IMPACT OF SERVICE SECTOR ON ECONOMIC GROWTH IN NIGERIA

0
712

ABSTRACT

The service sector is a crucial component of every country’s economy, and it has been identified as a sector with the capability to become a significant driver of sustained growth in Africa. This study examines the Impact of Service Sector on Economic Growth in Nigeria from the period 1981 to 2019 using annual time series data sourced from the CBN statistical bulletin. The econometric approach of the paper is based on ordinary least square (OLS), Augmented- Dickey Fuller test, Johannsen Co-integration test and Granger Causality test. The study seeks to find if service sector has an impact on economic growth in Nigeria and to also investigate if there is causal relationship between service sector and economic growth in Nigeria. The study revealed that the model is statistically significant at 5% level of significance and it revealed that there is positive relationship between transportation, health services and information and communication and the dependent variable economic growth, and a negative relationship between the independent variable education and the dependent variable economic growth. However, the study recommends that there should be increase in the investment in the service sector with more focus on education to boost the growth of the GDP.

TABLE OF CONTENTS

TITLE PAGE……………………………………………………………………………………………………… i

DECLARATION………………………………………………………………………………………………… ii

APPROVAL……………………………………………………………………………………………………… iii

DEDICATION………………………………………………………………………………………………….. iv

ACKNOWLEDGEMENT……………………………………………………………………………………. v

ABSTRACT…………………………………………………………………………………………………….. vi

TABLE OF CONTENTS…………………………………………………………………………………….. vii

LIST OF TABLES…………………………………………………………………………………………….. ix

LIST OF FIGURES…………………………………………………………………………………………….. x

CHAPTER ONE: INTRODUCTION

CHAPTER TWO: LITERATURE REVIEW AND TEORETICAL FRAMEWORK

  1. Introduction…………………………………………………………………………………………………….. 7
    1. Conceptual framework………………………………………………………………………………………… 7
    2. Theoretical framework………………………………………………………………………………………. 12
    3. Empirical review…………………………………………………………………………………………….. 16
    4. Literature gap…………………………………………………………………………………………………. 22

CHAPTER THREE: METHODOLOGY

  1. Introduction……………………………………………………………………………………………………. 23
    1. Method of data collection…………………………………………………………………………………… 23
    2. Method of data analysis……………………………………………………………………………………… 23
    3. Model specification…………………………………………………………………………………………… 23
    4. Justification of methods……………………………………………………………………………………… 24

CHAPTER FOUR: DATA PRESENTATION, ANALYSIS AND INTERPRETATION

  1. Introduction……………………………………………………………………………………………………. 26
    1. Descriptive statistics test…………………………………………………………………………………….. 26
    2. Unit root test…………………………………………………………………………………………………… 27
    3. Cointegration test…………………………………………………………………………………………….. 28
    4. Regression test………………………………………………………………………………………………… 29
    5. Granger Causality test……………………………………………………………………………………….. 31

CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATION

REFERENCES……………………………………………………………………………………………….. 35

APPENDIX…………………………………………………………………………………………………….. 37

LIST OF TABLES

Table 4.1 Descriptive statistics……………………………………………………………………………….. 26

Table 4.2 Unit root test………………………………………………………………………………………… 28

Table 4.3 Johansen co-integration test………………………………………………………………………. 28

Table 4.4 Regression test……………………………………………………………………………………… 29

Table 4.5 Granger Causality test…………………………………………………………………………….. 31

LIST OF FIGURES

Figure 2.2 conceptual framework……………………………………………………………………………… 7

Figure 4.1 trend of the variables (1981-2019)…

CHAPTER ONE INTRODUCTION

1.1 background of the study

Over the years, Nigeria’s economy has depended so much on its oil sector and, as such, has been facing challenges of macroeconomic volatility driven largely by external terms of trade shocks and large reliance on oil export earnings. To this end, World Bank (2003) ranked the economy among the most volatile in the world for the period 1960 to 2000. As a result, several calls have been made in various angles for the country to diversify the productive base of her economy in order to sustain long term growth. Therefore, the necessity for expansion

of non- oil sector cannot be over-emphasized because of the fact that crude oil, which is the main source of Nigeria’s foreign exchange earnings, is not inexhaustible and its price is volatile in nature.

The structure of Nigeria’s economy has evolved significantly. There is much more diversity than people assume. The country’s economy which has traditionally been dominated by crude oil and natural gas production has also shown a major growth in the services sector, which now accounts for the greatest share of the country’s GDP output at well over 50%. Paying calculated attention to and harnessing the full benefits of services sector will go a long way to reduce the nation’s dependence on traditional markets, provide a more diversified market, bring about new knowledge, experience and enhance domestic competitiveness. A virile services sector will also expand horizons, create new ideas, and increase the use of new technology, new approaches and new market techniques drawn from exposure to the global market place. This sector is vital to poverty alleviation and key to realizing the Millennium Development Goals both directly in terms of enhancing the availability and affordability of education, health services, energy, and ICT services as well as through entrepreneurial and employment creation opportunities in services enterprises.

The service sector is a crucial component of every country’s economy, and it has been identified as a sector with the capability to become a significant driver of sustained growth in Africa. The Nigerian service sector consists of several industries such as banking, retail and wholesale trade, tourism, real estate, telecommunications, motion pictures (Nollywood), information and communication technology, entertainment, and education. The service sector is currently the fastest growing sector in the world. It accounts for a significant proportion of gross domestic product in most countries and makes significant contribution to the share of total employment. As of2015, service sector contribution to Nigeria’s GDP stood at about 60%, with an average of about 33% of employment share compared to 7% for industry.

A productive service sector is known to strengthen the performance of other sectors in the economy such as manufacturing. This is because the sector enables and facilitates the functioning of most sectors (manufacturing,

industrial sector, etc.), as most of these sectors rely majorly on the service sector to supply needed functions such as banking, accountancy, information, and technology.

The service sector provides supplementary outputs to manufacturing firms that are dependent on external sourcing of basic inputs such as transportation, financing, design, and communication. The growth of the service sector is primarily a product of the level of individual consumption per capita and demand from the manufacturing sector. The service sector also influences the development of businesses by increasing productivity and value added.

The Nigerian service sector has been able to display impressive results despite tough economic circumstances. In 2014, Nigeria’s rebased Gross Domestic Product sectoral composition shifted toward the service sector and away from the oil sector. The service sector accounted for 54.8% of the rebased GDP, with the largest contributors being wholesale and retail trade contributing 16.27%, real estate contributing 8.37%, and Information and Communication contributing 11.04%. The service sector has the potential to increase economic growth in Nigeria. Diversifying and harnessing the full benefits of the service sector will reduce Nigeria’s overreliance on the oil sector, as innovations in the service sector play a crucial role in increasing both the productivity levels and also economic growth through innovation expenditures and innovation activities in general.

The current president (Muhammadu Buhari) and its administration has also made this call a key part of their developmental vision for the country. For example, speaking in Guangzhou, China in April 2016, the president noted that “a key preoccupation of his administration is taking urgent steps to diversify the Nigerian economy” (Business Day, 2016). A message he has continuously repeated since taking over office in 2015. Since the contribution of the secondary industry to growth and employment is very poor in many Sub-Saharan African countries (SSA), and based on the success of some developing countries such as the South Asian economies in services sector led growth, the service sector has been identified as a sector with the potential to become a significant factor for economic growth and development.

Nonetheless, the contribution of this study to existing research is to show the extent of service sector contribution to economic growth in relations to governance indicators knowing that there has been past misconception of services as being non-tradable, non-productive, and unable to drive growth in an economy. Government as a major participant in the service subsector has been given priority in this study as its contribution to service subsectors was examined from the windows of government expenditure. Governance and the mode of operations of the bureaucratic system of government have a long way of impacting on the execution of planned expenditure of government as most budgeted funds do not get to into the assigned projects and sectors where they are needed. The contribution of Nigerian service sector to her economic growth is pertinent, hence the examination of service sector from the windows of government expenditure on education, health, transportation, and communication in relation to governance indicators (control of corruption and government effectiveness). Thus, the extent to which services have been utilized as a driver to the growth of countries, particularly developing countries, has in recent times received considerable attention in the literature.

              STATEMENT OF THE RESEARCH PROBLEM

The service sector is a key to economic growth and development, the reliance on oil sector has to be reduced and focus on factors that will aid promote and enhance the economy such as the service sector, as it contributes to the GDP and also provides crucial inputs to the rest of the economy. However, various studies have been informative in showing how important it is to have a better service sector as it increases contribution to economic growth and development. Nigeria has been unable to achieve sustainable development due to her continuous dependence on the oil and gas sector. The main source of the nation’s revenue and foreign exchange earnings is from crude oil export, thereby making the country vulnerable to oil price volatilities. The urgent need to diversify the country’s economy cannot be overemphasized, especially going by the unstable and fluctuating global oil prices in order to minimize the country’s vulnerability to macroeconomic risks, such as decline in production, fall in demand and price, and also exhaust of reserves. This study will thus inform us about the impact of service sector on economic growth in Nigeria and the empirical relationship between service sector and economic growth.

    RESEARCH QUESTIONS

The following questions are formulated for the purpose of this research:

  1. What is the impact of service sector on economic growth in Nigeria?
  2. What is the causal relationship between service sector and economic growth in Nigeria?

              OBJECTIVES OF THE STUDY

The broad objective of this study is to evaluate the impact of service sector on economic growth in Nigeria. To accomplish this, the following specific objectives were pursued:

  1. To determine the impact of service sector on economic growth in Nigeria.
  2. To determine the causal relationship between service sector and economic growth in Nigeria.

1.5 HYPOTHESES OF THE STUDY

For the purpose of this study, the following statistical hypotheses are formulated:

H0: There is no significant relationship between service sector and economic growth in Nigeria

H0: There is no causal relationship between service sector and economic growth in Nigeria

              SIGNIFICANCE OF THE STUDY

The service sector is an important component of any country’s economy. It makes a direct and significant contribution to GDP and job creation, and provides crucial inputs for the rest of the economy. This study examines some service sectors such as transportation, education, communication, health sectors, and how it contributes to economic growth in the country.

Numerous services are key contributors to all or most different businesses and economic sectors e.g. infrastructure services such as, telecommunications, transportation; financial services which encourages exchanges and give access to funds for investment; health and education services which contribute to a vigorous,

well-trained labor force; and legal and accountancy services which are part of the institutional system required to support a healthy market economy. These service sectors are in this way a key piece of the investment climate, and can have a lot more extensive effect on by and large business execution, and hence productivity and development in the economy. Thus, having identified ways in which the sector can lead to crucial rapid growth and development of the Nigerian economy. Theoretically, the end result of this study will certainly enlarge to the volume of literature and serve as an empirical contribution for further economic research.