study also employed ECM for estimation. Variables used in this study included exchange rate, government expenditure on education, government expenditure on health, interest rate, inflation rate, gross domestic product (used as a proxy for the national income) and crude oil price. The results of the study suggest that a direct relationship exists between human capital development and a one-year lagged exchange rate, national income and crude-oil price in Nigeria. However, there is an inverse relationship between human capital development and variables such as two year lagged interest rate and a year lagged inflation rate.

Having seen that developments in exchange rate deregulation insignificantly impact on human capital development, it was recommended that government should allocate more financial resources to expenditure on health and education that comes as a result of depreciation of the exchange rate and also raise its percentage allocation in the budget to the 26 per cent minimum requirements mandated by UNESCO on expenditure and health and education.

CHAPTER ONE INTRODUCTION

     Background to the Study

Human capital is considered as the most valuable asset and needs to be mobilized (Awopegba, 2003). Human capital as an economic term encompasses health, education and other human capacities that can raise productivity (Todaro & Smith, 2003). Capital and natural resources are passive factors of production while human resources are active factors of production. Human capital constitutes the most valuable resource of a country; in its absence there will be the non-performance of physical capital (tools, machinery, and equipment) which will impede economic growth (Harbison & Myers, 1964). Health and education are two closely related human (resource) capital components that work together to make the individual more productive. One component cannot be considered important than the other (Lawanson, 2009). Health connotes the ability to lead a socially and economically productive life (Anyawu,Oyefusi, Oaikhena & Dimowo, 1997). A healthy populace will be highly productive and the educated have the tendency to apply a degree of sophistication in the production process. In political terms, investment in human capital prepares people for participation in the political processes, particularly as citizens in a democratic society. From the social, economic and cultural points of view, human capital investment helps to lead fuller and richer lives, less bound by tradition. It is a way to empower people; this in turn will help them contribute substantially to the growth process in the economy (Jaiyeoba, 2015). Education is the bedrock upon which the growth and development of any country hinges upon. An enlightened population is a necessary prerequisite of a sustained growth, hence

development in an economy. The growth of the education sector is part of the process of human capital development in any country which ultimately leads to efficiency and increased growth rates of the economy.

Furthermore, It has been stressed that the differences in the level of socio- economic development across nations is attributed not so much to natural resources and endowments and the stock of physical capital but to the quality and quantity of human resources (Dauda, 2010). Oladeji and Adebayo (1996) opined that human resources are a critical variable in the growth process and worthy of development. They are not only means but, more importantly, the ends that must be served to achieve economic progress. In addition, the wealth and prosperity of nations rest ultimately upon the development of people and the effective commitment of their energies and talents. Capital and natural resources are passive agents. The active agents of modernization are human beings, for they alone can accumulate capital, exploit natural resources and build political and social organizations (Sankay, Ismail & Shaari, 2010). Harbinson (1973) aptly summarized the importance of human capital to economic development by stating that “human resources constitute the ultimate basis for the development in the economy”. Human capital development refers to the development of the skills, knowledge and in general, the requisite ingredients that would raise the productivity of the human capital in order to bring about the desired goal of economic growth in an economy. In other words, Human capital investment is any activity which improves the quality (productivity) of the worker. Therefore, training is an important component of human capital investment. This refers to the knowledge and training required and undergone by a person that increases his or her capabilities in performing activities of economic values (Maran, Lawrence & Maimunah, 2009).

The deregulation of the exchange rate came to bare at a time when the economy could no longer absorb the demands of the economic units, such that supply could not be expanded to meet up with the rapidly rising demand for output. As part of the conditionality for granting loan by the IMF, the federal government had to stop the control of the exchange rate, allowing it to be directed by the market forces of demand and supply of foreign exchange (Obansa, Okoroafor, Aluko & Millicent, 2013). Overtime, the exchange rate has varied based on the conditions that prevailed in the economy; especially during the post- SAP era. Based on economic a priori, it is theoretically plausible that the exchange rate appreciation would make imports of goods and services cheap; while exports would be expensive. It has been recognized in the literature that depreciation of exchange rate tends to expand exports and reduce  imports, while the appreciation of exchange rate would discourage exports and encourage imports (Benson & Victor, 2012). It also retards foreign direct investment across the sectors of the economy, especially the real sectors. Contrariwise, exchange rate depreciation makes exports cheaper while imports become more expensive. In other words, this makes foreign prices to be translated into the domestic price level which reduces the demand for foreign goods and services while attracting foreign direct investment across the various sectors of the Nigerian economy (Aliyu, 2011). The various determinants of the exchange rate depreciation and appreciation would not be considered here, but establishing the linkages between the exchange rate deregulation and human capital development, especially education and health.

From the 1980s, Nigeria has been plagued with series of exchange rate depreciation and appreciation due to market forces in the forex market which is as a result of the import dependent nature inherent therein and

her  over  dependence  on  „the  liquid  black  gold‟  (that  is,  crude  oil).  For instance, since the export of our goods and services becomes cheaper in the face of depreciation, it is expected that this would attract foreign direct investment which would raise the productivity level and hence accelerate the growth process of the economy. Exchange rate depreciation which makes export of goods and services cheaper and raises the demand for domestic goods by foreigners creates net inflow of foreign currency which impacts the balance of payment positively (Usman & Adeare, 2012). A positive balance of payment implies an increased net income to the indigenes involved in exports and also the government which has a tendency to raise aggregate expenditures on human capital which is necessary for an accelerated growth in the economy. An increased expenditure on health and education leads to human capital development. Furthermore, it should be noted that increased expenditure on human capital would create a multiplier effect by raising the aggregate output in the economy which helps to meet the foreign demand through development of better techniques of production, inventions and so on. Contrariwise, in the face of exchange rate appreciation, the domestic prices are translated into foreign prices which has the tendency of leading to a fall in the aggregate demand for domestic output, the BOP suffers and there is a negative income which leads to a fall in the incomes of government and businesses involved in exports, which further leads to a fall in the portion of the expenditure to be allocated to health and education in order to raise human capital productivity. This has a cumulative effect of stagnating the economy in the area of economic growth and development.

On the other hand, variations in human capital development through changes in inventions, techniques of production, skills, literacy rate and

other components could also vary the exchange rate to a great extent through series of actions and reactions of the principal macroeconomic aggregates of the economy. For instance, a rise in the human capital development (which could be proxied by the literacy rate, level of education, employment rate, per capita income etc) raises the productivity of labour per unit of capital, which raises the capacity of the economy to meet local and foreign demand for output and further reduces the import dependent nature of the economy. This leads to less strain on the naira. In other words, this has a tendency of raising export, and by this leads to a fall in the exchange rate of the naira to the dollar and consequently raises the domestic reserves of the foreign currency, hence creating a favourable balance of payment. All this helps in accelerating the growth process in the economy. Contrariwise, a fall in human capital development leads to  a fall in the productivity of labour per unit of capital (OECD, 2009) through inefficient production techniques, reduced life span, and fall in the literacy rate and many more; which shrinks the economy‟s condition to meet up with increased demand for its output and international competitiveness. This has the tendency of raising local prices, the economy becomes import dependent especially if local prices are higher than foreign prices, the terms of trade becomes unfavourable as there is net outflow and depletion of foreign reserves due to a rise in demand for the international currency to pay for the imports. All of these raise the exchange rate of the naira to the dollar.

From the aforementioned, it could be deduced that the relationship between exchange rate deregulation and human capital development is a far and indirect one which takes the actions of other macroeconomic variables serving as linkages before they can affect each other either positively or negatively.

Therefore, this research project will access the role of exchange rate deregulation on human capital development in the Nigerian economy.

     Statement of the Research Problem:

Following the shocks suffered by the economy in the 1980s where the economy was beset by the inability to meet up with local and foreign demand for its output due to the discovery of the „liquid black gold‟, and a consequent neglect of key sectors in the economy especially agriculture; many analysts (like the IMF, 2008) opined that one of the ways in which the economy could attain its desirable status was the deregulation of the exchange rate. Many studies have shown and proven that the economic succour expected from deregulation of the exchange rate have indeed not been met as a result of the mono-economic nature of the Nigerian economy. For instance, according to the United Nations Development Report in 2013, following the entry of petroleum oil as a major source of revenue in the early 1970s, budgetary allocation to the education sector took an upward trend. For example allocation to the education sector as proportion of total budgetary allocation rose from 0.69% in 1970 to 10.83% in 1976 and dropped temporarily to 5.6% the following year following some vagaries in the international price of crude oil. The proportion of the annual budget allocated to education has remained low and unstable. From 1980 to 2003 allocation to education fluctuated between 1.9% and 9% of total federal government expenditure which is far below the United Nations recommended minimum standard of 26%. It reveals that the allocation to capital expenditures in the education sector has lagged behind that of recurrent expenditures particularly since 1986 when the Structural Adjustment Programme (SAP) was introduced as a package of economic management. As budgetary allocations to the education sector got thinner and thinner particularly since the

introduction of SAP, school enrolment at all levels recorded a rising trend. At all levels of education, the number of educational institutions has increased tremendously. These developments have created severe infrastructural gaps in schools. Per capita school infrastructures have declined as no new structures are built and old ones are not renovated. These features in the education sector has manifested in several problems. First the classrooms are overcrowded, in some instances school pupils go to school with their own furniture items. Those who could not afford such furniture items sit on bare floor to learn. Teaching aids are generally lacking. The scenario is not different in secondary and tertiary schools where in addition to rusty and cranky classroom facilities, science laboratories are either non-existent or dilapidated (Nwagwu,1997 & Sambo, 2002). Nigeria‟s 127th position out of 130 countries ranked in the World Economic Forum (WEF) 2016 Human Capital Index is troubling. Given our profile as the largest economy in Africa and our vast human and natural resources, the natural reaction might be to refute this abysmal ranking. But then, is Nigeria actively and effectively developing its human capital?

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